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Section 1: 10-Q (FORM 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

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 001-34028

 

 

AMERICAN WATER WORKS COMPANY, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   51-0063696

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1025 Laurel Oak Road, Voorhees, NJ   08043
(Address of principal executive offices)   (Zip Code)

(856) 346-8200

(Registrant’s telephone number, including area code)

 

 

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.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).    ¨  Yes    x  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at May 2, 2013

Common Stock, $0.01 par value per share   177,700,586 shares

 

 

 


Table of Contents

TABLE OF CONTENTS

AMERICAN WATER WORKS COMPANY, INC.

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2013

INDEX

 

PART I. FINANCIAL INFORMATION

     2   

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

     2-20   

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     21-32   

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     33   

ITEM 4. CONTROLS AND PROCEDURES

     33   

PART II. OTHER INFORMATION

     34   

ITEM 1. LEGAL PROCEEDINGS

     34   

ITEM 1A. RISK FACTORS

     34   

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     34   

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     34   

ITEM 4. MINE SAFETY DISCLOSURES

     34   

ITEM 5. OTHER INFORMATION

     34   

ITEM 6. EXHIBITS

     34   

SIGNATURES

     35   

EXHIBITS INDEX

  

EXHIBIT 10.1

  

EXHIBIT 10.2

  

EXHIBIT 10.2A

  

EXHIBIT 10.3

  

EXHIBIT 10.4

  

EXHIBIT 10.5

  

EXHIBIT 10.6

  

EXHIBIT 10.7

  

EXHIBIT 10.8

  

EXHIBIT 10.9

  

EXHIBIT 10.10

  

EXHIBIT 10.11

  

EXHIBIT 10.12

  

EXHIBIT 31.1

  

EXHIBIT 31.2

  

EXHIBIT 32.1

  

EXHIBIT 32.2

  

 

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Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Balance Sheets (Unaudited)

(In thousands, except per share data)

 

     March 31,
2013
    December 31,
2012
 
ASSETS     

Property, plant and equipment

    

Utility plant—at original cost, net of accumulated depreciation of $3,717,562 at March 31 and $3,657,221 at December 31

   $ 11,641,442      $ 11,584,944   

Nonutility property, net of accumulated depreciation of $207,858 at March 31 and $199,467 at December 31

     151,493        154,420   
  

 

 

   

 

 

 

Total property, plant and equipment

     11,792,935        11,739,364   
  

 

 

   

 

 

 

Current assets

    

Cash and cash equivalents

     21,181        24,433   

Restricted funds

     31,623        29,756   

Accounts receivable

     208,276        221,655   

Allowance for uncollectible accounts

     (25,425     (26,874

Unbilled revenues

     170,742        180,628   

Income taxes receivable

     13,137        9,594   

Materials and supplies

     31,150        29,772   

Other

     41,166        30,483   
  

 

 

   

 

 

 

Total current assets

     491,850        499,447   
  

 

 

   

 

 

 

Regulatory and other long-term assets

    

Regulatory assets

     1,207,967        1,199,114   

Restricted funds

     7,246        10,791   

Goodwill

     1,207,161        1,207,250   

Other

     62,057        63,010   
  

 

 

   

 

 

 

Total regulatory and other long-term assets

     2,484,431        2,480,165   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 14,769,216      $ 14,718,976   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Balance Sheets (Unaudited)

(In thousands, except per share data)

 

     March 31,
2013
    December 31,
2012
 
CAPITALIZATION AND LIABILITIES     

Capitalization

    

Common stock ($.01 par value, 500,000 shares authorized, 177,674 and 176,988 shares outstanding at March 31 and December 31, respectively)

   $ 1,777      $ 1,770   

Paid-in-capital

     6,232,815        6,222,644   

Accumulated deficit

     (1,607,321     (1,664,955

Accumulated other comprehensive loss

     (114,286     (116,191

Treasury stock

     (5,043     0   
  

 

 

   

 

 

 

Common stockholders’ equity

     4,507,942        4,443,268   

Preferred stock without mandatory redemption requirements

     1,720        1,720   
  

 

 

   

 

 

 

Total stockholders’ equity

     4,509,662        4,444,988   
  

 

 

   

 

 

 

Long-term debt

    

Long-term debt

     5,184,943        5,190,509   

Redeemable preferred stock at redemption value

     17,652        18,861   
  

 

 

   

 

 

 

Total capitalization

     9,712,257        9,654,358   
  

 

 

   

 

 

 

Current liabilities

    

Short-term debt

     333,786        269,985   

Current portion of long-term debt

     115,924        115,919   

Accounts payable

     166,723        279,613   

Taxes accrued

     51,152        35,555   

Interest accrued

     101,101        53,810   

Other

     189,646        239,950   
  

 

 

   

 

 

 

Total current liabilities

     958,332        994,832   
  

 

 

   

 

 

 

Regulatory and other long-term liabilities

    

Advances for construction

     379,280        379,737   

Deferred income taxes

     1,518,408        1,471,153   

Deferred investment tax credits

     27,533        27,909   

Regulatory liabilities

     370,340        364,181   

Accrued pension expense

     448,563        461,647   

Accrued postretirement benefit expense

     253,318        254,147   

Other

     98,777        114,876   
  

 

 

   

 

 

 

Total regulatory and other long-term liabilities

     3,096,219        3,073,650   
  

 

 

   

 

 

 

Contributions in aid of construction

     1,002,408        996,136   

Commitments and contingencies (See Note 10)

     —          —     
  

 

 

   

 

 

 

TOTAL CAPITALIZATION AND LIABILITIES

   $ 14,769,216      $ 14,718,976   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Operations and Comprehensive Income (Unaudited)

(In thousands, except per share data)

 

     Three Months Ended
March 31,
 
     2013     2012  

Operating revenues

   $ 636,137      $ 618,554   
  

 

 

   

 

 

 

Operating expenses

    

Operation and maintenance

     312,203        310,004   

Depreciation and amortization

     99,649        92,104   

General taxes

     60,146        57,121   

(Gain) loss on asset dispositions and purchases

     (94     (413
  

 

 

   

 

 

 

Total operating expenses, net

     471,904        458,816   
  

 

 

   

 

 

 

Operating income

     164,233        159,738   
  

 

 

   

 

 

 

Other income (expenses)

    

Interest, net

     (78,114     (79,654

Allowance for other funds used during construction

     3,396        4,362   

Allowance for borrowed funds used during construction

     1,653        2,081   

Amortization of debt expense

     (1,581     (1,266

Other, net

     (776     (616
  

 

 

   

 

 

 

Total other income (expenses)

     (75,422     (75,093
  

 

 

   

 

 

 

Income from continuing operations before income taxes

     88,811        84,645   

Provision for income taxes

     31,168        35,393   
  

 

 

   

 

 

 

Income from continuing operations

     57,643        49,252   

Loss from discontinued operations, net of tax

     0        (7,498
  

 

 

   

 

 

 

Net income

   $ 57,643      $ 41,754   
  

 

 

   

 

 

 

Other comprehensive income, net of tax:

    

Pension plan amortized to periodic benefit cost:

    

Prior service cost, net of tax of $28 and $28, respectively

     43        44   

Actuarial loss, net of tax of $1,424 and $1,167, respectively

     2,228        1,825   

Foreign currency translation adjustment

     (366     259   
  

 

 

   

 

 

 

Other comprehensive income

     1,905        2,128   
  

 

 

   

 

 

 

Comprehensive income

   $ 59,548      $ 43,882   
  

 

 

   

 

 

 

Basic earnings per common share:(a)

    

Income from continuing operations

   $ 0.32      $ 0.28   
  

 

 

   

 

 

 

Loss from discontinued operations, net of tax

   $ 0.00      $ (0.04
  

 

 

   

 

 

 

Net income

   $ 0.32      $ 0.24   
  

 

 

   

 

 

 

Diluted earnings per common share:(a)

    

Income from continuing operations

   $ 0.32      $ 0.28   
  

 

 

   

 

 

 

Loss from discontinued operations, net of tax

   $ 0.00      $ (0.04
  

 

 

   

 

 

 

Net income

   $ 0.32      $ 0.24   
  

 

 

   

 

 

 

Average common shares outstanding during the period:

    

Basic

     177,327        175,914   
  

 

 

   

 

 

 

Diluted

     178,465        177,028   
  

 

 

   

 

 

 

Dividends per common share

   $ 0.00      $ 0.23   
  

 

 

   

 

 

 

 

(a) Amounts may not sum due to rounding.

The accompanying notes are an integral part of these consolidated financial statements.

 

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American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Cash Flows (Unaudited)

(In thousands, except per share data)

 

     Three Months Ended
March 31,
 
     2013     2012  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net income

   $ 57,643      $ 41,754   

Adjustments

    

Depreciation and amortization

     99,649        92,104   

Provision for deferred income taxes

     29,446        39,669   

Amortization of deferred investment tax credits

     (376     (380

Provision for losses on accounts receivable

     3,041        2,357   

Allowance for other funds used during construction

     (3,396     (4,362

(Gain) loss on asset dispositions and purchases

     (94     (413

Pension and non-pension postretirement benefits

     19,518        20,141   

Stock-based compensation expense

     2,042        2,268   

Other, net

     (8,160     (5,649

Changes in assets and liabilities

    

Receivables and unbilled utility revenues

     18,775        12,650   

Taxes receivable, including income taxes

     (3,543     4,370   

Other current assets

     (12,060     (12,038

Pension and non-pension post retirement benefit contributions

     (29,766     (40,427

Accounts payable

     (37,278     (45,684

Taxes accrued, including income taxes

     14,854        20,055   

Interest accrued

     47,291        43,818   

Change in book overdraft

     (21,960     0   

Other current liabilities

     (26,001     (22,134
  

 

 

   

 

 

 

Net cash provided by operating activities

     149,625        148,099   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Capital expenditures

     (213,086     (233,366

Acquisitions

     (2,836     (104

Proceeds from sale of assets and securities

     280        461,375   

Removal costs from property, plant and equipment retirements, net

     (10,721     (10,927

Net funds (restricted) released

     (1,347     12,627   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (227,710     229,605   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from long-term debt

     1,378        14,372   

Repayment of long-term debt

     (2,392     (6,229

Net borrowings (repayments) under short-term debt agreements

     63,801        (347,951

Proceeds from issuances of employee stock plans and DRIP

     8,141        9,634   

Advances and contributions for construction, net of refunds of $4,477 and $3,607 at March 31, 2013 and 2012, respectively

     5,105        7,820   

Change in bank overdraft position

     0        (20,570

Redemption of preferred stocks

     (1,200     (1,100

Dividends paid

     0        (40,414

Other

     0        2,029   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     74,833        (382,409
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (3,252     (4,705

Cash and cash equivalents at beginning of period

     24,433        14,207   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 21,181      $ 9,502   
  

 

 

   

 

 

 

Non-cash investing activity:

    

Capital expenditures acquired on account but unpaid at quarter-end

   $ 81,455      $ 75,755   

Non-cash financing activity:

    

Advances and contributions

   $ 2,756      $ 1,182   

Dividends accrued

   $ 0      $ 40,526   

The accompanying notes are an integral part of these consolidated financial statements.

 

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Table of Contents

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)

(In thousands, except per share data)

    Common Stock                 Accumulated
Other
    Treasury Stock     Preferred
Stock
of
Subsidiary
Companies
Without
Mandatory
    Total
 
    Shares     Par
Value
    Paid-in
Capital
    Accumulated
Deficit
    Comprehensive
Loss
    Shares     At Cost     Redemption
Requirements
    Stockholders’
Equity
 

Balance at December 31, 2012

    176,988      $ 1,770      $ 6,222,644      $ (1,664,955   $ (116,191     0      $ 0      $ 1,720      $ 4,444,988   

Net income

    —          —          —          57,643        —          —          —          —          57,643   

Direct stock reinvestment and purchase plan, net of expense of $5

    10        0        387        —          —          —          —          —          387   

Employee stock purchase plan

    25        0        989        —          —          0        0        —          989   

Stock-based compensation activity

    651        7        8,795        (9     —          (132     (5,043     —          3,750   

Other comprehensive income, net of tax of $1,452

    —          —          —          —          1,905        —          —          —          1,905   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2013

    177,674      $ 1,777      $ 6,232,815      $ (1,607,321   $ (114,286     (132   $ (5,043   $ 1,720      $   4,509,662   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Common Stock                 Accumulated
Other
    Treasury Stock     Preferred
Stock
of
Subsidiary
Companies
Without
Mandatory
    Total
 
    Shares     Par
Value
    Paid-in
Capital
    Accumulated
Deficit
    Comprehensive
Loss
    Shares     At Cost     Redemption
Requirements
    Stockholders’
Equity
 

Balance at December 31, 2011

    175,664      $ 1,757      $ 6,180,558      $ (1,848,801   $ (97,677     0      $ 0      $ 4,547      $ 4,240,384   

Net income

    —          —          —          41,754        —          —          —          —          41,754   

Direct stock reinvestment and purchase plan, net of expense of $1

    17        0        570        —          —          —          —          —          570   

Employee stock purchase plan

    0        0        132        —          —          31        1,046        —          1,178   

Stock-based compensation activity

    519        5        11,166        (165     —          (31     (1,046     —          9,960   

Other comprehensive income, net of tax of $1,195

    —          —          —          —          2,128        —          —          —          2,128   

Dividends

    —          —          —          (40,538     —          —          —          —          (40,538
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

    176,200      $ 1,762      $ 6,192,426      $ (1,847,750   $   (95,549           0      $          0      $ 4,547      $ 4,255,436   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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American Water Works Company, Inc. and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except per share data)

Note 1: Basis of Presentation

The accompanying Consolidated Balance Sheet of American Water Works Company, Inc. and Subsidiary Companies (the “Company”) at March 31, 2013, the Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2013 and 2012, the Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012, and the Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2013 and 2012, are unaudited, but reflect all adjustments, which are, in the opinion of management, necessary to present fairly the consolidated financial position, the consolidated changes in stockholders’ equity, the consolidated results of operations and comprehensive income, and the consolidated cash flows for the periods presented. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Because they cover interim periods, the unaudited consolidated financial statements and related notes to the consolidated financial statements do not include all disclosures and notes normally provided in annual financial statements and, therefore, should be read in conjunction with the Company’s Consolidated Financial Statements and related Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the year, due primarily to the seasonality of the Company’s operations.

Certain reclassifications have been made to previously reported data to conform to the current presentation.

