CONFORMED COPY
Page 1 of 22
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-3437-2
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AMERICAN WATER WORKS COMPANY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 51-0063696
------------------------------- -----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1025 Laurel Oak Road, Voorhees, New Jersey 08043
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(Address of principal executive offices) (Zip Code)
(856) 346-8200
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
------ -----
At May 1, 2002, the number of shares of common stock, $1.25 par value,
outstanding was 100,032,346 shares.
Page 2 FORM 10-Q
PART I FINANCIAL INFORMATION
----------------------------
Item 1. Financial Statements
-----------------------------
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
-----------------------------------------------------------
Consolidated Statements of Income and Comprehensive Income
and of Retained Earnings (Unaudited)
(In thousands, except per share amounts)
Three Months Ended
March 31,
2002 2001
-------- --------
CONSOLIDATED INCOME AND COMPREHENSIVE INCOME
Operating revenues $384,740 $316,427
-------- --------
Operating expenses
Operation and maintenance 209,252 150,823
Depreciation and amortization 55,027 44,360
General taxes 34,758 33,311
-------- --------
Total operating expenses 299,037 228,494
-------- --------
Operating income 85,703 87,933
-------- --------
Other income (deductions)
Interest (57,412) (48,597)
Allowance for other funds used during
construction 1,620 1,081
Allowance for borrowed funds used
during construction 1,026 979
Amortization of debt expense (673) (678)
Preferred dividends of subsidiaries (713) (783)
Merger expenses (947) -
Other, net (934) (671)
-------- --------
Total other income (deductions) (58,033) (48,669)
-------- --------
Income before income taxes 27,670 39,264
Provision for income taxes 12,457 15,803
-------- --------
Income before cumulative effect of change in
accounting principle 15,213 23,461
Cumulative effect of change in accounting principle 2,679 -
-------- --------
Net income 17,892 23,461
Dividends on preferred stocks 146 146
-------- --------
Net income to common stock 17,746 23,315
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Page 3 FORM 10-Q
Three Months Ended
March 31,
2002 2001
---------- ----------
Other comprehensive loss, net of tax
Unrealized loss on securities (2,926) (1,994)
Foreign currency translation adjustment 708 -
---------- ----------
Comprehensive income $ 15,528 $ 21,321
========== ==========
Average shares of basic common stock outstanding 100,027 98,873
Earnings per average common share outstanding
Income before cumulative effect of change
in accounting principle $ 0.15 $ 0.24
Cumulative effect of change in accounting
principle $ 0.03 -
---------- --------
Basic $ 0.18 $ 0.24
========== ==========
Income before cumulative effect of change
in accounting principle $ 0.15 $ 0.24
Cumulative effect of change in accounting
principle $ 0.03 -
---------- ---------
Diluted $ 0.18 $ 0.24
========== ==========
CONSOLIDATED RETAINED EARNINGS
Balance at January 1 $1,137,772 $1,069,486
Add - net income 17,892 23,461
Preferred stock redemption premium (25) -
Gain on treasury stock - 338
---------- ----------
1,155,639 1,093,285
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Deduct - dividends paid
Preferred stock 32 32
Preference stock 114 114
Common stock - $.245 per share in 2002;
$.235 per share in 2001 24,505 23,212
---------- ----------
24,651 23,358
---------- ----------
Balance at March 31 $1,130,988 $1,069,927
========== ==========
The accompanying information and notes are an integral part of these
financial statements.
