# American Water Works Company, Inc.: Form 10-Q for the period ended Sep 30, 2011

- Company: [American Water Works Company, Inc.](/companies/awk.md) (CIK 1410636)
- Form: 10-Q
- Filed: 2011-11-02
- Accepted by EDGAR: Nov 2, 2011, 20:39 ET
- Period: 2011-09-30
- Accession: 0001193125-11-292885
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1410636/000119312511292885/d236523d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1410636/000119312511292885/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2011-07-01 to 2011-09-30 | $766.5m | us-gaap:Revenues |
| Revenue | 9 months, 2011-01-01 to 2011-09-30 | $2.04bn | us-gaap:Revenues |
| Operating income | 3 months, 2011-07-01 to 2011-09-30 | $281.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2011-01-01 to 2011-09-30 | $626.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2011-07-01 to 2011-09-30 | $78.6m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2011-01-01 to 2011-09-30 | $233.3m | us-gaap:InterestExpense |
| Income tax | 3 months, 2011-07-01 to 2011-09-30 | $78.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2011-01-01 to 2011-09-30 | $157.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2011-07-01 to 2011-09-30 | $137.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2011-01-01 to 2011-09-30 | $269.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2011-07-01 to 2011-09-30 | $0.78 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2011-01-01 to 2011-09-30 | $1.53 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2011-07-01 to 2011-09-30 | $0.78 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2011-01-01 to 2011-09-30 | $1.53 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2011-07-01 to 2011-09-30 | 176,593,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2011-01-01 to 2011-09-30 | 176,422,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2011-01-01 to 2011-09-30 | $576.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2011-07-01 to 2011-09-30 | $230.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Capital expenditure | 9 months, 2011-01-01 to 2011-09-30 | $621.9m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2011-01-01 to 2011-09-30 | $117.5m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2011-09-30 | $15.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2011-09-30 | $1.48bn | us-gaap:AssetsCurrent |
| Total assets | at 2011-09-30 | $14.54bn | us-gaap:Assets |
| Current liabilities | at 2011-09-30 | $1.38bn | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2011-09-30 | $5.36bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2011-09-30 | $8.9m | us-gaap:LongTermDebtCurrent |
| Short-term borrowings | at 2011-09-30 | $409.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2011-09-30 | $4.26bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 67,511 characters.

### 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, 2010 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 Businesses 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, 2010 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, 2010 filed with the SEC.

### Overview

As previously disclosed in our Form 10-K for the year ended December 31, 2010, as part of our portfolio optimization initiative, we entered into agreements to sell our regulated subsidiaries in Arizona and New Mexico as well as our regulated water and wastewater systems in Texas. The sale of the Texas subsidiary assets was completed in June 2011. In addition, on July 8, 2011, the Company entered into an agreement to sell our Ohio subsidiary. Therefore, the financial results of these entities have been presented as discontinued operations for all periods, unless otherwise noted. See Note 13 to Consolidated Financial Statements for further details on our discontinued operations.

*Financial Results.* Despite challenging weather events in the northeast region of the United States, American Water’s net income was $137.4 million for the third quarter of 2011, or diluted earnings per share of $0.78, compared to $124.1 million, or diluted earnings per share of $0.71, for the comparable quarter in 2010. Net income for 2011 is higher by $3.5 million, or $0.02 per share, as a result of the benefit from the cessation of depreciation on assets held by our discontinued operations in accordance with generally accepted accounting principles (“GAAP”). Net income from continuing operations was $128.4 million for the third quarter of 2011, compared to net income from continuing operations of $119.4 million for the third quarter of 2010. Diluted earnings from continuing operations per average common share was $0.73 for the third quarter of 2011 as compared to $0.68 for the third quarter of 2010.

For the nine months ended September 30, 2011, American Water’s net income was $269.3 million, or diluted earnings per share of $1.53 compared to $227.7 million, or diluted earnings per share of $1.30, for the nine months ended September 30, 2010. Net income for 2011 is higher by $11.4 million, or $0.06 per share, as a result of the benefit from the cessation of depreciation on assets held by our discontinued operations in accordance with GAAP. Net income from continuing operations was $243.8 million for the nine months ended September 30, 2011, compared to net income from continuing operations of $216.6 million for the nine months ended September 30, 2010. Diluted income from continuing operations per average common share was $1.38 for the nine months ended September 30, 2011, as compared to $1.24 for the nine months ended September 30, 2010.

The primary drivers contributing to these increases in net income from continuing operations for both the three and nine months ended September 30, 2011 were increased revenues resulting from rate increases as well as higher revenues in our Market-Based Operations segment partially offset by higher depreciation and amortization expense and general taxes. Also, partially offsetting the increase for the nine months ended September 30, 2011, compared to the same period in 2010, was an increase in operation and maintenance expense. For further details, see “Consolidated Results of Operations and Variances” and “Segment Results” below.

In 2011, our goals are to implement the execution of the portfolio optimization, resolve rate cases outstanding at the beginning of 2011, initiate state specific efforts to address the decline in water usage, continue improvement in our operation and maintenance expense (“O&M”) efficiency ratio, increase our earned rate of return to more closely align with that which is authorized by the PUCs, selectively expand our Market-Based Operations business, as well as optimize our municipal contract operations’ business model. We continue to make progress on our goals. The progress that we have made in the first nine months of 2011 with respect to portfolio optimization, resolution of rate cases and O&M efficiency ratio is described below.

*Implementation of Portfolio Optimization Initiative.* We continue to execute our plan for optimizing our portfolio. The Missouri-American Water Company’s acquisition of 11 regulated water systems and 48 wastewater systems in Missouri was completed in May 2011 for a purchase price of $3.3 million. The acquisition adds 1,700 water and nearly 2,000 wastewater customers. Also, in June 2011, we completed the sale of our Texas subsidiary’s assets.

We continue to move forward with the divestiture of our regulated water and wastewater operating companies located in Arizona and New Mexico. To date, filings have been made with the respective PUCs in these states. At the present time, we expect to consummate the divestiture of our Arizona and New Mexico subsidiaries in late 2011 or early 2012.

On July 8, 2011, we entered into an agreement to purchase seven regulated water systems in New York for approximately $71 million, adding approximately 50,000 customers to New York regulated operations. In a separate agreement, American Water will sell its eight regulated water systems and one wastewater system in Ohio for approximately $89 million, plus assumed liabilities of approximately $31 million for an estimated enterprise value of approximately $120 million. Ohio American Water serves approximately 58,000 customers. The completion of both transactions is subject to customary closing conditions including regulatory approval by public utility commissions in both New York and Ohio. The closing on these transactions is expected in early 2012.

