-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EdKv85b1jpUWzGu6I9LbSrFao8a/9ZEzMJe/Y8Jymh8CZT7LNA5mPXNUu5hqMKFp VWrnJ6uP1qlgr0qVvWjhzg== 0000318819-99-000010.txt : 19990326 0000318819-99-000010.hdr.sgml : 19990326 ACCESSION NUMBER: 0000318819-99-000010 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN WATER WORKS CO INC CENTRAL INDEX KEY: 0000318819 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 510063696 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03437 FILM NUMBER: 99572421 BUSINESS ADDRESS: STREET 1: 1025 LAUREL OAK RD CITY: VOORHEES STATE: NJ ZIP: 08043 BUSINESS PHONE: 6093468200 MAIL ADDRESS: STREET 1: 1025 LAUREL OAK ROAD CITY: VOORHEES STATE: NJ ZIP: 08043 10-K 1 EXHIBIT INDEX ON PAGES 12-14 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number 1-3437-2 AMERICAN WATER WORKS COMPANY, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 51-0063696 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1025 Laurel Oak Road, Voorhees, New Jersey 08043 - ------------------------------------------ ---------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code 609-346-8200 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------ Common Stock, $1.25 par value per share New York Stock Exchange Cumulative Preferred Stock, 5% Series, $25 par value per share New York Stock Exchange 5% Cumulative Preference Stock, $25 par value per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant at March 8, 1999 was $1,719,305,383. As of March 8, 1999, there were a total of 81,021,992 shares of Common Stock, $1.25 par value per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain information contained and incorporated by reference herein contains forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Certain factors could cause actual results to differ materially from those in the forward-looking statements. Those factors include, but are not limited to, the unpredictability of weather, rate regulations and timing of rate cases, and changes to existing and proposed environmental regulations. See "Management's Discussion and Analysis" beginning on page 23 of the Company's Annual Report to Shareholders incorporated herein by reference. (1) The following pages and section in Registrant's Annual Report to Shareholders for 1998 are incorporated by reference into Part I, Item 1 and Part II of this Form 10-K: pages 22 through 55, with the exception of the section entitled "Management's Responsibility for Financial Reporting" on page 37; and the section entitled "Range of Market Prices" on page 59. (2) The following pages and section in Registrant's definitive Proxy Statement relating to Registrant's Annual Meeting of Shareholders on May 6, 1999 are incorporated by reference into Part III of this Form 10-K: Page 4 (beginning with the eighth full paragraph thereon) through page 7, the section entitled "Director Remuneration" on page 9, pages 10 and 11, and pages 15 through 17. Page 1 PART I Item 1. Business The "Description of the Business" is set forth on page 23 of the Annual Report to Shareholders for 1998, 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 regulated 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 regulated subsidiaries have valid franchises, free from unduly burdensome restrictions, sufficient to enable them to carry on their business as presently conducted. They derive such franchise rights from statutes under which they were incorporated, municipal consents and ordinances, or certificates or permits received from state or local regulatory agencies. In most instances, such franchise rights are non- exclusive. In most of the states in which the operations of the regulated 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 regulated 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 subsection entitled "Capital Spending Program" under the section entitled "System Growth and Development," located on pages 24 and 26 of the Annual Report to Shareholders for 1998, 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 4,063 at December 31, 1998. Page 2 Item 1A. Executive Officers of the Registrant The following sets forth the names, ages and business experience during the past five years 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 Business Experience During Past Five Years J. James Barr 57 President and Chief Executive Officer of the Registrant since March, 1998 and Acting President and Chief Executive Officer of the Registrant from November, 1997 to March, 1998. Vice President and Treasurer of the Registrant prior thereto. Gerald C. Smith 64 Vice President of the Registrant. W. Timothy Pohl 44 General Counsel and Secretary of the Registrant. Joseph F. Hartnett, Jr. 47 Treasurer of the Registrant since January, 1998. Vice President and Treasurer of American Water Works Service Company, Inc., service subsidiary of the Registrant, prior thereto. Robert D. Sievers 45 Comptroller of the Registrant. 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. 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 regulated subsidiaries 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 regulated subsidiaries to be in good operating condition. Page 3 A substantial acreage of land is owned by the regulated subsidiaries, the greater part of which is located in watershed areas, with the balance being principally sites of pumping and treatment plants, storage reservoirs, tanks and standpipes. Item 3. Legal Proceedings There are no pending material legal proceedings, other than ordinary, routine litigation incidental to the business, to which the Registrant or any of its subsidiaries is a party or of which any of their property is the subject. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The information required under this item is contained in the section entitled "Range of Market Prices," located on page 59 of the Annual Report to Shareholders for 1998, filed as Exhibit 13 to this Report on Form 10-K; such information is hereby specifically incorporated herein by reference thereto. Item 6. Selected Financial Data The information required under this item is contained in the section entitled "Consolidated Summary of Selected Financial Data," located on page 22 of the Annual Report to Shareholders for 1998, 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 36 of the Annual Report to Shareholders for 1998, filed as Exhibit 13 to this Report on Form 10-K; such information is hereby specifically incorporated herein by reference thereto. Item 7A. Quantitative and Qualitative Disclosures About Market Risk The information required by this item with respect to market risk is contained on page 32, within the section entitled "Management's Discussion and Analysis," located on pages 23 through 36 of the Annual Report to Shareholders for 1998, filed as Exhibit 13 to this report on Form 10-K; such information is hereby specifically incorporated herein by reference thereto. Page 4 Item 8. Financial Statements and Supplementary Data The financial statements, together with the report thereon of PricewaterhouseCoopers LLP dated February 2, 1999, except as to Note 16 which is as of February 4, 1999, appearing on pages 37 through 55 of the 1998 Annual Report to Shareholders, 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 eighth full paragraph on page 4 through page 7 and in the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" on page 11 of the definitive Proxy Statement relating to the Registrant's Annual Meeting of Shareholders on May 6, 1999, 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 section entitled "Director Remuneration" which is located on page 9, and in the sections entitled "Report of the Compensation and Management Development Committee of the Board of Directors on Executive Compensation," "Performance Graph," "Management Remuneration," and "Pension Plan" which are located on pages 12 through 17 of the definitive Proxy Statement relating to the Registrant's Annual Meeting of Shareholders on May 6, 1999, 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 10 and 11 of the definitive Proxy Statement relating to the Registrant's Annual Meeting of Shareholders on May 6, 1999, 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. Page 5 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 9 and 10 of this Report on Form 10-K. 2. Financial Statement Schedules: the Financial Statement Schedules required to be filed by Item 8 and by paragraph (d) of this Item are listed in the Index to Financial Statements, which appears on Pages 9 and 10 of this Report on Form 10-K. 3. Exhibits: the Exhibits to this Form 10-K are listed in the Index to Exhibits, which appears on Pages 12 to 14 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. Page 6 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN WATER WORKS COMPANY, INC. By: J. James Barr, President and Chief Executive Officer DATE: March 4, 1999 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: J. James Barr President and Chief March 4, 1999 Executive Officer Principal Financial Officer: J. James Barr President and Chief March 4, 1999 Executive Officer Principal Accounting Officer: Robert D. Sievers Comptroller March 4, 1999 Page 7 SIGNATURES (Cont'd.) Directors: Marilyn Ware March 4, 1999 Anthony P. Terracciano March 4, 1999 J. James Barr March 4, 1999 William O. Albertini March 4, 1999 Elizabeth H. Gemmill March 4, 1999 Ray J. Groves March 4, 1999 Henry G. Hager March 4, 1999 Gerald C. Smith March 4, 1999 Paul W. Ware March 4, 1999 Ross A. Webber March 4, 1999 Horace Wilkins, Jr. March 4, 1999 Page 8 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT YEAR ENDED DECEMBER 31, 1998 AMERICAN WATER WORKS COMPANY, INC. FINANCIAL STATEMENTS Page 9 AMERICAN WATER WORKS COMPANY, INC. INDEX TO FINANCIAL STATEMENTS The following documents are filed as part of this report: Page(s) in (1) FINANCIAL STATEMENTS Annual Report* Report of Independent Accountants . . . . . . . . . . . . . . 37 Consolidated Balance Sheet of American Water Works Company, Inc. and Subsidiary Companies at December 31, 1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . .38 and 39 Consolidated Statement of Income and Retained Earnings of American Water Works Company, Inc. and Subsidiary Companies for each of the three years in the period ended December 31, 1998 . . . . . . . . . 40 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, 1998 . . . . . . . . . . . . . . . . . . . . . . 41 Consolidated Statement of Capitalization of American Water Works Company, Inc. and Subsidiary Companies at December 31, 1998 and 1997 . . . . . . . . . . . . . . .42 and 43 Consolidated Statement of Common Stockholders' Equity of American Water Works Company, Inc. and Subsidiary Companies for each of the three years in the period ended December 31, 1998 . . . . . . . . . . . . . . . . . . . 44 Balance Sheet of American Water Works Company, Inc. at December 31, 1998 and 1997 . . . . . . . . . . . . . . . . 45 Statement of Income and Retained Earnings of American Water Works Company, Inc. for each of the three years in the period ended December 31, 1998 . . . . . . 46 Statement of Cash Flows of American Water Works Company, Inc. for each of the three years in the period ended December 31, 1998. . . . . . . . . . . . . . . . 47 Notes to Financial Statements . . . . . . . . . . . . . .48 through 55 *Incorporated by reference from the indicated pages of the 1998 Annual Report to Shareholders, which is Exhibit 13 to this Report on Form 10-K. Page 10 AMERICAN WATER WORKS COMPANY, INC. INDEX TO FINANCIAL STATEMENTS (Continued) (2) FINANCIAL STATEMENT SCHEDULES 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 11 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-59059) and in the Registration Statements on Form S-8 (No. 333-52309, No. 33-52923, and No. 333-14451) of American Water Works Company, Inc. of our report dated February 2, 1999, except as to Note 16 which is as of February 4, 1999, appearing on page 37 of the Annual Report to Shareholders which is incorporated in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania 19103 March 25, 1999 Page 12 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 1996. (b) Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant, effective May 9, 1989, is incorporated herein by reference to Exhibit 3(b) to Form 10-K report of the Registrant for 1996. (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(c) to Form 10-K report of the Registrant for 1996. (d) Certificate of Designations of the Registrant, effective February 6, 1991, 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 1996. (e) Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant, effective May 2, 1996, is incorporated herein by reference to Exhibit 3(e) to Form 10-K report of the Registrant for 1996. (f) By-laws of the Registrant, as amended to February 4, 1999, 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 Union National Bank), Trustee, is incorporated herein by reference to Exhibit E to Form 10-K report of the Registrant for 1977. (b) First Supplemental Indenture dated as of December 1, 1989 between the Registrant and Fidelity Bank, National Association (name later changed to First Union National Bank), as Trustee, is incorporated herein by reference to Exhibit 4(i) to Form 10-K report of the Registrant for 1989. Page 13 AMERICAN WATER WORKS COMPANY, INC. INDEX TO EXHIBITS Exhibit Number Description 4 (cont'd.) (c) Second Supplemental Indenture dated as of February 1, 1993 between the Registrant and Fidelity Bank, National Association (name later changed to First Union National Bank), as Trustee, is incorporated herein by reference to Exhibit 4(c) to Form 10-K report of the Registrant for 1992. (d) Third Supplemental Indenture dated as of July 2, 1998 between the Registrant and First Union National Bank, as Trustee, is filed herewith. (e) Rights Agreement dated as of February 18, 1999 between the Registrant and BankBoston N.A., as Rights Agent, is incorporated herein by reference to Exhibit 4 to Form 8-A Registration Statement of the Registrant, No. 1-3437-2. 10 Material Contracts (a) Employees' Stock Ownership Plan of the Registrant and Its Designated Subsidiaries, as Amended and Restated Effective January 1, 1989, is incorporated herein by reference to Exhibit 10(a) to Form 10-K report of the Registrant for 1994. (b) Amendment No. 1 to Employees' Stock Ownership Plan of the Registrant is incorporated herein by reference to Exhibit 10(b) to Form 10-K report of the Registrant for 1995. (c) Amendment No. 2 to Employees' Stock Ownership Plan of the Registrant is incorporated herein by reference to Exhibit 10(c) to Form 10-K report of the Registrant for 1996. (d) Supplemental Executive Retirement Plan of the Registrant, as amended and restated July 1, 1997, is incorporated herein by reference to Exhibit 10(d) to Form 10-K report of the Registrant for 1997. (e) Supplemental Retirement Plan of the Registrant, as amended and restated effective July 1, 1997, is incorporated herein by reference to Exhibit 10(e) to Form 10-K report of the Registrant for 1997. Page 14 AMERICAN WATER WORKS COMPANY, INC. INDEX TO EXHIBITS Exhibit Number Description 10 (cont'd.) (f) Long-Term Performance-Based Incentive Plan of the Registrant, effective as of January 1, 1993, is incorporated herein by reference to Exhibit 10(f) to Form 10-K report of the Registrant for 1994. (g) Annual Incentive Plan of the Registrant, effective as of January 1, 1996, is incorporated herein by reference to Exhibit 10(j) to Form 10-K report of the Registrant for 1995. (h) Amendment No. 1 to the Annual Incentive Plan of the Registrant is incorporated herein by reference to Exhibit 10(h) to Form 10-K report of the Registrant for 1997. (i) Deferred Compensation Plan of the Registrant, as amended and restated effective October 1, 1998, is filed herewith. (j) Agreement between the Registrant and George W. Johnstone dated December 17, 1997, is incorporated herein by reference to Exhibit 10(j) to Form 10-K report of the Registrant for 1997. (k) Stay Incentive Award for J. James Barr dated November 6, 1997, is incorporated herein by reference to Exhibit 10(k) to Form 10-K report of the Registrant for 1997. 13 Annual Report to Security Holders The Registrant's Annual Report to Shareholders for 1998 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, 1998. 23 Consents of Experts and Counsel See "Consent of Independent Accountants" on page 11 of this Form 10-K report. 27 Financial Data Schedule Financial Data Schedule for the fiscal year ended December 31, 1998. EX-3 2 EXHIBIT 3(f) AMERICAN WATER WORKS COMPANY, INC. BY-LAWS ADOPTED APRIL 16, 1970 AS AMENDED TO FEBRUARY 4, 1999 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 and further amended February 4, 1999] Special meetings of the stockholders may be held only upon call of the Board of Directors or the Executive Committee or the Chairman of the Board or the President, 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. 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. 2 ARTICLE II BOARD OF DIRECTORS Section 1. (a) [As amended January 16, 1975 and further amended May 4, 1989, March 5, 1992 (effective May 7, 1992), September 4, 1997, March 5, 1998 (effective May 7, 1998) and October 1, 1998] The Board of Directors shall consist of thirteen 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 or 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, 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. 3 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. [As amended June 4, 1998] 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 (i) fill vacancies in the Board, (ii) to change the membership of or to fill vacancies in this or any Committee of the Board, (iii) approve or adopt, or recommend to the stockholders, any action or matter expressly required by the laws of Delaware to be submitted to stockholders for approval and (iv) adopt, amend or repeal any by-law 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 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 4 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 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. 5 (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. 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, 6 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. Section 2. [As amended January 8, 1998] The certificates of stock shall be signed by the Chairman of the Board, 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 7 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. 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. 8 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. 9 EX-4 3 EXHIBIT 4(d) ____________________________________________________________________________ AMERICAN WATER WORKS COMPANY, INC. TO FIRST UNION NATIONAL BANK As Trustee ________ THIRD SUPPLEMENTAL INDENTURE Dated as of July 2, 1998 ________ Providing for the Issuance of Series D Debentures, Due 2001-2004 and Supplementing the Indenture Dated as of November 1, 1977 _____________________________________________________________________________ THIS THIRD SUPPLEMENTAL INDENTURE, dated as of the second day of July, 1998, made by and between AMERICAN WATER WORKS COMPANY, INC., a corporation duly organized and existing under the laws of the State of Delaware (hereinafter called the "Company"), and FIRST UNION NATIONAL BANK, a corporation duly organized and existing under the laws of the United States of America (hereinafter called the "Trustee"), as Trustee under the Indenture hereinafter mentioned. The background of this Third Supplemental Indenture is: A. The Company has heretofore duly executed, acknowledged and delivered to The Fidelity Bank (name later changed to First Union National Bank), as Trustee, a certain Indenture dated as of November 1, 1977 (hereinafter called the "Original Indenture") to provide for the issuance of its Debentures (the "Debentures"), issuable in series and without limit as to aggregate principal amount (except as provided under Article IV of the Original Indenture), and pursuant to which the Company provided for the creation of an initial series of Debentures designated as "8-3/4% Series A Debentures, due November 1, 1997" (herein and in the Original Indenture sometimes called the "Series A Debentures"). B. The Original Indenture provides that the Debentures may be issued thereunder from time to time and in one or more series, upon conditions fully provided therein, the Debentures in each series to be substantially in the forms therein recited for the Series A Debentures but with such omissions, variations and insertions as are authorized or permitted by the Original Indenture and determined and specified by the Board of Directors of the Company. C. Pursuant to the Original Indenture and the first and second supplements thereto, there has been executed, authenticated and issued Debentures in an aggregate principal amount of $171,000,000, $116,000,000 of which are outstanding as of the date of execution hereof by the Company. D. The Company, by appropriate resolutions adopted by its Board of Directors, pursuant to the terms of the Original Indenture, has duly determined to create a new series of Debentures to be issued under the Original Indenture, as previously supplemented and as to be supplemented by this Third Supplemental Indenture dated as of July 2, 1998 (hereinafter called the "Third Supplement"), to be designated as "Series D Debentures, due 2001-2004" (hereinafter sometimes called the "Series D Debentures") to be limited to $120,000,000 in aggregate principal amount at any one time outstanding and to be payable as hereinafter provided. The Board of Directors of the Company also has duly determined that the form of the Series D Debentures and the Trustee's Certificate of Authentication and the terms and conditions upon which said Series D Debentures are to be executed, authenticated, issued and delivered are to be as hereinafter set forth. 2 E. All acts and things necessary to make the Series D Debentures, when executed by the Company and authenticated and delivered by the Trustee as provided in the Original Indenture, as previously supplemented, and in this Third Supplement, the valid, binding and legal obligations of the Company according to their terms, and to constitute these presents a valid indenture and agreement according to its terms, have been done and performed, and the execution of this Third Supplement and the issue hereunder of the Series D Debentures have in all respects been duly authorized; and the Company, in the exercise of the legal right and power vested in it, executes this Third Supplement and proposes to execute, deliver and issue the Series D Debentures. NOW, THEREFORE, THIS THIRD SUPPLEMENT WITNESSETH: That in order to declare the terms and conditions upon which the Series D Debentures are to be authenticated, issued and delivered, and in consideration of the premises, of the purchase and acceptance of the Series D Debentures by the owners thereof and of the sum of one dollar to it duly paid by the Trustee at the execution of these presents, the receipt whereof is hereby acknowledged, the Company covenants and agrees with the Trustee as follows: ARTICLE I DESCRIPTION OF THE SERIES D DEBENTURES Section 1.01. There shall be a series of Debentures designated as "Series D Debentures, due 2001-2004." The aggregate principal amount of Series D Debentures shall be limited to One Hundred Twenty Million Dollars ($120,000,000); and, except as provided in connection with transfers and exchanges and in Section 2.11 of the Original Indenture, the Company shall not execute and the Trustee shall not authenticate or deliver Series D Debentures in excess of said aggregate principal amount. The Series D Debentures shall be issued in four separate tranches which shall be due on the respective dates and shall bear interest at the respective rates as hereinafter set forth: Series D Debentures in the aggregate principal amount of $50,000,000 shall be designated as "Tranche A", shall be due July 2, 2001, and shall bear interest at the rate of six and twenty-one hundredths percent (6.21%) per annum, payable semiannually on January 2 and July 2 in each year until the payment of the principal thereof shall become due, and, so far as may be lawful, at the rate of eight and twenty-one hundredths percent (8.21%) per annum on all overdue principal, premium (if any) and interest. Series D Debentures in the aggregate principal amount of $10,000,000 shall be designated as "Tranche B", shall be due July 2, 2002, and shall bear interest at the rate of six and twenty-eight hundredths percent (6.28%) per annum, payable semiannually on January 2 and July 2 in each year until the payment of the principal thereof shall become due, and, so far as may be lawful, at the rate of eight and twenty- 3 eight hundredths percent (8.28%) per annum on all overdue principal, premium (if any) and interest. Series D Debentures in the aggregate principal amount of $45,000,000 shall be designated as "Tranche C", shall be due July 2, 2003, and shall bear interest at the rate of six and twenty-eight hundredths percent (6.28%) per annum, payable semiannually on January 2 and July 2 in each year until the payment of the principal thereof shall become due, and, so far as may be lawful, at the rate of eight and twenty-eight hundredths percent (8.28%) per annum on all overdue principal, premium (if any) and interest. Series D Debentures in the aggregate principal amount of $15,000,000 shall be designated as "Tranche D", shall be due July 2, 2004, and shall bear interest at the rate of six and thirty-two hundredths percent (6.32%) per annum, payable semiannually on January 2 and July 2 in each year until the payment of the principal thereof shall become due, and, so far as may be lawful, at the rate of eight and thirty-two hundredths percent (8.32%) per annum on all overdue principal, premium (if any) and interest. Interest on the Series D Debentures shall be computed on the basis of a 360-day year composed of twelve 30-day months. Section 1.02. The definitive Series D Debentures shall be issuable only as fully registered debentures without coupons, in the denomination of $1,000 or any multiple thereof. The Series D Debentures and the Trustee's certificate of authentication to be borne by all Series D Debentures are to be substantially in the form set forth in Exhibit A (which is attached hereto and made a part hereof). Section 1.03. The Series D Debentures shall be dated as of such date and shall bear interest from such date as is determined in accordance with Section 2.05 of the Original Indenture; except that (i) in connection with any original issue of a Series D Debenture, each such Series D Debenture shall be dated as of, and bear interest from, the date of its authentication; (ii) in connection with the exchange, substitution or transfer of any Series D Debenture between the date when the Series D Debenture is first issued hereunder and the first interest payment date for that Series D Debenture, such Series D Debenture shall be dated as of, and shall bear interest from, the date of such first issue; and (iii) so long as there is no existing default in the payment of interest on the outstanding Series D Debentures, any Series D Debenture authenticated between a record date for interest on Series