UNITED STATES SECURITIES AND EXCHANGE COMMISSION
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Analyst conference call, Monday Oct 29, 2001.
American Water Works
Moderator: Jim Harrison
October 29, 2001
1:00 p.m. MT
Operator: Ladies and gentlemen thank you for standing by. Welcome to
the American Water Works Company, Inc. third quarter results
conference call. At this time, all participants are in a
listen-only mode. Later we will conduct question and answer
session. At that time, if you have a question, you will need
to press the one followed by the four on your telephone. As a
reminder this conference is being recorded Monday, October
29, 2001. A Post View replay of this conference will be
available beginning today at 4:00 pm eastern and running
through November 5. To access the Post View replay, you will
need to dial 800/633-8284 and enter reservation number
19805637. I would now like to turn the conference over to Jim
Harrison, Vice-President of Investor Relations. Please go
ahead, sir.
Jim Harrison: Good afternoon. Thank you for participating in this
conference call to review our financial results for the third
quarter and to those of you listening to the webcast,
welcome. I'm Jim Harrison, Vice-President of Investor
Relations. Joining me today is Ellen Wolf, our Chief
Financial Officer. After I complete some preliminary matters,
Ellen will conduct the remainder of the call. Those of you
participating on the call should have received a copy of the
press release and the financial information. Anyone who did
not, you can call Kim Oliver at 480/614-3002, and she will
fax it to you. The information can also be found on our
website www.amwater.com. Participants or those listening to
the call are asked to be aware that forward looking
statements made during the call are based on current
information and expectations. Those statements are subject to
risk and uncertainty that may cause the actual results to
differ. It's for that reason, we advise that reference be
made to the disclosure language located at the bottom of the
press release for an explanation of some of the factors that
could impact forward looking statements. With those
preliminary matters completed, I'll turn the call over to
Ellen.
Ellen Wolf: Thank you Jim. As noted in our press release, net income from
operations for the third quarter was $62.6 million or 63
cents a share excluding one-time amounts that I'll talk about
in a minute. These third quarter results exceeded the 51
cents per share earned in the third quarter of 2000 where we
had experienced cooler temperatures and more frequent
rainfall than is normal for that time of the year. Water
sales throughout most of our service areas returned to more
historical levels except for our southeast region which
continued to experience frequent rainfalls during the third
quarter. Total gallons sold for the regulated operations were
102 billion for the third quarter versus 99.5 billion for the
same time last year. Our third quarter results were also
impacted by some one-time transactions which are shown on the
income statement. There are two items. First, expenses
incurred to negotiate our agreement with RWE for their
purchase of all of the company's common stock resulted in a
10 cents per-share charge. These expenses were offset by a
three cent per-share net gain on a sale which occurred at the
end of September of our water assets serving the city of
Salisbury, Massachusetts.
Now to talk about the individual components. On revenues.
As we had mentioned in our release, revenues for the
quarter increased $31 million to reach $395 million. This
represents an 8.5 percent improvement above the $364
million realized during the third quarter last year.
Factors contributing to this improvement were improved
sales, continued customer growth, and rate increases. The
addition of more than 40,000 customers since September 30,
2000 resulted in 2.5 billion gallons of additional sales
representing an increase of 2.5 percent gallons. This
improvement accounted for almost $10 million of the
revenue improvement. Revenues from rate increases
accounted for the remaining $21 million of that increase.
Ten rate increases were implemented between September 30,
2000 and September 30, 2001. The two most significant rate
increases were for approximately $12 million, which was
authorized in Missouri, and $5 million, which was
authorized in Illinois.
On the expense side, an increase of $12.5 million or 8.1
percent in operation and maintenance expenses for the
third quarter of this year over the third quarter last
year was primarily driven by the results of a $5 million
increase in our production costs such as power, purchased
water, and chemicals. However, on a per-customer O&M
expense basis for the 12 months ended September 30, 2001
we were only up 3.5 percent from per customer O&M for that
12 months ended. Operating margins of 33.5 percent in 2001
were virtually unchanged from the 33.4 percent in 2000. We
are making significant progress with the completion of our
projects to consolidate customer service and financial
functions of the company. Our national call center became
operational last quarter and now provides customer service
to about half of the total customer base for American
Water Works. The scheduled completion date for that
project is the end of 2002. Last month, the beginning of
September, we began operations of our shared services
center that completes many of the financial functions of
the company such as payroll, vendor reimbursement,
accounting, and rate case preparation on a consolidated
basis. That project will be completed by the end of this
year.
As noted during our discussion of increased revenues, rate
increases provided a significant contribution to improved
quarterly results. Four additional rate increase requests are
pending, which if approved as filed, will produce 55 million
in additional revenue. A $39 million request by our
Pennsylvania subsidiary and a $13 million request by our
Indiana subsidiary account for more than 95 percent of the
outstanding requests. Decisions on these requests are
anticipated in January 2002 for Pennsylvania and July 2002
for Indiana.