*Resolving Rate Cases.* For the three and nine months ended September 30, 2011, we were granted additional annualized revenue from rate authorizations of $4.8 million and $15.5 million, respectively. Also, during the three and nine months ended September 30, 2011, we were granted $3.3 million and $17.6 million in additional annualized revenues, respectively, assuming constant sales volumes, from infrastructure charges. The table below details the additional annualized revenues resulting from such rate authorizations by state:

*(In millions)*

| State General Rate Cases: | Annualized Rate Increases Granted For the three months ended September 30, 2011 | For the nine months ended September 30, 2011 |
| --- | ---: | ---: |
| Tennessee | — | $5.6 |
| West Virginia | — | 5.1 |
| Virginia (a) | $4.8 | 4.8 |
| Total General Rate cases | $4.8 | $15.5 |
| Infrastructure charges: |  |  |
| Pennsylvania | $3.1 | $10.8 |
| Missouri | — | 3.6 |
| Illinois | — | 2.0 |
| Other | 0.2 | 1.2 |
| Total Infrastructure charges | $3.3 | $17.6 |

(a) The new rates provide for additional annualized revenue of $4.3 million for jurisdictional customers and a $0.5 million increase for non-jurisdictional customers which are not subject to commission filing. This increase approximates what we had been collecting since August 2010 under interim rates.

On July 29, 2011, new rates, which would provide for an additional $2.3 million of annualized revenues, were put into effect under bond subject to refund for our Iowa subsidiary. There is no assurance that the bonded amount, or any portion thereof, will be approved.

In October 2011, additional annualized revenue of $5.6 million and $2.2 million resulting from infrastructure charges in our Pennsylvania and Missouri subsidiaries, respectively, became effective.

Additionally, in October 2011, settlements, or partial settlements have been reached in our general rate cases in Pennsylvania, Iowa and Hawaii, which could provide $39.8 million in additional annualized revenues, if approved, in accordance with the settlement agreements. All settlements are pending regulatory approvals and are all subject to change. Details of these cases will be released upon final approval.

During the third quarter of 2011, we filed general rate cases in Ohio and New Jersey requesting additional annualized revenue of $8.3 million and $95.5 million, respectively. Also, on October 27, 2011, we filed a general rate case in Illinois requesting additional annualized revenues of $37.8 million. As of November 2, 2011, including the aforementioned Illinois case and excluding the cases with settlements, we are awaiting final orders in ten states, requesting additional annualized revenues of $276.6 million. There is no assurance that the requested amount of any increase, or any portion of the requested increases, will be granted.

*Continue Improvement in O&M Efficiency Ratio for our Regulated Businesses.* Our O&M efficiency ratio (a non-GAAP measure) is defined as our regulated operation and maintenance expense divided by regulated operating revenues where both operation and maintenance expense and operating revenues are adjusted to eliminate purchased water expense. Our O&M efficiency ratio for the three and nine months ended September 30, 2011 was 39.6% and 43.3%, respectively, compared to 40.6% and 44.1%, respectively, for the three and nine months ended September 30, 2010. We evaluate our operating performance using this measure as it is the primary measure of the efficiency of our regulated operations. This information is intended to enhance an investor’s overall understanding of our operating performance. O&M efficiency ratio is not a measure defined under GAAP and may not be comparable to other companies’ operating measures or deemed more useful than the GAAP information provided elsewhere in this report. The following table provides a reconciliation between 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 and nine months ended September 30, 2011 as compared to the same periods ended September 30, 2010:

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

*(In thousands)*

|  | For the three months ended September 30, 2011 | 2010 | For the nine months ended September 30, 2011 | 2010 |
| --- | ---: | ---: | ---: | ---: |
| Total regulated O&M expense | $288,147 | $293,261 | $824,483 | $806,225 |
| Less: Regulated purchased water | 29,892 | 31,784 | 76,272 | 78,205 |
| Adjusted regulated O&M expense(a) | $258,255 | $261,477 | $748,211 | $728,020 |
| Total regulated operating revenues | $682,363 | $675,087 | $1,805,085 | $1,730,544 |
| Less: Regulated purchased water expense\* | 29,892 | 31,784 | 76,272 | 78,205 |
| Adjusted regulated operating revenues(b) | $652,471 | $643,303 | $1,728,813 | $1,652,339 |
| Regulated O&M efficiency ratio(a)/(b) | 39.6% | 40.6% | 43.3% | 44.1% |

\* Note calculation assumes purchased water revenues approximate purchased water expenses.

### Consolidated Results of Operations and Variances

*(In thousands except per share data)*

|  | For the three months ended September 30, 2011 | 2010 | Favorable (Unfavorable) Change | For the nine months ended September 30, 2011 | 2010 | Favorable (Unfavorable) Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Operating revenues | $766,450 | $748,953 | $17,497 | $2,042,520 | $1,941,883 | $100,637 |
| Operating expenses |  |  |  |  |  |  |
| Operation and maintenance | 345,757 | 346,180 | 423 | 993,434 | 960,779 | (32,655) |
| Depreciation and amortization | 88,424 | 84,005 | (4,419) | 263,027 | 246,759 | (16,268) |
| General taxes | 52,587 | 52,029 | (558) | 161,402 | 155,772 | (5,630) |
| (Gain) loss on asset dispositions and purchases | (1,635) | 211 | 1,846 | (1,339) | 166 | 1,505 |
| Total operating expenses, net | 485,133 | 482,425 | (2,708) | 1,416,524 | 1,363,476 | (53,048) |
| Operating income | 281,317 | 266,528 | 14,789 | 625,996 | 578,407 | 47,589 |
| Other income (expenses) |  |  |  |  |  |  |
| Interest, net | (78,602) | (74,568) | (4,034) | (233,326) | (231,456) | (1,870) |
| Allowance for other funds used during construction | 3,696 | 2,482 | 1,214 | 9,059 | 6,896 | 2,163 |
| Allowance for borrowed funds used during construction | 1,586 | 1,447 | 139 | 3,988 | 3,994 | (6) |
| Amortization of debt expense | (1,251) | (1,275) | 24 | (3,798) | (3,202) | (596) |
| Other, net | 13 | 505 | (492) | (462) | 2,564 | (3,026) |
| Total other income (expenses) | (74,558) | (71,409) | (3,149) | (224,539) | (221,204) | (3,335) |
| Income from continuing operations before income taxes | 206,759 | 195,119 | 11,640 | 401,457 | 357,203 | 44,254 |
| Provision for income taxes | 78,354 | 75,762 | (2,592) | 157,669 | 140,642 | (17,027) |
| Income from continuing operations | 128,405 | 119,357 | 9,048 | 243,788 | 216,561 | 27,227 |
| Income from discontinued operations, net of tax | 9,017 | 4,757 | 4,260 | 25,532 | 11,112 | 14,420 |
| Net income | $137,422 | $124,114 | $13,308 | $269,320 | $227,673 | $41,647 |
| Basic earnings per common share:(a) |  |  |  |  |  |  |
| Income from continuing operations | $0.73 | $0.68 |  | $1.39 | $1.24 |  |
| Income from discontinued operations, net of tax | $0.05 | $0.03 |  | $0.15 | $0.06 |  |
| Net income | $0.78 | $0.71 |  | $1.53 | $1.30 |  |
| Diluted earnings per common share:(a) |  |  |  |  |  |  |
| Income from continuing operations | $0.73 | $0.68 |  | $1.38 | $1.24 |  |
| Income from discontinued operations, net of tax | $0.05 | $0.03 |  | $0.14 | $0.06 |  |
| Net income | $0.78 | $0.71 |  | $1.53 | $1.30 |  |
| Average common shares outstanding during the period: |  |  |  |  |  |  |
| Basic | 175,547 | 174,859 |  | 175,426 | 174,785 |  |
| Diluted | 176,593 | 175,062 |  | 176,422 | 174,919 |  |

