10-Q 1 r10q930.txt CONFORMED COPY Page 1 of 20 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 -------------------------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 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 (IRS Employer Identification No.) incorporation or organization) 1025 Laurel Oak Road, Voorhees, New Jersey 08043 --------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (856) 346-8200 --------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable --------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ----- At November 1, 2001, the number of shares of common stock, $1.25 par value, outstanding was 99,983,686 shares. Page 2 FORM 10-Q PART I FINANCIAL INFORMATION ---------------------------- Item 1. Financial Statements ----------------------------- AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES ----------------------------------------------------------- Consolidated Statements of Income and Comprehensive Income and of Retained Earnings (Unaudited) (In thousands, except per share amounts) Three Months Ended September 30, 2001 2000 -------- -------- CONSOLIDATED INCOME AND COMPREHENSIVE INCOME Operating revenues $394,956 $364,125 -------- -------- Operating expenses Operation and maintenance 166,890 154,400 Depreciation and amortization 46,819 41,648 General taxes 33,049 31,942 -------- -------- Total operating expenses 246,758 227,990 -------- -------- Operating income 148,198 136,135 -------- -------- Other income (deductions) Interest (47,512) (48,556) Allowance for other funds used during construction 1,098 1,241 Allowance for borrowed funds used during construction 968 931 Amortization of debt expense (694) (691) Preferred dividends of subsidiaries (750) (789) RWE/AG acquisition expense (9,860) - Gain from sale of operating system 4,820 - Other, net 1,481 (4,052) -------- -------- Total other income (deductions) (50,449) (51,916) -------- -------- Income before income taxes 97,749 84,219 Provision for income taxes 41,972 33,488 -------- -------- Net income 55,777 50,731 Dividends on preferred stocks 146 996 -------- -------- Net income to common stock 55,631 49,735 -------- -------- Other comprehensive loss, net of tax Unrealized loss on securities (12,181) (23,856) Reclassification adjustment for gain included in net income (1,104) - -------- -------- Other comprehensive loss, net of tax (13,285) (23,856) -------- -------- Comprehensive income $ 42,346 $ 25,879 ======== ======== Page 3 FORM 10-Q Three Months Ended September 30, 2001 2000 ---------- ---------- Average shares of basic common stock outstanding 99,723 98,139 Basic and diluted earnings per common share on average shares outstanding $ 0.56 $ 0.51 ========== ========== CONSOLIDATED RETAINED EARNINGS Balance at July 1 $1,096,271 $1,026,417 Add - net income 55,777 50,731 Gain (loss) on treasury stock 57 (15) ---------- ---------- 1,152,105 1,077,133 ---------- ---------- Deduct - dividends paid Preferred stock 32 882 Preference stock 114 114 Common stock - $.235 per share in 2001; $.225 per share in 2000 23,409 22,062 ---------- ---------- 23,555 23,058 ---------- ---------- Balance at September 30 $1,128,550 $1,054,075 ========== ========== The accompanying information and notes are an integral part of these financial statements.
Page 4 FORM 10-Q AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES ----------------------------------------------------------- Consolidated Statements of Income and Comprehensive Income and of Retained Earnings (Unaudited) (In thousands, except per share amounts) Nine Months Ended September 30, 2001 2000 ---------- ---------- CONSOLIDATED INCOME AND COMPREHENSIVE INCOME Operating revenues $1,075,261 $1,018,293 ---------- ---------- Operating expenses Operation and maintenance 478,189 453,028 Depreciation and amortization 136,248 122,061 General taxes 98,825 96,610 ---------- ---------- Total operating expenses 713,262 671,699 ---------- ---------- Operating income 361,999 346,594 ---------- ---------- Other income(deductions) Interest (144,653) (143,030) Allowance for other funds used during construction 3,364 5,747 Allowance for borrowed funds used during construction 3,035 4,210 Amortization of debt expense (2,082) (2,081) Preferred dividends of subsidiaries (2,275) (2,382) RWE/AG acquisition expense (9,860) - Gain from sale of operating system 4,820 - Other, net 3,876 (5,126) ---------- --------- Total other income (deductions) (143,775) (142,662) ---------- --------- Income before income taxes 218,224 203,932 Provision for income taxes 89,605 80,979 ---------- --------- Net