-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, U6ZvRXJnarfcamoFf5stypYH1QtU1Kr9H1lykXuoZ/XEJi2SgXWrMohVCKV/+UHR sPdoG7nbXFUV/m/MdTcRpQ== 0000318819-94-000007.txt : 19940331 0000318819-94-000007.hdr.sgml : 19940331 ACCESSION NUMBER: 0000318819-94-000007 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN WATER WORKS CO INC CENTRAL INDEX KEY: 0000318819 STANDARD INDUSTRIAL CLASSIFICATION: 4941 IRS NUMBER: 510063696 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-03437 FILM NUMBER: 94519045 BUSINESS ADDRESS: STREET 1: 1025 LAUREL OAK RD CITY: VOORHEES STATE: NJ ZIP: 08043 BUSINESS PHONE: 6093468200 MAIL ADDRESS: ZIP: 07 10-K 1 REPORT ON FORM 10-K FOR 1993 1 Page 1 of 71 Exhibit Index on Pages 17-19 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (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, 1993 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, and (2) has been subject to such filing requirements for the past 90 days. YES X NO . 2 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 2, 1994 was $637,263,191. As of March 2, 1994, there were a total of 31,325,089 shares of Common Stock, $1.25 par value per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE (1) The following pages and sections in Registrant's Annual Report to Stockholders for 1993 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 the inside back cover. (2) Page 2 (beginning with the fourth full paragraph thereon) through page 11, with the exception of the second paragraph on page 4 and the sections entitled "Report of the Compensation and Management Development Committee of the Board of Directors on Executive Compensation" and "Performance Graph" on pages 9 and 11, respectively, of the definitive Proxy Statement relating to Registrant's Annual Meeting of Stockholders on May 5, 1994 are incorporated by reference into Part III of this Form 10-K. PART I Item 1. Business The "Description of the Business" is set forth on page 23 of the Annual Report to Stockholders for 1993, 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 require- ments. 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. 3 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 page 26 of the Annual Report to Stockholders for 1993, 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 4,062 at December 31, 1993. 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 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 55 President & Chief Executive Officer January 2, 1992 J. James Barr 52 Vice President & Treasurer January 20, 1984 Edward W. Limbach 55 Vice President May 3, 1990 Gerald C. Smith 59 Vice President May 2, 1991 W. Timothy Pohl 39 General Counsel & Secretary January 16, 1988 Robert D. Sievers 40 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 4 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. 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 the inside back cover of the Annual Report to Stockholders for 1993, filed as Exhibit 13 to this Report on Form 10-K; such information is hereby specifically incorporated herein by reference thereto. 5 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 1993, 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 1993, 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 dated February 1, 1994, appearing on pages 35 through 53 of the 1993 Annual Report to Stockholders, filed as Exhibit 13 to this Report on Form 10-K, are hereby specifically incorporated herein by reference thereto. 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 6 of the definitive Proxy Statement relating to the Registrant's Annual Meeting of Stockholders on May 5, 1994, 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," "Director Remuneration" and "Performance Graph" 6 which are located on pages 7 through 11 of the definitive Proxy Statement relating to the Registrant's Annual Meeting of Stockholders on May 5, 1994, 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 4, 5 and 6 of the definitive Proxy Statement relating to the Registrant's Annual Meeting of Stockholders on May 5, 1994, 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. 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 10 and 11 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 10 and 11 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 17 to 19 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. 7 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: /s/ George W. Johnstone George W. Johnstone, President and Chief Executive Officer DATE: March 3, 1994 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: /s/ George W. Johnstone President and March 3, 1994 George W. Johnstone Chief Executive Officer Principal Financial Officer: /s/ J. James Barr Vice President and March 3, 1994 J. James Barr Treasurer Principal Accounting Officer: /s/ Robert D. Sievers Comptroller March 3, 1994 Robert D. Sievers 8 SIGNATURES (Cont'd.) Directors: /s/ William O. Albertini March 3, 1994 William O. Albertini /s/ William R. Cobb March 3, 1994 William R. Cobb /s/ Elizabeth H. Gemmill March 3, 1994 Elizabeth H. Gemmill /s/ Henry G. Hager March 3, 1994 Henry G. Hager /s/ Nelson G. Harris March 3, 1994 Nelson G. Harris /s/ William F. Hyland March 3, 1994 William F. Hyland /s/ George W. Johnstone March 3, 1994 George W. Johnstone /s/ Marilyn W. Lewis March 3, 1994 Marilyn W. Lewis Nancy W. Wainwright /s/ Paul W. Ware March 3, 1994 Paul W. Ware /s/ Ross A. Webber March 3, 1994 Ross A. Webber 9 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT YEAR ENDED DECEMBER 31, 1993 AMERICAN WATER WORKS COMPANY, INC. FINANCIAL STATEMENTS 10 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, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . .36 and 37 Consolidated Statements 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, 1993 . . . . . . . . . 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, 1993 . . . . . . . . . . . . . . . . . . . . . . 39 Balance Sheet of American Water Works Company, Inc. at December 31, 1993 and 1992 . . . . . . . . . . . . . . . . 40 Statements of Income and Retained Earnings of American Water Works Company, Inc. for each of the three years in the period ended December 31, 1993 . . . . . . 41 Statement of Cash Flows of American Water Works Company, Inc. for each of the three years in the period ended December 31, 1993. . . . . . . . . . . . . . . . 42 Schedules Accompanying Financial Statements . . . . . . .43 through 45 Notes to Financial Statements . . . . . . . . . . . . . .46 through 53 *Incorporated by reference from the indicated pages of the 1993 Annual Report to Stockholders, which is Exhibit 13 to this Report on Form 10-K. 11 AMERICAN WATER WORKS COMPANY, INC. INDEX TO FINANCIAL STATEMENTS (Continued) (2) FINANCIAL STATEMENT SCHEDULES Description Page* Report of Independent Accountants on Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 Consent of Independent Accountants. . . . . . . . . . . . . . . 13 Schedule V: Property, Plant and Equipment . . . . . . . . . 14 Schedule VI: Accumulated Depreciation of Property, Plant and Equipment . . . . . . . . . . . . . . 15 Schedule VIII: Valuation and Qualifying Accounts-Allowance for Uncollectible Accounts. . . . . . . . . . . 16 Schedule X: Supplementary Income Statement Information. . . 16 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. 12 Report of Independent Accountants on Financial Statement Schedules To the Board of Directors American Water Works Company, Inc. Our audits of the consolidated financial statements referred to in our report dated February 1, 1994 appearing on page 35 of the 1993 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 Schedules listed in Item 14(a) of this Form 10-K. In our opinion, these Financial Statements Schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE Thirty South Seventeenth Street Philadelphia, Pennsylvania 19103 February 1, 1994 13 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- 32051), on Form S-8 (Number 33-34804) and on Form S-8 (Number 33-62438) of American Water Works Company, Inc. of our report dated February 1, 1994 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 Statements Schedules, which appears on page 12 of this Form 10-K. PRICE WATERHOUSE Thirty South Seventeenth Street Philadelphia, Pennsylvania 19103 March 25, 1994 14 FINANCIAL STATEMENT SCHEDULE V AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES SCHEDULE V - Property, Plant and Equipment Years Ended December 31 (In thousands) Other Beginning Additions Changes-Add Ending Year Balance At Cost (A) Retirements (Deduct) (B) Balance - ---- ---------- ----------- ----------- ------------ ---------- 1993 $2 596 267 $363 015 $ 17 103 $ 14 602 $2 956 781 1992 2 412 748 204 792 20 506 (767) 2 596 267 1991 2 244 032 187 396 15 908 (2 772) 2 412 748 1993 1992 1991 -------- -------- -------- (A) Construction expenditures $193 116 $197 579 $182 987 Property acquired 169 899 7 213 4 409 -------- -------- -------- $363 015 $204 792 $187 396 ======== ======== ======== (B) Property sold $ (23) $ (251) $ (37) Return of contributed property (1 747) Adoption of Statement of Financial Accounting Standards No. 109 -- Gross-up of allowance for borrowed funds used during construction 16 477 Miscellaneous (1 852) (516) (988) -------- -------- --------- $ 14 602 $ (767) $ (2 772) ======== ======== ======== 15 FINANCIAL STATEMENT SCHEDULE VI AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES SCHEDULE VI - Accumulated Depreciation of Property, Plant and Equipment Years Ended December 31 (In thousands) Additions Charged to Other Beginning Costs and Changes-Add Ending Year Balance Expenses (A) Retirements (Deduct) (B) Balance - ---- --------- ------------ ----------- ------------ --------- 1993 $414 482 $66 093 $17 103 $27 808 $491 280 1992 377 646 58 257 20 506 (915) 414 482 1991 342 717 51 887 15 908 (1 050) 377 646 1993 1992 1991 -------- -------- -------- (A) Additions to accumulated depreciation charged to costs and expenses $66 093 $58 257 $51 887 Amortization of premature property retirements 396 289 366 Other 349 (164) (186) ------- ------- ------- Depreciation and amortization charged to operating expenses $66 838 $58 382 $52 067 ======= ======= ======= (B) Property acquired $31 050 $ 984 $ 43 Depreciation charged to contributed property 2 202 1 861 2 048 Removal costs (6 201) (5 224) (4 815) Salvage credits 1 744 1 190 1 207 Miscellaneous (987) 274 467 ------- ------- ------- $27 808 $ (915) $(1 050) ======= ======= ======= 16 FINANCIAL STATEMENT SCHEDULES VIII & X AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES SCHEDULE VIII - 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 - ---- --------- ----------- --------- -------------- ------- 1993 $ 925 $ 3 377 $ 102 $ 3 297 $ 1 107 1992 871 3 580 3 526 925 1991 844 4 028 4 001 871 (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. SCHEDULE X - Supplementary Income Statement Information (In thousands) Charged to Costs and Expenses ----------------------------- During the Years Ended December 31 ----------------------------------- Item 1993 1992 1991 ---- ------- ------- ------- 1. Maintenance and repairs $45 914 $41 721 $47 043 3. Taxes, other than payroll and income taxes: Property and capital stock 24 664 21 867 20 287 Gross receipts and franchise 30 174 28 600 25 540 Miscellaneous 2 186 2 412 2 145 17 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 filed herewith. 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 Fidelity Bank, National Association), 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 Fidelity Bank, National Association), as Trustee, is incorporated herein by reference to Exhibit 4(i) to Form 10-K report of the Registrant for 1989. 18 AMERICAN WATER WORKS COMPANY, INC. INDEX TO EXHIBITS Exhibit Number Description 4 (cont.) (c) Second Supplemental Indenture dated as of February 1, 1993 between the Registrant and Fidelity Bank, National Association (name later changed to First Fidelity Bank, National Association), 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, 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, 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, 1987, is incorporated herein by reference to Exhibit 19(b) to Form 10-K report of the Registrant for 1986. (b) Amendment No. 1 to Employees' Stock Ownership Plan of the Registrant and Its Designated Subsidiaries, as Amended and Restated Effective January 1, 1987, is incorporated herein by reference to Exhibit 19(b) to Form 10-K report of the Registrant for 1988. (c) Amendment No. 2 to Employees' Stock Ownership Plan of the Registrant and Its Designated Subsidiaries, as Amended and Restated Effective January 1, 1987, is incorporated herein by reference to Exhibit 10(c) to Form 10-K report of the Registrant for 1989. (d) Amendment No. 3 to Employees' Stock Ownership Plan of the Registrant and Its Designated Subsidiaries, as Amended and Restated Effective January 1, 1987, is incorporated herein by reference to Exhibit 10(d) to Form 10-K report of the Registrant for 1990. 19 AMERICAN WATER WORKS COMPANY, INC. INDEX TO EXHIBITS Exhibit Number Description 10 (cont.) (e) 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. (f) 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. (g) 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. (h) 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. 13 Annual Report to Security Holders The Registrant's Annual Report to Stockholders for 1993 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, 1993. 23 Consents of Experts and Counsel See "Consent of Independent Accountants" on page 13 of this Form 10-K report. EX-3 2 EXHIBIT 3 TO 10-K FOR 1993 (BY-LAWS) 20 EXHIBIT 3(e) AMERICAN WATER WORKS COMPANY, INC. BY-LAWS ADOPTED APRIL 16, 1970 AS AMENDED TO JANUARY 6, 1994 ARTICLE I SHAREHOLDERS Section 1. [As amended January 2, 1986 and further amended July 6, 1989] The annual meeting of the stockholders of the Corporation shall be held at its office at 1025 Laurel Oak Road, Voorhees, New Jersey, on the first Thursday in May of each year (or if said day be a legal holiday, then on the next succeeding day not a holiday), at eleven o'clock in the forenoon, daylight saving time or standard time whichever shall be legally in effect in the Township of Voorhees, New Jersey, on that date, or on such other date or at such other time or at such other place within the continental United States as may be designated in the notice of the annual meeting, for the purpose of electing directors and for the transaction of such other business as may properly be brought before the meeting. Section 2. [As amended July 6, 1989] Special meetings of the stockholders may be held upon call of the Board of Directors or the Executive Committee or the Chairman of the Board or the President or the holders of the outstanding shares of the Corporation that would be entitled to cast a majority of the votes on the matter or matters to be considered at the special meeting, at such place and at such time and date as may be fixed by the body or person or persons giving such call, and as may be stated in the notice setting forth such call. Section 3. [As amended July 6, 1989] Notice of the place, time and date of every meeting of stockholders shall be delivered personally or mailed at least ten days prior thereto to each stockholder of record entitled to vote at such meeting at his address as it appears on the records of the Corporation. Such further notice shall be given as may be required by law. Section 4. Except as otherwise provided by law or in the Certificate of Incorporation, as amended, of the Corporation, at all meetings of the stockholders the presence in person or the representation by proxy of the holders of the outstanding shares that would be entitled to cast at least a majority of votes on a particular matter shall constitute a quorum for the purpose of considering such matter. If there be no such quorum present for considering a particular matter, the meeting on such matter may be adjourned from time to time, by vote of a majority of those present or represented and entitled to vote on such matter, without notice other than by announcement at the meeting, until such a quorum be present. 21 Section 5. Meetings of the stockholders shall be presided over by the Chairman of the Board, the Vice Chairman of the Board or the President or, if none of such officers is present, by a Vice President or, if no such officer is present, by a chairman to be chosen at the meeting. The Secretary of the Corporation or, in his absence, an Assistant Secretary, or in the absence of both the Secretary and an Assistant Secretary, a person appointed by the Chairman of the meeting shall act as secretary of the meeting. Section 6. Any stockholder entitled to vote at any meeting of stockholders may so vote in person or by proxy, but no proxy shall be acted upon after three years from its date, unless such proxy provides for a longer period. Section 7. [As amended January 2, 1986 and further amended March 5, 1992] At all elections of directors by the stockholders of the Corporation, each stockholder shall be entitled to vote as provided in the Certificate of Incorporation, as amended, of the Corporation. The Chairman of the Board or the chairman of each meeting at which directors are to be elected shall appoint an inspector of election, unless such appointment shall be unanimously waived by those stockholders present or represented by proxy at the meeting and entitled to vote at the election of directors. No director or candidate for the office of director shall be appointed as such inspector. Before undertaking his duties at any such meeting, the inspector shall take and subscribe an oath or affirmation faithfully to execute the duties of inspector at such meeting, with strict impartiality and according to the best of his ability, and shall take charge of the polls and after the balloting shall make a certificate of the result of the vote taken. Section 8. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, or such other action. Section 9. Any action required or permitted to be taken at any meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous consent shall be given to those stockholders who have not consented in writing. 