(a) Amounts may not sum due to rounding.

The following is a summary discussion of the consolidated results of operations for the three and nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010.

#### Three Months Ended September 30, 2011 Compared To Three Months Ended September 30, 2010

***Operating revenues.*** Consolidated operating revenues for the three months ended September 30, 2011 increased $17.5 million, or 2.3%, compared to the same period in 2010. This change reflects a $7.3 million increase in our Regulated Businesses segment, which was mainly attributable to rate increases, and an $11.3 million increase in our Market-Based Operations segment, which was primarily due to an $8.2 million increase in the Contract Operations Group revenues primarily related to our military services 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 September 30, 2011 remained relatively unchanged compared to the same period in 2010. Our Market-Based Operations segment increased by $7.0 million and was offset by a decrease in our Regulated Businesses of $5.1 million and by lower severance costs in 2011 as 2010 reflected costs associated with changes in certain senior management positions. For further information see the respective “Operation and Maintenance” discussions within the “Segment Results.”

***Depreciation and amortization.*** Depreciation and amortization expense increased by $4.4 million, or 5.3%, for the three months ended September 30, 2011, compared to the same period in the prior year, as a result of additional utility plant placed in service.

***General taxes.*** General taxes expense, which includes taxes for property, payroll, gross receipts, and other miscellaneous items, remained relatively unchanged for the three months ended September 30, 2011, compared to the three months ended September 30, 2010.

***Other income (expenses).*** Interest expense, net of interest income, which is the primary component of our other income (expenses), increased by $4.0 million, or 5.4% for the three months ended September 30, 2011, compared to the same period in the prior year. This increase was primarily due to the accelerated amortization in 2010 of $3.6 million in unamortized debt discounts associated with debt that was redeemed in July 2010.

***Provision for income taxes.*** Our consolidated provision for income taxes increased $2.6 million, or 3.4%, to $78.4 million for the three months ended September 30, 2011. The effective tax rates for the three months ended September 30, 2011 and 2010 were 37.9% and 38.8%, respectively. The rate for the three months ended September 30, 2011 includes a $4.5 million tax benefit related to one of our operating companies contributing non-utility property to a county authority within its operating area.

***Income from discontinued operations, net of tax.*** As noted above, the financial results of our regulated water and wastewater systems in Arizona, New Mexico, Texas and Ohio have been classified as discontinued operations for all periods presented. The increase in income from discontinued operations, net of tax, is primarily related to the cessation of depreciation in accordance with GAAP for the three months ended September 30, 2011. Under GAAP, operations that are considered discontinued operations cease to depreciate their assets. Had these assets been depreciated in 2011, net income and earnings per share for the three months ended September 30, 2011 would have been reduced by $3.5 million and $0.02, respectively.

#### Nine Months Ended September 30, 2011 Compared To Nine Months Ended September 30, 2010

***Operating revenues.*** Consolidated operating revenues for the nine months ended September 30, 2011 increased $100.6 million, or 5.2%, compared to the same period in 2010. This change reflects a $74.5 million increase in our Regulated Businesses segment, which was mainly attributable to rate increases, and a $29.8 million increase in our Market-Based Operations segment, which was primarily the result of a $22.5 million increase in the Contract Operations Group revenues primarily related to our military services contracts. For further information see the respective “Operating Revenues” discussions within the “Segment Results.”

***Operation and maintenance.*** Consolidated operation and maintenance expense for the nine months ended September 30, 2011 increased $32.7 million, or 3.4%, compared to the same period in 2010. This change was driven by an $18.3 million increase in our Regulated Businesses segment and a $17.8 million increase in our Market-Based Operations segment partially offset by the lower severance costs in 2011 as 2010 reflected costs associated with changes in certain senior management positions. For further information see the respective “Operation and Maintenance” discussions within the “Segment Results.”

***Depreciation and amortization.*** Depreciation and amortization expense increased by $16.3 million, or 6.6%, for the nine months ended September 30, 2011, compared to the same period in the prior year as a result of additional utility plant placed in service.

***General taxes.*** General taxes expense, which includes taxes for property, payroll, gross receipts, and other miscellaneous items, increased by $5.6 million, or 3.6%, for the nine months ended September 30, 2011, compared to the nine months ended September 30, 2010. This increase was principally due to higher gross receipts taxes of $3.2 million, primarily in our New Jersey regulated subsidiary, as well as property taxes of $2.1 million, mainly in our Indiana regulated subsidiary.

***Other income (expenses).*** Interest expense, net of interest income, which is the primary component of our other income (expenses), increased by $1.9 million, or 0.8%, for the nine months ended September 30, 2011, compared to the same period in the prior year. This increase is due to increased borrowings in 2011, mainly commercial paper, as well as the fact that 2010 included the $3.6 million accelerated amortization in unamortized debt discounts associated with debt that was redeemed in July 2010. These increases were partially offset by a decrease in 2011 due to $3.1 million in accelerated amortization in unamortized debt discounts associated with debt that was redeemed during the first quarter of 2011. Additionally, other income is lower in 2011 compared to 2010 as 2010 included $1.3 million attributable to the release of the remaining balance of a loss reserve due to the resolution of the outstanding issues and uncertainties.

***Provision for income taxes.*** Our consolidated provision for income taxes increased $17.0 million, or 12.1%, to $157.7 million for the nine months ended September 30, 2011. The effective tax rates for the nine months ended September 30, 2011 and 2010 were 39.3% and 39.4%, respectively. The effective tax rates in 2011 and 2010 include discrete items.