Note 2: New Accounting Pronouncements

The following recently issued accounting standards have been adopted by the Company and have been included in the consolidated results of operations, financial position or footnotes of the accompanying Consolidated Financial Statements:

Balance Sheet Offsetting

In December 2011, the Financial Accounting Standards Board (“FASB”) issued accounting guidance to amend the existing disclosure requirements for offsetting financial assets and liabilities to enhance current disclosures, as well as to improve comparability of balance sheets prepared under U.S. Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards (“IFRS”). In January 2013, the FASB issued additional guidance on the scope of these disclosures. The revised disclosure guidance applies to derivative instruments and securities borrowing and lending transactions that are either offset in the financial statements or subject to an enforceable master netting arrangement or similar agreement. The revised disclosure guidance is effective on a retrospective basis for interim and annual periods beginning January 1, 2013. As this guidance provides for additional disclosure requirements only, the adoption of this guidance did not have an impact on the Company’s results of operations, financial position or cash flows.

Testing Indefinite-Lived Intangible Assets for Impairment

In July 2012, the FASB updated the accounting guidance related to testing indefinite-lived intangible assets for impairment. This update permits an entity to perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test under current guidance. This update is effective for annual and interim impairment tests performed by the Company beginning on January 1, 2013. The adoption of this guidance did not have an impact on the Company’s results of operations, financial position or cash flows.

Amounts Reclassified Out of Accumulated Other Comprehensive Income

In February 2013, the FASB updated accounting guidance to add new disclosure requirements for items reclassified out of accumulated other comprehensive income. The update does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. The amendments are required to be applied prospectively for interim and annual reporting periods beginning January 1, 2013. As this guidance provides for additional disclosure requirements only, the adoption of this guidance did not have an impact on the Company’s results of operations, financial position or cash flows.

 

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The following recently announced accounting standards are not yet required to be adopted by the Company or included in the consolidated results of operations, financial position or footnotes of the Company:

Obligations Resulting from Joint and Several Liability Arrangements

In February 2013, the FASB issued guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. Examples of obligations within the scope of the updated guidance include debt arrangements, other contractual obligations, and settled litigation and judicial rulings. The update requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, as the sum of the following: (a) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (b) any additional amount the reporting entity expects to pay on behalf of its co-obligors. The updated guidance also includes additional disclosures regarding the nature and amount of the obligation as well as other information about those obligations. The update is effective on a retrospective basis for interim and annual periods beginning January 1, 2014. Early adoption is permitted. The Company is evaluating the specific provisions of the updated guidance, but does not expect the adoption of this guidance to have a significant impact on the Company’s results of operations, financial position or cash flows.

Foreign Currency Matters

In March 2013, the FASB issued guidance for a parent’s accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. The amendments resolve differing views in practice and apply to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or a business within a foreign entity. The update is effective prospectively for interim and annual periods beginning January 1, 2014. Early adoption is permitted. The Company does not expect the adoption of the updated guidance to have a significant impact on its results of operations, financial position or cash flows.

Note 3: Acquisitions and Divestitures

Acquisitions

As of March 31, 2013, the Company closed on five acquisitions of various regulated water and wastewater systems for a total aggregate purchase price of $2,836. Assets acquired, principally plant, totaled $3,535. Liabilities assumed, primarily contributions in aid of construction, totaled $699.

Divestitures

As part of the Company’s strategic review of its business investments, prior to 2012 it had entered into agreements to sell its Arizona, New Mexico and Ohio subsidiaries.

In January 2012, the Company completed the close of the sale of its Arizona and New Mexico subsidiaries. Initial sales proceeds were $461,057, and the Company recorded no gain or loss at the time of the sale closing.

A summary of discontinued operations presented in the Consolidated Statements of Operations and Comprehensive Income follows:

 

     March 31,
2012
 

Operating revenues

   $ 16,217   

Total operating expenses, net

     12,453   
  

 

 

 

Operating income

     3,764   

Other income (expenses), net

     (120
  

 

 

 

Income from discontinued operations before income taxes

     3,644   

Provision for income taxes

     11,142   
  

 

 

 

Loss from discontinued operations

   $ (7,498
  

 

 

 

Provision for income taxes includes the recognition of $9,705 of tax expense related to the inside basis differences of Arizona and New Mexico that resulted in a taxable gain, since an IRS 338 (h)(10) election was made to treat the sale as an asset sale.

 

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Note 4: Goodwill

The Company’s annual goodwill impairment test is conducted at November 30 of each calendar year. Interim reviews are performed when the Company determines that a triggering event that would more likely than not reduce the fair value of a reporting unit below its carrying value has occurred.

The following table summarizes the three-month changes in goodwill of the Company’s continuing operations by reporting unit:

 

     Regulated Unit     Market-Based Units     Consolidated  
     Cost     Accumulated
Impairment
    Cost      Accumulated
Impairment
    Cost     Accumulated
Impairment
    Total Net  

Balance at January 1, 2013

   $ 3,411,549      $ (2,332,670   $ 235,990       $ (107,619   $ 3,647,539      $ (2,440,289   $ 1,207,250   

Reclassifications and other activity

     (89     0        0        0       (89     0        (89
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2013

   $ 3,411,460      $ (2,332,670   $ 235,990       $ (107,619   $ 3,647,450      $ (2,440,289   $ 1,207,161   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2012

   $ 3,399,368      $ (2,332,670   $ 235,990       $ (107,619   $ 3,635,358      $ (2,440,289   $ 1,195,069   

Reclassifications and other activity

     0        0       0        0       0        0       0   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ 3,399,368      $ (2,332,670   $ 235,990       $ (107,619   $ 3,635,358      $ (2,440,289   $ 1,195,069   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Note 5: Stockholders’ Equity

Common Stock

In March 2010, the Company established American Water Stock Direct, a dividend reinvestment and direct stock purchase plan (the “DRIP”). Under the DRIP, stockholders may reinvest cash dividends and purchase additional Company common stock, up to certain limits, through a transfer agent without commission fees. The Company’s transfer agent may buy newly issued shares directly from the Company or shares held in the Company’s treasury. The transfer agent may also buy shares in the public markets or in privately negotiated transactions. Purchases generally will be made and credited to DRIP accounts once each week. As of March 31, 2013, there were 4,803 shares available for future issuance under the DRIP.

The following table summarizes information regarding issuances under the DRIP for the three months ended March 31, 2013 and 2012:

 

     2013      2012  

Shares of common stock issued

     10         17   

Cash proceeds received

   $ 392       $ 571   

 

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Cash dividend payments made during the three–month periods ended March 31 were as follows:

 

     2013      2012  

Dividends per share, three months ended: March 31

   $ 0       $ 0.23   

Total dividends paid, three months ended: March 31

   $ 0       $ 40,414   

Accumulated Other Comprehensive Income (Loss)

The following table presents changes in accumulated other comprehensive income (loss) by component, net of tax, for the three months ended March 31, 2013:

 

     Defined Benefit Plans            Total  
     Employee
Benefit Plan
Funded Status
    Prior
Service Cost
     Actuarial
Loss
     Foreign
Currency
Translation
    Accumulated
Other
Comprehensive  Loss
 

Beginning balance at January 1, 2013

   $ (143,183   $ 539       $ 22,239       $ 4,214      $ (116,191

Other comprehensive income (loss) before reclassifications

     0        0         0         (366     (366

Amounts reclassified from accumulated other comprehensive income

     0        43         2,228         0        2,271   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Other comprehensive income (loss) for the period

     0        43         2,228         (366     1,905   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Ending balance at March 31, 2013

   $ (143,183   $ 582       $ 24,467       $ 3,848      $ (114,286
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

The Company does not reclassify the amortization of defined benefit pension cost components from accumulated other comprehensive income (loss) directly to net income in its entirety. These accumulated other comprehensive income components are included in the computation of net periodic pension cost. (See Note 9)

Stock-Based Compensation

The Company has granted stock option and restricted stock unit awards to non-employee directors, officers and other key employees of the Company pursuant to the terms of its 2007 Omnibus Equity Compensation Plan (the “Plan”). As of March 31, 2013, a total of 9,631 shares were available for grant under the Plan. Shares issued under the Plan may be authorized but unissued shares of Company stock or reacquired shares of Company stock, including shares purchased by the Company on the open market for purposes of the Plan.

The Company recognizes compensation expense for stock awards over the vesting period of the award. The following table presents stock-based compensation expense recorded in operation and maintenance expense in the accompanying Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2013 and 2012:

 

     2013     2012  

Stock options

   $ 752      $ 846   

Restricted stock units

     1,157        1,290   

Employee stock purchase plan

     133        132   
  

 

 

   

 

 

 

Stock-based compensation in operation and maintenance expense

     2,042        2,268   

Income tax benefit

     (796     (884
  

 

 

   

 

 

 

After-tax stock-based compensation expense

   $ 1,246      $ 1,384   
  

 

 

   

 

 

 

There were no significant stock-based compensation costs capitalized during the three months ended March 31, 2013 and 2012, respectively.

 

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Stock Options

In the first three months of 2013, the Company granted non-qualified stock options to certain employees under the Plan. The stock options vest ratably over the three-year service period beginning January 1, 2013. These awards have no performance vesting conditions and the grant date fair value is amortized through expense over the requisite service period using the straight-line method.

On April 1, 2013, the Company granted 28 non-qualified options, with a grant date fair value of $5.64 per share, to its new Chief Financial Officer. Stock-based compensation expense at March 31, 2013 does not include the value of these options.

The following table presents the weighted-average assumptions used in the Black-Scholes option-pricing model and the resulting weighted-average grant date fair value per share of stock options granted through March 31, 2013:

 

Dividend yield

     2.53

Expected volatility

     23.61

Risk-free interest rate

     0.71

Expected life (years)

     4.3   

Exercise price

   $ 39.45   

Grant date fair value per share

   $ 5.79   

Stock options granted under the Plan have maximum terms of seven years, vest over periods ranging from one to three years, and are granted with exercise prices equal to the market value of the Company’s common stock on the date of grant. As of March 31, 2013, $4,486 of total unrecognized compensation cost related to the non-vested stock options is expected to be recognized over the weighted-average period of 1.8 years.

 

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The table below summarizes stock option activity for the three months ended March 31, 2013:

 

     Shares     Weighted-
Average
Exercise Price
(per share)
     Weighted-
Average
Remaining
Life (years)
     Aggregate
Intrinsic
Value
 

Options outstanding at January 1, 2013

     2,635      $ 25.77         

Granted

     320        39.45         

Forfeited or expired

     (8     34.15         

Exercised

     (297     23.23         
  

 

 

         

Options outstanding at March 31, 2013

     2,650      $ 27.68         4.4       $ 36,477   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at March 31, 2013

     1,711      $ 24.02         3.6       $ 29,796   
  

 

 

   

 

 

    

 

 

    

 

 

 

The following table summarizes additional information regarding stock options exercised during the three months ended March 31, 2013 and 2012:

 

     2013      2012  

Intrinsic value

   $ 4,995       $ 4,662   

Exercise proceeds

     6,893         8,197   

Income tax benefit

     1,418         1,214   

Restricted Stock Units

During 2010, the Company granted selected employees 255 restricted stock units with internal performance measures and, separately, certain market thresholds. These awards vested in January 2013. The terms of the grants specified that if certain performance on internal measures and market thresholds was achieved, the restricted stock units would vest; if performance was surpassed, up to 175% of the target awards would be distributed; and if thresholds were not met, awards would be cancelled. In January 2013, an additional 148 restricted stock units were granted and distributed because performance was exceeded and 19 restricted stock units were cancelled because thresholds were not met.

In the first three months of 2013, the Company granted restricted stock units, both with and without performance conditions, to certain employees under the Plan. The restricted stock units without performance conditions vest ratably over the three-year service period beginning January 1, 2013 and the restricted stock units with performance conditions vest ratably over the three-year performance period beginning January 1, 2013 (the “Performance Period”). Distribution of the performance shares is contingent upon the achievement of internal performance measures and, separately, certain market thresholds over the Performance Period. The restricted stock units granted with service-only conditions and those with internal performance measures are valued at the market value of the Company’s common stock on the date of grant. The restricted stock units granted with market conditions are valued using a Monte Carlo model.

On April 1, 2013, the Company granted 47 restricted stock units, with a grant date fair value of $41.27 per share, and 6 restricted stock units, with a per-share grant date fair value of $39.90, to its new Chief Financial Officer. The value of these restricted stock units is not included in stock-based compensation expense at March 31, 2013.

Weighted-average assumptions used in the Monte Carlo simulation are as follows for restricted stock units with market conditions granted through March 31, 2013:

 

Expected volatility

     19.40

Risk-free interest rate

     0.40

Expected life (years)

     3   

The grant date fair value of the restricted stock unit awards that vest ratably and have market and/or performance and service conditions is amortized through expense over the requisite service period using the graded-vesting method. Restricted stock units that have no performance conditions are amortized through expense over the requisite service period using the straight-line method. As of March 31, 2013, $8,686 of total unrecognized compensation cost related to the non-vested restricted stock units is expected to be recognized over the weighted-average remaining life of 1.6 years.

 

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The table below summarizes restricted stock unit activity for the three months ended March 31, 2013:

 

     Shares     Weighted-Average
Grant Date
Fair Value
(per share)
 

Non-vested total at January 1, 2013

     540      $ 29.48   

Granted

     335        32.52   

Vested

     (347     23.52   

Forfeited

     (3     37.40   

Cancelled

     (19     21.98   
  

 

 

   

Non-vested total at March 31, 2013

     506      $ 35.81   
  

 

 

   

 

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The following table summarizes additional information regarding restricted stock units distributed during the three months ended March 31, 2013 and 2012:

 

     2013      2012  

Intrinsic value

   $ 13,559       $ 5,804   

Income tax benefit

     2,049         798   

If dividends are declared with respect to shares of the Company’s common stock before the restricted stock units are distributed, the Company credits a liability for the value of the dividends that would have been paid if the restricted stock units were shares of Company common stock. When the restricted stock units are distributed, the Company pays the participant a lump sum cash payment equal to the value of the dividend equivalents accrued. The Company accrued dividend equivalents totaling $9 and $165 to retained earnings during the three months ended March 31, 2013 and 2012, respectively.

Employee Stock Purchase Plan

Under the Nonqualified Employee Stock Purchase Plan (the “ESPP”), employees can use payroll deductions to acquire Company stock at the lesser of 90% of the fair market value of (a) the beginning or (b) the end of each three-month purchase period. As of March 31, 2013 there were 1,449 shares of common stock reserved for issuance under the ESPP. During the three months ended March 31, 2013, the Company issued 25 shares under the ESPP.