22 ARTICLE II BOARD OF DIRECTORS Section 1. (a) [As amended January 16, 1975 and further amended May 4, 1989 and March 5, 1992 (effective May 7, 1992)] The Board of Directors shall consist of eleven directors, but the number of directors may be increased or decreased from time to time, within the limits as to the number specified in the Certificate of Incorporation, as amended, of the Corporation, in the manner hereinafter provided for amendment of the by-laws of the Corporation, but subject to Article Eleventh of the Certificate of Incorporation, as amended. (b) [As amended January 16, 1975 and further amended March 5, 1992] A majority of the number of directors shall constitute a quorum; provided, however, no amendment of this sentence shall be adopted which is in violation of the provisions of paragraph (h) of Section 1 of Division D of Article FOURTH of the Certificate of Incorporation, as amended. (c) [As amended January 16, 1975] Commencing with the annual election of directors in the year 1975, no person shall be qualified to serve as a director of the Corporation unless he is the beneficial holder of at least 100 shares of the common stock of the Corporation. (d) [As amended January 16, 1975 and further amended August 26, 1976, December 21, 1978, June 19, 1980, February 16, 1984 (effective June 1, 1984), January 2, 1986 and January 6, 1994] (i) No person shall be eligible for election to the Board of Directors of the Corporation in any year if such person shall be 72 years of age or older on the first day of the year of such election. (ii) Each member of the Board of Directors who ceases to be a director for any reason other than death after reaching the age of 65 shall thereupon become a Director Emeritus and shall serve as a Director Emeritus until the date of the second Annual Meeting following the date when such person first became a Director Emeritus. Each Director Emeritus will have the right to receive notice of meetings and to attend meetings of the Board of Directors and of each Committee thereof on which such Director Emeritus was serving immediately prior to becoming a Director Emeritus but will not have the right to vote on matters which come before the Board of Directors or any committee thereof. Section 2. Vacancies in the Board of Directors shall be filled by a majority of the remaining directors though less than a quorum and a director so chosen shall hold office until the next annual meeting of the stockholders and until the election and qualification of his successor. In case of any increase in the number of directors as provided in Section 1 of this Article II, the stockholders of the Board of Directors (by a majority of the directors constituting the Board prior to such increase), as the case may be, may, at the meeting at which such increase is voted, or at any adjournment or adjournments thereof, 23 elect such additional directors as shall be required, and the directors so chosen shall hold office until the next annual meeting of the stockholders and until the election and qualification of their respective successors. Section 3. Meetings of the Board of Directors shall be held at such place as may from time to time be fixed by resolution of the Board or as may be specified in the call of any meeting. Regular meetings of the Board of Directors shall be held at such times as may from time to time be fixed by resolution of the Board; and special meetings may be held at any time upon the call of the Executive Committee or of the Chairman of the Board or the President, by oral, telegraphic or written notice, duly served on or sent or mailed to each director not less than two days before the meeting. A meeting of the Board may be held without notice immediately after the annual meeting of stockholders at the same place at which such annual meeting is held. Notice need not be given of regular meetings of the Board held at times fixed by resolution of the Board. Section 4. The Board of Directors may, by resolution or resolutions, passed by a majority of the whole Board, designate an Executive Committee, to consist of two or more of the directors, as the Board may from time to time determine. The Executive Committee shall have and may exercise, when the Board is not in session, all the powers of the Board of Directors in the management of the business and affairs of the Corporation, and shall have power to authorize the seal of the Corporation to be affixed to all papers which may require it; provided that the Executive Committee shall not have or exercise any such power or powers if and so long as a "two years' default in preferred dividends," as defined in subdivision (f) of Section 1 of Division D of Article FOURTH of the Certificate of Incorporation, as amended, of the Corporation shall exist. The Executive Committee shall not have power to fill vacancies in the Board, or to change the membership of or to fill vacancies in the said Committee, or to make or amend by-laws of the Corporation. The Board shall have the power at any time to change the membership of the Executive Committee, to fill vacancies in it, or to dissolve it. The Board of Directors shall also have the power to designate one or more alternate members of said Executive Committee, which alternate members shall have power to serve, subject to such conditions as the Board of Directors may prescribe, as a member or members of said Executive Committee during the absence or inability to act of any one or more members of said Committee. The Executive Committee may make rules for the conduct of its business and may appoint such committees and assistants as it shall from time to time deem necessary. A majority of the members of the Executive Committee shall constitute a quorum. Section 5. The Board of Directors may also, by resolution or resolutions, passed by a majority of the whole Board, designate one or more other committees, each such committee to consist of one or more of the directors of the Corporation, which, to the extent provided in said resolution or resolutions, shall have and may exercise the powers of the Board of Directors in the management of the business affairs of the Corporation, and may have power to authorize the seal of the Corporation to be affixed to all papers which may require it; provided that no such committee shall have or exercise any such power or powers if and so long as a "two years' default in preferred dividends," as defined in 24 subdivision (f) of Section 1 of Division D of Article FOURTH of the Certificate of Incorporation, as amended, of the Corporation shall exist. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. A majority of the members of any such committee may determine its action and fix the time and place of its meetings unless the Board of Directors shall otherwise provide. The Board of Directors shall have power at any time to change the membership of, to fill vacancies in, or dissolve any such committee. Section 6. One or more of members of the Board of Directors or any committee thereof may participate in a meeting of the Board or a committee thereof by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Section 7. [As amended January 16, 1975] In addition to reimbursement of his reasonable expenses incurred in attending meetings or otherwise in connection with his attention to the affairs of the Corporation, each Director and each Director Emeritus as such, and as a member of the Executive Committee or of any other committee of the Board of Directors, shall be entitled to receive such compensation as may be fixed from time to time by the Board of Directors, subject to any applicable restriction imposed by the Certificate of Incorporation, as amended, of the Corporation. Section 8. [As amended February 4, 1987] (a) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director, officer or employee of the Corporation or a constituent Corporation absorbed in a consolidation or merger or is or was serving at the request of the Corporation or a constituent Corporation absorbed in a consolidation or merger, as a director, officer or employee of another Corporation, partnership, joint venture, trust or other enterprise, including an employee benefit plan, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding to the extent that such person is not otherwise indemnified and to the extent that such indemnification is not prohibited by applicable law. For this purpose the Board of Directors may, and on request of any such person shall be required to, determine in each case whether or not the applicable standards in any applicable statute have been met, or such determination shall be made by independent legal counsel if the Board of Directors so directs or if the Board of Directors is not empowered by statute to make such determination. Expenses incurred by an officer, director or employee of the Corporation in defending a civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding subject to the provisions of any applicable statute. The obligations of the Corporation to indemnify a director, officer or employee under this Article II, including the duty to advance expenses, shall be considered a contract between the Corporation and such individual, and no modification or repeal of any provision of this Article II shall affect, to the detriment of the 25 individual, such obligations of the Corporation in connection with a claim based on any act or failure to act occurring before such modification or repeal. (b) The indemnification and advancement of expenses provided by this Article II shall not be deemed exclusive of any other right to which one indemnified may be entitled, both as to action in such person's official capacity and as to action in another capacity while holding such office, and shall inure to the benefit of the heirs, executors and administrators of any such person. (c) The Board of Directors shall have the power to (i) authorize the Corporation to purchase and maintain, at the Corporation's expense, insurance on behalf of the Corporation and on behalf of others to the extent that power to do so has been or may be granted by statute, and (ii) give other indemnification to the extent permitted by law. ARTICLE III OFFICERS Section 1. The Board of Directors as soon as may be after its election shall choose a President of the Corporation, one or more Vice Presidents, a Secretary and a Treasurer and from time to time may appoint such Assistant Secretaries, Assistant Treasurers and such other officers, agents and employees as it may deem proper. The President shall be chosen from among the directors. The Board in its discretion may also choose a Chairman of the Board and a Vice Chairman of the Board from among the directors. Section 2. The term of office of each officer shall be one year, or until his successor is elected and qualified or until his earlier resignation or removal. Any officer may resign at any time upon written notice to the Corporation. Any officer may be removed from office at any time by the affirmative vote of a majority of the members of the Board then in office. Section 3. [As amended May 17, 1984 (effective June 1, 1984) and further amended May 4, 1988] The Chairman of the Board shall preside at all meetings of the stockholders (except as otherwise provided by statute) and of the Board of Directors, and shall have such other powers and duties as may from time to time be prescribed by the Board of Directors, but shall not participate in the day-to-day management or operations of the Corporation except as provided in Section 4 of this Article III in the event of a vacancy in the office of President. The Vice Chairman of the Board shall assist the Chairman of the Board in carrying out the Chairman's duties and, in the absence of the Chairman of the Board, shall have the powers and duties of the Chairman of the Board. The Vice Chairman shall also have such other powers and duties as may from time to time be assigned to such officer by the Board of Directors. 26 Section 4. The President shall be the chief executive officer of the Corporation and shall supervise the carrying out of the policies adopted or approved by the Board. He shall have general power to execute bonds, deeds and contracts in the name of the Corporation and to affix the corporate seal; to appoint and fix the compensation of all employees and agents of the Corporation whose appointment is not otherwise provided for; to remove or suspend such employees or agents as shall not have been appointed by the Board of Directors, and to exercise all the powers usually appertaining to the chief executive officer of a corporation, except those required by statute or by these by-laws to be exercised by another officer. In the absence of the Chairman and the Vice Chairman of the Board, he shall preside at all meetings of the stockholders and of the Board of Directors. In the event of a vacancy in the office of President, the powers and duties of the President as chief executive officer of the Corporation shall, without further action of any kind, devolve upon and to the Chairman of the Board. Upon the filling of such vacancy, such powers and duties as chief executive officer shall, without further action of any kind, revert to the President of the Corporation. Section 5. The several Vice Presidents shall perform all such duties and services as shall be assigned to or required of them, from time to time, by the Board of Directors or the President, respectively, and, unless their authority be expressly limited, shall act, in the order of their election, in the place of the President, exercising all his powers and performing his duties, during his absence or disability. Section 6. Subject to such limitations as the Board of Directors may from time to time prescribe, the other officers of the Corporation shall each have such powers and duties as generally pertain to their respective offices, as well as such powers and duties as from time to time may be conferred by the Board of Directors. Any officer, agent or employee of the Corporation may be required to give bond for the faithful discharge of his duties, in such sum and with such surety or sureties as the Board of Directors may from time to time prescribe. ARTICLE IV CERTIFICATES OF STOCK Section 1. [As amended January 2, 1986] The interest of each stockholder of the Corporation shall be evidenced by certificates for shares of stock in such form as the Board of Directors may from time to time prescribe. The shares in the stock of the Corporation shall be transferable on the books of the Corporation by the holder thereof in person or by his attorney, upon compliance with Section 3 below or upon surrender for cancellation of certificates for the same number of shares, with an assignment and power of transfer endorsed thereon or attached thereto, duly executed, and with such proof of the authenticity of the signature as the Corporation or its agents may reasonably require. 27 Section 2. The certificates of stock shall be signed by the President or a Vice President and by the Secretary or the Treasurer or an Assistant Secretary or an Assistant Treasurer of the Corporation (except that where any such certificate is manually countersigned by a transfer agent other than the Corporation or its employee or by a registrar other than the Corporation or its employee, any other signature on the certificate may be facsimile, engraved or printed), shall be sealed with the seal of the Corporation (or shall bear a facsimile of such seal, engraved or printed) and shall be countersigned and registered in such manner, if any, as the Board of Directors may by resolution prescribe. In case any officer or officers who shall have signed, or whose facsimile signature or signatures shall have been used on any such certificate or certificates, shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates, or whose facsimile signature or signatures shall have been used thereon, had not ceased to be such officer or officers of the Corporation. Section 3. No certificate for shares of stock in the Corporation shall be issued in place of any certificate alleged to have been lost, stolen or destroyed, except upon production of such evidence of such loss, theft or destruction and upon delivery to the Corporation of a bond of indemnity in such amount, upon such terms and with such surety, as the Board of Directors in its discretion may require. ARTICLE V CORPORATE RECORDS The books and records of the Corporation may be kept outside of Delaware at such other place or places as the Board of Directors may from time to time determine. ARTICLE VI CHECKS, NOTES, ETC. All checks and drafts on the Corporation bank accounts and all bills of exchange and promissory notes, and all acceptances, obligations and other instruments for the payment of money, shall be signed by such officer or officers or agent or agents or other employee or employees as shall be thereunto authorized from time to time by the Board of Directors. 28 ARTICLE VII FISCAL YEAR The fiscal year of the Corporation shall begin on the first day of January in each year and shall end on the thirty-first day of December following. ARTICLE VIII CORPORATE SEAL The corporate seal shall have inscribed thereon the name of the Corporation and the words "Incorporated Delaware 1936." In lieu of the corporate seal, when so authorized by the Board of Directors or a duly empowered committee thereof, and permitted by law, a facsimile thereof may be impressed or affixed or reproduced. ARTICLE IX OFFICES The Corporation and the stockholders and the directors may have offices outside of the State of Delaware at such places as shall be determined from time to time by the Board of Directors. ARTICLE X AMENDMENTS [As amended May 4, 1989] Subject to the provisions of Section 1 of Division D of Article Fourth and of Article Eleventh of the Certificate of Incorporation, as amended, of the Corporation, the by-laws of the Corporation, regardless of whether made by the stockholders or by the Board of Directors, may be altered, added to, or repealed at any meeting of the Board of Directors or of the stockholders, provided notice of the proposed change is given in the notice of the meeting. No change of the time or place for the annual meeting of the stockholders for the election of directors shall be made except in accordance with the Certificate of Incorporation, as amended, of the Corporation and the laws of Delaware. EX-13 3 EXHIBIT 13 TO 10-K FOR 1993 (ANNUAL REPORT) 29 (Page 22 of 1993 Annual Report) 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, 1993 1992 1991 1990 1989 - ----------------------------------------------------------------------------------------------- Revenues Water service Residential $ 400,230 $ 360,800 $ 347,241 $ 310,060 $ 287,074 Commercial 159,359 147,983 143,528 129,976 118,866 Industrial 50,490 47,492 47,071 44,464 42,417 Public and other 84,865 79,196 76,899 69,006 62,309 Other water revenues 5,579 5,372 4,899 3,925 2,993 - ----------------------------------------------------------------------------------------------- 700,523 640,843 619,638 557,431 513,659 Sewer service 11,801 11,391 10,427 10,157 9,237 Authority management fees 5,213 5,126 5,914 5,350 4,649 - ----------------------------------------------------------------------------------------------- $ 717,537 $ 657,360 $ 635,979 $ 572,938 $ 527,545 ============================================================= Water sales (million gallons) Residential 104,223 97,992 99,855 98,069 97,349 Commercial 57,880 55,587 57,144 56,442 55,986 Industrial 33,041 32,681 33,702 34,804 35,779 Public and other 25,669 24,349 25,172 23,539 22,232 - ----------------------------------------------------------------------------------------------- 220,813 210,609 215,873 212,854 211,346 ============================================================= Net income $ 75,387 $ 68,160 $ 73,593 $ 57,088 $ 48,318 Earnings per common share on average shares outstanding $ 2.29 $ 2.07 $ 2.27 $ 1.85 $ 1.56 Common dividends paid per share $ 1.00 $0.925 $ 0.86 $ 0.80 $ 0.74 At year-end Customers (thousands) 1,685 1,548 1,529 1,514 1,495 Total assets $ 2,994,011 $ 2,415,805 $ 2,240,503 $2,092,596 $1,916,329 Preferred stocks with mandatory redemption requirements American Water Works Company, Inc. $ 40,000 $ 40,480 $ 40,960 $ 1,690 $ 2,420 Subsidiaries 46,515 50,895 47,107 27,664 29,377 Long-term debt American Water Works Company, Inc. $ 131,000 $ 73,200 $ 73,200 $ 74,400 $ 85,600 Subsidiaries 1,056,404 870,940 874,804 725,291 689,736 Market price of common stock at year-end $ 30.00 $ 27.38 $ 26.50 $ 16.00 $ 18.13