Page 4 FORM 10-Q
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
-----------------------------------------------------------
Consolidated Balance Sheet (Unaudited)
(In thousands)
March 31, December 31,
2002 2001
------------ -----------
ASSETS
Property, plant and equipment
Utility plant - at original cost less
accumulated depreciation $ 6,152,285 $ 5,458,909
Utility plant acquisition adjustments, net 215,338 68,916
Non-utility property, net of accumulated
depreciation 95,874 94,149
----------- -----------
Total property, plant and equipment 6,463,497 5,621,974
----------- -----------
Current assets
Cash and cash equivalents 15,511 19,691
Customer accounts receivable 164,048 153,142
Allowance for uncollectible accounts (8,412) (7,660)
Unbilled revenues 90,966 86,065
Miscellaneous receivables 20,335 16,483
Materials and supplies 32,861 32,281
Deferred vacation pay 13,935 11,422
Restricted funds 224 224
Other 19,216 18,940
----------- -----------
Total current assets 348,684 330,588
----------- -----------
Regulatory and other long-term assets
Regulatory asset - income taxes
recoverable through rates 219,293 217,330
Other investments 37,881 39,956
Debt and preferred stock expense 48,183 45,882
Deferred pension expense 33,724 30,712
Deferred postretirement benefit expense 9,115 9,318
Deferred security costs 11,609 7,058
Deferred business services project expenses 40,109 36,311
Deferred tank painting costs 16,225 16,585
Restricted funds 9,397 8,570
Goodwill 285,326 136,488
Intangible assets 21,778 23,400
Other 98,262 82,927
----------- -----------
Total regulatory and other long-term assets 830,902 654,537
----------- -----------
TOTAL ASSETS $ 7,643,083 $ 6,607,099
=========== ===========
Page 5 FORM 10-Q
March 31, December 31,
2002 2001
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CAPITALIZATION AND LIABILITIES
Capitalization
Common stockholders' equity $ 1,748,674 $ 1,758,018
Preferred stocks without mandatory
redemption requirements - 11,673
Preferred stocks of subsidiaries with
mandatory redemption requirements 30,099 30,474
Preferred stocks of subsidiaries without
mandatory redemption requirements 7,268 7,268
Long-term debt
American Water Works Company, Inc. 297,000 297,000
Subsidiaries 3,221,601 2,253,019
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Total capitalization 5,304,642 4,357,452
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Current liabilities
Short-term debt 416,596 414,083
Current portion of long-term debt 170,314 166,087
Accounts payable 45,657 67,996
Taxes accrued, including federal income 42,890 21,756
Interest accrued 59,466 43,015
Accrued vacation pay 14,086 11,577
Other 119,065 100,220
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Total current liabilities 868,074 824,734
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Regulatory and other long-term liabilities
Advances for construction 262,141 230,801
Deferred income taxes 627,077 624,449
Deferred investment tax credits 38,272 38,633
Accrued pension expense 68,636 62,355
Accrued postretirement benefit expense 19,168 13,808
Other 40,329 41,007
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Total regulatory and other long-term
liabilities 1,055,623 1,011,053
----------- -----------
Contributions in aid of construction 414,744 413,860
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Commitments and contingencies -- --
----------- -----------
TOTAL CAPITALIZATION AND LIABILITIES $ 7,643,083 $ 6,607,099
=========== ===========
The accompanying information and notes are an integral part of these
financial statements.
Page 6 FORM 10-Q
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
-----------------------------------------------------------
Consolidated Statement of Cash Flows (Unaudited)
(In thousands)
Three Months Ended
March 31,
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 17,892 $23,461
Adjustments
Depreciation and amortization 55,027 44,360
Cumulative effect of change in accounting principle (2,679) -
Provision for deferred income taxes 4,288 3,165
Provision for losses on accounts receivable 2,840 1,943
Allowance for other funds used during
construction (1,620) (1,081)
Employee benefit expenses greater
than funding 7,441 3,876
Employee stock plan expenses 813 1,212
Deferred regulatory costs (9,247) (9,969)
Amortization of deferred charges 4,431 3,684
Other, net (11,890) (8,735)
Changes in assets and liabilities, net
of effects from acquisitions
Accounts receivable (2,995) 16,081
Unbilled revenues (154) 2,370
Other current assets (61) (350)
Accounts payable (24,077) (18,164)
Taxes accrued, including federal income 19,870 23,808
Interest accrued 16,442 5,143
Other current liabilities 16,935 (4,486)
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Net cash from operating activities 93,256 86,318
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CASH FLOWS FROM INVESTING ACTIVITIES
Construction expenditures (65,242) (62,523)
Allowance for other funds used during
construction 1,620 1,081
Acquisitions (883,064) (48,575)
Proceeds from the sale of assets 197 410
Removal costs from property, plant and
equipment retirements (1,394) (1,880)
Restricted funds (827) (247)
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Net cash used in investing activities (948,710) (111,734)
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Page 7 FORM 10-Q
Three Months Ended
March 31,
2002 2001
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CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt $926,097 $143,788
Proceeds from common stock 691 9,269
Purchase of common stock for treasury (36) (63)
Net borrowings (repayments) under
short-term debt agreements 2,513 (60,138)
Advances and contributions for construction,
net of refunds 5,490 6,506
Debt issuance costs (3,021) (780)
Repayment of long-term debt (43,736) (57,828)
Redemption of preferred stocks (12,073) (319)
Dividends paid (24,651) (23,358)
-------- --------
Net cash from financing activities 851,274 17,077
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Net decrease in cash and
cash equivalents (4,180) (8,339)
Cash and cash equivalents at January 1 19,691 28,571
-------- --------
Cash and cash equivalents at March 31 $15,511 $20,232
======== ========
Common stock placed into treasury in connection with the Employees Stock
Ownership Plan, the Savings Plan for Employees, and 2000 Stock Award and
Incentive Plan totaled $983 in 2002 and $890 in 2001.