Note 6: Long-Term Debt

The Company primarily issues long-term debt to fund capital expenditures at the regulated subsidiaries. The components of long-term debt are as follows:

 

     Rate    Weighted
Average Rate
     Maturity
Date
   March 31,
2013
     December 31,
2012
 

Long-term debt of American Water Capital Corp. (“AWCC”)(a)

              

Private activity bonds and government funded debt

              

Fixed rate

   4.85%-6.75%      5.72%       2018-2040    $ 322,610       $ 322,610   

Senior notes

              

Fixed rate

   4.30%-10.00%      6.08%       2013-2042      3,389,399         3,389,399   

Long-term debt of other subsidiaries

              

Private activity bonds and government funded debt

              

Fixed rate

   0.00%-6.20%      4.71%       2013-2041      862,012         865,969   

Mortgage bonds

              

Fixed rate

   4.29%-9.71%      7.41%       2013-2039      678,500         678,500   

Mandatory redeemable preferred stock

   8.47%-9.75%      8.61%       2019-2036      19,352         20,552   

Notes payable and other(b)

   9.49%-12.17%      11.65%       2013-2026      1,190         1,272   
           

 

 

    

 

 

 

Long-term debt

              5,273,063         5,278,302   

Unamortized debt discount, net(c)

              38,289         39,272   

Fair value adjustment to interest rate hedge

              7,167         7,715   
           

 

 

    

 

 

 

Total long-term debt

            $ 5,318,519       $ 5,325,289   
           

 

 

    

 

 

 

 

(a) AWCC, which is a wholly-owned subsidiary of the Company, has a strong support agreement with its parent that, under certain circumstances, is the functional equivalent of a guarantee.
(b) Includes capital lease obligations of $967 and $1,049 at March 31, 2013 and December 31, 2012, respectively.
(c) Includes fair value adjustments previously recognized in acquisition purchase accounting.

 

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The following long-term debt was issued in 2013:

 

Company

  

Type

   Interest Rate     Maturity    Amount  

Other subsidiaries

  

Private activity bonds and government funded debt—fixed rate

     1.59   2033    $ 1,378   
          

 

 

 

Total issuances

           $ 1,378   
          

 

 

 

The following long-term debt was retired through optional redemption or payment at maturity during 2013:

 

Company

  

Type

   Interest Rate    Maturity    Amount  

Other subsidiaries(1)

  

Private activity bonds and government funded debt—fixed rate

   0.00%-5.50%    2013-2041    $ 5,335   

Other subsidiaries

  

Mandatory redeemable preferred stock

   8.49%    2036      1,200   

Other

   Capital leases            82   
           

 

 

 

Total retirements and redemptions

            $ 6,617   
           

 

 

 

 

(1) Includes $3,025 of non-cash defeasance via use of restricted funds.

Interest income included in interest, net is summarized below:

 

     Three Months Ended
March 31,
 
     2013      2012  

Interest income

   $ 2,835       $ 2,812   

The Company has an interest-rate swap to hedge $100,000 of its 6.085% fixed-rate debt maturing 2017. The Company pays variable interest of six-month LIBOR plus 3.422%. The swap is accounted for as a fair-value hedge and matures with the fixed-rate debt in 2017. The following table provides a summary of the derivative fair value balance recorded by the Company and the line item in the Consolidated Balance Sheets in which such amount is recorded:

 

Balance sheet classification

   March 31,
2013
     December 31,
2012
 

Regulatory and other long-term assets

     

Other

   $ 7,236       $ 7,909   

Long-term debt

     

Long-term debt

     7,167         7,715   

For derivative instruments that are designated as and qualify as fair-value hedges, the gain or loss on the hedge instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current net income. The Company includes the gain or loss on the derivative instrument and the offsetting loss or gain on the hedged item in interest expense as follows:

 

     March 31,
2013
    March 31,
2012
 

Income Statement Classification

            

Interest, net

    

Gain (loss) on swap

   $ (673   $ (234

(Loss) gain on borrowing

     548        277   

Hedge Ineffectiveness

     (125     43   

 

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Table of Contents

Note 7: Short-Term Debt

Short-term debt consists of commercial paper borrowings totaling $333,786 (net of discount of $14) at March 31, 2013 and $269,985 (net of discount of $15) at December 31, 2012 respectively.

Note 8: Income Taxes

The Company’s estimated annual effective tax rate for the three months ended March 31, 2013 was 39.8% compared to 40.0% for the three months ended March 31, 2012, excluding various discrete items

The Company’s actual effective tax rates on continuing operations were as follows:

 

     Three Months Ended
March 31,
 
     2013     2012  

Actual effective tax rate on continuing operations

     35.1     41.8

Included in 2013 are discrete items including $3,274 of tax benefits associated with an entity reorganization within the Company’s Market-Based segment that allowed for the utilization of state net operating loss carryforwards and the release of a valuation allowance.

Note 9: Pension and Other Postretirement Benefits

The following table provides the components of net periodic benefit costs:

 

     Three Months Ended
March 31,
 
     2013     2012  

Components of net periodic pension benefit cost

    

Service cost

   $ 9,468      $ 8,507   

Interest cost

     17,024        17,521   

Expected return on plan assets

     (22,107     (19,619

Amortization of:

    

Prior service cost

     181        181   

Actuarial loss

     9,293        7,402   
  

 

 

   

 

 

 

Net periodic pension benefit cost

   $ 13,859      $ 13,992   
  

 

 

   

 

 

 

 

     Three Months Ended
March 31,
 
     2013     2012  

Components of net periodic other postretirement benefit cost

    

Service cost

   $ 3,820      $ 3,526   

Interest cost

     7,175        7,858   

Expected return on plan assets

     (7,571     (7,140

Amortization of:

    

Prior service credit

     (547     (479

Actuarial loss

     2,782        2,384   
  

 

 

   

 

 

 

Net periodic other postretirement benefit cost

   $      5,659      $    6,149   
  

 

 

   

 

 

 

The Company contributed $22,770 to its defined benefit pension plans in the first three months of 2013 and expects to contribute $44,005 during the balance of 2013. In addition, the Company contributed $6,996 for the funding of its other postretirement plans in the first three months of 2013 and expects to contribute $20,989 during the balance of 2013.

Note 10: Commitments and Contingencies

The Company is routinely involved in legal actions incident to the normal conduct of its business. At March 31, 2013, the Company has accrued approximately $2,400 as probable costs and it is reasonably possible that additional losses could range up to $26,700 for these matters. For certain matters, the Company is unable to estimate possible losses. The Company believes that damages or settlements recovered by plaintiffs in such claims or actions, if any, will not have a material adverse effect on the Company’s results of operations, financial position or cash flows.

 

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Table of Contents

The Company enters into agreements for the provision of services to water and wastewater facilities for the United States military, municipalities and other customers. The Company’s military services agreements expire between 2051 and 2060 and have remaining performance commitments as measured by estimated remaining contract revenue of $1,914,000 at March 31, 2013. The military contracts are subject to customary termination provisions held by the U.S. Federal Government prior to the agreed upon contract expiration. The Company’s Operations and Maintenance agreements with municipalities and other customers expire between 2013 and 2048 and have remaining performance commitments as measured by estimated remaining contract revenue of $987,000 at March 31, 2013. Some of the Company’s long-term contracts to operate and maintain a municipality’s, federal government’s or other party’s water or wastewater treatment and delivery facilities include responsibility for certain maintenance for some of those facilities, in exchange for an annual fee. Unless specifically required to perform certain maintenance activities, the maintenance costs are recognized when the maintenance is performed.

Note 11: Environmental Matters

The Company’s water and wastewater operations are subject to federal, state, local and foreign requirements relating to environmental protection, and as such, the Company periodically becomes subject to environmental claims in the normal course of business. 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, on an undiscounted basis, when it is probable that these costs will be incurred and can be reasonably estimated. Remediation costs accrued amounted to $4,400 at March 31, 2013 and December 31, 2012. The accrual relates to a conservation agreement entered into by a subsidiary of the Company with the National Oceanic and Atmospheric Administration (“NOAA”) requiring the Company to, among other provisions, implement certain measures to protect the steelhead trout and its habitat in the Carmel River watershed in the state of California. The Company has agreed to pay $1,100 annually from 2010 through 2016. The Company pursues recovery of incurred costs through all appropriate means, including regulatory recovery through customer rates. The Company’s regulatory assets at March 31, 2013 and December 31, 2012 include $8,547 and $8,656 respectively, related to the NOAA agreement.

Note 12: Earnings per Common Share

Earnings per share is calculated using the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security. The Company has participating securities related to restricted stock units, granted under the Company’s 2007 Omnibus Equity Compensation Plan, that earn dividend equivalents on an equal basis with common shares. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities. The following is a reconciliation of the Company’s income from continuing operations, loss from discontinued operations, net income and weighted-average common shares outstanding for calculating basic earnings per share:

 

     Three Months Ended
March 31,
 
     2013      2012  

Basic:

     

Income from continuing operations

   $ 57,643       $ 49,252   

Loss from discontinued operations

     0         (7,498

Net income

     57,643         41,754   

Less: Distributed earnings to common shareholders

     9         40,563   

Less: Distributed earnings to participating securities

     0         16   
  

 

 

    

 

 

 

Undistributed earnings

     57,634         1,175   

Undistributed earnings allocated to common shareholders

     57,614         1,175   

Undistributed earnings allocated to participating securities

     20         0   
  

 

 

    

 

 

 

Total income from continuing operations available to common shareholders, basic

   $ 57,623       $ 49,236   
  

 

 

    

 

 

 

Total income available to common shareholders, basic

   $ 57,623       $ 41,738   
  

 

 

    

 

 

 

Weighted-average common shares outstanding, basic

     177,327         175,914   
  

 

 

    

 

 

 

Basic earnings per share:(a)

     

Income from continuing operations

   $ 0.32       $ 0.28   
  

 

 

    

 

 

 

Loss from discontinued operations, net of tax

   $ 0.00       $ (0.04
  

 

 

    

 

 

 

Net income

   $ 0.32       $ 0.24   
  

 

 

    

 

 

 

 

(a) Amounts may not sum due to rounding.

 

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Table of Contents

Diluted earnings per common share is based on the weighted-average number of common shares outstanding adjusted for the dilutive effect of common stock equivalents related to the restricted stock units, stock options, and employee stock purchase plan. The dilutive effect of the common stock equivalents is calculated using the treasury stock method and expected proceeds on vesting of the restricted stock units, exercise of the stock options and purchases under the employee stock purchase plan. The following is a reconciliation of the Company’s income from continuing operations, loss from discontinued operations, net income and weighted-average common shares outstanding for calculating diluted earnings per share:

 

     Three Months Ended
March 31,
 
     2013      2012  

Diluted:

     

Total income from continuing operations available to common shareholders, basic

   $ 57,623       $ 49,236   

Loss from discontinued operations, net of tax

     0         (7,498

Total income available to common shareholders, basic

     57,623         41,738   

Undistributed earnings allocated to participating securities

     20         0   
  

 

 

    

 

 

 

Total income from continuing operations available to common shareholders, diluted

   $ 57,643       $ 49,236   
  

 

 

    

 

 

 

Total income available to common shareholders, diluted

   $ 57,643       $ 41,738   
  

 

 

    

 

 

 

Weighted-average common shares outstanding, basic

     177,327         175,914   

Stock-based compensation:

     

Restricted stock units

     381         492   

Stock options

     755         620   

Employee stock purchase plan

     2         2   
  

 

 

    

 

 

 

Weighted-average common shares outstanding, diluted

     178,465         177,028   
  

 

 

    

 

 

 

Diluted earnings per share:(a)

     

Income from continuing operations

   $ 0.32       $ 0.28   
  

 

 

    

 

 

 

Loss from discontinued operations, net of tax

   $ 0.00       $ (0.04
  

 

 

    

 

 

 

Net income

   $ 0.32       $ 0.24   
  

 

 

    

 

 

 

 

(a) Amounts may not sum due to rounding.

The following potentially dilutive common stock equivalents were not included in the earnings per share calculations because they were anti-dilutive:

 

     Three Months Ended
March  31,
 
     2013      2012  

Stock options

     317         603   

Restricted stock units where certain performance conditions were not met

     139         101   

Note 13: Fair Value of Assets and Liabilities

Fair Value of Financial Instruments

The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:

Current assets and current liabilities—The carrying amounts reported in the accompanying Consolidated Balance Sheets for current assets and current liabilities, including revolving credit debt, due to the short-term maturities and variable interest rates, approximate their fair values.

Preferred stock with mandatory redemption requirements and long-term debt—The fair values of preferred stock with mandatory redemption requirements and long-term debt are categorized within the fair value hierarchy based on the inputs that are used to value each instrument. The fair value of long-term debt classified as Level 1 is calculated using quoted prices in active markets. Level 2 instruments are valued using observable inputs and Level 3 instruments are valued using observable and unobservable inputs. The fair values of instruments classified as Level 2 and 3 are determined by a valuation model that is based on a conventional discounted cash flow methodology and utilizes assumptions of current market rates. As a majority of the Company’s debts do not trade in active markets, the Company calculated a base yield curve using a risk-free rate (a U.S. Treasury securities yield curve) plus a credit spread that is based on the following two factors: an average of the Company’s own publicly-traded debt securities and the current market rates for U.S. Utility BBB+ debt securities. The Company used these yield curve assumptions to derive a base yield for the Level 2 and Level 3 securities. Additionally, the Company adjusted the base yield for specific features of the debt securities including call features, coupon tax treatment and collateral for the Level 3 instruments.