30 (Page 23 of 1993 Annual Report) 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 American Water Works Service Company, a subsidiary, provides professional and staff services 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 OPERATING COMPANIES The 25 subsidiary operating companies provide water service to approximately six million people in 717 communities in 21 states. As public utilities, the operating 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. AMERICAN COMMONWEALTH MANAGEMENT SERVICES COMPANY American Commonwealth Management Services Company provides management services, at a profit, to non-affiliated water and wastewater systems. These services are provided under contract to various authorities in Pennsylvania which own nine water systems and three wastewater systems. In addition, this subsidiary manages a water district in Massachusetts and provides operating services for approximately 75 water and wastewater systems near Sarasota, Florida. This subsidiary completed construction of a carbon regeneration facility in 1993. This capability is being marketed to affiliated and non-affiliated water utilities throughout the country. Carbon is widely used for water filtration. Also in 1993, American Commonwealth Management Services Company and a subsidiary of Anglian Water Plc, a United Kingdom water and wastewater utility, formed a joint venture, AmericanAnglian Environmental [Photo Here] Members of the company's senior management team include (from left) Edward W. Limbach and Gerald C. Smith, vice presidents; Robert D. Sievers, comptroller; J. James Barr, vice president, treasurer and chief financial officer, and W. Timothy Pohl, Esquire, general counsel and secretary Technologies. AmericanAnglian will provide both technical expertise and financing to help communities throughout the United States upgrade their wastewater treatment systems. NON-OPERATING COMPANIES Greenwich Water System and American Commonwealth Company are non-operating subholding companies. Occoquan Land Corporation owns land, buildings and equipment, most of which are leased to affiliated American Water System companies. THE AMERICAN WATER SYSTEM The combination of the company and its subsidiaries constitutes the American Water System - a system that has functioned well for 46 years. Each subsidiary functions independently, yet shares in the benefits of size and identity afforded by the American Water System. 31 (Page 24 of 1993 Annual Report) MANAGEMENT'S DISCUSSION AND ANALYSIS THE PHILOSOPHY OF THE AMERICAN WATER SYSTEM The American Water System is dedicated to providing the best possible water service at the lowest possible 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. An operating subsidiary must exhibit the ability to attract its capital requirements 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 stockholders' investment through consistent earnings growth generated by earnings reinvestment. 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 the American Water System 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. THE INVESTMENT STRATEGY OF AMERICAN WATER WORKS COMPANY The business of the company is investing in common stock of water utilities. The purpose of this business is to protect and enhance the value of our stockholders' investment through growth in earnings and dividends per share. We seek to accomplish this purpose without diluting existing stockholders. Viewed over the long term, we believe this strategy has and will continue to maximize the total return to our stockholders. 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 the reinvestment of income. This reinvestment defers stockholder 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 periodically selling a portion of their enhanced investment in the company. The following chart reflects the results of this investment strategy: COMPOUNDED ANNUAL GROWTH RATES 1988-1993 [CHART] 9.5% 7.0% 4.5% 8.0% 6.7% Investment Operating Earnings Dividends Book value in subsidiaries revenue per share per share per share The company's investment in its subsidiaries has increased from $514,190,000 at year-end 1988 to $810,372,000 at year-end 1993. The top schedule on page 25 defines how this has been accomplished. 32 (Page 25 of 1993 Annual Report) AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES ANALYSIS OF GROWTH IN INVESTMENT IN SUBSIDIARIES
(000) 1993 1992 1991 1990 1989 - ----------------------------------------------------------------------------------------------------- Investment in subsidiaries at December 31 $ 810,372 $ 749,513 $693,312 $ 636,622 $ 573,038 Investment in subsidiaries at January 1 749,513 693,312 636,622 573,038 514,190 - ----------------------------------------------------------------------------------------------------- Change during the year $ 60,859 $ 56,201 $ 56,690 $ 63,584 $ 58,848 ================================================= Sources of additional investment Undistributed earnings of subsidiaries $ 18,984 $ 19,401 $ 15,690 $ 24,076 $ 10,747 Investment by the company in subsidiary securities 41,875 36,800 41,000 39,508 48,101 - ----------------------------------------------------------------------------------------------------- Change during the year $ 60,859 $ 56,201 $ 56,690 $ 63,584 $ 58,848 ================================================= Net income of subsidiaries $ 84,248 $ 75,260 $ 80,692 $ 64,408 $ 53,869 Return on January 1 investment in subsidiaries 11.2% 10.9% 12.7% 11.2% 10.5% Subsidiaries' common stock dividend payout ratio 77% 74% 81% 63% 80% - ----------------------------------------------------------------------------------------------------- Dividends to the company from subsidiaries $ 65,264 $ 55,859 $ 65,002 $ 40,332 $ 43,122 - ----------------------------------------------------------------------------------------------------- Company's use of cash Mandatory redemption of securities 480 1,680 16,930 2,680 2,680 Preferred dividends 3,996 4,019 3,420 690 727 Other cash requirements 7,834 6,633 8,465 7,365 5,559 - ----------------------------------------------------------------------------------------------------- 12,310 12,332 28,815 10,735 8,966 - ----------------------------------------------------------------------------------------------------- Available for common dividends 52,954 43,527 36,187 29,597 34,156 - ----------------------------------------------------------------------------------------------------- Common dividends declared 31,130 28,609 26,423 24,421 22,542 Dividend reinvestment 2,102 3,028 1,453 1,053 - ----------------------------------------------------------------------------------------------------- Common dividends 29,028 25,581 24,970 23,368 22,542 - ----------------------------------------------------------------------------------------------------- Cash payout ratio 55% 59% 69% 79% 66% Available after dividends 23,926 17,946 11,217 6,229 11,614 Cash at January 1 78 15 23 6,993 6,975 - ----------------------------------------------------------------------------------------------------- 24,004 17,961 11,240 13,222 18,589 Sale of securities and net bank borrowings 63,363 13,707 28,760 29,499 45,000 Early redemption of securities (23,200) - ----------------------------------------------------------------------------------------------------- 64,167 31,668 40,000 42,721 63,589 Investment in securities of subsidiaries 41,875 36,800 41,000 39,508 48,101 Notes and advances to subsidiaries (1,010) (5,210) (1,015) 3,190 8,495 - ----------------------------------------------------------------------------------------------------- 40,865 31,590 39,985 42,698 56,596 - ----------------------------------------------------------------------------------------------------- Cash at December 31 $ 23,302 $ 78 $ 15 $ 23 $ 6,993 ================================================= ANALYSIS OF CHANGE IN INCOME (000) 1993 1992 1991 1990 1989 - ----------------------------------------------------------------------------------------------------- Net income to common stock-current year $ 71,391 $ 64,141 $ 69,890 $ 56,398 $ 47,591 Net income to common stock-prior year 64,141 69,890 56,398 47,591 56,124 - ----------------------------------------------------------------------------------------------------- Change in income 7,250 (5,749) 13,492 8,807 (8,533) Change in company operating cost 1,738 317 2,792 1,732 1,247 - ----------------------------------------------------------------------------------------------------- Change in investment income $ 8,988 $ (5,432) $ 16,284 $ 10,539 $ (7,286) ================================================== Sources of change in investment income Additional investment in subsidiaries $ 6,317 $ 6,154 $ 8,059 $ 6,614 $ 4,345 Change in rate of return on investment 2,671 (11,586) 8,225 3,925 (11,631) - ----------------------------------------------------------------------------------------------------- Total change in investment income $ 8,988 $ (5,432) $ 16,284 $ 10,539 $ (7,286) ==================================================
33 (Page 26 of 1993 Annual Report) MANAGEMENT'S DISCUSSION AND ANALYSIS The top schedule on the previous page 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 stockholders have risen from $56,124,000 in 1988 to $71,391,000 in 1993. Income to common stockholders 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 the previous page demonstrates the source of change since 1988 in income to common stock. This analysis demonstrates that the growth in earnings over this period is the direct result of new investment in the 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 of operating the company has increased $7,826,000 over this five-year period. SYSTEM GROWTH AND DEVELOPMENT The investment in new facilities in 1993 totaled $193,116,000, which was 2% below 1992 construction expenditures of $197,579,000. Construction activity planned for 1994 totals $258,000,000. Expenditures recorded in any given year are influenced by many factors, including the economy, regulation, material delivery and weather conditions. It is anticipated the American Water System will invest approximately $1,100,000,000 in new facilities between now and 1998. These expenditures will support the company's ongoing program to comply with regulations promulgated to ensure water quality and protect the environment, to keep pace with expansion of our operating franchises and to replace plant as necessary. We expect the investment in this construction program to be recognized in regulatory decisions. Investment in new transmission and distribution facilities accounted for 40% of the 1993 expenditures. Significant projects included the completion of a pipeline in northern New Jersey which interconnects the New Jersey-American Water Company with another major public water supplier to ensure adequate water service for that region. Our New Jersey subsidiary also constructed sections of a 20-inch through 54-inch transmission main for its Tri-County Water Supply Project which will provide a regional supply for southern New Jersey in 1996. Pennsylvania-American Water Company completed the installation of 10 miles of 12-inch transmission main to connect its Hallstead and Susquehanna service areas and eliminate the need for more costly treatment facilities at Hallstead. A similar project was completed by West Virginia-American Water Company which interconnected the Gassaway and Sutton service areas to allow Sutton to be eventually supplied by new treatment facilities constructed in Gassaway. In addition, West Virginia-American continued the expansion of its service area by the installation of 16,500 feet of 16-inch pipeline to supply a newly acquired public service district. During 1993, construction of additional distribution storage was completed in several American System companies.
CONSTRUCTION EXPENDITURES BY CATEGORY (000) 1993 1992 1991 1990 1989 - ---------------------------------------------------------------------------------------- Water plant Sources of supply $ 8,054 $ 9,110 $ 10,498 $ 8,882 $ 9,261 Treatment and pumping 51,332 53,303 53,361 66,902 60,969 Transmission and distribution 77,998 80,357 63,232 66,752 79,019 Services, meters and fire hydrants 34,401 33,989 31,000 31,321 31,664 General structures and equipment 19,585 17,935 23,698 23,479 28,583 Sewer plant 1,746 2,885 1,198 1,952 966 ------------------------------------------------- $ 193,116 $197,579 $182,987 $199,288 $210,462 =================================================
34 (Page 27 of 1993 Annual Report) AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES Investment by the operating companies in production, treatment and pumping facilities accounted for 27% of 1993 construction expenditures. During 1993, significant production facility improvements were completed in Kane, Ellwood City and Pittsburgh, Pennsylvania; Lexington, Kentucky; Hopewell, Virginia, and Huntington, West Virginia. Treatment facility additions were constructed in the Frackville, Pennsylvania; Monterey, California, and Short Hills, New Jersey service areas. The final phase of a major treatment plant improvement in Kokomo, Indiana was also completed. Work began on a major treatment plant on the Delaware River in New Jersey that will supplement community water supplies in three counties. Expenditures for customer service lines, meters and fire hydrants accounted for 18% of 1993 construction expenditures. These reflect ongoing programs to ensure meter accuracy, install and replace fire hydrants, and provide service to new customers. Supply improvements in 1993 included the construction of several additional and replacement wells by New Jersey-American Water Company and a new production well by Paradise Valley Water Co. Dam improvements were completed in Greenwich, Connecticut and other dam improvements are in progress in California. Source-of-supply work accounted for approximately 4% of the 1993 construction expenditures. The area of engineering planning focused heavily on the importance of having an adequate source of supply at every American Water System service area. This goal has been achieved at most systems and was aggressively addressed at the locations where challenges still remain due to projected growth or existing source limitations. Detailed source-of-supply planning was undertaken in Hingham, Massachusetts; Greenwich, Connecticut; Indiana, Butler, Yardley and Cumberland County, Pennsylvania; Lexington, Kentucky, and Bel Air, Maryland. In addition, the company's comprehensive planning program proceeded, with reports completed for New Jersey-American Water Company's Cape May and Atlantic County systems. Comprehensive planning studies scheduled for 1994 completion are underway for eight other operating companies. On August 31, 1993, American Water Works Company, Inc. and its subsidiaries in Indiana, Missouri, and Ohio acquired the midwestern water utilities of Avatar Holdings, Inc. 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 utilities acquired in these transactions serve a population of approximately 350,000 in 54 communities. The governments of two of the areas served by these companies are pursuing acquisition of a portion of these facilities that serve a total population of 54,000. West Virginia-American Water Company acquired two public water supply systems in 1993 for $3,041,000. In April, the company took over the Washington Public Service District serving 5,500 people in Tornado. In November, it acquired the West Fork River Public Service District serving 4,000 people. During 1993, Ohio-American Water Company paid a total of $465,000 for six water supply companies. The companies serve a total of 4,200 people in the Mansfield area. In April 1993, New Jersey-American Water Company completed its $179,000 acquisition of the Borough of Allenhurst's water system which serves 1,000 people. The sale was approved by borough residents in a referendum in 1992. Pennsylvania-American Water Company acquired the Skyline Water Company and a water system owned by the Summit Township Municipal Authority in 1993. These two water systems, which serve a total of approximately 700 people, were acquired for $108,000. American Water Works Company and its subsidiaries continue to seek out and investigate acquisitions with a view toward expanding the American Water System. The objective is expansion of its core business which benefits the existing stockholder rather than growth for the sake of size. In September, a Virginia Circuit Court judge ruled that the Prince William County Service Authority could not take over Virginia-American Water Company's Dale City system which serves 47,000 people. The judge said that the authority had "failed to meet its burden of proving the necessity of condemnation." He also noted that Virginia-American provided exemplary service and that the takeover attempt contradicted a county initiative to privatize services. 