The accompanying information and notes are an integral part of these
financial statements.
Page 8 FORM 10-Q
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
-----------------------------------------------------------
Information Accompanying Financial Statements (Unaudited)
(In thousands, except share and per share amounts)
March 31, December 31,
2002 2001
--------- ------------
Preferred stocks without mandatory redemption requirements
(All shares redeemed March 1, 2002)
Cumulative preferred stock - $25 par value
5% series (one-tenth of a vote per share)
- 101,777 shares outstanding in 2001 $ -- $ 2,544
Cumulative preference stock - $25 par value
Authorized - 750,000 shares
5% series (non-voting) - 365,158 shares
outstanding in 2001 -- 9,129
Cumulative preferential stock - $35 par value
Authorized - 3,000,000 shares
(one-tenth of a vote per share)-
no outstanding shares -- --
--------- ------------
$ -- $ 11,673
========= ============
Common stockholders' equity
Common stock - $1.25 par value
Authorized - 300,000,000 shares
Issued - 100,048,457 shares in 2002;
100,016,273 shares in 2001 $ 125,060 $ 125,020
Paid-in capital 489,568 489,868
Retained earnings 1,130,988 1,137,772
Accumulated other comprehensive income 3,740 5,958
Unearned compensation -- (539)
Treasury stock at cost - 16,111 shares in
2002; 1,891 shares in 2001 (682) (61)
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$1,748,674 $ 1,758,018
========== ============
At March 31, 2002, common shares reserved for issuance in connection with the
Company's stock plans were 80,865,863 shares for the Stockholder Rights Plan,
1,641,852 shares for the Dividend Reinvestment and Stock Purchase Plan,
565,493 shares for the Employees' Stock Ownership Plan and 532,381 shares for
the Savings Plan for Employees. Up to 4,234,367 shares of common stock may
be issued under the 2000 Stock Award and Incentive Plan, of which
approximately 3,300,000 shares were available to be granted at March 31,
2002.
Page 9 FORM 10-Q
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
-----------------------------------------------------------
Notes to Consolidated Financial Statements (Unaudited)
NOTE 1 -- Financial Statement Presentation
The information presented in this Form 10-Q is unaudited. In the opinion
of management the information reported reflects all adjustments,
consisting of both normal recurring as well as any non-recurring
adjustments, which were necessary to a fair statement of the results for
the periods reported. Certain reclassifications have been made to conform
previously reported data to the current presentation.
NOTE 2 -- Merger Agreement with RWE
On September 16, 2001 the Company entered into a merger agreement with RWE
Aktiengesellschaft and Thames Water Aqua Holdings GmbH, which is RWE's
holding company for its global water business, to merge with a subsidiary
of RWE and become a wholly owned indirect subsidiary of RWE. Under the
terms of the merger agreement RWE will purchase all the outstanding shares
of American Water Works Company common stock at a price of $46.00 per
share in cash.
RWE is a global multi-utility company that does business through its
subsidiaries and affiliates in over 120 countries. Its core businesses
are electricity, gas, water, and waste and recycling. Upon completion of
the transaction, American Water will be combined with the U.S. operations
of Thames Water Plc, RWE's London-based international water services
business. American Water will manage the joint operations in North,
Central and South America.
The transaction was approved at a special meeting of the stockholders of
American Water Works Company on January 17, 2002. Before the transaction
can be completed, state and federal regulatory approvals are required. As
of the end of January 2002, all of the applications for approval were
filed where required by state regulatory authorities. The states where
applications for approval have been filed are Arizona, California, Hawaii,
Illinois, Kentucky, Maryland, New Jersey, New Mexico, New York,
Pennsylvania, Tennessee, Virginia and West Virginia. The states of
Georgia and Michigan do not regulate the Company's utility operations, and
the states of Indiana, Iowa, Missouri, Ohio and Texas have determined they
have no statutory jurisdiction over the RWE transaction. Regulatory
approval has not been requested in Connecticut, Massachusetts and New
Hampshire since these operations have been sold. As of April 1, 2002 the
Company is still awaiting approval in ten states. Those states are
Arizona, California, Illinois, Kentucky, Maryland, New Jersey, New Mexico,
New York, Pennsylvania and West Virginia. The Company anticipates making
a Hart-Scott-Rodino filing with the Federal Trade Commission in the second
quarter of 2002. As a result of the time required to complete the
approval process by the various regulatory agencies, the Company does not
anticipate completion of the merger until the first half of 2003. One
condition of the agreement requires the Company to redeem its publicly
traded preferred stock prior to closing. That redemption was completed on
March 1, 2002.