***Income from discontinued operations, net of tax.*** As noted above, the financial results of our regulated water and wastewater systems in Arizona, New Mexico, Texas and Ohio have been classified as discontinued operations for all periods presented. The increase in income from discontinued operations, net of tax, is primarily related to the cessation of depreciation for our Arizona, New Mexico, Texas and Ohio subsidiaries in accordance with GAAP for the nine months ended September, 2011. Had these assets been depreciated in 2011, net income and earnings per share for the nine months ended September 30, 2011 would have been reduced by $11.4 million and $0.06, respectively.

### Segment Results

We have two operating segments, which are also our reportable segments: the Regulated Businesses and the Market-Based Operations. These segments are determined based on how we assess performance and allocate resources. Prior to the first quarter of 2011, management evaluated the performance of its segments and allocated resources based on several factors, with the primary measure being Adjusted EBIT. Beginning in 2011, as management has become increasingly more focused on the overall contribution of the segment to the consolidated results, the Adjusted EBIT measure has been replaced by income from continuing operations before income taxes. All financial information in the Regulated Segment discussion below reflects only continuing operations.

### Regulated Segment

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

*(In thousands)*

|  | For the three months ended September 30, 2011 | 2010 | Increase (Decrease) | For the nine months ended September 30, 2011 | 2010 | Increase |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Operating revenues | $682,363 | $675,087 | $7,276 | $1,805,085 | $1,730,544 | $74,541 |
| Operation and maintenance expense | 288,147 | 293,261 | (5,114) | 824,483 | 806,225 | 18,258 |
| Operating expenses, net | 417,020 | 417,561 | (541) | 1,212,086 | 1,174,728 | 37,358 |
| Income from continuing operations before income taxes | 209,722 | 203,230 | 6,492 | 424,804 | 391,207 | 33,597 |

***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 state regulatory commissions in the states in which we operate.

Operating revenues increased by $7.3 million, or 1.1%, for the three months ended September 30, 2011 and $74.5 million, or 4.3%, for the nine months ended September 30, 2011 as compared to the same periods in 2010. The increase in revenues was primarily due to rate increases obtained through rate authorizations for a number of our operating companies of which the impact was approximately $26.7 million and $111.8 million for the three and nine months ending September 30, 2011, respectively. Partially offsetting the rate related increases were decreased revenues of $18.3 million and $41.1 million for the three and nine months ending September 30, 2011, respectively, which is attributable to decreased consumption in 2011 compared to 2010. The following table sets forth the percentage of Regulated Businesses’ revenues and billed water sales volume by customer class:

*(Dollars in thousands)*

*(Gallons in millions)*

| Customer Class Water service: | For the three months ended September 30, 2011 Operating Revenues |  | 2010\* |  | 2011 Billed Water Sales Volume |  | 2010\* |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Residential | $389,736 | 57.1% | $391,628 | 58.0% | 57,184 | 52.2% | 59,723 | 52.5% |
| Commercial | 141,269 | 20.7% | 138,129 | 20.5% | 25,388 | 23.2% | 26,433 | 23.2% |
| Industrial | 31,518 | 4.6% | 30,822 | 4.5% | 11,379 | 10.4% | 11,688 | 10.3% |
| Public and other | 84,704 | 12.4% | 82,777 | 12.3% | 15,602 | 14.2% | 15,927 | 14.0% |
| Other water revenues | 4,584 | 0.7% | 4,179 | 0.6% | — | — | — | — |
| Total water revenues | 651,811 | 95.5% | 647,535 | 95.9% | 109,553 | 100.0% | 113,771 | 100.0% |
| Wastewater service | 19,400 | 2.9% | 17,478 | 2.6% |  |  |  |  |
| Other revenues | 11,152 | 1.6% | 10,074 | 1.5% |  |  |  |  |
|  | $682,363 | 100.0% | $675,087 | 100.0% |  |  |  |  |

\* Certain reclassifications have been made between customer classes to conform to the 2011 presentation.

*(Dollars in thousands)*

*(Gallons in millions)*

| Customer Class Water service: | For the nine months ended September 30, 2011 Operating Revenues |  | 2010\* |  | 2011 Billed Water Sales Volume |  | 2010\* |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Residential | $1,022,953 | 56.6% | $987,683 | 57.1% | 138,794 | 51.3% | 143,524 | 51.5% |
| Commercial | 360,338 | 20.0% | 344,416 | 19.9% | 61,841 | 22.9% | 63,564 | 22.8% |
| Industrial | 88,567 | 4.9% | 83,740 | 4.8% | 30,140 | 11.1% | 30,307 | 10.9% |
| Public and other | 229,546 | 12.7% | 219,532 | 12.7% | 39,628 | 14.7% | 41,063 | 14.8% |
| Other water revenues | 15,902 | 0.9% | 17,653 | 1.0% | — | — | — | — |
| Total water revenues | 1,717,306 | 95.1% | 1,653,024 | 95.5% | 270,403 | 100.0% | 278,458 | 100.0% |
| Wastewater service | 57,302 | 3.2% | 51,207 | 3.0% |  |  |  |  |
| Other revenues | 30,477 | 1.7% | 26,313 | 1.5% |  |  |  |  |
|  | $1,805,085 | 100.0% | $1,730,544 | 100.0% |  |  |  |  |

\* Certain reclassifications have been made between customer classes to conform to the 2011 presentation.

The following discussion related to water services indicates the increase or decrease in the Regulated Businesses’ revenues and associated billed water sales volumes in gallons by customer class. While our New Jersey subsidiary’s volume for the three and nine months ended September 31, 2011 was down 11.5% and 5.9%, respectively, compared to the same periods in the prior year, our geographic diversity reduced that impact on our overall results.

*Water Services –*Water service operating revenues from residential customers for the three months ended September 30, 2011 totaled $389.7 million, a $1.9 million decrease, or 0.5%, compared to the three months ended September 30, 2010. The volume of water sold to residential customers decreased by 4.3% for the three months ended September 30, 2011 to 57.2 billion gallons, from 59.7 billion gallons for the same period in 2010. The majority of this decrease occurred in our New Jersey, Pennsylvania and New York subsidiaries mainly as a result of the extreme wet weather conditions, including the impacts associated with Hurricane Irene and other severe storms in the Northeast this quarter that created extended service interruptions in certain of our operating areas and even, in some cases, a loss in customers. The magnitude of these business interruption losses, related to the hurricane and the other severe storms, is still being evaluated. Upon completion of such evaluations, claims will be submitted to insurance carriers for such losses. Water service operating revenues from residential customers totaled $1,023.0 million for the nine months ended September 30, 2011, a $35.3 million or 3.6% increase over the same period of 2010, mainly due to rate increases partially offset by decreases in sales volume. The volume of water sold to residential customers decreased by 3.3% for the nine months ended September 30, 2011 to 138.8 billion gallons, from 143.5 billion gallons for the same period in 2010. We believe that factors contributing to the decline include the aforementioned weather conditions in the third quarter, an increased customer focus on conservation, the use of more efficient appliances, and the current economic climate. The extent to which these items individually contribute to the overall decline is difficult to measure.