35 (Page 28 of 1993 Annual Report) MANAGEMENT'S DISCUSSION AND ANALYSIS 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, water revenue can be made to keep pace with inflation. Inflation did not significantly impact the company's financial position or results of operations in 1991 through 1993, and it is not expected to materially affect 1994 results. The company's results of operations for the year ended December 31, 1993 included four months of results from the four acquired midwestern companies' operations. These acquisitions did not have a material impact on the company's reported results of operations for 1993. OPERATING REVENUES (000) 1993 1992 1991 - --------------------------------------------------------------- Water service $700,523 $640,843 $619,638 Sewer service 11,801 11,391 10,427 Authority management fees 5,213 5,126 5,914 -------------------------------- $717,537 $657,360 $635,979 ================================ CONSOLIDATED OPERATING REVENUES Revenues in 1993 totaled $717,537,000, and were 9% above those for 1992. The volume of water sold totaled 220.8 billion gallons in 1993 compared with 210.6 billion gallons in 1992, reflecting the impact of summer weather patterns and the company's acquisition in August of the four midwestern water utilities. The acquisition increased operating revenues by $10,646,000 in 1993 and added 5.1 billion gallons in water sales volume. Rate authorizations adjusted the water service rates in effect for 16 operating companies during 1993. These authorizations are expected to increase annual revenues by $37,833,000. Operating revenues for 1993 included approximately $25,603,000 which resulted from these rate orders. Rate adjustments have been authorized for two operating subsidiaries so far in 1994 which will generate approximately $3,367,000 of additional annual revenues. Five applications are awaiting regulatory decisions. If granted in full, they would produce additional annual revenues of $17,624,000. Revenues in 1992 were 3% above those for 1991, reflecting higher water service rates which more than offset a 2% decrease in water sales volume. Eleven operating companies received rate orders in 1992 authorizing increases in annual revenues aggregating $25,651,000. PERCENTAGE OF WATER REVENUES BY CUSTOMER CLASS 1993 1992 1991 - --------------------------------------------------- Residential 57.1% 56.3% 56.0% Commercial 22.8% 23.1% 23.1% Industrial 7.2% 7.4% 7.6% Public and other 12.1% 12.4% 12.5% Other water revenues .8% .8% .8% -------------------------- 100.0% 100.0% 100.0% ========================== RESIDENTIAL Residential water service revenues in 1993 amounted to $400,230,000, an increase of 11% over those for 1992. This 1993 revenue improvement followed an increase of 4% in 1992. The volume of water sold to residential customers increased by 6% in 1993 to 104.2 billion gallons. The average unit price for water in 1993 for residential customers increased by 4%, which was less than the average unit price increase of 6% in 1992. COMMERCIAL Revenues from commercial customers in 1993 rose by 8% to $159,359,000 following an increase of 3% in 1992. Commercial customers purchased 57.9 billion gallons of water in 1993, 4% more than in 1992. The average unit price of water increased by 3% in 1993, down from a 6% increase in 1992. INDUSTRIAL Industrial water use of 33 billion gallons in 1993 was 1% higher than in 1992. Revenues from industrial sales in the amount of $50,490,000 were 6% above those recorded in 1992. An increase of 6% in the average unit price of water was responsible for the additional revenue. Despite a 3% decrease in industrial sales volume, industrial revenues in 1992 were 1% above those for 1991 due to a 4% increase in the average unit price. Excluding the industrial sales of the four acquired midwestern companies, the volume of water used by industrial customers has decreased in each of the last five years. The company's largest industrial customer, which purchased 2.5 billion gallons from the Virginia-American Water Company in Hopewell at a cost of $1,977,000 in 1993, is investigating the possibility of developing its own source of supply. 36 (Page 29 of 1993 Annual Report) AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES PUBLIC AND OTHER Public and other revenues in 1993 rose by 7% to $84,865,000 following an increase of 3% in 1992. Revenues derived from municipal governments for fire protection services and customers requiring special private fire service facilities totaled $33,415,000 in 1993, exceeding 1992 revenue from these customers by 5%. The 25.7 billion gallons of water sold to governmental entities and resale customers was 5% above the quantities sold in 1992. Revenues generated by these sales totaled $51,450,000 and exceeded 1992 revenues by 9%. PERCENTAGE OF WATER SALES (GALLONS) BY CUSTOMER CLASS 1993 1992 1991 - ------------------------------------------------ Residential 47.2% 46.5% 46.3% Commercial 26.2% 26.4% 26.5% Industrial 15.0% 15.5% 15.6% Public and other 11.6% 11.6% 11.6% -------------------------- 100.0% 100.0% 100.0% ========================== SEWER SERVICE REVENUES Operating subsidiaries provide sewer collection service to two areas in New Jersey and one area in Ohio. Revenues from these services amounted to $11,801,000 in 1993, compared with $11,391,000 in 1992 and $10,427,000 in 1991. AUTHORITY MANAGEMENT FEES These fees represent charges primarily for management services provided by American Commonwealth Management Services Company to public water and sewer authorities in Pennsylvania and Massachusetts. Fees of $5,213,000 were received for these services in 1993 compared with management fees of $5,126,000 in 1992 and $5,914,000 in 1991. CONSOLIDATED OPERATING EXPENSES Operating expenses in 1993 increased by 11% to $545,070,000, following a 5% increase in 1992. The acquisition of the four midwestern water utilities increased operating expenses by $7,580,000 in 1993. Operation and maintenance expenses totaled $362,451,000 in 1993,which was 9% higher than in 1992. They had increased by 4% in 1992. OPERATING EXPENSES (000) 1993 1992 1991 - -------------------------------------------------------- Operation and maintenance expenses $362,451 $333,212 $321,303 Depreciation and amortization 66,838 58,382 52,067 General taxes 67,917 63,612 58,288 Income taxes 47,864 37,661 38,233 ---------------------------- $545,070 $492,867 $469,891 ============================ Employee-related costs, representing 47% of operation and maintenance expenses, increased by 8% in 1993 and 7% in 1992. Most of the increase in these expenses in 1993 can be attributed to the company's adoption of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The Statement requires the company to accrue, in a manner similar to that used to account for pensions, the expected cost of providing postretirement health care and life insurance benefits as employees render the services necessary to earn the benefits. The effect of adopting the new accounting method increased employee-related expenses by $8,779,000. The company's operating subsidiaries have pursued recovery in rates for service of the additional costs resulting from this change in accounting. During 1993, fifteen decisions reached by regulatory authorities on this matter have permitted such recovery. Three regulatory authorities have denied recovery in current rates, but will continue to allow recovery when the benefits are paid in the future. The outcome of this issue in the rate making process in two states served by the operating subsidiaries is presently uncertain. Where recovery is uncertain or has been initially denied, operating subsidiaries will continue to pursue recovery in rates of the increased costs. Excluding the impact of adopting the new accounting standard, health care expenses in 1993 were 7% above those of the prior year, reflecting the continuing upward trend in the cost of medical treatment programs. They had increased by 15% in 1992. 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. Employee contributions totaled $1,308,000 in 1993, compared with $952,000 in 1992 and $766,000 in 1991. 37 (Page 30 of 1993 Annual Report) MANAGEMENT'S DISCUSSION AND ANALYSIS Wage and salary expenses were up by 1%. The number of System employees at year-end totaled 4,062, which is 2% above the employment level of 3,982 at the close of 1992 and slightly above the level of 4,044 employees at the end of 1991. With the acquisition of Avatar Holdings' midwestern water utilities, 158 employees joined the American Water System. Excluding the employees obtained through this acquisition, the company's workforce during the year decreased by 78 employees, or 2%, as the result of improved operating efficiencies. OPERATION AND MAINTENANCE EXPENSES (000) 1993 1992 1991 - ------------------------------------------------------- Employee-related costs $171,989 $159,488 $149,280 Fuel and power 30,530 28,808 29,644 Purchased water 38,628 32,996 28,593 Chemicals 11,605 10,982 11,678 Waste disposal 11,235 10,717 10,469 Maintenance materials and services 21,585 19,026 24,995 Operating supplies and services 48,573 44,710 42,793 Customer billing and accounting 14,442 14,672 15,827 Other 13,864 11,813 8,024 ---------------------------- $362,451 $333,212 $321,303 ============================ 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 10% in 1993 after a 4% rise in 1992. The unit cost of water produced in 1993 exceeded 1992's by 5%. Higher purchased water costs, reflecting increased volume and rate increases authorized for utilities supplying water to several System companies, 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 13% in 1993 following a 24% decrease in 1992. Maintenance expense was higher than normal in 1991, reflecting both non-critical expenditures that had been postponed because of revenue shortfalls in 1990 and preventive maintenance that was performed in 1991 instead of 1992. Operating supplies and services include the day-to-day expenses of office operation, legal and other professional services, as well as information system and other office equipment rental charges. These costs increased by 9% in 1993 after a 4% increase in 1992. Customer billing and accounting charges decreased by 2% in 1993, and by 7% in 1992. Other operation and maintenance expenses include regulatory costs and system-wide casualty and liability insurance premiums. These expenses increased by 17% in 1993 primarily due to increased rate filing activity required to recover increased costs, including the additional costs associated with the change in accounting for postretirement health care and life insurance benefits. Claims experience also increased casualty insurance premiums. Other operation and maintenance expenses had increased by 47% in 1992, primarily as a result of claims experience. Depreciation and amortization increased by 14% in 1993 and 12% in 1992. 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 7% in 1993 after a 9% rise in 1992. Gross receipts and franchise taxes, which are a function of revenues, increased by 6% in 1993. Property and capital stock taxes are assessed on the basis of tax values assigned to assets or capitalization. These taxes in 1993 were 13% above those in 1992 due to higher property values and tax rate increases. Payroll taxes were up by 1% in 1993, consistent with the slight increase in the workforce. Income taxes increased by 27% in 1993, following a 1% decrease in 1992. The increase in income taxes is primarily due to higher taxable income in 1993. In addition, the Revenue Reconciliation Act of 1993 increased the company's federal income tax rate, retroactive to January 1, 1993, from 34% to 35%. During 1993, tax expense was adjusted to reflect the 1% increase in the tax rate, resulting in a reduction in the company's results of operations for 1993 of approximately $1,200,000. The company's effective tax rate increased due to the reversal of temporary differences (primarily accelerated depreciation for tax purposes on property placed in service prior to 1981) on which the tax benefit was previously flowed through to customers. Details regarding the components of the total amount of state and federal income taxes, and a reconciliation of statutory 38 (Page 31 of 1993 Annual Report) AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES to reported federal income tax expense are included in Note 2 to the financial statements. SUMMARY OF TAXES (000) 1993 1992 1991 - ------------------------------------------------------- Gross receipts and franchise taxes $ 30,174 $ 28,600 $25,540 Property and capital stock taxes 24,664 21,867 20,287 Payroll taxes 10,893 10,733 10,316 Miscellaneous taxes 2,186 2,412 2,145 State income taxes 7,375 6,246 6,099 Federal income taxes 40,489 31,415 32,134 ---------------------------- $115,781 $101,273 $96,521 ============================ CONSOLIDATED INCOME DEDUCTIONS Income deductions -- principally interest expense -- amounted to $102,446,000 in 1993. This was 3% above those in 1992 due to an increase in total debt partially offset by lower interest rates. They had increased by 4% in 1992. CONSOLIDATED NET INCOME Consolidated net income in 1993 totaled $75,387,000 and was 11% above 1992 net income. Consolidated net income in 1992 was 7% below that recorded in 1991. Dividends paid on preferred stocks of American Water Works Company, Inc. decreased to $3,996,000 in 1993 from $4,019,000 in 1992 due to mandatory redemptions. Consolidated net income to common stock totaled $71,391,000 in 1993 and was 11% above that reported for 1992. It had decreased by 8% in 1992. NEW ACCOUNTING STANDARDS In November 1992, Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits," was issued by the FASB. The company plans to adopt the Statement in the first quarter of 1994. The Statement will require the company to accrue the cost of providing benefits to former and inactive employees after employment, but before retirement. The company does not expect adoption of the Statement to have a material impact on its results of operations. CAPITALIZATION Long-term Preferred Common (000) Debt Stock Equity - ------------------------------------------------------------ Company 1993 $ 131,074 $ 51,673 $655,275 1992 73,275 52,153 609,572 1991 74,568 52,633 568,733 1990 90,852 13,363 521,792 1989 87,550 14,093 487,407 - ------------------------------------------------------------ Operating Subsidiaries 1993 $1,060,776 $ 54,532 $768,921 1992 966,171 60,093 705,419 1991 919,074 56,812 650,307 1990 763,768 37,376 598,984 1989 747,149 39,123 536,798 - ------------------------------------------------------------ Consolidated 1993 $1,192,809 $104,490 $655,275 1992 1,036,604 109,529 609,572 1991 986,691 106,726 568,733 1990 847,692 48,018 521,792 1989 832,907 50,493 487,407 CAPITALIZATION RATIOS Long-term Preferred Common Debt Stock Equity - ------------------------------------------------------------ Company 1993 16% 6% 78% 1992 10% 7% 83% 1991 11% 7% 82% 1990 15% 2% 83% 1989 15% 2% 83% - ------------------------------------------------------------ Operating Subsidiaries 1993 56% 3% 41% 1992 56% 3% 41% 1991 57% 3% 40% 1990 54% 3% 43% 1989 56% 3% 41% Long-term debt includes amounts due within one year. 39 (Page 32 of 1993 Annual Report) 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 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 stocks 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 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. During 1993, the company sold through private placement an aggregate of $81,000,000 of 7.41% Series C debentures. In addition to repaying short-term bank loans, proceeds from these debentures were used to finance additional investment in subsidiaries and to repay $23,200,000 of its 8 3/4% Series A debentures, which were called for redemption on March 1, 1993. A final mandatory sinking fund payment in the amount of $480,000 was made during 1993, redeeming the company's 4.90% cumulative preferred stock. In 1993, the company amended its dividend reinvestment plan to permit, in addition to the reinvestment of common stock dividends, the purchase of common stock through optional cash payments. The company's stockholders and customers of the operating subsidiaries can purchase up to $5,000 of common stock each month directly from the company at a 5% discount from the prevailing market price. Common dividends in the amount of $2,102,000 were reinvested during 1993, which resulted in the issuance of 78,932 new shares of common stock. Proceeds received from optional cash purchases of 21,599 new shares of common stock totaled $626,000. Another 86,966 shares of common stock were issued in connection with the Employees' Stock Ownership Plan and 21,163 shares of common stock were issued in connection with a 401(k) Savings Plan for Employees. The company invested $42,875,000 in new common stock of subsidiaries during 1993. It also increased its equity investment in subsidiaries by $18,984,000 from the earnings retained by them. One operating subsidiary redeemed $1,000,000 of preferred stock in 1993. A non-operating subsidiary repaid $1,000,000 in accordance with terms of a note which includes an annual sinking fund provision. The company plans to continue to use short-term bank borrowings, as cash requirements warrant it, to finance additional investment in subsidiaries. Over the next few years the company expects to issue new securities to repay bank borrowings and finance additional investment in subsidiaries. Common stock is expected to be issued in connection with the company's Dividend Reinvestment and Stock Purchase Plan, the Employees' Stock Ownership Plan and the Savings Plan for Employees. THE SUBSIDIARY COMPANIES Operating 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 1994 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 deemed acceptable for investor-owned water companies. Aggregate bank borrowings of subsidiaries at year-end 1993 amounted to $193,620,000 compared to $112,561,000 at year-end 1992. The increase in bank borrowings reflects the acquisition of Avatar Holdings' midwestern water utilities and the efforts of subsidiaries to take advantage of lower interest rates by calling certain higher yielding bonds before maturity. 40 (Page 33 of 1993 Annual Report) AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES During 1993, four subsidiaries issued a total of $59,000,000 of thirty-year mortgage bonds at interest rates ranging from 5.15% to 5.50% to government entities, which in turn issued tax-exempt securities. Twelve subsidiaries issued $126,900,000 of mortgage bonds during 1993 at interest rates between 5.97% and 7.71%. Proceeds from the sale of the bonds were used to repay bank loans, fund construction programs and to refinance existing debt at lower rates. The subsidiary companies plan to fund construction programs and repay bank borrowings and maturing bonds with the issuance of approximately $137,100,000 of long-term debt to institutional investors and $67,300,000 of common stock to the parent company in 1994. The combined amount of subsidiary bank borrowings and bonds maturing within one year is expected to remain at the current level during 1994. One subsidiary issued $1,000,000 in preferred stock with a dividend rate of 7.67% during 1993. This issue must be redeemed in 15 years. During 1993, subsidiaries repaid $127,701,000 of maturing bonds and certain higher yielding bonds before maturity. In addition, subsidiaries made mandatory payments to sinking funds in amounts adequate to retire $1,149,000 of debt and redeem $6,591,000 of preferred stocks. REGULATION Twenty state commissions regulate the company's operating 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 and Tennessee are elected by the voters in those states. In Virginia, members of the Corporation Commission are elected by a joint vote of the two houses of the general assembly. All other state commissioners regulating operating 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 insuring customers high quality service at reasonable cost. A rate case focuses on four areas: 1. The amount of investment in facilities which provide public service 2. The operating cost associated with providing that service 3. The capital costs for the funds used to build the facilities which serve the public 4. 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 operating 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. Another subsidiary recently received a rate order allowing it to capitalize $400,000 of interest 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 System 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 operating subsidiaries to address, on a timely basis, water supply issues which otherwise would still be unresolved. 