-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AL0rlzsQNtbWiriNBZL7UvjLD+mVDaI/WIVKSY+5vN4wgXkXTb/EXN84V4jQOLgN R0ljFQiEloT9gygSDgUtsg== 0000318819-96-000014.txt : 19960326 0000318819-96-000014.hdr.sgml : 19960326 ACCESSION NUMBER: 0000318819-96-000014 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960325 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN WATER WORKS CO INC CENTRAL INDEX KEY: 0000318819 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 510063696 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-03437 FILM NUMBER: 96537813 BUSINESS ADDRESS: STREET 1: 1025 LAUREL OAK RD CITY: VOORHEES STATE: NJ ZIP: 08043 BUSINESS PHONE: 6093468200 MAIL ADDRESS: STREET 1: 1025 LAUREL OAK ROAD CITY: VOORHEES STATE: NJ ZIP: 08043 10-K405 1 1995 FORM-10K REPORT EXHIBIT INDEX ON PAGES 14-16 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ________ to ________ Commission File Number 1-3437-2 AMERICAN WATER WORKS COMPANY, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 51-0063696 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. employer identification no.) incorporation or organization) 1025 Laurel Oak Road, Voorhees, New Jersey 08043 - ------------------------------------------ ---------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code 609-346-8200 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------ Common Stock, $1.25 par value per share New York Stock Exchange Cumulative Preferred Stock, 5% Series, $25 par value per share New York Stock Exchange 5% Cumulative Preference Stock, $25 par value per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant at March 8, 1996 was $886,322,858. As of March 4, 1996, there were a total of 34,260,095 shares of Common Stock, $1.25 par value per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain information contained and incorporated by reference herein contains forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Certain factors could cause actual results to differ materially from those in the forward-looking statements. Those factors include, but are not limited to, the unpredictability of weather, rate regulations and timing of rate cases, and changes to existing and proposed environmental regulations. See "Management's Discussion and Analysis" beginning on page 23 of the Company's Annual Report to Shareholders incorporated herein by reference. (1) The following pages and section in Registrant's Annual Report to Stockholders for 1995 are incorporated by reference into Part I, Item 1 and Part II of this Form 10-K: pages 22 through 33, pages 35 through 53, and the section entitled "Range of Market Prices" on page 57. (2) The following pages and section in Registrant's definitive Proxy Statement relating to Registrant's Annual Meeting of Stockholders on May 2, 1996 are incorporated by reference into Part III of this Form 10-K: Page 2 (beginning with the fourth full paragraph thereon) through the second paragraph on page 10 and the section entitled "Director Remuneration" on page 14, with the exception of the second through the fourth paragraphs on page 4 and the first three paragraphs on page 5. 1 of 78 PART I Item 1. Business The "Description of the Business" is set forth on page 23 of the Annual Report to Stockholders for 1995, filed as Exhibit 13 to this Report on Form 10-K; and such description is hereby specifically incorporated herein by reference thereto. The information provided in that section is supplemented by the following details: The water supplies of the operating subsidiaries consist of surface supplies, wells, and in a limited number of cases, water purchased under contract. Such supplies are considered adequate to meet present requirements. In general, all surface supplies are filtered and substantially all of the water is treated with chlorine, and, in some cases, special treatment is provided to correct specific conditions of the water. In general, the operating utility subsidiaries have valid franchises, free from unduly burdensome restrictions, sufficient to enable them to carry on their business as presently conducted. They derive such franchise rights from statutes under which they were incorporated, municipal consents and ordinances, or certificates or permits received from state or local regulatory agencies. In most instances, such franchise rights are non- exclusive. In most of the states in which the operations of the operating subsidiaries are carried on, there exists the right of municipal acquisition by one or both of the following methods: (1) condemnation; or (2) the right of purchase given or reserved by the law of the state in which the company was incorporated or received its franchise. The price to be paid upon condemnation is usually determined in accordance with the law of the state governing the taking of land or other property under eminent domain statutes; in other instances, the price is fixed by appraisers selected by the parties, or in accordance with a formula prescribed by the law of the state or in the particular franchise or special charter. Some of the expenditures for construction by operating subsidiaries have included facilities to comply with federal and state water quality and safety standards. The nature of some of the construction is described in the section entitled "System Growth and Development," located on pages 24 through 27 of the Annual Report to Stockholders for 1995, filed as Exhibit 13 to this Report on Form 10-K; such information is hereby specifically incorporated herein by reference thereto. The number of persons employed by the Registrant and subsidiary companies totaled 3,777 at December 31, 1995. Item 1A. Executive Officers of the Registrant The following list sets forth the names, ages and offices held with the Registrant by each of the executive officers of the Registrant. No family relationships exist among any of such executive officers, nor do any 2 arrangements or understandings exist between any such executive officer and any other person pursuant to which he was selected as an officer. Name Age Office Held Office Held Since George W. Johnstone 57 President & Chief Executive Officer January 2, 1992 J. James Barr 54 Vice President & Treasurer January 20, 1984 Edward W. Limbach 57 Vice President May 3, 1990 Gerald C. Smith 61 Vice President May 2, 1991 W. Timothy Pohl 41 General Counsel & Secretary January 16, 1988 Robert D. Sievers 42 Comptroller February 14, 1992 The executive officers are elected at the annual organizational meeting of the Board of Directors of the Registrant which is held in May. The executive officers serve at the pleasure of the Board of Directors. Successors to officers who resign, die or are removed during the year are elected by the Board. Prior to his election as President and Chief Executive Officer, Mr. Johnstone was named President-elect in March 1991. In addition, Mr. Johnstone had been a Vice President from May 1987 until January 1992 and an officer of subsidiary companies for more than five years prior to his election as a Vice President. Mr. Barr had been an officer of subsidiary companies for more than five years prior to his election as Treasurer. In addition, Mr. Barr was elected a Vice President on May 6, 1987. Mr. Limbach had been an officer of subsidiary companies for more than five years prior to his election as a Vice President. Mr. Smith had been an officer of subsidiary companies for more than five years prior to his election as a Vice President. Mr. Pohl had been an officer of subsidiary companies from May 1984 to his election as Secretary. In addition, Mr. Pohl was elected General Counsel on May 3, 1990. Prior to being elected to his current position, Mr. Sievers had been Assistant Comptroller since May 1985. Item 2. Properties The Registrant leases its office space, equipment and furniture from one of its wholly-owned subsidiaries. The office space, equipment and furniture are located in Voorhees, New Jersey and are utilized by the Registrant's directors, officers and staff in the conduct of the Registrant's business. The subsidiary operating companies own, in the states in which they operate, transmission and distribution mains, pump stations, treatment plants, storage tanks, reservoirs and related facilities. Properties are adequately maintained and units of property are replaced as and when necessary. The Registrant considers the properties of its operating companies to be in good operating condition. 3 A substantial acreage of land is owned by the operating companies, the greater part of which is located in watershed areas, with the balance being principally sites of pumping and treatment plants, storage reservoirs, tanks and standpipes. Item 3. Legal Proceedings There are no pending material legal proceedings, other than ordinary, routine litigation incidental to the business, to which the Registrant or any of its subsidiaries is a party or of which any of their property is the subject. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The information required under this item is contained in the section entitled "Range of Market Prices," located on page 57 of the Annual Report to Stockholders for 1995, filed as Exhibit 13 to this Report on Form 10-K; such information is hereby specifically incorporated herein by reference thereto. Item 6. Selected Financial Data The information required under this item is contained in the section entitled "Consolidated Summary of Selected Financial Data," located on page 22 of the Annual Report to Stockholders for 1995, filed as Exhibit 13 to this Report on Form 10-K; such information is hereby specifically incorporated by reference thereto. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required under this item is contained in the section entitled "Management's Discussion and Analysis," located on pages 23 through 33 of the Annual Report to Stockholders for 1995, filed as Exhibit 13 to this Report on Form 10-K; such information is hereby specifically incorporated herein by reference thereto. Item 8. Financial Statements and Supplementary Data The financial statements, together with the report thereon of Price Waterhouse LLP dated January 30, 1996, except as to Note 13, which is as of February 16, 1996, appearing on pages 35 through 53 of the 1995 Annual Report to Stockholders, filed as Exhibit 13 to this Report on Form 10-K, are hereby specifically incorporated herein by reference thereto. 4 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant The information required under this item with respect to the Directors of the Registrant appears in the fourth full paragraph on page 2 through the first full paragraph on page 4 and in the section entitled "Compliance with Section 16(a) of the Securities Exchange Act of 1934, As Amended" which is located on page 7 of the definitive Proxy Statement relating to the Registrant's Annual Meeting of Stockholders on May 2, 1996, to be filed by the Registrant with the Commission pursuant to Section 14(a) of the Securities Exchange Act of 1934 (the "1934 Act"); such information is hereby specifically incorporated herein by reference thereto. The information required under this item with respect to the Executive Officers of the Registrant is set forth in Item 1A of Part I above pursuant to paragraph (3) of General Instruction G to Form 10-K. Item 11. Executive Compensation The information required under this item is contained in the sections entitled "Management Remuneration," "Pension Plan," "Report of the Compensation and Management Development Committee of the Board of Directors on Executive Compensation," "Performance Graph" and "Director Remuneration" which are located on pages 8 through 14 of the definitive Proxy Statement relating to the Registrant's Annual Meeting of Stockholders on May 2, 1996, to be filed by the Registrant with the Commission pursuant to Section 14(a) of the 1934 Act, and is hereby specifically incorporated herein by reference thereto, except for the "Report of the Compensation and Management Development Committee of the Board of Directors on Executive Compensation" and "Performance Graph" which are not so incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required under this item is contained in the section entitled "Stock Ownership Information" which is located on pages 5 through 7 of the definitive Proxy Statement relating to the Registrant's Annual Meeting of Stockholders on May 2, 1996, to be filed by the Registrant with the Commission pursuant to Section 14(a) of the 1934 Act, and is hereby specifically incorporated herein by reference thereto. Item 13. Certain Relationships and Related Transactions There are no material relationships or related transactions other than those disclosed in response to Item 11 of this Part III. 5 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K a) The following documents are filed as part of this report: 1. Financial Statements: the Financial Statements required to be filed by Item 8 are listed in the Index to Financial Statements, which appears on Pages 9 and 10 of this Report on Form 10-K. 2. Financial Statement Schedules: the Financial Statement Schedules required to be filed by Item 8 and by paragraph (d) of this Item are listed in the Index to Financial Statements, which appears on Pages 9 and 10 of this Report on Form 10-K. 3. Exhibits: the Exhibits to this Form 10-K are listed in the Index to Exhibits, which appears on Pages 14 to 16 of this Report on Form 10-K. b) Reports on Form 8-K. During the last quarter of the period covered by this Report on Form 10-K, the Registrant filed no reports on Form 8-K. 6 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By: George W. Johnstone, President and Chief Executive Officer DATE: March 7, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date Principal Executive Officer: George W. Johnstone President and March 7, 1996 Chief Executive Officer Principal Financial Officer: J. James Barr Vice President and March 7, 1996 Treasurer Principal Accounting Officer: Robert D. Sievers Comptroller March 7, 1996 7 SIGNATURES (Cont'd.) Directors: William O. Albertini March 7, 1996 William R. Cobb March 7, 1996 Elizabeth H. Gemmill March 7, 1996 Henry G. Hager March 7, 1996 Nelson G. Harris March 7, 1996 George W. Johnstone March 7, 1996 Marilyn W. Lewis March 7, 1996 Nancy W. Wainwright March 7, 1996 Paul W. Ware March 7, 1996 Ross A. Webber March 7, 1996 8 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT YEAR ENDED DECEMBER 31, 1995 AMERICAN WATER WORKS COMPANY, INC. FINANCIAL STATEMENTS 9 AMERICAN WATER WORKS COMPANY, INC. INDEX TO FINANCIAL STATEMENTS The following documents are filed as part of this report: Page(s) in (1) FINANCIAL STATEMENTS Annual Report* Report of Independent Accountants . . . . . . . . . . . . . . 35 Consolidated Balance Sheet of American Water Works Company, Inc. and Subsidiary Companies at December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . .36 and 37 Consolidated Statement of Income and Retained Earnings of American Water Works Company, Inc. and Subsidiary Companies for each of the three years in the period ended December 31, 1995 . . . . . . . . . 38 Consolidated Statement of Cash Flows of American Water Works Company, Inc. and Subsidiary Companies for each of the three years in the period ended December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . 39 Consolidated Statement of Capitalization of American Water Works Company, Inc. and Subsidiary Companies at December 31, 1995 and 1994 . . . . . . . . . . . . . . .40 and 41 Consolidated Statement of Common Stockholders' Equity of American Water Works Company, Inc. and Subsidiary Companies for each of the three years in the period ended December 31, 1995 . . . . . . . . . . . . . . . . . . . 42 Balance Sheet of American Water Works Company, Inc. at December 31, 1995 and 1994 . . . . . . . . . . . . . . . . 43 Statements of Income and Retained Earnings of American Water Works Company, Inc. for each of the three years in the period ended December 31, 1995 . . . . . . 44 Statement of Cash Flows of American Water Works Company, Inc. for each of the three years in the period ended December 31, 1995. . . . . . . . . . . . . . . . 45 Notes to Financial Statements . . . . . . . . . . . . . .46 through 53 *Incorporated by reference from the indicated pages of the 1995 Annual Report to Stockholders, which is Exhibit 13 to this Report on Form 10-K. 10 AMERICAN WATER WORKS COMPANY, INC. INDEX TO FINANCIAL STATEMENTS (Continued) (2) FINANCIAL STATEMENT SCHEDULES Description Page* Schedule II: Valuation and Qualifying Accounts Allowance for Uncollectible Accounts. . . . . . . 13 Financial Statement Schedules not included in this Report on Form 10-K have been omitted because they are not applicable or the required information is shown in the Financial Statements or notes thereto. *Page number shown refers to the page number in this Report on Form 10-K. 11 Report of Independent Accountants on Financial Statement Schedule To the Board of Directors of American Water Works Company, Inc. Our audits of the consolidated financial statements referred to in our report dated January 30, 1996, except as to Note 13, which is as of February 16, 1996, appearing on page 35 of the 1995 Annual Report to Stockholders of American Water Works Company, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP Thirty South Seventeenth Street Philadelphia, Pennsylvania 19103 January 30, 1996, except as to Note 13, which is as of February 16, 1996 12 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Prospectuses constituting part of the Registration Statements on Form S-3 (Number 33-59059), on Form S-8 (Number 33-62438), and on Form S-8 (Number 33-52923) of American Water Works Company, Inc. of our report dated January 30, 1996, except as to Note 13, which is as of February 16, 1996, appearing on page 35 of the Annual Report to Stockholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page 11 of this Form 10-K. PRICE WATERHOUSE LLP Thirty South Seventeenth Street Philadelphia, Pennsylvania 19103 March 21, 1996 13 FINANCIAL STATEMENT SCHEDULE II AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES SCHEDULE II - Valuation and Qualifying Accounts Allowance for Uncollectible Accounts Years Ended December 31 (In thousands) Balance Additions Charged to Balance Beginning ------------------------- End of Year of Year Expense (A) Other (B) Deductions (C) Year - ---- --------- ----------- --------- -------------- ------- 1995 $ 999 $ 4 288 $ $ 4 257 $ 1 030 1994 1 107 3 762 3 870 999 1993 925 3 377 102 3 297 1 107 (A) Provisions included in operating expense. (B) Allowance for uncollectible accounts of acquired companies. (C) Amounts written off as uncollectible, net of recovery of amounts previously written off. 14 AMERICAN WATER WORKS COMPANY, INC. INDEX TO EXHIBITS Exhibit Number Description 3 Articles of Incorporation and By-laws (a) Certificate of Incorporation of the Registrant, as amended and restated as of May 15, 1987, is incorporated herein by reference to Exhibit 3(a) to Form 10-K report of the Registrant for 1987. (b) Certificate of Amendment of the Certificate of Incorporation of the Registrant, effective May 9, 1989, is incorporated herein by reference to Exhibit 3(a) to Form 10-Q report of the Registrant for June 30, 1989. (c) Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant, effective May 3, 1990, is incorporated herein by reference to Exhibit 3(a) to Form 10-Q report of the Registrant for June 30, 1990. (d) Certificate of Designations of the Registrant relating to its Cumulative Preferred Stock, 8.50% Series, is incorporated herein by reference to Exhibit 3(d) to Form 10-K report of the Registrant for 1990. (e) By-laws of the Registrant, as amended to January 6, 1994, are incorporated herein by reference to Exhibit 3(e) to Form 10-K report of the Registrant for 1993. 4 Instruments Defining the Rights of Security Holders, Including Indentures (a) Indenture dated as of November 1, 1977 between the Registrant and The Fidelity Bank (name later changed to First Union National Bank), Trustee, is incorporated herein by reference to Exhibit E to Form 10-K report of the Registrant for 1977. (b) First Supplemental Indenture dated as of December 1, 1989 between the Registrant and Fidelity Bank, National Association (name later changed to First Union National Bank), as Trustee, is incorporated herein by reference to Exhibit 4(i) to Form 10-K report of the Registrant for 1989. 15 AMERICAN WATER WORKS COMPANY, INC. INDEX TO EXHIBITS Exhibit Number Description 4 (cont'd.) (c) Second Supplemental Indenture dated as of February 1, 1993 between the Registrant and Fidelity Bank, National Association (name later changed to First Union National Bank), as Trustee, is incorporated herein by reference to Exhibit 4(c) to Form 10-K report of the Registrant for 1992. (d) Flip-Over Rights Agreement dated as of March 2, 1989 between the Registrant and Bank of Delaware (name later changed to PNC Bank), as Rights Agent, is incorporated herein by reference to Exhibit 1 to Form 8-A Registration Statement of the Registrant, No. 1-3437-2. (e) Flip-In Rights Agreement dated as of March 2, 1989 between the Registrant and Bank of Delaware (name later changed to PNC Bank), as Rights Agent, is incorporated herein by reference to Exhibit 1 to Form 8-A Registration Statement of the Registrant, No. 1-3437-2. 10 Material Contracts (a) Employees' Stock Ownership Plan of the Registrant and Its Designated Subsidiaries, as Amended and Restated Effective January 1, 1989, is incorporated herein by reference to Exhibit 10(a) to Form 10-K report of the Registrant for 1994. (b) Amendment No. 1 to Employees' Stock Ownership Plan of the Registrant is filed herewith. (c) Supplemental Executive Retirement Plan of the Registrant, effective as of January 1, 1985, is incorporated herein by reference to Exhibit 19(c) to Form 10-K report of the Registrant for 1985. (d) Amendment No. 1 to Supplemental Executive Retirement Plan of the Registrant is incorporated herein by reference to Exhibit 10(e) to Form 10-K report of the Registrant for 1989. (e) Amendment No. 2 to Supplemental Executive Retirement Plan of the Registrant is incorporated herein by reference to Exhibit 10(g) to Form 10-K report of the Registrant for 1990. 16 AMERICAN WATER WORKS COMPANY, INC. INDEX TO EXHIBITS Exhibit Number Description 10 (cont'd.) (f) Amendment No. 3 to Supplemental Executive Retirement Plan of the Registrant is filed herewith. (g) Supplemental Retirement Plan of the Registrant, effective as of April 1, 1989, is incorporated herein by reference to Exhibit 10(f) to Form 10-K report of the Registrant for 1989. (h) Amendment No. 1 to Supplemental Retirement Plan of the Registrant is filed herewith. (i) Long-Term Performance-Based Incentive Plan of the Registrant, effective as of January 1, 1993, is incorporated herein by reference to Exhibit 10(f) to Form 10-K report of the Registrant for 1994. (j) Annual Incentive Plan of the Registrant, effective as of January 1, 1996, is filed herewith. (k) Deferred Compensation Plan of the Registrant, effective as of January 1, 1996, is filed herewith. 13 Annual Report to Security Holders The Registrant's Annual Report to Stockholders for 1995 is filed as exhibit hereto solely to the extent portions thereof are specifically incorporated herein by reference. 21 Subsidiaries of the Registrant Subsidiaries of the Registrant as of December 31, 1995. 23 Consents of Experts and Counsel See "Consent of Independent Accountants" on page 12 of this Form 10-K report. 