D Debentures and an interest payment date for such series shall be dated as of, and bear interest from, such interest payment date. The owner of each Series D Debenture as the same shall appear on the Debenture Register at the close of business on any record date for interest on Series D Debentures shall be entitled to receive interest payable on such Debenture on the next following January 2 or July 2, notwithstanding any cancellation of such Series D Debenture upon any transfer, substitution or exchange thereof (including an exchange effected as an incident to a partial 4 redemption thereof) subsequent to such record date and prior to such next following January 2 or July 2, except that, if and to the extent that the Company shall be in default in the payment of interest due on such January 2 or July 2, then the owner of each Series D Debenture on such record date shall have no further right or claim in respect of such defaulted interest solely by reason of ownership of such Series D Debenture on such record date, and payment of any defaulted interest thereafter payable or paid on any Series D Debenture shall be made to the owner of such Series D Debenture on the date established as the record date for payment of such defaulted interest. As used in this Section 1.03, the term record date for interest on Series D Debentures means the December 12 next preceding a January 2 interest payment date or the June 12 next preceding a July 2 interest payment date, as the case may be, or, if such June 12 or December 12 shall be a legal holiday or a day on which banking institutions in the City of Philadelphia, Pennsylvania, are authorized by law to close, the next preceding day which shall not be a legal holiday or a day on which such institutions are so authorized to close; provided that the Company may fix another record date for the payment of interest on the Series D Debentures in accordance with Section 2.13 of the Original Indenture. The principal of and premium and interest on the Series D Debentures shall be payable at the principal corporate trust office of the Trustee in the City of Philadelphia, Pennsylvania, in coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts. Checks in payment of each installment of interest on the Series D Debentures will be mailed by the Trustee to each owner of a Series D Debenture at his Registered Address, unless prior to the date when any installment of interest is due such owner shall have given the Trustee written notice for mailing to another address or that he wishes to accept payment at said principal corporate trust office of the Trustee; provided that any other method of transmitting such payment which the Trustee deems appropriate or which has been approved by the Trustee in accordance with Section 2.16 of the Original Indenture may be used. Said principal corporate trust office of the Trustee shall be the office or agency of the Company for the purpose of making transfers and exchanges of the Series D Debentures pursuant to Sections 2.09 and 2.10 of the Original Indenture and where notices, presentations or demands in respect of the Series D Debentures or this Third Supplement may be given or made as provided in Section 6.06 of the Original Indenture. ARTICLE II REDEMPTION OF SERIES D DEBENTURES Section 2.01. The Series D Debentures shall be subject to redemption as set forth in the next following sentence upon compliance with the applicable provisions of Section 5.02 of the Original Indenture (except that: (a) notice of such redemption pursuant to Section 5.02.01 of the Original Indenture shall be given at least 30 days but not more than 60 days before the date fixed for redemption; (b) such notice shall be accompanied by an estimate of the Yield Maintenance Premium to be paid upon redemption of the Series D Debentures; (c) an actual calculation of the Yield Maintenance Premium will be sent by overnight courier or 5 facsimile to each owner of the Series D Debentures four days prior to the redemption date along with reasonable detail on the calculation; and (d) the scheduled redemption date for the Series D Debentures shall be a day other than a legal holiday or a day on which banking institutions in the City of Philadelphia, Pennsylvania, are authorized by law to close). The Series D Debentures shall be subject to redemption in whole at any time, or in part in minimum increments of $100,000 from time to time, at the option of the Company upon payment of the principal amount to be redeemed together with accrued interest to the date fixed for redemption, plus the Yield Maintenance Premium determined five business days prior to the date of such redemption; provided that the minimum aggregate amount that may be applied to the redemption of Series D Debentures shall be $100,000. "Yield Maintenance Premium" means as to each Series D Debenture (or portion thereof) to be redeemed, the excess, if any, of (i) the aggregate present value as of the date of such redemption of each dollar of principal of the applicable tranche being redeemed and the amount of interest (exclusive of accrued interest to the date of redemption) that would have been payable in respect of such dollar if such redemption had not been made, determined by discounting semi-annually such amounts at the Reinvestment Rate from the respective dates on which they would have been payable, over (ii) 100% of the principal amount of the outstanding Series D Debenture (or portion thereof) of the applicable tranche being redeemed, provided that in no event shall the Yield Maintenance Premium be less than zero. "Reinvestment Rate" means the Treasury Rate, plus 40 basis points. The "Treasury Rate" means the yield to maturity implied by (i) the yields reported, as of 10:00 A.M. (New York City time) on the fifth business day preceding the date fixed for the redemption of the principal being redeemed, on the display designated as "Page PX1" on the Bloomberg Financial Markets Services Screen (or such other display as may replace Page PX1 on the Bloomberg Financial Markets Services Screen) for actively traded U.S. Treasury securities having a maturity equal to the Remaining Term to Maturity of the principal of the tranche being redeemed as of the redemption date, or (ii) if such yields are not reported as of such time or the yields reported as of such time are not ascertainable, the arithmetic mean of the yields for the two columns under the heading "Week Ending" published in the Statistical Release under the caption "Treasury Constant Maturities" for the maturity (rounded to the nearest month) corresponding to the Remaining Term to Maturity of the principal being redeemed. If no maturity exactly corresponds to such Remaining Term to Maturity of the Series D Debenture of the applicable tranche to be redeemed, yields for the two published maturities most closely corresponding to such Remaining Term to Maturity shall be determined pursuant to the immediately preceding sentence of this paragraph and the Treasury Rate shall be interpolated or extrapolated from such yields on a straight-line basis, rounding to the nearest month. For purposes of determining the Treasury Rate, the most recent Statistical Release published prior to the date of determination of the premium hereunder shall be used. "Statistical Release" means the statistical release designated "H.15(519)" or any successor publication which is published weekly by the Federal Reserve System and which establishes yields on actively traded U.S. Treasury Notes adjusted to constant maturities or, 6 if such statistical release is not published at the time of any determination hereunder, then the Treasury Rate shall be the average of yield quotations for U.S. Government securities of a maturity (rounded to the nearest month) most closely corresponding to the Remaining Term to Maturity of the principal being redeemed received by the Trustee from three New York dealers of recognized standing in such securities. "Remaining Term to Maturity" for each tranche of Series D Debenture means the number of years (to the nearest 1/12) from the date of determination to the original maturity date for such tranche of Series D Debentures to be redeemed. Section 2.02. Notwithstanding any contrary provision of this Third Supplement, the Company will not purchase any of the Series D Debentures unless it shall have mailed to the owners of all such Series D Debentures, at least 15 days before any such purchase, offers to purchase their Series D Debentures pro rata upon the same terms and conditions as the proposed purchase. Such offer shall state the principal amount of such Series D Debentures which the Company will purchase. If a greater principal amount of such Series D Debentures is made available for purchase than the amount stated in the Company's offer, the Company may, at its option, purchase all such Series D Debentures made available for purchase or purchase from each owner who shall have accepted the Company's offer the same proportion of Series D Debentures made available for purchase by such owner as the aggregate principal amount of such Series D Debentures made available for purchase by such owner bears to the aggregate principal amount of all Series D Debentures made available for purchase by all owners. Any purchase of Series D Debentures pursuant to this Section 2.02 shall not be subject to the price limitations contained in Section 5.03 of the Original Indenture. ARTICLE III ADDITIONAL COVENANTS OF THE COMPANY Section 3.01. For purposes of Section 6.08.02 of the Original Indenture, the percentage of Series D Debentures entitled to exercise the rights set forth in such Section shall be 10%. Section 3.02. Simultaneously with the giving of notice pursuant to Section 6.14.01 and 6.14.02 of the Original Indenture, the Company will mail to each owner of the Series D Debentures at such owner's Registered Address a copy thereof; provided that the provisions of this Section 3.02 shall be for the exclusive benefit of the owners of the Series D Debentures. Section 3.03. Notwithstanding any contrary provision in Section 7.03 of the Original Indenture, in no event shall the Trustee withhold the notice referred to in such Section from the owners of the Series D Debentures. 7 ARTICLE IV ISSUE AND AUTHENTICATION OF SERIES D DEBENTURES Upon compliance by the Company with the requirements of the Indenture and this Third Supplement for the issuance of additional Debentures, Series D Debentures up to an aggregate principal amount of One Hundred Twenty Million Dollars ($120,000,000) shall forthwith be executed by the Company and delivered to the Trustee from time to time as determined by the Company, and shall be authenticated by the Trustee and delivered in accordance with the Written Order of the Company, and issued hereunder, upon delivery to the Trustee of the Basic Authentication Support Documents. ARTICLE V MISCELLANEOUS PROVISIONS Section 5.01. As supplemented by this Third Supplement, the Original Indenture, as previously supplemented, is in all respects ratified and confirmed, and the Original Indenture, as previously supplemented, and this Third Supplement shall be read as one instrument. All terms used in this Third Supplement shall have the same meaning as in the Original Indenture except where the context clearly indicates otherwise. Section 5.02. This Third Supplement may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. FIRST UNION NATIONAL BANK hereby accepts the trusts in this Third Supplement declared and provided, upon the terms and conditions in the Original Indenture, as previously supplemented, and this Third Supplement contained. 8 IN WITNESS WHEREOF, AMERICAN WATER ORKS COMPANY, INC. has caused this Third Supplement to be signed by its President or one of its Vice Presidents, and its corporate seal to be affixed hereunto and the same to be attested by its Secretary or one of its Assistant Secretaries; and FIRST UNION NATIONAL BANK has caused this Third Supplement to be signed and acknowledged by one of its Vice Presidents, and its corporate seal to be affixed hereunto and the same to be attested by its Secretary or one of its Assistant Secretaries, all as of the day and year first written above. AMERICAN WATER WORKS COMPANY, INC. By: J. James Barr President and Chief Executive Officer Attest: W. Timothy Pohl Secretary FIRST UNION NATIONAL BANK By: John H. Clapham Vice President Attest: Ralph E. Jones Authorized Officer 9 EXHIBIT A [FORM OF SERIES D DEBENTURE] AMERICAN WATER WORKS COMPANY, INC. [*] No. RD-___ $_______________ AMERICAN WATER WORKS COMPANY, INC., a corporation of the State of Delaware (hereinafter called the "Company"), for value received, hereby promises to pay to ______________________________ or registered assigns, on the second day of July, [**] ,at the principal corporate trust office of First Union National Bank, in Philadelphia, Pennsylvania, Trustee under the Indenture hereinafter mentioned, the principal sum of _____________________ ($__________) in coin or currency of the United States of America which at the time of payment is legal tender for the payment of public and private debts, and to pay in like coin or currency interest thereon from the date hereinafter indicated at the rate of [***] per annum, payable semi- annually, on January 2 and July 2 in each year until the payment of such principal shall become due, and, so far as may be lawful, at the rate of [****] per annum on all overdue principal, premium (if any) and interest. The interest on this Debenture shall be computed on the basis of a 360-day year composed of twelve 30-day months. _____________________________________ * $50,000,000 6.21% Series D Debentures, Tranche A, Due July 2, 2001 $10,000,000 6.28% Series D Debentures, Tranche B, Due July 2, 2002 $45,000,000 6.28% Series D Debentures, Tranche C, Due July 2, 2003 and $15,000,000 6.32% Series D Debentures, Tranche D, Due July 2, 2004 ** 2001, 2002, 2003, 2004 [as applicable] *** six and twenty-one hundredths percent (6.21%) - Tranche A six and twenty-eight hundredths percent (6.28%) - Tranche B six and twenty-eight hundredths percent (6.28%) - Tranche C six and thirty-two hundredths percent (6.32%) - Tranche D **** eight and twenty-one hundredths percent (8.21%) - Tranche A eight and twenty-eight hundredths percent (8.28%) - Tranche B eight and twenty-eight hundredths percent (8.28%) - Tranche C eight and thirty-two hundredths percent (8.32%) - Tranche D This Debenture shall bear interest from its date. Except as set forth below, this Debenture shall be dated as of the January 2 or July 2 next preceding the date on which this Debenture shall have been authenticated; but, if such date of authentication is a date prior to January 2, 1999 this Debenture shall be dated as of the date of its authentication; or if such authentication date is a January 2 or July 2 to which interest has been paid, this Debenture shall be dated as of such January 2 or July 2; or, if at the time of the authentication of this Debenture interest is in default on outstanding Debentures, this Debenture shall be dated as of the January 2 or July 2 to which interest has previously been paid in full or made available for payment in full on outstanding Debentures or, if no interest has been paid, from the date from which interest first accrued; provided that (i) if this Debenture is authenticated in connection with an exchange, substitution or transfer of a Debenture on a date prior to January 2, 1999, this Debenture shall be dated as of the date on which the Debenture which is tendered on account of such exchange, substitution or cancellation was first issued under the Indenture; and (ii) if the Company shall establish a record date for interest as hereinbelow provided and so long as there is no existing default in the payment of interest on outstanding Debentures, if this Debenture is authenticated on a date between such record date for interest and the next following January 2 or July 2, this Debenture shall be dated such January 2 or July 2; all as more fully provided in the Indenture. The Company may establish a record date for certain purposes and subject to certain conditions as provided in the Indenture, including a record date for the payment of the interest payable on this Debenture on any January 2 or July 2. If a record date has been so established for the payment of such interest, the owner of this Debenture on such record date shall be entitled to receive the interest so payable on this Debenture, unless the Company shall default in the payment of interest due on such date in which case payment shall be made as provided in the Indenture. Subject to its right to fix another record date in accordance with the applicable provisions of the Indenture and unless and until another record date is so fixed, the record date for interest payable on this Debenture on any January 2 or July 2, commencing with the January 2 next following the original issue of the Debentures, shall be on the close of business on the December 12 next preceding such January 2 or the June 12 next preceding such July 2, as the case may be, or, if such June 12 or December 12 shall be a legal holiday or a day on which banking institutions in the City of Philadelphia, Pennsylvania are authorized to close, the next preceding day which shall not be a legal holiday or a day on which such institutions are so authorized to close. This Debenture is one of a duly authorized issue of Debentures of the Company designated as its Series D Debentures, due 2001-2004 (herein referred to as the "Debentures"), limited to the aggregate principal amount of One Hundred Twenty Million Dollars ($120,000,000), excluding Debentures issued upon exchanges or transfers or in substitution for lost, stolen, destroyed or mutilated Debentures, all issued and to be issued under an Indenture dated as of November 1, 1977, between the Company and The Fidelity Bank (name later changed to First Union National Bank), as trustee (herein called the "Trustee"), as previously supplemented by a First Supplemental Indenture dated as of December 1, 1989, by a Second Supplemental Indenture dated as of February 1, 1993 and as further supplemented by a Third Supplemental Indenture dated as of July 2, 1998, duly executed and delivered by the Company and the Trustee (herein sometimes together called 2 the "Indenture"). The Debentures and other series of debentures that may be issued under the Indenture as provided therein are all equally and ratably entitled to the benefits of the Indenture. Reference is hereby made to the Indenture and all indentures supplemental thereto for a statement of the terms and conditions on which other series of debentures may be issued thereunder, the rights of the registered owners of the Debentures and of such other series of debentures, and of the rights, obligations, duties and immunities thereunder of the Trustee, the Company and the registered owners of the Debentures, and the limitations thereof; but neither the foregoing reference to the Indenture nor any provision of this Debenture or of the Indenture or of any indenture supplemental thereto shall affect or impair the obligation of the Company, which is absolute and unconditional, to pay at the stated or accelerated times herein provided, the principal of and the premium (if any) and the interest on this Debenture as herein provided. The Debentures are subject to redemption, in whole at any time or in part in minimum increments of $100,000 from time to time, at the option of the Company, upon notice mailed to the owners thereof at least 30 days before the redemption date, all on the conditions and in the manner provided in the Indenture, and upon payment of the principal amount to be redeemed together with accrued interest to the date fixed for redemption. The Debentures may be redeemed upon the terms and conditions set forth in Section 2.01 of the Third Supplemental Indenture, including in certain cases the payment of a Yield Maintenance Premium. If this Debenture, or any part hereof, is called for redemption and payment is duly provided for as specified in the Indenture, interest shall cease to accrue hereon, to the extent of principal amount hereof redeemed, from and after the date fixed for redemption. The Company may, at its option, at any time and from time to time (so long as the Company is not in default in the payment of interest on any of the Debentures) purchase Debentures then outstanding in such amounts and at such prices as it shall determine, provided the Company shall have first offered to purchase such amount of Debentures pro rata from all owners of Debentures in the manner and subject to the conditions provided in the Indenture. In case an Event of Default (as that term is defined in the Indenture) shall occur and be continuing, the principal of this Debenture may become or be declared due and payable before the stated maturity hereof in the manner and with the effect provided in the Indenture. The Debentures are issuable only in fully registered form, without coupons, in denominations of $1,000 and any multiple thereof. Upon surrender thereof at the principal corporate trust office of the Trustee in the City of Philadelphia, Pennsylvania, the Debentures may be exchanged for a like aggregate principal amount of Debentures of authorized denominations, upon payment of the charges and subject to the terms and conditions set forth in the Indenture. 3 This Debenture is transferable by the registered owner hereof, in person or by attorney duly authorized in writing, on the books of the Company kept for that purpose at the principal corporate trust office of the Trustee in the City of Philadelphia, Pennsylvania, upon surrender and cancellation of this Debenture accompanied by a duly executed written instrument of transfer, and thereupon a new Debenture or Debentures of the same aggregate principal amount and in authorized denominations will be issued to the transferee or transferees in exchange hereof; all upon payment of the charges and subject to the terms and conditions set forth in the Indenture. The Company and the Trustee may deem and treat the person in whose name this Debenture is registered on the aforesaid books of the Company kept for that purpose as the absolute owner hereof, whether or not this Debenture shall be overdue, for the purpose of receiving payment and for all other purposes, and neither the Company nor the Trustee shall be affected by any notice to the contrary. As provided in the Indenture and subject to certain provisions thereof, with the prior consent of the owners of not less than 66-2/3% in aggregate principal amount of all debentures at the time outstanding, the Company and the Trustee may enter into an indenture or indentures supplemental thereto for the purpose of adding provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any indenture supplemental thereto or of modifying in any manner the rights or obligations of the Company or the Trustee or the rights of the owners of the Debentures; provided that (i) no such supplemental indenture shall (A) extend the fixed maturity of any Debenture, or reduce the principal amount thereof, or reduce the rate or extend the time of payment of interest thereon, or reduce any premium payable upon the redemption thereof, or reduce the amount or extend the time of any payment to any sinking, amortization, purchase or other analogous fund without, in each case, the consent of the owner of each Debenture so affected, or (B) change the percentage of Debentures, the owners of which are required to consent to any such supplemental indenture without the consent of the owners of all Debentures affected by any such change; and (ii) no such action which would amend, eliminate, modify or otherwise affect in any manner any covenant or agreement of the Company or remedy of the Trustee or any Debenture owner contained in the Indenture or in any indenture supplemental thereto which is expressly stated to be exclusively for the protection or benefit of the owners of one or more but less than all series of debentures may be taken except by the consent of the owners of not less than 66-2/3% in aggregate principal amount of all debentures at the time outstanding and entitled to the protection or benefit of such covenant, agreement or remedy unless a different percentage is provided in the Indenture or any indenture supplemental thereto in respect of such covenant, agreement or remedy. No recourse shall be had for any payment of the principal of or the premium (if any) or the interest on this Debenture, or for any claim based hereon or on the Indenture or any indenture supplemental thereto, against any incorporator, stockholder, director or officer, as such, of the Company; all such liability being, by the acceptance hereof and as a condition of and consideration for the issue hereof, released by every owner hereof, as more fully provided in the Indenture. 4 This Debenture shall not be valid and shall not become obligatory for any purpose unless and until the certificate of authentication appearing hereon shall have been executed by the Trustee. 5 IN WITNESS WHEREOF, AMERICAN WATER WORKS COMPANY, INC. has caused its seal to be hereto affixed or hereon imprinted and attested by its Secretary or one of its Assistant Secretaries, and this Debenture to be executed in its name by its President or one of its Vice Presidents, and this Debenture to be dated ___________________, 19__. AMERICAN WATER WORKS COMPANY, INC. [Corporate Seal] By_________________________________ Attest: By____________________________ Secretary 6 [FORM OF TRUSTEE'S CERTIFICATE OF AUTHENTICATION FOR SERIES D DEBENTURES] TRUSTEE'S CERTIFICATE This is one of the Series D Debentures, due 2001-2004, described in the within-mentioned Indenture. FIRST UNION NATIONAL BANK as Trustee By_________________________________ Authorized Officer EX-10 4 EXHIBIT 10(i) AMERICAN WATER WORKS COMPANY, INC. DEFERRED COMPENSATION PLAN (As amended and restated effective October 1, 1998) Table of Contents Page ARTICLE I INTRODUCTION........................................ 1 1.1. Name..................................................... 1 1.2. Effective Date........................................... 1 1.3. Employers................................................ 1 1.4. Purpose.................................................. 1 ARTICLE II DEFINITIONS........................................ 1 2.1. "Administrator".......................................... 1 2.2. "Annual Incentive Plan".................................. 1 2.3. "Beneficiary"............................................ 1 2.4. "Board".................................................. 2 2.5. "Change in Control"...................................... 2 2.6. "Committee".............................................. 2 2.7. "Deferred Compensation Account".......................... 2 2.8. "Deferred Compensation Agreement"........................ 2 2.9. "Disability"............................................. 2 2.10 "Elective Deferred Compensation"......................... 2 2.11. "Eligible Employee"...................................... 3 2.12. "Participant"............................................ 3 2.13. "Plan Year".............................................. 3 2.14. "Retirement"............................................. 