Water service operating revenues from commercial water customers for the three and nine months ended September 30, 2011 increased by $3.1 million, or 2.3%, to $141.3 million and $15.9 million, or 4.6%, to $360.3 million, respectively, compared to the same periods in 2010. These increases were mainly due to rate increases partially offset by decreases in sales volume. The volume of water sold to commercial customers decreased by 4.0% for the three months ended September 30, 2011, to 25.4 billion gallons, from 26.4 billion gallons for the three months ended September 30, 2010, which we attribute to the wetter weather conditions in New Jersey, Pennsylvania and New York. Water volume sold to commercial customers decreased by 2.7% for the nine months ended September 30, 2011, to 61.8 billion gallons, from 63.6 billion gallons compared to the same period in 2010. We believe that factors contributing to this decline include wetter weather conditions, an increased customer focus on conservation as well as the current economic climate in certain areas in which we operate. Similar to the above, the extent to which these items individually contribute to the overall decline is difficult to measure.

Water service operating revenues from industrial customers totaled $31.5 million for the three months ended September 30, 2011, an increase of $0.7 million, or 2.3%, from those recorded for the same period of 2010, mainly due to rate increases offset by a decrease in sales volume. The volume of water sold to industrial customers totaled 11.4 billion gallons for the three months ended September 30, 2011, a decrease of 2.6% from the 11.7 billion gallons for the three months ended September 30, 2010. Similar to the residential and commercial classes above, a large portion of this decline was attributable to our New Jersey and Pennsylvania subsidiaries. For the nine months ended September 30, 2011, water service operating revenues from industrial customers totaled $88.6 million, an increase of $4.8 million, or 5.8%, compared to the same period of 2010, mainly due to rate increases offset by a decrease in sales volume. The volume of water sold to industrial customers totaled 30.1 billion gallons for the nine months ended September 30, 2011, a decrease of 0.6% from the 30.3 billion gallons for the nine months ended September 30, 2010.

Water service operating revenues from public and other customers, including municipal governments, other governmental entities and resale customers increased $1.9 million, or 2.3% to $84.7 million, for the three months ended September 30, 2011 from $82.8 million in the same period of 2010. For the nine months ended September 30, 2011, these revenues increased $10.0 million, or 4.6% to $229.5 million, from $219.5 million in 2010. These increases are mainly due to rate increases.

*Wastewater services –* Our subsidiaries provide wastewater services in nine states. Revenues from these services increased by $1.9 million, or 11.0%, to $19.4 million for the three months ended September 30, 2011, from the same period of 2010. Revenues from these services for the nine months ended September 30, 2011 increased by $6.1 million, or 11.9%, to $57.3 million, compared to the same period of 2010. The increase in both periods is primarily attributable to rate increases in a number of our operating companies.

*Other revenues –* Other revenues include such items as reconnection charges, initial application service fees, rental revenues, revenue collection services for others and similar items. The increase in revenues for both the three and nine months ended September 30, 2011, as compared to the same periods in the prior year, was mainly the result of increased rental revenues.

***Operation and maintenance.*** Operation and maintenance expense decreased $5.1 million, or 1.7%, for the three months ended September 30, 2011, compared to the three months ended September 30, 2010. Operation and maintenance expense increased $18.3 million, or 2.3%, for the nine months ended September 30, 2011, compared to the same period in the prior year. The following table provides information regarding operation and maintenance expense for the three and nine months ended September 30, 2011 and 2010, by major expense category:

Production costs and employee-related costs, which account for approximately 70% of the total Regulated Businesses operation and maintenance expense, are discussed in more detail below.

*(In thousands)*

|  | For the three months ended September 30, 2011 | 2010 | Increase (Decrease) | Percentage | For the nine months ended September 30, 2011 | 2010 | Increase (Decrease) | Percentage |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Production costs | $78,800 | $82,069 | $(3,269) | (4.0%) | $203,084 | $205,552 | $(2,468) | (1.2%) |
| Employee-related costs | 126,048 | 125,301 | 747 | 0.6% | 368,539 | 358,760 | 9,779 | 2.7% |
| Operating supplies and services | 43,772 | 45,293 | (1,521) | (3.4%) | 140,498 | 129,946 | 10,552 | 8.1% |
| Maintenance materials and services | 17,335 | 17,430 | (95) | (0.5%) | 50,978 | 50,969 | 9 | 0.0% |
| Customer billing and accounting | 12,639 | 12,216 | 423 | 3.5% | 33,776 | 35,058 | (1,282) | (3.7%) |
| Other | 9,553 | 10,952 | (1,399) | (12.8%) | 27,608 | 25,940 | 1,668 | 6.4% |
| Total | $288,147 | $293,261 | $(5,114) | (1.7%) | $824,483 | $806,225 | $18,258 | 2.3% |

28

Production costs, including fuel and power, purchased water, chemicals and waste disposal costs decreased $3.3 million, or 4.0%, for the three months ended September 30, 2011, compared to the same period in the prior year. For the nine month period, these costs decreased $2.5 million, or 1.2%. Production costs, by major expense type were as follows:

*(In thousands)*

|  | For the three months ended September 30, 2011 | 2010 | Increase (Decrease) | Percentage | For the nine months ended September 30, 2011 | 2010 | Increase (Decrease) | Percentage |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Fuel and power | $26,338 | $26,993 | $(655) | (2.4%) | $67,808 | $68,036 | $(228) | (0.3%) |
| Purchased Water | 29,892 | 31,784 | (1,892) | (6.0%) | 76,272 | 78,205 | (1,933) | (2.5%) |
| Chemicals | 15,216 | 16,211 | (995) | (6.1%) | 37,221 | 39,071 | (1,850) | (4.7%) |
| Waste disposal | 7,354 | 7,081 | 273 | 3.9% | 21,783 | 20,240 | 1,543 | 7.6% |
| Total | $78,800 | $82,069 | $(3,269) | (4.0%) | $203,084 | $205,552 | $(2,468) | (1.2%) |

The decrease in purchased water for the three and nine month periods was primarily due to decreases in usage, most notably in our New Jersey subsidiary, due to the wet weather conditions previously discussed, as well as in our California subsidiary as customer needs were met with internally produced water. The decrease in chemicals for the three and nine months ended September 30, 2011, as compared to the same periods in 2010, is mainly attributable to the decline in usage. This decline was attributable to higher consumption in 2010 as a result of much drier and warmer weather in the Northeast region of the United States. Also, contributing to the 2011 decrease is favorable pricing in some of our operating companies. The increase in waste disposal costs for the nine month period is due to increased rates in one of our subsidiaries.