27 Financial Data Schedule Financial Data Schedule for the fiscal year ended December 31, 1995. EX-10 2 MATERIAL CONTRACTS 17 EXHIBIT 10(b) AMENDMENT NO. 1 TO THE EMPLOYEES' STOCK OWNERSHIP PLAN OF AMERICAN WATER WORKS COMPANY, INC. AND ITS DESIGNATED SUBSIDIARIES (As Amended Effective January 1, 1989) Pursuant to the power reserved to it in Section 13.1 of the Employees' Stock Ownership Plan of American Water Works Company, Inc. and Its Designated Subsidiaries, as amended effective January 1, 1989, (the "Plan"), American Water Works Company, Inc. hereby amends the Plan as follows, effective immediately: 1. SECTIONS 10.2, 10.3 AND 10.4 are hereby deleted and the following substituted therefor: 10.2 Distributions Upon Termination of Service. The balance of a Participant's Account as of the December 31 coincident with or immediately preceding his termination of service for any reason, including disability or retirement, plus any amounts subsequently allocated to his Account under Section 7.2 shall be distributed no later than the February 28 (the "Annuity Starting Date") coincident with or immediately following the end of the Plan Year in which occurs the last allocation to the Participant's Account. Notwithstanding the foregoing, if the value of a Participant's Account exceeds $3,500 as of the end of the month preceding the month in which he is notified of his election rights under this Section 10.2, payment to such Participant shall not be made unless the Participant consents in writing to the distribution. Consent to such distribution shall not be valid unless the Participant is informed of his right to defer receipt of the distribution. The consent of the Participant's spouse, if any, to such distribution shall not be required. A Participant must have his Account distributed as of the Annuity Starting Date following the close of the Plan Year in which he reaches age 65. For the purpose of this Section 10.2 a Participant's service shall not be deemed to have terminated by reason of his transfer to an employment status with the Company or a Designated Subsidiary which is not covered by this Plan. Notwithstanding the foregoing, the entire value of a Participant's Accounts must be distributed beginning no later than the Participant's Required Beginning Date. 18 10.3 Distribution Upon Death. Upon termination of a Participant's service by reason of his death, the balance of his Account as of the December 31 coincident with or immediately preceding the Participant's date of death, plus any amounts subsequently allocated to his Account under Section 7.2, shall be distributed to the Participant's Beneficiary, not later than the Annuity Starting Date following the end of the Plan Year in which occurs the last allocation to the Participant's Account. To the extent practicable, the Committee shall insure that any distribution pursuant to this Section 10.3 is completed within the recipient's taxable year in which it begins. 10.4 Death After Termination. If a Participant dies following his termination of service, but before any distribution is made pursuant to Section 10.2, the balance of his Account, as of the December 31 coincident with or immediately preceding his termination of service plus any amounts subsequently allocated to his Account under Section 7.2, shall be distributed to the Participant's Beneficiary, beginning not later than the Annuity Starting Date following the end of the Plan Year in which occurs the last allocation to the Participant's Account. To the extent practicable, the Committee shall insure that any distribution pursuant to this Section 10.4 is completed within the recipient's taxable year in which it begins. 10.5 Deferred Distribution. A Participant who elected to defer distribution of his Account pursuant to Section 10.2 may subsequently elect a distribution of his Account as of the Annuity Starting Date following the date he provides notice of his election in accordance with procedures established by the Committee. A Participant may not elect a partial distribution of his Account pursuant to this Section 10.5. 2. SECTIONS 10.5, 10.6, 10.7, 10.8 AND 10.9 are hereby renumbered as Sections 10.6, 10.7, 10.8, 10.9 and 10.10, respectively. 3. SECTION 10.9 is hereby amended by adding the following at the end thereof: All distributions under this Article X shall be made as soon as administratively feasible after the applicable Annuity Starting Date. 2 19 4. SECTION 13.1 is hereby amended to read as follows: 13.1 This Plan may be amended at any time, and from time to time, by the Company's Retirement Plan Committee, provided that such amendment does not materially increase the cost of the Plan. The Plan may also be amended at any time and from time to time by the Board of Directors. No amendment shall divest any vested interest of any Participant or Beneficiary nor be effective unless that Plan, as so amended, continues to be maintained for the exclusive benefit of Participants and their Beneficiaries. * * * * * To record the adoption of this Amendment No. 1 to the Plan, American Water Works Company, Inc. has caused its authorized officers to affix its corporate name and seal this 1st day of February, 1996. AMERICAN WATER WORKS COMPANY, INC. By: George W. Johnstone Attest: W. Timothy Pohl General Counsel and Secretary 3 20 EXHIBIT 10(f) AMENDMENT NO. 3 TO THE AMERICAN WATER WORKS COMPANY, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN -------------------------------------- American Water Works Company, Inc. hereby amends the Supplemental Executive Retirement Plan (the "Plan"), as follows: The second sentence of Paragraph 4 of the Plan is amended to read in its entirety as follows: "Average Earnings" means the average of the participant's salary paid and Annual Incentive Plan awards granted during those 36 consecutive months preceding the earlier of his attainment of age 65 or his actual retirement that produce the highest average. To record the adoption of this Amendment No. 3 to the Plan by its Board of Directors on January 4, 1996, American Water Works Company, Inc. has caused its President and Secretary to affix its corporate name and seal hereto, this 4th day of January, 1996. AMERICAN WATER WORKS COMPANY, INC. By: George W. Johnstone President and Chief Executive Officer Attest: W. Timothy Pohl Secretary 21 EXHIBIT 10(h) AMENDMENT NO. 1 TO THE AMERICAN WATER WORKS COMPANY, INC. SUPPLEMENTAL RETIREMENT PLAN ---------------------------------- American Water Works Company, Inc. hereby amends the Supplemental Retirement Plan (the "Plan"), as follows: The second sentence of Paragraph 4 of the Plan is amended to read in its entirety as follows: "Average Earnings" means the average of the participant's salary paid and Annual Incentive Plan awards granted during those 60 months taken into account under Paragraph 2(s) of the Pension Plan in computing the participant's benefit under the Pension Plan or any applicable successor provision. To record the adoption of this Amendment No. 1 to the Plan by its Board of Directors on January 4, 1996, American Water Works Company, Inc. has caused its President and Secretary to affix its corporate name and seal hereto, this 4th day of January, 1996. AMERICAN WATER WORKS COMPANY, INC. By: George W. Johnstone President and Chief Executive Officer Attest: W. Timothy Pohl Secretary 22 EXHIBIT 10(j) AMERICAN WATER WORKS COMPANY, INC. ANNUAL INCENTIVE PLAN EFFECTIVE JANUARY 1, 1996 1. OBJECTIVE The objective of the Annual Incentive Plan (the "Plan") is to support the business goals of American Water Works Company, Inc. and certain of its subsidiaries by providing variable, performance-based incentive compensation to attract, retain and motivate key members of management who have a substantial impact on the performance and growth of the American Water System. 2. DEFINITIONS (a) "BOARD OF DIRECTORS" shall mean the Board of Directors of American Water Works Company, Inc. (b) "COMPANY" shall mean American Water Works Company, Inc. and its Participating Subsidiaries. (c) "COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE" shall mean the committee of the Board of Directors of that name or its successor. (d) "ELIGIBLE PARTICIPANT" shall mean the President and Chief Executive Officer and any executive officer or manager recommended for participation in the Plan by the President and Chief Executive Officer and approved for participation in the Plan by the Compensation and Management Development Committee. (e) "INCENTIVE YEAR" shall mean any respective fiscal year of American Water Works Company, Inc. beginning on or after January 1, 1996 during which the Plan shall be in effect. (f) "PARTICIPATING SUBSIDIARY" shall mean American Water Works Company, Inc. and any Subsidiary which has been admitted to participation in the Plan with the approval of the Board of Directors of American Water Works Company, Inc.. (g) "PRESIDENT AND CHIEF EXECUTIVE OFFICER" shall mean the President and Chief Executive Officer of American Water Works Company, Inc. (h) "SALARY GRADE MIDPOINT" shall mean the respective midpoint of the salary grade or the equivalent thereof of the Eligible Participant as of January 1 of the respective Incentive Year. (i) "SUBSIDIARY" shall mean any company of which at least 50 percent of the outstanding voting stock is owned directly or indirectly by American Water Works Company, Inc. 23 (j) "TARGET AWARD" shall mean such amount expressed as a percent of Salary Grade Midpoint of an Eligible Participant projected for award to such Eligible Participant as of the commencement of and for such Incentive Year on the assumption that the performance objectives of the Company for the Incentive Year as determined by the Compensation and Management Development Committee will in each case be achieved. 3. ADMINISTRATION AND GENERAL CONDITIONS (a) The Plan shall be administered by the Compensation and Management Development Committee. (b) As soon as practicable after the commencement of each Incentive Year, the Compensation and Management Development Committee shall consult with the President and Chief Executive Officer and shall determine the Eligible Participants and the Target Award for each Eligible Participant. New Eligible Participants may be added during an Incentive Year by the President and Chief Executive Officer and, if approved by the Compensation and Management Development Committee, will receive a pro rata award based on the number of full months in the Incentive Year that such an employee was an Eligible Participant. The Compensation and Management Development Committee may during an Incentive Year revise the Target Award for an Eligible Participant based on changes in such person's salary grade, responsibilities or other factors. (c) Any Eligible Participant who ceases to be a full time employee of the Company during an Incentive Year or is not employed by the Company on the last day of the incentive year for any reason other than death, disability or retirement will be deemed ineligible for an award under the Plan for such Incentive Year. (d) The Compensation and Management Development Committee shall adopt such rules and procedures and shall make such determinations and interpretations of the Plan thereunder as it shall deem desirable. All such rules, procedures and determinations shall be conclusive and binding upon all parties. (e) Classification as an Eligible Participant or determination of a Target Award shall not in themselves be deemed to create any rights or interests under the Plan, and the interest of an Eligible Participant in the Plan shall not be assignable either by voluntary or involuntary assignment or by operation of the law. (f) An award under the Plan shall not confer upon an Eligible Participant any right to continue in the employ of the Company or limit in any way the right of the Company to terminate employment of an Eligible Participant at any time. (g) The Plan shall be effective as of January 1, 1996, subject to approval by the Board of Directors, and shall continue from year to year until terminated by the Board of Directors. -2- 24 (h) The Board of Directors may amend, suspend or terminate the Plan at any time, but may in no way reduce amounts previously awarded under the Plan and to which Eligible Participants are entitled. 4. DETERMINATION OF AWARDS The selection of Eligible Participants and the amount of the award for each such Eligible Participant shall be determined by the Compensation and Management Development Committee after consultation with the President and Chief Executive Officer. The Compensation and Management Development Committee shall determine the award to the President and Chief Executive Officer. The Compensation and Management Development Committee no later than 90 days after the commencement of the Incentive Year shall determine the performance objectives for the Incentive Year. The Compensation and Management Development Committee shall determine the financial objectives (e.g., earnings per share, operating income, return on equity, return on assets, total shareholder return, etc.), the customer service objectives (e.g., water quality, reliability, responsiveness, etc.) and the operational goals for the Incentive Year. The weighting of the selected objectives shall also be determined by the Compensation and Management Development Committee. The Compensation and Management Development Committee may also take into account the profitability or earnings of the Company in comparison with a prior year or years, other companies or generally prevailing economic conditions, the presence or absence of non-recurring or extraordinary items or income, gain, expense, or loss (including security gains and losses) and any and all other factors which, in its sole discretion, it may deem relevant. Such factors may result in the Compensation and Management Development Committee adjusting the actual award received upward or downward from the Target Award. 5. PAYMENT OF AWARDS Awards shall be payable in cash as soon as practicable after the consolidated financial results, and other goals for the Incentive Year have been determined and certified. Each Eligible Participant's annual award, if any, will be included as earnings under all Company-sponsored retirement plans, whether qualified or non-qualified, in accordance with the terms of the relevant plan as in effect from time to time. Twenty percent of the award will be mandatorily deferred and will be distributed after a restriction period of three years or upon termination of employment with the Company, if elected by the Eligible Participant. The mandatory 20 percent deferred compensation amount will be invested in stock units of equivalent value of American Water Works Company, Inc. common stock. Dividends on such stock units will be assumed during the deferral period, on the same basis as dividends are actually paid on American Water Works Company, Inc. common stock, and will be converted to additional stock units. The mandatory three year deferral period shall consist of the -3- 25 three calendar years following the Incentive Year. The value of the stock units will be determined as of the first business day of the fourth calendar year following the Incentive Year and shall be paid as soon as practicable thereafter. Eligible Participants will be permitted to elect an amount for deferral larger than the mandatory 20 percent deferral, and to elect to defer such amount for three years or to termination of employment with the Company. Such request shall be in accordance with the provisions of the American Water Works Company, Inc. Deferred Compensation Plan. Any such deferred awards shall be retained as part of the general assets of the Company and paid in cash at the end of the deferral period. 6. APPLICABLE TAXES Payment of all awards hereunder shall be subject to withholding of all federal, state or local taxes which, by law, must be withheld in respect to such payment. To record the adoption of this Plan, American Water Works Company, Inc. has caused its authorized officers to affix its corporate name and seal this 21st day of March, 1996. AMERICAN WATER WORKS COMPANY, INC. By: George W. Johnstone President and Chief Executive Officer Attest: W. Timothy Pohl General Counsel and Secretary -4- 26 EXHIBIT 10(k) AMERICAN WATER WORKS COMPANY, INC. DEFERRED COMPENSATION PLAN (Effective January 1, 1996) 27 Table of Contents Page ARTICLE I INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . 1 1.1. Name. . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2. Effective Date. . . . . . . . . . . . . . . . . . . . . . 1 1.3. Employers . . . . . . . . . . . . . . . . . . . . . . . . 1 1.4. Purpose . . . . . . . . . . . . . . . . . . . . . . . . . 1 ARTICLE II DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . 2 2.1. "Administrator" . . . . . . . . . . . . . . . . . . . . . 2 2.2. "Annual Incentive Plan" . . . . . . . . . . . . . . . . . 2 2.3. "Beneficiary" . . . . . . . . . . . . . . . . . . . . . . 2 2.4. "Board" . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.5. "Change in Control" . . . . . . . . . . . . . . . . . . . 2 2.6. "Committee" . . . . . . . . . . . . . . . . . . . . . . . 2 2.7. "Compensation". . . . . . . . . . . . . . . . . . . . . . 3 2.8. "Elective Deferred Compensation". . . . . . . . . . . . . 3 2.9. "Deferred Compensation Account" . . . . . . . . . . . . . 3 2.10. "Deferred Compensation Agreement" . . . . . . . . . . . . 3 2.11. "Eligible Employee" . . . . . . . . . . . . . . . . . . . 3 2.12. "Participant" . . . . . . . . . . . . . . . . . . . . . . 3 2.13. "Plan Year" . . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE III PARTICIPATION BY ELIGIBLE EMPLOYEES . . . . . . . . . . . 4 3.1. Participation . . . . . . . . . . . . . . . . . . . . . . 4 3.2. Failure to Designate. . . . . . . . . . . . . . . . . . . 4 3.3. Continuity of Participation . . . . . . . . . . . . . . . 4 3.4. Immediate Cash-Out of Ineligible Employee . . . . . . . . 4 ARTICLE IV ANNUAL INCENTIVE AWARD COMPENSATION DEFERRAL AND ACCOUNT CREDITS . . . . . . . . . . . . . . . . . . . . . 5 4.1. Annual Incentive Award Deferral Election. . . . . . . . . 5 4.2. Deferral in Stock Equivalent Units. . . . . . . . . . . . 5 4.3. Mandatory Deferrals of Annual Incentive Plan Awards . . . 5 4.4. Period for Which Deferral Election is Effective . . . . . 6 ARTICLE V DISTRIBUTIONS . . . . . . . . . . . . . . . . . . . . . . 6 5.1. Election of Distribution Date . . . . . . . . . . . . . . 6 5.2. Distribution of Mandatory Deferrals Not Elected To Be Extended. . . . . . . . . . . . . . . . . . . . . . . . . 7 5.3. Method of Payment . . . . . . . . . . . . . . . . . . . . 7 5.4. Special Election for Early Distribution . . . . . . . . . 7 5.5. Distributions on Death. . . . . . . . . . . . . . . . . . 7 5.6. Valuation of Distributions. . . . . . . . . . . . . . . . 8 -i- 28 Table of Contents Page ARTICLE VI ACCOUNTS. . . . . . . . . . . . . . . . . . . . . . . . . 8 6.1. Deferred Compensation Account . . . . . . . . . . . . . . 8 6.2. Crediting of Dividends and Statement of Account . . . . . 9 ARTICLE VII FUNDING AND PARTICIPANT'S INTEREST. . . . . . . . . . . . 10 7.1. Deferred Compensation Plan Unfunded . . . . . . . . . . . 10 7.2. Participant's Interest in Plan. . . . . . . . . . . . . . 10 ARTICLE VIII ADMINISTRATION AND INTERPRETATION . . . . . . . . . . . . 11 8.1. Administration. . . . . . . . . . . . . . . . . . . . . . 11 8.2. Interpretation. . . . . . . . . . . . . . . . . . . . . . 11 8.3. Records and Reports . . . . . . . . . . . . . . . . . . . 12 8.4. Payment of Expenses . . . . . . . . . . . . . . . . . . . 12 8.5. Indemnification for Liability . . . . . . . . . . . . . . 13 8.6. Claims Procedure. . . . . . . . . . . . . . . . . . . . . 13 8.7. Review Procedure. . . . . . . . . . . . . . . . . . . . . 14 ARTICLE IX AMENDMENT AND TERMINATION . . . . . . . . . . . . . . . . 14 9.1. Amendment and Termination . . . . . . . . . . . . . . . . 14 ARTICLE X MISCELLANEOUS PROVISIONS. . . . . . . . . . . . . . . . . 15 10.1. Right of Employers to Take Employment Actions . . . . . . 15 10.2. Alienation or Assignment of Benefits. . . . . . . . . . . 15 10.3. Right to Withhold . . . . . . . . . . . . . . . . . . . . 16 10.4. Construction. . . . . . . . . . . . . . . . . . . . . . . 16 10.5. Headings. . . . . . . . . . . . . . . . . . . . . . . . . 16 10.6. Number and Gender . . . . . . . . . . . . . . . . . . . . 16 -ii- 29 ARTICLE I INTRODUCTION 1.1. Name. The name of this plan is the American Water Works Company, Inc. Deferred Compensation Plan ("Deferred Compensation Plan"). 1.2. Effective Date. The effective date of this Deferred Compensation Plan is January 1, 1996. 1.3. Employers. American Water Works Company, Inc. ("American Water Works") and each subsidiary or affiliate of American Water Works that employs one or more Eligible Employees who have become Participants in accordance with Article III, shall each be an "Employer" under this Deferred Compensation Plan. 1.4. Purpose. This Deferred Compensation Plan is established effective January 1, 1996 by American Water Works for the purpose of providing deferred compensation benefits for a select group of management or highly compensated employees of the Employers. This Deferred Compensation Plan provides a means whereby Participants may defer all or a portion of their annual incentive awards they otherwise would receive under the Annual Incentive Plan for services performed for their Employers. It will also be the means for maintaining Eligible Employees' mandatory deferrals of a portion of the annual incentive awards under the Annual Incentive Plan, whether or not those mandatory deferrals are extended for further deferral periods under this Deferred Compensation Plan. All deferrals under this Deferred Compensation Plan shall be in the form of stock equivalent units of American Water Works, the number of which shall be increased whenever a dividend is declared on the common stock of American Water Works. 30 ARTICLE II DEFINITIONS Whenever the following initially capitalized words and phrases are used in this Deferred Compensation Plan, they shall have the meanings specified below unless the context clearly indicates to the contrary: 2.1. "Administrator" shall mean the Vice President-Human Resources of American Water Works Service Company, Inc., or his delegate. 2.2. "Annual Incentive Plan" shall mean American Water Works Company, Inc.'s Annual Incentive Plan, effective January 1, 1996. 2.3. "Beneficiary" shall mean such person or legal entity as may be designated by a Participant under Section 5.5 to receive benefits hereunder after such Participant's death. 2.4. "Board" shall mean the Board of Directors of American Water Works Company, Inc. 2.5. "Change in Control" shall mean a change in the control of American Water Works Company, Inc. which shall be deemed to have occurred upon the earliest to occur of the following: (i) the purchase or announcement of an offer to purchase by a person, or group of persons acting in concert, of at least twenty-five percent of the voting securities of American Water Works Company, Inc.; or (ii) during any twenty-four-month period, individuals who at the beginning of such period constituted the Board cease for any reason to constitute a majority thereof. 2.6. "Committee" shall mean the Compensation and Management Development Committee of the Board. -2- 31 2.7. "Compensation" shall mean the annual incentive award payable to a Participant for a Plan Year under the Annual Incentive Plan before any reduction to such incentive award is effected in accordance with the Annual Incentive Plan and Deferred Compensation Agreement. 2.8. "Elective Deferred Compensation" shall mean that portion of the Participant's Compensation which the Participant elects to defer pursuant to Section 4.1 of this Deferred Compensation Plan in accordance with the Deferred Compensation Agreement. 2.9. "Deferred Compensation Account" shall mean the record keeping account established by the Administrator for each Participant to which the portion of a Participant's annual incentive award that is voluntarily deferred pursuant to Section 4.1 and mandatorily deferred under the terms of the Annual Incentive Plan (and income thereon) is credited and from which distributions to the Participant or to his Beneficiary are debited. 