 

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The carrying amounts (including fair value adjustments previously recognized in acquisition purchase accounting) and fair values of the financial instruments are as follows:

 

            At Fair Value as of March 31, 2013  

Recurring Fair Value Measures

   Carrying
Amount
     Level 1      Level 2      Level 3      Total  

Preferred stocks with mandatory redemption requirements

   $ 19,302       $ 0       $ 0      $ 26,150       $ 26,150   

Long-term debt (excluding capital lease obligations)

     5,298,250         2,415,212        1,669,429         2,247,372         6,332,013   

 

            At Fair Value as of December 31, 2012  

Recurring Fair Value Measures

   Carrying
Amount
     Level 1      Level 2      Level 3      Total  

Preferred stocks with mandatory redemption requirements

   $ 20,511       $ 0       $ 0      $ 27,263       $ 27,263   

Long-term debt (excluding capital lease obligations)

     5,303,729         2,400,847        1,677,776         2,252,272         6,330,895   

Recurring Fair Value Measurements

The following table presents assets and liabilities measured and recorded at fair value on a recurring basis and their level within the fair value hierarchy as of March 31, 2013 and December 31, 2012, respectively:

 

     At Fair Value as of March 31, 2013  

Recurring Fair Value Measures

   Level 1      Level 2     Level 3      Total  

Assets:

          

Restricted funds

   $ 38,869       $ —          —         $ 38,869   

Rabbi trust investments

     —           719        —           719   

Deposits

     11,627         —          —           11,627   

Mark-to-market derivative asset

     —           7,236        —           7,236   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total assets

     50,496         7,955        —           58,451   
  

 

 

    

 

 

   

 

 

    

 

 

 

Liabilities:

          

Deferred compensation obligation

     —           10,172        —           10,172   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total liabilities

     —           10,172        —           10,172   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total net assets (liabilities)

   $ 50,496       $ (2,217     —         $ 48,279   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

     At Fair Value as of December 31, 2012  

Recurring Fair Value Measures

   Level 1      Level 2     Level 3      Total  

Assets:

          

Restricted funds

   $ 40,547       $ —          —         $ 40,547   

Rabbi trust investments

     —           481        —           481   

Deposits

     2,103         —          —           2,103   

Mark-to-market derivative asset

     —           7,909        —           7,909   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total assets

     42,650         8,390        —           51,040   
  

 

 

    

 

 

   

 

 

    

 

 

 

Liabilities:

          

Deferred compensation obligation

     —           10,237        —           10,237   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total liabilities

     —           10,237        —           10,237   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total net assets (liabilities)

   $ 42,650       $ (1,847     —         $ 40,803   
  

 

 

    

 

 

   

 

 

    

 

 

 

Restricted funds—The Company’s restricted funds primarily represent proceeds received from financings for the construction and capital improvement of facilities and from customers for future services under operations and maintenance projects. The proceeds of these financings are held in escrow until the designated expenditures are incurred. Restricted funds expected to be released within twelve months subsequent to the balance sheet date are classified as current.

 

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Rabbi trust investments—The Company’s rabbi trust investments consist primarily of fixed income investments from which supplemental executive retirement plan benefits are paid. The Company includes these assets in other long-term assets.

Deposits—Deposits include escrow funds and certain other deposits held in trust. The Company includes cash deposits in other current assets.

Deferred compensation obligations—The Company’s deferred compensation plans allow participants to defer certain cash compensation into notional investment accounts. The Company includes such plans in other long-term liabilities. The value of the Company’s deferred compensation obligations is based on the market value of the participants’ notional investment accounts. The notional investments are comprised primarily of mutual funds, which are based on observable market prices.

Mark-to-market derivative asset—The Company utilizes fixed-to-floating interest-rate swaps, typically designated as fair-value hedges, to achieve a targeted level of variable-rate debt as a percentage of total debt. The Company uses a calculation of future cash inflows and estimated future outflows, which are discounted, to determine the current fair value. Additional inputs to the present value calculation include the contract terms, counterparty credit risk, interest rates and market volatility.

Note 14: Segment Information

The Company has two operating segments that are also the Company’s two reportable segments, referred to as Regulated Businesses and Market-Based Operations.

The following table includes the Company’s summarized segment information:

 

     As of or for the Three Months Ended
March 31, 2013
 
     Regulated
Businesses
     Market-Based
Operations
     Other     Consolidated  

Net operating revenues

   $ 573,237       $ 67,336       $ (4,436   $ 636,137   

Depreciation and amortization

     91,857         1,759         6,033        99,649   

Total operating expenses, net

     415,516         62,381         (5,993     471,904   

Income (loss) from continuing operations before income taxes

     98,781         5,671         (15,641     88,811   

Total assets

     12,747,924         260,389         1,760,903        14,769,216   

Capital expenditures

     212,265         821         0        213,086   

 

     As of or for the Three Months Ended
March 31, 2012
 
     Regulated
Businesses
     Market-Based
Operations
     Other     Consolidated  

Net operating revenues

   $ 541,875       $ 80,581       $ (3,902   $ 618,554   

Depreciation and amortization

     84,788         1,681         5,635        92,104   

Total operating expenses, net

     394,642         70,756         (6,582     458,816   

Income (loss) from continuing operations before income taxes

     90,416         10,483         (16,254     84,645   

Total assets

     12,182,806         243,819         1,661,114        14,087,739   

Assets of discontinued operations (included in total assets above)

     141,945         0         (4,440     137,505   

Capital expenditures

     233,198         168         0        233,366   

Capital expenditures of discontinued operations (included in above)

     2,699         0         0        2,699   

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Certain matters within this Quarterly Report on Form 10-Q include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements included in this Form 10-Q, other than statements of historical fact, may constitute forward-looking statements. Forward-looking statements can be identified by the use of words such as “may,” “should,” “will,” “could,” “estimates,” “predicts,” “potential,” “continue,” “anticipates,” “believes,” “plans,” “expects,” “future” and “intends” and similar expressions. Forward-looking statements may involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance to differ from those projected in the forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Factors that could cause or contribute to differences in results and outcomes from those in our forward-looking statements include, without limitation, those items discussed in the “Risk Factors” section or other sections in the Company’s Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission (“SEC”), as well as in Item IA of Part II of this Quarterly Report. We undertake no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

General

American Water Works Company, Inc. (herein referred to as “American Water” or the “Company”) is the largest investor-owned United States water and wastewater utility company, as measured both by operating revenue and population served. Our primary business involves the ownership of water and wastewater utilities that provide water and wastewater services to residential, commercial, industrial and other customers. Our Regulated Businesses that provide these services are generally subject to economic regulation by state regulatory agencies (“PUCs”) in the states in which they operate. We report the results of these businesses in our Regulated Business segment. We also provide services that are not subject to economic regulation by state regulatory agencies. We report the results of these businesses in our Market-Based Operations segment. For further description of our businesses see the “Business” section found in our Form 10-K for the year ended December 31, 2012 filed with the SEC.

You should read the following discussion in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and in our Form 10-K for the year ended December 31, 2012 filed with the SEC.

Overview

All financial information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) reflects only continuing operations. As previously disclosed in our Form 10-K for the year ended December 31, 2012, as part of our portfolio optimization initiative, we entered into agreements in 2011 to sell our regulated subsidiaries in Arizona, New Mexico and Ohio. In the first quarter of 2012, we completed the divestiture of the Arizona and New Mexico subsidiaries, and on May 1, 2012, we completed the divestiture of our Ohio subsidiary. Therefore, the financial results of these entities have been presented as discontinued operations for all periods, unless otherwise noted.

Financial Results. For the three months ended March 31, 2013, we reported net income of $57.6 million, or diluted earnings per share (“EPS”) of $0.32 compared to $41.8 million, or diluted EPS of $0.24 for the comparable period in 2012. Income from continuing operations was $57.6 million for the first quarter of 2013 compared to $49.3 million in the first quarter of 2012. Diluted income from continuing operations per average common share was $0.32 for the first quarter of 2013 as compared to $0.28 for the first quarter of 2012.

The primary factors contributing to the increase in net income from continuing operations for the three months ended March 31, 2013 were increased revenues in our Regulated Businesses resulting from rate increases and lower income tax expense resulting from a $3.3 million tax benefit. Partially offsetting these increases were higher operation and maintenance expense and depreciation expense. For further details, see “Consolidated Results of Operations and Variances” and “Segment Results” below.

In 2013, our goals include actively addressing regulatory lag that impacts return on our investments and promoting constructive regulatory frameworks, continuing to improve our regulated operation and maintenance (“O&M”) efficiency ratio, making efficient use of our capital and expanding both our Regulated Business segment through focused acquisitions and/or organic growth and our Market-Based segment through core growth, expanded markets and new offerings.

We expect to file up to four general rate cases as well as file for infrastructure surcharges in 2013. Additionally, we expect, as part of our general rate case filings or in separate filings, to seek appropriate pass-through mechanisms for certain costs and forward-looking adjustments or mechanisms including those that recognize declining usage.

 

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The progress that we have made in the first three months of 2013 with respect to these objectives is described below.

Addressing Regulatory Lag and Declining Usage. On January 1, 2013, additional annualized revenue of $6.5 million resulting from infrastructure charges in our Pennsylvania subsidiary became effective.

Additionally on January 1, 2013, the second step increase of our 2012 California rate case became effective in the amount of $3.5 million. The last step increase will be effective on January 1, 2014. Also on January 1, 2013, the final step increase of our 2010 Pennsylvania wastewater rate case became effective in the amount of $2.6 million.

On April 1, 2013, additional annualized revenue of $2.9 million resulting from infrastructure charges in our Pennsylvania subsidiary became effective. Also, on April 1, 2013 the second step increase of $1.4 million from our 2012 New York rate case became effective. The final step increase will be effective on April 1, 2014 in the amount of $1.2 million.

On February 28, 2013, the Company filed for additional annualized revenues of $5.3 million resulting from infrastructure charges in our Missouri subsidiary. This filing is expected to be effective during the second or third quarter of 2013.

On April 30, 2013, we filed general rate cases in Pennsylvania and Iowa requesting additional annualized revenues of $58.6 million and $6.4 million, respectively. On May 10, 2013, $2.7 million in annualized revenues of the $6.4 million requested in the Iowa rate case will be put into effect as interim rates under bond and subject to refund. Also on May 1, 2013, we filed a proposed application in California requesting additional annualized revenues of $32.7 million which includes staged increases in 2016 and 2017 of $8.0 million and $6.5 million, respectively. As of May 1, 2013, we are awaiting final orders in five states requesting additional annualized revenues of $134.6 million. There is no assurance that all, or any portion, of this requested increase will be granted.

Continuing Improvement in O&M Efficiency Ratio for our Regulated Businesses. Our O&M efficiency ratio (a non-GAAP measure) is calculated on our Regulated Business operations and is defined as operation and maintenance expense divided by operating revenues where both operation and maintenance expense and operating revenues are adjusted to eliminate the impact of purchased water. We also exclude the allocable portion of non-O&M support services costs, mainly depreciation and general taxes that are reflected in the Regulated Business segment as O&M costs but for consolidated financial reporting purposes are categorized within other line items in the Statement of Operations. Our operating efficiency ratio was 42.9% for the three months ended March 31, 2013, compared to 43.6% for the three months ended March 31, 2012.

The improvement in our O&M efficiency ratio was driven by an increase in revenue. We evaluate our operating performance using this measure because management believes it is a direct measure of the efficiency of our regulated operations. This information is intended to enhance an investor’s overall understanding of our operating performance. The O&M efficiency ratio is not a measure defined under GAAP and may not be comparable to other companies’ operating measures and should not be used in place of the GAAP information provided elsewhere in this report. The following table provides a reconciliation that compares operation and maintenance expense and operating revenues, as determined in accordance with GAAP, to those amounts utilized in the calculation of our O&M efficiency ratio for the three months ended March 31, 2013 as compared to the same period in 2012:

Regulated O&M Efficiency Ratio (a Non-GAAP Measure)

 

     For the three months ended
March 31,
 
     2013     2012  
     (In thousands)  

Total O&M expense

   $ 312,203      $ 310,004   

Less:

    

O&M expense—Market-Based Operations

     59,224        67,765   

O&M expense—Other

     (15,963     (15,692
  

 

 

   

 

 

 

Total Regulated O&M expense

     268,942        257,931   

Less:

    

Regulated purchased water expense

     23,984        22,410   

Allocation of internal O&M costs

     9,554       9,245  
  

 

 

   

 

 

 

Adjusted Regulated O&M expense(a)

   $ 235,404      $ 226,276   
  

 

 

   

 

 

 

Total Operating Revenues

   $ 636,137      $ 618,554   

Less:

    

Operating revenues—Market-Based Operations

     67,336        80,581   

Operating revenues—Other

     (4,436     (3,902
  

 

 

   

 

 

 

Total Regulated operating revenues

     573,237        541,875   

Less: Regulated purchased water expense*

     23,984        22,410   
  

 

 

   

 

 

 

Adjusted Regulated operating revenues(b)

   $ 549,253      $ 519,465   
  

 

 

   

 

 

 

Regulated O&M efficiency ratio (a)/(b)

     42.9     43.6

 

* Calculation assumes purchased water revenues approximate purchased water expenses.

 

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Making Efficient Use of Capital. We invested approximately $213 million in Company-funded capital improvements during the three months ended March 31, 2013.

During 2013, we expect to roll-out Phase II of our business transformation project. Phase II consists of the roll-out of a new Enterprise Asset Management system, which will manage an asset’s lifecycle, and a Customer Information System, which will contain all billing and data pertaining to our Regulated segment customers. Phase II is expected to be substantially complete by December 31, 2013. Through March 31, 2013, we have spent $280.1 million, including allowance for funds used during construction (“AFUDC”), on this project with $23.1 million spent in 2013. Expenditures associated with this project are included in the estimated capital investment spending of $950 million for 2013.

Expanding Markets and Developing New Offerings. For the three months ended March 31, 2013 our Regulated business completed the purchase of four water systems in Pennsylvania, California and Indiana and a wastewater system in Missouri. These acquisitions added approximately 1,600 customers to our regulated operations. Also, during the first quarter of 2013, our Homeowner Services Group (“HOS”) announced that it is expanding its water and sewer line protection programs into seven new states.

On May 2, 2013, we signed an agreement to purchase a wastewater utility company in Virginia for $12.0 million in cash plus the assumption of approximately $13.8 million in long-term debt. This acquisition will add approximately 20,000 wastewater customers to our Virginia regulated operations.

