# American Water Works Company, Inc.: Form 10-Q for the period ended Mar 31, 2013

- Company: [American Water Works Company, Inc.](/companies/awk.md) (CIK 1410636)
- Form: 10-Q
- Filed: 2013-05-07
- Accepted by EDGAR: May 7, 2013, 21:09 ET
- Period: 2013-03-31
- Accession: 0001193125-13-204722
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1410636/000119312513204722/d522605d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1410636/000119312513204722/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2013-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2013-01-01 to 2013-03-31 | $636.1m | us-gaap:Revenues |
| Operating income | 3 months, 2013-01-01 to 2013-03-31 | $164.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2013-01-01 to 2013-03-31 | $78.1m | us-gaap:InterestExpense |
| Income tax | 3 months, 2013-01-01 to 2013-03-31 | $31.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2013-01-01 to 2013-03-31 | $57.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2013-01-01 to 2013-03-31 | $0.32 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2013-01-01 to 2013-03-31 | $0.32 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2013-01-01 to 2013-03-31 | 178,465,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2013-01-01 to 2013-03-31 | $149.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2013-01-01 to 2013-03-31 | $213.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2013-01-01 to 2013-03-31 | $0 | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2013-03-31 | $21.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2013-03-31 | $491.9m | us-gaap:AssetsCurrent |
| Total assets | at 2013-03-31 | $14.77bn | us-gaap:Assets |
| Current liabilities | at 2013-03-31 | $958.3m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2013-03-31 | $5.18bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2013-03-31 | $115.9m | us-gaap:LongTermDebtCurrent |
| Short-term borrowings | at 2013-03-31 | $333.8m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2013-03-31 | $4.51bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 46,322 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, 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.

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)

*(In thousands)*

|  | For the three months ended March 31, 2013 | 2012 |
| --- | ---: | ---: |
| 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.

*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

*(In thousands, except per share data)*

|  | For the three months ended March 31, 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

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

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:

*(In thousands)*

|  | For the three months ended March 31, 2013 | 2012 | Increase (Decrease) |
| --- | ---: | ---: | ---: |
| 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:

*(Dollars in thousands)*

*(Gallons in millions)*

| Customer Class Water service | For the three months ended March 31, 2013 Operating Revenues |  | 2012 |  | 2013 Billed Water Sales Volume |  | 2012 |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| 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 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:

*(In thousands)*

|  | For the three months ended March 31, 2013 | 2012 | Increase (Decrease) | Percentage |
| --- | ---: | ---: | ---: | ---: |
| 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:

*(In thousands)*

|  | For the three months ended March 31, 2013 | 2012 | Increase (Decrease) | Percentage |
| --- | ---: | ---: | ---: | ---: |
| 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.

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:

*(In thousands)*

|  | For the three months ended March 31, 2013 | 2012 | Increase (Decrease) | Percentage |
| --- | ---: | ---: | ---: | ---: |
| 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.

### Market-Based Operations

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

*(In thousands)*

|  | For the three months ended March 31, 2013 | 2012 | Increase (Decrease) |
| --- | ---: | ---: | ---: |
| 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:

*(In thousands)*

|  | For the three months ended March 31, 2013 | 2012 | Increase (Decrease) | Percentage |
| --- | ---: | ---: | ---: | ---: |
| 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.

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:

*(In thousands)*

|  | For the three months ended March 31, 2013 | 2012 |
| --- | ---: | ---: |
| 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:

*(In thousands)*

|  | For the three months ended March 31, 2013 | 2012 |
| --- | ---: | ---: |
| 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.

### 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.

*(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 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| 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.

### 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.

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.

## 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, 3,098 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 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.

## 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, 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.

Filed May 7, 2013.
Source: SEC EDGAR, the filing index for accession 0001193125-13-204722. Last ingested by Listed: Nov 6, 2026, 17:16 ET. No prices; not investment advice.