2.10. "Deferred Compensation Agreement" shall mean a document (or documents) as made available from time to time by the Administrator, whereby an Eligible Employee enrolls as a Participant and elects to defer Compensation pursuant to Section 4.1 of this Deferred Compensation Plan. 2.11. "Eligible Employee" shall mean an individual employed by an Employer who is a member of a select group of management or highly compensated employees participating in the Annual Incentive Plan. 2.12. "Participant" shall mean an Eligible Employee who has amounts standing to his credit under a Deferred Compensation Account. 2.13. "Plan Year" shall mean the calendar year. -3- 32 ARTICLE III PARTICIPATION BY ELIGIBLE EMPLOYEES 3.1. Participation. Participation in this Deferred Compensation Plan is limited to Eligible Employees. An Eligible Employee shall participate in this Deferred Compensation Plan as determined by the Committee in its sole discretion. 3.2. Failure to Designate. In the event that the Committee fails to designate the group of Eligible Employees who shall be eligible to participate for any year, each Eligible Employee who was designated in the prior year shall be deemed to have been designated for the next succeeding Plan Year, provided that any such Eligible Employee shall participate for purposes of the next succeeding Plan Year only if he is actively employed by an Employer on the first day of such succeeding Plan Year. 3.3. Continuity of Participation. A Participant who separates from service with all of the Employers will cease active participation hereunder. However, the separation from service of an Eligible Employee with one Employer will not interrupt the continuity of his active participation if, concurrently with or immediately after such separation, he is employed by one or more of the other Employers. 3.4. Immediate Cash-Out of Ineligible Employee. This Deferred Compensation Plan is intended to be an unfunded "top-hat" plan, maintained primarily for the purposes of providing deferred compensation for a select group of management or highly compensated employees. Accordingly, if the Committee determines that any Participant does not qualify as a member of the select group, one hundred percent (100%) of such Participant's Deferred Compensation Account shall be paid to the Participant immediately. -4- 33 ARTICLE IV ANNUAL INCENTIVE AWARD COMPENSATION DEFERRAL AND ACCOUNT CREDITS 4.1. Annual Incentive Award Deferral Election. No later than June 30 of the Plan Year in which an annual incentive award under the Annual Incentive Plan is earned, each Eligible Employee may irrevocably elect, by completing and executing a Deferred Compensation Agreement and filing it with the Administrator, to defer any portion of his annual incentive award to be earned for that year that is not mandatorily deferred under the Annual Incentive Plan. In addition, any mandatorily deferred portion of the annual incentive award to be earned for the Plan Year may also be deferred for a longer period as permitted under this Deferred Compensation Plan provided such election is also made by June 30. 4.2. Deferral in Stock Equivalent Units. All deferred amounts shall be credited to the Participant's Deferred Compensation Account in the form of stock equivalent units. The number of stock equivalent units (calculated to the nearest thousandth of a unit) to be credited shall be calculated by dividing (i) the amount of deferred annual incentive award by (ii) the closing market price of American Water Works common stock as published in The Wall Street Journal report of New York Stock Exchange Composite Transactions for the date the annual incentive award was payable to the Participant. A Participant shall at all times be fully vested in the balance of his Deferred Compensation Account. 4.3. Mandatory Deferrals of Annual Incentive Plan Awards. Any portion of a Participant's annual incentive award that is mandatorily deferred under the terms of the Annual Incentive Plan shall also be credited to a Participant's Deferred Compensation Account in the form and amount of stock equivalent units as calculated in Section 4.2. -5- 34 4.4. Period for Which Deferral Election is Effective. A Participant's deferral election under Section 4.1 shall be effective only with respect to the annual incentive award for the Plan Year specified in the Deferred Compensation Agreement. A Participant must file a separate Deferred Compensation Agreement by June 30 of each subsequent Plan Year in order to make annual incentive award deferrals or extend mandatory deferrals for that Plan Year. ARTICLE V DISTRIBUTIONS 5.1. Election of Distribution Date. At the time a Participant makes an election to defer Compensation under Article IV, such Participant shall also specify in writing in the Deferred Compensation Agreement the date or event on which the cash payment of the Participant's Deferred Compensation Account shall be made. Such date may be any of the following: (a) with respect to voluntarily deferred portions of the annual incentive award: (i) a period of time equal to the period of mandatory deferral applicable to a portion of the Plan Year's annual incentive award for which the voluntary deferral is being made, provided no election is made to extend the period of deferral for that Plan Year's award subject to mandatory deferral; or (ii) the Participant's termination of employment for any reason, including death or disability; (b) with respect to the mandatorily deferred portion of a Plan Year's annual incentive award, the Participant's termination of employment for any reason, including death or disability. -6- 35 5.2. Distribution of Mandatory Deferrals Not Elected To Be Extended. If the Participant has not made an election to extend the deferral period of any mandatory deferral of a portion of his annual incentive award to be earned under the Annual Incentive Plan for any Plan Year, a payment of the cash value of the stock equivalent units credited to his Deferred Compensation Account attributable to such mandatory deferral, including additional units credited as a result of dividends as provided under Section 6.2, shall be made on the date the period of mandatory deferral ends. 5.3. Method of Payment. All distributions under this Plan shall be in the form of a cash lump sum payment. 5.4. Special Election for Early Distribution. A Participant may apply to the Administrator for early distribution of all or any part of his Deferred Compensation Account excluding any amounts attributable to mandatory deferrals that have not been credited to his Deferred Compensation Account for the minimum period of mandatory deferral. Such early distribution shall be made in a single lump sum and in cash, provided that 10% of the amount withdrawn in such early distribution shall be forfeited to the Participant's Employer prior to payment of the remainder to the Participant. In the event a Participant's early distribution election is submitted within one year after a Change in Control the forfeiture penalty shall be reduced to 5%. 5.5. Distributions on Death. In the event of a Participant's death before his Deferred Compensation Account has been distributed, distribution of his entire account, including mandatory deferrals shall be made to the Beneficiary selected by the Participant, in a single lump sum cash payment within 30 days after the date of death (or, if later, after the proper Beneficiary has been identified). A Participant may from time to time change his designated Beneficiary without the consent of such Beneficiary by filing a new designation in writing with the Administrator. If no -7- 36 Beneficiary designation is in effect at the time of the Participant's death, or if the designated Beneficiary is missing or has predeceased the Participant, distribution shall be made to the Participant's surviving spouse, or if none, to his surviving children per stirpes, and if none, to his estate. 5.6. Valuation of Distributions. All distributions under this Deferred Compensation Plan shall be based upon the cash value of the stock equivalent units credited to a Participant's Deferred Compensation Account as of the date immediately preceding the date of the distribution. The cash value payable to a Participant or Beneficiary shall be determined by multiplying the number of stock equivalent units credited to the Deferred Compensation Account by the closing market price of American Water Works common stock on the day immediately preceding the date of distribution (or the last trading day preceding that date) as published in The Wall Street Journal report of New York Stock Exchange Composite Transactions. It is understood that administrative requirements may lead to a delay between such valuation date and the date of distribution, not to exceed 30 days. ARTICLE VI ACCOUNTS 6.1. Deferred Compensation Account. The Administrator shall establish and maintain, or cause to be established and maintained, a separate Deferred Compensation Account for each Participant hereunder who executes an election pursuant to Section 4.1 or has a portion of his annual incentive award mandatorily deferred under the Annual Incentive Plan. Each such Participant's Compensation deferred pursuant to a Deferred Compensation Agreement under Section 4.1 or mandatorily deferred under the Annual Incentive Plan shall be separately accounted for and credited with stock equivalent units, for record keeping purposes only, to his Deferred Compensation -8- 37 Account. A Participant's Deferred Compensation Account shall be solely for the purpose of measuring the amounts to be paid under this Deferred Compensation Plan. The Employers shall not be required to fund or secure the Deferred Compensation Account in any way, the Employers' obligation to Participants hereunder being purely contractual. 6.2. Crediting of Dividends and Statement of Account. The Participant's Deferred Compensation Account shall be deemed invested solely in stock equivalent units of American Water Works common stock, shall be denominated in numbers of stock equivalent units, and shall be valued each time stock equivalent units are credited to such Deferred Compensation Account by multiplying the units by the then-current market value of American Water Works common stock. Whenever a dividend is declared and payable on American Water Works common stock, the number of stock equivalent units in the Participant's Deferred Compensation Account will be increased by the following calculations: (a) the number of units in the Participant's Deferred Compensation Account multiplied by any cash dividend declared by the Board on a share of American Water Works common stock, divided by the closing market price of American Water Works common stock on the related dividend payment date as published in The Wall Street Journal report of New York Stock Exchange Composite Transactions; or (b) the number of units in the Participant's Deferred Compensation Account on the related dividend payment date multiplied by any stock dividend declared by the Board on a share of American Water Works common stock. In the event of any change in the number or kind of outstanding shares of common stock of American Water Works including a stock split or splits (other than a stock dividend as provided above) an appropriate adjustment shall be made in the number of units credited to the Participant's Deferred Compensation Account. As soon as practicable -9- 38 after the end of each Plan Year (and at such additional times as the Administrator may determine), the Administrator shall furnish each Participant with a statement of the balance credited to the Participant's Deferred Compensation Account. ARTICLE VII FUNDING AND PARTICIPANT'S INTEREST 7.1. Deferred Compensation Plan Unfunded. This Deferred Compensation Plan shall be unfunded and no trust shall be created by this Deferred Compensation Plan. The crediting to each Participant's Deferred Compensation Account shall be made through record keeping entries. No actual funds shall be set aside; provided, however, that nothing herein shall prevent the Employers from establishing one or more grantor trusts from which benefits due under this Deferred Compensation Plan may be paid in certain instances. All distributions shall be paid by the Employer from its general assets and a Participant (or his Beneficiary) shall have the rights of a general, unsecured creditor against the Employer for any distributions due hereunder. This Deferred Compensation Plan constitutes a mere promise by the Employers to make benefit payments in the future. 7.2. Participant's Interest in Plan. A Participant has an interest in the cash value represented by the stock equivalent units credited to his Deferred Compensation Account. A Participant has no rights or interests in any American Water Works common stock or dividends and has no right to elect delivery of shares of American Water Works common stock. -10- 39 ARTICLE VIII ADMINISTRATION AND INTERPRETATION 8.1. Administration. Except where certain duties are delegated to the Administrator, the Committee shall be in charge of the operation and administration of this Deferred Compensation Plan. The Committee has, to the extent appropriate and in addition to the powers described elsewhere in this Deferred Compensation Plan, full discretionary authority to construe and interpret the terms and provisions of this Deferred Compensation Plan; to adopt, alter and repeal administrative rules, guidelines and practices governing this Deferred Compensation Plan; to perform all acts, including the delegation of its administrative responsibilities to advisors or other persons who may or may not be employees of the Employers; and to rely upon the information or opinions of legal counsel or experts selected to render advice with respect to this Deferred Compensation Plan, as it shall deem advisable, with respect to the administration of this Deferred Compensation Plan. 8.2. Interpretation. The Committee may take any action, correct any defect, supply any omission or reconcile any inconsistency in this Deferred Compensation Plan, or in any election hereunder, in the manner and to the extent it shall deem necessary to carry this Deferred Compensation Plan into effect or to carry out the Board's purposes in adopting the Plan. Any decision, interpretation or other action made or taken in good faith by or at the direction of the Employers, the Board, the board of directors of any Employer, the Committee, or the Administrator arising out of or in connection with this Deferred Compensation Plan, shall be within the absolute discretion of all and each of them, as the case may be, and shall be final, binding and conclusive on the Employers and all Participants and Beneficiaries and their respective heirs, executors, administrators, successors and assigns. The Committee's determinations hereunder need not be uniform, and may be made selectively among Eligible Employees, whether or not they are similarly -11- 40 situated. Any actions to be taken by the Committee will require the consent of a majority of the Committee members. If a member of the Committee is a Participant in this Deferred Compensation Plan, such member may not decide or determine any matter or question concerning his benefits under this Deferred Compensation Plan that such member would not have the right to decide or determine if he were not a member. 8.3. Records and Reports. The Administrator shall keep a record of proceedings and actions and shall maintain or cause to be maintained all such books of account, records, and other data as shall be necessary for the proper administration of this Deferred Compensation Plan. Such records shall contain all relevant data pertaining to Participants and their rights under this Deferred Compensation Plan. The Administrator shall have the duty to carry into effect all rights or benefits provided hereunder to the extent assets of the Employers are properly available. 8.4. Payment of Expenses. The Employers, in such proportions as the Committee determines, shall bear all expenses incurred by them and by the Committee in administering this Deferred Compensation Plan. If a claim or dispute arises concerning the rights of a Participant or Beneficiary to amounts deferred under this Deferred Compensation Plan, regardless of the party by whom such claim or dispute is initiated, the Employers shall (in such proportions as between the Employers as the Committee determines), and upon presentation of appropriate vouchers, pay all legal expenses, including reasonable attorneys' fees, court costs, and ordinary and necessary out-of-pocket costs of attorneys, billed to and payable by the Participant or by anyone claiming under or through the Participant (such person being hereinafter referred to as the "Participant's Claimant"), in connection with the bringing, prosecuting, defending, litigating, negotiating, or settling of such claim or dispute; provided, that: -12- 41 (a) The Participant or the Participant's Claimant shall repay to his Employer any such expenses theretofore paid or advanced by his Employer if and to the extent that the party disputing the Participant's rights obtains a judgment in its favor from a court of competent jurisdiction from which no appeal may be taken, whether because the time to do so has expired or otherwise, and it is determined by the court that such expenses were not incurred by the Participant or the Participant's Claimant while acting in good faith; provided, further, that (b) In the case of any claim or dispute initiated by a Participant or the Participant's Claimant, such claim shall be made, or notice of such dispute given, with specific reference to the provisions of this Deferred Compensation Plan, to the Committee within two years (three years, in the event of a Change in Control) after the occurrence of the event giving rise to such claim or dispute. 8.5. Indemnification for Liability. The Employers shall indemnify the Administrator, the members of the Committee, and the employees of any Employer to whom the Administrator delegates duties under this Deferred Compensation Plan, against any and all claims, losses, damages, expenses and liabilities arising from their responsibilities in connection with this Deferred Compensation Plan, unless the same is determined to be due to gross negligence or willful misconduct. 8.6. Claims Procedure. If a claim for benefits or for participation under this Deferred Compensation Plan is denied in whole or in part, a Participant will receive written notification. The notification will include specific reasons for the denial, specific reference to pertinent provisions of this Deferred Compensation Plan, a description of any additional material or information necessary to process the claim and why such material or information is necessary, and -13- 42 an explanation of the claims review procedure. If the Committee fails to respond within 90 days, the claim is treated as denied. 8.7. Review Procedure. Within 60 days after the claim is denied or, if the claim is deemed denied, within 150 days after the claim is filed, a Participant or his duly authorized representative) may file a written request with the Committee for a review of his denied claim. The Participant may review pertinent documents that were used in processing his claim, submit pertinent documents, and address issues and comments in writing to the Committee. The Committee will notify the Participant of its final decision in writing. In its response, the Committee will explain the reason for the decision, with specific references to pertinent Deferred Compensation Plan provisions on which the decision was based. If the Committee fails to respond to the request for review within 60 days, the review is treated as denied. ARTICLE IX AMENDMENT AND TERMINATION 9.1. Amendment and Termination. The Board shall have the right, at any time, to amend or terminate this Deferred Compensation Plan, in whole or in part, provided that such amendment or termination shall not adversely affect the right of any Participant or Beneficiary to payment of Participant's Deferred Compensation Account. The Administrator or Committee, upon review of the effectiveness of this Deferred Compensation Plan, may at any time recommend amendments to, or termination of, this Deferred Compensation Plan to the Board. American Water Works reserves the right, in its sole discretion, to discontinue deferrals under, or completely terminate, this Deferred Compensation Plan at any time. If this Deferred Compensation Plan is discontinued with respect to future deferrals, Participants' Deferred Compensation Accounts shall be distributed on the distribution dates elected in accordance with Section 5.1, unless the Committee -14- 43 designates that distributions shall be made on an earlier date. If the Committee designates such earlier date, each Participant shall receive distribution of his entire Deferred Compensation Account as specified by the Committee. If this Deferred Compensation Plan is completely terminated, each Participant shall receive distribution of his entire Deferred Compensation Account in one lump sum cash payment as of the date of this Deferred Compensation Plan terminates. ARTICLE X MISCELLANEOUS PROVISIONS 10.1. Right of Employers to Take Employment Actions. The adoption and maintenance of this Deferred Compensation Plan shall not be deemed to constitute a contract between an Employer and any Eligible Employee, or to be a consideration for, or an inducement or condition of, the employment of any individual. Nothing herein contained, or any action taken hereunder, shall be deemed to give any Eligible Employee the right to be retained in the employ of an Employer or to interfere with the right of an Employer to discharge any Eligible Employees at any time, nor shall it be deemed to give to an Employer the right to require the Eligible Employee to remain in its employ, nor shall it interfere with the Eligible Employee's right to terminate his employment at any time. Nothing in this Deferred Compensation Plan shall prevent an Employer from amending, modifying, or terminating any other benefit plan, including the Annual Incentive Plan. 10.2. Alienation or Assignment of Benefits. A Participant's rights and interest under this Deferred Compensation Plan shall not be assigned or transferred except as otherwise provided herein, and a Participant's rights to benefit payments under this Deferred Compensation Plan shall not be subject to alienation, pledge or garnishment by or on behalf of creditors (including heirs, beneficiaries, or dependents) of the Participant or of a Beneficiary. -15- 44 10.3. Right to Withhold. To the extent required by law in effect at the time a distribution is made from this Deferred Compensation Plan, the Employer or its agents shall have the right to withhold or deduct from any distributions or payments any taxes required to be withheld by federal, state or local governments. 10.4. Construction. All legal questions pertaining to this Deferred Compensation Plan shall be determined in accordance with the laws of the State of New Jersey, to the extent such laws are not superseded by the Employee Retirement Income Security Act of 1974, as amended, or any other federal law. 10.5. Headings. The headings of the Articles and Sections of this Deferred Compensation Plan are for reference only. In the event of a conflict between a heading and the contents of an Article or Section, the contents of the Article or Section shall control. 10.6. Number and Gender. Whenever any words used herein are in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply, and references to the male gender shall be construed as applicable to the female gender where applicable, and vice versa. AMERICAN WATER WORKS COMPANY, INC. By: George W. Johnstone President and Chief Executive Officer Attest: W. Timothy Pohl General Counsel and Secretary -16- EX-13 3 1995 ANNUAL REPORT 45 EXHIBIT 13 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- Consolidated Summary of Selected Financial Data (Dollars in thousands, except per share amounts)