Consolidated Results of Operations and Variances

 

     For the three months ended
March 31,
 
     (In thousands, except per share data)  
     2013     2012     Favorable
(Unfavorable)
Change
 

Operating revenues

   $ 636,137      $ 618,554      $ 17,583   
  

 

 

   

 

 

   

 

 

 

Operating expenses

      

Operation and maintenance

     312,203        310,004        (2,199

Depreciation and amortization

     99,649        92,104        (7,545

General taxes

     60,146        57,121        (3,025

(Gain) loss on asset dispositions and purchases

     (94     (413     (319
  

 

 

   

 

 

   

 

 

 

Total operating expenses, net

     471,904        458,816        (13,088
  

 

 

   

 

 

   

 

 

 

Operating income

     164,233        159,738        4,495   

Other income (expenses)

      

Interest, net

     (78,114     (79,654     1,540   

Allowance for other funds used during construction

     3,396        4,362        (966

Allowance for borrowed funds used during construction

     1,653        2,081        (428

Amortization of debt expense

     (1,581     (1,266     (315

Other, net

     (776     (616     (160
  

 

 

   

 

 

   

 

 

 

Total other income (expenses)

     (75,422     (75,093     (329
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     88,811        84,645        4,166   

Provision for income taxes

     31,168        35,393        4,225   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     57,643        49,252        8,391   

Loss from discontinued operations

     —          (7,498     7,498   
  

 

 

   

 

 

   

 

 

 

Net income

   $ 57,643      $ 41,754      $ 15,889   
  

 

 

   

 

 

   

 

 

 

Basic earnings per share (a)

      

Income from continuing operations

   $ 0.32      $ 0.28     
  

 

 

   

 

 

   

Income from discontinued operations

     —        $ (0.04  
  

 

 

   

 

 

   

Net income

   $ 0.32      $ 0.24     
  

 

 

   

 

 

   

Diluted earnings per share (a)

      

Income from continuing operations

   $ 0.32      $ 0.28     
  

 

 

   

 

 

   

Income from discontinued operations

     —        $ (0.04  
  

 

 

   

 

 

   

Net income

   $ 0.32      $ 0.24     
  

 

 

   

 

 

   

Average common shares outstanding during the period

      

Basic

     177,327        175,914     
  

 

 

   

 

 

   

Diluted

     178,465        177,028     
  

 

 

   

 

 

   

 

(a) Amounts may not sum due to rounding

 

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The following is a discussion of the consolidated results of operations for the three months ended March 31, 2013 compared to the three months ended March 31, 2012:

Operating revenues. Consolidated operating revenues for the three months ended March 31, 2013 increased $17.6 million, or 2.8%, compared to the same period in 2012. The variance is mainly attributable to a $31.4 million increase in our Regulated Business segment mainly as a result of rate increases partially offset by a $13.2 million decrease in our Market Based Operations segment related to a decline in our Contract Operations Group revenues mainly as a result of delays in 2013 construction activities associated with our military contracts and the termination of certain municipal and industrial operations and maintenance contracts. For further information, see the respective “Operating Revenues” discussions within the “Segment Results.”

Operation and maintenance. Consolidated operation and maintenance expense for the three months ended March 31, 2013 increased by $2.2 million, or 0.7%, compared to the same period in 2012. For further information, see the respective “Operation and Maintenance” discussions within the “Segment Results.”

Depreciation and amortization. Depreciation and amortization expense increased by $7.5 million, or 8.2%, for the three months ended March 31, 2013 compared to the same period in the prior year as a result of additional utility plant placed in service, including the expenditures associated with Phase I of our business transformation project that went into service during the third quarter of 2012, and incremental depreciation of $0.6 million associated with our New York acquisition in 2012.

Other income (expenses). Other expenses increased by $0.3 million, or 0.4%, for the three months ended March 31, 2013 compared to the same period in the prior year. The change is attributable to additional amortization of deferred debt financing costs associated with the new unsecured revolving credit facility that was entered into the fourth quarter of 2012 as well as a reduction in AFUDC attributable to decreased construction activities in the first quarter of 2013 compared to the same period in 2012. Partially offsetting these expense increases was a reduction in interest expense of $1.5 million.

Provision for income taxes. Our consolidated provision for income taxes decreased $4.2 million, or 11.9%, to $31.2 million for the three months ended March 31, 2013. The effective tax rates for the three months ended March 31, 2013 and 2012 were 35.1% and 41.8%, respectively. The 2013 rate includes a $3.3 million tax benefit associated with a legal structure reorganization within our Market-Based segment. This strategic restructuring allows us to utilize state net operating loss carryforwards (NOLCF), which without the restructuring most likely would not have been utilized prior to their expiration.

Income (loss) from discontinued operations, net of tax. As noted above, the financial results of our regulated water and wastewater systems in Arizona, New Mexico and Ohio were classified as discontinued operations for the three months ended March 31, 2012. For the three months ended March 31, 2012, income from discontinued operations, net of tax included net income associated with the discontinued operations for the period and a benefit of $1.6 million related to the cessation of depreciation for our Arizona, New

 

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Mexico and Ohio subsidiaries. Under GAAP, operations that are considered discontinued operations cease to depreciate their assets. Also reflected in the three months ended March 31, 2012 is a $9.7 million charge for income taxes resulting from the divestiture of our Arizona and New Mexico subsidiaries.

Segment Results

We have two operating segments that are also our reportable segments: the Regulated Businesses and the Market-Based Operations. We evaluate the performance of our segments and allocate resources based on several factors, with the primary measure being income from continuing operations before income taxes. Certain amounts within 2012 operating revenues and operations and maintenance expense categories have been reclassified to conform to the 2013 presentation.

Regulated Businesses Segment

The following table summarizes certain financial information for our Regulated Businesses for the periods indicated:

 

     For the three months ended
March 31,
 
     2013      2012      Increase
(Decrease)
 
     (In thousands)  

Operating revenues

   $ 573,237       $ 541,875       $ 31,362   

Operation and maintenance expense

     268,942         257,931         11,011   

Operating expenses, net

     415,516         394,642         20,874   

Income from continuing operations before income taxes

     98,781         90,416         8,365   

Operating revenues. Our primary business involves the ownership of water and wastewater utilities that provide services to residential, commercial, industrial and other customers. This business is generally subject to state regulation and our results of operations are impacted significantly by rates authorized by the regulatory commissions in the states in which we operate.

Operating revenues increased by $31.4 million, or 5.8%, for the three months ended March 31, 2013 compared to three months ended March 31, 2012. The increase in revenues was primarily due to rate increases obtained through rate authorizations for a number of our operating companies, the impact of which was approximately $25.3 million. Additional revenues of $5.1 million are associated with acquisitions, most significant being our New York acquisition in the second quarter of 2012, and increased surcharge and balancing account revenues of $5.2 million. These increases were partially offset by decreased revenues of approximately $3.6 million attributable to lower demand in the first quarter of 2013 compared to the first quarter of 2012.

The following table provides information regarding the Regulated Businesses’ revenues and billed water sales volume by customer class:

 

     For the three months ended
March 31,
 
     2013     2012     2013     2012  
     Operating Revenues     Billed Water Sales Volume  
     (Dollars in thousands)     (Gallons in millions)  

Customer Class

                    

Water service

                    

Residential

   $ 321,664         56.1   $ 305,897         56.5     38,064         50.4     38,475         50.3

Commercial

     112,862         19.7     106,672         19.7     16,939         22.4     17,259         22.6

Industrial

     27,892         4.9     26,481         4.9     8,883         11.8     8,975         11.8

Public and other

     74,493         13.0     71,281         13.1     11,627         15.4     11,726         15.3

Other water revenues

     5,133         0.9     3,186         0.6     —           —          —           —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total water revenues

   $ 542,044         94.6   $ 513,517         94.8     75,513         100.0     76,435         100.0
            

 

 

    

 

 

   

 

 

    

 

 

 

Wastewater revenues

     19,884         3.4     19,121         3.5          

Other revenues

     11,309         2.0     9,237         1.7          
  

 

 

    

 

 

   

 

 

    

 

 

           
   $ 573,237         100.0   $ 541,875         100.0          
  

 

 

    

 

 

   

 

 

    

 

 

           

Water Services – Water service operating revenues from residential customers for the three months ended March 31, 2013 totaled $321.7 million, a $15.8 million increase, or 5.2%, over the same period of 2012, mainly due to rate increases and additional

 

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revenues resulting from acquisitions, partially offset by a decrease in sales volume. The volume of water sold to residential customers decreased by 1.1% for the three months ended March 31, 2013 to 38.1 billion gallons, from 38.5 billion gallons for the same period in 2012.

Water service operating revenues from commercial water customers for the three months ended March 31, 2013 increased by $6.2 million, or 5.8%, to $112.9 million, compared to the same period in 2012. This increase was mainly due to rate increases partially offset by a decrease in sales volume. The volume of water sold to commercial customers decreased by 1.9% for the three months ended March 31, 2013 to 16.9 billion gallons, from 17.3 billion gallons for the three months ended March 31, 2012.

Water service operating revenues from industrial customers totaled $27.9 million for the three months ended March 31, 2013, an increase of $1.4 million, or 5.3%, from those recorded for the same period in 2012, mainly due to rate increases partially offset by a decrease in sales volume. The volume of water sold to industrial customers totaled 8.9 billion gallons for the three months ended March 31, 2013, a decrease of 1.0% from 9.0 billion gallons for the three months ended March 31, 2012.

Water service operating revenues from public and other customers, including municipal governments, other governmental entities and resale customers increased $3.2 million, or 4.5%, to $74.5 million for the three months ended March 31, 2013, mainly due to rate increases.

Operation and maintenance. Operation and maintenance expense increased $11.0 million, or 4.3%, for the three months ended March 31, 2013, compared to the three months ended March 31, 2012. Included in this increase is $3.4 million of incremental costs in 2013 associated with our 2012 New York acquisition.

The following table provides information regarding operation and maintenance expense for the three months ended March 31, 2013 and 2012, by major expense category:

 

     For the three months ended
March 31,
 
     2013      2012      Increase
(Decrease)
    Percentage  
     (In thousands)  

Production costs

   $ 60,450       $ 58,460       $ 1,990        3.4

Employee-related costs

     113,201         115,655         (2,454     (2.1 %) 

Operating supplies and services

     54,360         48,015         6,345        13.2

Maintenance materials and supplies

     18,279         16,195         2,084        12.9

Customer billing and accounting

     10,172         8,887         1,285        14.5

Other

     12,480         10,719         1,761        16.4
  

 

 

    

 

 

    

 

 

   

Total

   $ 268,942       $ 257,931       $ 11,011        4.3
  

 

 

    

 

 

    

 

 

   

Production costs and employee-related costs, which account for approximately 65% and 68% of the total Regulated Businesses operation and maintenance expense, for the three months ended March 31, 2013 and 2012, respectively, are discussed in more detail below.

Production costs by major expense type were as follows:

 

     For the three months ended
March 31,
       
     2013      2012      Increase
(Decrease)
    Percentage  
     (In thousands)        

Purchased Water

   $ 23,984       $ 22,410       $ 1,574        7.0

Fuel and Power

     19,978         20,100         (122     (0.6 %) 

Chemicals

     10,604         9,508         1,096        11.5

Waste Disposal

     5,884         6,442         (558     (8.7 %) 
  

 

 

    

 

 

    

 

 

   

Total

   $ 60,450       $ 58,460       $ 1,990        3.4
  

 

 

    

 

 

    

 

 

   

Overall, production costs increased for the three months ended March 31, 2013 compared to the same period in the prior year as a result of higher purchased water costs, attributable to supplier price increases in certain of our subsidiaries, as well as incremental expense attributable to an increase in the amount allowed by a cost recovery mechanism in one of our regulated subsidiaries in 2013. The increase in chemicals is attributable to incremental costs associated with our 2012 acquisition in New York, with the remainder mainly due to price increases and increased chemical dosages as a result of unfavorable water conditions.

 

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Employee-related costs, including salaries and wages, group insurance, and pension expense, decreased $2.5 million, or 2.1%, for the three months ended March 31, 2013 compared to the same period in the prior year. These employee-related costs represent approximately 42% and 45% of operation and maintenance expense for the three months ended March 31, 2013 and 2012, respectively.

The following table provides information with respect to components of employee-related costs for the three months ended March 31, 2013 and 2012:

 

     For the three months ended
March 31,
 
     2013      2012      Increase
(Decrease)
    Percentage  
     (In thousands)  

Salaries and wages

   $ 78,845       $ 78,631       $ 214        0.3

Pensions

     12,371         13,358         (987     (7.4 %) 

Group insurance

     16,844         18,930         (2,086     (11.0 %) 

Other benefits

     5,141         4,736         405        8.6
  

 

 

    

 

 

    

 

 

   

Total

   $ 113,201       $ 115,655       $ (2,454     (2.1 %) 
  

 

 

    

 

 

    

 

 

   

The overall decrease in employee-related costs was primarily driven by decreased group insurance and pension expense. The reduction in group insurance costs for the three months ended March 31, 2013 compared to the same period in 2012 was mainly attributable to higher capitalization rates. The decrease in pension expense for the three months ended March 31, 2013 was primarily due to decreased contributions in certain of our regulated operating companies whose costs are recovered based on our funding policy, which is to fund at least the minimum amount required by the Employee Retirement Income Security Act of 1974, partially offset by increased pension expense resulting from the finalization of our California rate case. Salaries and wages expense was relatively unchanged for the three months ended March 31, 2013, compared to 2012, with increases related to annual wage increases and increased overtime expense offset by higher capitalization rates and $2.4 million of severance-related costs included in the 2012 period.

Operating supplies and services include the day-to-day expenses of office operation, legal and other professional services, transportation expenses, information systems rental charges and other office equipment rental charges. These costs increased $6.3 million, or 13.2%, for the three months ended March 31, 2013. The overall increase was primarily due to higher contracted services, mainly as a result of backfilling positions; the use of contractors for other specific projects; and lastly, additional incremental costs attributable to the continued maturity of our Enterprise Resource Planning systems in conjunction with the implementation of Phase I of our business transformation project. Also, contributing to the increase in operating supplies and services is the 2013 operating costs associated with the New York acquisition. Partially offsetting these increases was lower transportation expenses due to a reduction in leased vehicle costs.

Maintenance materials and supplies, which include emergency repairs as well as costs for preventive maintenance, increased $2.1 million, or 12.9%, for the three months ended March 31, 2013 mainly as a result of higher than normal main breaks in a number of subsidiaries, increased costs as a result of the 2012 New York acquisition and an increase in tank cleaning costs in California.

Customer billing and accounting expenses, which include uncollectible accounts expense, postage and other customer related expenses, increased $1.3 million, or 14.5%, for the three months ended March 31, 2013 primarily due to an increase in uncollectible expense associated with the increase in revenues.

Other operation and maintenance expenses include casualty and liability insurance premiums and regulatory costs. For the three months ended March 31, 2013, costs increased by $1.8 million primarily driven by higher casualty insurance costs as a result of historical claims experience and retroactive adjustments.

Operating expenses. The increase in operating expenses is due to the increases in operation and maintenance expense for the three months ended March 31, 2013 explained above, higher depreciation and amortization expense of $7.1 million and higher general tax expense of $2.8 million. The increase in depreciation and amortization is primarily due to additional utility plant placed in service. The increase in general tax expense is primarily due to $2.4 million of property taxes incurred as a result of our New York acquisition in the second quarter of 2012.