In a moment, I'll provide some updated information on the
Citizens, Azurix North America, and RWE acquisitions. First
I'd like to take a moment to provide additional details
regarding our other growth projects. The addition of more
than 40,000 customers to our regulated subsidiaries that was
mentioned earlier during the revenue increase discussion
resulted from the completion and integration of eight
different acquisitions since September 30, 2000, and internal
growth from projects to extend existing distribution systems.
This type of growth will continue as consolidation of the
water industry occurs. We also have 23 acquisitions in
various states of completion other than the acquisition of
the water and wastewater assets owned by Citizens. These
acquisitions will add another 40,000-plus customers to our
regulated customer base and approximately $6.5 million in
additional annual revenue.
An update on our contract management business. In September,
we completed the acquisition of the remaining interests of
our partnership in a joint venture with Environmental
Management Corporation. The joint venture provided operating
services for municipally owned water and wastewater systems
in the Midwest under long-term contracts. Sole ownership of
this joint venture continues to strengthen our credentials as
an operator of water and wastewater systems. As discussed in
the press release, we are moving forward with completion of
the Citizens transaction and anticipate closing on that
transaction prior to the end of this year. However,
procedural delays due to appeals filed with the California
Public Utility Commission have delayed closing again at least
until the end of this year.
We continue to move forward in our acquisition with the
Azurix North America and anticipate the closing of that
transaction in November. As it relates to approvals for the
RWE agreement, we've identified 14 states that we believe
require approval. These states are Arizona, California,
Connecticut, Illinois, Kentucky, Maryland, New Hampshire, New
Jersey, New Mexico, New York, Ohio, Pennsylvania, Virginia
and West Virginia. We also will need approval in Connecticut
and New Hampshire for our transaction with Kelda Group and
our sale of the New England properties to that organization.
In five other states, we will be filing advisory letters.
These states are Hawaii, Iowa, Missouri, Tennessee, and
Texas.
That concludes my prepared remarks at this point. Operator,
you can now open the call for any questions.
Operator: Ladies and gentlemen, we will now begin the
question-and-answer session. If you have a question, please
press the one followed by the four on your telephone. You
will hear a three-tone prompt acknowledging your request. If
your question has been answered and you wish to withdraw your
polling request, you may do so by pressing the one followed
by the three. If you are using a speakerphone, please pick up
the handset before entering your request. Once again, if you
do have a question, please press the one followed by the four
at this time. Once again if you do have a question, please
press the one followed by the four. Sean Dany with Gruss
Asset Management, please go ahead.
Sean Dany: Yes. Could you please give us a brief picture of what the
response has been to the RWE transaction since you guys
announced it - I mean from the states?
E. Wolf: We've not met with any of the states individually. I can talk
to you about our shareholders who are very pleased with the
transaction. In terms of the individual states, we'll be
doing our filings over the next month or so. We'll have a
better idea at that point.
S. Dany: Are there any states which you expect to represent sort of
the gating approval - that have longer approval processes
than other states?
E. Wolf: There are some states--each state has a different timeframe
in which they must rule or approve the transaction. Some
states have absolutely no time limits and other states have a
two-month period and some states have a year to look at the
transaction. We've looked at all of those historically. There
is not one that I would say could delay us beyond any others.
California, as you know, we're heading into our second year
with that approval and it did take close to two years to get
that approval. That was a more complex transaction, the
Citizens - at the time, it was combined with San Jose-was
more complex that what we're dealing with here, which is a
straight acquisition of the parent company.
S. Dany: OK. Great. Thank you.
Operator: The next question comes from Michael Herzog with Davidson
Kempner. Please go ahead.
Michael Herzog: Hi. Just building on that, could you give us a little bit
more flavor for where you think the important filings are
going to be required now? I understand that it is 14 states
that we need filings in. Just an overview of how the process
is going to go.
E. Wolf: I wish I could give you a cookie cutter answer for all of the
states but there isn't one. Different states have different
requirements. The way the process we're working on now is
that we'll file the applications starting in December. We
will file in all 14 states, and then in terms of response to
inquiries or questions that they have, we will do and respond
to those as soon as we receive the individual comments from
the staff and the Commission.
M. Herzog: Do we know, for instance, whether we definitely have to file
with California?
E. Wolf: Yes we do.
M. Herzog: We definitely do?
E. Wolf: Yes.
M. Herzog: OK.
E. Wolf: In the list of 14 states I mentioned, those are states we
have to file in. California is one. New Jersey is another.
Pennsylvania--if I look at our major states, it's
Pennsylvania, New Jersey, West Virginia, Illinois, California
of the larger states.
M. Herzog: OK, and the feedback to date?
E. Wolf: We've not had discussions with the Commissioners or the
staff. We will do that as allowed to by the individual state
rules when we file the applications.
M. Herzog: OK. Thank you.
Operator: The next question comes from Robert Miller Bakewell with
Merrill Lynch. Please go ahead.