For the years ended December 31, 1995 1994 1993 1992 1991 ============================================================================== Revenues Water service Residential $ 451,143 $ 431,225 $ 399,916 $ 360,800 $ 347,241 Commercial 175,792 169,532 159,335 147,983 143,528 Industrial 54,423 53,049 50,490 47,492 47,071 Public and other 92,565 90,436 84,861 79,196 76,899 Other water revenues 5,849 6,502 5,579 5,372 4,899 - ------------------------------------------------------------------------------ 779,772 750,744 700,181 640,843 619,638 Wastewater service 14,953 13,933 12,143 11,391 10,427 Authority management fees 8,095 5,564 5,213 5,126 5,914 - ------------------------------------------------------------------------------ $ 802,820 $ 770,241 $ 717,537 $ 657,360 $ 635,979 ========================================================== Water sales (million gallons) Residential 117,128 113,950 104,721 97,992 99,855 Commercial 61,726 60,901 57,880 55,587 57,144 Industrial 34,171 34,735 33,040 32,681 33,702 Public and other 26,968 26,953 25,172 24,349 25,172 - ------------------------------------------------------------------------------ 239,993 236,539 220,813 210,609 215,873 ========================================================== Net income $ 92,061 $ 78,652 $ 75,387 $ 68,160 $ 73,593 Earnings per common share on average shares outstanding $2.64 $2.34 $2.29 $2.07 $2.27 Common dividends paid per share $1.28 $1.08 $1.00 $0.925 $0.86 AT YEAR-END Customers (thousands) 1,720 1,706 1,685 1,548 1,529 Total assets $3,403,141 $3,172,237 $2,948,069 $2,415,805 $2,240,503 Preferred stocks with mandatory redemption requirements American Water Works Company, Inc. $ 40,000 $ 40,000 $ 40,000 $ 40,480 $ 40,960 Subsidiaries 42,326 43,737 46,515 50,895 47,107 Long-term debt American Water Works Company, Inc. $ 116,000 $ 131,000 $ 131,000 $ 73,200 $ 73,200 Subsidiaries 1,268,649 1,177,043 1,056,404 870,940 874,804 Market price per share of common stock at year-end $38.88 $27.00 $30.00 $27.38 $26.50
22 46 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- Management's Discussion and Analysis DESCRIPTION OF THE BUSINESS THE COMPANY The principal business of American Water Works Company is the ownership of common stock of companies providing water supply service. THE SERVICE COMPANY The American Water Works Service Company, a subsidiary, provides professional and staff services as required to affiliated companies. These services include accounting, engineering, operations, finance, water quality, information systems, personnel administration and training, purchasing, insurance, safety, and community relations. This arrangement, which provides these services at cost, affords affiliated companies support otherwise unavailable economically or on a timely basis. The regulated companies with less than 100,000 customers have a greater need to utilize these services than do larger companies. THE REGULATED COMPANIES The 22 regulated subsidiary companies provide water service to approximately 6.5 million people in 741 communities in 21 states. As public utilities, the regulated companies function under rules and regulations prescribed by state regulatory commissions. Further, each company is subject to the rules of both federal and state environmental protection agencies, particularly with respect to the quality of the water they distribute. THE FINANCIAL COMPANIES American International Water Services Company owns a 50% interest in AmericanAnglian Environmental Technologies, a joint venture with British water and wastewater utility Anglian Water Plc. AmericanAnglian provides both technical expertise and financing resources to communities throughout the United States to operate and upgrade their water and wastewater systems. In December 1995, AmericanAnglian Environmental Technologies acquired the Company's American Commonwealth Management Services Company subsidiary. American Commonwealth Management Services provides management and operating services, at a profit, to non-affiliated water and wastewater systems. These services are provided under contract to various authorities, utilities, and businesses in Pennsylvania, Massachusetts, Delaware and Florida. American Commonwealth Management Services also owns a facility to regenerate carbon used for water filtration and those capabilities are being marketed to water utilities throughout the country. Massachusetts Capital Resources Company is a subsidiary of the Company created during 1995 for the specific purpose of financing the construction of a water treatment plant in Hingham, Massachusetts, that upon completion will be leased to an affiliated regulated company for 40 years. Occoquan Land Corporation owns land, buildings, and equipment, most of which are leased to affiliated companies. Greenwich Water System is a subsidiary of the Company that owns the common stock of the regulated companies in Connecticut, Massachusetts, New Hampshire, and New York and a portion of the common stock of the regulated company in Pennsylvania. American Commonwealth Company is a subsidiary of the Company that owns a portion of the common stock of the regulated company in New Jersey. THE PHILOSOPHY OF AMERICAN WATER WORKS COMPANY American Water Works Company is dedicated to providing the best possible water service at an affordable cost consistent with adequate compensation for investors and reasonable wages and benefits for its personnel. We believe there is an unalterable link between quality service, responsive regulation, and financial success. Three basic principles are observed under this management philosophy: 1. The preservation and efficient utilization of capital assets are best assured by a management approach that draws upon prudent planning, builds consensus and acts decisively on a timely basis. 2. A regulated subsidiary must exhibit the ability to attract the capital it requires as a prerequisite to the initiation of construction of facilities needed to meet water service demands. 3. The ability to attract needed capital is dependent upon consistently achieving adequate earnings. This dictates an aggressive pursuit of regulatory decisions acknowledging this principle. In accordance with this philosophy, the Company seeks to enhance the value of its shareholders' investment through consistent earnings growth. The market value of the Company's common stock is subject to the volatility always present in the stock market, as well as to the vagaries of the national economy. The true worth of this stock should be measured by the intrinsic value of the tangible assets of American Water Works and the worth of the organization put in place by the management team. These assets are used to provide a service which is essential for urban living. There is no substitute for water. 23 47 - --------------------------------------------------------------------------- Management's Discussion and Analysis THE INVESTMENT STRATEGY OF AMERICAN WATER WORKS COMPANY The business of the Company is the investment in common stock of water utilities. The purpose of this business is to protect and enhance the value of our shareholders' investment through growth in earnings and dividends per share. We seek to accomplish this purpose without diluting existing shareholders' investment. Viewed over the long term, we believe this strategy has and will continue to maximize the total return to our shareholders. The value of the investment in the Company has increased due to earnings growth. Earnings growth has resulted from increased investment by the Company in its subsidiaries funded by the sale of securities and reinvestment of income. This reinvestment defers shareholder payment of income taxes so earnings growth can be compounded on a larger investment base. It also permits consistent and reliable dividend increases. Investors preferring a greater current yield can supplement their cash flow by occasionally selling a portion of their enhanced investment in the Company. The following chart reflects the results of this investment strategy: [ID: GRAPHIC -- BAR CHART SHOWING THE FOLLOWING VALUES ON A SCALE OF 0% TO 10%] COMPOUND ANNUAL GROWTH RATES 1990 -- 1995 Investment in subsidiaries ... 9.5% Operating revenue ............ 7.0% Earnings per share ........... 7.4% Dividends per share .......... 9.9% Book value per share ......... 7.2% The Company's investment in its subsidiaries has increased from $637 million at year-end 1990 to $1 billion at year-end 1995. The top schedule on page 25 defines how this has been accomplished. This analysis illustrates that the growth in the Company's investment in its subsidiaries has been accomplished by subsidiary earnings retention, the investment of a portion of the dividends received by the Company from subsidiaries, the sale of securities and bank loans. Earnings to common shareholders have risen from $56.4 million in 1990 to $88.1 million in 1995. Income to common shareholders of the Company is influenced by three factors: 1. The amount of investment by the Company 2. The rate of return on that investment 3. The costs to operate the Company The bottom schedule on page 25 demonstrates the source of change since 1990 in income to common stock. This analysis demonstrates that the growth in earnings over this period is the direct result of new investment in subsidiaries. Fluctuations in the rate of return are the result of the influence of weather conditions on sales volume and the response of utility regulation to the economic climate. The cost to operate the Company has increased $7.4 million over this five-year period. SYSTEM GROWTH AND DEVELOPMENT CAPITAL SPENDING PROGRAM The investment in new facilities in 1995 totaled $331 million, which was 24% above 1994 construction expenditures of $266 million. Construction activity planned for 1996 totals $312 million. Expenditures recorded in any given year are influenced by many factors, including the economy, regulation, material delivery and weather conditions. It is anticipated that approximately $1.3 billion will be invested in new facilities between now and the year 2000. These expendi- 24 48 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - ---------------------------------------------------------------------------
Analysis of Growth in Investment in Subsidiaries (000) 1995 1994 1993 1992 1991 =============================================================================================== Investment in subsidiaries at December 31 $1,003,088 $898,219 $810,372 $749,513 $693,312 Investment in subsidiaries at January 1 898,219 810,372 749,513 693,312 636,622 - ----------------------------------------------------------------------------------------------- Change during the year $ 104,869 $ 87,847 $ 60,859 $ 56,201 $ 56,690 ====================================================== Sources of additional investment Undistributed earnings of subsidiaries $ 26,315 $ 24,532 $ 18,984 $ 19,401 $ 15,690 Investment by the Company in subsidiary securities 78,554 63,315 41,875 36,800 41,000 - ----------------------------------------------------------------------------------------------- Change during the year $ 104,869 $ 87,847 $ 60,859 $ 56,201 $ 56,690 ====================================================== Net income of subsidiaries $ 103,497 $ 89,449 $ 84,248 $ 75,260 $ 80,692 Return on January 1 investment in subsidiaries 11.5% 11.0% 11.2% 10.9% 12.7% Subsidiaries' common stock dividend payout ratio 75% 73% 77% 74% 81% - ----------------------------------------------------------------------------------------------- Dividends to the Company from subsidiaries $ 77,182 $ 64,917 $ 65,264 $ 55,859 $ 65,002 - ----------------------------------------------------------------------------------------------- Company's use of cash Mandatory redemption of securities -- -- 480 1,680 16,930 Preferred dividends 3,984 3,984 3,996 4,019 3,420 Other cash requirements 9,765 10,744 7,556 6,630 8,471 - ----------------------------------------------------------------------------------------------- 13,749 14,728 12,032 12,329 28,821 - ----------------------------------------------------------------------------------------------- Available for common dividends 63,433 50,189 53,232 43,530 36,181 Common dividends declared 42,500 34,386 31,130 28,609 26,423 Cash payout ratio 67% 69% 58% 66% 73% Available after dividends 20,933 15,803 22,102 14,921 9,758 Cash at January 1 17,647 23,302 78 15 23 - ----------------------------------------------------------------------------------------------- 38,580 39,105 22,180 14,936 9,781 Investment in securities of subsidiaries (78,554) (63,315) (41,875) (36,800) (41,000) Notes and advances to subsidiaries 10 4,510 1,010 5,210 1,015 - ----------------------------------------------------------------------------------------------- (39,964) (19,700) (18,685) (16,654) (30,204) - ----------------------------------------------------------------------------------------------- Net bank borrowings 3,700 -- (21,255) 11,425 (13,255) Proceeds from long-term debt -- -- 81,000 -- -- Proceeds from preferred stock -- -- -- -- 40,000 Proceeds from common stock 36,383 37,347 5,442 5,307 3,474 Early redemption of securities -- -- (23,200) -- -- - ----------------------------------------------------------------------------------------------- 40,083 37,347 41,987 16,732 30,219 - ----------------------------------------------------------------------------------------------- Cash at December 31 $ 119 $ 17,647 $ 23,302 $ 78 $ 15 ======================================================
Analysis of Change in Income (000) 1995 1994 1993 1992 1991 - ----------------------------------------------------------------------------------------------- Net income to common stock-current year $ 88,077 $ 74,668 $ 71,391 $ 64,141 $ 69,890 Net income to common stock-prior year 74,668 71,391 64,141 69,890 56,398 - ----------------------------------------------------------------------------------------------- Change in income 13,409 3,277 7,250 (5,749) 13,492 Change in Company operating cost 639 1,924 1,738 317 2,792 - ----------------------------------------------------------------------------------------------- Change in investment income $ 14,048 $ 5,201 $ 8,988 $ (5,432) $ 16,284 ====================================================== Sources of change in investment income Additional investment in subsidiaries $ 10,122 $ 6,718 $ 6,317 $ 6,154 $ 8,059 Change in rate of return on investment 3,926 (1,517) 2,671 (11,586) 8,225 - ----------------------------------------------------------------------------------------------- Total change in investment income $ 14,048 $ 5,201 $ 8,988 $ (5,432) $ 16,284 ======================================================
25 49 - --------------------------------------------------------------------------- Management's Discussion and Analysis tures will support ongoing programs to comply with regulations promulgated to ensure water quality and protect the environment, to keep pace with the development of our service territories and to replace plant as necessary. We expect the investment in this construction program to be recognized in regulatory decisions. Supply improvements in 1995 accounted for approximately 5% of the year's construction expenditures. Significant projects included the construction or re-drilling of ground water sources in the systems serving Baldwin Hills and San Marino, California; Greenwood and Franklin, Indiana; Bel Air, Maryland; Atlantic County, Belvedere and Oxford, New Jersey; Clovis, New Mexico; and Tiffin, Ohio. In addition, substantial projects involving new intake, pumping and/or piping facilities were completed in Butler, Pennsylvania and Greenwich, Connecticut for the purpose of enhancing the source of supply capabilities in those systems. Investment in treatment and pumping facilities comprised 38% of the 1995 construction expenditures. Construction was nearly completed on a 30 million gallons-per-day capacity treatment plant on the Delaware River in New Jersey as part of the Tri-County Water Supply Project that will supplement community water supplies in three counties of southern New Jersey in the Philadelphia metropolitan area. During 1995, significant production facility improvements were also completed in Kittanning, Pittsburgh, Susquehanna and Yardley, Pennsylvania; Tiffin, Ohio; Lexington, Kentucky; Chattanooga, Tennessee; Huntington, West Virginia; and Haddon Heights, New Jersey. Significant progress was made toward completion of a new 7 million gallons-per-day facility to treat the existing surface and ground water supplies in Hingham, Massachusetts. Additionally, construction was initiated on the 5 million gallons-per-day treatment plant which will serve the Mercer and Summers County regions of West Virginia. Investment in new transmission and distribution facilities accounted for 33% of 1995 construction expenditures. The most prominent project involved the completion of nearly 30 miles of 24-inch through 54-inch transmission mains which deliver water from New Jersey-American Water Company's new Tri-County Water Supply Project treatment plant to residents in Burlington, Camden and Gloucester Counties. The project also included construction of 13 interconnections to deliver supply to surrounding water systems. Other significant projects in 1995 involving new transmission and distribution facilities included major main extension programs in Pennsylvania and New Jersey to provide service to residents that previously had inadequate well supplies. Also, booster stations and storage tanks were completed at a number of operating systems during the year. Engineering planning remained focused on the importance of having adequate source of supply and production facilities in every service area. This goal has been achieved at most systems and was aggressively addressed at the locations where additional supply is needed due to existing source limitations, projected growth, or regional opportunities. Detailed source of supply and production planning was undertaken for the systems in Jeffersonville and New Albany, Indiana; Alton, Illinois; Millbury, Massachusetts; St. Charles County, Missouri; Monmouth and Ocean Counties, New Jersey; and Norristown, Yardley and Brownsville, Pennsylvania. In addition, the Company's formal Comprehensive Planning Study program proceeded with reports completed for West Virginia-American Water Company, which encompasses 13 service areas, and for five systems in Pennsylvania and four systems in Indiana. Along with the continuation of the studies for Indiana-American Water Company and Pennsylvania-American Water Company, which in total will include 47 separate service areas, studies are underway for the regulated companies in Illinois, Iowa, Missouri, New York, Connecticut and California.
CONSTRUCTION EXPENDITURES BY CATEGORY (000) 1995 1994 1993 1992 1991 ======================================================================================= Water plant Sources of supply $ 18,156 $ 11,511 $ 8,054 $ 9,110 $ 10,498 Treatment and pumping 125,350 82,700 51,332 53,303 53,361 Transmission and distribution 110,600 108,929 77,998 80,357 63,232 Services, meters and fire hydrants 45,835 40,506 34,401 33,989 31,000 General structures and equipment 29,602 20,703 19,585 17,935 23,698 Wastewater plant 1,219 1,390 1,746 2,885 1,198 - --------------------------------------------------------------------------------------- $330,762 $265,739 $193,116 $197,579 $182,987 ================================================
26 50 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- ACQUISITIONS OF WATER SYSTEMS In addition to the investment of capital in facilities which are absolutely essential to safe and reliable water service, we continue to search for opportunities to acquire water systems that represent the prospect for enhanced shareholder value. In that regard, in late April of 1995, the Company announced that its subsidiary, Pennsylvania- American Water Company, agreed to purchase the water utility operations of Pennsylvania Gas and Water Company, a subsidiary of Pennsylvania Enterprises, Inc. The asset sale was consummated on February 16, 1996 for approximately $409 million. Pennsylvania-American funded the purchase through short-term borrowings and the assumption of $143 million of long-term debt. The short-term debt will be refunded through the issuance of long-term debt and the sale of common stock to the Company. The acquired operations, which include 10 water treatment plants and 36 reservoirs, serve 400,000 people in northeastern Pennsylvania. With Pennsylvania-American's current service territory primarily in the western and central-southeastern parts of the commonwealth, the Company anticipates that the addition of this large northeastern operation will increase this subsidiary's geographical diversity and provide opportunity for greater operational synergy. Pennsylvania-American Water Company also paid $5.3 million for four water systems in the northeastern part of the state, increasing the population it serves by about 30,000 during 1995. On November 7, 1995, voters in Howell Township, New Jersey, approved a referendum providing for the sale of the community's water system to the Company's subsidiary, New Jersey-American Water Company, for $35.1 million. The system, which serves 16,000 people, is located between the Shrewsbury and Lakewood operating centers of New Jersey-American. A portion of its supply and treatment capacity will be used to serve those two service territories. In 1995, West Virginia-American Water Company paid $0.3 million for three water systems. These systems, including the Town of Winfield in Putnam County, will serve nearly 1,300 people. During 1994, the integration of utilities acquired in 1993 in Indiana, Missouri, Ohio and Michigan was completed, resulting in more efficient and productive water service. A total of $62 million was paid for the common stock of these Midwestern utilities that serve a population of approximately 355,000 in 17 communities. The acquired utilities in Indiana and Missouri were merged with the Company's existing subsidiaries in those states effective January 1, 1995. On September 29, 1995, under the threat of taking by eminent domain, the portion of these assets in Ohio which serve a population of 54,000 were sold. The sale of these assets by Ohio Suburban Water Company to the City of Huber Heights was in accordance with a sales agreement providing for the Company to recover the entire investment that it had made only two years earlier. Accordingly, there was no gain or loss from the sale of these assets for $14.4 million. During 1995, the Orange County Local Agency Formation Commission decided not to approve a $300 million proposal from California-American Water Company, a subsidiary, to acquire the water and wastewater systems of the Santa Margarita Water District in Orange County, California. This proposal, made in conjunction with a petition by customers of the District, was filed in May 1994. RESULTS OF OPERATIONS The Company's experience in assessing the impact of inflation on its business indicates that with timely rate increases authorized by regulators, revenue will likely keep pace with inflation. Inflation did not significantly impact the Company's financial position or results of operations in 1993 through 1995, and it is not expected to materially affect 1996 results. The results of operations of the Company for the year ended December 31, 1993 included four months of results from the four acquired Midwestern companies' operations.