41 (Page 35 of 1993 Annual Report) AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES REPORT OF INDEPENDENT ACCOUNTANTS To the Stockholders and Board of Directors American Water Works Company, Inc. In our opinion, the accompanying balance sheets and the related statements of income and retained earnings and of cash flows present fairly, in all material respects, the financial position of American Water Works Company, Inc. and of that company and its subsidiary companies consolidated at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, 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. As discussed in Notes 2 and 4 to the Financial Statements, effective January 1, 1993 the company changed its method of accounting for income taxes and postretirement benefits other than pensions. PRICE WATERHOUSE Thirty South Seventeenth Street Philadelphia, Pennsylvania February 1, 1994 42 (Page 36 of the Annual Report) CONSOLIDATED BALANCE SHEET (In thousands) At December 31, 1993 1992 - ----------------------------------------------------------------------------- ASSETS Property, plant and equipment Utility plant - at original cost less accumulated depreciation $2,444,277 $2,157,625 Utility plant acquisition adjustments 40,689 1,793 Other utility plant adjustments 246 296 Nonutility property, net of accumulated depreciation 21,224 24,160 Excess of cost of investments in subsidiaries over book equity at acquisition 22,709 22,608 - ----------------------------------------------------------------------------- 2,529,145 2,206,482 - ----------------------------------------------------------------------------- Current assets Cash and cash equivalents 52,979 29,113 Temporary investments - at cost plus accrued interest 399 299 Customer accounts receivable 46,795 42,168 Allowance for uncollectible accounts (1,107) (925) Unbilled revenues 57,298 51,285 Miscellaneous receivables 7,033 4,075 Materials and supplies 8,965 8,261 Deferred vacation pay 8,517 7,759 Other 8,776 8,530 - ----------------------------------------------------------------------------- 189,655 150,565 - ----------------------------------------------------------------------------- Regulatory and other long-term assets Regulatory asset - income taxes recoverable through rates 198,744 Deferred pension expense 13,437 9,757 Debt and preferred stock expense 15,552 9,934 Tank painting costs 7,906 6,673 Other 39,572 32,394 - ----------------------------------------------------------------------------- 275,211 58,758 - ----------------------------------------------------------------------------- $2,994,011 $2,415,805 ===================== 43 (Page 37 of 1993 Annual Report) AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES 1993 1992 - -------------------------------------------------------------------- CAPITAL AND LIABILITIES Capital Common stock $ 39,055 $ 38,794 Paid-in capital 37,627 32,446 Retained earnings 578,593 538,332 - -------------------------------------------------------------------- Common stockholders' equity 655,275 609,572 Preferred stocks with mandatory redemption requirements 40,000 40,480 Preferred stocks without mandatory redemption requirements 11,673 11,673 Preferred stocks of subsidiaries with mandatory redemption requirements 46,515 50,895 Preferred stocks of subsidiaries without mandatory redemption requirements 6,302 6,481 Long-term debt American Water Works Company, Inc. 131,000 73,200 Subsidiaries 1,056,404 870,940 - -------------------------------------------------------------------- 1,947,169 1,663,241 - -------------------------------------------------------------------- Current liabilities Bank debt 193,620 133,816 Current portion of long-term debt 5,405 92,464 Accounts payable 31,644 27,118 Taxes accrued, including federal income 11,798 10,734 Interest accrued 23,226 23,296 Accrued vacation pay 8,835 8,044 Other 27,852 30,196 - -------------------------------------------------------------------- 302,380 325,668 - -------------------------------------------------------------------- Regulatory and other long-term liabilities Advances for construction 125,031 88,531 Deferred income taxes 309,204 139,614 Regulatory liability - income taxes refundable through rates 45,942 Deferred investment tax credits 41,644 40,726 Other 38,146 24,084 - -------------------------------------------------------------------- 559,967 292,955 - -------------------------------------------------------------------- Contributions in aid of construction 184,495 133,941 - -------------------------------------------------------------------- $2,994,011 $2,415,805 ======================= The accompanying schedules and notes are an integral part of these financial statements. 44 (Page 38 of 1993 Annual Report) AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (In thousands, except per share amounts) For the years ended December 31, 1993 1992 1991 - ---------------------------------------------------------------------- CONSOLIDATED INCOME Operating revenues $717,537 $657,360 $635,979 - ---------------------------------------------------------------------- Operating expenses Operation and maintenance 362,451 333,212 321,303 Depreciation and amortization 66,838 58,382 52,067 General taxes 67,917 63,612 58,288 State income taxes 7,375 6,246 6,099 Federal income taxes 40,489 31,415 32,134 - ---------------------------------------------------------------------- 545,070 492,867 469,891 - ---------------------------------------------------------------------- Operating income 172,467 164,493 166,088 Allowance for other funds used during construction 3,757 2,711 2,974 Other income 1,609 715 492 - ---------------------------------------------------------------------- 177,833 167,919 169,554 - ---------------------------------------------------------------------- Income deductions Interest 97,235 96,368 94,388 Allowance for borrowed funds used during construction (3,087) (3,718) (3,436) Amortization of debt expense 1,563 1,044 825 Preferred dividends of subsidiaries 4,361 4,631 2,971 Other deductions 2,374 1,434 1,213 - ---------------------------------------------------------------------- 102,446 99,759 95,961 - ---------------------------------------------------------------------- Net income 75,387 68,160 73,593 Dividends on preferred stocks 3,996 4,019 3,703 - ---------------------------------------------------------------------- Net income to common stock $ 71,391 $ 64,141 $ 69,890 ============================== Average shares of common stock outstanding 31,139 30,943 30,731 Earnings per common share on average shares outstanding $ 2.29 $ 2.07 $ 2.27 ============================== CONSOLIDATED RETAINED EARNINGS Balance at beginning of year $538,332 $502,800 $459,333 Add: net income 75,387 68,160 73,593 - ---------------------------------------------------------------------- 613,719 570,960 532,926 - ---------------------------------------------------------------------- Deduct: dividends Preferred stock 3,540 3,563 3,247 Preference stock 456 456 456 Common stock - $1.00 per share in 1993; $.925 per share in 1992; $.86 per share in 1991 31,130 28,609 26,423 - ---------------------------------------------------------------------- 35,126 32,628 30,126 - ---------------------------------------------------------------------- Balance at end of year $578,593 $538,332 $502,800 ============================== The accompanying schedules and notes are an integral part of these financial statements. 45 (Page 39 of 1993 Annual Report) AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENT OF CASH FLOWS (In thousands) For the years ended December 31, 1993 1992 1991 - ----------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 75,387 $ 68,160 $ 73,593 Adjustments Depreciation and amortization 66,838 58,382 52,067 Provision for deferred income taxes 7,873 13,042 12,639 Provision for losses on accounts receivable 3,377 3,580 4,028 Allowance for other funds used during construction (3,087) (2,711) (2,974) Employee benefit expenses in excess of funding 2,567 1,450 393 Common stock contributions to employee benefit plans 1,581 1,316 1,165 Deferred revenues, net (398) 2,426 (1,541) Deferred tank painting costs (1,653) (1,539) (1,440) Deferred rate case expense (3,008) (3,040) (2,858) Amortization of deferred charges 8,268 6,270 5,548 Other, net (1,873) (19) (3,205) Changes in assets and liabilities, net of effects from acquisitions Accounts receivable (9,734) (2,308) (5,567) Unbilled revenues (3,738) 229 (1,934) Other current assets (352) (598) (1,758) Accounts payable 2,987 (1,568) (4,165) Taxes accrued, including federal income (664) 2,958 (1,651) Interest accrued (674) (3,417) 1,869 Other current liabilities (3,257) (34) 3,185 - ----------------------------------------------------------------------------- Net cash from operating activities 140,440 142,579 127,394 - ----------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Construction expenditures (193,116) (197,453) (182,649) Allowance for other funds used during construction 3,087 2,711 2,974 Water system acquisitions, net of acquired cash (65,889) (5,949) (5,084) Proceeds from the disposition of property, plant and equipment 2,183 1,616 2,684 Removal costs from property, plant and equipment retirements (6,201) (5,224) (4,815) Funds restricted for construction activity (700) (5,200) Temporary investments (100) 102 127 - ----------------------------------------------------------------------------- Net cash used in investing activities (260,736) (209,397) (186,763) - ----------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt 267,070 244,900 200,300 Proceeds from preferred stock 1,000 5,600 61,000 Proceeds from common stock 2,059 963 858 Net borrowings (repayments) under line-of-credit agreements 50,535 58,602 (117,987) Advances and contributions for construction, net of refunds 20,661 8,535 6,335 Debt issuance costs (5,018) (5,335) (2,257) Repayment of long-term debt (152,050) (195,113) (61,639) Redemption of preferred stocks (7,071) (2,797) (2,292) Dividends paid (33,024) (29,600) (28,390) - ----------------------------------------------------------------------------- Net cash from financing activities 144,162 85,755 55,928 - ----------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 23,866 18,937 (3,441) Cash and cash equivalents at beginning of year 29,113 10,176 13,617 - ----------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 52,979 $ 29,113 $ 10,176 ============================= Cash paid during the year for: Interest, net of capitalized amount $ 99,433 $ 97,088 $ 91,272 ============================= Income taxes $ 41,880 $ 25,728 $ 31,889 ============================= Common stock issued in lieu of cash in connection with the Dividend Reinvestment and Stock Purchase Plan, the Employees' Stock Ownership Plan and the Savings Plan for Employees totaled $3,683 in 1993, $4,344 in 1992 and $2,618 in 1991. Capital lease obligations of $126 and $338 were recorded in 1992 and 1991, respectively. The accompanying schedules and notes are an integral part of these financial statements. 46 (Page 40 of 1993 Annual Report) AMERICAN WATER WORKS COMPANY, INC. BALANCE SHEET (In thousands) At December 31, 1993 1992 - -------------------------------------------------------------------- ASSETS Investments in subsidiaries Securities $810,372 $749,513 Notes and advances 3,630 4,640 - -------------------------------------------------------------------- 814,002 754,153 - -------------------------------------------------------------------- Current assets Cash and cash equivalents 23,302 78 Notes receivable from subsidiaries 1,010 1,010 Other 253 437 - -------------------------------------------------------------------- 24,565 1,525 - -------------------------------------------------------------------- Deferred debits Debt expense 402 177 Preferred stock expense 278 305 Other 1,624 1,551 - -------------------------------------------------------------------- 2,304 2,033 - -------------------------------------------------------------------- Other long-term assets 6,103 5,429 - -------------------------------------------------------------------- $846,974 $763,140 ===================== CAPITAL AND LIABILITIES Capital Common stock $ 39,055 $ 38,794 Paid-in capital 37,627 32,446 Retained earnings 578,593 538,332 - -------------------------------------------------------------------- Common stockholders' equity 655,275 609,572 Preferred stocks with mandatory redemption requirements 40,000 40,480 Preferred stocks without mandatory redemption requirements 11,673 11,673 Long-term debt 131,058 73,262 - -------------------------------------------------------------------- 838,006 734,987 - -------------------------------------------------------------------- Current liabilities Bank debt 21,255 Current portion of long-term debt 16 13 Taxes accrued, including federal income 548 (156) Interest accrued 1,378 885 Other 856 739 - -------------------------------------------------------------------- 2,798 22,736 - -------------------------------------------------------------------- Other long-term liabilities 6,170 5,417 - -------------------------------------------------------------------- $846,974 $763,140 ===================== The accompanying schedules and notes are an integral part of these financial statements. 47 (Page 41 of 1993 Annual Report) AMERICAN WATER WORKS COMPANY, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS (In thousands, except per share amount) For the years ended December 31, 1993 1992 1991 - ----------------------------------------------------------------------------- INCOME Income from subsidiaries Equity in earnings of subsidiaries Dividends $ 65,264 $ 55,859 $ 65,002 Undistributed earnings 18,984 19,401 15,690 - ----------------------------------------------------------------------------- 84,248 75,260 80,692 Interest 352 804 1,184 Other income 868 304 464 - ----------------------------------------------------------------------------- 85,468 76,368 82,340 - ----------------------------------------------------------------------------- Expenses and taxes Operating and administrative expenses 5,438 4,335 4,081 General taxes 200 200 200 Federal income taxes (5,228) (3,989) (4,061) Interest 9,618 7,629 8,492 Amortization of debt expense 53 33 35 - ----------------------------------------------------------------------------- 10,081 8,208 8,747 - ----------------------------------------------------------------------------- Net income 75,387 68,160 73,593 Dividends on preferred stocks 3,996 4,019 3,703 - ----------------------------------------------------------------------------- Net income to common stock $ 71,391 $ 64,141 $ 69,890 =============================== Average shares of common stock outstanding 31,139 30,943 30,731 Earnings per common share on average shares outstanding $ 2.29 $ 2.07 $ 2.27 =============================== RETAINED EARNINGS Balance at beginning of year $538,332 $502,800 $459,333 Add: net income 75,387 68,160 73,593 - ----------------------------------------------------------------------------- 613,719 570,960 532,926 - ----------------------------------------------------------------------------- Deduct: dividends Preferred stock 3,540 3,563 3,247 Preference stock 456 456 456 Common stock - $1.00 per share in 1993; $.925 per share in 1992; $.86 per share in 1991 31,130 28,609 26,423 - ----------------------------------------------------------------------------- 35,126 32,628 30,126 - ----------------------------------------------------------------------------- Balance at end of year $578,593 $538,332 $502,800 =============================== The accompanying schedules and notes are an integral part of these financial statements. 48 (Page 42 of 1993 Annual Report) AMERICAN WATER WORKS COMPANY, INC. STATEMENT OF CASH FLOWS (In thousands) For the years ended December 31, 1993 1992 1991 - ------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 75,387 $ 68,160 $ 73,593 Adjustments Undistributed earnings of subsidiaries (18,984) (19,401) (15,690) Other, net 739 605 88 Changes in assets and liabilities Other current assets 184 (180) (42) Taxes accrued, including federal income 704 109 102 Interest accrued 493 26 (237) Other current liabilities 117 46 (88) - ------------------------------------------------------------------------- Net cash from operating activities 58,640 49,365 57,726 - ------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in subsidiaries' common stock (42,875) (36,800) (41,000) Redemption of preferred stock by subsidiary 1,000 Repayment of promissory notes by subsidiaries 1,010 5,210 1,015 Other (594) (728) - ------------------------------------------------------------------------- Net cash used in investing activities (41,459) (31,590) (40,713) - ------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Net borrowings (repayments) under line-of-credit agreements (21,255) 11,425 (13,255) Proceeds from long-term debt 81,000 Proceeds from common stock 3,618 2,282 2,015 Proceeds from preferred stock 40,000 Repayment of long-term debt (23,214) (1,317) (16,310) Redemption of preferred stock (480) (480) (730) Dividends paid (33,024) (29,600) (28,390) Other (602) (22) (351) - ------------------------------------------------------------------------- Net cash from (used in) financing activities 6,043 (17,712) (17,021) - ------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 23,224 63 (8) Cash and cash equivalents at beginning of year 78 15 23 - ------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 23,302 $ 78 $ 15 ============================ Cash paid (received) during the year for: Interest $ 9,125 $ 7,603 $ 8,729 ============================ Income taxes $ (4,846) $ (3,870) $ (3,904) ============================ Common stock issued in lieu of cash in connection with the Dividend Reinvestment and Stock Purchase Plan totaled $2,102 in 1993, $3,028 in 1992 and $1,453 in 1991. The accompanying schedules and notes are an integral part of these financial statements. 49 (Page 43 of 1993 Annual Report) AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES SCHEDULES ACCOMPANYING FINANCIAL STATEMENTS (In thousands, except share and per share amounts)
Par value Shares of shares CAPITAL STOCK OF AMERICAN WATER WORKS COMPANY, INC. outstanding outstanding Dividends - ---------------------------------------------------------------------------------------------- Common stock - $1.25 par value Authorized - 100,000,000 shares 1993 31,243,743 $39,055 $31,130 1992 31,035,083 38,794 28,609 1991 30,793,836 38,492 26,423