Income from continuing operations before income taxes. The $8.4 million increase for the three months ended March 31, 2013 is the result of the aforementioned changes in operating revenue and operating expenses.

 

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Market-Based Operations

The following table provides financial information for our Market-Based Operations segment for the periods indicated:

 

     For the three months ended
March 31,
 
     2013      2012      Increase
(Decrease)
 
     (In thousands)  

Operating revenues

   $ 67,336       $ 80,581       $ (13,245

Operation and maintenance expense

     59,224         67,765         (8,541

Operating expenses, net

     62,381         70,756         (8,375

Income from continuing operations before income taxes

     5,671         10,483         (4,812

Operating revenues. The net decrease in revenues is primarily attributable to a decrease in the Contract Operations Group revenues of $14.7 million. Of this decrease, approximately $9.8 million is due to delays in 2013 of capital activities associated with military construction with the remaining decrease primarily due to the termination of certain municipal and industrial operations and maintenance contracts. The decrease in the Contract Operations Group revenues is partially offset by a $1.5 million increase in our HOS revenues associated with contract growth.

Operation and maintenance. Operation and maintenance expense decreased $8.5 million, or 12.6%, for the three months ended March 31, 2013.

The following table provides information regarding categories of operation and maintenance expense for the three months ended March 31, 2013 and 2012:

 

     For the three months ended
March 31,
 
     2013      2012      Increase
(Decrease)
    Percentage  
     (In thousands)  

Production costs

   $ 10,059       $ 12,039       $ (1,980     (16.4 %) 

Employee-related costs

     16,331         17,865         (1,534     (8.6 %) 

Operating supplies and services

     21,470         27,419         (5,949     (21.7 %) 

Maintenance materials and supplies

     10,586         9,029         1,557        17.2

Other

     778         1,413         (635     (44.9 %) 
  

 

 

    

 

 

    

 

 

   

Total

   $ 59,224       $ 67,765       $ (8,541     (12.6 %) 
  

 

 

    

 

 

    

 

 

   

As noted in the table above, decreases in operating supplies and services, production costs and employee-related costs were partially offset by an increase in maintenance materials and supplies and correspond with the decrease in revenues above. The decrease in production costs and employee-related costs is due to the termination of certain municipal and industrial operations and maintenance contracts. The decrease in operating supplies and services is attributable to the delayed construction activity for our military contracts and is partially offset by increased HOS printing and postage costs associated with marketing campaigns, including New York City. The increase in maintenance materials and services is primarily due to higher HOS repair costs, attributable to new contracts, an increase in the number of claims, as well as an increase in the average cost per claim.

Operating expense. The change in operating expenses for the three months ended March 31, 2013 compared to 2012 is primarily due to the variances in the operation and maintenance expense explained above.

Income from continuing operations before income taxes. The $4.8 million decrease for the three months ended March 31, 2013 compared to the same period in 2012 is the result of the aforementioned changes in operating revenues and operating expenses.

Liquidity and Capital Resources

For a general overview of our sources and uses of capital resources, see the introductory discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources,” contained in part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012.

 

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We believe that our ability to access the capital markets, our revolving credit facility and our cash flows from operations will generate sufficient cash to fund our short-term capital requirements. We fund liquidity needs for capital investment, working capital and other financial commitments through cash flows from operations, public and private debt offerings, commercial paper markets, and to the extent necessary, our revolving credit facility with a diversified group of banks. We regularly evaluate the capital markets as well as closely monitor the financial condition of the financial institutions associated with the revolving credit facility.

In order to meet our short-term liquidity needs, we, through American Water Capital Corp. (“AWCC”), our financing subsidiary, issue primarily commercial paper, which is supported by the revolving credit facility. The revolving credit facility is also used, to a limited extent, to support our issuance of letters of credit. As of March 31, 2013, AWCC had no outstanding borrowings and $29.0 million of outstanding letters of credit under the revolving credit facility. As of March 31, 2013, AWCC had $971.0 million available under the credit facility that we can use to fulfill our short-term liquidity needs, to issue letters of credit and back our $333.8 million outstanding commercial paper. We can provide no assurances that our lenders will meet their existing commitments or that we will be able to access the commercial paper or loan markets in the future on terms acceptable to us or at all.

Cash Flows from Operating Activities

Cash flows from operating activities primarily result from the sale of water and wastewater services and, due to the seasonality of demand, are generally greater during the third quarter of each fiscal year. Cash flows from operating activities for the three months ended March 31, 2013 were $149.6 million compared to $148.1 million for the three months ended March 31, 2012.

The following table provides a summary of the major items affecting our cash flows from operating activities for the three months ended March 31, 2013 and 2012:

 

     For the three months ended
March 31,
 
     2013     2012  
     (In thousands)  

Net income

   $ 57,643      $ 41,754   

Add (subtract):

    

Non-cash operating activities(1)

     141,670        145,735   

Changes in working capital(2)

     (19,922     1,037   

Pension and postretirement healthcare contributions

     (29,766     (40,427
  

 

 

   

 

 

 

Net cash flows provided by operations

   $ 149,625      $ 148,099   
  

 

 

   

 

 

 

 

(1) Includes, depreciation and amortization, provision for deferred income taxes, amortization of deferred investment tax credits, provision for losses on accounts receivable, allowance for other funds used during construction, (gain) loss on asset dispositions and purchases, pension and non-pension post retirement benefits expense, stock-based compensation expense and other non-cash items. Details of each component can be found in the Consolidated Statements of Cash Flows.
(2) Changes in working capital include changes to accounts receivable and unbilled utility revenue, taxes receivable including income taxes, other current assets, accounts payable, taxes accrued (including income taxes), interest accrued, book overdraft and other current liabilities.

Our working capital needs are primarily limited to funding the increase in our customer accounts receivable and unbilled revenues which is mainly associated with the revenue increase as a result of rate increases in our Regulated Businesses. We address this timing issue through the aforementioned liquidity funding mechanisms.

Cash Flows from Investing Activities

The following table provides information regarding cash flows used in investing activities for the periods indicated:

 

     For the three months ended
March 31,
 
     2013     2012  
     (In thousands)  

Net capital expenditures

   $ (213,086   $ (233,366

Proceeds from sale of assets and securities

     280        461,375   

Acquisitions

     (2,836     (104

Other investing activities, net(1)

     (12,068     1,700   
  

 

 

   

 

 

 

Net cash flows used in investing activities

   $ (227,710   $ 229,605   
  

 

 

   

 

 

 

 

(1) Includes removal costs from property, plant and equipment retirements, net and net funds released.

 

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Cash Flows from Financing Activities

Our financing activities, primarily focused on funding construction expenditures, include the issuance of long-term and short-term debt, primarily through AWCC. We intend to access the capital markets on a regular basis, subject to market conditions. In addition, new infrastructure may be financed with customer advances and contributions for construction (net of refunds).

The following table provides information on long-term debt that was issued during the first three months of 2013:

 

Company

  

Type

   Interest Rate     Maturity      Amount
(In thousands)
 

Other subsidiaries

  

Private activity bonds and government funded debt – fixed rate

     1.59     2033       $ 1,378   
          

 

 

 

Total issuances

           $ 1,378   
          

 

 

 

Proceeds from the above issuances were received from Pennsylvania Infrastructure Investment Authority and will be used to fund certain specified projects.

The following long-term debt was retired through optional redemption, sinking fund provisions or payment at maturity during the first three months of 2013:

 

Company

  

Type

   Interest Rate   Maturity    Amount
(In  thousands)
 

Other subsidiaries (1)

  

Private activity bonds and government funded debt -fixed rate

   0.00%-5.50%   2013-2041    $ 5,335   

Other subsidiaries

  

Mandatory redeemable preferred stock

   8.49%   2036      1,200   

Other

  

Capital leases and other

          82   
          

 

 

 

Total retirements and redemptions

           $ 6,617   
          

 

 

 

 

  (1) Includes $3,025 thousands of non-cash redemptions via the use of restricted funds.

From time to time, and as market conditions warrant, we may engage in additional long-term debt retirements via tender offers, open market repurchases or other viable transactions.

Credit Facilities and Short-Term Debt

Short-term debt at March 31, 2013 consists of the following:

 

     Amount
(In thousands)
 

Commercial paper, net

   $ 333,786   
  

 

 

 

Total short-term debt

   $ 333,786   
  

 

 

 

The following table provides information as of March 31, 2013 regarding letters of credit sub-limits under our revolving credit facility and available funds under the revolving credit facility, as well as outstanding amounts of commercial paper and borrowings under the revolving credit facilities.

 

     Credit Facility
Commitment
     Available
Credit Facility
Capacity
     Letter of Credit
Sub-limit
     Available
Letter of Credit
Capacity
     Outstanding
Commercial
Paper
(Net of Discount)
     Credit Line
Borrowings
 
     (In thousands)  

March 31, 2013

   $ 1,000,000       $ 970,960       $ 150,000       $ 120,960       $ 333,786       $ —     

The weighted-average interest rate on short-term borrowings for the three months ended March 31, 2013 was approximately 0.41% compared to 0.52% for the three months ended March 31, 2012.

 

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Capital Structure

The following table provides information regarding our capital structure for the periods presented:

 

     At
March 31,
2013
    At
December 31,
2012
 

Common stockholders’ equity and preferred stock without mandatory redemption rights

     44     44

Long-term debt and redeemable preferred stock at redemption value

     51     52

Short-term debt and current portion of long-term debt

     5     4
  

 

 

   

 

 

 
     100     100
  

 

 

   

 

 

 

Debt Covenants

Our debt agreements contain financial and non-financial covenants. To the extent that we are not in compliance, we or our subsidiaries may be restricted in the ability to pay dividends, issue new debt or access our revolving credit facility. We were in compliance with our covenants as of March 31, 2013. Our failure to comply with restrictive covenants under our credit facility could accelerate repayment obligations. Our long-term debt indentures contain a number of covenants that, among other things, limit the Company from issuing debt secured by the Company’s assets, subject to certain exceptions.

Certain long-term notes and the revolving credit facility require us to maintain a ratio of consolidated debt to consolidated capitalization of not more than 0.70 to 1.00. As of March 31, 2013, our ratio was 0.56 to 1.00 and therefore we were in compliance with the covenant.

Security Ratings

Our access to the capital markets, including the commercial paper market, and respective financing costs in those markets, is directly affected by securities ratings of the entity that is accessing the capital markets. We primarily access the capital markets, including the commercial paper market, through AWCC. However, we also issue debt through our regulated subsidiaries, primarily in the form of tax exempt securities, to lower our overall cost of debt.

The following table shows the Company’s securities ratings as of March 31, 2013:

 

Securities

   Moody’s Investors
Service
     Standard & Poor’s
Ratings Service
 

Senior unsecured debt

     Baa2         BBB+   

Commercial paper

     P2         A2   

A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency, and each rating should be evaluated independently of any other rating. Security ratings are highly dependent upon our ability to generate cash flows in an amount sufficient to service our debt and meet our investment plans. We can provide no assurances that our ability to generate cash flows is sufficient to maintain our existing ratings. None of our borrowings are subject to default or prepayment as a result of the downgrading of these security ratings, although such a downgrading could increase fees and interest charges under our credit facility.

As part of the normal course of business, we routinely enter into contracts for the purchase and sale of water, energy, fuels and other services. These contracts either contain express provisions or otherwise permit us and our counterparties to demand adequate assurance of future performance when there are reasonable grounds for doing so. In accordance with the contracts and applicable contract law, if we are downgraded by a credit rating agency, especially if such downgrade is to a level below investment grade, it is possible that a counterparty would attempt to rely on such a downgrade as a basis for making a demand for adequate assurance of future performance, which could include a demand that we provide collateral to secure our obligations. We do not expect that our posting of collateral would have a material adverse impact on our results of operations, financial position or cash flows.

Dividends

Our board of directors’ practice has been to distribute to our shareholders a portion of our net cash provided by operating activities as regular quarterly dividends, rather than retaining that cash for other purposes. Since the dividends on our common stock will not be cumulative, only declared dividends will be paid.

 

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In order to take advantage of existing 2012 tax rates, the cash dividend payment that would have historically been paid in March 2013 was paid in December 2012. In March 2012, we made a cash dividend payment of $0.23 per share to all shareholders of record as of February 3, 2012.

On May 6, 2013, our board of directors declared a quarterly cash dividend payment of $0.28 per share payable on June 3, 2013 to all shareholders of record as of May 24, 2013.

Market Risk

There have been no significant changes to our market risk since December 31, 2012. For a discussion of our exposure to market risk, refer to Part II, Item 7A. “Quantitative and Qualitative Disclosures about Market Risk,” contained in our Annual Report on Form 10-K for the year ended December 31, 2012.

Application of Critical Accounting Policies and Estimates

Our financial condition, results of operations and cash flows are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates,” in our Form 10-K for the year ended December 31, 2012 filed with the SEC for a discussion of our critical accounting policies.

Recent Accounting Pronouncements

See Part I, Item 1 – Financial Statements (Unaudited) – Note 2 – New Accounting Pronouncements in this Quarterly Report on Form 10-Q for a discussion of new accounting standards recently adopted or pending adoption.

 

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Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to market risks in the normal course of business, including changes in interest rates and equity prices. For further discussion of market risks see “Market Risk” in Part I, Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

American Water Works Company, Inc. maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed or submitted under the Securities Exchange Act of 1934 (“the Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Our management, including the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) of the Exchange Act) as of March 31, 2013 pursuant to 15d-15(e) under the Exchange Act.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2013, our disclosure controls and procedures were effective at a reasonable level of assurance. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2013, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

As noted under “Making Efficient Use of Capital” in Part I, Item 2- Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Form 10-Q, we have undertaken a project with the goals of increasing our operating efficiencies and effectiveness and controlling the costs associated with the operation of our business, all of which are important to providing quality service to our customers and communities we serve. Phase II of this project focuses on the implementation of an Enterprise Asset Management system, which will handle the management of asset lifecycles; and a Customer Information system which will contain all billing and data pertaining to our regulated customers. The implementation of these two systems, along with their integration with the Enterprise Resource Planning systems which went live in 2012, is reasonably likely to significantly change our internal control over financial reporting. Efforts have and will continue to be made to minimize any adverse impact on our controls, however, we cannot assure that all such impacts will be mitigated.

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

Previously reported under Part I, Item 3 “Legal Proceedings” in the Company’s Form 10-K for the year ended December 31, 2012.

