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
<PAGE>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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>
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.
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.
<PAGE>
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
<PAGE>
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.
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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
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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.
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(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,
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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
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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.
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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
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
_____________________________________________________________________________
<PAGE>
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.
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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-
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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
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<PAGE>
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
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<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
[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
EXHIBIT 10(i)
AMERICAN WATER WORKS COMPANY, INC.
DEFERRED COMPENSATION PLAN
(As amended and restated effective October 1, 1998)
<PAGE>
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
<PAGE>
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
<PAGE>
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-
<PAGE>
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.
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<PAGE>
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-
<PAGE>
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.
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<PAGE>
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
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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
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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
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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.
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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.
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<PAGE>
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:
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(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
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<PAGE>
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.
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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
EXHIBIT 13
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
- ---------------------------------------------------------------------------
CONSOLIDATED SUMMARY OF SELECTED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998 1997 1996 1995 1994
=====================================================================================================
<S> <C> <C> <C> <C> <C>
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
</TABLE>
22
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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
<PAGE>
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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
<PAGE>
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
- ---------------------------------------------------------------------------
ANALYSIS OF GROWTH IN INVESTMENT IN SUBSIDIARIES
<TABLE>
<CAPTION>
(000) 1998 1997 1996 1995 1994
=========================================================================================================
<S> <C> <C> <C> <C> <C>
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
============================================================
</TABLE>
<TABLE>
<CAPTION>
ANALYSIS OF CHANGE IN INCOME
(000) 1998 1997 1996 1995 1994
==========================================================================================================
<S> <C> <C> <C> <C> <C>
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
===========================================================
</TABLE>
25
<PAGE>
- ---------------------------------------------------------------------------
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
<TABLE>
<CAPTION>
CONSTRUCTION EXPENDITURES BY CATEGORY
(000) 1998 1997 1996 1995 1994
=========================================================================================
<S> <C> <C> <C> <C> <C>
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
====================================================
</TABLE>
26
<PAGE>
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
<PAGE>
- ---------------------------------------------------------------------------
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
<PAGE>
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
<PAGE>
- ---------------------------------------------------------------------------
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
<PAGE>
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
<PAGE>
- ---------------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
INTEREST RATE RISK
Fair Value at
(000) 1999 2000 2001 2002 2003 Thereafter Total Dec. 31, 1998
=========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
</TABLE>
32
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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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
- ---------------------------------------------------------------------------
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
- ------------------------------------------------------------------------------
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
<PAGE>
AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CURRENT
MATURITIES 1998 1997
=======================================================================================
<S> <C> <C> <C>
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
======================
</TABLE>
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
<PAGE>
AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES
- ---------------------------------------------------------------------------
CONSOLIDATED STATEMENT OF COMMON STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Common Stock Common
--------------------- Paid-in Retained Unearned Stockholders'
Shares Par Value Capital Earnings Compensation Equity
==============================================================================================================
<S> <C> <C> <C> <C> <C> <C>
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
==========================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
44
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
- ---------------------------------------------------------------------------
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
<PAGE>
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
<PAGE>
- ---------------------------------------------------------------------------
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
<PAGE>
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
<PAGE>
- ---------------------------------------------------------------------------
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
<PAGE>
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
<PAGE>
- ---------------------------------------------------------------------------
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
<PAGE>
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
<PAGE>
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
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.
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