At December 31, 1993, 30,461,581 common shares were reserved for issuance in connection with the company's Stockholder Rights Plan, 1,619,433 common shares were reserved for issuance in connection with the company's Dividend Reinvestment and Stock Purchase Plan, 119,568 common shares were reserved for issuance in connection with the company's Employees' Stock Ownership Plan and 478,837 common shares were reserved for issuance in connection with the company's Savings Plan for Employees. Paid-in capital Paid-in capital was increased by the net proceeds received in excess of the par value of 208,660 shares in 1993, 241,247 shares in 1992, and 175,893 shares in 1991 of common stock that was issued. Shares issued in connection with the company's Dividend Reinvestment and Stock Purchase Plan totaled 100,531 in 1993, 137,635 in 1992 and 72,639 in 1991. Shares issued under the company's Employees' Stock Ownership Plan totaled 86,966 in 1993, 103,612 in 1992 and 103,254 in 1991. Shares issued through the company's Savings Plan for Employees totaled 21,163 in 1993. Preferred stocks with mandatory redemption requirements Cumulative preferred stock - $25 par value Authorized - 1,770,000 shares 5 1/2% series of 1961 (non-voting) 1991 10 4.90% series (non-voting) 1993 13 1992 19,200 480 36 1991 38,400 960 59 8.50% series (non-voting) 1993 1,600,000 40,000 3,400 1992 1,600,000 40,000 3,400 1991 1,600,000 40,000 3,051
The terms of the 8.50% preferred stock provide that all shares of the series shall be redeemed on December 1, 2000. In September 1991 all remaining shares of the 5 1/2% series of 1961 were redeemed. In June 1993 all remaining shares of the 4.90% series were redeemed. Preferred stocks without mandatory redemption requirements Cumulative preferred stock - $25 par value 5% series 1993, 1992 and 1991 101,777 2,544 127 Cumulative preference stock - $25 par value Authorized - 750,000 shares 5% series (non-voting) 1993, 1992 and 1991 365,158 9,129 456
50 (Page 44 of 1993 Annual Report) SCHEDULES ACCOMPANYING FINANCIAL STATEMENTS (Dollars in thousands) PREFERRED STOCKS OF SUBSIDIARIES At December 31, 1993 1992 1991 - ------------------------------------------------------------------------- Dividend rate 3.9% to less than 5% $ 8,621 $ 9,386 $ 9,972 5% to less than 6% 6,012 5,865 6,000 6% to less than 7% 2,673 2,117 2,281 7% to less than 8% 2,470 1,520 1,570 8% to less than 9% 24,973 25,006 19,439 9% to less than 10% 5,406 5,624 5,977 10% to less than 11% 1,320 1,500 2,180 11% to less than 12% 1,142 6,058 6,274 12% to less than 13% 200 300 400 - ------------------------------------------------------------------------- $52,817 $57,376 $54,093 ================================ Preferred stock agreements of certain subsidiaries require annual sinking fund payments in varying amounts and permit redemption at various redemption 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 $1,703 in 1994; $1,477 in 1995; $1,332 in 1996; $1,237 in 1997 and $1,231 in 1998. LONG-TERM DEBT OF AMERICAN WATER WORKS COMPANY, INC. At December 31, 1993 1993 1992 - ------------------------------------------------------------------------- Due within Due after Due after one year one year one year - ------------------------------------------------------------------------- 8 3/4% Series A sinking fund debentures $23,200 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 Capital lease obligation to a subsidiary $ 16 58 62 - ------------------------------------------------------------------------- $ 16 $131,058 $73,262 =============================== In March 1993 the 8 3/4% Series A sinking fund debentures were called for redemption. 51 (Page 45 of 1993 Annual Report) AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES LONG-TERM DEBT OF SUBSIDIARIES At December 31, 1993 1993 1992 - ------------------------------------------------------------------------- Due within Due after Due after one year one year one year - ------------------------------------------------------------------------- Interest rate 4% to less than 5% $1,059 $ 399 $ 5,733 5% to less than 6% 77,717 8,200 6% to less than 7% 10 142,349 46,000 7% to less than 8% 32 165,945 128,237 8% to less than 9% 72 198,809 223,330 9% to less than 10% 205 347,440 338,059 10% to less than 11% 484 82,535 78,930 11% to less than 12% 14,500 14,500 12% to less than 13% 11,800 11,800 13% to less than 14% 3,150 12,152 13,000 14% to less than 15% 50 800 850 - ------------------------------------------------------------------------- 5,062 1,054,446 868,639 Capital leases 343 1,958 2,301 - ------------------------------------------------------------------------- $5,405 $1,056,404 $870,940 ================================== Maturities of long-term debt, including sinking fund requirements, during the next five years will amount to $5,405 in 1994; $74,042 in 1995; $28,294 in 1996; $57,618 in 1997 and $22,255 in 1998. Long-term debt of subsidiaries is substantially secured by utility plant. UTILITY PLANT At December 31, 1993 1992 - ------------------------------------------------------------------------- Water plant Sources of supply $ 134,787 $ 123,700 Treatment and pumping facilities 598,236 540,635 Transmission and distribution facilities 1,379,501 1,204,709 Services, meters and fire hydrants 520,019 450,229 General structures and equipment 184,517 165,143 Sewer plant 30,974 18,852 Construction work in progress 80,475 60,585 - ------------------------------------------------------------------------- 2,928,509 2,563,853 Less--accumulated depreciation 484,232 406,228 - ------------------------------------------------------------------------- $2,444,277 $2,157,625 ======================== 52 (Page 46 of 1993 Annual Report) NOTES TO FINANCIAL STATEMENTS NOTE 1 SIGNIFICANT ACCOUNTING POLICIES The accounting policies of the operating subsidiaries are in conformity with generally accepted accounting principles for regulated public utilities and accounting procedures prescribed by regulatory authorities of the respective states in which they operate. Certain reclassifications have been made to conform previously reported data to the current presentation. 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). PROPERTY, PLANT AND EQUIPMENT The cost of additions to utility plant and replacement of retirement units of property is capitalized. Cost includes 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. Upon regulatory approval as an allowable cost recoverable in future rates, losses on major premature property retirements are deferred and amortized over periods as authorized. 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 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 a maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist primarily of bank certificates of deposit and repurchase agreements. 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 conjunction with the adoption of 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 acquired before the adoption of full normalization for rate making purposes by regulatory authorities. The effects of adopting SFAS No. 109 are discussed in more detail in Note 2. 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. 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, 1993 and 1992 include payables to banks of $5,308,000 and $9,871,000, respectively, which represent checks issued but not presented to the banks for payment, net of the related bank balance. 53 (Page 47 of 1993 Annual Report) AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES REGULATORY AND OTHER LONG-TERM LIABILITIES In accordance with SFAS No. 109, the company has recorded a regulatory liability for the net reduction expected in future revenues as deferred taxes previously provided, attributable to the difference between the federal income tax rate under prior law and the current 35% rate, reverse over the average remaining service lives of the related assets. ADVANCES AND CONTRIBUTIONS IN AID OF CONSTRUCTION Operating 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. 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 each company, 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 is recognized currently. Certain income and expense items are accounted for in different time periods for financial reporting than for income tax reporting purposes. Prior to 1993, deferred income taxes with respect to these differences were provided to the extent permitted by regulatory authorities in determining rates for water service. In 1993, 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 based on the enacted tax rates to be in effect when such temporary differences are expected to reverse. The effects of adopting SFAS No. 109 are explained in more detail in Note 2. To the extent permitted by regulatory authorities, 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 increase in utility plant which represents the cost of borrowed funds and a return on equity funds devoted to plant under construction. The company's operating subsidiaries record AFUDC to the extent permitted by regulatory authorities. NOTE 2 INCOME TAXES Effective January 1, 1993, the company adopted, on a prospective basis, SFAS No. 109. The Statement requires deferred income taxes to be provided on the difference between the tax bases of assets and liabilities and the amounts at which they are carried in the financial statements, based on the enacted tax rates to be in effect when such temporary differences are expected to reverse. SFAS No. 109 requires regulated enterprises to provide deferred taxes on all temporary differences including those not previously recognized when the tax effects of the differences are, at the direction of regulatory authorities, flowed through to customers. Regulated enterprises 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. As a result of the adoption, the company recorded additional assets and liabilities of approximately $210,000,000 at January 1, 1993. The company's results of operations were not materially impacted by the adoption of SFAS No. 109. 54 (Page 48 of 1993 Annual Report) NOTES TO FINANCIAL STATEMENTS After adoption of SFAS No. 109, $230,000,000 of the company's net non-current deferred tax liability at January 1, 1993 was attributable to property, plant, and equipment basis differences, as well as differences in depreciation methods, $79,000,000 was attributable to income taxes recoverable through rates in the future and $(31,000,000) related to the net amount of all other types of temporary differences. The Revenue Reconciliation Act of 1993 increased the company's federal income tax rate, retroactive to January 1, 1993, from 34% to 35%. The increased tax rate also resulted in an increase in the company's net deferred income tax liability, as well as increases in tax related regulatory assets and liabilities which are recorded at revenue requirement levels in accordance with SFAS No. 109. Where recovery of the increase in deferred income taxes is expected from regulatory authorities, operating subsidiaries have recorded a regulatory asset. As a result, the company recorded additional assets and liabilities of approximately $5,500,000. During 1993, federal income tax expense was adjusted to reflect the 1% increase in the tax rate, resulting in a reduction in the company's results of operations for 1993 of approximately $1,200,000. As of December 31, 1993, the company and its subsidiaries had a net non-current deferred tax liability of $309,204,000. Non-current deferred tax liabilities of $496,758,000 were offset by non-current deferred tax assets of $187,554,000. No valuation allowances were required on deferred tax assets. At December 31, 1993, $257,000,000 of the company's net non-current deferred tax liability was attributed to property, plant, and equipment basis differences and depreciation methods, $84,000,000 was attributed to income taxes recoverable in future rates and $(32,000,000) related to the net of all other types of temporary differences. Components of consolidated income tax expense are as follows (in thousands): 1993 1992 1991 - ----------------------------------------------------------- State income taxes: Current $ 8,681 $ 5,575 $ 5,438 Deferred Current (57) (15) Non-current (1,249) 671 676 - ----------------------------------------------------------- $ 7,375 $ 6,246 $ 6,099 ========================== Federal income taxes: Current $31,162 $19,111 $20,261 Deferred Current (92) (67) (90) Non-current 10,640 13,526 13,183 Amortization of deferred investment tax credits (1,221) (1,155) (1,220) - ----------------------------------------------------------- $40,489 $31,415 $32,134 ========================== Following is a reconciliation of federal income tax expense to income tax at the statutory rate (in thousands): 1993 1992 1991 - ----------------------------------------------------------- Income before federal income tax $115,876 $99,575 $105,727 =========================== Income tax at federal statutory rate - 35% in 1993; 34% in 1992 and 1991 $ 40,557 $33,856 $ 35,947 Increases (decreases) resulting from - Flow through differences 1,494 (1,683) (1,212) Investment tax credits (1,221) (1,155) (1,220) Subsidiary preferred dividends 1,486 1,533 967 Other (1,827) (1,136) (2,348) - ----------------------------------------------------------- Federal income tax expense $ 40,489 $31,415 $ 32,134 ============================ NOTE 3 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, 1993 was $181,758,000. Borrowings under such lines of credit generally are payable on demand and bear interest at variable rates. None of the agreements with lending banks has compensating balance requirements. 55 (Page 49 of 1993 Annual Report) AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES Short-term bank borrowing information is as follows (in thousands): 1993 1992 1991 - ------------------------------------------------------------ Maximum amount outstanding $220,150 $133,816 $193,201 Average amount outstanding 171,340 84,210 103,206 Weighted average annual interest rate 3.82% 4.56% 7.04% Interest rate at December 31 3.71% 3.26% 4.68% NOTE 4 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 in the last five years of employment. 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): 1993 1992 1991 - ------------------------------------------------------------ Service cost-benefits earned during the year $ 8,659 $ 9,071 $ 7,600 Interest cost on projected benefit obligation 21,989 21,455 19,556 Actual return on plan assets (23,620) (18,484) (27,654) Net amortization and deferral (1,595) (6,016) 4,182 - ------------------------------------------------------------ Net pension cost $ 5,433 $ 6,026 $ 3,684 =========================== Assumed asset earnings rate 8.75% 8.75% 9.00% The company's policy is to fund pension costs accrued, subject to the statutory minimum and maximum limits. Due to the funded status of the plan there were no contributions made in 1993, 1992 or 1991. Pension plan assets are invested in a guaranteed interest contract with a major insurance company, United States government securities, equity mutual funds and publicly traded bonds. The following table reconciles plan assets and liabilities to the funded status of the plan at December 31 (in thousands): 1993 1992 - ------------------------------------------------------------ Plan assets at fair value $283,772 $268,456 ================== Actuarial present value of benefit obligations: Vested benefits $252,289 $201,129 Non-vested benefits 6,259 5,544 - ------------------------------------------------------------ Accumulated benefit obligation 258,548 206,673 Effect of projected future salary increases 73,427 65,327 - ------------------------------------------------------------ Total projected benefit obligation $331,975 $272,000 ================== Projected benefit obligation in excess of plan assets $(48,203) $ (3,544) Unrecognized net transition asset (21,173) (23,526) Unrecognized prior service cost 1,653 1,782 Unrecognized net loss 49,696 13,346 - ------------------------------------------------------------ Accrued pension cost $(18,027) $(11,942) ================== Discount rate assumption 7.25% 8.00% Compensation growth rate assumption 5.00% 5.75% 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 $1,066,000 for 1993, $1,017,000 for 1992 and $825,000 for 1991. At December 31, 1993, the projected benefit obligation for these plans totaled $9,405,000. $5,876,000 is accrued as a pension liability on the balance sheet representing $4,393,000 of accrued pension cost and an unfunded accumulated benefit obligation in excess of accrued pension cost of $1,483,000. 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. The program provides for monthly contributions from post-1990 retirees and their dependents under age 65 that elect a basic/major medical plan that covers hospital and surgical expenses at 100%. A comprehensive medical plan, with certain limitations on benefits, that does not require contributions from retirees is also available. Both plans contain cost-sharing features such as deductibles and coinsurance, and require 56 (Page 50 of 1993 Annual Report) NOTES TO FINANCIAL STATEMENTS additional monthly contributions from retirees that took early retirement after July 31, 1993. In the first quarter of 1993, the company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." The Statement requires the company to accrue the expected cost of providing postretirement health care and life insurance benefits as employees render the services necessary to earn the benefits, in a manner similar to that used to account for pensions. The effect of adopting the new accounting method increased postretirement benefit costs in 1993 by $16,459,000, of which $6,649,000 was deferred because future recovery in rates is probable and $1,031,000 was capitalized to utility plant. The company's operating subsidiaries have been pursuing recovery in rates for service of the additional costs resulting from this change in accounting. During 1993, fifteen decisions reached by regulatory authorities on this matter have permitted such recovery. Three regulatory authorities have denied recovery in current rates, but will continue to allow recovery when the benefits are paid in the future. The outcome of this issue in the rate making process in two states served by the operating subsidiaries is presently uncertain. Where recovery is uncertain or has been initially denied, operating subsidiaries will continue to pursue recovery in rates of the increased costs. The operating subsidiaries recovered approximately $5,178,000 of these increased costs in rates during 1993. This change in accounting decreased net income for 1993 by $2,207,000, or $.07 per share, after giving effect to the additional amounts recovered in rates. Prior to 1993, the company recognized the cost of providing postretirement benefits by expensing annual insurance premiums as incurred. Such premiums approximated $4,600,000 in 1992 and $3,700,000 in 1991. The following table provides postretirement benefit cost components for 1993 (in thousands): - ------------------------------------------------------------ Service cost - benefits earned during the year $ 5,153 Interest cost on accumulated postretirement benefit obligation 10,100 Amortization of transition obligation 6,173 - ------------------------------------------------------------ Net postretirement benefit cost $21,426 ======= The transition obligation of $122,115,000 at January 1, 1993 is being amortized over twenty years. The company began making contributions to trust funds established for its postretirement benefit