Page 10 FORM 10-Q
During the first three months of 2002 the Company recorded a charge of
$0.9 million, reflecting costs incurred in connection with the merger.
The merger related costs have been reported on a separate line in the
consolidated statement of income and comprehensive income. No tax benefit
was recognized for these legal fees because it is not probable that these
costs will be deductible for tax purposes.
On November 6, 2001 the Company and its financing subsidiary, American
Water Capital Corp., executed a Note Purchase Agreement with RWE for $1.2
billion in senior unsecured notes at an interest rate of 4.92%. The notes
were purchased at par by RWE and mature on November 6, 2002.
The Company and its subsidiaries used the proceeds from the sale of the
notes to acquire the common stock of Azurix North America and Azurix
Industrials, to fund the acquisition of the water and wastewater assets of
Citizens Communications Company and to reduce outstanding short-term debt.
Closing occurred in two tranches with one on November 6, 2001 in the
amount of $298.5 million and another on January 14, 2002 in the amount of
$900 million.
NOTE 3 -- Acquisition of Water and Wastewater Assets of Citizens
Communications Company
On January 15, 2002 the Company and its subsidiaries completed their
acquisition of all of the water and wastewater assets of Citizens
Communications Company (NYSE:CZN) for $859 million in cash and $120
million of assumed liabilities. The purchase price is subject to
adjustment upon the completion of an audited closing statement of net
assets. The acquired operations provide water and wastewater service to
approximately 284,000 regulated customers in Arizona, California,
Illinois, Indiana, Ohio and Pennsylvania. Citizens also had developed a
water supply project in Illinois with the possibility of additional
wholesale customers along the pipeline.
The Company is in the process of making the determinations as to the
amounts to be assigned to intangible assets and goodwill, and thus has not
finalized the allocation of the purchase price. At March 31, 2002, $137.9
million has been recorded as goodwill on a preliminary basis in connection
with this transaction.
The purchase price for these assets was consistent with the multiples paid
in other similar transactions. Regulatory and strategic considerations
contributed to a purchase price that resulted in the recognition of
goodwill. The assets reside in progressive regulatory environments where
the Company currently operates and broadens the geographic diversity of
the Company's total operations. The inclusion of the acquired customers
in California and Arizona increases the Company's customers in the Western
United States to 10% of its total customer base. With the acquisition,
the Company becomes one of the principal water purveyors in the Phoenix
area and strengthens its competitive position for the privatization
opportunities in this rapidly growing region and the other states included
in the acquisition footprint.
The unaudited pro forma results listed below were prepared as if the
acquisition occurred on January 1, 2001 and include the historical results
of the Company and of the acquired operations. The unaudited pro forma
information is not necessarily indicative of the results of operations
Page 11 FORM 10-Q
that might have occurred had the acquisition actually taken place on the
date indicated, or of future results of operations of the combined
entities:
Quarter ended March 31, 2002 2001
Revenues $389,564 $340,300
Income before cumulative effect of change
in accounting principle 13,767 18,826
Net income 16,446 18,826
Earnings per average common share outstanding
Income before cumulative effect of change
in accounting principle $.13 $.19
Cumulative effect of change in accounting
principle $.03 $ -
Basic $.16 $.19
Income before cumulative effect of change
in accounting principle $.13 $.19
Cumulative effect of change in accounting
principle $.03 $ -
Diluted $.16 $.19
NOTE 4 -- Segment Information
The following table presents information about the Company's reportable
segments.
Regulated
Utility
Services
Unregulated
Services
Other
Items
Consolidated
Three months ended
March 31, 2002
Revenues from external
customers
$338,361
$46,379
$ -
$384,740
Intersegment revenues
1,558
(1,558)
-
Income before
cumulative effect
of change in
accounting principle
25,350
(2,060)
(8,077)
15,213
Net income
28,029
(2,060)
(8,077)
17,892
Total assets
7,346,079
318,454
(21,450)
7,643,083
Three months ended
March 31, 2001
Revenues from external
customers
$306,142
$10,285
$ -
$316,427
Intersegment revenues
1,350
(1,350)
-
Income before
cumulative effect
of change in
accounting principle
30,220
(741)
(6,018)
23,461
Net income
30,220
(741)
(6,018)
23,461
Total assets
6,084,757
98,687
6,494
6,189,938
Page 12 FORM 10-Q
The "other items" include corporate costs of American Water Works Company
and intersegment eliminations.