3 2.15. "Stock".................................................. 3 ARTICLE III PARTICIPATION BY ELIGIBLE EMPLOYEES............... 3 3.1. Participation............................................ 3 3.2. Continuity of Participation.............................. 3 3.3. Immediate Cash-Out of Ineligible Employee................ 4 ARTICLE IV DEFERRALS AND DEFERRED COMPENSATION ACCOUNTS....... 4 4.1. Compensation Eligible for Deferral....................... 4 4.2. Irrevocability of Deferral Elections..................... 4 4.3. Date of Election......................................... 5 4.4. Establishment of Deferred Compensation Accounts.......... 5 4.5. Hypothetical Investment Vehicles......................... 5 4.6. Allocation and Reallocation of Hypothetical Investments.. 5 4.7. Dividend Equivalents..................................... 6 4.8. Restrictions on Participant Direction.................... 6 Table of Contents Page ARTICLE V DISTRIBUTIONS....................................... 7 5.1. Election of Distribution Date............................ 7 5.2. Distribution of Mandatory Deferrals Not Elected To Be Extended................................................. 7 5.3. Method of Payment........................................ 7 5.4. Special Election for Early Distribution.................. 8 5.5. Distributions on Death................................... 8 5.6. Valuation of Cash Distributions.......................... 8 5.7. Financial Emergency and Other Payments................... 8 ARTICLE VI FUNDING AND PARTICIPANT'S INTEREST................. 9 6.1. Deferred Compensation Plan Unfunded...................... 9 6.2. Participant's Interest in Plan........................... 9 ARTICLE VII ADMINISTRATION AND INTERPRETATION................. 9 7.1. Administration........................................... 9 7.2. Interpretation........................................... 10 7.3. Records and Reports...................................... 10 7.4. Payment of Expenses...................................... 10 7.5. Indemnification for Liability............................ 11 7.6. Claims Procedure......................................... 11 7.7. Review Procedure......................................... 11 ARTICLE VIII AMENDMENT AND TERMINATION........................ 12 8.1. Amendment and Termination................................ 12 ARTICLE IX MISCELLANEOUS PROVISIONS........................... 12 9.1. Right of Employers to Take Employment Actions............ 12 9.2. Alienation or Assignment of Benefits..................... 13 9.3. Right to Withhold........................................ 13 9.4. Construction............................................. 13 9.5. Headings................................................. 13 9.6. Number and Gender........................................ 13 ARTICLE I INTRODUCTION 1.1. Name. The name of this plan is the American Water Works Company, Inc. Deferred Compensation Plan ("Deferred Compensation Plan"). 1.2. Effective Date. The effective date of this Deferred Compensation Plan is January 1, 1996. 1.3. Employers. American Water Works Company, Inc. ("American Water Works"), and each subsidiary or affiliate of American Water Works that employs one or more Eligible Employees who have become Participants in accordance with Article III, shall each be an "Employer" under this Deferred Compensation Plan. 1.4. Purpose. This Deferred Compensation Plan is established effective January 1, 1996 by American Water Works for the purpose of providing deferred compensation benefits for a select group of management or highly compensated employees of the Employers. ARTICLE II DEFINITIONS Whenever the following initially capitalized words and phrases are used in this Deferred Compensation Plan, they shall have the meanings specified below unless the context clearly indicates to the contrary: 2.1. "Administrator" shall mean the Retirement Committee of American Water Works Company, Inc., or its delegate. 2.2. "Annual Incentive Plan" shall mean American Water Works Company, Inc.'s Annual Incentive Plan, effective January 1, 1996. 2.3. "Beneficiary" shall mean such person or legal entity as may be designated by a Participant under Section 5.5 to receive benefits hereunder after such Participant's death. -1- 2.4. "Board" shall mean the Board of Directors of American Water Works Company, Inc. 2.5. "Change in Control" shall mean a change in the control of American Water Works Company, Inc., which shall be deemed to have occurred upon the earliest to occur of the following: (i) the purchase or announcement of an offer to purchase by a person, or group of persons acting in concert, of at least twenty-five percent of the voting securities of American Water Works Company, Inc.; or (ii) during any twenty-four-month period, individuals who at the beginning of such period constituted the Board cease for any reason to constitute a majority thereof. 2.6. "Committee" shall mean the Compensation and Management Development Committee of the Board. 2.7. "Deferred Compensation Account" shall mean the account or subaccount established and maintained by the Administrator for specified deferrals by a Participant, as described in Article IV of this Deferred Compensation Plan. Deferred Compensation Accounts shall be maintained solely as bookkeeping entries to evidence unfunded obligations of American Water Works. 2.8. "Deferred Compensation Agreement" shall mean a document (or documents) as made available from time to time by the Administrator, whereby an Eligible Employee enrolls as a Participant and elects to defer compensation pursuant to Article IV of this Deferred Compensation Plan. 2.9. "Disability" shall mean a physical or mental impairment of sufficient severity such that a Participant is eligible for benefits under the long-term disability provisions of his Employer's benefit plans. 2.10. "Elective Deferred Compensation" shall mean that portion of the Participant's Compensation which the Participant elects to defer pursuant to Article IV of this Deferred Compensation Plan in accordance with the Deferred Compensation Agreement. -2- 2.11. "Eligible Employee" shall mean an individual employed by an Employer who is a member of a select group of management or highly compensated employees participating in the Annual Incentive Plan. 2.12. "Participant" shall mean an Eligible Employee who has amounts standing to his credit under a Deferred Compensation Account. 2.13. "Plan Year" shall mean the calendar year. 2.14. "Retirement" shall mean a Participant's voluntary termination of employment at or after the date on which he is eligible promptly thereafter to commence receipt of retirement benefits under the Pension Plan for Employees of American Water Works Company, Inc. and Its Designated Subsidiaries or any supplemental retirement plan maintained by American Water Works or any successor plan thereto. 2.15. "Stock" shall mean American Water Works Company, Inc. common stock, or any other equity securities of American Water Works designated by the Administrator. ARTICLE III PARTICIPATION BY ELIGIBLE EMPLOYEES 3.1. Participation. Participation in this Deferred Compensation Plan is limited to Eligible Employees. An Eligible Employee shall participate in this Deferred Compensation Plan as determined by the Administrator in its sole discretion; provided, however, that all executive officers of American Water Works shall automatically be considered Eligible Employees. 3.2. Continuity of Participation. A Participant who separates from service with all of the Employers will cease active participation hereunder. However, the separation from service of an Eligible Employee with one Employer will not interrupt the continuity of his active participation if, concurrently with or immediately after such separation, he is employed by one or more of the other Employers. -3- 3.3. Immediate Cash-Out of Ineligible Employee. This Deferred Compensation Plan is intended to be an unfunded "top-hat" plan, maintained primarily for the purposes of providing deferred compensation for a select group of management or highly compensated employees. Accordingly, if the Administrator determines that any Participant does not qualify as a member of the select group, one hundred percent (100%) of such Participant's Deferred Compensation Account shall be paid to the Participant immediately. ARTICLE IV DEFERRALS AND DEFERRED COMPENSATION ACCOUNTS 4.1. Compensation Eligible for Deferral. To the extent authorized by the Committee, a Participant may elect to defer compensation or awards which may be in the form of cash, Stock, Stock-denominated awards or other property to be received from an Employer, including salary, annual bonus awards, long-term awards, shares issuable on stock option exercise and compensation payable under other plans and programs, employment agreements or other arrangements, or otherwise, as may be provided under the terms of such plans, programs and arrangements or as designated by the Administrator. The Committee may impose limitations on the amounts permitted to be deferred and other terms and conditions on deferrals under the Deferred Compensation Plan. Any such limitations, and other terms and conditions of deferral, shall be set forth in the rules relating to the Deferred Compensation Plan or election forms, other forms, or instructions published by or at the direction of the Administrator. The Committee may permit awards and other amounts to be treated as deferrals under the Deferred Compensation Plan, including deferrals that may be mandatory as determined by the Committee in its sole discretion or under the terms of another plan or arrangement of an Employer, for administrative convenience or otherwise to serve the purposes of the Deferred Compensation Plan and such other plan or arrangement. 4.2. Irrevocability of Deferral Elections. Once a Deferred Compensation Agreement, properly completed, is received by the Administrator, the elections of the Participant shall be irrevocable; provided, however, that the Administrator may, in its discretion, permit a Participant to elect a further deferral of amounts credited to a Deferred Compensation Account by filing a later election form; provided, further, that, unless otherwise approved by the Administrator, any election to further defer amounts credited to a Deferred Compensation Account must be made at least one year prior to the date such amounts would otherwise be payable. -4- 4.3. Date of Election. An election to defer compensation or awards hereunder must be received by the Administrator prior to the date specified by the Administrator. Under no circumstances may a Participant defer compensation or awards to which the Participant has attained, at the time of deferral, a legally enforceable right to current receipt of such compensation or awards. 4.4. Establishment of Deferred Compensation Accounts. One or more Deferred Compensation Accounts will be established for each Participant, as determined by the Administrator. The amount of compensation or awards deferred with respect to each Deferred Compensation Account will be credited to such Account as of the date on which such amounts would have been paid to the Participant but for the Participant's election to defer receipt hereunder, unless otherwise determined by the Administrator. With respect to any fractional shares of Stock or Stock-denominated awards, the Administrator, in its sole discretion, shall pay such fractional shares to the Participant in cash, credit the Deferred Compensation Account with cash in lieu of depositing fractional shares into the Deferred Compensation Account, or credit the Deferred Compensation Account with a fraction of a share calculated to at least three decimal places. Unless otherwise determined by the Administrator, amounts credited to a Deferred Compensation Account shall be deemed invested in a hypothetical investment as of the date of deferral. The amounts of hypothetical income and appreciation and depreciation in the value of such Account will be credited and debited to, or otherwise reflected in, such Account from time to time. 4.5. Hypothetical Investment Vehicles. Subject to the provisions of Sections 4.6 and 4.8, amounts credited to a Deferred Compensation Account shall be deemed to be invested, at the Participant's direction, in one or more investment vehicles as may be specified from time to time by the Administrator. The Administrator may change or discontinue any hypothetical investment vehicle available under the Deferred Compensation Plan in its discretion; provided, however, that each affected Participant shall be given the opportunity, without limiting or otherwise impairing any other right of such Participant regarding changes in investment directions, to redirect the allocation of his Deferred Compensation Account deemed invested in the discontinued investment vehicle among the other hypothetical investment vehicles, including any replacement vehicle. 4.6. Allocation and Reallocation of Hypothetical Investments. A Participant may allocate amounts credited to his Deferred Compensation Account to one or more of the hypothetical -5- investment vehicles authorized under the Deferred Compensation Plan. Subject to the rules established by the Administrator, a Participant may reallocate amounts credited to his Deferred Compensation Account to one or more of such hypothetical investment vehicles as of the next day following the filing of the Participant's election to reallocate amounts credited to his Deferred Compensation Account. The Administrator may, in its discretion, restrict allocation into or reallocation by specified Participants into or out of specified investment vehicles or specify minimum or maximum amounts that may be allocated or reallocated by Participants. 4.7. Dividend Equivalents. Dividend equivalents will be credited on stock equivalent units credited to a Participant's Deferred Compensation Account as follows: (a) Cash and Non-Stock Dividends. If American Water Works declares and pays a dividend on Stock in the form of cash or property other than shares of Stock, then a number of additional stock equivalent units shall be credited to a Participant's Deferred Compensation Account as of the payment date for such dividend equal to (i) the number of stock equivalent units credited to the Deferred Compensation Account as of the record date for such dividend, multiplied by (ii) the amount of cash plus the fair market value of any property other than shares actually paid as a dividend on each share at such payment date, divided by (iii) the closing market price of a share of Stock at such payment date as published in The Wall Street Journal report of New York Stock Exchange Composite transactions. (b) Stock Dividends and Splits. If American Water Works declares and pays a dividend on Stock in the form of additional shares of Stock, or there occurs a forward split of Stock, then a number of additional stock equivalent units shall be credited to the Participant's Deferred Compensation Account as of the payment date for such dividend or forward Stock split equal to (i) the number of stock equivalent units credited to the Deferred Compensation Account as of the record date for such dividend or split, multiplied by (ii) the number of additional shares actually paid as a dividend or issued in such split in respect of each share of Stock. 4.8. Restrictions on Participant Direction. The provisions of Sections 4.5 and 4.6 notwithstanding, the Administrator may restrict or prohibit reallocations of amounts deemed invested in specified investment vehicles, and subject such amounts to a risk of forfeiture and other -6- restrictions, in order to conform to restrictions applicable to Stock, a Stock-denominated award, or any other award or amount deferred under the Deferred Compensation Plan and resulting in such deemed investment, to comply with any applicable law or regulation, or for such other purpose as the Administrator may determine is not inconsistent with the Deferred Compensation Plan. Notwithstanding any other provision of the Deferred Compensation Plan to the contrary, deferrals of all Stock-denominated awards under the American Water Works Company, Inc. Long-Term Performance- Based Incentive Plan shall be credited to the Participant's Deferred Compensation Account in the form of stock equivalent units and may not be reallocated or deemed reinvested in any other investment vehicle. ARTICLE V DISTRIBUTIONS 5.1. Election of Distribution Date. At the time a Participant makes an election to defer compensation under Article IV, such Participant shall also specify in writing in the Deferred Compensation Agreement the date or event on which the payment of the Participant's Deferred Compensation Account shall be made. Payments in settlement of a Deferred Compensation Account shall be made as soon as practicable after the date or dates (including upon the occurrence of specified events), and in such number of installments, as may be directed by the Participant in his election relating to such Deferred Compensation Account, provided that, in the event of termination of employment for reasons other than Retirement or Disability, a single lump sum payment in settlement of any Deferred Compensation Account (including an Account with respect to which one or more installment payments have previously been made) shall be made as promptly as practicable thereafter, unless otherwise determined by the Administrator. 5.2. Distribution of Mandatory Deferrals Not Elected To Be Extended. If the Participant has not made an election to extend the deferral period of any mandatory deferral of a portion of his annual incentive award to be earned under the Annual Incentive Plan for any Plan Year, a payment of the cash value of the stock equivalent units credited to his Deferred Compensation Account attributable to such mandatory deferral, including additional units credited as a result of dividends as provided under Section 4.7, shall be made on the date the period of mandatory deferral ends. 5.3. Method of Payment. All distributions under this Deferred Compensation Plan shall be in the form of a cash payment; provided, however, that all deferrals of Stock-denominated -7- awards under the American Water Works Company, Inc. Long-Term Performance- Based Incentive Plan shall be paid by delivery of shares of Stock reserved under such Plan. 5.4. Special Election for Early Distribution. A Participant may apply to the Administrator for early distribution of all or any part of his Deferred Compensation Account excluding any amounts attributable to mandatory deferrals that have not been credited to his Deferred Compensation Account for the minimum period of mandatory deferral. Such early distribution shall be made in a single lump sum, provided that 10% of the amount withdrawn in such early distribution shall be forfeited to the Participant's Employer prior to payment of the remainder to the Participant. In the event a Participant's early distribution election is submitted within one year after a Change in Control, the forfeiture penalty shall be reduced to 5%. 5.5. Distributions on Death. In the event of a Participant's death before his Deferred Compensation Account has been distributed, distribution of his entire account (including mandatory deferrals) shall be made to the Beneficiary selected by the Participant in a single lump sum payment within 30 days after the date of death (or, if later, after the proper Beneficiary has been identified). A Participant may from time to time change his designated Beneficiary without the consent of such Beneficiary by filing a new designation in writing with the Administrator. If no Beneficiary designation is in effect at the time of the Participant's death, or if the designated Beneficiary is missing or has predeceased the Participant, distribution shall be made to the Participant's estate. 5.6. Valuation of Cash Distributions. All cash distributions under this Deferred Compensation Plan shall be based upon the cash value of the investment credited to a Participant's Deferred Compensation Account as of the date immediately preceding the date of the distribution. It is understood that administrative requirements may lead to a delay between such valuation date and the date of distribution, not to exceed 30 days. 5.7. Financial Emergency and Other Payments. Other provisions of this Deferred Compensation Plan notwithstanding, if, upon the written application of a Participant, the Administrator determines that the Participant has a financial emergency of such a substantial nature and beyond the individual's control that payment of amounts previously deferred under this Deferred Compensation Plan is warranted, the Administrator may direct the payment to the Participant of all or a portion of the balance of his Deferred Compensation Account and the time and manner of such payment. -8- ARTICLE VI FUNDING AND PARTICIPANT'S INTEREST 6.1. Deferred Compensation Plan Unfunded. This Deferred Compensation Plan shall be unfunded and no trust shall be created by this Deferred Compensation Plan. The crediting to each Participant's Deferred Compensation Account shall be made through record keeping entries. No actual funds shall be set aside; provided, however, that nothing herein shall prevent the Employers from establishing one or more grantor trusts from which benefits due under this Deferred Compensation Plan may be paid in certain instances. All distributions shall be paid by the Employer from its general assets and a Participant (or his Beneficiary) shall have the rights of a general, unsecured creditor against the Employer for any distributions due hereunder. This Deferred Compensation Plan constitutes a mere promise by the Employers to make benefit payments in the future. 6.2. Participant's Interest in Plan. A Participant has an interest in the cash value of amounts credited to his Deferred Compensation Account. A Participant has no rights or interests in Stock or dividends and has no right to elect delivery of shares of Stock except as provided in Section 5.3. ARTICLE VII ADMINISTRATION AND INTERPRETATION 7.1. Administration. Except where certain duties are delegated to the Administrator, the Committee shall be in charge of the operation and administration of this Deferred Compensation Plan. The Committee has, to the extent appropriate and in addition to the powers described elsewhere in this Deferred Compensation Plan, full discretionary authority to construe and interpret the terms and provisions of this Deferred Compensation Plan; to adopt, alter and repeal administrative rules, guidelines and practices governing this Deferred Compensation Plan; to perform all acts, including the delegation of its administrative responsibilities to advisors or other persons who may or may not be employees of the Employers; and to rely upon the information or opinions of legal counsel or experts selected to render advice with respect to this Deferred Compensation Plan, as it shall deem advisable, with respect to the administration of this Deferred Compensation Plan. -9- 7.2. Interpretation. The Committee may take any action, correct any defect, supply any omission or reconcile any inconsistency in this Deferred Compensation Plan, or in any election hereunder, in the manner and to the extent it shall deem necessary to carry this Deferred Compensation Plan into effect or to carry out the Board's purposes in adopting the Plan. Any decision, interpretation or other action made or taken in good faith by or at the direction of the Employers, the Board, the board of directors of any Employer, the Committee, or the Administrator arising out of or in connection with this Deferred Compensation Plan, shall be within the absolute discretion of all and each of them, as the case may be, and shall be final, binding and conclusive on the Employers and all Participants and Beneficiaries and their respective heirs, executors, administrators, successors and assigns. The Committee's or Administrator's determinations hereunder need not be uniform, and may be made selectively among Eligible Employees, whether or not they are similarly situated. Any actions to be taken by the Committee or Administrator will require majority vote of the Committee or the Administrator. If a member of the Committee or the Administrator is a Participant in this Deferred Compensation Plan, such member may not decide or determine any matter or question concerning his benefits under this Deferred Compensation Plan that such member would not have the right to decide or determine if he were not a member. 7.3. Records and Reports. The Administrator shall keep a record of proceedings and actions and shall maintain or cause to be maintained all such books of account, records, and other data as shall be necessary for the proper administration of this Deferred Compensation Plan. Such records shall contain all relevant data pertaining to Participants and their rights under this Deferred Compensation Plan. The Administrator shall have the duty to carry into effect all rights or benefits provided hereunder to the extent assets of the Employers are properly available. 7.4. Payment of Expenses. The Employers, in such proportions as the Committee determines, shall bear all expenses incurred by them and by the Committee in administering this Deferred Compensation Plan. If a claim or dispute arises concerning the rights of a Participant or Beneficiary to amounts deferred under this Deferred Compensation Plan, regardless of the party by whom such claim or dispute is initiated, the Employers shall (in such proportions as between the Employers as the Committee determines), and upon presentation of appropriate vouchers, pay all legal expenses, including reasonable attorneys' fees, court costs, and ordinary and necessary out-of-pocket costs of attorneys, billed to and payable by the Participant or by anyone claiming under or through the Participant (such person being hereinafter referred to as the "Participant's Claimant"), in connection with the bringing, prosecuting, defending, litigating, negotiating, or settling of such claim or dispute; provided, that: -10- (a) The Participant or the Participant's Claimant shall repay to his Employer any such expenses theretofore paid or advanced by his Employer if and to the extent that the party disputing the Participant's rights obtains a judgment in its favor from a court of competent jurisdiction from which no appeal may be taken, whether because the time to do so has expired or otherwise, and it is determined by the court that such expenses were not incurred by the Participant or the Participant's Claimant while acting in good faith; provided, further, that (b) In the case of any claim or dispute initiated by a Participant or the Participant's Claimant, such claim shall be made, or notice of such dispute given, with specific reference to the provisions of this Deferred Compensation Plan, to the Committee within two years (three years, in the event of a Change in Control) after the occurrence of the event giving rise to such claim or dispute. 7.5. Indemnification for Liability. The Employers shall indemnify the Administrator, the members of the Committee, and the employees of any Employer to whom the Administrator delegates duties under this Deferred Compensation Plan, against any and all claims, losses, damages, expenses and liabilities arising from their responsibilities in connection with this Deferred Compensation Plan, unless the same is determined to be due to gross negligence or willful misconduct. 