 

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in the “Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2012, and our other public filings, which could materially affect our business, financial condition or future results. There have been no material changes from risk factors previously disclosed in “Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2012.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

 

ITEM 4. MINE SAFETY DISCLOSURES

None

 

ITEM 5. OTHER INFORMATION

None

 

ITEM 6. EXHIBITS

 

Exhibit

Number

  

Exhibit Description

*10.1    2013 Annual Incentive Plan Highlights Brochure
*10.2    Agreement and General Release between Ellen C. Wolf and American Water Works Company, Inc., dated March 25, 2013
*10.2A    First Amendment to the Agreement and General Release between Ellen C. Wolf and American Water Works Company, Inc., dated March 28, 2013
*10.3    Employment Letter Agreement between Susan N. Story and American Water Works Company, Inc. dated February 6, 2013
*10.4    Credit Agreement, dated as of October 29, 2012, among American Water Capital Corp., the Lenders identified therein and JPMorgan Chase Bank, N.A.
*10.5    American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2013 Initial Restricted Stock Unit Grant Form for Susan N. Story.
*10.6    American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2013 Restricted Stock Unit Grant Form for Jeffry E. Sterba
*10.7    American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2013 Performance Stock Unit Grant Form A for Jeffry E. Sterba
*10.8    American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2013 Performance Stock Unit Grant Form B for Jeffry E. Sterba
*10.9    American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2013 Nonqualified Stock Option Grant Form for Jeffry E. Sterba
*10.10    American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2013 Restricted Stock Unit Grant Form for ML2 - L5
*10.11    American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2013 Performance Stock Unit Grant Form A for ML2 - L5
*10.12    American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2013 Performance Stock Unit Grant Form B for ML2 - L5
*10.13    American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2013 Nonqualified Stock Option Grant Form for ML2 - L5
*31.1    Certification of Jeffry Sterba, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
*31.2    Certification of Susan N. Story, Senior Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
*32.1    Certification of Jeffry Sterba, President and Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act
*32.2    Certification of, Susan N. Story, Senior Vice President and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act
101    The following financial statements from American Water Works Company, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013, filed with the Securities and Exchange Commission on May 7, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations and Comprehensive Income; (iii) the Consolidated Statements of Cash Flows; (iv) the Consolidated Statements of Changes in Stockholders’ Equity; and (v) the Notes to Consolidated Financial Statements.

 

* filed herewith.

 

34


Table of Contents

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 7th day of May, 2013.

 

AMERICAN WATER WORKS COMPANY, INC.

(REGISTRANT)

 

/S/    Jeffry Sterba        

Jeffry Sterba

President and Chief Executive Officer

Principal Executive Officer

 

/S/    Susan N. Story        

Susan N. Story

Senior Vice President and Chief Financial Officer

Principal Financial Officer

/S/    Mark Chesla        

Mark Chesla

Vice President and Controller

Principal Accounting Officer

 

35


Table of Contents

EXHIBIT INDEX

 

Exhibit

Number

  

Exhibit Description

*10.1    2013 Annual Incentive Plan Highlights Brochure
*10.2   

Agreement and General Release between Ellen C. Wolf and American Water Works Company, Inc., dated

March 25, 2013

*10.2A    First Amendment to the Agreement and General Release between Ellen C. Wolf and American Water Works Company, Inc., dated March 28, 2013
*10.3    Employment Letter Agreement between Susan N. Story and American Water Works Company, Inc. dated February 6, 2013
*10.4    Credit Agreement, dated as of October 29, 2012, among American Water Capital Corp., the Lenders identified therein and JPMorgan Chase Bank, N.A.
*10.5    American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2013 Initial Restricted Stock Unit Grant Form for Susan N. Story.
*10.6    American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2013 Restricted Stock Unit Grant Form for Jeffry E. Sterba
*10.7    American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2013 Performance Stock Unit Grant Form A for Jeffry E. Sterba
*10.8    American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2013 Performance Stock Unit Grant Form B for Jeffry E. Sterba
*10.9    American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2013 Nonqualified Stock Option Grant Form for Jeffry E. Sterba
*10.10    American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2013 Restricted Stock Unit Grant Form for ML2 – L5
*10.11    American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2013 Performance Stock Unit Grant Form A for ML2 – L5
*10.12    American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2013 Performance Stock Unit Grant Form B for ML2 – L5
*10.13    American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2013 Nonqualified Stock Option Grant Form for ML2 – L5


Table of Contents

Exhibit

Number

  

Exhibit Description

*31.1    Certification of Jeffry Sterba, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
*31.2    Certification of Susan N. Story, Senior Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
*32.1    Certification of Jeffry Sterba, President and Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act
*32.2    Certification of Susan N. Story, Senior Vice President and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act
101    The following financial statements from American Water Works Company, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013, filed with the Securities and Exchange Commission on May 7, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations and Comprehensive Income; (iii) the Consolidated Statements of Cash Flows; (iv) the Consolidated Statements of Changes in Stockholders’ Equity; and (v) the Notes to Consolidated Financial Statements.

 

* filed herewith.
(Back To Top)

Section 2: EX-10.1 (EX-10.1)

EX-10.1

Exhibit 10.1

 

LOGO

2013

Annual

Incentive

Plan

 

 


 

Table of Contents

 

THE 2013 AMERICAN WATER ANNUAL INCENTIVE PLAN

     1   

Your Performance — Your Award

     1   

Eligibility

     2   

DETERMINING AIP AWARDS

     4   

Step 1: Establish initial award pool based on overall corporate performance

     5   

Step 2: Allocate overall corporate funding to organizational groups/ functional areas, and adjust specific organizational group/functional area funding to reflect results

     7   

Step 3: Determine individual AIP award based on (a) individual performance, and (b) available organizational group/functional area funding; awards are paid from available organizational group/functional area award pool

     7   

WHAT THE 2013 AIP MEANS FOR YOU

     8   

Performance Ratings

     8   

Award Funding Determination

     10   

Receiving Your AIP Award

     11   

FREQUENTLY ASKED QUESTIONS

     12   


American Water   1

 

THE 2013 AMERICAN WATER ANNUAL INCENTIVE PLAN

Your Performance — Your Award

At American Water, your performance counts. We rely on our employees’ knowledge and skills to help the company achieve its business objectives.

 

 

The American Water 2013 Annual Incentive Plan (AIP) is designed to give eligible exempt employees an annual opportunity to earn a cash award that recognizes and rewards their contributions to the company’s success. This means that company and individual performance are both taken into account to determine cash awards under the plan. We continue to make adjustments to the AIP design to reinforce the link between company and individual performance and award payouts.

 

 

We are continuing the funding approach that was used in 2012, which directly ties the amount of available cash for AIP payouts to company performance against specific metrics. AIP funding for all eligible, exempt employees will depend on the company’s achieving its financial, Business Transformation and operational goals.

 

 

Your individual performance continues to play a large role in determining the amount of your payout. Employees who exceed their performance targets could receive higher payouts. Conversely, employees who underperform and do not meet their performance targets could receive lower payouts or no payout at all. In short, your performance directly impacts the amount of your award.

The 2013 AIP is designed to challenge and motivate you to perform at your highest level, and promote the creation of value to the customer and shareholder. Read this brochure to learn about how the 2013 plan works and what it means for you.


American Water   2

 

The 2013 AIP

Elements of the Program

 

 

AIP award pool funding is based on overall corporate performance against specific financial, Business Transformation and operational performance (represented by the Corporate Multiplier), then allocated across organizational groups/functional areas. Allocation is subject to senior management’s discretion and recognizes organizational group/functional area results.

 

   

AIP funding for all eligible exempt employees depends on the company achieving its financial, nonfinancial goals which are Business Transformation and operational performance.

 

   

A pre-determined financial threshold for company performance must be met in order for funding and any award to be provided under the AIP,

 

 

Individual award payouts will be based on individual performance against specific goals represented by the Individual Performance Factor and paid from available organizational group/functional area funding.

 

For 2013, the Individual Performance Factor range is 0%-200%. Individual payouts will be capped at 200% of AIP target award.

 

 

Award opportunity (Target Award) is expressed as a percentage of base salary. (See Attachment B).

 

   

Actual payout may be lower or higher than target depending on company and individual performance against specific goals.

 

 

Individual performance is assessed by your manager and measured against your pre- determined performance goals.

 

 

Your AIP will be distributed as a cash award in March.

 

   

You must be actively employed with American Water on the date awards are paid to receive your 2013 AIP payout. You (or your beneficiary) may be eligible for a prorata award if you are disabled, retire, die, involuntarily terminate (not “for cause”) or a divestiture occurred after June 30, 2013. Involuntary termination for cause would not be eligible.

 

 

Eligibility

 

 

You are eligible for an AIP award opportunity if you are a regular, full-time exempt employee of American Water.

 

   

Regular, full-time exempt employees who join American Water on or before September 30, 2013 are also eligible to participate in the AIP on a prorated basis.

 

   

Employees transferred from nonexempt to exempt status on or after September 30, 2013 are not eligible in the current plan year.


American Water   3

 

 

If you are promoted or transferred during the plan year to a position with a higher AIP target level, or if you are reclassified/transferred to a position with a lower AIP target level, your award payout will be based on your new salary and target level as of December 14, 2013, except ML4s and above who will be prorated at each salary and target level. All AIP target awards will be paid based on salaries as of December 14, 2013.

 

 

You must be an active employee with American Water on the date the payout is made in order to receive the award. You (or your beneficiary) may be eligible for a prorata award if you are disabled, retire, die, involuntarily terminate (not “for cause”) or a divestiture occurred after June 30, 2013. (Retirement under this plan is age 55 and 10 total years of employment service.)

 

 

You are not eligible for an AIP award if:

 

   

you transfer from exempt status to nonexempt status during the current plan year or your job was reclassified to nonexempt status,

 

   

your performance rating is “Unacceptable” or “Too Soon to Rate,”

 

   

you have not complied with the company’s annual Code of Ethics certification by the established deadline,

 

   

your employment was involuntarily terminated for cause.

Why Is the Plan Based on Individual Performance?

Since the value (as reflected in our share price and our return to shareholders) and success of our business depend on the achievement of annual company and individual performance goals, American Water recognizes the need to differentiate and reward the performance of employees who enable us to reach these goals. The 2013 AIP is designed to ensure that award payouts are directly tied to measurable contributions — both company and individual — to American Water’s success.


American Water   4

 

DETERMINING AIP AWARDS

AIP award payouts depend on individual performance; they also depend on overall corporate performance and organizational group/functional area results (which determine award pool funding).

AIP awards will be determined according to the following three-step process:

 

Step 1:    Establish initial award pool based on overall corporate performance.
Step 2:    Allocate overall corporate funding to organizational groups/functional areas, and adjust specific organizational group/functional area funding to reflect results.
Step 3:    Determine AIP award based on individual performance; awards are paid from available organizational group/functional area funding.


American Water   5

 

Step 1: Establish initial award pool based on overall corporate performance

 

Each year, American Water establishes funding for the AIP award pool. In 2013, the funding will be directly tied to company performance and represented by the Corporate Multiplier. The Corporate Multiplier can range from 0% to 150% depending on how well the company performed against the financial, Business Transformation and operational goals described below. Note that there is a pre- determined threshold for company performance:

 

•      2013 Diluted Earnings Per Share (EPS) must be at least 94% of target for any financial funding and award to be provided under the AIP.

 

•      2013 Diluted Earnings Per Share (EPS) must be at least 90% of target for funding of any award to be provided under the A IP for Business Transformation and Operational Performance Factors.

  

Based on financial (weighted 55%), nonfinancial (weighted 45%)

Business Transformation(weighted 25%) and

operational (weighted 20%) goals

 

LOGO


American Water   6

 

 

Financial Metric (Weighted 55%) *

 

   

Diluted Earnings Per Share is a widely tracked measure of financial performance/profitability, and is calculated as follows:

Net Income to Common Stockholders

÷

Average Outstanding Shares (including dilutive securities such as stock options)

=

Diluted Earnings per Share

 

* 2013 Diluted Earnings Per Share (EPS) must be at least 94% of target for any financial funding and award to be provided under the AIP.

 

   

Nonfinancial Metric (Weighted 45%)

 

   

Business Transformation (Weighted 25%)

 

   

Enterprise Asset Management/Customer Information System successful go live (Judgment of Management with Discretion of the Board of Directors.)

 

   

Operational Performance (Weighted 20%)*

 

   

Environmental Compliance Notices of Violation (NOVs) (5%)

 

   

Safety Performance (5%)

 

   

Customer Satisfaction Survey (5%)

 

   

Customer Service Quality Survey (5%)

 

* These outcomes are based on a combination of surveys, end-of-year results, data and other annual reports (For more details on these performance measures, see Attachment A at the back of this brochure).

Please note that AIP funding for all employees will depend on how well the company achieves its financial, nonfinancial goals which are Business Transformation and operational performance. A predetermined financial threshold for company performance must be met in order for funding and any


American Water   7

 

award to be provided under the AIP. For 2013, the threshold is 90% of EPS target in order to fund any award to be provided under the AIP for Business Transformation and operational performance factors.

The financial, Business Transformation and operational metrics are added together to determine the Corporate Multiplier. So, even if certain metrics are not achieved, the funding may be reduced, but not eliminated altogether. However, if the company’s financial performance does not meet the threshold, the Corporate Multiplier will be reduced to zero, which would eliminate any award payout. The Corporate Multiplier (and thus funding for payouts) may be adjusted to take into account nonrecurring items such as impairment charges, dissolutions or acquisitions of businesses or costs associated with one-time events.

Step 2: Allocate overall corporate funding to organizational groups/ functional areas, and adjust specific organizational group/functional area funding to reflect results

Once the overall corporate funding is determined as described under Step 1, senior management will allocate the corporate funding to American Water’s organizational groups and functional areas. The funding for each organizational group/functional area may be increased or decreased, at senior management’s discretion, to reflect specific organizational group/functional area results.

Step 3: Determine individual AIP award based on (a) individual performance, and (b) available organizational group/functional area funding; awards are paid from available organizational group/ functional area award pool

Your AIP target award (i.e., your award opportunity) is based on your job with the company and is expressed as a percentage of your base salary. Your actual award payout may be higher or lower than target depending on whether individual and company performance goals have been met, and your organizational group’s/ functional area’s results. Contact your manager for information on your individual AIP Target Award.