NOTE 5 -- New Accounting Standards
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, "Business Combinations" (SFAS
141) and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142),
collectively referred to as the "Standards." SFAS 141 supersedes
Accounting Principles Board Opinion (APB) No. 16, "Business Combinations."
The provisions of SFAS 141 (1) require that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001, (2) provided specific criteria for the initial recognition and
measurement of intangible assets apart from goodwill, and (3) require that
unamortized negative goodwill be written off immediately as an
extraordinary gain instead of being deferred and amortized. SFAS 141 also
requires that upon adoption of SFAS 142 the Company reclassify the
carrying amounts of certain intangible assets into or out of goodwill,
based on certain criteria. SFAS 142 supersedes APB 17, "Intangible
Assets," and is effective for fiscal years beginning after December 15,
2001. SFAS 142 primarily addresses the accounting for goodwill and
intangible assets subsequent to their initial recognition. The provisions
of SFAS 142 (1) prohibit the amortization of goodwill and indefinite-lived
intangible assets, (2) require that goodwill and indefinite-lived
intangible assets be tested annually for impairment (and in interim
periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired), (3)
require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill, and (4) remove the forty-year
limitation on the amortization period of intangible assets that have
finite lives. The Company adopted the provisions of the Standards on
January 1, 2002.
The Standards require the excess of the fair values of acquired net assets
over cost recorded in the statement of financial position to be recognized
as the effect of a change in accounting principle as of the date SFAS 141
is initially applied in its entirety. In compliance with this transition
requirement the Company recognized a $2.7 million gain on January 1, 2002.
The Company is in the process of making the determinations as to what its
reporting units are and what amounts of goodwill, intangible assets, other
assets and liabilities should be allocated to those reporting units. The
Company is no longer recording $1.7 million of annual tax deductible
amortization relating to its existing goodwill associated with the 1999
acquisition of its joint venture partner's interest in AmericanAnglian
Environmental Technologies.
SFAS 142 requires that goodwill be tested annually for impairment using a
two-step process. The first step is to identify a potential impairment
and, in transition, this step must be measured as of the beginning of the
fiscal year. However, a company has six months from the date of adoption
to complete the first step. The Company expects to complete that first
step of the goodwill impairment test during the second quarter of 2002.
The second step of the goodwill impairment test measures the amount of the
impairment loss (measured as of the beginning of the year of adoption), if
any, and must be completed by the end of the Company's fiscal year. The
Company has not yet determined what effect these impairment tests will
Page 13 FORM 10-Q
have on the Company's earnings and financial position.
In June of 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations," (SFAS 143) on the accounting for obligations
associated with the retirement of long-lived assets. SFAS 143 requires a
liability to be recognized in the financial statements for retirement
obligations meeting specific criteria. Measurement of the initial
obligation is to approximate fair value with an equivalent amount recorded
as an increase in the value of the capitalized asset. The asset will be
depreciable in accordance with normal depreciation policy and the
liability will be increased, with a charge to the income statement, until
the obligation is settled. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. The Company is currently evaluating the
effects that adoption of the provisions of SFAS 143 will have on its
results of operations and financial position but does not expect them to
be material.
In August of 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," (SFAS 144) that replaces
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS 144 requires that one accounting model be used for long-lived
assets to be disposed of by sale and broadens discontinued operations to
include more disposal transactions. Under SFAS 144, operating losses of
discontinued operations are recognized in the period in which they occur,
instead of accruing future operating losses before they occur. The
effects of adoption of the provisions of SFAS 144 by the Company on
January 1, 2002 did not have a material effect on its results of
operations and financial position.
In April of 2002 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 145, "Recession of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS 145)." SFAS 145 updates, clarifies and simplifies
existing accounting pronouncements. The Company does not expect that the
adoption of the provisions of SFAS 145 to have a material effect on its
results of operations and financial position.
NOTE 6 -- Subsequent Events
SALE OF INVESTMENT IN ITC HOLDING COMPANY
On April 2, 2002 the Company tendered approximately 2.2 million shares of
the 3.5 million shares of ITC Holding Company's common stock it acquired
as part of the acquisition of National Enterprises Inc. The sale, which
was carried out through ITC Holding Company's repurchase program, resulted
in proceeds of $26.2 million, including a $13 million after-tax gain which
will be reflected in second quarter 2002 results.