OPERATING REVENUES (000) 1995 1994 1993 =============================================================== Water service $779,772 $750,744 $700,181 Wastewater service 14,953 13,933 12,143 Authority management fees 8,095 5,564 5,213 - --------------------------------------------------------------- $802,820 $770,241 $717,537 ==================================
27 51 - --------------------------------------------------------------------------- Management's Discussion and Analysis CONSOLIDATED OPERATING REVENUES Revenues in 1995 totaled $802.8 million and were 4% above those for 1994. The volume of water sold increased 1% to 240 billion gallons in 1995. Rate authorizations adjusted the water service rates in effect for 11 regulated companies during 1995. These authorizations are expected to increase annual revenues by $17.3 million. Operating revenues for 1995 included approximately $5.9 million which resulted from these rate orders. Three rate adjustments have been authorized for regulated subsidiaries so far in 1996 which will generate approximately $7.2 million of additional annual revenues. Seven applications are awaiting regulatory decisions. If granted in full, they would produce additional annual revenues of $77 million. A rate increase application pending for New Jersey-American Water Company accounts for $52.9 million of the $77 million in requested additional annual revenues awaiting decision. That case addresses New Jersey-American's $186 million Tri-County Water Supply Project that takes water from the Delaware River to a new treatment plant and then delivers it throughout the southern New Jersey area by way of a nearly 30-mile long pipeline. On February 2, 1996 an Administrative Law Judge issued a decision on the case finding that the Company had acted reasonably and prudently in designing the project and recommending full rate base recognition of the project that was found to be a reasonable approach to the region's needs. The judge's decision, if approved by the commission, would result in approximately $39.5 million in additional annual revenues. The project was designed partly as a supply source for future wholesale customers who have been mandated by the state to reduce their intake from an aquifer that is suffering from declining water levels. The actual revenues the Company would receive under the judge's decision would depend on how many of these wholesale customers enter into contracts to use water from the project as their alternative source of supply. Revenues of $770.2 million in 1994 were 7% above those for 1993. Ten regulated companies received rate orders in 1994, authorizing increases in annual revenues aggregating $27.2 million. Operating revenues for 1994 included approximately $10.4 million which resulted from these rate orders. The 236.5 billion gallons of water sold in 1994 was a 7% increase compared to 1993, reflecting the impact of summer weather patterns and the Company's August 1993 acquisition of the four Midwestern water utilities. The acquisition of the Midwestern utilities increased operating revenues by $22.7 million in 1994 and added 11.6 billion gallons in water sales volume in comparison to 1993.
PERCENTAGE OF WATER REVENUES BY CUSTOMER CLASS 1995 1994 1993 =============================================================== Residential 57.9% 57.4% 57.1% Commercial 22.5% 22.6% 22.8% Industrial 7.0% 7.1% 7.2% Public and other 11.9% 12.0% 12.1% Other water revenues .7% .9% .8% - --------------------------------------------------------------- 100.0% 100.0% 100.0% ================================
Residential Residential water service revenues in 1995 amounted to $451.1 million, an increase of 5% over those for 1994. This 1995 revenue improvement followed an increase of 8% in 1994. The volume of water sold to residential customers increased by 3% in 1995 to 11 7.1 billion gallons. The average unit price of residential water increased by 2% in 1995. A 2% increase in unit price for water due to rate increases and the comparatively low unit price of water sold by the acquired Midwestern utilities resulted in the average unit price for water in 1994 for residential customers decreasing by 1%. Commercial Revenues from commercial customers in 1995 rose by 4% to $175.8 million, following an increase of 6% in 1994. Commercial customers purchased 61.7 billion gallons of water in 1995, 1% more than in 1994. The average unit price of water increased by 3% in 1995, up from a 1% increase in 1994. Industrial Industrial water use of 34.2 billion gallons in 1995 was 2% lower than in 1994. Revenues from industrial sales in the amount of $54.4 million were 3% above those recorded in 1994 due to a 4% increase in the average unit price of water. There was no change in the average unit price of water in 1994. Excluding the industrial sales of the four acquired Midwestern utilities, the volume of water used by industrial customers had increased in 1994 for the first time in six years. Public and Other Public and other revenues in 1995 rose by 2% to $92.6 million following an increase of 7% in 1994. Revenues derived from municipal governments for fire protection services and customers requiring special private fire service facilities totaled $36.5 million in 1995, exceeding 1994 revenue from these customers by 3%. The 27 billion gallons of water sold to governmental entities and resale customers was approximately equal to the quantities sold in 1994. Revenues generated by these sales totaled $56.1 million and exceeded 1994 revenues by 2%. 28 52 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - ---------------------------------------------------------------------------
PERCENTAGE OF WATER SALES (GALLONS) BY CUSTOMER CLASS 1995 1994 1993 =============================================================== Residential 48.8% 48.2% 47.4% Commercial 25.7% 25.7% 26.2% Industrial 14.3% 14.7% 15.0% Public and other 11.2% 11.4% 11.4% - --------------------------------------------------------------- 100.0% 100.0% 100.0% ================================
Wastewater Service Revenues Regulated subsidiaries provided wastewater collection service to portions of the Company's service area in New Jersey, Ohio, Pennsylvania, Missouri and Indiana. Revenues from these services amounted to $15.0 million in 1995, compared with $13.9 million in 1994 and $12.1 million in 1993. Authority Management Fees These fees represent charges for management services provided by American Commonwealth Management Services Company to public water and wastewater authorities in Pennsylvania, Massachusetts, Delaware and Florida. In late December 1995, American Commonwealth Management Services was acquired by AmericanAnglian Environmental Technologies, a joint venture in which a subsidiary of the Company owns a 50% interest. Management fees of $8.1 million were received for these services in 1995 compared with fees of $5.6 million in 1994 and $5.2 million in 1993.
OPERATING EXPENSES (000) 1995 1994 1993 ==================================================================== Operation and maintenance expenses $402,362 $391,539 $362,451 Depreciation and amortization 79,977 72,892 66,838 General taxes 76,208 73,085 67,917 - -------------------------------------------------------------------- $558,547 $537,516 $497,206 ==================================
CONSOLIDATED OPERATING EXPENSES Operating expenses in 1995 increased by 4% to $558.5 million, following an 8% increase in 1994. The acquisition of the four Midwestern water utilities increased operating expenses by $16.5 million in 1994 in comparison to 1993. Operation and maintenance expenses totaled $402.4 million in 1995, 3% higher than in 1994. These expenses had increased by 8% in 1994. The Midwestern acquisition increased operating and maintenance expenses by $12.4 million in 1994 in comparison to 1993. Employee-related costs, representing 48% of operation and maintenance expenses, increased by 2% in 1995 and 9% in 1994. The primary components of employee-related costs are wage and salary expenses, which were up 3% to $148.1 million in 1995 following a 5% increase in 1994. The number of employees at year-end totaled 3,777, which was 5% below the employment level of 3,992 at the close of 1994 and 7% below the 4,062 employees at the end of 1993. In 1993, the Company added 158 employees due to the acquisition of four Midwestern water utilities and in 1995, because of the change in ownership of American Commonwealth Management Services Company and the sale of the assets of the Ohio Suburban Water Company, 79 employees left the Company. Excluding the effect of these acquisitions and dispositions, the Company's workforce has decreased by 284 employees or 7% since 1992, as the result of continued efforts to improve operating efficiencies. Health care expenses, which include the cost of providing current benefits as well as the expected cost of providing postretirement health care and life insurance benefits, decreased by 12% to $33.7 million in 1995 after a 19% increase in 1994. The fluctuation in health care costs is attributable to the timing of the rate recovery permitted by regulatory authorities of the additional expense resulting from the adoption in 1993 of a new accounting standard requiring the Company to accrue the cost of postretirement benefits in a manner similar to that used to account for pensions. These costs declined in 1995 because of rate decisions allowing an increased portion of these expenses to be deferred and recovered in rates in future periods. In 1994 the portion of these postretirement costs that were deferred pending future recovery had declined in comparison to the previous year. The cost of providing current health care benefits has been increasing due to the rising cost of medical treatment programs. The increase in health care expenses has been moderated by certain cost containment measures that were implemented in 1991, including plan options which provide for employee contributions toward the cost of health care benefits. In 1996 the Company will implement further plan revisions that will encourage employees to take advantage of the managed care plan option and that will require additional contributions from employees and early retirees. 29 53 - --------------------------------------------------------------------------- Management's Discussion and Analysis Pension expense increased by 54% in 1995 to $9.4 million following a 113% increase in 1994. Pension cost is deferred by certain subsidiaries when it is probable such costs will be recovered in future water service rates as contributions are made to the plan. Cash contributions of $10 million in 1995 and $4.8 million in 1994 were made to the pension plan after a period of several years during which no contributions were made due to the funded status of the plan. Deferrals of pension cost decreased in conjunction with the resumption of contributions, resulting in the large increases in pension expense in 1995 and 1994.
OPERATION AND MAINTENANCE EXPENSES (000) 1995 1994 1993 ==================================================================== Employee-related costs $191,151 $187,735 $171,989 Fuel and power 33,282 33,216 30,530 Purchased water 44,114 40,375 38,628 Chemicals 14,974 13,089 11,605 Waste disposal 12,234 11,994 11,235 Maintenance materials and services 22,258 22,115 21,585 Operating supplies and services 54,416 53,399 48,573 Customer billing and accounting 16,917 14,809 14,442 Other 13,016 14,807 13,864 - -------------------------------------------------------------------- $402,362 $391,539 $362,451 ==================================
Expenses associated with the collection, treatment, and pumping of water include the cost of fuel and power, water purchased from other suppliers, chemicals for water treatment and purification, and waste disposal. These costs increased by 6% in 1995 after a 7% rise in 1994. The unit cost of water produced increased 4% in 1995, after being unchanged in 1994. Higher purchased water costs, reflecting increased volume and rate increases authorized for other utilities supplying water to several subsidiaries, were primarily responsible for the rise in the unit cost of production. Maintenance materials and services, which include emergency repairs as well as costs for preventive maintenance, increased by 1% in 1995 following a 2% increase in 1994. Operating supplies and services include the day-to-day expenses of office operation, legal and other professional services, as well as information systems and other office equipment rental charges. These costs increased by 2% in 1995 after a 10% increase in 1994. Customer billing and accounting charges increased by 14% in 1995, and increased by 3% in 1994. These costs increased in 1995 because of a change from quarterly to monthly billing in several service areas. Other operation and maintenance expenses include regulatory costs and system-wide casualty and liability insurance premiums. These expenses decreased by 12% in 1995 after increasing by 7% in 1994. Regulatory costs vary from year-to-year because of changing levels of rate case activity and different amortization periods for these costs. Casualty insurance premiums fluctuate as a result of claims experience. Depreciation and amortization increased by 10% in 1995 and 9% in 1994. The higher depreciation expense in both years was primarily due to growth in utility plant in service. General taxes, which include gross receipts, franchise, property, capital stock, payroll and miscellaneous taxes, increased by 4% in 1995 after an 8% rise in 1994. Gross receipts and franchise taxes, which are a function of revenues, increased by 3% in 1995. Property and capital stock taxes are assessed on the basis of tax values assigned to assets and capitalization. These taxes in 1995 were 6% above those in 1994 due to higher property values and tax rate increases. Payroll taxes in 1995 were approximately equal to 1994. CONSOLIDATED OTHER INCOME AND INCOME DEDUCTIONS During 1995 the Company resolved its litigation with the Grafton Water District in Massachusetts to recover the fair market value of the water utility taken through eminent domain by the District in 1988. In 1990, a jury awarded the Company $5.6 million for these assets. Since that time, the District pursued various appeals, all of which resulted in reaffirmation of the jury award. In addition to the approximately $1.1 million paid by the District in 1988, the Company received $6.6 million which included the remainder of the jury award and $2.1 million in interest. 30 54 The total allowance for funds used during construction recorded in 1995 was $21.3 million, which was 104% higher than in 1994. This large increase was due to the New Jersey-American Water Company's $186 million Tri-County Water Supply Project which will begin operation in early 1996. Interest expense rose 6% to $117 million in 1995 compared to 1994. This expense had increased by 10% in 1994 primarily due to an increase in total debt to fund construction of new water service assets. CONSOLIDATED INCOME TAXES Income taxes increased by 15% in 1995, following a 4% increase in 1994. The 1995 increase in income taxes is due to higher taxable income. Details regarding the components of the total amount of state and federal income taxes, and a reconciliation of statutory to reported federal income tax expense are included in Note 3 to the financial statements.
SUMMARY OF TAXES (000) 1995 1994 1993 ======================================================================== Gross receipts and franchise taxes $ 33,272 $ 32,168 $ 30,174 Property and capital stock taxes 28,868 27,245 24,664 Payroll taxes 11,524 11,521 10,893 Miscellaneous taxes 2,544 2,151 2,186 State income taxes 8,079 7,718 7,375 Federal income taxes 49,567 42,194 40,489 - ------------------------------------------------------------------------ $133,854 $122,997 $115,781 ==================================
CONSOLIDATED NET INCOME Consolidated net income in 1995 totaled $92.1 million and was 17% above 1994 net income. Without the one-time after-tax gain of $3.9 million in 1995 from the litigation relating to the taking through eminent domain of water system assets, consolidated net income increased by 12% in comparison to 1994. Consolidated net income in 1994 was 4% above that recorded in 1993. Consolidated net income to common stock totaled $88.1 million in 1995 and was 18% above that reported for 1994. Without the gain from the settlement of litigation, consolidated net income to common stock increased by 13% above that reported in 1994. It had increased by 5% in 1994.
CAPITALIZATION COMMON PREFERRED LONG-TERM (000) EQUITY STOCK DEBT ======================================================================= Company 1995 $818,939 $ 51,673 $ 131,064 1994 733,440 51,673 131,071 1993 655,275 51,673 131,074 1992 609,572 52,153 73,275 1991 568,733 52,633 74,568 - ----------------------------------------------------------------------- Regulated Subsidiaries 1995 $953,718 $ 50,325 $1,260,389 1994 855,961 51,738 1,251,101 1993 768,921 54,532 1,060,776 1992 705,419 60,093 966,171 1991 650,307 56,812 919,074 - ----------------------------------------------------------------------- Consolidated 1995 $818,939 $100,287 $1,428,970 1994 733,440 101,698 1,381,972 1993 655,275 104,490 1,192,809 1992 609,572 109,529 1,036,604 1991 568,733 106,726 986,691 - -----------------------------------------------------------------------
CAPITALIZATION RATIOS COMMON PREFERRED LONG-TERM EQUITY STOCK DEBT ======================================================================= Company 1995 82% 5% 13% 1994 80% 6% 14% 1993 78% 6% 16% 1992 83% 7% 10% 1991 82% 7% 11% - ----------------------------------------------------------------------- Regulated Subsidiaries 1995 42% 2% 56% 1994 40% 2% 58% 1993 41% 3% 56% 1992 41% 3% 56% 1991 40% 3% 57% - ----------------------------------------------------------------------- Note: Long-term debt includes amounts due within one year.
31 55 - --------------------------------------------------------------------------- Management's Discussion and Analysis LIQUIDITY AND CAPITAL RESOURCES Internal sources of cash flow are provided by retention of a portion of earnings, amortization of deferred charges, deferral of taxes and depreciation. Internal cash generation is influenced by weather patterns, economic conditions and the timing of rate relief. When internal cash generation is not sufficient to meet corporate obligations on a timely basis, external sources of funds are utilized. External cash availability and its cost are dependent upon, among other things, the consistency and reliability of earnings. Outside sources of cash consist of short-term bank loans, the sale of securities -- bonds, preferred stock and common stock -- as well as advances and contributions from developers. THE PARENT COMPANY The Company pays all of its administrative and interest expenses, meets its mandatory contributions to sinking funds, retires maturing bonds, and pays dividends on all classes of stock from the dividends received from investments in its subsidiary companies. Remaining funds are retained for additional investment in subsidiaries. Investments are made when prospective returns are expected to continue at an adequate level or the potential for satisfactory earnings has been exhibited. Periodically, it is necessary to supplement internal sources of cash flow with short-term bank loans. These loans are repaid as internal sources of cash allow or with proceeds from the periodic issuance of new securities. In addition to the reinvestment of common stock dividends, the Company's Dividend Reinvestment and Stock Purchase Plan allows shareholders and customers of the regulated subsidiaries to purchase up to $5,000 of common stock each month directly from the Company at the then prevailing market price. Prior to March 1, 1996, such purchases were offered at a 5% discount from the prevailing market price. Common dividends in the amount of $4.8 million were reinvested during 1995, which resulted in the issuance of 169,543 new shares of common stock. Proceeds received from optional cash purchases of 904,936 new shares of common stock totaled $26.1 million in 1995. Another 77,365 shares of common stock were issued in connection with the Employees' Stock Ownership Plan and 102,304 shares of common stock were issued in connection with a 401(k) Savings Plan for Employees in return for cash contributions from employees totaling $1.6 million and Company contributions with a value of $1.4 million. The Company invested $78.6 million in new common stock of subsidiaries during 1995. It also increased its equity investment in subsidiaries by $26.3 million from the earnings retained by them. The Company plans to continue to use short-term bank borrowings, as cash requirements warrant it, to finance additional investment in subsidiaries. In addition, during 1996, the Company intends to publicly offer common stock to finance the larger investment in subsidiaries related to the acquisition of the water assets of the Pennsylvania Gas and Water Company. Common stock also is expected to be issued in connection with the continuation of the Company's Dividend Reinvestment and Stock Purchase Plan, the Employees' Stock Ownership Plan and the Savings Plan for Employees. THE SUBSIDIARY COMPANIES Regulated subsidiary companies fund construction programs and supplement cash flow by borrowing from banks under individual credit lines established annually. Ample credit lines are available to provide funds needed for 1996 construction requirements and to maintain bank borrowings not yet refinanced on a long-term basis. Bank borrowings are repaid from the proceeds obtained from selling bonds and preferred stock either publicly or to institutional investors on a private placement basis, and selling common stock to the Company. Security offerings are made when they are of marketable size, meet indenture and charter requirements and can compete successfully in the capital market. In order to compete successfully, the individual company must have exhibited satisfactory earnings. Capitalization and dividend payout ratios are maintained within a range found acceptable for investor-owned water companies. Aggregate bank borrowings of subsidiaries at year-end 1995 amounted to $144.9 million compared to $82.4 million at year-end 1994. During 1995, the Company created a subsidiary, Massachusetts Capital Resources Company, for the specific purpose of financing the construction of a water treatment plant. This new subsidiary issued $37.7 million of tax-exempt mortgage bonds with an average maturity of 29 years and a weighted average coupon rate of 6.77%. Upon completion of the plant in 1996, the facility will be leased for 40 years to a regulated subsidiary of the Company. Also in 1995, eight subsidiaries issued $94.6 million of taxable mortgage bonds at interest rates between 6.76% and 8.58%. Proceeds from the sale of the bonds were used to repay bank loans, fund construction programs, and to refinance existing debt at lower rates. 32 56 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- The subsidiary companies plan to fund acquisitions, construction programs, and repay bank borrowings and maturing bonds with the issuance of approximately $290 million of long-term debt and $230 million of common stock to the Company in 1996. Excluding short-term borrowings incurred in connection with the recent asset acquisition in Pennsylvania, the combined amount of subsidiary bank borrowings and bonds maturing within one year is expected to remain at approximately the current level during 1996. During 1995, subsidiaries repaid $11.6 million of maturing bonds and certain higher yielding bonds before maturity. In addition, subsidiaries made mandatory payments to sinking funds in amounts adequate to retire $73.9 million of debt and redeem $1.4 million of preferred stocks. REGULATION Twenty state commissions regulate the Company's utility subsidiaries. They have broad authority to establish rates for service, prescribe service standards, review and approve rules and regulations and, in most instances, they must approve long-term financing programs prior to their completion. The jurisdiction exercised by each commission is prescribed by state legislation and therefore varies from state to state. The commissioners in Arizona are elected by the voting public. During 1995, the Tennessee Legislature did not renew the authority of the Tennessee Public Service Commission, but in its place created the Tennessee Regulatory Authority. The new Authority will consist of three directors to be appointed by the Governor, the Speaker of the Senate, and the Speaker of the House of Representatives. Under prior regulation by the Tennessee Public Service Commission, each of the commissioners was elected by the electorate of Tennessee. Much of the authority of the Public Service Commission, including the regulation of water companies, will be assumed by the Tennessee Regulatory Authority. The Company does not anticipate any material changes in regulation brought about by this change. In Virginia, members of the State Corporation Commission are elected by a joint vote of the two houses of the general assembly. All other state commissioners regulating subsidiaries are appointed by the governors of the respective states and usually require approval by the state legislature. Commissions range in size from three to seven members. The background of the individuals serving in these important positions covers a broad spectrum. Economic regulation deals with many competing, if not conflicting, public pressures. Rate adjustments normally are initiated by the regulated entity. Public hearings, which are basically financial fact-finding sessions, are conducted. The purpose of this process is to set rates for service which assure the financial viability of the regulated entity while ensuring customers high quality service at reasonable cost. A rate case focuses on four areas: o The amount of investment in facilities which provide public service o The operating cost associated with providing that service o The capital costs for the funds used to build the facilities which serve the public o The tariff design which allocates revenue requirements equitably across the customer base Prudent management dictates that a water utility anticipate the time required for the regulatory process and file for rate adjustments which will reflect the cost of providing service at the time the authorized rates become effective. Requests that regulators deal with single issue cost increases as they occur have met with limited success. Recovery of such costs is therefore normally delayed for the time required to move through the full regulatory process. The regulated subsidiaries aggressively pursue various methods of offsetting the adverse financial impact of regulatory lag. Several subsidiaries now recover in rates a return on plant before it is in service instead of capitalizing an allowance for funds during construction. Certain subsidiaries have also received rate orders allowing recovery of interest and depreciation expense related to the period of time from when a major construction project was placed in service until new rates reflecting the cost of the project went into effect. American Water Works personnel participate in regulatory conferences and meetings, including those conducted by regional regulatory associations. Our goal in this effort is to increase understanding of the industry and its unique regulatory requirements. The Company appreciates the thoughtful work of the Water Committee of the National Association of Regulatory Utility Commissioners. Its initiatives and the growing public awareness of the importance of adequate water supply have led to progressive regulation which has allowed utility subsidiaries to address, on a timely basis, water supply issues which otherwise would still be unresolved. 33 57 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- Report of Independent Accountants TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF AMERICAN WATER WORKS COMPANY, INC. In our opinion, the accompanying consolidated balance sheet and consolidated statement of capitalization and the related consolidated statements of income and retained earnings, of cash flows and of common stockholders' equity of American Water Works Company, Inc. and Subsidiary Companies and the accompanying balance sheet and the related statements of income and retained earnings and of cash flows of American Water Works Company, Inc., present fairly, in all material respects, the consolidated financial position of American Water Works Company, Inc. and Subsidiary Companies and the financial position of American Water Works Company, Inc. at December 31, 1995 and 1994, and the consolidated results of operations and cash flows of American Water Works Company, Inc. and Subsidiary Companies for each of the three years in the period ended December 31, 1995 and the results of operations and cash flows of American Water Works Company, Inc. for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Thirty South Seventeenth Street Philadelphia, Pennsylvania January 30, 1996, except as to Note 13, which is as of February 16, 1996 35 58 - --------------------------------------------------------------------------- Consolidated Balance Sheet (Dollars in thousands)
At December 31, 1995 1994 ============================================================================== ASSETS Property, plant and equipment Utility plant -- at original cost less accumulated depreciation $2,884,681 $2,645,079 Utility plant acquisition adjustments 34,974 39,212 Other utility plant adjustments 147 196 Nonutility property, net of accumulated depreciation 20,144 18,951 Excess of cost of investments in subsidiaries over book equity at acquisition 22,638 22,681 - ------------------------------------------------------------------------------ 2,962,584 2,726,119 - ------------------------------------------------------------------------------ Current assets Cash and cash equivalents 23,204 30,091 Temporary investments -- at cost plus accrued interest 513 1,448 Customer accounts receivable 61,786 50,375 Allowance for uncollectible accounts (1,030) (999) Unbilled revenues 47,790 57,687 Miscellaneous receivables 4,571 5,342 Materials and supplies 9,599 9,846 Deferred vacation pay 9,374 9,256 Other 8,563 7,531 - ------------------------------------------------------------------------------ 164,370 170,577 - ------------------------------------------------------------------------------ Regulatory and other long-term assets Regulatory asset -- income taxes recoverable through rates 172,265 168,341 Funds restricted for construction 13,927 26,213 Debt and preferred stock expense 20,753 18,882 Deferred pension expense 16,468 17,931 Deferred postretirement benefit expense 11,418 8,545 Tank painting costs 8,901 8,997 Other 32,455 26,632 - ------------------------------------------------------------------------------ 276,187 275,541 - ------------------------------------------------------------------------------ $3,403,141 $3,172,237 =================================
36 59 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - ---------------------------------------------------------------------------
1995 1994 ============================================================================== CAPITALIZATION AND LIABILITIES Capitalization Common stockholders' equity $ 818,939 $ 733,440 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 42,326 43,737 Preferred stocks of subsidiaries without mandatory redemption requirements 6,288 6,288 Long-term debt American Water Works Company, Inc. 116,000 131,000 Subsidiaries 1,268,649 1,177,043 - ------------------------------------------------------------------------------ 2,303,875 2,143,181 - ------------------------------------------------------------------------------ Current liabilities Bank debt 148,639 82,425 Current portion of long-term debt 44,321 73,929 Accounts payable 43,300 43,629 Taxes accrued, including federal income 13,098 13,352 Interest accrued 26,263 26,296 Accrued vacation pay 9,512 9,575 Other 35,940 27,587 - ------------------------------------------------------------------------------ 321,073 276,793 - ------------------------------------------------------------------------------ Regulatory and other long-term liabilities Advances for construction 131,141 131,553 Deferred income taxes 356,608 339,444 Deferred investment tax credits 38,515 39,702 Accrued pension expense 30,652 29,121 Accrued postretirement benefit expense 9,100 9,100 Other 3,840 4,940 - ------------------------------------------------------------------------------ 569,856 553,860 - ------------------------------------------------------------------------------ Contributions in aid of construction 208,337 198,403 - ------------------------------------------------------------------------------ Commitments and contingencies -- -- - ------------------------------------------------------------------------------ $3,403,141 $3,172,237 ================================= The accompanying notes are an integral part of these financial statements.