Robert Bakewell: Some more background to the 3.5 percent increase in O&M
expenses per customer. To what extent do you see that as a
run rate going forward? Or do you believe that with the
accounting center being fully operational at the end of the
year in the customer services area that there will actually
be some reductions in the run rate going forward?
E. Wolf: I would expect that our run rate going forward would decrease
starting towards the end of 2002 as we complete all of these
consolidations.
RM Bakewell: Thank you.
Operator: If there are any additional questions, please press the one
followed by the four at this time. The next question comes
from Jakob Holm with Bay Isle Financial. Please go ahead.
Jakob Holm: Good afternoon everyone. I was wondering with the 14 states
where you must file for approval, if the approval process
runs into rough water in any one of those, can RWE walk away
from the transaction at this point?
E. Wolf: The transaction, if you--it is available for you to look at
the agreement. It is filed with the SEC if you would like to
do that. It has several clauses dealing with materiality and
material adverse effect. It is our intent as well as RWE's
and Thames' to get this transaction completed, and that is
the goal that we've set for ourselves.
J. Holm: OK. Thank you.
Operator: The next question comes from Christian Correa with Lehman
Brothers. Please go ahead.
Christian Correa: Could you repeat the list of states in which you're required
to file and the states in which you've made advisory filings.
E. Wolf: Did I read that too fast?
C.Correa: It was pretty quick.
E. Wolf: It is available. We will have it up for you to look at. Here
it is: Arizona, California, Connecticut, Illinois, Kentucky,
Maryland, New Hampshire, New Jersey, New Mexico, New York,
Ohio, Pennsylvania, Virginia, and West Virginia. Connecticut
and New Hampshire. That is our interpretation at the moment.
There are advisory letters that we are filing in Hawaii,
Iowa, Missouri, Tennessee, and Texas.
C. Correa: Great. Thank you.
E. Wolf: You're welcome.
Operator: Once again, if you do have a question, please press the one
followed by the four at this time. I am showing no additional
questions. Please continue with your presentation or any
closing comments.
E. Wolf: I'd like to thank each of you for joining us on our quarterly
call. If you have any questions, feel free to direct them to
myself or Jim Harrison. Thank you.
Operator: Ladies and gentlemen, that does conclude your conference for
today. A Post View replay of this conference will be
available beginning today at 4:00 pm eastern and running
through November 5th. To access the Post View replay you will
need to dial 800/633-8284 and enter reservation number
19805637. You may all disconnect. Thank you for
participating.
* * *
American Water Works Company, Inc. (the "Company"), RWE
Aktiengesellschaft, a company organized under the laws of the Federal Republic
of Germany ("Guarantor"), Thames Water Aqua Holdings GmbH, a company organized
under the laws of the Federal Republic of Germany and a wholly owned
subsidiary of Guarantor ("Parent"), and Apollo Acquisition Company, a Delaware
corporation and a wholly owned subsidiary of Parent ("Sub") have entered into
an Agreement and Plan of Merger, dated as of September 16, 2001, pursuant to
which Sub will be merged with and into the Company with the Company surviving
the merger (the "Merger"). In connection with the Merger, the Company will be
filing a proxy statement with the Securities and Exchange Commission (the
"SEC"). SECURITY HOLDERS OF THE COMPANY ARE URGED TO READ THE PROXY STATEMENT
WHEN IT BECOMES AVAILABLE BECAUSE IT CONTAINS IMPORTANT INFORMATION REGARDING
THE MERGER. Investors and security holders may obtain a free copy of the proxy
statement when it becomes available and other documents filed by the Company
with the SEC in connection with the Merger at the SEC's web site at
www.sec.gov. Security holders of the Company may also obtain for free a copy
of the proxy statement and other documents filed with the SEC by the Company
in connection with the Merger by contacting Nancy A. Macenko, Vice President
External Affairs, at (856) 566-4026.
The Company and its subsidiaries and their respective directors and
executive officers may be deemed to be participants in the solicitation of
proxies from the Company's stockholders in favor of the Merger. These
directors include the following: Marilyn Ware, Gerald C. Smith, J. James Barr,
Henry G. Hager, Ross A. Webber, Frederick S. Kirkpatrick, Paul W. Ware, Nancy
Ware Wainwright, Ray J. Groves, Elizabeth H. Gemmill, William S. White,
Anthony P. Terracciano, William O. Albertini, Rhoda W. Cobb and Horace
Wilkins, Jr. and these officers include Joseph F. Hartnett, Jr., Daniel L.
Kelleher, W. Timothy Pohl, Robert D. Sievers, Ellen C. Wolf, Nancy A. Macenko
and James E. Harrison. Collectively, as of March 5, 2001, the directors and
executive officers of the Company may be deemed to beneficially own
approximately 21.9% of the outstanding shares of the Company's common stock
and under 5% of the outstanding shares of the Company's Cumulative Preferred
Stock, 5% Series. Stockholders of the Company may obtain additional
information regarding the interests of the participants by reading the proxy
statement when it becomes available.
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; the ability to satisfy the conditions to closing set
forth in the definitive agreement; 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.