DIVESTITURE OF NEW ENGLAND OPERATIONS
Kelda Group plc and the Company jointly announced on August 30, 2001 that
they had reached an agreement whereby Kelda's Aquarion Company would
acquire the Company's New England operations. On April 25, 2002 the
Company completed the divestiture and received its initial cash payment of
Page 14 FORM 10-Q
$120.5 million subject to the terms and conditions of the agreement. The
contract calls for certain true-ups with the expected after-tax gain to
amount to approximately $20 million.
The utility operations acquired by Aquarion serve a total of 65,000
customers and had revenues of $51 million in 2001. A finance subsidiary
of the Company, which owns and leases certain assets to its affiliated
operating company in Massachusetts, was also acquired by Aquarion as part
of the transaction.
Page 15 FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
----------------------------------------------------------------------
Results of Operations
---------------------
The operating results of the Azurix and Citizens acquisitions have been
included in the consolidated statements of income and comprehensive income
since the completion of the acquisitions on November 7, 2001 and January
15, 2002, respectively.
Consolidated revenues of $384.7 million for the quarter were 22% higher
than those recorded in the first quarter of 2001. More than half of this
overall revenue growth came about as a result of the acquisition of
Azurix's North American water and wastewater related operations. Another
significant portion of this increase in revenues came from a 13% increase
in the number of customers receiving water and wastewater services from
regulated subsidiaries from the first quarter of 2001 to the first quarter
of 2002. This addition of 334,000 new customers increases the customer
base of the Company's regulated operations to almost three million
customers.
The six state acquisition of the water and wastewater assets from Citizens
accounted for 284,000 of the 334,000 new customers. Customer growth was
also realized by the addition of more than 23,000 new customers in
Missouri from tuck-in acquisitions around St. Louis. Smaller acquisitions
and organic growth of existing distribution systems accounted for the
remaining 27,000 additional customers.
Revenue from rate increases accounted for the remainder of the revenue
growth. During 2002, four utility subsidiaries have received rate orders
that are expected to provide $26.3 million in additional annual revenues.
The most notable of these rate increases was a $24 million annual rate
increase authorization in Pennsylvania that became effective in January of
2002. Two of the Company's subsidiaries have rate increase applications
on file requesting additional annual revenues of $13.6 million. The $12.7
million request by the Company's Indiana subsidiary accounts for the major
portion of the pending requests.
Even though revenues increased between the first quarter of 2001 and the
first quarter of 2002, per customer water sales, excluding the Citizens
acquisition, were five percent less quarter over quarter. This decrease
is mainly a result of lower water sales to industrial customers. The
decline in water sales to industrial customers that impacted financial
results for the year 2001 persisted into the first quarter of 2002. Water
sales of nine billion gallons for the first quarter of 2002 to this group
of customers was about one billion gallons, or about 10 percent less than
water sales to this same group of customers during the first quarter of
2001. These sales losses were most notable in the Midwestern and
Pennsylvania operations.
Page 16 FORM 10-Q
Comparison of water sales information for the first quarter of 2002 and
the first quarter of 2001 showed a slight decline in water sales in
Pennsylvania and New Jersey, where state mandated water use restrictions
are in place. However, if drought conditions persist along the east cost
of the U.S. water use restrictions will have a noticeable impact on
earnings. Water sales are typically greater during June, July and August
than in any other months of the year.
Revenues from the Azurix and Citizens operations are anticipated to be
greater in the later months of 2002 than they were during the first
quarter of 2002. Portions of the Azurix operations, such as its residual
waste removal business, complete their work during the summer months when
warmer weather facilitates the operation of that business. Citizens
operations have historically experienced increased water sales during the
summer months, and that pattern is expected to be repeated during 2002.
Of the 284,000 customers associated with the Citizens acquisition, only
37,000 of those are located in Pennsylvania where water use restrictions
are currently in place.
Operation and maintenance expenses (O&M) increased 39% from those in the
first quarter of 2001 primarily as the result of including the expenses of
the Azurix and Citizens operations. Exclusive of those acquisitions, per
customer O&M of the regulated operations increased 8%. Increased
production costs, especially increased purchased water costs associated
with the drought on the east coast and increased sales in California, were
significant factors in this increase.
The increase in depreciation expense was primarily related to the
company's ongoing program of utility plant construction.
Interest expense rose by $8.8 million, or 18%, to $57.4 million in the
first quarter of 2002. This increase is attributable to approximately
$1.2 billion of new debt associated with the Azurix and Citizens
acquisitions.
Income taxes decreased in the first three months of 2002 when compared to
the first three months in 2001 as a result of decreased earnings.