37 60 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- Consolidated Statement of Income and Retained Earnings (Dollars in thousands, except per share amounts)
For the years ended December 31, 1995 1994 1993 ============================================================================== CONSOLIDATED INCOME Operating revenues $802,820 $770,241 $717,537 - ------------------------------------------------------------------------------ Operating expenses Operation and maintenance 402,362 391,539 362,451 Depreciation and amortization 79,977 72,892 66,838 General taxes 76,208 73,085 67,917 - ------------------------------------------------------------------------------ 558,547 537,516 497,206 - ------------------------------------------------------------------------------ Operating income 244,273 232,725 220,331 Allowance for other funds used during construction 11,771 5,890 3,757 Gain from eminent domain litigation 6,600 -- -- Other income 1,844 2,383 1,609 - ------------------------------------------------------------------------------ 264,488 240,998 225,697 - ------------------------------------------------------------------------------ Income deductions Interest 117,042 110,088 97,235 Allowance for borrowed funds used during construction (9,573) (4,570) (3,087) Amortization of debt expense 1,273 1,229 1,563 Preferred dividends of subsidiaries 3,698 3,814 4,361 Other deductions 2,341 1,873 2,374 - ------------------------------------------------------------------------------ 114,781 112,434 102,446 - ------------------------------------------------------------------------------ Income before income taxes 149,707 128,564 123,251 Provision for income taxes 57,646 49,912 47,864 - ------------------------------------------------------------------------------ Net income 92,061 78,652 75,387 Dividends on preferred stocks 3,984 3,984 3,996 - ------------------------------------------------------------------------------ Net income to common stock $ 88,077 $ 74,668 $ 71,391 ============================== Average shares of common stock outstanding (thousands) 33,382 31,918 31,139 Earnings per common share on average shares outstanding $ 2.64 $ 2.34 $ 2.29 ============================== CONSOLIDATED RETAINED EARNINGS Balance at beginning of year $618,875 $578,593 $538,332 Add: net income 92,061 78,652 75,387 - ------------------------------------------------------------------------------ 710,936 657,245 613,719 - ------------------------------------------------------------------------------ Deduct: dividends Preferred stock 3,528 3,528 3,540 Preference stock 456 456 456 Common stock -- $1.28 per share in 1995, $1.08 per share in 1994, $1.00 per share in 1993 42,500 34,386 31,130 - ------------------------------------------------------------------------------ 46,484 38,370 35,126 - ------------------------------------------------------------------------------ Balance at end of year $664,452 $618,875 $578,593 ============================== The accompanying notes are an integral part of these financial statements.
38 61 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- Consolidated Statement of Cash Flows (Dollars in thousands)
For the years ended December 31, 1995 1994 1993 ============================================================================== CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 92,061 $ 78,652 $ 75,387 Adjustments Depreciation and amortization 79,977 72,892 66,838 Provision for deferred income taxes 15,344 17,482 7,873 Provision for losses on accounts receivable 4,288 3,762 3,377 Allowance for other funds used during construction (11,771) (5,890) (3,757) Employee benefit expenses greater (less) than funding (6,643) (1,999) 2,567 Common stock contributions to employee benefit plans 2,839 2,310 1,581 Deferred revenues, net (17) 138 (398) Deferred tank painting costs (1,675) (2,308) (1,653) Deferred rate case expense (3,032) (2,171) (3,008) Deferred extraordinary weather costs -- (1,248) -- Amortization of deferred charges 6,995 7,726 8,268 Other, net (1,222) (2,562) (1,873) Changes in assets and liabilities, net of effects from acquisitions Accounts receivable (14,897) (5,759) (9,734) Unbilled revenues 9,897 (389) (3,738) Other current assets (785) 364 (352) Accounts payable (329) 11,985 2,987 Taxes accrued, including federal income (254) 1,554 (664) Interest accrued (33) 3,070 (674) Other current liabilities 8,353 (265) (3,257) - ------------------------------------------------------------------------------ Net cash from operating activities 179,096 177,344 139,770 - ------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Construction expenditures (330,762) (265,673) (193,116) Allowance for other funds used during construction 11,771 5,890 3,757 Water system acquisitions, net of acquired cash (5,738) (6,011) (65,889) Proceeds from the disposition of property, plant and equipment 16,307 3,013 2,183 Removal costs from property, plant and equipment retirements (7,204) (6,375) (6,201) Funds restricted for construction activity 12,286 (20,314) (700) Temporary investments 935 (1,049) (100) - ------------------------------------------------------------------------------ Net cash used in investing activities (302,405) (290,519) (260,066) - ------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt 132,450 196,400 267,070 Proceeds from preferred stock -- -- 1,000 Proceeds from common stock 33,544 35,037 3,861 Net borrowings (repayments) under line-of-credit agreements 66,214 (111,195) 50,535 Advances and contributions for construction, net of refunds 19,296 22,586 20,661 Debt issuance costs (1,735) (4,076) (4,718) Repayment of long-term debt (85,452) (7,303) (152,050) Redemption of preferred stocks (1,411) (2,792) (7,071) Dividends paid (46,484) (38,370) (35,126) - ------------------------------------------------------------------------------ Net cash from financing activities 116,422 90,287 144,162 - ------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents (6,887) (22,888) 23,866 Cash and cash equivalents at beginning of year 30,091 52,979 29,113 ------------------------------- Cash and cash equivalents at end of year $ 23,204 $ 30,091 $ 52,979 =============================== Cash paid during the year for: Interest, net of capitalized amount $ 119,676 $ 108,653 $ 99,433 =============================== Income taxes $ 44,191 $ 34,429 $ 41,880 =============================== Common stock issued in lieu of cash in connection with the Employees' Stock Ownership Plan and the Savings Plan for Employees totaled $2,839 in 1995, $2,310 in 1994 and $1,581 in 1993. Capital lease obligations of $66 were recorded in 1994. The accompanying notes are an integral part of these financial statements.
39 62 - --------------------------------------------------------------------------- Consolidated Statement of Capitalization (Dollars in thousands, except per share amounts)
At December 31, 1995 1994 ============================================================================== COMMON STOCKHOLDERS' EQUITY: Common stock -- $1.25 par value, authorized 100,000,000 shares, outstanding 33,913,335 shares in 1995 and 32,659,187 shares in 1994 $ 42,392 $ 40,824 Paid-in capital 114,161 76,003 Retained earnings 664,452 618,875 Unearned compensation (2,066) (2,262) - ------------------------------------------------------------------------------ 818,939 733,440 - ------------------------------------------------------------------------------ At December 31, 1995, common shares reserved for issuance in connection with the Company's stock plans were 30,461,581 shares for the Stockholder Rights Plan, 4,301,164 shares for the Dividend Reinvestment and Stock Purchase Plan, 534,849 shares for the Employees' Stock Ownership Plan, 287,233 shares for the Savings Plan for Employees and 350,000 shares for the Long-Term Performance-Based Incentive Plan. PREFERRED STOCKS WITH MANDATORY REDEMPTION REQUIREMENTS: Cumulative preferred stock -- $25 par value, authorized 1,770,000 shares 8.50% series (non-voting), outstanding 1,600,000 shares, due for redemption at par value on December 1, 2000 40,000 40,000 - ------------------------------------------------------------------------------ PREFERRED STOCKS WITHOUT MANDATORY REDEMPTION REQUIREMENTS: Cumulative preferred stock -- $25 par value 5% series, outstanding 101,777 shares 2,544 2,544 Cumulative preference stock -- $25 par value, authorized 750,000 shares 5% series (non-voting), outstanding 365,158 shares 9,129 9,129 Cumulative preferential stock -- $35 par value, authorized 3,000,000 shares, no outstanding shares -- -- - ------------------------------------------------------------------------------ 11,673 11,673 - ------------------------------------------------------------------------------ PREFERRED STOCKS OF SUBSIDIARIES: Dividend rate 3.9% to less than 5% 7,523 8,052 5% to less than 6% 5,719 5,866 6% to less than 7% 2,285 2,479 7% to less than 8% 2,370 2,420 8% to less than 9% 24,907 24,940 9% to less than 10% 4,970 5,188 10% to less than 11% 840 980 11% to less than 12% -- -- 12% to less than 13% -- 100 - ------------------------------------------------------------------------------ 48,614 50,025 - ------------------------------------------------------------------------------ Preferred stock agreements of certain subsidiaries require annual sinking fund payments in varying amounts and permit redemption at various prices at the option of the subsidiaries on thirty days' notice, or, in the event of involuntary liquidation, at par value plus accrued dividends. Sinking fund payments for the next five years will amount to $1,266 in 1996, $1,321 in 1997, $1,314 in 1998 and $1,247 in 1999, and $1,149 in 2000. The subsidiaries issued preferred stock with a value of $1,000 in 1993. Redemptions of preferred stock amounted to $1,411 in 1995, $2,792 in 1994 and $6,591 in 1993.
40 63 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - ---------------------------------------------------------------------------
CURRENT MATURITIES 1995 1994 ============================================================================== LONG-TERM DEBT OF AMERICAN WATER WORKS COMPANY, INC.: 8.91% Series B-1 debentures, due December 1, 1996 $15,000 $ -- $ 15,000 9.06% Series B-2 debentures, due December 1, 1999 -- 35,000 35,000 7.41% Series C debentures, due May 1, 2003 -- 81,000 81,000 - ------------------------------------------------------------------------------ 15,000 116,000 131,000 - ------------------------------------------------------------------------------ Capital lease obligations to a subsidiary were $40 in 1995 and $51 in 1994. LONG-TERM DEBT OF SUBSIDIARIES: Interest Rate 4% to less than 5% 37 326 363 5% to less than 6% 505 112,646 113,151 6% to less than 7% 4 276,304 229,140 7% to less than 8% 39 297,323 240,212 8% to less than 9% 12,900 203,800 196,589 9% to less than 10% 15,004 311,021 327,525 10% to less than 11% 455 65,225 65,680 11% to less than 12% -- -- -- 12% to less than 13% -- -- -- 13% to less than 14% -- -- 2,002 14% to less than 15% 50 700 750 - ------------------------------------------------------------------------------ 28,994 1,267,345 1,175,412 Capital leases 327 1,304 1,631 - ------------------------------------------------------------------------------ $29,321 1,268,649 1,177,043 - ------------------------------------------------------------------------------ $2,303,875 $2,143,181 ======================== Maturities of long-term debt of subsidiaries, including sinking fund requirements, during the next five years will amount to $29,321 in 1996, $56,430 in 1997, $24,404 in 1998, $17,254 in 1999 and $36,243 in 2000. Long-term debt of subsidiaries is substantially secured by utility plant and by a pledge of certain securities of subsidiaries and affiliates. The accompanying notes are an integral part of these financial statements.
41 64 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- Consolidated Statement of Common Shareholders' Equity (Dollars in thousands, except per share amounts)
Common Stock Common --------------------- Paid-in Retained Unearned Stockholders' Shares Par Value Capital Earnings Compensation Equity ============================================================================================================== BALANCE AT DECEMBER 31, 1992 31,035,083 $38,794 $ 32,446 $538,332 $ -- $609,572 Net income -- -- -- 75,387 -- 75,387 Dividend reinvestment 78,932 99 1,956 -- -- 2,055 Stock purchase 21,599 27 355 -- -- 382 Employees' stock ownership plan 86,966 109 2,250 -- -- 2,359 Savings plan for employees 21,163 26 620 -- -- 646 Dividends: Preferred stocks -- -- -- (3,996) -- (3,996) Common stock, $1.00 per share -- -- -- (31,130) -- (31,130) - -------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1993 31,243,743 39,055 37,627 578,593 -- 655,275 Net income -- -- -- 78,652 -- 78,652 Dividend reinvestment 151,254 189 3,910 -- -- 4,099 Stock purchase 1,092,536 1,365 26,993 -- -- 28,358 Employees' stock ownership plan 82,354 103 2,283 -- -- 2,386 Savings plan for employees 89,300 112 2,392 -- -- 2,504 Incentive plan -- -- 2,798 -- (2,262) 536 Dividends: Preferred stocks -- -- -- (3,984) -- (3,984) Common stock, $1.08 per share -- -- -- (34,386) -- (34,386) - -------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 32,659,187 40,824 76,003 618,875 (2,262) 733,440 Net income -- -- -- 92,061 -- 92,061 Dividend reinvestment 169,543 212 4,576 -- -- 4,788 Stock purchase 904,936 1,131 24,936 -- -- 26,067 Employees' stock ownership plan 77,365 97 2,363 -- -- 2,460 Savings plan for employees 102,304 128 2,940 -- -- 3,068 Incentive plan -- -- 3,343 -- 196 3,539 Dividends: Preferred stocks -- -- -- (3,984) -- (3,984) Common stock, $1.28 per share -- -- -- (42,500) -- (42,500) - -------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 33,913,335 $42,392 $114,161 $664,452 $(2,066) $818,939 ========================================================================== The accompanying notes are an integral part of these financial statements.
42 65 AMERICAN WATER WORKS COMPANY, INC. - --------------------------------------------------------------------------- Balance Sheet (Dollars in thousands)
At December 31, 1995 1994 ============================================================================== ASSETS Investments in subsidiaries Securities $1,003,088 $898,219 Notes and advances 110 120 - ------------------------------------------------------------------------------ 1,003,198 898,339 - ------------------------------------------------------------------------------ Current assets Cash and cash equivalents 119 17,647 Other receivable from subsidiaries 2,673 10 Other 157 120 - ------------------------------------------------------------------------------ 2,949 17,777 - ------------------------------------------------------------------------------ Deferred debits Deferred income taxes 2,922 2,025 Debt expense 291 346 Preferred stock expense 231 255 Other 11 2 - ------------------------------------------------------------------------------ 3,455 2,628 - ------------------------------------------------------------------------------ Other long-term assets 8,982 6,171 - ------------------------------------------------------------------------------ $1,018,584 $924,915 ========================== CAPITALIZATION AND LIABILITIES Capitalization Common stockholders' equity $ 818,939 $733,440 Preferred stocks with mandatory redemption requirements 40,000 40,000 Preferred stocks without mandatory redemption requirements 11,673 11,673 Long-term debt 116,040 131,051 - ------------------------------------------------------------------------------ 986,652 916,164 - ------------------------------------------------------------------------------ Current liabilities Bank debt 3,700 -- Current portion of long-term debt 15,024 20 Taxes accrued, including federal income -- 53 Interest accrued 1,502 1,414 Other 1,345 750 - ------------------------------------------------------------------------------ 21,571 2,237 - ------------------------------------------------------------------------------ Other long-term liabilities 10,361 6,514 - ------------------------------------------------------------------------------ Commitments and contingencies -- -- - ------------------------------------------------------------------------------ $1,018,584 $924,915 ========================== The accompanying notes are an integral part of these financial statements.
