-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DcmkIW5AK3uPjTKvZ+LNRvDoyyBEs/1XtiK0HemfImSAbLHFFOoidMmoYNWdOOHh yoaraTeBKpgX9fijoHr7cQ== 0000318819-97-000003.txt : 19970325 0000318819-97-000003.hdr.sgml : 19970325 ACCESSION NUMBER: 0000318819-97-000003 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970324 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN WATER WORKS CO INC CENTRAL INDEX KEY: 0000318819 STANDARD INDUSTRIAL CLASSIFICATION: WATER SUPPLY [4941] IRS NUMBER: 510063696 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-03437 FILM NUMBER: 97561163 BUSINESS ADDRESS: STREET 1: 1025 LAUREL OAK RD CITY: VOORHEES STATE: NJ ZIP: 08043 BUSINESS PHONE: 6093468200 MAIL ADDRESS: STREET 1: 1025 LAUREL OAK ROAD CITY: VOORHEES STATE: NJ ZIP: 08043 10-K405 1 EXHIBIT INDEX ON PAGES 14-17 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number 1-3437-2 AMERICAN WATER WORKS COMPANY, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 51-0063696 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1025 Laurel Oak Road, Voorhees, New Jersey 08043 - ------------------------------------------ ---------- (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code 609-346-8200 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------ Common Stock, $1.25 par value per share New York Stock Exchange Cumulative Preferred Stock, 5% Series, $25 par value per share New York Stock Exchange 5% Cumulative Preference Stock, $25 par value per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant at March 4, 1997 was $1,321,224,243. As of March 3, 1997, there were a total of 78,639,254 shares of Common Stock, $1.25 par value per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Certain information contained and incorporated by reference herein contains forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Certain factors could cause actual results to differ materially from those in the forward-looking statements. Those factors include, but are not limited to, the unpredictability of weather, rate regulations and timing of rate cases, and changes to existing and proposed environmental regulations. See "Management's Discussion and Analysis" beginning on page 23 of the Company's Annual Report to Shareholders incorporated herein by reference. (1) The following pages and section in Registrant's Annual Report to Stockholders for 1996 are incorporated by reference into Part I, Item 1 and Part II of this Form 10-K: pages 22 through 53 with the exception of the section entitled "Management's Responsibility for Financial Reporting" on page 35, and the section entitled "Range of Market Prices" on page 57. (2) The following pages and section in Registrant's definitive Proxy Statement relating to Registrant's Annual Meeting of Stockholders on May 1, 1997 are incorporated by reference into Part III of this Form 10-K: Page 2 (beginning with the fourth full paragraph thereon) through page 4, the section entitled "Director Remuneration" on page 6, pages 7 and 8, and pages 13 and 14. Page 1 PART I Item 1. Business The "Description of the Business" is set forth on page 23 of the Annual Report to Stockholders for 1996, filed as Exhibit 13 to this Report on Form 10-K; and such description is hereby specifically incorporated herein by reference thereto. The information provided in that section is supplemented by the following details: The water supplies of the regulated subsidiaries consist of surface supplies, wells, and in a limited number of cases, water purchased under contract. Such supplies are considered adequate to meet present require- ments. In general, all surface supplies are filtered and substantially all of the water is treated with chlorine, and, in some cases, special treatment is provided to correct specific conditions of the water. In general, the regulated subsidiaries have valid franchises, free from unduly burdensome restrictions, sufficient to enable them to carry on their business as presently conducted. They derive such franchise rights from statutes under which they were incorporated, municipal consents and ordinances, or certificates or permits received from state or local regulatory agencies. In most instances, such franchise rights are non- exclusive. In most of the states in which the operations of the regulated subsidiaries are carried on, there exists the right of municipal acquisition by one or both of the following methods: (1) condemnation; or (2) the right of purchase given or reserved by the law of the state in which the company was incorporated or received its franchise. The price to be paid upon condemnation is usually determined in accordance with the law of the state governing the taking of land or other property under eminent domain statutes; in other instances, the price is fixed by appraisers selected by the parties, or in accordance