income 128,619 122,953 Dividends on preferred stocks 438 2,988 ---------- --------- Net income to common stock 128,181 119,965 ---------- --------- Other comprehensive loss, net of tax Unrealized loss on securities (16,636) (47,062) Reclassification adjustment for gain included in net income (3,158) - ---------- --------- Other comprehensive loss, net of tax (19,794) (47,062) ---------- --------- Comprehensive income $108,387 $ 72,903 ========== ========= Page 5 FORM 10-Q Nine Months Ended September 30, 2001 2000 ---------- ---------- Average shares of basic common stock outstanding 99,287 97,944 Basic and diluted earnings per common share on average shares outstanding $ 1.29 $ 1.22 ========== ========== CONSOLIDATED RETAINED EARNINGS Balance at January 1 $1,069,486 $1,001,029 Add - net income 128,619 122,953 - gain (loss) on treasury stock 801 (959) ---------- ---------- 1,198,906 1,123,023 ---------- ---------- Deduct - dividends paid Preferred stock 96 2,646 Preference stock 342 342 Common stock - $.705 per share in 2001; $.675 per share in 2000 69,918 65,960 ---------- ---------- 70,356 68,948 ---------- ---------- Balance at September 30 $1,128,550 $1,054,075 ========== ========== The accompanying information and notes are an integral part of these financial statements.
Page 6 FORM 10-Q AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES ----------------------------------------------------------- Consolidated Balance Sheet (Unaudited) (In thousands) September 30 December 31 2001 2000 ------------ ----------- ASSETS Property, plant and equipment Utility plant - at original cost less accumulated depreciation $ 5,358,174 $ 5,202,833 Utility plant acquisition adjustments, net 72,881 75,294 Non-utility property, net of accumulated depreciation 47,236 37,831 Excess of cost of investments in subsidiaries over book equity at acquisition, net 59,142 55,590 ----------- ----------- Total property, plant and equipment 5,537,433 5,371,548 ----------- ----------- Current assets Cash and cash equivalents 43,357 28,571 Customer accounts receivable 134,232 103,975 Allowance for uncollectible accounts (3,316) (2,575) Unbilled revenues 94,168 83,878 Miscellaneous receivables 12,911 15,117 Materials and supplies 23,154 20,683 Deferred vacation pay 12,818 10,923 Restricted funds 224 224 Other 17,820 16,900 ----------- ----------- Total current assets 335,368 277,696 ----------- ----------- Regulatory and other long-term assets Regulatory asset - income taxes recoverable through rates 216,376 216,652 Other investments 39,196 73,997 Debt and preferred stock expense 46,571 47,630 Deferred pension expense 28,755 23,479 Deferred postretirement benefit expense 9,521 10,129 Deferred business services project costs 32,559 4,796 Deferred tank painting costs 16,005 16,829 Restricted funds 8,590 8,343 Other 88,301 83,699 ----------- ----------- Total regulatory and other long-term assets 485,874 485,554 ----------- ----------- TOTAL ASSETS $ 6,358,675 $ 6,134,798 =========== =========== Page 7 FORM 10-Q September 30 December 31 2001 2000 ------------ ----------- CAPITALIZATION AND LIABILITIES Capitalization Common stockholders' equity $ 1,746,520 $ 1,669,677 Preferred stocks without mandatory redemption requirements 11,673 11,673 Preferred stocks of subsidiaries with mandatory redemption requirements 30,698 32,902 Preferred stocks of subsidiaries without mandatory redemption requirements 8,118 8,118 Long-term debt American Water Works Company, Inc. 147,000 159,000 Subsidiaries 2,234,916 2,112,165 ----------- ----------- Total capitalization 4,178,925 3,993,535 ----------- ----------- Current liabilities Short-term debt 447,556 412,179 Current portion of long-term debt 79,661 161,395 Accounts payable 46,344 52,447 Taxes accrued, including federal income 86,402 25,960 Interest accrued 49,153 42,641 Accrued vacation pay 13,060 11,564 Other 66,758 67,865 ----------- ----------- Total current liabilities 788,934 774,051 ----------- ----------- Regulatory and other long-term liabilities Advances for construction 224,741 216,125 Deferred income taxes 603,051 605,343 Deferred investment tax credits 38,889 40,098 Accrued pension expense 61,231 50,414 Accrued postretirement benefit expense 13,394 13,930 Other 37,263 37,823 ----------- ----------- Total regulatory and other long-term liabilities 978,569 963,733 ----------- ----------- Contributions in aid of construction 412,247 403,479 ----------- ----------- Commitments and contingencies -- -- ----------- ----------- TOTAL CAPITALIZATION AND LIABILITIES $ 6,358,675 $ 6,134,798 =========== =========== The accompanying information and notes are an integral part of these financial statements.