American Water   8

 

Your individual performance factor is based on (a) your performance against specific targets, and

(b) the amount of organizational group/functional area funding available

 

LOGO

The sum of individual awards for a specific organizational group/functional area must not exceed

the funding allocated to that organizational group/functional area

The Individual Performance Factor represents how well you achieve your annual individual performance goals. Your Individual Performance Factor (IPF) can range from 0% to 200%, depending on your performance for the plan year and the amount of organizational group/functional area funding available. This performance factor will then be multiplied by your Target Award to determine your 2013 AIP award payout. Individual payouts will be capped at 200% of AIP target award.

Individual AIP awards are then paid from the available organizational group/ functional area award funding, which may impact the original IPF determination. The sum of all individual awards within a given organizational group/functional area must not exceed its allocated pool of dollars.

WHAT THE 2013 AIP MEANS FOR YOU

Performance Ratings

Most people are motivated to do their best; therefore the better you perform, the greater your potential award will be under the plan. It is your responsibility to maximize your award opportunity by achieving or exceeding your goals.

Each year, you and your manager identify four to six high priority and challenging performance targets, which represent where you can directly impact the company’s success. These performance targets and their weightings should be specific, measurable and aligned with the company’s performance targets. During your year- end performance review, you and your manager will discuss how well you performed against the established targets, and rate your performance using one of the following performance ratings:


American Water   9

 

2013 Performance Rating Scale

 

Rating

      

Description

Exceptional      Contributions are widely recognized as extraordinary. Results far exceed all defined expectations, producing important and substantial impact on the Company, Division, Operating Company, Line of Business or Function.
Highly Effective     

Contributions are widely recognized as distinguished.

Results exceed all or most expectations, producing a tangible and material impact on the Company, Division, Operating Company, Line of Business or Function.

Commendable      Contributions are widely recognized as meaningful. Results meet, and in some cases exceed expectations, producing a positive and desirable impact on the Company, Division, Operating Company, Line of Business or Function.
Needs Improvement      Contributions are widely recognized as limited. Results generally meet but in some cases fall slightly short of expectations, producing inconsistent and marginal impact on the Company, Division, Operating Company, Line of Business or Function.
Unacceptable      Contributions are widely recognized as unsatisfactory. Results fall considerably short of expectations, producing negligible or no impact on the Company, Division, Operating Company, Line of Business or Function.
Too Soon to Rate      Contributions cannot be measured at this time because more time is needed to see a result.

Later, during the AIP process, your manager will use your rating to determine your Individual Performance Factor. Depending on how you performed during the year, you could potentially earn a higher payout — or you could earn a lower payout or no payout at all. In other words, the AIP design gives you more power to impact the size of your award. It also means that you are accountable for meeting your performance goals.


American Water   10

 

Award Funding Determination

Below are four scenarios that demonstrate how AIP funding may be calculated:

AIP Funding Assumptions

 

Total AIP Funding *

   $ 20,000,000   

Total AIP Funding for Organizational Group*

   $ 2,000,000   

 

* The total is the sum of the target awards for the eligible employees.

 

     Performance  
     Scenario 1      Scenario 2      Scenario 3      Scenario 4  
•    Company    Above Target      Target      Threshold      Below Threshold  

— Financial Performance Factor

     1.39         0.94         0.25         0.00   

— Business Transformation Performance Factor

     1.10         0.85         0.50         0.00   

— Operational Performance Factor

     0.90         1.16         0.50         0.00   

 

    Scenario 1   Scenario 2   Scenario 3   Scenario 4

STEP 1: Establish corporate funding based on overall corporate performance

 

Total of AIP Targets (A)

  $20,000,000   $20,000,000   $20,000,000   $20,000,000

Financial Performance Factor (i) (55% weight)

  1.39 x 0.55 = 

0.76

  0.94 x 0.55 = 0.52   0.25 x 0.55 = 0.14   0.00 x 0.55 = 0.00

Business Transformation Performance Factor (ii) (25% Weight)

  1.10 x 0.25 = 0.27   0.85 x 0.25 = 0.21   0.50 x 0.25 = 0.12   0.00 x 0.25 = 0.00

Operational Performance Factor (iii) (20% weight)

  0.90 x 0.20 = 0.18   1.16 x 0.20 = 0.23   0.50 x 0.20 = 0.10   0.00 x 0.20 = 0.00

i + ii + iii = Corporate Multiplier (B)

  1.21   .96   0.36   0.00

A x B = Corporate Funding

  $20,000,000 x1.21 =
$24,200,000
  $20,000,000 x.96 =
$19,200,000
  $20,000,000 x 0.36 =
$7,200,000
  $20,000,000 x 0.00 =
$0


American Water   11

 

STEP 2: Allocate overall corporate funding to organizational groups/functional areas; adjust specific organizational group/functional area funding to reflect results

Organizational Group Pool (C) (Allocated from corporate funding)

  $2,420,000   $1,920,000   $720,000   $0

Organizational Group

  1.00   .80   1.20   1.00

Adjustment (D)

  (Target)   (Below Target)   (Above Target)   (Target)

C x D = Organizational Group Pool (adjusted based on results)

  $2,420,000 x1.00 =

$2,420,000

  $1,920,000 x 0.80 =

$1,536,000

  $720,000x1.20 =
$864,000
  $0 x 1.00
= $0

Both company and individual performance can significantly impact your final payout. Also, remember that the sum of individual awards for a specific organizational group/functional area must equal the funding allocated to that organizational group/functional area.

 

 

Please discuss the AIP with your manager to ensure you clearly understand how the formula works and how your performance impacts your potential award payout

Receiving Your AIP Award

Awards will be paid in cash no later than March 15, 2014. If you are eligible for an award payout, please keep in mind that:

 

 

You must be actively employed with the company on the date of payout.

 

 

The payout will be based on your annual base salary as of December 14, 2013 and subject to all federal, state and local income tax withholdings.

 

 

The American Water Board of Directors or its Designee has the right to adjust the award determination(s) and/or award payouts(s) at its discretion.

Remember, it’s your performance —and your award: The contributions you make to American Water’s success throughout the year ultimately impact the amount of your payout. Be sure to carefully review this brochure; then speak with your manager about the AIP and about what you can do to improve your performance and share the financial rewards of American Water’s success.


American Water   12

 

FREQUENTLY ASKED QUESTIONS

 

Question

  

Answer

How does the plan reward performance?    The AIP allows us to differentiate and reward the performance of employees who contribute to the achievement of the company’s goals. The 2013 AIP directly ties award payouts to measurable contributions (company, organizational group/ functional area and individual) to American Water’s success.
Who is eligible for the AIP?    All regular, full-time exempt employees are eligible to participate. If you join American Water on or before September 30, 2013, you are also eligible to participate in the plan on a prorated basis.
What do I have to do to receive an AIP award?   

Any payout will depend largely on your performance, as well as on company, organizational group/functional area performance (including financial, nonfinancial- Business Transformation and operational), which determines funding.

If your performance is rated “Needs Improvement” or higher, you may receive an award payout—but only if threshold company performance metrics have been met. If your performance rating is “Unacceptable” or “Too Soon to Rate,” you will not receive a payout. To maximize your award opportunity, it’s important to meet with your manager to establish meaningful performance goals, and then work hard throughout the year to achieve those goals.

How is my AIP target award opportunity determined? How can I find out what it is?    Your AIP target award opportunity is based on your job and is expressed as a percentage of your base salary. Please see your manager to learn more about your target award opportunity for 2013.
How will my AIP award payout be calculated?    The size of the pool which funds your award is determined based on overall corporate performance and adjusted to reflect specific organizational group/functional area results. AIP funding for all eligible employees will depend on the company and/or organizational group/functional area achieving its nonfinancial - operational and Business Transformation goals as well as financial goals. Once individual awards are calculated, they are paid from the organizational group/functional area funding.
What is the minimum and maximum that could be paid under the plan (as a percent of target)?    AIP award payouts can range from zero, to a maximum of an Individual Performance Factor of 200%. Payouts are capped at 200% of AIP target award.


American Water   13

 

Question

  

Answer

Will I receive an award payout if I meet my individual performance goals but the company does not achieve minimum (threshold) performance?    No. A pre-determined financial threshold for company performance must be met in order for funding and any award to be provided under the AIP.
What happens if I leave American Water before I receive my award payout?    To receive the award payout, you must be actively employed with American Water on the date the payment is to be made. You (or your beneficiary) may be eligible for a prorata award if you are disabled, retire, die, involuntarily terminate (not “for cause”) or a divestiture occurred after June 30, 2013. (Retirement under this plan is age 55 and 10 total years of employment service.) Employees involuntarily terminated for cause would not be eligible.
What happens if I change job positions or I receive a merit increase within American Water during the plan year?    Your award payout will be based on your base salary and target level percentage as of December 14, 2013.

This brochure is the 2013 American Water Annual Incentive Plan. The American Water Board of Directors or its Designee, whose decisions will be final and binding, will determine interpretations of the Plan. The company reserves the right to amend, modify, or discontinue the Plan during the plan year or at any time in the future. Participation in the Plan does not convey any commitment to ongoing employment.


American Water   Attachment A

 

2013 AIP FINANCIAL PAYOUT CURVE

DILUTED EARNINGS PER SHARE (EPS) (55%)

 

% Target Achieved

   % Payout  
103.0%      150.0
102.4%      140.0
101.8%      130.0
101.2%      120.0
100.6%      110.0
100%      100.0
98.8%      85
97.6%      70
96.4%      55
95.2%      40
94.0%      25
<94.0%      0

NONFINANCIAL PERFORMANCE (45%)

BUSINESS TRANSFORMATION PERFORMANCE

2013 AIP MEASURE

Enterprise Asset Management/Customer Information System successful go live (judgment of management with discretion of the Board of Directors.)


American Water   Attachment A

 

2013 AIP OPERATIONAL MEASURES

Environmental Compliance (5%)

For determining environmental compliance, American Water will count Notices of Violation (NOV) for which the company is responsible as described in the Environmental Non- Compliance Reporting Practice. For 2013 American Water’s NOV target is 15%.

 

NOVs

 

Award

 
9     150.0
11     137.5
13     125.0
14     112.5
15     100.0
16     87.5
17     75.0
18     62.5
19     50.0
>19     0

Safety Performance (5%)

Safety performance will be determined using the total OSHA Recordable Incident Rate (ORIR) which measures all injuries and illnesses requiring treatment beyond first aid for every 200,000 hours worked. For 2013 the goal has been set at 3.10 which is 40% below the Bureau of Labor Statistics (BLS) Water Utility Average ORIR of 5.20 and will be evaluated against the graduated award scale below and discretion of management.

 

ORIR

 

Award

 
2.90     150.0
2.95     137.5
3.00     125.0
3.05     112.5
3.10     100.0
3.20     87.5
3.30     75.0
3.40     62.5
3.50     50.0
>3.50     0


American Water   Attachment A

 

2013 AIP OPERATIONAL MEASURES

Service Quality (5%)

This metric is measured by the Service Quality Survey (SQS) which is conducted throughout the year for customers requesting service resulting in completion of a service order by a Field Service Representative (FSR). The score is based on the survey question: “Overall, how satisfied were you with the outcome of your service contact?” taking the top two response categories of a 5 point response scale (5. Extremely Satisfied, 4. Very Satisfied, 3. Somewhat Satisfied, 2. Somewhat Dissatisfied, 1. Very Dissatisfied). The American Water goal for 2013 is 85% and the graduated award scale is provided below.

 

SQS
%

  Award  
90     150
89     140
88     130
87     120
86     110
85     100
84     90
83     80
82     70
81     60
80     50
<80     0

Customer Satisfaction (5%)

This metric measures overall customer satisfaction through a random customer survey containing the following question, “Overall, how satisfied have you been with (Company Name) in general during the past twelve months”, which has a five-point response scale (Extremely Satisfied, Very Satisfied, Somewhat Satisfied, Somewhat Dissatisfied, Very Dissatisfied), response percentages in the top three categories are indicative of overall customer satisfaction levels and a 90% target has been set.

 

CSS%

  Award  
95     150
94     140
93     130
92     120
91     110
90     100
89     90
88     80
87     70
86     60
85     50
<85     0
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Section 3: EX-10.2 (EX-10.2)

EX-10.2

Exhibit 10.2

AGREEMENT AND GENERAL RELEASE

This Agreement and General Release (the “Agreement”) is entered into by Ellen Wolf (the “Executive”) and American Water Works Company, Inc. (“American Water” or the “Company”). As used herein any reference to the “Company” shall mean American Water Works Company, Inc., American Water Works Service Company, Inc., and all of their respective divisions, parents, subsidiaries, affiliates or related companies, their past, present and future officers, directors, shareholders, benefit plans, insurers, attorneys, legal representatives, employees and agents and all of their respective heirs, executors, administrators, successors and assigns, or any other persons and/or entities through which American Water has acted with respect to the Executive.

RECITALS

WHEREAS, the Executive is employed by the Company as Senior Vice President and Chief Financial Officer of American Water Works Company, Inc.;

WHEREAS, the Executive is a participant in the Company’s Long Term Incentive Plan (the “LTIP”);

WHEREAS, the Company wishes to permit the accelerated vesting of the Executive’s LTIP grants of stock options and performance stock units; and

WHEREAS, the parties intend that this Agreement shall terminate the letter agreement the Executive entered into with the Company on February 15, 2008 except for paragraphs 5 and 9 therein.

NOW, THEREFORE, in consideration of the promises and conditions set forth herein, the sufficiency of which is hereby acknowledged, the Company and the Executive agree as follows:

 

  1. Step Down and Transition.

 

  a. Step Down. The Executive shall step down from the office of Senior Vice President and Chief Financial Officer of the Company and any and all other offices the Executive may hold with any of the Company’s affiliates effective at the close of business on April 1, 2013 (the “Step Down Date”). The Executive shall sign letters of resignation where required to satisfy legal or governance requirements for such offices the Executive holds with the Company.

 

  b. Transition. The Executive will facilitate a transition from the opening of business on April 2, 2013 through the close of business on May 1, 2013 (the “Transition Period”).

 

  i. During the Transition Period, the Executive’s regular physical presence in the office during normal business hours will be expected unless Executive is granted permission from or is otherwise directed by the President and Chief Executive Officer or his designee.

 

  1    EW Ellen Wolf’s Initials


  ii. During the Transition Period, the Executive shall continue to perform all duties and responsibilities assigned to her and make reasonable good faith efforts to complete such tasks and assignments specified by the President and Chief Executive Officer or his designee.

 

  iii. During the Transition Period, the Executive shall be available to perform such duties as required to effect an orderly transition, including but not limited to transferring documents and contacts to, sharing knowledge of relationships and business strategies with, and assisting as needed the Executive’s named successor and the President and Chief Executive Officer or his designee.

 

  iv.