43 66 AMERICAN WATER WORKS COMPANY, INC. - --------------------------------------------------------------------------- Statements of Income and Retained Earnings (Dollars in thousands, except per share amounts)
For the years ended December 31, 1995 1994 1993 ============================================================================== INCOME Income from subsidiaries Equity in earnings of subsidiaries Dividends $ 77,182 $ 64,917 $ 65,264 Undistributed earnings 26,315 24,532 18,984 - ------------------------------------------------------------------------------ 103,497 89,449 84,248 Interest 7 154 352 Other income 1,147 510 868 - ------------------------------------------------------------------------------ 104,651 90,113 85,468 - ------------------------------------------------------------------------------ Expenses Operating and administrative expenses 8,086 6,897 5,438 General taxes 239 232 200 Interest 11,027 10,642 9,618 Amortization of debt expense 56 56 53 - ------------------------------------------------------------------------------ 19,408 17,827 15,309 - ------------------------------------------------------------------------------ Income before income taxes 85,243 72,286 70,159 Provision for income taxes (6,818) (6,366) (5,228) - ------------------------------------------------------------------------------ Net income 92,061 78,652 75,387 Dividends on preferred stocks 3,984 3,984 3,996 - ------------------------------------------------------------------------------ Net income to common stock $ 88,077 $ 74,668 $ 71,391 ============================== Average shares of common stock outstanding (thousands) 33,382 31,918 31,139 Earnings per common share on average shares outstanding $ 2.64 $ 2.34 $ 2.29 ============================== RETAINED EARNINGS Balance at beginning of year $618,875 $578,593 $538,332 Add: net income 92,061 78,652 75,387 - ------------------------------------------------------------------------------ 710,936 657,245 613,719 - ------------------------------------------------------------------------------ Deduct: dividends Preferred stock 3,528 3,528 3,540 Preference stock 456 456 456 Common stock -- $1.28 per share in 1995, $1.08 per share in 1994, $1.00 per share in 1993 42,500 34,386 31,130 - ------------------------------------------------------------------------------ 46,484 38,370 35,126 ------------------------------ Balance at end of year $664,452 $618,875 $578,593 ============================== The accompanying notes are an integral part of these financial statements.
44 67 AMERICAN WATER WORKS COMPANY, INC. - --------------------------------------------------------------------------- Statement of Cash Flows (Dollars in thousands)
For the years ended December 31, 1995 1994 1993 ============================================================================== CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 92,061 $ 78,652 $ 75,387 Adjustments Undistributed earnings of subsidiaries (26,315) (24,532) (18,984) Other, net 1,620 1,558 739 Changes in assets and liabilities Other current assets (24) (223) 184 Taxes accrued, including federal income (71) (495) 704 Interest accrued 88 36 493 Other current liabilities 595 (106) 117 - ------------------------------------------------------------------------------ Net cash from operating activities 67,954 54,890 58,640 - ------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Investment in subsidiaries' common stock (78,554) (63,315) (42,875) Redemption of preferred stock by subsidiary -- -- 1,000 Repayment of promissory notes by subsidiaries 10 4,510 1,010 Other (501) (684) (594) - ------------------------------------------------------------------------------ Net cash used in investing activities (79,045) (59,489) (41,459) - ------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt -- -- 81,000 Proceeds from common stock 36,383 37,347 5,442 Net borrowings (repayments) under line-of-credit agreements 3,700 -- (21,255) Repayment of long-term debt (23) (15) (23,214) Redemption of preferred stock -- -- (480) Dividends paid (46,484) (38,370) (35,126) Other (13) (18) (324) - ------------------------------------------------------------------------------ Net cash from (used in) financing activities (6,437) (1,056) 6,043 - ------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents (17,528) (5,655) 23,224 Cash and cash equivalents at beginning of year 17,647 23,302 78 - ------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 119 $ 17,647 $ 23,302 ============================== Cash paid (received) during the year for: Interest $ 10,939 $ 10,606 $ 9,125 ============================== Income taxes $ (5,844) $ (5,848) $ (4,846) ============================== The accompanying notes are an integral part of these financial statements.
45 68 - --------------------------------------------------------------------------- Notes to Financial Statements NOTE 1: ORGANIZATION AND OPERATION American Water Works Company, Inc. through its regulated subsidiaries provides water service to 1,720,000 customers in 21 states. As public utilities, the regulated companies function under rules and regulations prescribed by state regulatory commissions. NOTE 2: SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the parent company and all subsidiaries. All intercompany accounts and transactions are eliminated. Parent company financial statements reflect the equity method of accounting for investments in common stock of subsidiaries (cost plus equity in subsidiaries' undistributed earnings since acquisition). USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. REGULATION The regulated subsidiaries have incurred various costs and received various credits which have been reflected as regulatory assets and liabilities on the Company's consolidated balance sheets. Accounting for such costs and credits as regulatory assets and liabilities is in accordance with Statement of Financial Accounting Standards No. 71 (SFAS No. 71), "Accounting for the Effects of Certain Types of Regulation." This statement sets forth the application of generally accepted accounting principles for those companies whose rates are established by or are subject to approval by an independent third-party regulator. Under SFAS No. 71, regulated companies defer costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that those costs and credits will be allowed in the ratesetting process in a period different from the period in which they would have been reflected in income by an unregulated company. These deferred regulatory assets and liabilities are then flowed through the income statement in the period in which the same amounts are reflected in rates. PROPERTY, PLANT AND EQUIPMENT Additions to utility plant and replacements of retirement units of property are capitalized. Costs capitalized include material, direct labor and such indirect items as engineering and supervision, payroll taxes and benefits, transportation and an allowance for funds used during construction. Repairs, maintenance and minor replacements of property are charged to current operations. The cost of property units retired in the ordinary course of business plus removal cost (less salvage) is charged to accumulated depreciation. The cost of property, plant and equipment is depreciated using the straight-line method over the estimated service lives of the assets. Utility plant acquisition adjustments and other utility plant adjustments include the difference between the purchase price of utility plant and its original cost (less accumulated depreciation) and are being amortized principally over 40 years. INTANGIBLE ASSETS The excess of cost of investments in subsidiaries over book equity at acquisition, which relates primarily to acquisitions prior to October 31, 1970, is not being amortized because in the opinion of management there has been no diminution in value. CASH AND CASH EQUIVALENTS Substantially all of the Company's cash is invested in interest bearing accounts. The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash equivalents consist primarily of investment grade commercial paper, bank certificates of deposit and United States Government securities. Cash equivalents are stated at cost plus accrued interest. MATERIALS AND SUPPLIES Materials and supplies are stated at average cost. REGULATORY AND OTHER LONG-TERM ASSETS In accordance with Statement of Financial Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes," the Company has recorded a regulatory asset for the additional revenues expected to be realized as the tax effects of temporary differences previously flowed through to customers reverse. These temporary differences are primarily related to the depreciation of property placed in service before the adoption of full normalization for rate making purposes by regulatory authorities. The regulatory asset for income taxes recoverable through rates on the balance sheet is net of the reduction expected in future revenues as deferred taxes previously provided, attributable to the difference between the state and federal income tax rates under prior law and the current statutory rates, reverse over the average remaining service lives of the related assets. Pension expense is deferred by certain subsidiaries when it is probable such costs will be recovered in future water service rates as contributions are made to the pension plan. 46 69 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- The Company adopted Statement of Financial Accounting Standards No. 106 (SFAS No. 106), "Employers' Accounting for Postretirement Benefits Other Than Pensions," effective January 1, 1993. Postretirement benefit expense in excess of the amount recovered in rates is deferred by certain subsidiaries when it is probable that recovery of such costs will be included in rates within approximately five years from the date of adoption of SFAS No. 106, and the combined deferral recovery period will not exceed approximately 20 years. Debt expense is amortized over the lives of the respective issues. Call premiums on the redemption of long-term debt, as well as unamortized debt expense, are deferred and amortized to the extent they will be recovered through future water service rates. Expenses of preferred stock issues without sinking fund provisions are amortized over 30 years from date of issue; expenses of issues with sinking fund provisions are charged to operations as shares are retired. Tank painting costs included in regulatory assets are generally being amortized on a straight-line basis over periods ranging from 4 to 20 years as permitted by the regulatory authorities. OTHER CURRENT LIABILITIES Other current liabilities at December 31, 1995 and 1994 include payables to banks of $9,818,000 and $7,009,000, respectively, which represent checks issued but not presented to the banks for payment, net of the related bank balance. ENVIRONMENTAL COSTS Environmental expenditures that relate to current operations or provide a future benefit are expensed or capitalized as appropriate. Remediation costs that relate to an existing condition caused by past operations are accrued when it is probable that these costs will be incurred and can be reasonably estimated. ADVANCES AND CONTRIBUTIONS IN AID OF CONSTRUCTION Regulated subsidiaries may receive advances and contributions to fund construction necessary to extend service to new areas. As determined by regulatory authorities, advances for construction are refundable for limited periods of time as new customers begin to receive service. Amounts which are no longer refundable are reclassified to contributions in aid of construction. Utility plant funded by advances and contributions is excluded from rate base and is generally not depreciated for rate making purposes. Generally, advances and contributions received subsequent to 1986 must be included in taxable income and the related property is depreciable for tax purposes. RECOGNITION OF REVENUES Water service revenues for financial reporting purposes include amounts billed to customers on a cycle basis and unbilled amounts based on estimated usage from the date of the latest meter reading to the end of the accounting period. INCOME TAXES The Company and its subsidiaries participate in a consolidated federal income tax return. For the Company and each of its subsidiaries, federal income tax expense for financial reporting purposes is provided on a separate return basis, except that the federal income tax rate applicable to the consolidated group is applied to separate company taxable income and the benefit of net operating losses, principally at the parent company level, is recognized currently. Certain income and expense items are accounted for in different time periods for financial reporting than for income tax reporting purposes. Deferred income taxes have been provided in accordance with SFAS No. 109 on the difference between the tax bases of assets and liabilities and the amounts at which they are carried in the financial statements. These deferred income taxes are based on the enacted tax rates to be in effect when such temporary differences are expected to reverse. The regulated subsidiaries are also required to recognize regulatory assets and liabilities for the effect on revenues expected to be realized as the tax effects of temporary differences previously flowed through to customers reverse. Investment tax credits have been deferred and are being amortized to income over the average estimated service lives of the related assets. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC) AFUDC is a non-cash credit to income with a corresponding charge to utility plant which represents the cost of borrowed funds and a return on equity funds utilized to fund plant under construction. The regulated subsidiaries record AFUDC to the extent permitted by regulatory authorities. NEW ACCOUNTING STANDARD In March 1995, Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," was issued by the Financial Accounting Standards Board requiring implementation by no later than 1996. The statement requires that long-lived assets and certain identifiable intangible assets, including utility plant acquisition adjustments and the excess cost of investments in subsidiaries over book equity at acquisition, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected future cash 47 70 - --------------------------------------------------------------------------- Notes to Financial Statements flows expected to result from the use of the asset and its eventual disposition is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of an impairment loss would be based on the fair value of the asset. The Statement also requires that a rate-regulated enterprise should charge a regulatory asset to earnings if and when future recovery in rates of that asset is no longer probable. Adoption of the Statement effective January 1, 1996, is not expected to have a significant effect on the results of operations or the financial position of the Company. RECLASSIFICATIONS Certain reclassifications have been made to conform previously reported data to the current presentation. NOTE 3: INCOME TAXES Components of consolidated income tax expense for the years presented in the consolidated statement of income are as follows (in thousands):
1995 1994 1993 ============================================================================== STATE INCOME TAXES: Current $ 7,938 $ 7,399 $ 8,681 Deferred Current 59 97 (57) Non-current 82 222 (1,249) - ------------------------------------------------------------------------------ $ 8,079 $ 7,718 $ 7,375 ============================== FEDERAL INCOME TAXES: Current $ 34,485 $ 24,930 $ 31,162 Deferred Current (180) 4 (92) Non-current 16,505 18,511 10,640 Amortization of deferred investment tax credits (1,243) (1,251) (1,221) - ------------------------------------------------------------------------------ $ 49,567 $ 42,194 $ 40,489 ==============================
Following is a reconciliation of federal income tax expense to income tax at the statutory rate (in thousands):
1995 1994 1993 ============================================================================== Income before federal income tax $141,628 $120,846 $115,876 ============================== Income tax at federal statutory rate of 35% $ 49,570 $ 42,296 $ 40,557 Increases (decreases) resulting from -- Flow through differences 556 874 1,494 Amortization of investment tax credits (1,243) (1,251) (1,221) Subsidiary preferred dividends 1,258 1,297 1,486 Other (574) (1,022) (1,827) - ------------------------------------------------------------------------------ Federal income tax expense $ 49,567 $ 42,194 $ 40,489 ==============================
The following table provides the components of the net deferred tax liability at December 31 (in thousands):
1995 1994 =================================================================== DEFERRED TAX ASSETS: Advances and contributions $132,497 $127,914 Deferred investment tax credits 14,849 15,335 Other 9,566 6,633 - ------------------------------------------------------------------- 156,912 149,882 - ------------------------------------------------------------------- DEFERRED TAX LIABILITIES: Utility plant, principally due to depreciation differences 428,215 405,688 Income taxes recoverable through rates 66,259 67,637 Other 19,046 16,001 - ------------------------------------------------------------------- 513,520 489,326 - ------------------------------------------------------------------- $356,608 $339,444 ===================
As of December 31, 1995 and 1994, the parent company had no material temporary differences. No valuation allowances were required on deferred tax assets at December 31, 1995 and 1994. NOTE 4: COMPENSATING BALANCES AND BANK DEBT The Company and its subsidiaries maintain lines of credit with various banks. The total of the unused lines of credit at December 31, 1995 was $38,200,000 for the Company and $123,130,000 for the subsidiaries. Borrowings under such lines of credit generally are payable on demand and bear interest at variable rates. None of the agreements with lending banks have compensating balance requirements. Short-term bank borrowing information is as follows (in thousands):
1995 1994 1993 ============================================================================== Maximum amount outstanding $148,639 $195,727 $220,150 Average amount outstanding 109,530 123,545 171,340 Weighted average annual interest rate 6.66% 4.60% 3.82% Interest rate at December 31 6.33% 4.84% 3.71%
48 71 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- NOTE 5: POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS PENSION BENEFITS The Company and its subsidiaries have a noncontributory defined benefit pension plan covering substantially all employees. Benefits under the plan are based on the employee's years of service and average annual compensation for those 60 consecutive months of employment which yield the highest average. The following table provides pension cost components and the expected long-term rate of return on plan assets used in determining net pension cost (in thousands):
1995 1994 1993 ============================================================================== Service cost-benefits earned during the year $ 8,332 $ 10,240 $ 8,659 Interest cost on projected benefit obligation 25,560 24,360 21,989 Actual return on plan assets (94,167) (9,383) (23,620) Net amortization and deferral 67,768 (15,472) (1,595) - ------------------------------------------------------------------------------ Net pension cost $ 7,493 $ 9,745 $ 5,433 ============================== Assumed asset earnings rate 8.50% 8.50% 8.75%
The Company's funding policy is to contribute at least the minimum amount required by the Employee Retirement Income Security Act of 1974. The Company made contributions to the plan of $9,993,000 in 1995 and $4,750,000 in 1994. There was no contribution made in 1993 due to the funded status of the plan. Pension plan assets are invested in a number of investments including a guaranteed interest contract with a major insurance company, equity mutual funds, United States Government securities and publicly traded bonds. In November 1995, the plan received 2,000,000 shares of common stock from Allmerica Financial Corporation in connection with the demutualization of its State Mutual Life Assurance Company subsidiary. State Mutual, as a mutual insurance company, was owned by its policyholders, and the plan has invested significant amounts with that company. The shares of Allmerica Financial received by the plan were subsequently sold, resulting in a net gain of approximately $47,000,000 to the plan. The following table reconciles plan assets and liabilities to the funded status of the plan at December 31 (in thousands):
1995 1994 ============================================================================== Plan assets at fair value $376,508 $285,641 =================== Actuarial present value of benefit obligations: Vested benefits $300,475 $226,293 Non-vested benefits 7,873 5,930 - ------------------------------------------------------------------------------ Accumulated benefit obligation 308,348 232,223 Effect of projected future salary increases 89,036 58,059 - ------------------------------------------------------------------------------ Total projected benefit obligation $397,384 $290,282 =================== Projected benefit obligation in excess of plan assets $(20,876) $ (4,641) Unrecognized net transition asset (16,468) (18,821) Unrecognized prior service cost 919 1,003 Unrecognized net (gain) loss 15,904 (562) - ------------------------------------------------------------------------------ Accrued pension cost $(20,521) $(23,021) =================== Discount rate assumption 7.00% 8.75% Compensation growth rate assumption 5.00% 5.00%
The Company also has two unfunded supplemental non-qualified pension plans that provide additional retirement benefits to certain employees of the Company and its subsidiaries. Pension costs for the supplemental plans were $1,163,000 for 1995, $1,344,000 for 1994 and $1,066,000 for 1993. At December 31, 1995, the projected benefit obligation for these plans totaled $10,313,000. Accrued as a pension liability on the balance sheet is $8,000,000 representing $6,119,000 of accrued pension cost and an unfunded accumulated benefit obligation in excess of accrued pension cost of $1,881,000. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company and its subsidiaries provide certain life insurance benefits for retired employees and certain health care benefits for retired employees and their dependents. Substantially all employees may become eligible for those benefits if they reach retirement age while still working for the Company. Retirees and their dependents under age 65 can elect either a comprehensive medical plan under which covered expenses are paid at 80% (90% prior to August 1, 1993) after an annual deductible has been satisfied or, effective January 1, 1996, a managed care plan that requires copayments. Monthly contributions for early retirements that began prior to age 62 have been required since August 1, 1993, and additional contributions will be required until age 65 for retirements that take place after 1995. A basic/major medical plan that covered 100% of hospital and surgical expenses and required additional contributions will not be available after 1995. Retirees and their dependents age 65 and over are covered by a Medicare supplement plan. 49 72 - --------------------------------------------------------------------------- Notes to Financial Statements The following table provides postretirement benefit cost components and the expected long-term rate of return used in determining net postretirement benefit cost (in thousands):
1995 1994 1993 ============================================================================== Service cost-benefits earned during the year $ 4,641 $ 5,759 $ 5,153 Interest cost on accumulated postretirement benefit obligation 11,637 10,374 10,100 Actual return on plan assets (2,450) (975) -- Net amortization and deferral 5,196 5,648 6,173 - ------------------------------------------------------------------------------ Net postretirement benefit cost $19,024 $20,806 $21,426 ============================ Assumed asset earnings rate 7.70% 7.70% 7.70%
The transition obligation of $122,115,000 at January 1, 1993 is being amortized over twenty years. The Company made contributions to trust funds established for its postretirement benefit plans of $19,024,000 in 1995, $20,806,000 in 1994 and $8,235,000 in 1993. The Company's policy is to fund postretirement benefit costs accrued. Plan assets are invested in both a mutual fund comprised of high quality debt securities and a municipal bond money market fund. The following table reconciles the funded status of the plan with the liability included in the consolidated balance sheet at December 31 (in thousands):