Page 8 FORM 10-Q AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES ----------------------------------------------------------- Consolidated Statement of Cash Flows (Unaudited) (In thousands) Nine Months Ended September 30, 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $128,619 $122,953 Adjustments Depreciation and amortization 136,248 122,061 Provision for deferred income taxes 10,148 13,757 Provision for losses on accounts receivable 7,266 6,334 Allowance for other funds used during construction (3,364) (5,747) Gain from sale of telecommunications company investments (5,177) - Gain from sale of operating system (4,820) - Employee benefit expenses greater than funding 525 4,946 Employee stock plan expenses 3,745 (2) Deferred business services project expenses (27,763) - Deferred tank painting costs (2,184) (1,591) Deferred rate case expense (2,095) (1,322) Amortization of deferred charges 12,332 8,266 Other, net (2,683) (7,047) Changes in assets and liabilities, net Accounts receivable (34,576) (29,458) Unbilled revenues (10,290) (7,489) Other current assets (3,391) (4,226) Accounts payable (6,103) (26,480) Taxes accrued, including federal income 60,442 21,206 Interest accrued 6,512 4,679 Other current liabilities (1,107) (19,778) -------- -------- Net cash from operating activities 262,284 201,062 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Construction expenditures (251,225) (253,011) Allowance for other funds used during construction 3,364 5,747 Acquisitions (55,859) (48,951) Proceeds from the disposition of property, plant and equipment 19,359 2,342 Removal costs from property, plant and equipment retirements (9,633) (4,500) Restricted funds (247) 12,540 -------- -------- Net cash used in investing activities (294,241) (285,833) -------- -------- Page 9 FORM 10-Q Nine Months Ended September 30, 2001 2000 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt $148,321 $ 46,014 Proceeds from common stock 34,736 25,455 Purchase of common stock for treasury (932) (3,426) Net borrowings under short-term debt agreements 35,377 73,583 Advances and contributions for construction, net of refunds 22,109 21,243 Debt issuance costs (1,004) (1,782) Repayment of long-term debt (119,304) (26,796) Redemption of preferred stocks (2,204) (926) Dividends paid (70,356) (68,948) -------- -------- Net cash from financing activities 46,743 64,417 -------- -------- Net increase (decrease) in cash and cash equivalents 14,786 (20,354) Cash and cash equivalents at January 1 28,571 43,100 -------- -------- Cash and cash equivalents at September 30 $43,357 $ 22,746 ======== ======== Common stock issued in lieu of cash in connection with the Employees' Stock Ownership Plan, the Savings Plan for Employees and the 2000 Stock Award and Incentive Plan totaled $1,488 in 2000. Common stock placed into treasury in connection with the Employees Stock Ownership Plan, the Savings Plan for Employees, and 2000 Stock Award and Incentive Plan totaled $1,774 in 2001 and $4,871 in 2000. The accompanying information and notes are an integral part of these financial statements.
Page 10 FORM 10-Q AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES ----------------------------------------------------------- Information Accompanying Financial Statements (Unaudited) (In thousands, except share and per share amounts) September 30 December 31 2001 2000 ---------- ---------- Preferred stocks without mandatory redemption requirements Cumulative preferred stock - $25 par value 5% series (one-tenth of a vote per share) - 101,777 shares outstanding $ 2,544 $ 2,544 Cumulative preference stock - $25 par value Authorized - 750,000 shares 5% series (non-voting) - 365,158 shares outstanding 9,129 9,129 Cumulative preferential stock - $35 par value Authorized - 3,000,000 shares (one-tenth of a vote per share)- no outstanding shares -- -- ---------- ----------- $ 11,673 $ 11,673 ========== ========== Common stockholders' equity Common stock - $1.25 par value Authorized - 300,000,000 shares Issued - 100,006,273 shares in 2001; 98,819,845 shares in 2000 $ 125,008 $ 123,525 Paid-in capital 489,257 454,568 Retained earnings 1,128,550 1,069,486 Accumulated other comprehensive income 5,509 25,303 Unearned compensation (778) (359) Treasury stock at cost - 34,731 shares in 2001; 129,216 shares in 2000 (1,026) (2,846) ---------- ---------- $1,746,520 $1,669,677 ========== ========== At September 30, 2001, common shares reserved for issuance in connection with the Company's stock