plans in the second half of 1993, when $8,235,000 was contributed. In subsequent years, the company intends to fund postretirement benefit costs accrued. Plan assets are currently invested in money market funds and may be invested in United States government securities, equity mutual funds and publicly traded bonds. The following table reconciles the funded status of the plans with the liability included in the consolidated balance sheet at December 31, 1993 (in thousands): - ------------------------------------------------------------ Plan assets at fair value $ 8,288 ========== Actuarial present value of postretirement benefit obligations: Retirees and dependents $ 48,731 Fully eligible active plan participants 4,326 Other active plan participants 86,662 - ------------------------------------------------------------ Total accumulated postretirement benefit obligation $ 139,719 ========== Accumulated postretirement benefit obligation in excess of plan assets $ (131,431) Unrecognized transition obligation 116,009 Unrecognized prior service costs 3,751 Unrecognized loss 2,571 - ------------------------------------------------------------ Accrued postretirement benefit cost $ (9,100) ========== The health care cost trend rate, used to calculate the company's cost for postretirement health care benefits, is a 12% annual increase in 1994 and is assumed to decrease gradually to a 5.5% annual increase for 2004 and remain at that level thereafter. The assumed long-term rate of annual compensation increase used for life insurance benefits was an age-related scale, averaging 5%. The discount rate used was 7.25%. The assumed weighted average rate of return on plan assets was 7.7%. A one-percentage-point increase in the health care cost trend rate would have increased the accumulated postretirement benefit obligation by $19,800,000 at January 1, 1994, and the aggregate of the service and interest cost components of postretirement benefit costs for 1993 by $2,500,000. POSTEMPLOYMENT BENEFITS In November 1992, Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits,'' was issued by the FASB. The company plans to adopt the Statement in the first quarter 57 (Page 51 of 1993 Annual Report) AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES of 1994. The Statement will require the company to accrue the cost of providing benefits to former and inactive employees after employment, but before retirement. The company does not expect adoption of the Statement to have a material impact on its results of operations. NOTE 5 LEASES The company has entered into operating leases involving certain facilities and equipment. Rental expenses under operating leases were $8,706,000 for 1993, $7,954,000 for 1992 and $7,278,000 for 1991. Capital leases currently in effect are not significant. At December 31, 1993, 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): - ---------------------------------------- 1994 $ 4,278 1995 3,235 1996 2,115 1997 1,711 1998 1,262 Later years 5,320 - ---------------------------------------- $17,921 ======= NOTE 6 COMMON STOCKHOLDERS' EQUITY DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN The company's dividend reinvestment plan was amended on July 1, 1993, to provide for optional cash purchases of newly-issued common stock of the company and is hereinafter referred to as the Dividend Reinvestment and Stock Purchase Plan. 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 amended plan permits stockholders and customers of the company's operating subsidiaries to purchase up to $5,000 of common stock each month directly from the company. The additional shares are offered at a 5% discount from the prevailing market price. Dividends paid on common stock of $2,102,000 in 1993, $3,028,000 in 1992 and $1,453,000 in 1991 were used by stockholders to purchase 78,932 shares in 1993, 137,635 shares in 1992 and 72,639 shares in 1991 of newly-issued common stock through the plan. In 1993, $626,000 was received in connection with optional cash purchases of 21,599 shares of newly-issued common stock. Costs associated with the plan of $299,000 in 1993 were charged to paid-in capital. 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. 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 matching contributions in an amount equal to 100% of each participant's contribution. The company expensed contributions of $1,350,000 for 1993, $1,316,000 for 1992 and $1,165,000 for 1991 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. The company issued 86,966 shares in 1993, 103,612 shares in 1992 and 103,254 shares in 1991 of newly issued common stock with a value of $2,367,000, $2,297,000 and $2,022,000, respectively, to the plan. 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. Each employee can elect to contribute up to 6% of their compensation to the plan. 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 will make matching contributions in an amount equal to 30% of the first 2% of each employee's compensation contributed to any fund, increasing to 40% of the first 3% of each employee's compensation contributed beginning August 1, 1994. 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. 58 (Page 52 of 1993 Annual Report) NOTES TO FINANCIAL STATEMENTS During 1993, employees contributed $416,000 to the fund of company common stock, resulting in the issuance of 13,608 shares. The company expensed matching contributions to the plan totaling $231,000 for 1993, which were used by the trustee to purchase 7,555 shares of newly issued common stock from the company at the prevailing market price. STOCKHOLDER RIGHTS PLAN Each share of the company's common stock has one Flip-Over Right and one Flip-In Right attached. The Rights will not be exercisable until 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 7 COMMITMENTS AND CONTINGENCIES Construction programs of subsidiaries for 1994 are estimated to cost approximately $258,000,000. Commitments have been made in connection with certain construction programs. In 1988, a subsidiary filed suit against the Grafton Water District in Massachusetts to recover the fair market value of water utility assets taken by eminent domain. The District initially paid $1,099,000 for the system that had served 2,300 customers. In 1990, a jury ruled that the District should pay an additional $4,501,000 plus interest for the property. After the jury verdict, the District appealed the decision and also caused legislation to be enacted by the Commonwealth of Massachusetts that purports to relieve the District from paying the judgement. The subsidiary has filed suit to appeal the constitutionality of the enacted legislation. Because of the uncertainty surrounding this award, no recognition has been given to it in the accompanying financial statements. The company is routinely involved in condemnation proceedings and legal actions relating to several operating 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 8 FAIR VALUE 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. 59 (Page 53 of 1993 Annual Report) AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES 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, 1993 and 1992 are as follows (in thousands): Carrying 1993 Amount Fair Value - -------------------------------------------------------------- Preferred stocks with mandatory redemption requirements $ 86,515 $ 96,052 Long-term debt 1,190,508 1,343,129 Carrying 1992 Amount Fair Value - -------------------------------------------------------------- Preferred stocks with mandatory redemption requirements $ 91,375 $ 97,733 Long-term debt 1,034,001 1,115,601 NOTE 9 ACQUISITION On August 31, 1993, American Water Works Company, Inc. and its subsidiaries in Indiana, Missouri, and Ohio acquired the midwestern water utilities of Avatar Holdings, Inc. 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 accounted for 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 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. NOTE 10 QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 1993 and 1992 (in thousands, except per share amounts) are as follows: - --------------------------------------------------------------------------- First Second Third Fourth 1993 Quarter Quarter Quarter Quarter Total - --------------------------------------------------------------------------- Operating revenues $155,472 $179,935 $200,154 $181,976 $717,537 Operating income 35,281 45,532 52,402 39,252 172,467 Net income 10,161 21,857 28,651 14,718 75,387 Net income to common stock 9,159 20,855 27,655 13,722 71,391 Net income per common share $.30 $.67 $.88 $.44 $2.29 - --------------------------------------------------------------------------- First Second Third Fourth 1992 Quarter Quarter Quarter Quarter Total - --------------------------------------------------------------------------- Operating revenues $152,258 $168,180 $176,284 $160,638 $657,360 Operating income 36,332 44,418 46,839 36,904 164,493 Net income 12,114 20,250 23,158 12,638 68,160 Net income to common stock 11,106 19,243 22,156 11,636 64,141 Net income per common share $.36 $.62 $.72 $.37 $2.07 60 (Inside Back Cover of 1993 Annual Report) SECURITIES INFORMATION DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN Dividends paid by American Water Works Company, Inc. to common stockholders can be reinvested in accordance with the company's Dividend Reinvestment and Stock Purchase Plan. The plan permits record holders of the common stock to have all or part of their dividends automatically reinvested in additional shares of common stock. It also permits direct investment by stockholders and operating subsidiary customers of from $100 to $5,000 per month in common stock. The additional shares are offered at a 5% discount. Stockholders seeking additional information on the plan or an application for participation may write to The First National Bank of Boston at Mail Stop 45-02-09, Boston, MA 02102-0644 or call the bank at (617) 575-2900 or (800) 442-2001. TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING AGENT FOR COMMON, PREFERRED AND PREFERENCE STOCKS: The First National Bank of Boston Mail Stop 45-02-09 Boston, MA 02102-0644 (617) 575-2900 (800) 442-2001 Inquiries relating to your stock ownership and dividend payments should be directed to The First National Bank of Boston as indicated above. Transfer requests sent by mail should be directed with appropriate instructions to the above-referenced address. TRANSFER AGENT'S NEW YORK DROP: BancBoston Trust Company of New York 55 Broadway Third Floor New York, NY 10006 INVESTOR RELATIONS Contact: J. James Barr Vice President, Treasurer and Chief Financial Officer P.O. Box 1770 1025 Laurel Oak Road Voorhees, NJ 08043 (609) 346-8200 STOCKHOLDER RELATIONS Contact: W. Timothy Pohl General Counsel and Secretary P.O. Box 1770 1025 Laurel Oak Road Voorhees, NJ 08043 (609) 346-8200 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 - -------------------------------------------------------------------------------------------------- 1993 High Low High Low High Low - -------------------------------------------------------------------------------------------------- 1st quarter $27 5/8 $24 7/8 $20 $18 3/4 $20 $18 5/8 2nd quarter 28 24 5/8 19 5/8 18 1/2 19 5/8 18 1/2 3rd quarter 32 1/4 27 21 19 22 1/2 19 1/8 4th quarter 31 5/8 29 22 1/2 20 1/4 23 21 1/4 Quarterly dividend paid per share 25 cents 31 1/4 cents 31 1/4 cents Number of stockholders at December 31, 1993 9,571 318 1,069 - -------------------------------------------------------------------------------------------------- 1992 - -------------------------------------------------------------------------------------------------- 1st quarter $28 1/2 $21 7/8 $18 1/2 $17 1/2 $19 $17 1/8 2nd quarter 23 20 5/8 18 16 1/2 17 7/8 16 3/4 3rd quarter 26 1/4 21 3/4 20 17 5/8 19 3/4 17 4th quarter 27 3/8 24 1/8 19 1/2 17 1/4 20 18 3/8 Quarterly dividend paid per share 23 1/8 cents 31 1/4 cents 31 1/4 cents - --------------------------------------------------------------------------------------------------
Each of the stocks except the 5% preference stock has voting rights. EX-21 4 EXHIBIT 21 TO 10-K FOR 1993 61 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, 1993. 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 Commonwealth Management Services Company, Inc. 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 The 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 99.54 Indiana-American Water Company, Inc. Indiana 100 Indiana Cities Water Corporation Indiana 100 Iowa-American Water Company Delaware 94.63 Kentucky-American Water Company Kentucky 100 Maryland-American Water Company Maryland 100 Missouri-American Water Company Missouri 100 Missouri Cities Water Company Missouri 100 New Jersey-American Water Company, Inc. New Jersey 100* New Mexico-American Water Company, Inc. New Mexico 99.98 Northern Michigan 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 95.28** Tennessee-American Water Company Tennessee 99.74 Virginia-American Water Company Virginia 100 West Virginia-American Water Company West Virginia 99.90 Bluefield Valley Water Works Company Virginia 100 - ---------------------------------------------------------------------------- * Includes 10.41% which is owned by American Commonwealth Company, an affiliate of the Registrant. ** Includes .19% and 2.47% which are owned by American Commonwealth Company and Greenwich Water System, Inc., respectively, affiliates of the Registrant. EX-99 5 EXHIBIT 99 TO 1O-K FOR 1993 (PROXY STATEMENT) 62 (Page 2 of 1994 Proxy Statement) PROPOSAL NO. 1 ELECTION OF DIRECTORS At the annual meeting, 11 directors are to be elected to hold office until the next annual election of directors and until their respective successors are elected and qualified. It is the intention of the persons named in the accompanying form of proxy to vote all shares they are empowered to vote for the election of as many as possible of the persons named in the following table, all of whom are now directors of the Company. In case any nominee named in the table withdraws or is otherwise unable to serve, which is not anticipated, the persons named in the proxy may vote for another person of their choice. Stockholders are entitled to cumulative voting rights in the election of directors. Each holder of Common Stock is entitled to one vote per share, and each holder of Cumulative Preferred Stock, 5% Series, is entitled to one-tenth of a vote per share. Each stockholder may cast as many votes as such stockholder's number of shares shall entitle him or her to vote in the election of directors multiplied by the number of directors to be elected, namely 11, and such stockholder may cast all of such votes for a single director or distribute them among all of the directors to be voted for, or any two or more of them. A stockholder wishing to exercise his or her cumulative voting rights should give instructions on the enclosed form of proxy as to how such stockholder's votes are to be cumulated. Unless a stockholder specifically exercises his or her cumulative voting rights, such stockholder's votes may be distributed among the nominees (other than those from whom the stockholder withholds his or her vote) by the persons named in the proxy to elect as many as possible of the nominees. Such persons may vote cumulatively for such of the nominees (in some circumstances, less than all) as they in their discretion determine if in their judgment such action is necessary to elect as many of the nominees as possible. Information as of March 7, 1994 concerning the nominees is set forth below:
NAME, AGE AND PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE DIRECTOR OF THE POSITION WITH COMPANY DURING PAST FIVE YEARS; OTHER DIRECTORSHIPS COMPANY SINCE - ---------------------------------- ----------------------------------------------------------------- --------------- WILLIAM O. ALBERTINI, 50 Vice President and Chief Financial Officer, Bell Atlantic 1990 (2) (3) Corporation, provider of telecommunications, since February, 1991; Chairman, President and Chief Executive Officer from May, 1989 until February, 1991, and Vice President-Operations and Planning from May, 1988 until May, 1989, Bell Atlantic Enterprises Corporation, provider of cellular communications, computer maintenance and financial services. WILLIAM R. COBB, 60 Retired since May, 1991; Regional Vice President from March, 1979 1993 (1) (2) (4) to May, 1991, American Water Works Service Company, Inc., service subsidiary of the Company. ELIZABETH H. GEMMILL, 48 Vice President and Secretary, Tasty Baking Company, since 1983 (1) (2) (3) February, 1988.
- ------------------ See footnotes on next page 2 63 (Page 3 of 1993 Proxy Statement)
NAME, AGE AND PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE DIRECTOR OF THE POSITION WITH COMPANY DURING PAST FIVE YEARS; OTHER DIRECTORSHIPS COMPANY SINCE - ---------------------------------- ----------------------------------------------------------------- --------------- HENRY G. HAGER, 59 President, Insurance Federation of Pennsylvania, Inc. since 1986 (2) (4) January, 1985; Partner, Stradley, Ronon, Stevens & Young, attorneys, since November, 1993; Senior Partner, Liebert, Short & Hirshland, attorneys, from January, 1982 to November, 1993. Director: Commonwealth Bank and Trust, N.A. NELSON G. HARRIS, 67 Chairman of the Executive Committee since May, 1992 and President 1985 Vice Chairman and Chief Executive Officer prior thereto, Tasty Baking Company. of the Board Director: CoreStates Financial Corp, Philadelphia Electric (1) (2) (4) Company, Tasty Baking Company, Phillips & Jacobs, Inc. WILLIAM F. HYLAND, 70 Of Counsel, Riker, Danzig, Scherer, Hyland & Perretti, attorneys. 1984 (3) (4) Director: First Fidelity Bancorporation. GEORGE W. JOHNSTONE, 55 President and Chief Executive Officer of the Company since 1991 President and Chief January, 1992 and Vice President of the Company from May, 1987 Executive Officer of until January, 1992; President since May, 1991 and Senior Vice the Company President-Operating Services from February, 1984 until May, 1991, (1) American Water Works Service Company, Inc., service subsidiary of the Company. MARILYN W. LEWIS, 50 President, KLS Educational Systems, Inc., specialized education 1982 Chairman of the Board and consultants, from March, 1987 until January, 1992; Public Chairman of the Executive relations consultant and business advisor. Director: Cigna Committee Corporation, South Jersey Industries, Inc. (1) (2) (3) (4) NANCY W. WAINWRIGHT, 57 Vice President, United Propane, Inc., gas distributor. 1984 (2) (3) PAUL W. WARE, 47 Chairman since June, 1990, Vice Chairman from June, 1987 until 1990(dagger) (1) (2) June, 1990, President from June, 1989 until March, 1992 and Executive Vice President from June, 1988 until June, 1989, Penn Fuel Gas, Inc., gas distributor. Director: York Water Company. ROSS A. WEBBER, 59 Chairperson of the Management Department and Professor of 1986 (3) (4) Management, The Wharton School, University of Pennsylvania; Private consultant, general management development. Director: Heidemij, N.V.