7.6. Claims Procedure. If a claim for benefits or for participation under this Deferred Compensation Plan is denied in whole or in part, a Participant will receive written notification. The notification will include specific reasons for the denial, specific reference to pertinent provisions of this Deferred Compensation Plan, a description of any additional material or information necessary to process the claim and why such material or information is necessary, and an explanation of the claims review procedure. If the Committee fails to respond within 90 days, the claim is treated as denied. 7.7. Review Procedure. Within 60 days after the claim is denied or, if the claim is deemed denied, within 150 days after the claim is filed, a Participant (or his duly authorized representative) may file a written request with the Committee for a review of his denied claim. The Participant may review pertinent documents that were used in processing his claim, submit pertinent documents, and address issues and comments in writing to the Committee. The Committee will notify the Participant of its final decision in writing. In its response, the Committee will explain the reason for the decision, with specific references to pertinent Deferred Compensation Plan provisions on which -11- the decision was based. If the Committee fails to respond to the request for review within 60 days, the review is treated as denied. ARTICLE VIII AMENDMENT AND TERMINATION 8.1. Amendment and Termination. The Committee shall have the right, at any time, to amend or terminate this Deferred Compensation Plan, in whole or in part, provided that such amendment or termination shall not adversely affect the right of any Participant or Beneficiary to payment of Participant's Deferred Compensation Account. The Administrator, upon review of the effectiveness of this Deferred Compensation Plan, may at any time recommend amendments to, or termination of, this Deferred Compensation Plan to the Committee. American Water Works reserves the right, in its sole discretion, to discontinue deferrals under, or completely terminate, this Deferred Compensation Plan at any time. If this Deferred Compensation Plan is discontinued with respect to future deferrals, Participants' Deferred Compensation Accounts shall be distributed on the distribution dates elected in accordance with Section 5.1, unless the Committee designates that distributions shall be made on an earlier date. If the Committee designates such earlier date, each Participant shall receive distribution of his entire Deferred Compensation Account as specified by the Committee. If this Deferred Compensation Plan is completely terminated, each Participant shall receive distribution of his entire Deferred Compensation Account in one lump sum payment as of the date this Deferred Compensation Plan terminates. ARTICLE IX MISCELLANEOUS PROVISIONS 9.1. Right of Employers to Take Employment Actions. The adoption and maintenance of this Deferred Compensation Plan shall not be deemed to constitute a contract between an Employer and any Eligible Employee, or to be a consideration for, or an inducement or condition of, the employment of any individual. Nothing herein contained, or any action taken hereunder, shall be deemed to give any Eligible Employee the right to be retained in the employ of an Employer or to interfere with the right of an Employer to discharge any Eligible Employees at any time, nor shall it be deemed to give to an Employer the right to require the Eligible Employee to remain in its employ, nor shall it interfere with the Eligible Employee's right to terminate his employment at any time. Nothing in this Deferred Compensation Plan shall prevent an Employer from amending, modifying, or terminating any other benefit plan, including the Annual Incentive Plan. -12- 9.2. Alienation or Assignment of Benefits. A Participant's rights and interest under this Deferred Compensation Plan shall not be assigned or transferred except as otherwise provided herein, and a Participant's rights to benefit payments under this Deferred Compensation Plan shall not be subject to alienation, pledge or garnishment by or on behalf of creditors (including heirs, beneficiaries, or dependents) of the Participant or of a Beneficiary. 9.3. Right to Withhold. To the extent required by law in effect at the time a distribution is made from this Deferred Compensation Plan, the Employer or its agents shall have the right to withhold or deduct from any distributions or payments any taxes required to be withheld by federal, state or local governments. 9.4. Construction. All legal questions pertaining to this Deferred Compensation Plan shall be determined in accordance with the laws of the State of New Jersey, to the extent such laws are not superseded by the Employee Retirement Income Security Act of 1974, as amended, or any other federal law. 9.5. Headings. The headings of the Articles and Sections of this Deferred Compensation Plan are for reference only. In the event of a conflict between a heading and the contents of an Article or Section, the contents of the Article or Section shall control. 9.6. Number and Gender. Whenever any words used herein are in the singular form, they shall be construed as though they were also used in the plural form in all cases where they would so apply, and references to the male gender shall be construed as applicable to the female gender where applicable, and vice versa. AMERICAN WATER WORKS COMPANY, INC. By: J. James Barr President and Chief Executive Officer Attest: W. Timothy Pohl General Counsel and Secretary EX-13 5 EXHIBIT 13 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- CONSOLIDATED SUMMARY OF SELECTED FINANCIAL DATA (Dollars in thousands, except per share amounts)
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994 ===================================================================================================== Revenues Water service Residential $ 575,321 $ 546,972 $ 510,050 $ 451,143 $ 431,225 Commercial 220,357 207,126 197,314 175,792 169,532 Industrial 67,471 63,389 62,153 54,423 53,049 Public and other 122,362 112,766 101,816 92,565 90,436 Other water revenues 11,481 9,037 7,935 5,902 6,502 - ----------------------------------------------------------------------------------------------------- 996,992 939,290 879,268 779,825 750,744 Wastewater service 20,820 14,909 15,378 14,953 13,933 Management fees -- -- -- 8,042 5,564 - ----------------------------------------------------------------------------------------------------- $1,017,812 $ 954,199 $ 894,646 $ 802,820 $ 770,241 ============================================================== Water sales (million gallons) Residential 124,419 124,339 119,900 117,128 113,950 Commercial 65,413 64,726 63,491 61,726 60,901 Industrial 36,639 36,354 36,129 34,171 34,735 Public and other 30,619 30,310 27,764 26,968 26,953 - ----------------------------------------------------------------------------------------------------- 257,090 255,729 247,284 239,993 236,539 ============================================================== Net income $ 131,048 $ 119,128 $ 101,674 $ 92,061 $ 78,652 Basic and diluted earnings per common share on average shares outstanding $1.58 $1.45 $1.31 $1.32 $1.17 Common dividends paid per share $.82 $.76 $.70 $.64 $.54 AT YEAR-END Water customers (thousands) 1,942 1,900 1,884 1,720 1,706 Wastewater customers (thousands) 39 25 24 24 19 Total assets $4,708,307 $4,314,286 $4,032,156 $3,403,141 $3,172,237 Preferred stocks with mandatory redemption requirements American Water Works Company, Inc. $ 40,000 $ 40,000 $ 40,000 $ 40,000 $ 40,000 Subsidiaries 39,161 39,734 41,060 42,326 43,737 Long-term debt American Water Works Company, Inc. $ 201,000 $ 116,000 $ 116,000 $ 116,000 $ 131,000 Subsidiaries 1,905,011 1,754,766 1,600,394 1,268,649 1,177,043 MARKET DATA Market price per share of common stock at year-end $33.75 $27.31 $20.63 $19.44 $13.50 Average shares outstanding (thousands) 80,298 79,144 74,540 66,544 63,836 Average daily trading volume 82,834 81,838 93,169 56,467 54,148 Annual trading volume (thousands) 20,874 20,705 23,673 14,230 13,645 Annual trading volume as a percentage of average outstanding shares 26% 26% 32% 21% 21% P/E ratio* 19.22 15.80 15.14 11.73 11.94 Dividend yield* 2.70% 3.32% 3.53% 4.13% 3.86% *Based on average month-end closing prices of common stock
22 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 service. The water utility industry environment is changing rapidly. Changes in regulation, the need for significant capital replacement, low growth in consumption within existing service territories, and continuing pressures for increased efficiencies and productivity are changing the nature of the industry. THE SERVICE COMPANY The American Water Works Service Company, a subsidiary, provides professional services as required to affiliated companies. These services include accounting, administration, communication, corporate secretarial, engineering, financial, human resources, information systems, operations, rates and revenue, risk management and water quality. This arrangement, which provides these services at cost, affords affiliated companies professional and technical talent otherwise unavailable economically or on a timely basis. THE UTILITY COMPANIES The 23 utility subsidiaries provide water and/or wastewater service to more than 7 million people in 879 communities in 22 states. As public utilities, 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. In addition, with the exception of Michigan-American Water Company, the utility companies function under economic regulations prescribed by state regulatory commissions. THE NON-REGULATED COMPANIES American International Water Services Company (AIWSC) is a subsidiary formed for the specific purpose of responding to the dynamic nature of the water and wastewater industry. The mission of the company is to seek out, evaluate and attain investment opportunities within the governmental and industrial markets. Additionally, AIWSC is a 50 percent owner of American-Anglian Environmental Technologies, L.P. (AAET), a joint venture with a subsidiary of British water and wastewater utility Anglian Water, Plc. AAET provides both technical expertise and financing resources to communities to operate their water and wastewater systems. These services are currently provided to non-affiliated authorities, utilities and businesses in six states. AAET also owns facilities to regenerate carbon used for water filtration and those capabilities are being marketed to water systems. Massachusetts Capital Resources Company is a subsidiary of the Company formed for the specific purpose of financing the construction of a water treatment plant in Hingham, Massachusetts. In 1996, Massachusetts Capital Resources leased this facility to an affiliated utility subsidiary for 40 years. Occoquan Land Corporation owns land, buildings, and equipment, most of which are leased to affiliated companies. Greenwich Water System is a subsidiary that owns the common stock of the utility subsidiaries in Connecticut, Massachusetts, New Hampshire, New York and a portion of the common stock of the utility subsidiary in Pennsylvania. American Commonwealth Company is a subsidiary that owns a portion of the common stock of the utility subsidiary in New Jersey. THE AMERICAN WATER SYSTEM The combination of the Company and its subsidiaries constitutes the American Water System -- a system that has functioned well for over 50 years. Each utility subsidiary functions independently, yet shares in the benefits of size and identity afforded by the American Water System. THE PHILOSOPHY OF AMERICAN WATER WORKS COMPANY American Water Works Company is dedicated to providing the best possible water service at a reasonable cost consistent with adequate compensation for investors and reasonable wages and benefits for its personnel. We believe there is an unalterable link between quality service, responsive regulation, and financial success. Three basic principles are observed under this management philosophy: 1. The preservation and efficient utilization of capital assets are best assured by a management approach that draws upon prudent planning, builds consensus and acts decisively on a timely basis. 2. A utility subsidiary must exhibit the ability to attract the capital it requires as a prerequisite to the initiation of construction of facilities needed to meet water service demands. 3. The ability to attract needed capital is dependent upon consistently achieving adequate earnings. This dictates an aggressive pursuit of regulatory decisions acknowledging this principle. In accordance with this philosophy, the Company seeks to enhance the value of its shareholders' investment through consistent earnings growth. The market value of the Company's common stock is subject to the volatility present in the stock market, as well as to the vagaries of the national economy. The true worth of this stock should be measured by the intrinsic value of the tangible assets of American Water Works and the worth of the organization put in place by the management team. These assets are used to provide a service which is essential for community life. There is no substitute for water. 23 - --------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS THE INVESTMENT STRATEGY OF AMERICAN WATER WORKS COMPANY The business of the Company is the investment in common stock of water utilities. The purpose of this business is to protect and enhance the value of our shareholders' investment through growth in earnings and dividends per share. [ID - PHOTO WITH CAPTION] FROM LEFT ARE W. TIMOTHY POHL, GENERAL COUNSEL AND SECRETARY, AMERICAN WATER WORKS COMPANY AND VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY, AMERICAN WATER WORKS SERVICE COMPANY; AND C. GLENN PIERCE, II, VICE PRESIDENT HUMAN RESOURCES, AMERICAN WATER WORKS SERVICE COMPANY, INC. We seek to accomplish this purpose without diluting existing shareholders' investment. Viewed over the long term, we believe this strategy has and will continue to provide a basis for total return to our shareholders that is attractive in comparison with other utility investment opportunities. The value of the investment in the Company has increased due to earnings growth. Earnings growth has resulted from increased investment by the Company in its subsidiaries funded by the sale of securities and reinvestment of income. This reinvestment defers shareholder payment of income taxes so earnings growth can be compounded on a larger investment base. It also permits consistent and reliable dividend increases. Investors preferring a greater current yield can supplement their cash flow by occasionally selling a portion of their enhanced investment in the Company. The following chart reflects the results of this investment strategy: [ID -- GRAPHIC, SHOWING THE FOLLOWING VALUES] COMPOUND ANNUAL GROWTH RATES 1993-1998 Investment in subsidiaries ....... 13.2% Operating revenue ................ 7.2% Earnings per share ............... 6.6% Dividends per share .............. 10.4% Book value per share ............. 7.9% The Company's investment in its subsidiaries has increased from $810 million at year-end 1993 to $1.5 billion at year-end 1998. The schedule at the top of page 25 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 and the sale of securities and bank loans. Earnings to common shareholders have risen from $71.4 million in 1993 to $127.1 million in 1998. Income to common shareholders of the Company is influenced by three factors: 1. The amount of investment by the Company 2. The rate of return on that investment 3. The costs to operate the Company The schedule at the bottom of page 25 demonstrates that the growth in earnings over this period is the direct result of new investment in subsidiaries. Fluctuations in the rate of return are the result of the influence of weather conditions on sales volume and the response of utility regulation to the economic climate. The cost to operate the Company has increased $8.1 million over this five-year period. SYSTEM GROWTH AND DEVELOPMENT CAPITAL SPENDING PROGRAM The investment in new facilities in 1998 totaled $392 million, which is 11 percent above the 1997 construction expenditures of $352 million. Construction activity planned for 1999 totals $407 million. Expenditures recorded in any given year are influenced by many factors, including the economy, regulation, material delivery and weather conditions. It is anticipated that approximately $2.0 billion will be invested in new facilities between now and the end of the year 2003. These expenditures will support ongoing programs to comply with regulations promulgated to ensure proper water quality and protect the environment, to keep pace with the development of our service territories and to replace facilities as necessary. We expect the full investment in this construction program to be recognized in regulatory decisions. Source of supply improvements in 1998 accounted for approximately 5 percent of the year's construction expenditures. Projects included groundwater development in Hampton, New Hampshire; Warrensburg, Missouri; and southern Indiana to meet growing customer demands. New wells in Clovis, New Mexico; Monterey, California; and Marion, Ohio were constructed to maintain supply capabilities. Structural upgrades to the Swimming River Dam in New Jersey were also completed in 1998. Investment in treatment and pumping facilities comprised approximately 28 percent of the 1998 construction expenditures. A new surface water treatment plant was constructed in Weston, West Virginia to support a regional 24 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- ANALYSIS OF GROWTH IN INVESTMENT IN SUBSIDIARIES
(000) 1998 1997 1996 1995 1994 ========================================================================================================= Investment in subsidiaries at December 31 $1,506,969 $1,366,016 $1,261,532 $1,003,088 $898,219 Investment in subsidiaries at January 1 1,366,016 1,261,532 1,003,088 898,219 810,372 - --------------------------------------------------------------------------------------------------------- Change during the year $ 140,953 $ 104,484 $ 258,444 $ 104,869 $ 87,847 ============================================================ Sources of additional investment Undistributed earnings of subsidiaries $ 38,490 $ 36,335 $ 31,605 $ 26,315 $ 24,532 Investment by the Company in subsidiary securities 102,463 68,149 226,839 78,554 63,315 - --------------------------------------------------------------------------------------------------------- Change during the year $ 140,953 $ 104,484 $ 258,444 $ 104,869 $ 87,847 ============================================================ Net income of subsidiaries $ 148,068 $ 132,762 $ 113,760 $ 103,497 $ 89,449 Return on January 1 investment in subsidiaries 10.8% 10.5% 11.3% 11.5% 11.0% Subsidiaries' common stock dividend payout ratio 74% 73% 72% 75% 73% - --------------------------------------------------------------------------------------------------------- Dividends to the Company from subsidiaries 109,578 96,427 82,155 77,182 64,917 - --------------------------------------------------------------------------------------------------------- Company's use of cash Preferred dividends 3,984 3,984 3,984 3,984 3,984 Other cash requirements 16,374 13,396 12,375 9,765 10,744 - --------------------------------------------------------------------------------------------------------- 20,358 17,380 16,359 13,749 14,728 - --------------------------------------------------------------------------------------------------------- Available for common dividends 89,220 79,047 65,796 63,433 50,189 Common dividends declared 65,781 60,084 51,299 42,500 34,386 Cash payout ratio 74% 76% 78% 67% 69% Available after dividends 23,439 18,963 14,497 20,933 15,803 Cash at January 1 308 43 119 17,647 23,302 - --------------------------------------------------------------------------------------------------------- 23,747 19,006 14,616 38,580 39,105 Investment in securities of subsidiaries (102,463) (68,149) (226,839) (78,554) (63,315) Notes and advances to subsidiaries 10 10 10 10 4,510 - --------------------------------------------------------------------------------------------------------- (78,706) (49,133) (212,213) (39,964) (19,700) - --------------------------------------------------------------------------------------------------------- Net bank borrowings (59,500) 21,400 34,400 3,700 -- Proceeds from long-term debt 120,000 -- -- -- -- Proceeds from common stock 36,227 28,041 192,856 36,383 37,347 Redemption of securities -- -- (15,000) -- -- - --------------------------------------------------------------------------------------------------------- 96,727 49,441 212,256 40,083 37,347 - --------------------------------------------------------------------------------------------------------- Cash at December 31 $ 18,021 $ 308 $ 43 $ 119 $ 17,647 ============================================================
ANALYSIS OF CHANGE IN INCOME (000) 1998 1997 1996 1995 1994 ========================================================================================================== Net income to common stock-current year $127,064 $115,144 $97,690 $88,077 $74,668 Net income to common stock-prior year 115,144 97,690 88,077 74,668 71,391 - ---------------------------------------------------------------------------------------------------------- Change in income 11,920 17,454 9,613 13,409 3,277 Change in Company operating cost 3,386 1,548 650 639 1,924 - ---------------------------------------------------------------------------------------------------------- Change in investment income $ 15,306 $ 19,002 $10,263 $14,048 $ 5,201 =========================================================== Sources of change in investment income Additional investment in subsidiaries $ 11,334 $ 27,198 $11,893 $10,122 $ 6,718 Change in rate of return on investment 3,972 (8,196) (1,630) 3,926 (1,517) - ---------------------------------------------------------------------------------------------------------- Total change in investment income $ 15,306 $ 19,002 $10,263 $14,048 $ 5,201 ===========================================================
25 - --------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS [ID - PHOTO WITH CAPTION] FROM LEFT ARE JOHN S. YOUNG, JR., VICE PRESIDENT ENGINEERING, AMERICAN WATER WORKS SERVICE COMPANY, INC.; GERALD C. SMITH, VICE PRESIDENT, AMERICAN WATER WORKS COMPANY, INC. AND SENIOR VICE PRESIDENT, AMERICAN WATER WORKS SERVICE COMPANY, INC.; AND RICHARD H. MOSER, VICE PRESIDENT WATER QUALITY, AMERICAN WATER WORKS SERVICE COMPANY, INC. water supply project. Significant capacity and/or reliability upgrades were also completed for treatment plants in Huntington, West Virginia; Parkville, Missouri; and Davenport, Iowa. Major plant upgrades continued or commenced in Norristown, Pennsylvania; St. Joseph, Missouri; southern Indiana; Wilkes-Barre/Scranton, Pennsylvania; and Ashtabula, Ohio. Transmission and distribution facilities accounted for approximately 38 percent of the 1998 construction expenditures. The most prominent individual projects included regional projects in Boone County and Fayette County, West Virginia; southern Indiana; Bond/Madison County, Illinois; and Clarion Township, Pennsylvania; the interconnection of several systems in Pennsylvania; and an extension from the regional pipeline in southern New Jersey. Significant pipeline reinforcement projects were completed for the systems in Morris County and Frenchtown, New Jersey; Charleston, West Virginia; and Peoria, Illinois. Also, pumping stations and storage tanks were completed at a number of utility subsidiaries during the year including tanks in Frenchtown and Cape May, New Jersey; Shelbyville and Newburgh, Indiana; Cairo, Illinois; Monterey and the Los Angeles vicinity in California; and several locations in West Virginia. The Company's formal Comprehensive Planning Study (CPS) process involves an exhaustive evaluation at five year intervals by each utility subsidiary of all aspects of public water supply. This includes review of source water supply reliability, adequacy of water treatment facilities and distribution systems, and the potential for consolidation and acquisition. In 1998 CPS reports were completed for the Newburgh, Wabash and Jefferson/New Albany systems in Indiana; the Ashtabula, Lawrence County, Mansfield, Marion and Tiffin systems in Ohio; and the Brownsville, Clarion, Mechanicsburg, Susquehanna County and Warren systems in Pennsylvania. Studies are underway for utility subsidiaries in Arizona, California, Hawaii, Indiana, New Hampshire, New Jersey and Tennessee. These ongoing studies will encompass 34 service areas. In addition to the Company's CPS program, engineering planning focused on technical analysis to support regional water supply projects and acquisitions. ACQUISITIONS OF UTILITY SYSTEMS In addition to the investment of capital in facilities which are essential to high quality reliable water service, the Company and its subsidiaries continue to search for opportunities to acquire water and wastewater systems that represent the prospect for enhanced shareholder value. We began 1998 with 15 acquisitions that were awaiting regulatory approval. During the year, contract negotiations for 30 more acquisitions were completed. Of the total 45 transactions, 22 were finalized during 1998, adding approximately 26,700 new customers to utility subsidiaries in Illinois, Indiana, Kentucky, New Jersey, Pennsylvania and West Virginia, and at the new utility subsidiary, Hawaii-American. Hawaii-American, a suburban Honolulu wastewater utility, was acquired for $17.3 million from a subsidiary of the Kemper Corporation. There are 23 pending acquisitions for which agreements have been signed, including National Enterprises Inc. (NEI), a privately owned holding company with operations primarily in the water utility business. For more information about NEI please refer to Note 3 of Notes to Financial Statements on page 50 of this report. The acquisition of NEI is the largest water utility acquisition in the United States. NEI provides water utility service to more than 500,000 customers in Illinois, Indiana, Missouri and New York. NEI has annual revenues of
CONSTRUCTION EXPENDITURES BY CATEGORY (000) 1998 1997 1996 1995 1994 ========================================================================================= Water plant Sources of supply $ 18,389 $ 16,725 $ 10,798 $ 18,156 $ 11,511 Treatment and pumping 107,986 95,709 77,071 125,350 82,700 Transmission and distribution 150,280 131,835 107,145 110,600 108,929 Services, meters and fire hydrants 63,678 58,349 47,946 45,835 40,506 General structures and equipment 48,589 45,170 29,029 29,602 20,703 Wastewater plant 3,262 4,649 1,805 1,219 1,390 - ----------------------------------------------------------------------------------------- $392,184 $352,437 $273,794 $330,762 $265,739 ====================================================