Employee-related costs, including wage and salary, group insurance, and pension expense, increased $0.7 million, or 0.6%, for the three months ended September 30, 2011, compared to the same period in the prior year. These employee-related costs represent approximately 44% of regulated operation and maintenance expense for the three months ended September 30, 2011 and 2010. These costs also increased $9.8 million, or 2.7%, for the nine months ended September 30, 2011, compared to the same period in the prior year. These employee-related costs represent approximately 45% of regulated operation and maintenance expense for the nine months ended September 30, 2011 and 2010. The following table provides information with respect to components of employee-related costs for the three and nine months ended September 30, 2011 and 2010:

*(In thousands)*

|  | For the three months ended September 30, 2011 | 2010 | Increase (Decrease) | Percentage | For the nine months ended September 30, 2011 | 2010 | Increase (Decrease) | Percentage |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Salaries and wages | $85,591 | $85,461 | $130 | 0.2% | $247,467 | $246,091 | $1,376 | 0.6% |
| Pensions | 16,309 | 16,236 | 73 | 0.4% | 49,150 | 42,808 | 6,342 | 14.8% |
| Group insurance | 19,471 | 19,403 | 68 | 0.4% | 58,190 | 57,531 | 659 | 1.1% |
| Other benefits | 4,677 | 4,201 | 476 | 11.3% | 13,732 | 12,330 | 1,402 | 11.4% |
| Total | $126,048 | $125,301 | $747 | 0.6% | $368,539 | $358,760 | $9,779 | 2.7% |

For the three months ended September 30, 2011, salaries and wages were relatively unchanged with increased incentive expenses of $2.7 million and annual wage increases offset by vacant positions and lower severance expense as compared to the same period in the prior year. For the nine months ended September 30, 2011, salaries and wages increased $1.4 million primarily due to higher incentive compensation expense of $3.7 million. Additionally, salaries and wages increased due to annual wage increases and were partially offset by lower amounts of severance expense and vacant positions as compared to the same period in the prior year. The increase in pension expense for the nine months ended September 30, 2011 was primarily due to increased contributions in certain of our regulated operating companies whose costs and revenue requirements are based on the minimum amount required by the Employee Retirement Income Security Act of 1974. Other benefits increased for the nine months largely due to the implementation of an incentive program in 2011 that encourages employees to maintain or improve their health.

Operating supplies and services include expenses for office operation, legal and other professional services, including transportation expenses, information systems rental charges and other office equipment rental charges. Overall these costs decreased $1.5 million, or 3.4%, for the three months ended September 30, 2011 and increased $10.6 million, or 8.1%, for the nine months ended September 30, 2011, respectively, compared to the same periods in the prior year. Contributing to the three month decrease and offsetting the nine month increase were lower office expenses, as well as lower expenses attributable to fines and penalties expenses for the three and nine month periods ended September 30, 2011, compared to the same periods in 2010. The three and nine month periods in 2011 include the recording of an anticipated recovery of $2.2 million of expenses related to costs incurred as a result of severe weather storms, primarily Hurricane Irene, which have been recorded in their respective expense lines. Additionally, the same periods in 2010 included the establishment of $1.4 million in reserves for assets not recoverable associated with the California rate case. Also included in the 2010 periods was the reversal of a $3.5 million payment previously made by our California operating company to the California Department of Fish and Game (“CDFG”) on behalf of the National Oceanographic and Atmospheric Administration (“NOAA”). This reversal was the result of an advice letter issued by the California Public Utility Commission which allowed for rate recovery of such payment. Also, impacting the nine month period ended September 30, 2011 as compared to the same period in 2010 were higher contracted services of $8.8 million and increased transportation expenses of $1.4 million. Contract services increased due to backfilling positions, including those left open by individuals assigned to our business transformation project, as well as the use of contractors for other specific projects, and increased transportation expense primarily related to higher gasoline prices than those in the prior year.

Other operation and maintenance expenses include casualty and liability insurance premiums and regulatory costs. The decrease of $1.4 million for the three months ended September 30, 2011 was primarily due to lower insurance costs due to lower premiums. The increase of $1.7 million for the nine months ended September 30, 2011, was mainly driven by higher insurance costs as 2010 insurance costs reflected incremental credits resulting from positive resolution of prior years’ claims partially offset by lower premiums in 2011.

***Operating expenses.*** The decrease in operating expenses for the three months ended September 30, 2011 is primarily due to the decrease in operation and maintenance expense, as explained above, in addition to a $1.6 million gain associated with the purchase of assets in Missouri, offset by higher depreciation expense of $4.7 million and increased general taxes of $1.4 million. For the nine months ended September 30, 2011, the increase in operating expenses is primarily due to the increase in operation and maintenance expense, as explained above, as well as higher depreciation expense of $14.8 million and increased general taxes of $5.9 million offset by the $1.6 million gain on purchase of assets in Missouri. The higher depreciation for both the three months and nine months ended September 30, 2011 is the result of additional utility plant placed in service. The increase in general taxes for both the three and nine months ended September 30, 2011 is principally attributable to higher gross receipts taxes in our New Jersey regulated subsidiary and higher property taxes in our Indiana regulated subsidiary.

***Income from continuing operations before income taxes.*** The $6.5 million and $33.6 million increases, for the three and nine months ended September 30, 2011, respectively, compared to the same periods in the prior year, are the result of the aforementioned variations in operating revenue and operating expenses.

### Market-Based Operations

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

*(In thousands)*

|  | For the three months ended September 30, 2011 | 2010 | Increase | For the nine months ended September 30, 2011 | 2010 | Increase |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Operating revenues | $91,628 | $80,310 | $11,318 | $259,916 | $230,153 | $29,763 |
| Operation and maintenance expense | 74,519 | 67,520 | 6,999 | 221,455 | 203,698 | 17,757 |
| Operating expenses, net | 77,548 | 71,499 | 6,049 | 232,023 | 214,285 | 17,738 |
| Income from continuing operations before income taxes | 14,682 | 9,431 | 5,251 | 29,585 | 19,679 | 9,906 |

***Operating revenues.*** The net increase in revenues for the three months ended September 30, 2011, compared to the same period in 2010, is primarily attributable to an increase in the Contract Operations Group revenues of $8.2 million. This increase is mainly the result of incremental revenues associated with military construction and operations & maintenance projects of $11.0 million, partially offset by lower revenues associated with other expired and terminated contracts.