1995 1994 ============================================================================== Plan assets at fair value $ 47,446 $ 32,142 ==================== Actuarial present value of postretirement benefit obligations: Retirees and dependents $ 60,248 $ 53,300 Fully eligible active plan participants 4,363 3,847 Other active plan participants 88,080 73,980 - ------------------------------------------------------------------------------ Total accumulated postretirement benefit obligation $ 152,691 $ 131,127 ==================== Accumulated postretirement benefit obligation in excess of plan assets $(105,245) $ (98,985) Unrecognized transition obligation 97,357 109,903 Unrecognized prior service costs -- 3,537 Unrecognized net gain (1,212) (23,555) - ------------------------------------------------------------------------------ Accrued postretirement benefit cost $ (9,100) $ (9,100) ==================== Discount rate assumption 7.00% 8.75% Compensation growth rate assumption 5.00% 5.00%
The health care cost trend rate, used to calculate the Company's cost for postretirement health care benefits, is a 9% annual rate in 1996 that is assumed to decrease gradually to a 5.5% annual rate for 2003 and remain at that level thereafter for the comprehensive plan and a constant 5.5% annual rate for the managed care plan. A one-percentage-point increase in the health care cost trend rate would have increased the accumulated postretirement benefit obligation by $22,200,000 at January 1, 1996 and the aggregate of the service and interest cost components of postretirement benefit costs for 1995 by $2,600,000. NOTE 6: LEASES The Company has entered into operating leases involving certain facilities and equipment. Rental expenses under operating leases were $8,985,000 for 1995, $8,264,000 for 1994 and $8,706,000 for 1993. Capital leases currently in effect are not significant. At December 31, 1995, the minimum annual future rental commitment under operating leases that have initial or remaining noncancellable lease terms in excess of one year are as follows (in thousands): ===================================== 1996 $3,878 1997 2,937 1998 2,168 1999 1,411 2000 824 Later years 3,264 - ------------------------------------- NOTE 7: COMMON STOCKHOLDERS' EQUITY DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN The Company's Dividend Reinvestment and Stock Purchase Plan was amended on July 1, 1993, to provide for optional cash purchases of newly issued common stock of the Company. In addition to permitting record holders of common stock to have all or part of their dividends automatically reinvested in additional shares of common stock, the plan permits stockholders to purchase up to $5,000 of common stock each month directly from the Company. The initial costs associated with the plan amendment providing for optional cash purchase of stock of $507,000 in 1994 and $299,000 in 1993 were charged to paid-in capital. The plan was amended, as of March 1, 1996, to provide for new shares purchased under the plan to be priced at the applicable average market price. Until March 1, 1996, shares purchased with reinvested dividends or optional cash purchases were priced at 95% of the applicable average market price. EMPLOYEES' STOCK OWNERSHIP PLAN The Company and its subsidiaries have an Employees' Stock Ownership Plan which provides for beneficial ownership of Company common stock by all employees who are not included in a bargaining unit and have more than one year of service. The Company will make a basic annual contribution to the plan equal to 1/2% of each participating employee's compensation for the preceding year. In addition, each participant can elect to contribute an amount that does not exceed 2% of the participant's compensation for the preceding year. The Company will make 50 73 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- matching contributions in an amount equal to 100% of each participant's contribution. The Company expensed contributions of $1,408,000 for 1995, $1,366,000 for 1994 and $1,350,000 for 1993 that it made to the plan. The trustee of the plan may purchase shares of the Company's common stock from the Company, on the open market, or from a qualified stockholder. SAVINGS PLAN FOR EMPLOYEES The Company and its subsidiaries implemented a 401(k) Savings Plan for Employees on August 1, 1993 for all employees who have more than six months of service. Employee contributions are invested at the direction of the employee in one or more funds including a fund consisting entirely of common stock of the Company. The Company matches a portion of the contributions of participating employees up to a designated level. Effective January 1, 1996, the Company will match 45% of the first 4% of each employee's pay contributed to the plan. All of the Company's matching contributions are invested in the fund of Company common stock. The trustee of the plan may purchase shares of the Company's common stock from the Company at the prevailing market price, on the open market, or from a qualified stockholder. The Company expensed matching contributions to the plan totaling $1,429,000 for 1995, $999,000 for 1994 and $291,000 for 1993. LONG-TERM PERFORMANCE-BASED INCENTIVE PLAN In 1994 the Company and its subsidiaries implemented a Long-Term Performance-Based Incentive Plan effective as of January 1, 1993. Under the plan, designated executives and other key employees will be eligible to receive awards if performance cycle goals based on earnings-per-share growth and total return to Company stockholders, in comparison to a designated peer group of water companies, are met. The plan is administered by the Compensation and Management Development Committee of the Board of Directors. The Committee will determine the value or range of values, including the maximum value, of awards to each participant. Awards may be paid in the form of cash, restricted shares of common stock, or a combination of both. The market value of common stock expected to be awarded under the plan has been recorded as unearned compensation and is shown as a separate component of common stockholders' equity. The unearned compensation is being charged to expense over the three-year performance cycle. Such expense was $5,386,000 in 1995 and $914,000 in 1994. STOCKHOLDER RIGHTS PLAN Each share of the Company's common stock has one Flip-Over Right and one Flip-In Right ("The Rights") attached. The Rights will not be exercisable until such time as a person or group (an "Acquiring Person") acquires or announces an offer for 25% or more of the Company's common stock. The Rights will then entitle the holder to buy from the Company one-half share of the Company's common stock for $40. Thereafter, if the Company is acquired in a merger or business combination in which the Company does not survive or, if 50% or more of the Company's assets or earning power are sold or transferred, each Flip-Over Right will become the right to buy, at twice its then current exercise price, that number of shares of the acquiring person's common stock which at that time have a market value of four times the then current exercise price of the Flip-Over Right. If an Acquiring Person (i) acquires beneficial ownership of 35% or more of the Company's common stock, (ii) acquires the Company in a merger or business combination transaction in which the Company survives and its stock is not changed or (iii) engages in certain self-dealing transactions, each Flip-In Right not owned by the acquiror will become the right to buy, at twice its then current exercise price, that number of shares of the Company's common stock which at that time has a market value of four times the then current price of the Flip-In Right. The Rights are redeemable, in whole, but not in part, by the Company at a price of $.0005 per Right under certain circumstances. The Rights do not have voting or dividend rights and, until they become exercisable, have no dilutive effect on the earnings per share of the Company. NOTE 8: COMMITMENTS AND CONTINGENCIES Construction programs of subsidiaries for 1996 are estimated to cost approximately $312,000,000. Commitments have been made in connection with certain construction programs. The Company's subsidiary, New Jersey-American Water Company, has a rate increase application requesting $52.9 million in additional annual revenues awaiting decision. That case addresses New Jersey-American's $186 million Tri-County Water Supply Project that takes water from the Delaware River to a new treatment plant and then delivers it throughout the southern New Jersey area by way of a nearly 30-mile long pipeline. On February 2, 1996 an Administrative Law Judge issued a decision on the case finding that the Company had acted reasonably and prudently in designing the project and recommending full rate base recognition of the project that was found to be a reasonable approach to the region's needs. The judge's decision, if approved by the commission, would result in approximately $39.5 million in additional annual revenues. The project was designed partly 51 74 - --------------------------------------------------------------------------- Notes to Financial Statements as a supply source for future wholesale customers who have been mandated by the state to reduce their intake from an aquifer that is suffering from declining water levels. The actual revenues the Company would receive under the judge's decision would depend on how many of these wholesale customers enter into contracts to use water from the project as their alternative source of supply. The Company is routinely involved in condemnation proceedings and legal actions relating to several regulated subsidiaries. In the opinion of management, none of these matters will have a material adverse effect, if any, on the financial position or results of operations of the Company. NOTE 9: FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Current assets and current liabilities: The carrying amount reported in the balance sheet for current assets and current liabilities, including bank debt, approximates their fair values. Preferred stocks with mandatory redemption requirements and long-term debt: The fair values of the Company's preferred stocks with mandatory redemption requirements and long-term debt are estimated using discounted cash flow analyses based on the Company's current incremental financing rates for similar types of securities. The carrying amounts and fair values of the Company's financial instruments at December 31, 1995 and 1994 are as follows (in thousands):
CARRYING 1995 AMOUNT FAIR VALUE ============================================================================== Preferred stocks of the Company with mandatory redemption requirements $ 40,000 $ 42,496 Preferred stocks of subsidiaries with mandatory redemption requirements 42,326 49,242 Long-term debt of the Company 131,000 140,632 Long-term debt of subsidiaries 1,296,339 1,455,561
CARRYING 1994 AMOUNT FAIR VALUE ============================================================================== Preferred stocks of the Company with mandatory redemption requirements $ 40,000 $ 40,356 Preferred stocks of subsidiaries with mandatory redemption requirements 43,737 41,838 Long-term debt of the Company 131,000 126,432 Long-term debt of subsidiaries 1,249,022 1,210,456
NOTE 10: ACQUISITIONS AND DISPOSITION PENNSYLVANIA GAS AND WATER COMPANY WATER UTILITY OPERATIONS ACQUISITION As discussed in Note 13, the Company's subsidiary in Pennsylvania acquired the water utility operations of Pennsylvania Gas and Water Company. MIDWESTERN WATER UTILITIES ACQUISITION On August 31, 1993, American Water Works Company, Inc. and its subsidiaries in Indiana, Missouri, and Ohio acquired four Midwestern water utilities. A total of $62,000,000 was paid for the common stock of ICWC Holdings, Inc. and its subsidiary Indiana Cities Water Corporation, Missouri Cities Water Company, Ohio Suburban Water Company and Northern Michigan Water Company. The acquisitions were recorded using the purchase method and resulted in the recording of a utility plant acquisition adjustment in the amount of $38,000,000 and a deferred tax liability on this book/tax temporary difference of $10,800,000. The Company's results of operations for the year ended December 31, 1993 included four months of results from the acquired companies' operations. GRAFTON, MASSACHUSETTS EMINENT DOMAIN PROCEEDING During the second quarter of 1995, the Company resolved its litigation with the Grafton Water District in Massachusetts to recover the fair market value of the water utility taken through eminent domain by the District in 1988. In 1990, a jury awarded the Company $5,600,000 for these assets that had served 2,300 customers. Since that time, the District pursued various appeals, all of which resulted in reaffirmation of the jury award. In addition to the $1,100,000 paid by the District in 1988, the Company received $6,600,000 which includes the remainder of the jury award and $2,100,000 in interest. This produced a gain in 1995 of $3,900,000, or $.12 per share, after applicable income taxes. OHIO SUBURBAN WATER COMPANY EMINENT DOMAIN PROCEEDING On September 29, 1995, the City of Huber Heights acquired, under threat of taking through eminent domain, the assets of the Ohio Suburban Water Company for $14,400,000. Ohio Suburban, which had served 14,600 customers, was acquired by the Company's subsidiary in Ohio as part of the Midwestern water utilities acquisition described above. The sale of these assets, in accordance with a sales agreement providing for the Company to recoup the entire investment that it made only two years ago, did not have an adverse financial effect on the Company. HOWELL TOWNSHIP, NEW JERSEY ACQUISITION On November 7, 1995, voters in Howell Township, New Jersey approved a referendum providing for the sale of the community's water system to the Company's subsid- 52 75 AMERICAN WATER WORKS, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- iary, New Jersey-American Water Company, for approximately $35,100,000. The system which serves 5,500 customers is located between New Jersey-American's Shrewsbury and Lakewood operations, and a portion of its supply and treatment capacity will be used to serve those two service territories. New Jersey-American and Howell Township are currently finalizing the terms of the acquisition which is expected to be accomplished in 1996. NOTE 11: JOINT VENTURE A subsidiary of the Company owns a 50 percent interest in AmericanAnglian Environmental Technologies, a joint venture with British water and wastewater utility Anglian Water Plc. AmericanAnglian provides both technical expertise and financing resources to help communities throughout the United States to upgrade their water and wastewater systems. The results of the joint venture are accounted for by the Company under the equity method. In December 1995, half of the common stock of the Company's American Commonwealth Management Services Company subsidiary was sold to Anglian Water Plc. for $1,174,000 in cash. The Company and Anglian then transferred ownership of American Commonwealth Management Services to their AmericanAnglian joint venture. American Commonwealth Management Services provides management and operating services, at a profit, to non-affiliated water and wastewater systems. It also owns a facility to regenerate carbon used For water filtration and those capabilities are being marketed to affiliated and non-affiliated water utilities throughout the country. NOTE 12: UTILITY PLANT Information on utility plant by category at December 31 is as follows (in thousands):
1995 1994 ============================================================================== Water plant Sources of supply $ 147,159 $ 140,743 Treatment and pumping 669,161 634,792 Transmission and distribution 1,550,687 1,468,584 Services, meters and fire hydrants 595,156 553,262 General structures and equipment 213,070 200,609 Wastewater plant 29,451 32,351 Construction in progress 270,824 149,866 - ------------------------------------------------------------------------------ 3,475,508 3,180,207 Less-accumulated depreciation 590,827 535,128 - ------------------------------------------------------------------------------ $2,884,681 $2,645,079 =====================
NOTE 13: SUBSEQUENT EVENT On February 16, 1996, the Company's subsidiary, Pennsylvania-American Water Company, completed the acquisition of the water utility operations of Pennsylvania Gas and Water Company for approximately $409,000,000. The acquired operations, which include 10 water treatment plants and 36 reservoirs, serve 132,000 customers in northeastern Pennsylvania. With Pennsylvania-American's current service territory primarily in the western and central-southeastern parts of the commonwealth, the Company anticipates that the addition of this large northeastern operation will increase this subsidiary's geographical diversity and provide opportunity for greater operational synergy. The acquisition, which will be accounted for under the purchase method, was financed with short-term borrowings and the assumption of $143,000,000 of long-term debt. NOTE 14: QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 1995 and 1994 (in thousands, except per share amounts) are as follows:
FIRST SECOND THIRD FOURTH 1995 QUARTER QUARTER QUARTER QUARTER TOTAL =============================================================================== Operating revenues $180,844 $200,662 $222,961 $198,353 $802,820 Operating income 48,010 63,791 78,139 54,333 244,273 Net income 13,547 27,425 32,599 18,490 92,061 Net income to common stock 12,551 26,429 31,603 17,494 88,077 Net income per common share $.38 $.80 $.94 $.52 $2.64
FIRST SECOND THIRD FOURTH 1994 QUARTER QUARTER QUARTER QUARTER TOTAL =============================================================================== Operating revenues $177,659 $195,136 $209,844 $187,602 $770,241 Operating income 43,886 63,044 71,587 54,208 232,725 Net income 10,430 22,729 27,815 17,678 78,652 Net income to common stock 9,434 21,733 26,820 16,681 74,668 Net income per common share $.30 $.68 $.84 $.51 $2.34
53 76 - --------------------------------------------------------------------------- Company Information DIVIDEND REINVESTMENT AND STOCK PURCHASE Through the Company's Dividend Reinvestment and Stock Purchase Plan, shareholders of American Water Works Company, Inc. can automatically reinvest all or part of their dividends in American Water common stock and purchase additional shares of Company stock at a the prevailing market price. Also, customers of American Water's regulated subsidiaries may buy initial shares of common stock through the plan. For more information or an application for participation contact The First National Bank of Boston, c/o Boston EquiServe, L.P., Mail Stop 45-02-64, P.O. Box 644, Boston, MA 02102-0644 or call (800) 736-3001 or (617) 575-3100. SHAREHOLDER INFORMATION Inquiries regarding shareholder stock ownership, dividends or the transfer/reissuance of shares can be addressed to our Transfer Agent, The First National Bank of Boston, c/o Boston EquiServe, L.P., Mail Stop 45-02-64, P.O. Box 644, Boston, MA 02102-0644 or telephone (800) 736-3001 or (617) 575-3100. Transfer requests sent by mail should provide the appropriate instructions. Other shareholder inquiries should be directed to W. Timothy Pohl, Esq., General Counsel and Secretary, P.O. Box 1770, Voorhees, NJ 08043, telephone (609) 346-8200. INVESTOR RELATIONS Investors desiring information about the Company can contact J. James Barr, Vice President, Treasurer and Chief Financial Officer, P.O. Box 1770, Voorhees, NJ 08043, telephone (609) 346-8200. ANNUAL MEETING The 1996 Annual Meeting of American Water Works Company shareholders will be held on Thursday, May 2, at 11:00 a.m. at the Company's Corporate Center, 1025 Laurel Oak Road, Voorhees, New Jersey. RANGE OF MARKET PRICES AWK is the trading symbol of American Water Works Company, Inc. on the New York Stock Exchange on which the Common Stock, 5% Preferred Stock and 5% Preference Stock of the Company are traded.
Common Stock 5% Preferred Stock 5% Preference Stock - ----------------------------------------------------------------------------- Newspaper listing AmWtr A Wat pr A Wat pf - ----------------------------------------------------------------------------- 1995 High Low High Low High Low ============================================================================= 1st quarter $29-1/2 $26-3/4 $19 $17 $19 $17 2nd quarter 32 28-1/2 19 17-1/8 19 17-3/4 3rd quarter 32-3/4 29-1/8 19-1/2 18 19-5/8 18 4th quarter 39-1/4 30-1/2 20-1/2 17-3/4 19-1/2 18
Quarterly dividend paid per share 32 cents 31-1/4 cents 31-1/4 cents Number of stock- holders at De- cember 31, 1995 32,653 275 936 - -----------------------------------------------------------------------------
Common Stock 5% Preferred Stock 5% Preference Stock - ----------------------------------------------------------------------------- Newspaper listing AmWtr A Wat pr A Wat pf - ----------------------------------------------------------------------------- 1994 High Low High Low High Low ============================================================================= 1st quarter $32-1/4 $27-5/8 $22-1/2 $20-3/4 $22-1/2 $20 2nd quarter 29-5/8 26-3/8 21 18-1/8 20-3/4 18 3rd quarter 28-1/4 26 19-3/4 17-1/2 20-3/4 18 4th quarter 27-1/2 25-1/4 19 16-1/2 18-3/4 16-1/2
Quarterly dividend paid per share 27 cents 31-1/4 cents 31-1/4 cents Number of stock- holders at De- cember 31, 1994 28,761 293 1,007 - -----------------------------------------------------------------------------
The common and 5% preferred stocks have voting rights. [RECYCLE LOGO] This Annual Report is printed on recycled paper. 57 EX-21 4 SUBSIDIARIES 77 EXHIBIT 21 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES Subsidiaries of the Registrant The following list includes the Registrant and all of its subsidiaries as of December 31, 1995. The voting stock of each company shown indented is owned, to the extent indicated by the percentage, by the company immediately above which is not indented to the same degree. All subsidiaries of the Registrant appearing in the following table are included in the consolidated financial statements of the Registrant and its subsidiaries. Percentage State of Voting Stock Name of Company Incorporation Owned American Water Works Company, Inc. American Commonwealth Company Delaware 100 American International Water Services Co. Delaware 100 American Water Works Service Company, Inc. Delaware 100 California-American Water Company California 100 Greenwich Water System, Inc. Delaware 100 Connecticut-American Water Company Connecticut 100 Hampton Water Works Company New Hampshire 100 Massachusetts-American Water Company Massachusetts 100 New York-American Water Company, Inc. New York 100 The Salisbury Water Supply Company Massachusetts 100 Illinois-American Water Company Illinois 99.71 Indiana-American Water Company, Inc. Indiana 100 Iowa-American Water Company Delaware 94.84 Kentucky-American Water Company Kentucky 100 Maryland-American Water Company Maryland 100 Massachusetts Capital Resources Company Delaware 100 Missouri-American Water Company Missouri 100 New Jersey-American Resources Company New Jersey 100 New Jersey-American Water Company, Inc. New Jersey 100* New Mexico-American Water Company, Inc. New Mexico 99.98 Michigan-American Water Company Michigan 100 Occoquan Land Corporation Virginia 100 Ohio-American Water Company Ohio 100 Ohio Suburban Water Company Ohio 100 Paradise Valley Water Company Arizona 100 Pennsylvania-American Water Company Pennsylvania 95.80** Tennessee-American Water Company Tennessee 99.78 Virginia-American Water Company Virginia 100 West Virginia-American Water Company West Virginia 99.91 Bluefield Valley Water Works Company Virginia 100 - --------------------------------------------------------------------------- * Includes 8.56% which is owned by American Commonwealth Company, an affiliate of the Registrant. ** Includes .17% and 2.26% which are owned by American Commonwealth Company and Greenwich Water System, Inc., respectively, affiliates of the Registrant. EX-27 5 FDS
OPUR1 This schedule contains summary financial information extracted from the consolidated financial statements set forth in Form 10-K report of the Registrant for 1995. 0000318819 ROBERT D. SIEVERS 1,000 12-MOS DEC-31-1995 DEC-31-1995 PER-BOOK 2,884,681 77,903 164,370 243,732 32,455 3,403,141 42,392 112,095 664,452 818,939 82,326 17,961 1,384,649 148,639 0 0 44,321 0 0 0 906,306 3,403,141 802,820 57,646 558,547 616,193 186,627 22,476 209,103 117,042 92,061 3,984 88,077 42,500 112,073 179,096 2.64 0
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