26 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- [ID - PHOTO] FROM LEFT ARE JOHN S. YOUNG, JR., VICE PRESIDENT ENGINEERING, AMERICAN WATER WORKS SERVICE COMPANY, INC.; GERALD C. SMITH, VICE PRESIDENT, AMERICAN WATER WORKS COMPANY, INC. AND SENIOR VICE PRESIDENT, AMERICAN WATER WORKS SERVICE COMPANY, INC.; AND RICHARD H. MOSER, VICE PRESIDENT WATER QUALITY, AMERICAN WATER WORKS SERVICE COMPANY, INC. approximately $180 million and net income of approximately $19 million. An agreement in principle for American Water Works to acquire NEI was reached on October 13, 1998. A definitive agreement for the acquisition was signed on February 12, 1999. The NEI acquisition, along with the other 22 acquisitions for which signed agreements are in hand, will add over 1.7 million people to the more than 7 million people served by the utility subsidiaries of the Company. CONDEMNATIONS OF UTILITY SYSTEMS The mayor of the city of Chattanooga, Tennessee has publicly expressed an intent to acquire Tennessee-American Water Company, a utility subsidiary providing water utility service in Chattanooga and surrounding areas in both Tennessee and Georgia. In response, Tennessee-American has publicly stated the company is not for sale. The mayor has received authorization from the Chattanooga city council to proceed with the acquisition and the council has appropriated approximately $750,000 to pay for the costs of the condemnation. The mayor has also said he expects 12 to 18 months will be required to complete the condemnation. In Peoria, Illinois, the city has begun a feasibility study of acquiring the Peoria operations of Illinois-American Water Company. The city desires to use a buy-out provision in a franchise agreement dating back to 1889. The management of Illinois-American has made it clear that the water utility operations are not for sale. Also, Illinois-American has asked the St. Clair County Court to declare the buy-out provision invalid. The resolution of this matter is expected to take at least 6 months. Tennessee-American and Illinois-American are both prepared to vigorously oppose these condemnations because they are not in the best long-term interests of the customers. CONTRACT OPERATIONS The mission of AmericanAnglian Environmental Technologies, L.P. (AAET) is to provide wastewater and water utility operational and management services to clients in the United States on an unregulated basis. The joint venture will also invest in wastewater treatment infrastructure and non-regulated water facilities. The current market for contract services to government-owned water and wastewater utility systems is approximately $1 billion in annual revenues. That market is expected to grow at a rate of 15 to 20 percent for the foreseeable future. Major domestic and international water and wastewater service firms have entered this market and have made it extremely competitive. The plan for the joint venture contemplates a concerted effort to make AAET a key participant in this rapidly growing sector of the business. The joint venture employs a disciplined approach that draws on the expertise available within its affiliated organizations. Target measures of growth and profitability have been established to guide these efforts. Although margins are comparatively low in this business segment, capital requirements are minimal. In 1998, the AAET joint venture successfully obtained operations contracts that included a wastewater service contract [ID - GRAPHIC. GRAYSCALE MAPS OF FOUR STATES] PENDING AMERICAN WATER WORKS COMPANY ACQUISITION OF NATIONAL ENTERPRISES, INC. SUBSIDIARIES, THE LARGEST WATER UTILITY ACQUISITION IN THE UNITED STATES. [] INDIANA-AMERICAN WATER COMPANY Wabash County Howard County Montgomery County Hamilton County Madison County Delaware County Wayne County Vigo County Johnson County Shelby County Sullivan County Jackson County Warrick County Floyd County Clark County [] NORTHWEST INDIANA WATER COMPANY Lake County Porter County [] ILLINOIS-AMERICAN WATER COMPANY Peoria County Tazewell County Jersey County Madison County Bond County St. Clair County Monroe County [] NORTHERN ILLINOIS WATER COMPANY Champaign County Livingston County La Salle County Whiteside County [] NEW YORK-AMERICAN WATER COMPANY Westchester County [] LONG ISLAND WATER CORPORATION Nassau County [] MISSOURI-AMERICAN WATER COMPANY Buchanan County Platte County Clarion County Audrain County Johnson County St. Charles County [] ST. LOUIS COUNTY WATER COMPANY St. Louis County St. Louis City Jasper County [] TERRITORIES OF AMERICAN WATER WORKS UTILITY SUBSIDIARIES [] TERRITORIES OF NEI UTILITY SUBSIDIARIES 27 - --------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS [ID - PHOTO WITH CAPTION] FROM LEFT ARE ROBERT D. SIEVERS, COMPTROLLER, AMERICAN WATER WORKS COMPANY, INC. AND VICE PRESIDENT AND COMPTROLLER, AMERICAN WATER WORKS SERVICE COMPANY, INC; AND WILLIAM M. PISZKER, VICE PRESIDENT, INFORMATION SYSTEMS, AMERICAN WATER WORKS SERVICE COMPANY, INC. with Danville, Virginia, and a water service contract with Cohasset, Massachusetts. At year end, the joint venture had secured 33 water and wastewater contracts with government agencies in Indiana, Massachusetts, New York, North Carolina, Pennsylvania and Virginia. RESULTS OF OPERATIONS The Company's experience in assessing the impact of inflation on its business indicates that with timely rate increases authorized by regulators, revenue will likely keep pace with inflation. Inflation did not significantly impact the Company's financial position or results of operations in 1996 through 1998, and it is not expected to materially affect 1999 results. OPERATING REVENUES (000) 1998 1997 1996 ================================================================== Water service $ 996,992 $939,290 $879,268 Wastewater service 20,820 14,909 15,378 - ------------------------------------------------------------------ $1,017,812 $954,199 $894,646 ====================================== CONSOLIDATED OPERATING REVENUES Revenues in 1998 totaled $1.018 billion and were 7% above those for 1997, reflecting increased sales volume due to customer growth, acquisitions and rate increases authorized for various subsidiaries in 1998 and the latter part of 1997. The volume of water sold increased 1% to 257.1 billion gallons in 1998 compared with 1997. Rate authorizations adjusted the water service rates in effect for six utility subsidiaries during 1998. These authorizations are expected to increase annual revenues by $10.2 million. Operating revenues for 1998 included approximately $2.7 million which resulted from these rate orders. One rate adjustment has been authorized for a utility subsidiary so far in 1999 which will generate approximately $1.0 million of additional annual revenues. Four applications requesting additional annual revenues of $35.8 million are awaiting regulatory decisions. The largest of these, the New Jersey-American rate case, was originally filed requesting $29.9 million. Since the filing, a number of issues have been resolved and amounts have been updated for known and measurable changes. As a result, the Company's currently requested revenue increase is $18.5 million. Revenues of $954.2 million in 1997 were 7% above those for 1996. Twelve utility companies received rate orders in 1997, authorizing increases in annual revenues aggregating $53.3 million. Operating revenues for 1997 included approximately $12.9 million which resulted from these rate orders. The 255.7 billion gallons of water sold in 1997 was a 3% increase compared to 1996. On February 16, 1996, Pennsylvania-American Water Company acquired water utility operations serving 400,000 people in northeastern Pennsylvania from Pennsylvania Gas and Water Company for $409.4 million. On October 2, 1997, the Pennsylvania Public Utility Commission approved a settlement in a rate proceeding designed to produce additional annual revenues of $27.5 million. An important aspect of this rate proceeding was the recognition of Pennsylvania-American's acquisition of the water service assets in northeastern Pennsylvania. The northeastern Pennsylvania acquisition increased operating revenues by $7.4 million and added 1.8 billion gallons of water sales volume in 1997, compared to 1996. PERCENTAGE OF WATER REVENUES BY CUSTOMER CLASS 1998 1997 1996 ================================================================ Residential 57.7% 58.2% 58.0% Commercial 22.1% 22.1% 22.4% Industrial 6.8% 6.7% 7.1% Public and other 12.3% 12.0% 11.6% Other water revenues 1.1% 1.0% .9% - ---------------------------------------------------------------- 100.0% 100.0% 100.0% ================================== RESIDENTIAL Residential water service revenues in 1998 amounted to $575.3 million, an increase of 5% over those for 1997. This 1998 revenue improvement followed an increase of 7% in 1997. The volume of water sold to residential customers increased slightly in 1998 to 124.4 billion gallons. The average unit price of residential water increased by 5% in 1998 and by 4% in 1997. COMMERCIAL Revenues from commercial customers in 1998 rose by 6% to $220.4 million, following an increase of 5% in 1997. 28 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- Commercial customers purchased 65.4 billion gallons of water in 1998, 1% more than in 1997. The average unit price of water increased by 5% in 1998, up from a 3% increase in 1997. INDUSTRIAL Industrial water use of 36.6 billion gallons in 1998 was 1% higher than in 1997. Revenues from industrial sales in the amount of $67.5 million were 6% above those recorded in 1997 due to a 5% increase in the average unit price of water. In 1997, revenues from industrial sales were 2% above those for 1996 due to a 1% increase in the average unit price of water. PUBLIC AND OTHER Public and other revenues in 1998 increased by 9% to $122.4 million following an increase of 11% in 1997. Revenues derived from municipal governments for fire protection services and customers requiring special private fire service facilities totaled $46.4 million in 1998, exceeding 1997 revenue from these customers by 6%. The 30.6 billion gallons of water sold to governmental entities and resale customers was 1% greater than the quantities sold in 1997. Revenues generated by these sales totaled $76.0 million and exceeded 1997 revenues by 10%. PERCENTAGE OF WATER SALES (GALLONS) BY CUSTOMER CLASS 1998 1997 1996 ================================================================ Residential 48.4% 48.6% 48.5% Commercial 25.4% 25.3% 25.7% Industrial 14.3% 14.2% 14.6% Public and other 11.9% 11.9% 11.2% - ---------------------------------------------------------------- 100.0% 100.0% 100.0% ================================== WASTEWATER SERVICE REVENUES Utility subsidiaries provided wastewater service in Hawaii and to portions of the Company's service areas in New Jersey, Pennsylvania, Missouri, West Virginia, Kentucky and Indiana. Revenues from these services amounted to $20.8 million in 1998, compared with $14.9 million in 1997 and $15.4 million in 1996. The Hawaii acquisition increased 1998 wastewater service revenues $4.7 million beginning with operations in April. OPERATING EXPENSES (000) 1998 1997 1996 =================================================================== Operation and maintenance expenses $445,334 $428,779 $425,170 Depreciation and amortization 119,725 103,660 93,413 General taxes 92,845 87,860 82,017 - ------------------------------------------------------------------- $657,904 $620,299 $600,600 ==================================== CONSOLIDATED OPERATING EXPENSES Operating expenses in 1998 increased by 6% to $657.9 million, following a 3% increase in 1997. Operation and maintenance expenses totaled $445.3 million in 1998, 4% higher than in 1997. These expenses had increased by 1% in 1997. Associate-related costs, representing 44% of operation and maintenance expenses, increased by 2% in 1998 after a decrease of 1% in 1997. The primary components of associate-related costs are wage and salary expenses, which were up 1% to $159.2 million in 1998 following a 3% increase in 1997. The number of associates employed at year-end totaled 4,063, which was slightly above the employment level of 4,034 at the close of 1997 and approximately equal to the 4,065 associates at the end of 1996. Group insurance expense, which includes the cost of providing current health care and life insurance benefits as well as the expected cost of providing postretirement benefits, increased by 6% to $32.2 million in 1998 after a 12% decrease in 1997. The 1998 increase reflects recognition of previously deferred postretirement benefit costs. The 1997 decrease is the result of favorable claims experience in addition to health care expenses being moderated by cost containment measures. In 1996, the Company implemented plan revisions that encourage plan participants to take advantage of a managed care plan option. Associates and early retirees not selecting the managed care plan option are required to make additional contributions. Pension expense increased by 33% in 1998 to $4.4 million following a 42% decrease in 1997. Pension cost is deferred by certain subsidiaries when it is probable such costs will be recovered in future water service rates as contributions are made to the plan. There were no cash contributions in 1998 or 1997. Cash contributions of $4.3 million were made to the pension plan in 1996. The increased expense in 1998 reflects higher supplemental pension plan expense. Pension expense declined in 1997 reflecting the decrease in contributions resulting from the plan reaching fully funded status. OPERATION AND MAINTENANCE EXPENSES (000) 1998 1997 1996 =================================================================== Associate-related costs $195,845 $191,505 $193,798 Fuel and power 36,781 36,603 34,654 Purchased water 43,182 44,661 45,069 Chemicals 18,401 16,940 17,693 Waste disposal 14,866 14,167 14,145 Maintenance materials and services 28,551 26,761 24,559 Operating supplies and services 72,576 63,091 60,626 Customer billing and accounting 21,648 22,067 19,998 Other 13,484 12,984 14,628 - ------------------------------------------------------------------- $445,334 $428,779 $425,170 ==================================== 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 1% in 1998 after a 1% rise in 1997. The unit cost of water produced increased less than 1% in 1998 and decreased 3% in 1997. 29 - --------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS Maintenance materials and services, which include emergency repairs as well as costs for preventive maintenance, increased by 7% in 1998 following a 9% increase in 1997. Operating supplies and services include the day-to-day expenses of office operation, legal and other professional services, as well as information systems and other office equipment rental charges. These costs increased by 15% in 1998 after a 4% increase in 1997. Customer billing and accounting expenses decreased by 2% in 1998 and increased by 10% in 1997. Billing costs increased in 1997 because of a change from quarterly to monthly billing in several service areas. Other operation and maintenance expenses include regulatory costs and system-wide casualty and liability insurance premiums. These expenses increased by 4% in 1998 after decreasing by 11% in 1997. Regulatory costs vary from year-to-year because of changing levels of rate case activity and different amortization periods for these costs. Casualty insurance premiums fluctuate as a result of claims experience. Depreciation and amortization increased by 15% in 1998 and 11% in 1997. 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 other taxes, increased by 6% in 1998 after a 7% rise in 1997. Gross receipts and franchise taxes, which are a function of revenues, increased by 5% in 1998. Property and capital stock taxes are assessed on the basis of tax values assigned to assets and capitalization. These taxes in 1998 were 6% above those in 1997 due to higher property values and tax rate increases. CONSOLIDATED OTHER INCOME AND INCOME DEDUCTIONS The total allowance for funds used (equity and borrowed) during construction recorded in 1998 was $15.3 million, which was 30% higher than the $11.8 million recorded in 1997. The 1998 increase was the result of the construction of new water service assets. The utility subsidiaries record an allowance for funds used (equity and borrowed) during construction to the extent permitted by the regulatory authorities. Interest expense rose 6% to $154.3 million in 1998 compared to 1997. This expense had increased by 7% in 1997. The increases in 1998 and 1997 can be attributed primarily to an increase in total debt to fund the construction of new water service assets. Gains of $.8 million and $1.8 million on the dispositions of property are included in other income in 1998 and 1996, respectively. CONSOLIDATED INCOME TAXES Income taxes increased by 12% in 1998, following a 17% increase in 1997. The 1998 and 1997 increases in income taxes are due to higher taxable income and the reversal of flow-through differences primarily relating to depreciation. Details regarding the components of the total amount of state and federal income taxes, and a reconciliation of statutory to reported income tax expense are included in Note 11 to the financial statements. SUMMARY OF TAXES (000) 1998 1997 1996 ======================================================================== Gross receipts and franchise taxes $ 39,352 $ 37,580 $ 35,684 Property and capital stock taxes 37,460 35,466 31,971 Payroll taxes 12,486 12,433 12,060 Other general taxes 3,547 2,381 2,302 State income taxes 12,219 10,269 9,227 Federal income taxes 71,093 64,444 54,601 - ------------------------------------------------------------------------ $176,157 $162,573 $145,845 ==================================== CONSOLIDATED NET INCOME Consolidated net income in 1998 totaled $131.0 million, a 10% increase over net income in 1997. Consolidated net income in 1997 was 17% above that recorded in 1996. Consolidated net income to common stock of $127.1 million in 1998 increased by 10% over the amount reported in 1997. Consolidated net income to common stock totaled $115.1 million in 1997 and was 18% above that reported for 1996. CAPITALIZATION COMMON PREFERRED LONG-TERM (000) EQUITY STOCK DEBT ============================================================= Company 1998 $1,239,174 $51,673 $ 236,650 1997 1,142,416 51,673 116,461 1996 1,057,874 51,673 116,136 1995 818,939 51,673 131,064 1994 733,440 51,673 131,071 - ------------------------------------------------------------- Utility Subsidiaries 1998 $1,451,599 $47,121 $1,886,197 1997 1,313,674 47,697 1,742,544 1996 1,212,238 49,048 1,619,948 1995 953,718 50,325 1,260,389 1994 855,961 51,738 1,251,101 - ------------------------------------------------------------- Consolidated 1998 $1,239,174 $ 97,089 $2,159,332 1997 1,142,416 97,663 1,895,914 1996 1,057,874 99,012 1,773,538 1995 818,939 100,287 1,428,970 1994 733,440 101,698 1,381,972 - ------------------------------------------------------------- CAPITALIZATION RATIOS COMMON PREFERRED LONG-TERM EQUITY STOCK DEBT ============================================================= Company 1998 81% 3% 16% 1997 87% 4% 9% 1996 86% 4% 10% 1995 82% 5% 13% 1994 80% 6% 14% - ------------------------------------------------------------- Utility Subsidiaries 1998 43% 1% 56% 1997 42% 2% 56% 1996 42% 2% 56% 1995 42% 2% 56% 1994 40% 2% 58% - ------------------------------------------------------------- Note: Long-term debt includes amounts due within one year. 30 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- [ID - PHOTO WITH CAPTION] FROM LEFT ARE EDWARD D. VALLEJO, TREASURER, AMERICAN WATER WORKS SERVICE COMPANY, INC.; THOMAS G. MCKITRICK, VICE PRESIDENT INVESTOR RELATIONS, AMERICAN WATER WORKS SERVICE COMPANY, INC.; AND JOSEPH F. HARTNETT, JR., TREASURER, AMERICAN WATER WORKS COMPANY, INC. AND VICE PRESIDENT FINANCE, AMERICAN WATER WORKS SERVICE COMPANY, INC. 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 expense. 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. The availability and cost of external cash reflect the consistency and reliability of earnings. External sources of cash consist of short-term bank loans, the sale of securities -- bonds, preferred stock and common stock -- as well as advances and contributions from developers. THE PARENT COMPANY The Company pays all of its administrative and interest expenses, 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 cash flow with short-term bank loans. These loans are repaid as internal sources of cash allow and with proceeds from the issuance of new securities. On July 15, 1998 the Company issued $120 million in debentures to institutional investors. The proceeds from the financing were used to reduce short-term bank loans and to take advantage of extremely attractive interest rates available to corporate issues at the time. The Series D debentures were sold at face value with an average coupon rate of 6.26% and an average life of 4.2 years. In May 1996, the Company sold 3,643,100 shares of common stock at $37.625 per share in a public offering. Concurrently with the public offering, certain members of the Ware family, who were already substantial shareholders, agreed to purchase 556,900 shares of common stock at the price available to the public, less underwriting discounts and commissions, in a private offering. Including the effect of the July 1996 stock split, these offerings increased by 8,400,000 shares the number of the Company's shares of common stock outstanding. The Company used the net proceeds of $152.7 million from the sale of the common stock to invest in the equity of Pennsylvania-American Water Company, which in turn reduced short-term indebtedness incurred to finance its acquisition of water utility operations in northeastern Pennsylvania. The Company's Dividend Reinvestment and Stock Purchase Plan allows shareholders and customers of the utility subsidiaries to purchase up to $5,000 of common stock each month directly from the Company at a 2% discount from the then prevailing market price. Common dividends in the amount of $7.4 million were reinvested during 1998, which resulted in the issuance of 249,250 new shares of common stock. Proceeds received from optional cash purchases of 600,036 new shares of common stock totaled $18.0 million in 1998. Another 95,499 shares of common stock were issued in connection with the Employees' Stock Ownership Plan, 70,450 shares were issued in connection with the Long-Term Performance-Based Incentive Plan, and 193,943 shares of common stock were issued in connection with a 401(k) Savings Plan for Employees in return for cash contributions from associates totaling $3.1 million and Company contributions with a value of $2.7 million. The Company invested a total of $102.5 million in common stock of subsidiaries during 1998. It also increased its equity investment in subsidiaries by $38.5 million from the earnings retained by them. The Company plans to continue to use short-term bank borrowings, as cash requirements warrant it, to finance additional investment in subsidiaries. Common stock also is expected to be issued in connection with the continuation of the Company's Dividend Reinvestment and Stock Purchase Plan, the Employees' Stock Ownership Plan, the Savings Plan for Employees and the Long-Term Performance-Based Incentive Plan. THE SUBSIDIARY COMPANIES Utility 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 1999 construction requirements and to maintain bank borrowings not yet refinanced on a long-term basis. Bank borrowings are 31 - --------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS repaid with the proceeds obtained from selling bonds and preferred stock either publicly or to institutional investors on a private placement basis, and selling common stock to the Company. Security offerings are made when they are of marketable size, meet indenture and charter requirements and can compete successfully in the capital market. In order to compete successfully, the individual company must have exhibited satisfactory earnings. Capitalization and dividend payout ratios are maintained within a range found acceptable for investor-owned water companies. During 1998, ten subsidiaries issued $95.2 million of mortgage bonds at interest rates between 6.31% and 7.48%. Three subsidiaries issued tax-exempt debt totaling $75.5 million at interest rates between 5.0% and 5.25%. Proceeds from the sale of the bonds were used to repay bank loans, fund construction programs, and to refinance existing debt. Aggregate bank borrowings of subsidiaries at year-end 1998 amounted to $88.6 million compared to $75.3 million at year-end 1997. During 1998, subsidiaries made mandatory payments to sinking funds in amounts adequate to retire $29.3 million of debt and redeem $2.4 million of preferred stocks. The subsidiary companies plan to fund construction programs, continue acquisitions and repay bank borrowings and maturing bonds with the issuance of approximately $157 million of long-term debt and $64 million of common stock to the Company in 1999. The combined amount of subsidiary bank borrowings and bonds maturing within one year is expected to increase by approximately $65 million in 1999. A discussion of the subsidiary companies' capital spending programs begins on page 24. REGULATION ECONOMIC Twenty state commissions regulate the Company's utility subsidiaries. They have broad authority to establish rates for service, prescribe service standards, review and approve rules and regulations and, in most instances, they must approve long-term financing programs prior to their completion. The jurisdiction exercised by each commission is prescribed by state legislation and therefore varies from state to state. Commissions range in size from three to seven members. The commissioners in Arizona are elected by the voting public. The three directors of the Tennessee Regulatory Authority are appointed by the Governor, the Speaker of the Senate, and the Speaker of the House of Representatives. In Virginia, members of the State Corporation Commission are elected by a joint vote of the two houses of the general assembly. A new state regulatory commission in New Mexico has been formed and implemented as of January 1, 1999 consisting of five popularly elected Commissioners from separate districts. All other state commissioners regulating subsidiaries are appointed by the governors of the respective states and usually require approval by the state legislature. The background of the individuals serving in these important utility regulatory commissioner positions covers a broad spectrum. Economic regulation deals with many competing, if not conflicting, public pressures. Rate adjustments normally are initiated by the utility entity. Public hearings, which are basically financial fact-finding sessions, are conducted. The MARKET RISK The Company is exposed to market risk, including changes in interest rates, certain commodity prices and equity prices. The exposure to changes in interest rates is a result of financing through the issuance of fixed-rate preferred stocks and long-term debt. The following table provides the principal amounts by period of maturity and the weighted average effective interest rate for all such obligations outstanding in the period for the Company's obligations that are sensitive to interest rate changes.