plans were 80,865,863 shares for the Stockholder Rights Plan, 1,641,852 shares for the Dividend Reinvestment and Stock Purchase Plan, 565,493 shares for the Employees' Stock Ownership Plan and 532,381 shares for the Savings Plan for Employees. Up to 4,254,367 shares of common stock may be issued under the 2000 Stock Award and Incentive Plan, of which approximately 3,300,000 shares were available to be granted at September 30, 2001. Page 11 FORM 10-Q AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES ----------------------------------------------------------- Notes to Consolidated Financial Statements (Unaudited) NOTE 1 -- Financial Statement Presentation The information presented in this Form 10-Q is unaudited. In the opinion of management the information reported reflects all adjustments, consisting of normal recurring adjustments, which were necessary to a fair statement of the results for the periods reported. Certain reclassifications have been made to conform previously reported data to the current presentation. NOTE 2 -- RWE/AG Acquisition of American Water Works On September 17, 2001 the Company announced that it had entered into a definitive agreement under which an indirect wholly owned subsidiary of RWE Aktiengesellschaft (RWE/AG) will merge with and into the Company, with each outstanding share of the Company's common stock converted in the merger into the right to receive $46.00 per share in cash. RWE/AG is a global multi-utility company that does business, through its subsidiaries and affiliates, in over 120 countries. Its core businesses are electricity, gas, water, and wastewater management services. RWE/AG's all-cash proposal represents a 37.2% premium over the average closing price per share of the Company's shares over the 30 trading days prior to September 10, 2001, and a 29.5% premium over the highest closing share price the Company's stock ever obtained prior to the public announcement of the agreement. The proposed transaction has a total value of $7.6 billion, including the assumption of approximately $3.0 billion in debt the Company had outstanding as of June 30, 2001. Upon completion of the transaction, the Company will join with Thames Water, RWE/AG's London-based international water services business. The American Water brand will continue, and its management team headquartered in Voorhees, New Jersey is expected to lead the RWE/AG-Thames water business in North, Central and South America. The transaction is expected to take at least a year to complete, following approval by the Company's shareholders and appropriate state regulatory agencies. The Company has identified fourteen states that it believes are required to approve the transaction. Those states are Arizona, California, Connecticut, Illinois, Kentucky, Maryland, New Hampshire, New Jersey, New Mexico, New York, Ohio, Pennsylvania, Virginia, and West Virginia. Approval in Connecticut and New Hampshire will likely not be required when the sale of those properties to Kelda Group (See Note 3) is completed. In five states only advisory letter filings are required. Those states are Hawaii, Iowa, Missouri, Tennessee, and Texas. The Company does not believe filings will be necessary in Georgia, Indiana, Massachusetts, and Michigan. NOTE 3 -Sales of Operating Systems TOWN OF SALISBURY MASSACHUSETTS On September 28, 2001 the Company completed the sale of its Salisbury Water Supply Company's operating system to the Town of Salisbury, Massachusetts for $11.5 million in cash plus outstanding accounts receivable. The Salisbury system serves 3,000 customers and had revenues of $1.9 million in 2000. Page 12 FORM 10-Q KELDA GROUP ACQUISITION OF NEW ENGLAND OPERATIONS Kelda Group Plc and the Company jointly announced on August 30, 2001 that they had reached an agreement whereby Kelda Group would acquire the Company's New England operations. The transaction price is approximately $118 million in cash plus the assumption of $115 million in debt. The utility operations being acquired by Kelda Group serve a total of 64,000 customers and had revenues of $47.3 million in 2000. Massachusetts Capital Resources Company, a finance subsidiary of the Company, which owns and leases certain assets to Massachusetts-American, will also be acquired as part of the transaction. The Public Utility Commissions in Connecticut, New York, and New Hampshire must approve the Kelda Group transaction, which is expected to be consummated by the end of the first half of 2002. The transaction is also subject to review by the Federal Trade Commission. Note 4 -- Pending Acquisition