The net increase in revenues for the nine months ended September 30, 2011 compared to the same period in 2010 is also primarily attributable to an increase in the Contract Operations Group revenues of $22.5 million, which is also attributable to incremental revenues associated with military construction and operations and maintenance projects totaling $37.1 million, partially offset by lower revenues associated with expired and terminated contracts.

***Operation and maintenance.*** Operation and maintenance expense increased $7.0 million, or 10.4%, and $17.8 million, or 8.7%, for the three and nine months ended September 30, 2011, respectively, compared to the three and nine months ended September 30, 2010.

The following table provides information regarding operation and maintenance expense for the three and nine months ended September 30, 2011 and 2010, by major expense category:

*(In thousands)*

|  | For the three months ended September 30, 2011 | 2010 | Increase (Decrease) | Percentage | For the nine months ended September 30, 2011 | 2010 | Increase (Decrease) | Percentage |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Production costs | $12,532 | $12,329 | $203 | 1.6% | $37,613 | $41,911 | $(4,298) | (10.3%) |
| Employee-related costs | 20,934 | 22,418 | (1,484) | (6.6%) | 61,404 | 65,717 | (4,313) | (6.6%) |
| Operating supplies and services | 29,788 | 23,655 | 6,133 | 25.9% | 86,861 | 67,088 | 19,773 | 29.5% |
| Maintenance materials and services | 9,129 | 8,205 | 924 | 11.3% | 29,142 | 26,556 | 2,586 | 9.7% |
| Other | 2,136 | 913 | 1,223 | 134.0% | 6,435 | 2,426 | 4,009 | 165.3% |
| Total | $74,519 | $67,520 | $6,999 | 10.4% | $221,455 | $203,698 | $17,757 | 8.7% |

30

Production costs are comprised of fuel and power, purchased water, chemicals and waste disposal costs. Production costs for the three months ended September 30, 2011 increased only $0.2 million, compared to the same period in 2010. For the nine months ended September 30, 2011, the overall decrease is mainly attributable to decreased fuel and purchased power as well as chemical costs as compared to the same period in the prior year as a result of the cessation of costs related to contracts that terminated and expired during the first half of 2010.

Employee-related costs, including wage and salary, group insurance, and pension expense, decreased for the three and nine months ended September 30, 2011 primarily due to lower expenses due to expired and terminated contracts and lower incentive compensation costs partially offset by increased costs associated with our military contracts. Additionally, for the nine months ended September 30, 2011, costs were also lower due to reduced headcount attributable to both eliminated as well as vacant positions compared to the same period in 2010.

Operating supplies and services consist primarily of contracted services and expenses for office operation, legal and other professional services, transportation expenses, as well as information systems rental charges and other office equipment rental charges. The increase in these expenses for the three and nine months ended September 30, 2011 was primarily attributable to the higher expenses in our Contract Operations Group, which are related to increased activity in our military construction projects, corresponding with the increase in revenues, partially offset by lower expenses due to expired and terminated contracts.

***Operating expense.*** The increase in operating expenses for the three and nine months ended September 30, 2011 is primarily driven by the increase in operation and maintenance expense, which is explained above.

***Income from continuing operations before income taxes.*** The $5.3 million and $9.9 million increases for the three and the nine months ended September 30, 2011, respectively, are 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, 2010.

We believe that our ability to access the capital markets, our revolving credit facilities and our cash flows from operations will generate sufficient cash to fund our short-term capital requirements. The Company funds 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 credit facilities. The Company closely monitors the financial condition of the financial institutions associated with its credit facilities.

In order to meet our short-term liquidity needs, we primarily issue commercial paper. We also have $850 million in committed revolving credit facilities, from a diversified group of banks, which management views primarily as an alternative source of short-term capital in the event we are unable to access our cash needs through the commercial paper markets. The revolving credit facilities are also used, to a limited extent, to support our issuance of letters of credit. AWCC had no outstanding borrowings and $35.8 million of outstanding letters of credit under its credit facilities as of September 30, 2011. Letters of credit reduce availability under our revolving credit facility. As of September 30, 2011, AWCC had $814.2 million under our credit facilities that we can use to fulfill our short-term liquidity needs, to issue letters of credit and back our $389.6 million outstanding commercial paper. We expect to use the net proceeds from the sale of our Arizona and New Mexico subsidiaries to pay down debt and for general corporate purposes.

### 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 nine months ended September 30, 2011 were $576.0 million compared to $587.0 million for the nine months ended September 30, 2010.

The following table provides a summary of the major items affecting our cash flows from operating activities for the nine months ended September 30, 2011 and 2010:

*(In thousands)*

|  | For the nine months ended September 30, 2011 | 2010 |
| --- | ---: | ---: |
| Net income | $269,320 | $227,673 |
| Add (subtract): |  |  |
| Non-cash operating activities(1) | 470,343 | 498,909 |
| Changes in working capital(2) | (28,798) | (28,816) |
| Pension and postretirement healthcare contributions | (134,821) | (110,739) |
| Net cash flows provided by operations | $576,044 | $587,027 |

(1) Includes, depreciation and amortization, provision for deferred income taxes, amortization of deferred investment tax credits, provision for losses on utility accounts receivable, allowance for other funds used during construction, (gain) loss on asset dispositions and purchases, and pension and non-pension post retirement benefits 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, income taxes receivable, other current assets, accounts payable, taxes accrued (including income taxes), interest accrued and other current liabilities.

The decrease in cash flows from operations for the nine months ended September 30, 2011, compared to the same period in 2010, is primarily driven by additional pension contributions and the receipt of a tax refund in the first nine months of 2010 that did not occur in 2011, partially offset by higher net income. For the nine months ended September 30, 2011, we made pension and postretirement benefit contributions totalling $134.8 million compared to $110.7 million for the nine months ended September 30, 2010. In October 2011, we contributed an additional $23.2 million to the pension plan and we expect to contribute an additional $6.8 million to the postretirement plan in the fourth quarter of 2011.

C***ash Flows from Investing Activities***

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

*(In thousands)*

|  | For the nine months ended September 30, 2011 | 2010 |
| --- | ---: | ---: |
| Net capital expenditures | $(621,940) | $(522,090) |
| Other investing activities, net(1) | 15,939 | 16,138 |
| Net cash flows used in investing activities | $(606,001) | $(505,952) |

(1) Includes acquisitions, proceeds from the sale of assets and securities, removal costs from property, plant and equipment retirements, net and net restricted funds released.

The increase in our capital expenditures for the nine months ended September 30, 2011 is attributable to the construction and replacement of certain treatment facilities and infrastructure in our Pennsylvania subsidiary, as well as, increased capital spending associated with our business transformation project as we move into its design and build phase.