INTEREST RATE RISK Fair Value at (000) 1999 2000 2001 2002 2003 Thereafter Total Dec. 31, 1998 ========================================================================================================================= Fixed-rate long-term debt, including current portion $52,643 $36,784 $157,232 $143,271 $204,666 $1,562,620 $2,157,216 $2,382,822 Average interest rate 7.29% 7.24% 7.21% 7.21% 7.21% 7.16% Fixed-rate preferred stocks with mandatory redemption requirements $ 3,198 $41,031 $ 956 $ 788 $ 704 $ 32,484 $ 79,161 $ 86,812 Average interest rate 8.11% 8.16% 8.06% 8.10% 8.13% 8.14%
32 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- purpose of this process is to set rates for service which ensure the financial viability of the utility entity while ensuring that customers receive high quality service at reasonable cost. A rate case focuses on four areas: o The amount of investment in facilities which provide public service o The operating costs associated with providing that service o The capital costs for the funds used to provide the facilities which serve the public o The tariff design which allocates revenue requirements equitably across the customer base Prudent management dictates that a water utility anticipate the time required for the regulatory process and file for rate adjustments which will reflect the cost of providing service at the time the authorized rates become effective. The utility subsidiaries aggressively pursue various methods of offsetting the adverse financial impact of regulatory lag. Certain subsidiaries have received rate orders allowing recovery of interest and depreciation expense related to the interim period from the time a major construction project was placed in service until new rates reflecting the cost of the project went into effect. Several subsidiaries also now recover in rates a return on utility plant before it is in service instead of capitalizing an allowance for funds used during construction. Additionally, utility subsidiaries with multiple operating districts within a state have pursued single tariff pricing. This is a concept that sets identical rates for service throughout the service territory. It allows simplification of customer service operations. This concept also reduces the complexity of rate proceedings. It also permits flexibility in timing of utility subsidiary financing. Single tariff pricing is now in effect in Connecticut, Illinois, Missouri, New Jersey, Ohio, Pennsylvania and West Virginia During the past year, six subsidiaries were authorized by regulatory commissions to increase rates for service by an annual amount of $10.2 million. In most of these decisions, the primary factor for these price increases was to reflect a return on the investment made in the essential water service facilities. In Ohio, West Virginia and New York, rate awards were granted under three phase rate case procedures permitted in those states. The three phase rate case format is designed to allow the utility subsidiary to earn a return on new investments or recover increased expenses without the need to file and process a complete rate case. This not only benefits the utility subsidiary with more timely recognition of investments and recovery of increased expenses, but it benefits the customer through reduced rate case expenses. The third step of a three phase rate case was placed into effect on October 1, 1998 for Ohio-American Water Company. This case was originally filed in 1995. As can be seen from the table below there has been a rate adjustment each year under this methodology. Ohio-American is the only utility in Ohio utilizing this methodology. West Virginia-American Water Company received two rate increase authorizations during 1998. The first one was the third phase of a three phase rate proceeding begun in 1995, similar to Ohio-American's. The second order for a rate increase was received on December 31, 1998 as the result of a full rate filing. The December 31, 1998 rate award is the first of three steps for this case as well. Two more increases will be awarded on January 1 of each of the years 2000 and 2001. New York-American Water Company received a rate increase authorization on August 1, 1998. This authorization is the first phase of a three step rate proceeding. Two more increases will be awarded on August 1 of each of the years 2000 and 2001. ADDITIONAL ANNUAL REVENUES AUTHORIZED BY RATE DECISIONS (000) 1998 1997 1996 ============================================================== Arizona $ -- $ 739 $ -- California -- 1,354 3,556 Connecticut -- -- 1,899 Illinois -- 7,301 999 Indiana -- 6,101 2,636 Iowa 1,836 -- -- Kentucky -- 1,050 1,515 Maryland -- 31 202 Massachusetts -- -- 5,376 Michigan 80 -- -- Missouri -- 2,707 -- New Jersey -- 2,157 39,486 New Mexico 790 -- -- New York 440 -- -- Ohio 733 952 1,106 Pennsylvania -- 27,450 -- Tennessee -- -- 1,405 Virginia -- 717 -- West Virginia 6,287 2,698 4,704 - -------------------------------------------------------------- $10,166 $53,257 $62,884 =================================== Massachusetts-American water customers will begin seeing an annual credit with a 9-year duration on their water bills beginning in 1999. The credit represents a pass-through of financial assistance made available by the Massachusetts Water Pollution Abatement Trust to mitigate the cost of a new water treatment facility in Hingham. 33 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS American Water System personnel participate in regulatory conferences and meetings, including those conducted by regional regulatory associations. The goal in this effort is to increase understanding of the industry and its unique regulatory requirements. The Company appreciates the thoughtful work of the Water Committee of the National Association of Regulatory Utility Commissioners. Its initiatives and the growing public awareness of the importance of adequate water supply have led to progressive regulation which has allowed utility subsidiaries to address, on a timely basis, water supply issues which otherwise would still be unresolved. ENVIRONMENTAL Two areas of environmental regulation impact the water utility industry. The regulation of drinking water quality is legislated under the Safe Drinking Water Act, which most recently was amended in August of 1996. The regulation of wastes generated during the drinking water treatment process is legislated under the Clean Water Act, Resource Conservation and Recovery Act, and Toxic Substances Control Act. Water utilities, individually and through industry associations, follow the development of these legislative mandates closely, and provide technical guidance to Congress on areas of improvement. By far, the Safe Drinking Water Act has the most potential for impact on water utilities, and has as its objective the improvement of public health. The utility subsidiaries are, as a matter of policy, committed to compliance with all applicable environmental mandates and routinely support environmental protection initiatives. All environmental regulations promulgated under these statutes are adopted by the United States Environmental Protection Agency (EPA). As part of the regulatory development process, EPA solicits comments, and the American Water System regularly provides technical advice regarding proposed regulations. Its broad operating experience and current research effort afford the American Water System the unique opportunity to assist EPA in developing the most practical regulation possible. EPA has been working on several regulations, such as more stringent microbial control, more extensive limits for disinfection by-products, limits for arsenic and radon, and disinfection of ground waters. During 1998, EPA implemented several new regulations. The Consumer Confidence Reports regulation was finalized, which requires that an annual report of water quality be sent to each customer detailing the quality of the water being distributed to them. This detailed reporting must be initiated by all water utilities by October, 1999. Plans have been made for the utility subsidiaries to issue the first Consumer Confidence Reports in the spring of 1999. The Interim Enhanced Surface Water Treatment rule was finalized in 1998. This regulation requires lower turbidity in filtered surface water than had previously been required. All surface water treatment plants operated by the Company's utility subsidiaries already meet the requirements of this rule. The final stage one Disinfection By-Product (DBP) rule requires a lower trihalomethane level in finished water and initiates specific limits on certain compounds. Full compliance is required by 2001. Approximately 85% of the utility subsidiaries' water systems already meet this rule, and the balance of the systems should be brought into compliance during 1999. When Congress amended the Safe Drinking Water Act in 1996, it required EPA to proceed with all these regulations and more. For the first time, the Safe Drinking Water Act provides funding for improvements to water quality, forces EPA to better protect drinking water sources of supply from contamination, requires development of a national water plant operator certification program and prohibits non-viable water systems from going into business. The American Water System supported these provisions and welcomes changes that improve service to customers and protect public health. As these new regulations go into effect, it is clear that the use of chlorine as a disinfectant in water treatment will continue to be modified. EPA is promoting less use of chlorine because of the potential for DBPs, which result from the use of chlorine, to be toxic. However, in most cases, EPA also desires greater disinfection to better protect against a waterborne disease outbreak due to microbes that are not easily disinfected. For many utilities, both objectives could be reached by using a different disinfectant, such as ozone. However, ozone also creates some toxic by-products. Use of membrane filtration processes, such as reverse osmosis, can attain both objectives, but the cost is very high. So all water utilities will be faced with balancing microbial risk with chemical risk while holding down treatment costs, both capital and operating. Clearly the future is for less chlorine, but for many utilities, by-product limits can be reached without the need for ozone or some other very capital-intensive technology. Research has continued to focus on the most important topics to public health. Cryptosporidium research has concentrated on developing better test methods, better understanding of disinfection and removal efficiencies, and monitoring the occurrence around the American Water System. Viruses also have been a major topic of study, as the Company is performing a very important investigation for the industry and EPA by looking for viruses in numerous groundwaters around the country, and correlating that data to geology and distance to contaminant sources as possible vulnerability measures, which will be the basis for EPA's regulation in a few years. 34 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- The responsibility for implementing and enforcing the regulations promulgated by EPA rests with the individual states. In some instances, state regulations have established standards that are more demanding than the federal standards. American Water Works water utility subsidiaries are aggressively pursuing the standards set for The Partnership for Safe Water. This partnership is a voluntary cooperative effort between the EPA, American Water Works Association, state health officials and other drinking water organizations, and over 186 surface water utilities representing 245 water treatment plants throughout the United States. The Partnership's goal is to provide a new measure of safety to millions of Americans by implementing prevention programs where legislation or regulation does not exist. The preventative measures are based around optimizing treatment plant performance and thus increasing protection against microbial contamination in America's drinking water supply. All waste from the utility subsidiaries' water treatment processes are either recycled or discharged. Solid wastes are disposed in accordance with current best practices, and with the proper permits from the authorities. Most solid wastes are disposed of in landfills, and some are taken to local sewage plants for treatment. In several instances, water treatment wastes are discharged to a river in accordance with state permits. YEAR 2000 ISSUES Many computer systems in use today were designed and developed without regard to the impact of the upcoming century change. Computer programs and devices often use only two digits for the year to identify dates. As a result, computer systems may fail completely or create erroneous results unless corrective measures are taken. The Company utilizes numerous computerized systems and date sensitive devices in its operations. If some of these key systems and devices are not ready for the Year 2000 there will likely be adverse effects on the Company's business, results of operations, and financial condition. The Company is also dependent on third parties that supply important materials and services such as water treatment chemicals, electric power for pumps and the processing of customer payments. The failure of some of these third parties to be Year 2000 compliant on a timely basis would also have an adverse effect on the Company. The Company has assigned a very high priority to its Year 2000 compliance efforts, and considerable progress has been made. These efforts are expected to be substantially completed in the second quarter of 1999. An inventory of all important computer programs and devices with embedded technology has been prepared for each utility subsidiary. Those inventories are being used to track the status of any necessary upgrades or replacements, and to log the results of testing by Company personnel to ensure that all important systems are in fact Year 2000 compliant. In some instances work on other information technology projects has been delayed because of Year 2000 remediation projects, but these delays are not expected to have a significant impact on the Company's operations. Because the Company is particularly dependent on its computerized financial, customer service and treatment plant automation systems, those systems are the primary areas in which Year 2000 efforts are focused. The Company is currently implementing two new software packages for financial and customer service applications that are Year 2000 compliant. Although the decision to purchase and implement this software was based on an analysis of all of the Company's current and future systems requirements, once the decision was made, these projects became a key part of the Company's Year 2000 compliance plan. The enterprise software for financial applications is already in use by many of the utility subsidiaries, and implementation and testing is expected to be completed during the first half of 1999. The new customer service software is currently being used by two of the Company's subsidiaries, and an additional subsidiary is expected to begin using the new software in 1999. Implementation of the new customer service software will continue beyond 1999, so the customer service software currently used by most of the subsidiaries is also being made Year 2000 compliant. All of the utility subsidiaries are expected to have Year 2000 compliant customer service software by the middle of 1999. In conjunction with these two projects, midrange and personal computers have been upgraded with hardware and operating systems that are Year 2000 compliant. Many of the Company's water treatment plants utilize automation systems that are controlled by personal computers. These systems are being tested and upgraded if necessary, and that work has been completed at most facilities. The Company's production and distribution facilities also utilize many pieces of equipment with embedded microcontroller chips. These chips, which may be time/date sensitive, are an integral part of critical operating equipment. Much of this equipment cannot be field tested to evaluate Year 2000 compliance, so the Company has developed a systematic approach to identify and resolve this issue that is expected to be completed during the first quarter of 1999. As a contingency, the Company's production and distribution facilities can be operated manually in the event of an internal Year 2000 related failure. 35 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS In addition to the work being done on the Company's internal systems, interfaces used to exchange information with banks and other entities are being tested to ensure Year 2000 compliance. And where feasible, plans are being formulated to minimize the impact of problems outside parties may have in providing supplies and services. The cost of the new financial and customer service software, implementation consulting services, and the cost of upgrading and replacing computers and other equipment will be capitalized by the utility subsidiaries and included in future rate increase requests. The total cost of these Year 2000 related capital projects is expected to be approximately $45 million, of which approximately $35 million has been incurred to date. Costs for specific Year 2000 remediation projects will be charged to expense unless they meet the requirements for deferral as regulatory assets. However, current period expenses are not expected to be materially different from the usual ongoing level of information systems related expenses. NEW ACCOUNTING STANDARDS In 1998, the Company adopted Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (SFAS 130), Statement of Financial Accounting Standards No. 131 "Disclosures About Segments of an Enterprise and Related Information" (SFAS 131) and Statement of Financial Accounting Standards No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits (SFAS 132) that were issued by the Financial Accounting Standards Board. None of these new accounting standards will have any effect on the Company's financial position or results of operations as they require only changes or additions to current disclosure requirements. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The adoption of SFAS 130 did not require additional reporting because the Company has no charges or credits that are to be reported as "other comprehensive income." SFAS 131 establishes standards for reporting information about operating segments based upon products and services, geographic areas and major customers. The adoption of SFAS 131 did not require additional reporting as the Company's utility subsidiaries represent similar entities offering substantially identical services to similar customers. SFAS 132 revises and standardizes employers' disclosures about pension and other postretirement benefit plans required by SFAS No. 87 "Employers' Accounting for Pensions," SFAS No. 88 "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No. 106 "Employers' Accounting for Postretirement Benefits other than Pensions," but does not change the measurement or recognition of those plans. FORWARD LOOKING INFORMATION Forward looking statements in this report, including, without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from advertising and promotional efforts; existence of adverse publicity or litigation; changes in business strategy or plans; quality of management; availability, terms and development of capital; business abilities and judgment of personnel; changes in, or the failure to comply with governmental regulations; Year 2000 issues; and other factors described in filings of the Company with the SEC. The Company undertakes no obligation to publicly update or revise any forward looking statement, whether as a result of new information, future events or otherwise. 36 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF AMERICAN WATER WORKS COMPANY, INC. In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income and retained earnings, of cash flows, of capitalization and of common stockholders' equity of American Water Works Company, Inc. and Subsidiary Companies and the accompanying balance sheet and the related statements of income and retained earnings and of cash flows of American Water Works Company, Inc., present fairly, in all material respects, the consolidated financial position of American Water Works Company, Inc. and Subsidiary Companies and the financial position of American Water Works Company, Inc. at December 31, 1998 and 1997, and the consolidated results of operations and cash flows of American Water Works Company, Inc. and Subsidiary Companies for each of the three years in the period ended December 31, 1998, and the results of operations and cash flows of American Water Works Company, Inc. for each of the three years in the period ended December 31, 1998, 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. PRICEWATERHOUSECOOPERS LLP Thirty South Seventeenth Street Philadelphia, Pennsylvania February 2, 1999, except as to Note 16 which is as of February 4, 1999 37 - --------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET (Dollars in thousands) At December 31, 1998 1997 =========================================================================== ASSETS Property, plant and equipment Utility plant -- at original cost less accumulated depreciation $4,041,819 $3,713,390 Utility plant acquisition adjustments, net 54,739 58,976 Nonutility property, net of accumulated depreciation 32,217 32,942 Excess of cost of investments in subsidiaries over book equity at acquisition, net 24,431 22,745 - --------------------------------------------------------------------------- 4,153,206 3,828,053 - --------------------------------------------------------------------------- Current assets Cash and cash equivalents 39,059 12,661 Customer accounts receivable 73,774 67,318 Allowance for uncollectible accounts (1,583) (1,249) Unbilled revenues 58,778 55,750 Miscellaneous receivables 8,786 5,673 Materials and supplies 11,943 11,415 Deferred vacation pay 10,127 11,132 Other 10,888 10,158 - --------------------------------------------------------------------------- 211,772 172,858 - --------------------------------------------------------------------------- Regulatory and other long-term assets Regulatory asset -- income taxes recoverable through rates 186,748 181,566 Debt and preferred stock expense 33,617 30,216 Deferred pension expense 26,345 22,163 Deferred postretirement benefit expense 11,181 11,372 Deferred treatment plant costs 6,873 7,690 Deferred water utility billings 1,862 4,013 Tank painting costs 12,599 10,531 Funds restricted for construction 10,935 5,340 Other 53,169 40,484 - --------------------------------------------------------------------------- 343,329 313,375 - --------------------------------------------------------------------------- $4,708,307 $4,314,286 ========== ========== 38 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - ----------------------------------------------------------------------------- 1998 1997 ============================================================================== CAPITALIZATION AND LIABILITIES Capitalization Common stockholders' equity $1,239,174 $1,142,416 Preferred stocks with mandatory redemption requirements 40,000 40,000 Preferred stocks without mandatory redemption requirements 11,673 11,673 Preferred stocks of subsidiaries with mandatory redemption requirements 39,161 39,734 Preferred stocks of subsidiaries without mandatory redemption requirements 6,255 6,256 Long-term debt American Water Works Company, Inc. 201,000 116,000 Subsidiaries 1,905,011 1,754,766 - ------------------------------------------------------------------------------ 3,442,274 3,110,845 - ------------------------------------------------------------------------------ Current liabilities Bank debt 88,590 134,762 Current portion of long-term debt 53,321 25,148 Accounts payable 56,728 42,766 Taxes accrued, including federal income 18,867 14,409 Interest accrued 38,313 33,404 Accrued vacation pay 10,243 11,239 Other 35,269 44,725 - ------------------------------------------------------------------------------ 301,331 306,453 - ------------------------------------------------------------------------------ Regulatory and other long-term liabilities Advances for construction 138,204 127,457 Deferred income taxes 451,118 418,248 Deferred investment tax credits 35,083 36,239 Accrued pension expense 48,755 41,079 Accrued postretirement benefit expense 10,034 10,034 Other 9,602 6,197 - ------------------------------------------------------------------------------ 692,796 639,254 - ------------------------------------------------------------------------------ Contributions in aid of construction 271,906 257,734 - ------------------------------------------------------------------------------ Commitments and contingencies -- -- - ------------------------------------------------------------------------------ $4,708,307 $4,314,286 ========================== The accompanying notes are an integral part of these financial statements. 39 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - ------------------------------------------------------------------------------ CONSOLIDATED STATEMENT OF INCOME AND RETAINED EARNINGS (Dollars in thousands, except per share amounts) For the years ended December 31, 1998 1997 1996 ============================================================================== CONSOLIDATED INCOME Operating revenues $1,017,812 $954,199 $894,646 - ------------------------------------------------------------------------------ Operating expenses Operation and maintenance 445,334 428,779 425,170 Depreciation and amortization 119,725 103,660 93,413 General taxes 92,845 87,860 82,017 - ------------------------------------------------------------------------------ 657,904 620,299 600,600 - ------------------------------------------------------------------------------ Operating income 359,908 333,900 294,046 Allowance for other funds used during construction 9,690 7,035 6,540 Other income 1,975 1,353 3,301 - ------------------------------------------------------------------------------ 371,573 342,288 303,887 - ------------------------------------------------------------------------------ Income deductions Interest 154,273 145,766 136,760 Allowance for borrowed funds used during construction (5,622) (4,715) (5,202) Amortization of debt expense 1,832 1,614 1,497 Preferred dividends of subsidiaries 3,408 3,522 3,616 Other deductions 3,322 2,260 1,714 - ------------------------------------------------------------------------------ 157,213 148,447 138,385 - ------------------------------------------------------------------------------ Income before income taxes 214,360 193,841 165,502 Provision for income taxes 83,312 74,713 63,828 - ------------------------------------------------------------------------------ Net income 131,048 119,128 101,674 Dividends on preferred stocks 3,984 3,984 3,984 - ------------------------------------------------------------------------------ Net income to common stock $ 127,064 $115,144 $ 97,690 ================================== Average shares of basic common stock outstanding (thousands) 80,298 79,144 74,540 Basic earnings per common share on average shares outstanding $ 1.58 $ 1.45 $ 1.31 ================================== Diluted earnings per common share on average shares outstanding $ 1.58 $ 1.45 $ 1.31 ================================== CONSOLIDATED RETAINED EARNINGS Balance at beginning of year $ 717,243 $662,183 $622,061 Add: net income 131,048 119,128 101,674 Deduct: adjustment for 1996 stock split on shares issued during the year -- -- 6,269 - ------------------------------------------------------------------------------ 848,291 781,311 717,466 - ------------------------------------------------------------------------------ Deduct: dividends Preferred stock 3,528 3,528 3,528 Preference stock 456 456 456 Common stock -- $.82 per share in 1998, $.76 per share in 1997, $.70 per share in 1996 65,781 60,084 51,299 - ------------------------------------------------------------------------------ 69,765 64,068 55,283 - ------------------------------------------------------------------------------ Balance at end of year $ 778,526 $717,243 $662,183 ================================== The accompanying notes are an integral part of these financial statements. 