Net income to common stock was $17.7 million for the first quarter of 2002
compared with $23.3 million for the same period in 2001.
Other comprehensive loss, net of tax, was $2.2 million in the first
quarter of 2002 compared to $2 million in the same period in 2001. The
Company's other comprehensive income or loss represents the after-tax
unrealized gain or loss on passive investments in publicly traded
securities and foreign currency translation adjustments.
Comprehensive income was $15.5 million in the first quarter of 2002
compared to $21.3 million in the same period in 2001.
Earnings per share of common stock in 2002 were $.18 compared to $.24 in
the same period in 2001. These 2002 results include a three-cent per share
positive impact of adopting the new financial accounting standards
relating to business combinations, as well as a six-cent per share
negative impact associated with recent acquisition activity and expenses
of one-cent per share related to the RWE transaction.
Page 17 FORM 10-Q
Capital Resources and Liquidity
-------------------------------
On January 14, 2002 the Company's financing subsidiary, American Water
Capital Corp. closed on its second and final issue totaling $900 million
under the Note Purchase Agreement with RWE. These 4.92% notes were
primarily used to fund the acquisition of the Citizens water and
wastewater assets.
Two subsidiaries issued $39.9 million in tax-exempt long-term debt during
the first four months of 2002.
In the first four months of 2002, the Company invested $13.5 million in
the common stock of two subsidiaries.
A condition of the merger agreement with RWE required the Company to
redeem all of its issued and outstanding shares of 5% Cumulative
Preference Stock and 5% Cumulative Preferred Stock prior to closing. That
redemption was completed on March 1, 2002. The 365,158 shares of 5%
Cumulative Preference Stock were redeemed for $25.00 per share and the
101,777 shares of 5% Cumulative Preferred Stock were redeemed for $25.25
per share, in each case without interest.
On April 2, 2002 the Company tendered approximately 2.2 million shares of
the 3.5 million shares of ITC Holding Company's common stock it acquired
as part of the acquisition of National Enterprises Inc. The sale, which
was carried out through ITC Holding Company's repurchase program, resulted
in proceeds of $26.2 million, including a $13 million after-tax gain which
will be reflected in second quarter 2002 results.
New Accounting Standards
------------------------
In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 141, "Business Combinations" (SFAS
141) and No. 142, "Goodwill and Other Intangible Assets" (SFAS 142),
collectively referred to as the "Standards." SFAS 141 supersedes
Accounting Principles Board Opinion (APB) No. 16, "Business Combinations."
The provisions of SFAS 141 (1) require that the purchase method of
accounting be used for all business combinations initiated after June 30,
2001, (2) provided specific criteria for the initial recognition and
measurement of intangible assets apart from goodwill, and (3) require that
unamortized negative goodwill be written off immediately as an
extraordinary gain instead of being deferred and amortized. SFAS 141 also
requires that upon adoption of SFAS 142 the Company reclassify the
carrying amounts of certain intangible assets into or out of goodwill,
based on certain criteria. SFAS 142 supersedes APB 17, "Intangible
Assets," and is effective for fiscal years beginning after December 15,
2001. SFAS 142 primarily addresses the accounting for goodwill and
intangible assets subsequent to their initial recognition. The provisions
of SFAS 142 (1) prohibit the amortization of goodwill and indefinite-lived
intangible assets, (2) require that goodwill and indefinite-lived
intangible assets be tested annually for impairment (and in interim
periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired), (3)
require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill, and (4) remove the forty-year
Page 18 FORM 10-Q
limitation on the amortization period of intangible assets that have
finite lives. The Company adopted the provisions of the Standards on
January 1, 2002.
The Standards require the excess of the fair values of acquired net assets
over cost recorded in the statement of financial position to be recognized
as the effect of a change in accounting principle as of the date SFAS 141
is initially applied in its entirety. In compliance with this transition
requirement the Company recognized a $2.7 million gain on January 1, 2002.
The Company is in the process of making the determinations as to what its
reporting units are and what amounts of goodwill, intangible assets, other
assets and liabilities should be allocated to those reporting units. The
Company is no longer recording $1.7 million of annual tax deductible
amortization relating to its existing goodwill associated with the 1999
acquisition of its joint venture partner's interest in AmericanAnglian
Environmental Technologies.
SFAS 142 requires that goodwill be tested annually for impairment using a
two-step process. The first step is to identify a potential impairment
and, in transition, this step must be measured as of the beginning of the
fiscal year. However, a company has six months from the date of adoption
to complete the first step. The Company expects to complete that first
step of the goodwill impairment test during the second quarter of 2002.