with a formula prescribed by the law of the state or in the particular franchise or special charter. Some of the expenditures for construction by regulated subsidiaries have included facilities to comply with federal and state water quality and safety standards. The nature of some of the construction is described in the section entitled "System Growth and Development," located on pages 24 through 27 of the Annual Report to Stockholders for 1996, filed as Exhibit 13 to this Report on Form 10-K; such information is hereby specifically incorporated herein by reference thereto. The number of persons employed by the Registrant and subsidiary companies totaled 4,065 at December 31, 1996. Page 2 Item 1A. Executive Officers of the Registrant The following sets forth the names, ages and business experience during the past five years of the executive officers of the Registrant. No family relationships exist among any of such executive officers, nor do any arrangements or understandings exist between any such executive officer and any other person pursuant to which he was selected as an officer. Name Age Business Experience During Past Five Years George W. Johnstone 58 President and Chief Executive Officer of the Registrant since January 1992 and Vice President of the Registrant prior thereto. J. James Barr 55 Vice President and Treasurer of the Registrant. Gerald C. Smith 62 Vice President of the Registrant. W. Timothy Pohl 42 General Counsel and Secretary of the Registrant. Robert D. Sievers 43 Comptroller of the Registrant since February 1992 and Assistant Comptroller of the Registrant prior thereto. The executive officers are elected at the annual organizational meeting of the Board of Directors of the Registrant which is held in May. The executive officers serve at the pleasure of the Board of Directors. Successors to officers who resign, die or are removed during the year are elected by the Board. Item 2. Properties The Registrant leases its office space, equipment and furniture from one of its wholly-owned subsidiaries. The office space, equipment and furniture are located in Voorhees, New Jersey and are utilized by the Registrant's directors, officers and staff in the conduct of the Registrant's business. The regulated subsidiaries own, in the states in which they operate, transmission and distribution mains, pump stations, treatment plants, storage tanks, reservoirs and related facilities. Properties are adequately maintained and units of property are replaced as and when necessary. The Registrant considers the properties of its regulated subsidiaries to be in good operating condition. Page 3 A substantial acreage of land is owned by the regulated subsidiaries, the greater part of which is located in watershed areas, with the balance being principally sites of pumping and treatment plants, storage reservoirs, tanks and standpipes. Item 3. Legal Proceedings There are no pending material legal proceedings, other than ordinary, routine litigation incidental to the business, to which the Registrant or any of its subsidiaries is a party or of which any of their property is the subject. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters The information required under this item is contained in the section entitled "Range of Market Prices," located on page 57 of the Annual Report to Stockholders for 1996, filed as Exhibit 13 to this Report on Form 10-K; such information is hereby specifically incorporated herein by reference thereto. Item 6. Selected Financial Data The information required under this item is contained in the section entitled "Consolidated Summary of Selected Financial Data," located on page 22 of the Annual Report to Stockholders for 1996, filed as Exhibit 13 to this Report on Form 10-K; such information is hereby specifically incorporated by reference thereto. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The information required under this item is contained in the section entitled "Management's Discussion and Analysis," located on pages 23 through 34 of the Annual Report to Stockholders for 1996, filed as Exhibit 13 to this Report on Form 10-K; such information is hereby specifically incorporated herein by reference thereto. Item 8. Financial Statements and Supplementary Data The financial statements, together with the report thereon of Price Waterhouse LLP dated February 3, 1997, appearing on pages 35 through 53 of the 1996 Annual Report to Stockholders, filed as Exhibit 13 to this Report on Form 10-K, are hereby specifically incorporated herein by reference thereto. Page 4 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant The information required under this item with respect to the Directors of the Registrant appears in the fourth full paragraph on page 2 through page 4 of the definitive Proxy Statement relating to the Registrant's