- ------------------ (dagger) Also Director of the Company from May, 1982 to May, 1986 (1) Member of Executive Committee (2) Member of Audit Committee (3) Member of Compensation and Management Development Committee (4) Member of Nominating Committee 3 64 (Page 4 of 1994 Proxy Statement) Marilyn W. Lewis and Paul W. Ware are the daughter and son of John H. Ware, 3rd and Marian S. Ware, who beneficially own more than 5% of the Company's Common Stock. William R. Cobb is the spouse of Rhoda W. Cobb, who was a director of the Company and beneficially owns more than 5% of the Company's Common Stock. Rhoda W. Cobb and Nancy W. Wainwright are sisters and are cousins of Marilyn W. Lewis and Paul W. Ware. Attendance at meetings of the Board and committees of the Board by incumbent directors averaged 95% during 1993. All nominees attended 83% or more of the meetings of the Board and committees on which he or she served. There were ten meetings of the Board of Directors and nine meetings of the Board's Executive Committee during 1993. The Board also has an Audit Committee, a Compensation and Management Development Committee and a Nominating Committee. The Audit Committee recommends to the Board the independent accountants to audit the books and accounts of the Company. The Audit Committee met with the Company's independent accountants and the Company's officers three times during 1993 to review the scope of the audit to be performed and to approve, subject to review by the Board of Directors, the fee to be paid for the audit and to review the results of the audit of the financial statements included in the Annual Report and the adequacy of internal accounting controls and accounting practices. The Compensation and Management Development Committee met five times during 1993 to evaluate and report to the Board concerning the Company's compensation practices and benefit programs and to evaluate and set, subject to the concurrence of the Board of Directors, the annual salary to be paid to the President and Chief Executive Officer. The Nominating Committee met three times during 1993. The Nominating Committee will consider nominees for the Board of Directors suggested by stockholders. Such suggestions must be in writing and delivered to the General Counsel and Secretary of the Company. STOCK OWNERSHIP INFORMATION The following table sets forth information as of March 7, 1994 with respect to beneficial ownership of Common Stock of the Company by: (i) the nominees, (ii) the five most highly compensated executive officers and (iii) all nominees and executive officers of the Company as a group. If a nominee owns less than one percent of the Company's Common Stock, no percentage is shown under the heading "Percent of Class." Information for the table was obtained from the nominees and executive officers. For purposes of the table, a person is a "beneficial owner" of the Company's Common Stock if that person, directly or indirectly, has or shares with others (i) the power to vote or direct the voting of the Common Stock or (ii) investment power with respect to the Common Stock, which includes the power to dispose or direct the disposition of the Common Stock. 4 65 (Page 5 of 1994 Proxy Statement)
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP ---------------------------- SOLE VOTING SHARED VOTING SHARES OWNED NAME OF INDIVIDUAL OR OR INVESTMENT OR INVESTMENT BY SPOUSE AND PERCENT OF NUMBER OF PERSONS IN GROUP POWER(dagger) POWER* MINOR CHILDREN* TOTAL CLASS - ------------------------------------------ ------------- ------------- --------------- ----------- ----------- William O. Albertini...................... 1,691 1,691 William R. Cobb........................... 2,911 5,270 8,181 Elizabeth H. Gemmill...................... 16,141 90,000 15,600 121,741 Henry G. Hager............................ 5,166 5,166 Nelson G. Harris.......................... 2,011 2,011 William F. Hyland......................... 1,109 1,109 George W. Johnstone....................... 6,645 481 7,126 Marilyn W. Lewis.......................... 10,200 443,728 453,928 1.45% Nancy W. Wainwright....................... 3,462 805,808 809,270 2.58% Paul W. Ware.............................. 10,200 443,728 453,928 1.45% Ross A. Webber............................ 851 300 1,151 J. James Barr............................. 357,520 357,520 1.14% Edward W. Limbach......................... 6,590 6,590 W. Timothy Pohl........................... 1,510 1,510 Gerald C. Smith........................... 7,491 7,491 All nominees and executive officers as a group (15 persons)................... 433,498 1,479,176 21,651 1,934,325 6.18%
- ------------------ (dagger) Does not include shares of the Company's Common Stock to be credited during 1994 to the accounts of the executive officers pursuant to the Company's Employees' Stock Ownership Plan and Savings Plan for Employees. * Ware Foundation, a charitable trust of which Rhoda W. Cobb and Nancy W. Wainwright are trustees, owns 805,808 shares (2.57%) of the Common Stock of the Company. Oxford Foundation, Inc., a non-profit corporation of which Marilyn W. Lewis and Paul W. Ware are directors, owns 304,088 shares of the Common Stock of the Company. Warwick Foundation, a charitable foundation of which Elizabeth H. Gemmill is a trustee, owns 90,000 shares of the Common Stock of the Company. As the trustees or directors of these non-profit organizations have voting and investment power, the shares of the Company's Common Stock held by such non-profit organizations are shown opposite the name of each such trustee or director, but such shares are reported only once in the total for nominees and officers as a group. The nominees deny beneficial ownership of such shares. The nominees also deny beneficial ownership of shares owned by their spouses and minor children. None of the nominees has any material interest in any other stock of the Company or its subsidiaries. 5 66 (Page 6 of 1994 Proxy Statement) Based upon information available to the Company, the following persons owned beneficially more than 5% of the Company's Common Stock as of March 7, 1994.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP ---------------------------- SOLE VOTING SHARED VOTING NAME AND ADDRESS OR INVESTMENT OR INVESTMENT PERCENT OF OF BENEFICIAL OWNER POWER POWER CLASS - ---------------------------------------------------- ------------- ------------- ----------- Rhoda W. Cobb....................................... 3,670 1,807,064 5.78% 212 Key Palm Road Boca Raton, FL 33432 John H. Ware, 3rd and............................... 3,340,662 33,160 10.77% his wife Marian S. Ware 550-A Bunker Hill Road Strasburg, PA 17579 John H. Ware, 3rd................................... 12,600 550-A Bunker Hill Road Strasburg, PA 17579 Marian S. Ware...................................... 39,000 304,088 1.10% 550-A Bunker Hill Road Strasburg, PA 17579 Northern Trust Corporation.......................... 2,897,550 74,990 9.49% 50 South LaSalle Street Chicago, IL 60675
Based upon filings with the Securities and Exchange Commission, as of March 7, 1994 there are no persons who own beneficially more than 5% of the outstanding shares of the Company's Cumulative Preferred Stock, 5% Series. COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Company's directors, executive officers and persons who own more than ten percent of the Company's stock to file initial reports of ownership and reports of changes in ownership of the Company's stock with the Securities and Exchange Commission and the New York Stock Exchange and to provide copies of all such reports to the Company. Based solely on a review of the copies of such reports provided to the Company, the Company believes that during calendar year 1993 all Section 16(a) filing requirements applicable to its directors, officers and greater-than-ten-percent owners were complied with. 6 67 (Page 7 of 1994 Proxy Statement) MANAGEMENT REMUNERATION The following table sets forth the annual compensation paid to each of the Company's five most highly compensated executive officers for services to the Company and its subsidiaries in all capacities for each of the last three calendar years.
SUMMARY COMPENSATION TABLE ANNUAL COMPENSATION NAME OF EXECUTIVE OFFICER ---------------------- ALL OTHER AND PRINCIPAL POSITION YEAR SALARY COMPENSATION(dagger) - ----------------------------------------------------------------------- --------- ----------- ------------------- George W. Johnstone.................................................... 1993 $377,500 $6,098 President and Chief Executive Officer of the Company 1992 351,667 5,556 1991* -0- -0- J. James Barr.......................................................... 1993 245,833 6,098 Vice President and Treasurer of the Company 1992 233,750 5,396 1991 215,833 4,975 Edward W. Limbach...................................................... 1993 245,833 6,098 Vice President of the Company 1992 233,750 5,365 1991 214,583 4,879 Gerald C. Smith........................................................ 1993 245,833 6,098 Vice President of the Company 1992 233,750 5,192 1991 207,500 4,630 W. Timothy Pohl........................................................ 1993 139,667 3,524 General Counsel and Secretary of the Company 1992 126,667 2,770 1991 110,833 2,450
- ------------------ (dagger) Value of the shares of the Company's Common Stock purchased with Company contributions and credited to the account of the named executive officer under the Employees' Stock Ownership Plan and Savings Plan for Employees. * Though Mr. Johnstone has been an employee of the Company or one of its subsidiaries for more than 27 years, only the compensation paid to him while serving as President and Chief Executive Officer is reported. The Company has maintained since 1976 an Employees' Stock Ownership Plan (the "ESOP") which has been amended from time to time, primarily to reflect changes in federal tax law. All employees of the Company and its subsidiaries who are not included in a bargaining unit and have more than one year of service with the Company may participate in the ESOP. During 1993, the Company established a Savings Plan for Employees. All employees of the Company and its subsidiaries who have completed six months of service may participate in the Savings Plan. As of March 7, 1994, the ESOP and Savings Plan together held 3.2% of the Company's Common Stock. 7 68 (Page 8 of 1994 Proxy Statement) PENSION PLAN The following table shows the approximate annual retirement benefits which will be payable under the Company's Pension Plan, Supplemental Executive Retirement Plan and Supplemental Retirement Plan at the normal retirement age of 65 (assuming continuation of the plans) for specified years of service and levels of average remuneration.
YEARS OF SERVICE FINAL AVERAGE ---------------------------------------------------------------------------- REMUNERATION 15 20 25 30 35 40 - ------------- ----------- ----------- ----------- ----------- ----------- ----------- $100,000 30,340 40,460 50,570 54,070 57,570 61,070 150,000 46,840 62,460 78,070 83,320 88,570 93,820 200,000 63,340 84,460 105,570 112,570 119,570 126,570 250,000 79,840 106,460 133,070 141,820 150,570 159,320 300,000 96,340 128,460 160,570 171,070 181,570 192,070 350,000 112,840 150,460 188,070 200,320 212,570 224,820 400,000 129,340 172,460 215,570 229,570 243,570 257,570 450,000 145,840 194,460 243,070 258,820 274,570 290,320
The Company and its subsidiaries have a defined benefit, non-contributory Pension Plan which covers substantially all employees, including the executive officers shown above. Annual amounts which are contributed to the plan and charged to expense during the year are computed on an aggregate actuarial basis and cannot be individually allocated. The remuneration covered under the plan includes salaries, but not directors fees, paid to plan participants. Directors who are not also employees do not participate in the plan. Benefits under the plan are calculated as a percentage of average remuneration over the last five years of employment, which percentage depends on the employee's total number of years of service. Benefits are not subject to reduction for Social Security or other benefits, but are restricted under federal tax law to a maximum of $118,800 per year. As of March 7, 1994, Messrs. Johnstone, Barr, Limbach, Smith and Pohl have been credited with 27, 32, 29, 41 and 9 years of service, respectively, under the plan. In 1985, the Company established a Supplemental Executive Retirement Plan under which it has agreed to provide additional retirement benefits to certain employees of the Company and its subsidiaries, designated from time to time by the Board. Messrs. Johnstone, Barr, Limbach and Smith have been so designated. Benefits under the Supplemental Executive Retirement Plan are intended to (i) provide the additional retirement benefits that would be payable under the Company's Pension Plan if federal tax law did not restrict such benefits as described in the preceding paragraph, (ii) compute the benefits payable on the basis of average remuneration over the final three years of employment rather than the final five years and (iii) provide additional years of service to those covered employees hired in mid-career. In 1989, recognizing that the federal tax law restrictions on benefits payable under the Pension Plan had begun to affect employees who were not eligible for the Supplemental Executive Retirement Plan, the Company adopted the Supplemental Retirement Plan (the "SRP"). The SRP is designed to provide benefits to employees above certain salary grades, or otherwise designated by the Board of Directors, equal to those that would be provided under the Pension Plan's benefit formula if it were unaffected by the federal tax law restrictions on benefits. Benefits payable under the SRP are reduced by any benefit payable to the same individual under the Supplemental Executive Retirement Plan. 8 69 (Page 9 of 1994 Proxy Statement) REPORT OF THE COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE OF THE BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION The Compensation and Management Development Committee of the Board of Directors (the "Committee") is comprised entirely of the following independent non-employee directors: William O. Albertini, Elizabeth H. Gemmill, William F. Hyland, Marilyn W. Lewis, Nancy W. Wainwright and Ross A. Webber. The Committee establishes, subject to the concurrence of the Board of Directors, the Company's compensation policy and objective and is responsible for administering the compensation program for the Company's executive officers. The Committee endeavors to ensure that compensation and benefits are at levels which enable the Company to attract and retain the high-quality employees it needs. Consistent with this objective, it is the policy of the Committee that the total compensation paid to executive officers should be competitive with the remuneration received by those in positions of similar responsibilities in other utilities of comparable size. To this end, an independent compensation expert is retained to assist the Committee by periodically studying the Company's compensation program for officers, reporting its findings and making recommendations consistent with the compensation policy. The Committee then establishes the appropriate salary range or band for each officer position based on the findings of the independent compensation expert. The President and Chief Executive Officer, with the concurrence of the Committee, annually sets the salary within the designated salary band for each executive officer other than himself based on his personal assessment of the performance of each such officer. The Committee, with the concurrence of the Board of Directors, sets a salary within the designated salary band which is appropriate for the President and Chief Executive Officer. The salary is reviewed annually, and an adjustment within the designated salary band is made on the basis of merit. This evaluation of merit involves an analysis of (i) the Company's financial performance within the limitations imposed by state utility regulators and fluctuating and varying weather conditions and (ii) the performance of the President and Chief Executive Officer in maintaining the Company as a leader in the water service industry and in expanding the Company's water service operations consistent with the Company's commitment to quality water service to customers of its utility subsidiaries. Inasmuch as water service operations are the Company's principal business, evaluating the Company's financial performance requires an understanding of (i) the prevailing regulatory practice in each of the states in which the Company's utility subsidiaries operate and (ii) the effect varying weather conditions have on revenues and expenses. Consequently, the Committee has not adopted a formula relationship between changes in the Company's financial performance and changes in the level of salary compensation for the President and Chief Executive Officer. Similarly, because of the varied subjective considerations involved, the Committee does not evaluate on a formula basis the performance of the President and Chief Executive Officer in maintaining the Company as a leader in the water service industry or in expanding the Company's water service operations. The salary being paid to George W. Johnstone, the Company's President and Chief Executive Officer, was reviewed at the April, 1993 meeting of the Committee, the meeting during each calendar year at which the compensation paid to executive officers and others is evaluated. Based on the 9 70 (Page 10 of 1994 Proxy Statement) analysis described above, Mr. Johnstone's annual salary was increased to $390,000, effective June 1, 1993. The independent compensation expert has analyzed various published and unpublished compensation surveys of utility companies by industry (i.e., electric, gas and water) and has found that the salary bands established by the Committee are competitive, but that the total compensation of the Company's executives, which is defined by the independent compensation expert to include incentives in addition to salary, is significantly lower than the median of total compensation paid to executives of companies reported in the surveys. At present, the Company does not have an incentive program for its executives. However, the Committee is recommending the adoption of the Long-Term Performance-Based Incentive Plan described in this Proxy Statement to supplement the salaries paid to the Company's executives. AS SUBMITTED BY THE MEMBERS OF THE COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE: William O. Albertini Marilyn W. Lewis Elizabeth H. Gemmill Nancy W. Wainwright William F. Hyland Ross A. Webber Dated: February 4, 1994 DIRECTOR REMUNERATION The amounts paid to directors who are not employees of the Company or one of its subsidiaries for their services as such and for their participation on committees of the Board are as follows: (i) each director receives a retainer of $15,500 per year plus a fee of $1,200 for each Board meeting attended, (ii) each member of the Executive Committee receives an additional retainer of $13,000 per year plus a fee of $1,000 for each Executive Committee meeting attended and (iii) the Chairmen of the Audit Committee, Compensation and Management Development Committee and Nominating Committee each receive an additional retainer of $1,500 per year, and each member of such committees receives a fee of $1,000 for each meeting attended. The Chairman of the Board and Executive Committee and Vice Chairman of the Board receive additional annual retainers of $85,000 and $20,000, respectively. Directors who are employees of the Company or one of its subsidiaries do not receive retainers or attendance fees. A retiring director receives, as a retirement benefit, an annual amount equal to the retainer for service as a director in effect at the time of retirement. Such payment continues for a period equal to the lesser of (i) the life of such director or (ii) the period such director served as a member of the Board, exclusive of any period when such director was also a salaried employee of the Company or any of its subsidiaries. 10 71 (Page 11 of 1994 Proxy Statement) PERFORMANCE GRAPH The following graph compares the changes over the last five years in the value of $100 invested in (i) the Company's Common Stock ("American"), (ii) the Standard & Poor's 500 Stock Index and (iii) the Dow Jones Water Utilities Index. The year-end values of each investment are based on share price appreciation plus dividends paid in cash, with the dividends reinvested on the date they were paid. The calculations exclude trading commissions and taxes. Total stockholder returns from each investment, whether measured in dollars or percent, can be calculated from the year-end investment values shown beneath the graph. FIVE-YEAR CUMULATIVE TOTAL RETURNS VALUE OF $100 INVESTED ON DECEMBER 31, 1988 [ INSERT PERFORMANCE GRAPH ]
Dec-88 Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 American 100 110 102 176 189 215 S&P 500 100 132 128 166 179 197 DJ Water Utils 100 105 93 142 153 172
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