The second step of the goodwill impairment test measures the amount of the
impairment loss (measured as of the beginning of the year of adoption), if
any, and must be completed by the end of the Company's fiscal year. The
Company has not yet determined what effect these impairment tests will
have on the Company's earnings and financial position.
In June of 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations," (SFAS 143) on the accounting for obligations
associated with the retirement of long-lived assets. SFAS 143 requires a
liability to be recognized in the financial statements for retirement
obligations meeting specific criteria. Measurement of the initial
obligation is to approximate fair value with an equivalent amount recorded
as an increase in the value of the capitalized asset. The asset will be
depreciable in accordance with normal depreciation policy and the
liability will be increased, with a charge to the income statement, until
the obligation is settled. SFAS 143 is effective for fiscal years
beginning after June 15, 2002. The Company is currently evaluating the
effects that adoption of the provisions of SFAS 143 will have on its
results of operations and financial position but does not expect them to
be material.
In August of 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," (SFAS 144) that replaces
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." SFAS 144 requires that one accounting model be used for long-lived
assets to be disposed of by sale and broadens discontinued operations to
include more disposal transactions. Under SFAS 144, operating losses of
discontinued operations are recognized in the period in which they occur,
instead of accruing future operating losses before they occur. The
effects of adoption of the provisions of SFAS 144 by the Company on
Page 19 FORM 10-Q
January 1, 2002 did not have a material effect on its results of
operations and financial position.
In April of 2002 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 145, "Recession of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS 145)." SFAS 145 updates, clarifies and simplifies
existing accounting pronouncements. The Company does not expect that the
adoption of the provisions of SFAS 145 to have a material effect on its
results of operations and financial position.
Forward Looking Information
---------------------------
Forward looking statements in this report, including, without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to
the safe harbor provisions of the U.S. Private Securities Litigation
Reform Act of 1995. These forward looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to be materially
different from any future results, performance or achievements expressed
or implied by such forward looking statements. These factors include,
among others, the following: the success of pending applications for rate
increases, inability to obtain, or to meet conditions imposed for,
regulatory approval of pending acquisitions, weather conditions that tend
to extremes of temperature or duration; availability, terms and
development of capital; business abilities and judgment of personnel;
changes in, or the failure to comply with governmental regulations,
particularly those affecting the environment and water quality;
competition; success of operating initiatives, advertising and promotional
efforts; existence of adverse publicity or litigation; changes in business
strategy or plans; quality of management; general economic and business
conditions; and other factors described in filings of the Company with the
SEC. The Company undertakes no obligation to publicly update or revise any
forward looking statement, whether as a result of new information, future
events or otherwise.
Page 20 FORM 10-Q
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
-------------------------------------------------------------
(a) The Company held its annual meeting of shareholders on May 1, 2002.
(b) Class I Directors (with a term expiring in 2005) were elected by
a vote of:
For Withheld
--- --------
J. James Barr 90,256,263 562,361
Elizabeth H. Gemmill 90,259,959 558,665
Nancy Ware Wainwright 90,229,487 589,137
Paul W. Ware 90,244,309 574,315
William S. White 90,338,173 538,316
The appointment of PricewaterhouseCoopers LLP as the Company's independent
accountants for the year ending December 2002 was approved by a vote of
89,055,798 for the appointment and 1,503,888 against, with 258,938
abstentions.
Page 21 FORM 10-Q
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
A. Exhibits
--------
None
B. Reports on Form 8-K
-------------------
A current report on Form 8-K was filed on January 15, 2002 by the Company
regarding the completion of the acquisition of Citizens Communications'
water and wastewater assets.
A current report on Form 8-K was filed on January 17, 2002 by the Company
regarding the stockholders approval of the September 16, 2001 agreement
and plan of merger pursuant to which the company will merge with a
subsidiary of RWE/AG.
A current report on Form 8-K was filed on February 8, 2002 by the Company
regarding an employee communication relating to its proposed merger with a
subsidiary of RWE/AG.
A current report on Form 8-K was filed on March 28, 2002 by the Company
regarding an employee communication relating to its proposed merger with a
subsidiary of RWE/AG.
Page 22 FORM 10-Q
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICAN WATER WORKS COMPANY, INC.
(Registrant)
Date May 15, 2002 \s\ Ellen C. Wolf
---------------------- -----------------------------------------
Vice President and Chief Financial Officer
(Authorized Officer)
Date May 15, 2002 \s\ Robert D. Sievers
---------------------- ---------------------------------------
Comptroller
(Chief Accounting Officer)