### Cash Flows from Financing Activities

Our financing activities, primarily focused on funding capital 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 long-term debt was issued in 2011:

| Company | Type | Interest Rate | Maturity | Amount |
| --- | --- | --- | --- | ---: |
| Other subsidiaries | Private activity bonds and government funded debt – fixed rate | 0.00%-1.56% | 2031 | $12,350 |
| Total issuances |  |  |  | $12,350 |

32

Proceeds from the above issuances were received from various financing or development authorities, including $11.5 million of low-interest financing from the Pennsylvania Infrastructure Investment Authority. The proceeds from these financings 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 nine months of 2011:

| Company | Type | Interest Rate | Maturity | Amount (In thousands) |
| --- | --- | --- | --- | ---: |
| American Water Capital Corp. | Senior notes – fixed rate | 6.00%-8.25% | 2011-2039 | $28,287 |
| Other subsidiaries | Mortgage bonds – fixed rate | 8.21%-9.71% | 2011-2022 | 33,142 |
| Other subsidiaries | Private activity bonds and government funded debt | 0.00%-5.90% | 2011-2034 | 6,876 |
| Other subsidiaries | Mandatory redeemable preferred stock | 4.60%-6.00% | 2013-2019 | 140 |
| Other(a) | Capital leases and other |  |  | 3,871 |
| Total retirements and redemptions |  |  |  | $72,316 |

(a) Includes non-cash redemption of $3,487 associated with a cancelled sublease and a capital lease arrangement.

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

### Credit Facilities and Short-Term Debt

The components of short-term debt at September 30, 2011 were as follows:

|  | Amount (In thousands) |
| --- | ---: |
| Commercial paper, net | $389,567 |
| Bank overdraft | 19,431 |
| Total short-term debt | $408,998 |

The following table provides information as of September 30, 2011, regarding letters of credit sub-limit and available capacities under the revolving credit facility, as well as outstanding amounts of commercial paper and borrowings under the revolving credit facilities.

*(In thousands)*

|  | 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 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| September 30, 2011 | $850,000 | $814,214 | $150,000 | $114,214 | $389,567 | $0 |

Interest rates on advances under the revolving credit facility are based on either the prime rate or LIBOR, plus an applicable margin based upon our credit ratings, as well as total outstanding amounts under the facility at the time of the borrowing. If we were borrowing under the credit facility at our current credit ratings, the spread would be 22.5 basis points over LIBOR.

The weighted average interest rate on short-term borrowings for the nine months ended September 30, 2011 was approximately 0.40% compared to 0.42% for the nine months ended September 30, 2010.

AWCC, our financing subsidiary, has a $10.0 million committed revolving line of credit with PNC Bank, N.A which expires on December 31, 2011, unless extended. This line is used primarily for short-term working capital needs. In addition, AWCC also has an $840.0 million senior unsecured revolving credit facility syndicated among a group of 10 banks with JPMorgan Chase Bank, N.A. acting as administrative agent. A portion of the credit facility is principally used to support our commercial paper program and to provide up to $150.0 million in letters of credit. A majority of the banks have agreed to extend $685.0 million of commitments under this revolving credit facility to September 15, 2013. The remainder expires on September 15, 2012.

We intend to renegotiate or replace our credit facilities prior to their expiration in order to provide sufficient liquidity to finance operations and construction expenditures. The availability and terms of such credit facilities will depend on the credit markets at that time, as well as our credit ratings and operating results.

As previously disclosed, we expect to use the net proceeds from the sale of our Arizona and New Mexico subsidiaries to reduce the amount of outstanding commercial paper.

### Capital Structure

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

|  | At September 30, 2011 | At December 31, 2010 |
| --- | ---: | ---: |
| Common stockholder equity and preferred stock without mandatory redemption rights | 42% | 42% |
| Long-term debt and redeemable preferred stock at redemption value | 54% | 55% |
| Short-term debt and current portion of long-term debt | 4% | 3% |
|  | 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 our ability to pay dividends, issue debt or access our revolving credit facility. Our failure to comply with restrictive covenants under our credit facilities 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. We were in compliance with our covenants as of September 30, 2011.

The revolving credit facility requires us to maintain a ratio of consolidated debt to consolidated capitalization of not more than 0.70 to 1.00. As of September 30, 2011, our ratio was 0.58 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, our regulated subsidiaries also issue debt, primarily in the form of tax exempt securities, to lower our overall cost of debt. On January 28, 2011, Standard & Poor’s Ratings Service, which we refer to as S&P, reaffirmed its ratings. Both S&P and Moody’s rating outlook for both American Water and AWCC is stable.

The following table shows the Company’s securities ratings as of September 30, 2011:

| 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 enough 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 facilities.

As part of the normal course of business, we routinely enter into contracts for the purchase and/or 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. Depending on our net position with counterparty, the demand could be for the posting of collateral. In the absence of expressly agreed provisions that specify the collateral that must be provided, the obligation to supply the collateral requested will depend upon the facts and circumstances of our situation at the time of the demand. If we can reasonably claim that we are willing and financially able to perform our obligations, it may be possible to argue successfully that no collateral should be posted or that an amount equal to only two or three months of future payments should be sufficient. We do not expect that our posting of collateral will have a material adverse impact on our results of operations, financial position or cash flows.

### Dividends

Our board of directors has adopted a dividend policy to distribute to our stockholders a portion of our net cash provided by operating activities as regular quarterly dividends, rather than retaining that cash for other purposes. We expect that dividends will be paid quarterly to holders of record approximately 15 days prior to the distribution date. Since the dividends on our common stock will not be cumulative, only declared dividends will be paid.

In March 2011 and June 2011, the Company made cash dividend payments of $0.22 per share to all shareholders of record as of February 18, 2011 and May 18, 2011, respectively, and on September 1, 2011, of $0.23 per share to all shareholders of record as of August 12, 2011. In March 2010 and June 2010, the Company made cash dividend payments of $0.21 per share to all shareholders of record as of February 18, 2010 and May 18, 2010, respectively, and on September 1, 2010, of $0.22 per share to all common shareholders of record as of August 18, 2010.

On September 23, 2011, our board of directors declared a quarterly cash dividend payment of $0.23 per share payable on December 1, 2011 to all shareholders of record as of November 18, 2011.

### Market Risk

There have been no significant changes to our market risk since December 31, 2010. 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, 2010.

### 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, 2010 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.

## Market risk

As filed, 283 characters.

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.

## Controls and procedures

As filed, 2,005 characters.

### 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 September 30, 2011 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 September 30, 2011, 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 nine months ended September 30, 2011, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

## Risk factors

As filed, 472 characters.

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, 2010, 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, 2010.

Filed Nov 2, 2011.
Source: SEC EDGAR, the filing index for accession 0001193125-11-292885. Last ingested by Listed: Nov 6, 2026, 17:16 ET. No prices; not investment advice.