WATER AND WASTEWATER ASSETS OF CITIZENS COMMUNICATIONS On October 15, 1999, the Company entered into an agreement to acquire all of the water and wastewater utility assets of Citizens Communications Company (formerly Citizens Utilities Company) (NYSE:CZN) for $835 million in cash and debt. Citizens provides water and wastewater service to 305,000 customers in Arizona, California, Illinois, Indiana, Ohio and Pennsylvania. For the latest fiscal year ended December 31, 2000, the operations being acquired had revenues of approximately $110 million. The Company now has approval from state regulatory agencies in all six states covered by the purchase agreement. The California Public Utility Commission approved the Company's acquisition of Citizens' water and wastewater assets in that state on September 30, 2001, but the Company is awaiting a possible rehearing before that commission and a possible appellate proceeding before closing the acquisition. Note 5-- Acquisition AZURIX NORTH AMERICA AND AZURIX INDUSTRIALS On August 6, 2001 the Company entered into an agreement to acquire Azurix North America Corp. and Azurix Industrials Corp. for approximately $150 million in cash and debt. Azurix North America and Azurix Industrials are wholly-owned subsidiaries of Azurix Corp. and provide a range of water and wastewater services, including operations and maintenance, engineering, carbon regeneration, underground infrastructure rehabilitation and residuals management. Azurix North America and Azurix Industrials, which had revenues totaling approximately $157 million in 2000, have approximately 1,050 employees and operate facilities serving an end-user population of approximately 2 million people across North America. This acquisition, which was completed on November 7, 2001, strengthens the Company's position as a premier provider of water resource management services in the United States and Canada. Page 13 FORM 10-Q Note 6-- Security Issues In the aftermath of the tragic events of September 11, 2001, all aspects of how the Company secures its facilities in order to protect the safety of its customers and associates are being reviewed and additional security measures are being implemented. It is anticipated that these additional measures will result in a significant increase in spending on security. The regulated utility subsidiaries are seeking recognition of these increased security costs in the rates charged for utility service. At this time the Company plans to defer these additional costs because it believes that it is probable that they will be recovered in rates, and therefore expects no significant impact on the Company's financial position or results of operations. NOTE 7 -- New Accounting Standards On January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), as amended. The statement establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS 133 was issued by the Financial Accounting Standards Board in June of 1998 and requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This new accounting standard did not have any effect on the Company's financial position or results of operations. The Company's contracts that meet the definition of a derivative are for normal purchases and normal sales, are expected to result in a physical delivery, and are of quantities expected to be used or sold over a reasonable period in the normal course of business. The Company has no hedging activities. In June of 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141) and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company is required to adopt SFAS 142 effective January 1, 2002. The Company is currently evaluating the effect that adoption of the provisions of SFAS 142 that are effective January 1, 2002 will have on its results of operations and financial position. Also in June of 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 143, "Accounting for Asset Retirement Obligations," (SFAS 143) on the accounting for obligations associated with the retirement of long-lived assets. SFAS 143 requires a liability to be recognized in the financial statements for retirement obligations meeting specific criteria. Measurement of the initial obligation is to approximate fair value with an equivalent amount recorded as an increase in the value of the capitalized asset. Page 14 FORM 10-Q The asset will be depreciable in accordance with normal depreciation policy and the liability will be increased, with a charge to the income statement, until the obligation is settled. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The Company is currently evaluating the effect that adoption of the provisions of SFAS 143 will have on its results of operations and financial position. In August of 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," (SFAS 144) that replaces Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS 144 requires that one accounting model be used for long-lived assets to be disposed of by sale and broadens discontinued operations to include more disposal transactions. Under SFAS 144, operating losses of discontinued operations are recognized in the period in which they occur, instead of accruing future operating losses before they occur. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The Company is currently evaluating the effect that adoption of the provisions of SFAS 144 will have on its results of operations and financial position. Note 8 - Subsequent Event On November 6, 2001 the Company and its financing subsidiary, American Water Capital Corp., executed a Note Purchase Agreement for up to $1.2 billion in senior unsecured notes at an interest rate of 4.92%. The notes will be purchased at par by RWE/AG and mature on November 6, 2006. The Company and its subsidiaries are using proceeds from the sale of the notes to acquire the common stock of Azurix North America and Azurix Industrials, to fund the acquisition of the water and wastewater assets of Citizens Communication Company and to reduce outstanding short-term debt. Closing will occur in two or more tranches, the first of which took place on November 6, 2001 in the amount of $298.5 million. Page 15 FORM 10-Q PART I - FINANCIAL INFORMATION Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ---------------------------------------------------------------------- Results of Operations --------------------- Operating revenues for the third quarter and the first nine months of 2001 were higher than for the same periods of 2000 by 8% and 6%, respectively. Increased revenues were the result of water sales to 40,000 new customers, authorized increases in rates charged for service and modest weather pattern improvements. Water sales volume during the third quarter of 2001 increased 3% to 102.0 billion gallons from 99.5 billion gallons in the third quarter of 2000. The 260.7 billion gallons of sales volume for the first nine months of 2001 was 1% greater than the 258.0 billion gallons sold in the same period of 2000. During 2001, ten utility subsidiaries have received rate decisions, which are expected to provide approximately $23.5 million in additional annual revenues. Four subsidiaries have rate increase applications on file before regulatory agencies, which, if granted in full, would provide approximately $55.4 million in additional annual revenues. The largest portion of this total is from two separate requests filed by Pennsylvania- American and Indiana-American at $39 million and $13 million, respectively. Decisions in the Pennsylvania and Indiana cases are expected in the first and third quarters of 2002, respectively. Operating expenses in the third quarter and the first nine months of 2001 were 8% and 6% higher compared to the same periods in 2000. Operation and maintenance expenses increased by 8% and 6% in the third quarter and the first nine months when compared to the same periods in 2000 primarily because of increased production costs such as power, purchased water and chemicals. A portion of the expense increase was associated with customer growth. The increases in depreciation expense for the quarter and first nine months were related to the Company's ongoing program of utility plant construction. Interest expense decreased by 2% in the third quarter and increased 1% in the first nine months of 2001 compared to the same periods in 2000, reflecting declining interest rates in 2001. The total allowance for funds used (equity and borrowed) during construction ("AFUDC") recorded in the third quarter of 2001 was $2.1 million, compared to $2.2 million in the third quarter of 2000. AFUDC for the first nine months of 2001 was $6.4 million compared to $10.0 million for the same period in 2000. The utility subsidiaries record AFUDC to the extent permitted by the regulatory authorities. During the third quarter and first nine months of 2001 the Company sold a portion of its telecommunication company investments and realized pre-tax gains of $1.8 million and $5.2 million in other income. Income taxes increased in the third quarter and first nine months of 2001 when compared to the comparable periods in 2000, as a result of increased earnings in 2001. Page 16 FORM 10-Q Net income to