40 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - ------------------------------------------------------------------------------ CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in thousands) For the years ended December 31, 1998 1997 1996 ============================================================================== CASH FLOWS FROM OPERATING ACTIVITIES Net income $131,048 $119,128 $101,674 Adjustments Depreciation and amortization 119,725 103,660 93,413 Provision for deferred income taxes 29,039 31,850 22,288 Provision for losses on accounts receivable 6,172 6,650 5,479 Allowance for other funds used during construction (9,690) (7,035) (6,540) Employee stock plan expenses 5,648 6,301 5,165 Employee benefit expenses greater (less) than funding (2,031) 1,243 (849) Deferred revenues, net -- -- (1,125) Deferred tank painting costs (3,950) (1,834) (2,544) Deferred rate case expense (1,894) (2,219) (1,897) Deferred treatment plant costs (1,803) (2,654) (1,125) Amortization of deferred charges 10,046 8,862 8,533 Other, net (6,570) (445) (6,387) Changes in assets and liabilities, net of effects from acquisitions Accounts receivable (15,407) (7,427) (5,175) Unbilled revenues (3,028) (1,882) (1,543) Other current assets (1,258) (2,516) 612 Accounts payable 13,962 5,980 (6,514) Taxes accrued, including federal income 4,458 3,606 (2,591) Interest accrued 4,909 1,276 3,465 Other current liabilities (9,456) 4,570 4,178 - ------------------------------------------------------------------------------ Net cash from operating activities 269,920 267,114 208,517 - ------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Construction expenditures (390,594) (352,437) (273,732) Allowance for other funds used during construction 9,690 7,035 6,540 Water system acquisitions (45,740) (3,072) (302,447) Proceeds from the disposition of property, plant and equipment 1,484 3,717 4,649 Removal costs from property, plant and equipment retirements (9,412) (12,855) (8,264) Funds restricted for construction activity (5,595) 451 8,136 - ------------------------------------------------------------------------------ Net cash used in investing activities (440,167) (357,161) (565,118) - ------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt 291,174 179,700 248,459 Proceeds from common stock, net of issuance costs 29,942 23,040 186,451 Net repayments under line-of-credit agreements (46,172) (12,628) (1,249) Advances and contributions for construction, net of refunds 28,515 25,893 17,829 Debt issuance costs (5,265) (3,530) (4,187) Repayment of long-term debt (29,346) (57,324) (44,887) Redemption of preferred stocks (2,438) (1,349) (1,275) Dividends paid (69,765) (64,068) (55,283) - ------------------------------------------------------------------------------ Net cash from financing activities 196,645 89,734 345,858 - ------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 26,398 (313) (10,743) Cash and cash equivalents at beginning of year 12,661 12,974 23,717 - ------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 39,059 $ 12,661 $ 12,974 ================================ Cash paid during the year for: Interest, net of capitalized amount $153,431 $146,794 $134,084 ================================ Income taxes $ 63,850 $ 56,269 $ 49,197 ================================ Common stock issued in lieu of cash in connection with the Employee Stock Ownership Plan, the Savings Plan for Employees and the Long-Term Performance-Based Incentive Plan totaled $6,854 in 1998, $5,438 in 1997 and $8,093 in 1996. Capital lease obligations of $1,590 were recorded in 1998 and $62 in 1996. The accompanying notes are an integral part of these financial statements. 41 - ------------------------------------------------------------------------------ CONSOLIDATED STATEMENT OF CAPITALIZATION (Dollars in thousands, except per share amounts) At December 31, 1998 1997 ============================================================================== COMMON STOCKHOLDERS' EQUITY: Common stock -- $1.25 par value, authorized 300,000,000 shares, outstanding 80,894,790 shares in 1998 and 79,685,612 shares in 1997 $ 101,118 $ 99,607 Paid-in capital 360,510 326,382 Retained earnings 778,526 717,243 Unearned compensation (980) (816) - ------------------------------------------------------------------------------ 1,239,174 1,142,416 - ------------------------------------------------------------------------------ At December 31, 1998, common shares reserved for issuance in connection with the Company's stock plans were 60,923,162 shares for the Stockholder Rights Plan, 5,345,600 shares for the Dividend Reinvestment and Stock Purchase Plan, 707,559 shares for the Employees' Stock Ownership Plan, 798,078 shares for the Savings Plan for Employees and 327,135 shares for the Long-Term Performance-Based Incentive Plan. PREFERRED STOCKS WITH MANDATORY REDEMPTION REQUIREMENTS: Cumulative preferred stock -- $25 par value, authorized 1,770,000 shares 8.50% series (non-voting), outstanding 1,600,000 shares, due for redemption at par value on December 1, 2000 40,000 40,000 - ------------------------------------------------------------------------------ PREFERRED STOCKS WITHOUT MANDATORY REDEMPTION REQUIREMENTS: Cumulative preferred stock -- $25 par value 5% series, outstanding 101,777 shares 2,544 2,544 Cumulative preference stock -- $25 par value, authorized 750,000 shares 5% series (non-voting), outstanding 365,158 shares 9,129 9,129 Cumulative preferential stock -- $35 par value, authorized 3,000,000 shares, no outstanding shares -- -- - ------------------------------------------------------------------------------ 11,673 11,673 - ------------------------------------------------------------------------------ PREFERRED STOCKS OF SUBSIDIARIES: Dividend rate 3.9% to less than 5% 5,931 6,545 5% to less than 6% 5,285 5,429 6% to less than 7% 1,823 1,957 7% to less than 8% 4,084 2,270 8% to less than 9% 24,370 24,695 9% to less than 10% 3,503 4,534 10% to less than 11% 420 560 - ------------------------------------------------------------------------------ 45,416 45,990 - ------------------------------------------------------------------------------ Preferred stock agreements of certain subsidiaries require annual sinking fund payments in varying amounts and permit redemption at various prices at the option of the subsidiaries on thirty days notice, or, in the event of involuntary liquidation, at par value plus accrued dividends. Sinking fund payments for the next five years will amount to $3,198 in 1999, $1,031 in 2000, $956 in 2001, $788 in 2002 and $728 in 2003. Redemptions of preferred stock amounted to $2,438 in 1998 and $1,349 in 1997. 42 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - ------------------------------------------------------------------------------
CURRENT MATURITIES 1998 1997 ======================================================================================= LONG-TERM DEBT OF AMERICAN WATER WORKS COMPANY, INC. 9.06% Series B-2 debentures, due December 1, 1999 $35,000 $ -- $ 35,000 7.41% Series C debentures, due May 1, 2003 -- 81,000 81,000 6.21% Series D debentures, due July 2, 2001 -- 50,000 -- 6.28% Series D debentures, due July 2, 2002 -- 10,000 -- 6.28% Series D debentures, due July 2, 2003 -- 45,000 -- 6.32% Series D debentures, due July 2, 2004 -- 15,000 -- - --------------------------------------------------------------------------------------- 35,000 201,000 116,000 - --------------------------------------------------------------------------------------- Capital lease obligations to a subsidiary were $650 in 1998 and $461 in 1997. LONG-TERM DEBT OF SUBSIDIARIES: Interest rate 1% to less than 2% 138 5,880 2,140 3% to less than 4% 37 433 -- 4% to less than 5% 407 4,418 4,825 5% to less than 6% 51 253,745 178,361 6% to less than 7% 860 463,257 375,821 7% to less than 8% 1,141 688,361 689,779 8% to less than 9% 1,100 170,000 171,100 9% to less than 10% 3,909 263,164 267,663 10% to less than 11% 10,455 53,860 64,315 - --------------------------------------------------------------------------------------- 18,098 1,903,118 1,754,004 Capital leases 223 1,893 762 - --------------------------------------------------------------------------------------- $18,321 1,905,011 1,754,766 - --------------------------------------------------------------------------------------- $3,442,274 $3,110,845 ======================
Maturities of long-term debt of subsidiaries, including sinking fund requirements, during the next five years will amount to $18,321 in 1999, $36,764 in 2000, $107,230 in 2001, $133,243 in 2002 and $78,750 in 2003. Long-term debt of subsidiaries is substantially secured by utility plant and by a pledge of certain securities of subsidiaries and affiliates. The accompanying notes are an integral part of these financial statements. 43 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY (Dollars in thousands, except per share amounts)
Common Stock Common --------------------- Paid-in Retained Unearned Stockholders' Shares Par Value Capital Earnings Compensation Equity ============================================================================================================== BALANCE AT DECEMBER 31, 1995 67,826,670 $ 84,783 $114,161 $622,061 $(2,066) $ 818,939 Net income -- -- -- 101,674 -- 101,674 Common stock offering 8,400,000 10,500 147,436 (5,250) -- 152,686 Dividend reinvestment 283,332 354 5,222 (90) -- 5,486 Stock purchase 1,277,765 1,597 23,211 (596) -- 24,212 Employees' stock ownership plan 132,458 166 2,428 (83) -- 2,511 Savings plan for employees 259,505 325 4,878 (99) -- 5,104 Incentive plan 241,572 302 1,112 (151) 1,282 2,545 Dividends: Preferred stocks -- -- -- (3,984) -- (3,984) Common stock, $.70 per share -- -- -- (51,299) -- (51,299) - -------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 78,421,302 98,027 298,448 662,183 (784) 1,057,874 Net income -- -- -- 119,128 -- 119,128 Dividend reinvestment 291,236 364 6,235 -- -- 6,599 Stock purchase 555,109 693 11,777 -- -- 12,470 Employees' stock ownership plan 134,182 168 2,761 -- -- 2,929 Savings plan for employees 222,940 279 4,741 -- -- 5,020 Incentive plan 60,843 76 2,420 -- (32) 2,464 Dividends: Preferred stocks -- -- -- (3,984) -- (3,984) Common stock, $.76 per share -- -- -- (60,084) -- (60,084) - -------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 79,685,612 99,607 326,382 717,243 (816) 1,142,416 Net income -- -- -- 131,048 -- 131,048 Dividend reinvestment 249,250 312 7,082 -- -- 7,394 Stock purchase 600,036 750 17,267 -- -- 18,017 Employees' stock ownership plan 95,499 119 2,903 -- -- 3,022 Savings plan for employees 193,943 242 5,593 -- -- 5,835 Incentive plan 70,450 88 1,283 -- (164) 1,207 Dividends: Preferred stocks -- -- -- (3,984) -- (3,984) Common stock, $.82 per share -- -- -- (65,781) -- (65,781) - -------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1998 80,894,790 $101,118 $360,510 $778,526 $(980) $1,239,174 ==========================================================================
The accompanying notes are an integral part of these financial statements. 44 AMERICAN WATER WORKS COMPANY, INC. - ------------------------------------------------------------------------------ BALANCE SHEET (Dollars in thousands) At December 31, 1998 1997 ============================================================================== ASSETS Investments in subsidiaries Securities $1,506,969 $1,366,016 Notes and advances 80 90 - ------------------------------------------------------------------------------ 1,507,049 1,366,106 - ------------------------------------------------------------------------------ Current assets Cash and cash equivalents 18,021 308 Other receivable from subsidiaries 990 1,767 Other 549 500 - ------------------------------------------------------------------------------ 19,560 2,575 - ------------------------------------------------------------------------------ Deferred debits Deferred income taxes 5,165 4,212 Debt expense 468 191 Preferred stock expense 90 137 Other 1 2 - ------------------------------------------------------------------------------ 5,724 4,542 - ------------------------------------------------------------------------------ Other long-term assets 16,076 12,907 - ------------------------------------------------------------------------------ $1,548,409 $1,386,130 ====================== CAPITALIZATION AND LIABILITIES Capitalization Common stockholders' equity $1,239,174 $1,142,416 Preferred stocks with mandatory redemption requirements 40,000 40,000 Preferred stocks without mandatory redemption requirements 11,673 11,673 Long-term debt 201,492 116,366 - ------------------------------------------------------------------------------ 1,492,339 1,310,455 - ------------------------------------------------------------------------------ Current liabilities Bank debt -- 59,500 Current portion of long-term debt 35,158 95 Interest accrued 5,105 1,760 Taxes accrued, including federal income 30 34 Other 757 760 - ------------------------------------------------------------------------------ 41,050 62,149 - ------------------------------------------------------------------------------ Other long-term liabilities 15,020 13,526 - ------------------------------------------------------------------------------ Commitments and contingencies -- -- - ------------------------------------------------------------------------------ $1,548,409 $1,386,130 ====================== The accompanying notes are an integral part of these financial statements. 45 AMERICAN WATER WORKS COMPANY, INC. - ------------------------------------------------------------------------------ STATEMENT OF INCOME AND RETAINED EARNINGS (Dollars in thousands, except per share amounts) For the years ended December 31, 1998 1997 1996 ============================================================================== INCOME Income from subsidiaries Equity in earnings of subsidiaries Dividends $109,578 $ 96,427 $ 82,155 Undistributed earnings 38,490 36,335 31,605 - ------------------------------------------------------------------------------ 148,068 132,762 113,760 Interest 5 6 6 Other income 1,254 585 503 - ------------------------------------------------------------------------------ 149,327 133,353 114,269 - ------------------------------------------------------------------------------ Expenses Operating and administrative expenses 11,791 9,431 8,003 General taxes 260 266 252 Interest 16,109 12,629 11,639 Amortization of debt expense 74 45 55 - ------------------------------------------------------------------------------ 28,234 22,371 19,949 - ------------------------------------------------------------------------------ Income before income taxes 121,093 110,982 94,320 Provision for income taxes (9,955) (8,146) (7,354) - ------------------------------------------------------------------------------ Net income 131,048 119,128 101,674 Dividends on preferred stocks 3,984 3,984 3,984 - ------------------------------------------------------------------------------ Net income to common stock $127,064 $115,144 $ 97,690 ================================ Average shares of basic common stock outstanding (thousands) 80,298 79,144 74,540 Basic earnings per common share on average shares outstanding $1.58 $1.45 $1.31 ================================ Diluted earnings per common share on average shares outstanding $1.58 $1.45 $1.31 ================================ RETAINED EARNINGS Balance at beginning of year $717,243 $662,183 $622,061 Add: net income 131,048 119,128 101,674 Deduct: adjustment for 1996 stock split on shares issued during the year -- -- 6,269 - ------------------------------------------------------------------------------ 848,291 781,311 717,466 - ------------------------------------------------------------------------------ Deduct: dividends Preferred stock 3,528 3,528 3,528 Preference stock 456 456 456 Common stock -- $.82 per share in 1998, $.76 per share in 1997, $.70 per share in 1996 65,781 60,084 51,299 - ------------------------------------------------------------------------------ 69,765 64,068 55,283 - ------------------------------------------------------------------------------ Balance at end of year $778,526 $717,243 $662,183 ================================ The accompanying notes are an integral part of these financial statements. 46 AMERICAN WATER WORKS COMPANY, INC. - ------------------------------------------------------------------------------ STATEMENT OF CASH FLOWS (Dollars in thousands) For the years ended December 31, 1998 1997 1996 ============================================================================== CASH FLOWS FROM OPERATING ACTIVITIES Net income $131,048 $119,128 $101,674 Adjustments Undistributed earnings of subsidiaries (38,490) (36,335) (31,605) Employee stock plan expenses 98 585 451 Other, net 1,325 947 863 Changes in assets and liabilities Receivables from subsidiaries -- -- 4 Other current assets (49) (310) (82) Taxes accrued, including federal income (4) 3 50 Interest accrued 3,345 191 67 Other current liabilities (3) (155) (400) - ------------------------------------------------------------------------------ Net cash from operating activities 97,270 84,054 71,022 - ------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Investment in subsidiaries' common stock (102,463) (68,149) (226,839) Repayment of promissory notes by subsidiaries 10 10 10 Other (3,449) (950) (1,209) - ------------------------------------------------------------------------------ Net cash used in investing activities (105,902) (69,089) (228,038) - ------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from common stock, net of issuance costs 36,227 28,041 192,856 Dividends paid (69,765) (64,068) (55,283) Net borrowings (repayments) under line-of-credit agreements (59,500) 21,400 34,400 Proceeds from long-term debt 120,000 -- -- Repayment of long-term debt (265) (73) (15,033) Debt issuance costs (352) -- -- - ------------------------------------------------------------------------------ Net cash from (used in) financing activities 26,345 (14,700) 156,940 - ------------------------------------------------------------------------------ Net increase (decrease) in cash and cash equivalents 17,213 265 (76) Cash and cash equivalents at beginning of year 308 43 119 - ------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 18,021 $ 308 $ 43 ================================ Cash paid (received) during the year for: Interest $ 12,663 $ 12,438 $ 11,572 ================================ Income taxes $ (8,652) $ (7,105) $ (6,905) ================================ Common stock issued in lieu of cash in connection with the Long-Term Performance-Based Incentive Plan totaled $111 in 1998 and $437 in 1997. The accompanying notes are an integral part of these financial statements. 47 - --------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) NOTE 1: ORGANIZATION AND OPERATION American Water Works Company, Inc. through its utility subsidiaries provides water and wastewater service in 22 states. The Company however, reflects one reportable segment for financial statement purposes as the Company's utility subsidiaries represent similar entities offering substantially identical services to similar customers. Wastewater service has not been reflected as a reportable segment as revenues, net income and assets associated with this service are less than 10% of those for the Company as a whole. As public utilities, the utility companies function under rules and regulations prescribed by state regulatory commissions. NOTE 2: SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the parent company and all subsidiaries. Intercompany accounts and transactions are eliminated. Parent company financial statements reflect the equity method of accounting for investments in common stock of subsidiaries (cost plus equity in subsidiaries' undistributed earnings since acquisition). USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. REGULATION The utility subsidiaries have incurred various costs and received various credits which have been reflected as regulatory assets and liabilities on the Company's consolidated balance sheet. Accounting for such costs and credits as regulatory assets and liabilities is in accordance with Statement of Financial Accounting Standards No. 71 "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). This statement sets forth the application of generally accepted accounting principles for those companies whose rates are established by or are subject to approval by an independent third-party regulator. Under SFAS 71, utility companies defer costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that those costs and credits will be recognized in the rate making process in a period different from the period in which they would have been reflected in income by an unregulated company. These deferred regulatory assets and liabilities are then reflected in the income statement in the period in which the same amounts are reflected in the rates charged for service. PROPERTY, PLANT AND EQUIPMENT Additions to utility plant and replacements of retirement units of property are capitalized. Costs include material, direct labor and such indirect items as engineering and supervision, payroll taxes and benefits, transportation and an allowance for funds used during construction. Repairs, maintenance and minor replacements of property are charged to current operations. The cost of property units retired in the ordinary course of business plus removal cost (less salvage) is charged to accumulated depreciation. The cost of property, plant and equipment is generally depreciated using the straight-line method over the estimated service lives of the assets. The costs incurred to acquire and internally develop computer software for internal use are capitalized as a unit of property. Utility plant acquisition adjustments include the difference between the purchase price of utility plant and its original cost (less accumulated depreciation) and are being amortized over a period of 40 years. Utility plant acquisition adjustments and the excess of cost of investments in subsidiaries over book equity at acquisition, prior to October 31, 1970, are 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 investment grade commercial paper, bank certificates of deposit and United States Government securities. Cash equivalents are stated at cost plus accrued interest which approximates market value. MATERIALS AND SUPPLIES Materials and supplies are stated at average cost. REGULATORY AND OTHER LONG-TERM ASSETS 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 difference between book and tax depreciation on property placed in service before the adoption by the regulatory authorities of full normalization for rate making purposes. The regulatory asset for income taxes recoverable through rates is net of the reduction expected in future revenues as deferred taxes previously provided, attributable to the difference between the state and federal income tax rates under prior law and the current statutory rates, reverse over the average remaining service lives of the related assets. 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 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. 48 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- Pension expense in excess of the amount contributed to the pension plan is deferred by certain subsidiaries. These costs will be recovered in future service rates as contributions are made to the pension plan. Postretirement benefit expense in excess of the amount recovered in rates through 1997 has been deferred by certain subsidiaries. These costs are now recognized in the rates charged for water service and will be fully recovered over a 20-year period ending in 2012 as authorized by the regulatory authorities. Deferred treatment plant costs consist of operating expenses, including depreciation and property taxes, and the carrying charges associated with several water treatment plants and related facilities acquired in 1996 (see Northeastern Pennsylvania Acquisition in note 3) from the time the assets were placed in service until recovery of such costs is allowed in future service rates. These costs have been recognized in the rates charged for water service and are being amortized over a 10-year period as authorized by the regulatory authorities. Deferred water utility billings represent revenue which will be recovered from customers in future years under the terms of qualified phase-in plans pursuant to the provisions of Statement of Financial Accounting Standards No. 92 "Utility Enterprises -- Accounting for Phase-In Plans." These regulatory assets have been recorded in accordance with the terms of rate orders received by the previous owners of water utility assets that were acquired in 1996 (see Northeastern Pennsylvania Acquisition in note 3). The deferred billings are scheduled to conclude in 2001. Tank painting costs are generally deferred and amortized to current operations on a straight-line basis over periods ranging from 4 to 20 years, as authorized by the regulatory authorities in their determination of rates charged for service. OTHER CURRENT LIABILITIES Other current liabilities at December 31, 1998 and 1997 include payables to banks of $10,882 and $14,307 respectively, which represent checks issued but not presented to the banks for payment, net of the related bank balance. ADVANCES AND CONTRIBUTIONS IN AID OF CONSTRUCTION Utility subsidiaries may receive advances and contributions to fund construction necessary to extend service to new areas. As determined by the regulatory authorities, advances for construction are refundable for limited periods of time as new customers begin to receive service. Amounts which are no longer refundable are reclassified to contributions in aid of construction. Utility plant funded by advances and contributions is excluded from rate base and is generally not depreciated for rate making purposes. Generally, advances and contributions received during the period January 1, 1987 through June 12, 1996 have been included in taxable income and the related property is depreciable for tax purposes. As a result of a tax law change advances and contributions received subsequent to June 12, 1996 are excluded from taxable income. RECOGNITION OF REVENUES 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. Federal income tax expense for financial reporting purposes is provided on a separate return basis, except that the federal income tax rate applicable to the consolidated group is applied to separate company taxable income and the benefit of net operating losses, principally at the parent company level, is recognized currently. Certain income and expense items are accounted for in different time periods for financial reporting than for income tax reporting purposes. Deferred income taxes have been provided on the difference between the tax bases of assets and liabilities and the amounts at which they are carried in the financial statements. These deferred income taxes are based on the enacted tax rates to be in effect when such temporary differences are expected to reverse. The utility subsidiaries also recognize regulatory assets and liabilities for the effect on revenues expected to be realized as the tax effects of temporary differences previously flowed through to customers reverse. Investment tax credits have been deferred and are being amortized to income over the average estimated service lives of the related assets. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC) AFUDC is a non-cash credit to income with a corresponding charge to utility plant which represents the cost of borrowed funds and a return on equity funds devoted to plant under construction. The utility subsidiaries record AFUDC to the extent permitted by the regulatory authorities. ENVIRONMENTAL COSTS Environmental expenditures that relate to current operations or provide a future benefit are expensed or capitalized as appropriate. Remediation costs that relate to an existing condition caused by past operations are accrued when it is probable that these costs will be incurred and can be reasonably estimated. ASSET IMPAIRMENT Long-lived assets and certain identifiable intangible assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, on a separate entity basis, may not be recoverable. If the sum of the future cash flows expected to result from the use of the assets and their eventual disposition is less than the carrying amount of the assets, an impairment loss is recognized. Measurement of an impairment loss is based on the fair value of the assets. A regulatory asset is charged to earnings if and when future recovery in rates of that asset is no longer probable. 49 - --------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) EARNINGS PER SHARE The average number of shares used to calculate diluted earnings per share includes 57,831, 76,996 and 68,802 of potential common shares issuable in connection with the Company's Long-Term Performance-Based Incentive Plan (see note 8) in 1998, 1997 and 1996, respectively. NEW ACCOUNTING STANDARDS In 1998, the Company adopted Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" (SFAS 130), Statement of Financial Accounting Standards No. 131 "Disclosures About Segments of an Enterprise and Related Information" (SFAS 131) and Statement of Financial Accounting Standards No. 132 "Employers' Disclosures about Pensions and Other Postretirement Benefits" (SFAS 132) that were issued by the Financial Accounting Standards Board. None of these new accounting standards will have any effect on the Company's financial position or results of operations as they require only changes or additions to current disclosure requirements. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The adoption of SFAS 130 did not require additional reporting because the Company has no charges or credits that are to be reported as "other comprehensive income." SFAS 131 establishes standards for reporting information about operating segments based upon products and services, geographic areas and major customers. The adoption of SFAS 131 did not require additional reporting as the Company's utility subsidiaries represent similar entities offering substantially identical services to similar customers. SFAS 132 revises and standardizes employers' disclosures about pension and other postretirement benefit plans required by SFAS No. 87 "Employers' Accounting for Pensions," SFAS No. 88 "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," and SFAS No. 106 "Employers' Accounting for Postretirement Benefits other than Pensions," but does not change the measurement or recognition of those plans. RECLASSIFICATION Certain reclassifications have been made to conform previously reported data to the current presentation. NOTE 3: ACQUISITIONS NATIONAL ENTERPRISES INC. ACQUISITION, On October 13, 1998, the Company announced that an agreement in principle had been reached to acquire National Enterprises Inc. (NEI) in a transaction valued at $700,000. Subsidiaries of NEI, a privately owned company, provide water service to 504,000 customers in Missouri, Illinois, Indiana and New York. The transaction, which will be accounted for as a pooling of interests, will be accomplished through a tax free exchange of 14,937,000 shares of the Company's stock valued at $475,000, for all of the outstanding shares of NEI and $225,000 of assumed debt. For the latest fiscal year ended December 31, 1998, NEI had revenues of $182,225, net income of $19,391 and total assets of $750,376. It is anticipated that the transaction will be completed in 1999, following regulatory approvals, termination of the waiting period under Federal anti-trust laws and completion of other requirements. NEI is the parent company of Continental Water Company, which in turn owns: St. Louis County Water Company serving suburban St. Louis, Missouri; Northwest Indiana Water Company serving Gary, Hobart and surrounding areas; Northern Illinois Water Company serving Champaign, Urbana and surrounding areas; and Long Island Water Corporation serving the southwest portion of Nassau County on Long Island, New York. NEI also has passive investments in the telecommunications industry owning approximately 4 million shares of ITC Deltacom and .6 million shares of Powertel as well as an interest in privately held ITC Holdings. All of the common stock of NEI is currently owned by descendants of the Charles Stewart Mott family. Upon completion of this transaction, the Mott family will hold approximately 16% of the outstanding shares of American Water Works common stock. It is expected that two representatives of the Mott family will be elected to the Board of Directors of the Company. HAWAII ACQUISITION On April 1, 1998, the Company acquired East Honolulu Community Services, Inc. ("EHCS"), a suburban Honolulu wastewater utility located on the eastern tip of Oahu, Hawaii. The Company was acquired for $17,300 from Maunalua Associates, Inc., a subsidiary of Kemper Corporation. EHCS provides wastewater service to approximately 10,000 customers in the community of Hawaii Kai. NORTHEASTERN PENNSYLVANIA ACQUISITION On February 16, 1996, the Company's subsidiary, Pennsylvania-American Water Company, acquired the water utility operations of Pennsylvania Gas and Water Company (now known as PG Energy Inc.) for $409,400. The acquired operations, which include 10 water treatment plants and 36 reservoirs, serve 132,000 customers in northeastern Pennsylvania. The acquisition was accounted for as a purchase, and the accompanying financial statements reflect the results of operations of the acquired business subsequent to the purchase date. The purchase price consisted of $262,500 in cash and the assumption of $146,900 of PG Energy Inc.'s liabilities, including $141,000 of its long-term debt. The cash payment was funded with short-term debt that was subsequently repaid with the proceeds from the Company's common stock offering (see note 6) and a portion of the proceeds from Pennsylvania-American's offering of $150,000 of 30-year, 7.8% General Mortgage Bonds in 1996. 50 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- HOWELL TOWNSHIP, NEW JERSEY ACQUISITION On December 23, 1996, the Company's subsidiary, New Jersey-American Water Company, acquired the water utility assets of Howell Township, New Jersey, at a total cost of $35,400. The system which serves 6,000 customers is located between New Jersey-American's existing Monmouth County and Lakewood operations. NOTE 4: UTILITY PLANT The components of utility plant by category at December 31 are as follows: 1998 1997 ================================================================ Water plant Sources of supply $ 226,376 $ 215,321 Treatment and pumping 1,081,971 1,052,944 Transmission and distribution 2,174,467 2,016,300 Services, meters and fire hydrants 817,462 757,729 General structures and equipment 303,160 281,523 Wastewater plant 67,928 33,124 Construction work in progress 218,912 111,808 - ---------------------------------------------------------------- 4,890,276 4,468,749 Less-accumulated depreciation 848,457 755,359 - ---------------------------------------------------------------- $4,041,819 $3,713,390 ========================= NOTE 5: STOCK SPLIT On July 3, 1996, the Board of Directors declared a two-for-one common stock split, in conjunction with an increase in the number of shares of common stock the Company is authorized to issue from 100,000,000 shares to 300,000,000 shares approved at the Company's Annual Meeting of Stockholders held May 2, 1996. The stock split was paid in the form of a 100% stock dividend whereby each holder of shares of common stock received one additional share of common stock for each share owned. The stock dividend was paid on July 25, 1996 to shareholders of record on July 15, 1996. The transaction had no effect on total stockholders' equity. The number of shares and the amounts for common stock, retained earnings, net income per share, and dividends paid per share of common stock have been restated to reflect the effect of the stock split. NOTE 6: COMMON STOCK OFFERING On May 9, 1996, the Company sold 3,643,100 shares of common stock at $37.625 per share in a public common stock offering. Concurrently with, and conditioned upon the completion of this offering, certain members of families that are existing large holders of common stock (the "Ware Family Buyers") agreed to purchase from the Company and the Company agreed to sell to the Ware Family Buyers 556,900 shares of common stock at the price available to the public, less underwriting discounts and commissions, in a private offering. Including the effect of the July 1996 stock split (see note 5), these offerings increased by 8,400,000 shares the number of the Company's shares of common stock outstanding. The net proceeds from the offerings were $152,700, after deducting the underwriting discounts and commissions and offering expenses payable by the Company. The Ware Family Buyers include William R. Cobb, Marilyn Ware and Paul W. Ware, who are directors of the Company. NOTE 7: DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN The Company's Dividend Reinvestment and Stock Purchase Plan provides for optional cash purchases of newly issued common stock of the Company. In addition to permitting record holders of common stock to have all or part of their dividends automatically reinvested in additional shares of common stock, the plan permits stockholders to purchase up to five thousand dollars of common stock each month directly from the Company. The plan was amended, as of March 15, 1998, to provide for new shares purchased under the plan to be priced at a 2% discount from the applicable average market price. Previously shares purchased with reinvested dividends or optional cash purchases were priced at the applicable average market price. NOTE 8: EMPLOYEE STOCK PLANS 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 associates who are not included in a bargaining unit. Each participating associate can elect to contribute an amount that does not exceed 2% of their wages for the preceding year. In addition to the associate's participation, the Company makes a contribution equivalent to 1/2% of each participant's qualified compensation for the preceding year, and matches 100% of the contribution by each participant. The Company expensed contributions of $1,706 for 1998, $1,674 for 1997 and $1,427 for 1996 that it made to the plan. The trustee of the plan may purchase shares of the Company's common stock from the Company, in the open market, or in a private transaction. SAVINGS PLAN FOR EMPLOYEES The Company and its subsidiaries have a 401(k) Savings Plan for Employees for all associates who have more than six months of service. Associate contributions are invested at the direction of the associate in one or more funds including a fund consisting entirely of common stock of the Company. The Company matches 50% of the first 4% of each associate's wages contributed to the plan. The Company expensed matching contributions to the plan totaling $2,705 for 1998, $2,304 for 1997 and $2,198 for 1996. 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 at the prevailing market price from the Company, in the open market, or in a private transaction. 51 - --------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) LONG-TERM PERFORMANCE-BASED INCENTIVE PLAN The Company and its subsidiaries have a Long-Term Performance-Based Incentive Plan. Under the plan, designated executives and other key associates are eligible to receive awards if performance cycle goals based on earnings-per-share growth and total return to Company stockholders, in comparison to a designated peer group of water companies, are met. The plan is administered by the Compensation and Management Development Committee of the Board of Directors. The Committee will determine the value or range of values, including the maximum value, of awards to each participant. Awards may be paid in the form of cash, restricted shares of common stock, or a combination of both. The cost of the plan is being charged to expense over each three-year performance cycle. Such expense was $1,541 in 1998, $2,715 in 1997 and $1,950 in 1996. The market value of common stock expected to be awarded under the plan has been recorded as unearned compensation and is shown as a separate component of common stockholders' equity. NOTE 9: PENSION AND OTHER POSTRETIREMENT BENEFITS PENSION BENEFITS The Company and its subsidiaries have a noncontributory defined benefit pension plan covering substantially all associates. Benefits under the plan are based on the associate's years of service and average annual compensation for those 60 consecutive months of the final 120 months of employment which yield the highest average. The Company's funding policy is to contribute at least the minimum amount required by the Employee Retirement Income Security Act of 1974. Due to the funded status of the plan there were no contributions made in 1998 and 1997. Pension plan assets are invested in a number of investments including a guaranteed interest contract with a major insurance company, equity mutual funds, United States Government securities and publicly traded bonds. The actual return on plan assets over the last three years reflects the higher than expected returns in the general capital markets. The Company also has two unfunded noncontributory supplemental non-qualified pension plans that provide additional retirement benefits to certain associates of the Company and its subsidiaries. OTHER POSTRETIREMENT BENEFITS The Company and its subsidiaries provide certain life insurance benefits for retired associates and certain health care benefits for retired associates and their dependents. Substantially all associates may become eligible for these benefits if they reach retirement age while still working for the Company. Retirees and their dependents under age 65 can elect either a comprehensive medical plan under which covered expenses are paid at 80% after an annual deductible has been satisfied or a managed care plan that requires copayments. Associates who elect to retire prior to attaining age 65 are generally required to make contributions towards their medical coverage until attaining age 65. Retirees and their dependents age 65 and over are covered by a Medicare supplement plan. The adoption of a new accounting standard for other postretirement benefits caused a transition obligation of $122,115 at January 1, 1993 which is being amortized over 20 years. The Company's policy is to fund postretirement benefit costs accrued. Plan assets are invested in equity and bond mutual funds. Other Pension Postretirement Benefits Benefits 1998 1997 1998 1997 ========================================================================== CHANGE IN BENEFIT OBLIGATION Benefit obligation at January 1 $465,120 $407,075 $167,355 $149,935 Service cost 13,618 11,952 5,746 4,992 Interest cost 32,874 30,792 11,598 11,230 Plan participants' contributions -- -- 625 489 Amendments 82 626 (2,276) (2,409) Actuarial loss 10,532 31,016 5,656 10,371 Benefits paid (18,221) (16,341) (8,611) (7,253) - -------------------------------------------------------------------------- Benefit obligation at December 31 $504,005 $465,120 $180,093 $167,355 ========================================== CHANGE IN PLAN ASSETS Fair value of plan assets at January 1 $441,218 $404,321 $ 85,452 $ 63,664 Actual return on plan assets 41,073 52,721 14,692 12,156 Employer contribution -- -- 15,960 16,396 Plan participants' contributions -- -- 625 489 Benefits paid (17,441) (15,824) (8,611) (7,253) - -------------------------------------------------------------------------- Fair value of plan assets at December 31 $464,850 $441,218 $108,118 $ 85,452 ========================================== Funded status at December 31 $(39,155) $(23,902) $(71,975) $(81,903) Unrecognized net actuarial gain (3,680) (9,921) (26,337) (22,591) Unrecognized prior service cost 5,952 7,681 8,101 8,556 Unrecognized net transition obligation (asset) (9,123) (11,380) 80,177 85,904 - -------------------------------------------------------------------------- Net amount recognized $(46,006) $(37,522) $(10,034) $(10,034) ========================================== Amounts recognized in the balance sheet consist of: Accrued benefit cost $(46,006) $(37,522) $(10,034) $(10,034) Additional minimum liability (2,749) (3,557) -- -- Intangible asset 2,749 3,557 -- -- - -------------------------------------------------------------------------- Net amount recognized $(46,006) $(37,522) $(10,034) $(10,034) ========================================== 52 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- The projected benefit obligation and accumulated benefit obligation for pension plans with accumulated benefit obligations in excess of plan assets (these two supplemental plans are unfunded) were $16,386 and $13,377, respectively, as of December 31, 1998, and $15,295 and $12,235, respectively, as of December 31, 1997. 1998 1997 1996 ======================================================================= COMPONENTS OF NET PERIODIC PENSION BENEFIT COST Service cost $13,618 $11,952 $13,007 Interest cost 32,874 30,792 28,845 Expected return on plan assets (36,780) (33,712) (31,763) Amortization of transition asset (2,257) (2,257) (2,257) Amortization of prior service cost 1,810 1,077 249 Recognized net actuarial loss -- -- 195 - ----------------------------------------------------------------------- Net periodic pension benefit cost $ 9,265 $ 7,852 $ 8,276 ================================= COMPONENTS OF NET PERIODIC OTHER POSTRETIREMENT BENEFIT COST Service cost $ 5,746 $ 4,992 $ 5,848 Interest cost 11,598 11,230 11,545 Expected return on plan assets (7,097) (5,419) (4,230) Amortization of transition obligation 5,727 5,727 5,727 Amortization of prior service cost 455 620 283 Recognized net actuarial gain (469) (754) -- - ----------------------------------------------------------------------- Net periodic other postretirement benefit cost $15,960 $16,396 $19,173 ================================= Other Pension Postretirement Benefits Benefits 1998 1997 1998 1997 =========================================================================== WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31 Discount rate 6.75% 7.00% 6.75% 7.00% Expected return on plan assets 8.50% 8.50% 7.90% 7.90% Rate of compensation increase 4.75% 5.00% 4.75% 5.00% The health care cost trend rate, used to calculate the Company's cost for postretirement health care benefits, is a 6.0% annual rate in 1999 that is assumed to decrease to a 5.5% annual rate in 2000 and remain at that level thereafter for the comprehensive plan, a constant 5.5% annual rate for the managed care plan and an 7.5% annual rate in 1998 that is assumed to decrease gradually to a 5.5% annual rate in 2003 and remain at that level thereafter for pre-acquisition retirees of the Pennsylvania water utility operations acquired in 1996 (see Northeastern Pennsylvania Acquisition in note 3). Assumed health care cost trend rates have a significant effect on the amounts reported for the other postretirement benefit plan. A one-percentage-point change in assumed health care cost trend rates would have the following effects: One-Percentage- One-Percentage- Point Increase Point Decrease ===================================================================== Effect on total of service and interest cost components $ 2,589 $ (2,218) Effect on other postretirement benefit obligation $18,788 $(17,013) NOTE 10: GENERAL TAXES Components of general tax expense for the years presented in the consolidated statement of income are as follows: 1998 1997 1996 =================================================================== Gross receipts and franchise $39,352 $37,580 $35,684 Property and capital stock 37,460 35,466 31,971 Payroll 12,486 12,433 12,060 Other general 3,547 2,381 2,302 - ------------------------------------------------------------------- $92,845 $87,860 $82,017 ================================= NOTE 11: INCOME TAXES Components of income tax expense for the years presented in the consolidated statement of income are as follows: 1998 1997 1996 =================================================================== STATE INCOME TAXES: Current $ 9,370 $ 7,514 $ 8,291 Deferred Current (24) 146 99 Non-current 2,873 2,609 837 - ------------------------------------------------------------------- $12,219 $10,269 $ 9,227 ================================= FEDERAL INCOME TAXES: Current $44,755 $35,259 $33,219 Deferred Current 172 (56) (69) Non-current 27,409 30,484 22,694 Amortization of deferred investment tax credits (1,243) (1,243) (1,243) - ------------------------------------------------------------------- $71,093 $64,444 $54,601 ================================= A reconciliation of income tax expense at the statutory federal income tax rate to actual income tax expense is as follows: 1998 1997 1996 =================================================================== Income tax at statutory rate $75,026 $67,845 $57,926 Increases (decreases) resulting from -- State taxes, net of federal taxes 7,942 6,675 5,998 Flow through differences 1,273 1,143 742 Amortization of investment tax credits (1,243) (1,243) (1,243) Subsidiary preferred dividends 1,177 1,198 1,230 Other, net (863) (905) (825) - ------------------------------------------------------------------- Actual income tax expense $83,312 $74,713 $63,828 ================================= 53 - --------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) The following table provides the components of the net deferred tax liability at December 31: 1998 1997 ============================================================= DEFERRED TAX ASSETS: Advances and contributions $158,531 $149,058 Deferred investment tax credits 12,857 13,862 Other 17,704 14,205 - ------------------------------------------------------------- 189,092 177,125 - ------------------------------------------------------------- DEFERRED TAX LIABILITIES: Utility plant, principally due to depreciation differences 537,591 496,827 Income taxes recoverable through rates 72,968 71,475 Other 29,651 27,071 - ------------------------------------------------------------- 640,210 595,373 - ------------------------------------------------------------- $451,118 $418,248 ====================== As of December 31, 1998 and 1997, the parent company had no material temporary differences. No material valuation allowances were required on deferred tax assets at December 31, 1998 and 1997. NOTE 12: LEASES The Company has entered into operating leases involving certain facilities and equipment. Rental expenses under operating leases were $9,524 for 1998, $9,199 for 1997 and $8,973 for 1996. Capital leases currently in effect are not significant. At December 31, 1998, the minimum annual future rental commitment under operating leases that have initial or remaining noncancellable lease terms in excess of one year are $10,241 in 1999, $9,057 in 2000, $6,694 in 2001, $5,265 in 2002 and $4,772 on 2003. NOTE 13: COMMITMENTS AND CONTINGENCIES Construction programs of subsidiaries for 1999 are estimated to cost approximately $407,000. Commitments have been made in connection with certain construction programs. The Company is routinely involved in condemnation proceedings and legal actions relating to several utility 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 14: COMPENSATING BALANCES AND BANK DEBT During 1998 the Company and its subsidiaries maintained lines of credit with various banks. The total of the unused lines of credit at December 31, 1998 was $34,000 for the Company and $235,726 for the subsidiaries. Borrowings under such lines of credit generally are payable on demand and bear interest at variable rates. None of the agreements with lending banks have compensating balance requirements. The maximum amount of short-term bank borrowings outstanding during 1998 was $230,410, and the average amount outstanding during the year was $134,187. The weighted average annual interest rate on these borrowings during 1998 was 6.13%, and the interest rate at December 31, 1998 was 5.89%. NOTE 15: FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Current assets and current liabilities: The carrying amount reported in the balance sheet for current assets and current liabilities, including bank debt, approximates their fair values. Preferred stocks with mandatory redemption requirements and long-term debt: The fair values of the Company's preferred stocks with mandatory redemption requirements and long-term debt are estimated using discounted cash flow analyses based on the Company's current incremental financing rates for similar types of securities. The carrying amounts and fair values of the Company's financial instruments at December 31 are as follows: CARRYING 1998 AMOUNT FAIR VALUE ================================================================= Preferred stocks of the Company with mandatory redemption requirements $ 40,000 $ 44,298 Preferred stocks of subsidiaries with mandatory redemption requirements 39,161 42,514 Long-term debt of the Company 236,000 249,296 Long-term debt of subsidiaries 1,921,216 2,133,526 CARRYING 1997 AMOUNT FAIR VALUE ================================================================= Preferred stocks of the Company with mandatory redemption requirements $ 40,000 $ 42,879 Preferred stocks of subsidiaries with mandatory redemption requirements 39,734 43,069 Long-term debt of the Company 116,000 120,116 Long-term debt of subsidiaries 1,778,869 1,919,923 54 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- NOTE 16: SUBSEQUENT EVENT On February 4, 1999 the Company's Board of Directors adopted a new Shareholder Rights Plan to replace the Rights Plan adopted 10 years ago which expired on March 2, 1999. Each Right under the new plan will entitle stockholders to buy one share of the Company's Common Stock at an exercise price of $150. Each Right will entitle its holder to purchase, at the Right's then-current exercise price, shares of American Water Works Common Stock, or a number of shares of an acquiring company's stock, which would have a market value of two times the exercise price. The Rights become exercisable if there is a public announcement that a person or group acquires, or commences a tender offer to acquire, 25% or more of the outstanding shares of American Water Works. The Rights also become exercisable if American Water Works is acquired in a merger or a person or group acquires 35% or more of the outstanding shares of American Water Works. 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 17: QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 1998 and 1997 are as follows: FIRST SECOND THIRD FOURTH 1998 QUARTER QUARTER QUARTER QUARTER ===================================================================== Operating revenues $226,000 $255,980 $282,548 $253,284 Operating income 71,916 93,621 112,913 81,458 Net income 21,588 35,062 46,645 27,753 Net income to common stock 20,592 34,066 45,649 26,757 Basic and diluted net income per common share $0.26 $0.42 $0.57 $0.33 FIRST SECOND THIRD FOURTH 1997 QUARTER QUARTER QUARTER QUARTER ===================================================================== Operating revenues $213,357 $237,915 $266,012 $236,915 Operating income 64,903 86,574 104,908 77,515 Net income 18,030 31,640 43,491 25,967 Net income to common stock 17,034 30,644 42,495 24,971 Basic and diluted net income per common share $.22 $.39 $.54 $.31 55 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 AmWtrWks A Wat pr A Wat pf - --------------------------------------------------------------------------- 1998 High Low High Low High Low =========================================================================== 1st quarter $33-5/16 $25-1/4 $22 $19 $22 $19-15/16 2nd quarter 33-3/16 28-1/8 23 20-1/2 24 20 3rd quarter 33-1/4 27-3/8 23-1/2 21-11/16 24 21-5/16 4th quarter 33-3/4 30-1/4 24-3/4 23-1/2 24-3/4 23 Quarterly dividend paid per share $.205 $.3125 $.3125 Number of shareholders at December 31, 1998 43,256 203 688 - --------------------------------------------------------------------------- 1997 =========================================================================== 1st quarter $24-1/2 $19-7/8 $22 $18-3/4 $19-1/2 $18 2nd quarter 22-3/8 20-5/8 20-1/4 18-1/2 20 18-1/4 3rd quarter 22-1/2 20-3/4 20-1/2 19-1/4 21 19 4th quarter 29-11/16 20-11/16 21-3/4 19-1/4 21 19-1/4 Quarterly dividend paid per share $.19 $.3125 $.3125 Number of shareholders at December 31, 1997 41,123 226 769 - --------------------------------------------------------------------------- The common and 5% preferred stocks have voting rights. OPTIONS TRADING Options for Company stock (AWK) are traded on the Philadelphia Stock Exchange (Newspaper listing: PB). Design/Production: The Creative Department, Inc. Copywriting: Gerard F. Reimel Photography: Jack Andersen, cover; H. Mark Weidman, editorial section; Mimi Janosy, portraits EX-21 6 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, 1998. The voting stock of each company shown indented is owned, to the extent indicated by the percentage, by the company immediately above which is not indented to the same degree. All subsidiaries of the Registrant appearing in the following table are included in the consolidated financial statements of the Registrant and its subsidiaries. Percentage State of Voting Stock Name of Company Incorporation Owned American Water Works Company, Inc. American Commonwealth Company Delaware 100 American International Water Services Co. Delaware 100 American Water Works Service Company, Inc. Delaware 100 California-American Water Company California 100 Greenwich Water System, Inc. Delaware 100 Connecticut-American Water Company Connecticut 100 Hampton Water Works Company New Hampshire 100 Massachusetts-American Water Company Massachusetts 100 New York-American Water Company, Inc. New York 100 The Salisbury Water Supply Company Massachusetts 100 Hawaii-American Water Company Nevada 100 Illinois-American Water Company Illinois 99.84 Indiana-American Water Company, Inc. Indiana 100 Iowa-American Water Company Delaware 95.77 Kentucky-American Water Company Kentucky 100 Maryland-American Water Company Maryland 100 Massachusetts Capital Resources Company Delaware 100 Michigan-American Water Company Michigan 100 Missouri-American Water Company Missouri 100 New Jersey-American Resources Company New Jersey 100 New Jersey-American Water Company, Inc. New Jersey 100* New Mexico-American Water Company, Inc. New Mexico 99.98 Occoquan Land Corporation Virginia 100 Ohio-American Water Company Ohio 100 Paradise Valley Water Company Arizona 100 Pennsylvania-American Water Company Pennsylvania 95.58** Tennessee-American Water Company Tennessee 99.89 Virginia-American Water Company Virginia 100 West Virginia-American Water Company West Virginia 99.96 Bluefield Valley Water Works Company Virginia 100 - --------------------------------------------------------------------------- * Includes 6.79% which is owned by American Commonwealth Company, an affiliate of the Registrant. ** Includes .17% and 2.25% which are owned by American Commonwealth Company and Greenwich Water System, Inc., respectively, affiliates of the Registrant. EX-27 7
OPUR1 0000318819 W. TIMOTHY POHL 1,000 12-MOS DEC-31-1998 DEC-31-1998 PER-BOOK 4,041,819 111,387 211,772 290,160 53,169 4,708,307 101,118 359,530 778,526 1,239,174 79,161 17,928 2,106,011 88,590 0 0 53,321 0 0 0 1,124,122 4,708,307 1,017,812 83,312 657,904 741,216 276,596 8,725 285,321 154,273 131,048 3,984 127,064 65,781 149,851 269,920 1.58 1.58
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