common stock was $55.6 million for the third quarter of 2001 compared with $49.7 million for the same period in 2000. Net income to common stock for the first nine months of 2001 was $128.2 million compared with $120.0 million for the first nine months of 2000. Other comprehensive loss was $13.3 million and $19.8 million in the third quarter and first nine months of 2001, respectively, compared to other comprehensive loss of $23.9 million and $47.1 million in the same periods in 2000. The Company's other comprehensive loss represents the unrealized loss on passive investments in publicly traded securities. Earnings per share of common stock in 2001 were $.63 for the quarter and $1.36 for the nine months ended September 30, 2001 prior to one-time transactions. Earnings per share in 2000 were $.51 for the third quarter and $1.22 for the nine months year-to-date. In 2001 a $.10 per share charge resulted from expenses incurred for the RWE/AG transaction and a $.03 per share net gain was recorded for the sale of the operating system in Salisbury Massachusetts. After these one-time transactions, per share earnings in 2001 were $.56 for the third quarter and $1.29 for the year- to-date. Capital Resources and Liquidity ------------------------------- During the first nine months of 2001, 1,154,244 shares of common stock were issued in connection with the Dividend Reinvestment and Stock Purchase Plan, and 32,184 shares were issued for non-qualified stock options that were exercised. Also, 163,892 non-qualified stock options were granted in connection with the 2000 Stock Award and Inventive Plan during the first nine months of 2001. The Company issued 153,648 shares of common stock out of treasury during the first nine months of 2001 in connection with the Employees' Stock Ownership Plan, the Savings Plan for Employees and the 2000 Stock Award and Incentive Plan. On March 29, 2001 the Company's financing subsidiary, American Water Capital Corp. (AWCC) closed on its inaugural long-term debt financing of $140 million. The securities issued are senior unsecured notes carrying an interest rate of 6.87% maturing on March 29, 2011. The Company loaned the proceeds of that financing to nine utility subsidiaries to repay short- term debt. In the first nine months of 2001, the Company invested $7.2 million in the common stock of two subsidiaries. New Accounting Standards ------------------------ On January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133), as amended. The statement establishes accounting and reporting standards for derivative instruments and hedging activities. SFAS 133 was issued by the Financial Accounting Standards Board in June of 1998 and requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. Page 17 FORM 10-Q This new accounting standard did not have any effect on the Company's financial position or results of operations. The Company's contracts that meet the definition of a derivative are for normal purchases and normal sales, are expected to result in a physical delivery, and are of quantities expected to be used or sold over a reasonable period in the normal course of business. The Company has no hedging activities. In June of 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations" (SFAS 141) and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). SFAS 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS 142, goodwill and intangible assets with indefinite lives are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have indefinite lives will continue to be amortized over their useful lives. The amortization provisions of SFAS 142 apply to goodwill and intangible assets acquired after June 30, 2001. With respect to goodwill and intangible assets acquired prior to July 1, 2001, the Company is required to adopt SFAS 142 effective January 1, 2002. The Company is currently evaluating the effect that adoption of the provisions of SFAS 142 that are effective January 1, 2002 will have on its results of operations and financial position. Also in June of 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 143, "Accounting for Asset Retirement Obligations," (SFAS 143) on the accounting for obligations associated with the retirement of long-lived assets. SFAS 143 requires a liability to be recognized in the financial statements for retirement obligations meeting specific criteria. Measurement of the initial obligation is to approximate fair value with an equivalent amount recorded as an increase in the value of the capitalized asset. The asset will be depreciable in accordance with normal depreciation policy and the liability will be increased, with a charge to the income statement, until the obligation is settled. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The Company is currently evaluating the effect that adoption of the provisions of SFAS 143 will have on its results of operations and financial position. In August of 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," (SFAS 144) that replaces Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS 144 requires that one accounting model be used for long-lived assets to be disposed of by sale and broadens discontinued operations to include more disposal transactions. Under SFAS 144, operating losses of discontinued operations are recognized in the period in which they occur, instead of accruing future operating losses before they occur. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The Company is currently evaluating the effect that adoption of the provisions of SFAS 144 will have on its results of operations and financial position. Page 18 FORM 10-Q Subsequent Event ---------------- On November 6, 2001 the Company and its financing subsidiary, American Water Capital Corp., executed a Note Purchase Agreement for up to $1.2 billion in senior unsecured notes at an interest rate of 4.92%. The notes will be purchased at par by RWE/AG and mature on November 6, 2006. The Company and its subsidiaries are using proceeds from the sale of the notes to acquire the common stock of Azurix North America and Azurix Industrials, to fund the acquisition of the water and wastewater assets of Citizens Communication Company and to reduce outstanding short-term debt. Closing will occur by the issuance of two or more tranches, the first of which took place on November 6, 2001 in the amount of $298.5 million. Forward Looking Information --------------------------- Forward looking statements in this report, including, without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward looking statements. These factors include, among others, the following: the success of pending applications for rate increases; inability to obtain, or to meet conditions imposed for, regulatory approval of pending acquisitions; weather conditions that tend to extremes of temperature or duration; availability, terms and development of capital; business abilities and judgment of personnel; changes in, or the failure to comply with governmental regulations, particularly those affecting the environment and water quality; competition; success of operating initiatives, advertising and promotional efforts; existence of adverse publicity or litigation; changes in business strategy or plans; quality of management; general economic and business conditions; and other factors described in filings of the Company with the SEC. The Company undertakes no obligation to publicly update or revise any forward looking statement, whether as a result of new information, future events or otherwise. Page 19 FORM 10-Q PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K ----------------------------------------- A. Exhibits -------- Exhibit Number Description -------------- ----------- 10 Material Contracts (a) Note Purchase Agreement for up to $1.2 billion 4.92% senior notes due November 6, 2006 B. Reports on Form 8-K ------------------- A current report on Form 8-K was filed on August 7, 2001 by the Company regarding the agreement to acquire Azurix North America Corp. and Azurix Industrials Corp. A current report on Form 8-K was filed on August 30, 2001 by the Company regarding the agreement to sell the Company's New England Operations to the Kelda Group Plc. A current report on Form 8-K was filed on September 17, 2001 by the Company regarding the RWE/AG merger agreement. A current report on Form 8-K was filed on October 30, 2001 by the Company regarding the release of the Company's third quarter earnings. A current report on Form 8-K was filed on November 7, 2001 by the Company regarding the note purchase agreement with RWE/AG. A current report on Form 8-K was filed on November 8, 2001 by the Company regarding completion of the acquisition of Azurix North America Corp. and Azurix Industrials Corp. Page 20 FORM 10-Q SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. AMERICAN WATER WORKS COMPANY, INC. (Registrant) Date November 14, 2001 \s\Ellen C. Wolf ---------------------- ----------------------------------------- Vice President and Chief Financial Officer (Authorized Officer) Date November 14, 2001 \s\Robert D. Sievers ---------------------- --------------------------------------- Comptroller (Chief Accounting Officer)