Annual Meeting of Stockholders on May 1, 1997, to be filed by the Registrant with the Commission pursuant to Section 14(a) of the Securities Exchange Act of 1934 (the "1934 Act"); such information is hereby specifically incorporated herein by reference thereto. The information required under this item with respect to the Executive Officers of the Registrant is set forth in Item 1A of Part I above pursuant to paragraph (3) of General Instruction G to Form 10-K. Item 11. Executive Compensation The information required under this item is contained in the section entitled "Director Remuneration" which is located on page 6, and in the sections entitled "Report of the Compensation and Management Development Committee of the Board of Directors on Executive Compensation," "Performance Graph," "Management Remuneration," and "Pension Plan" which are located on pages 9 through 14 of the definitive Proxy Statement relating to the Registrant's Annual Meeting of Stockholders on May 1, 1997, to be filed by the Registrant with the Commission pursuant to Section 14(a) of the 1934 Act, and is hereby specifically incorporated herein by reference thereto, except for the "Report of the Compensation and Management Development Committee of the Board of Directors on Executive Compensation" and "Performance Graph" which are not so incorporated by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required under this item is contained in the section entitled "Stock Ownership Information" which is located on pages 7 and 8 of the definitive Proxy Statement relating to the Registrant's Annual Meeting of Stockholders on May 1, 1997, to be filed by the Registrant with the Commission pursuant to Section 14(a) of the 1934 Act, and is hereby specifically incorporated herein by reference thereto. Item 13. Certain Relationships and Related Transactions There are no material relationships or related transactions other than those disclosed in response to Item 11 of this Part III. Page 5 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K a) The following documents are filed as part of this report: 1. Financial Statements: the Financial Statements required to be filed by Item 8 are listed in the Index to Financial Statements, which appears on Pages 9 and 10 of this Report on Form 10-K. 2. Financial Statement Schedules: the Financial Statement Schedules required to be filed by Item 8 and by paragraph (d) of this Item are listed in the Index to Financial Statements, which appears on Pages 9 and 10 of this Report on Form 10-K. 3. Exhibits: the Exhibits to this Form 10-K are listed in the Index to Exhibits, which appears on Pages 14 to 17 of this Report on Form 10-K. b) Reports on Form 8-K. During the last quarter of the period covered by this Report on Form 10-K, the Registrant filed no reports on Form 8-K. Page 6 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN WATER WORKS COMPANY, INC. By: George W. Johnstone, President and Chief Executive Officer DATE: March 6, 1997 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date Principal Executive Officer: George W. Johnstone President and March 6, 1997 Chief Executive Officer Principal Financial Officer: J. James Barr Vice President and March 6, 1997 Treasurer Principal Accounting Officer: Robert D. Sievers Comptroller March 6, 1997 Page 7 SIGNATURES (Cont'd.) Directors: William O. Albertini March 6, 1997 William R. Cobb March 6, 1997 Elizabeth H. Gemmill March 6, 1997 Henry G. Hager March 6, 1997 Nelson G. Harris March 6, 1997 George W. Johnstone March 6, 1997 Marilyn Ware Lewis March 6, 1997 Nancy Ware Wainwright March 6, 1997 Paul W. Ware March 6, 1997 Ross A. Webber March 6, 1997 Horace Wilkins, Jr. March 6, 1997 Page 8 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT YEAR ENDED DECEMBER 31, 1996 AMERICAN WATER WORKS COMPANY, INC. FINANCIAL STATEMENTS Page 9 AMERICAN WATER WORKS COMPANY, INC. INDEX TO FINANCIAL STATEMENTS The following documents are filed as part of this report: Page(s) in (1) FINANCIAL STATEMENTS Annual Report* Report of Independent Accountants . . . . . . . . . . . . . . 35 Consolidated Balance Sheet of American Water Works Company, Inc. and Subsidiary Companies at December 31, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . .36 and 37 Consolidated Statement of Income and Retained Earnings of American Water Works Company, Inc. and Subsidiary Companies for each of the three years in the period ended December 31, 1996 . . . . . . . . . 38 Consolidated Statement of Cash Flows of American Water Works Company, Inc. and Subsidiary Companies for each of the three years in the period ended December 31, 1996 . . . . . . . . . . . . . . . . . . . . . . 39 Consolidated Statement of Capitalization of American Water Works Company, Inc. and Subsidiary Companies at December 31, 1996 and 1995 . . . . . . . . . . . . . . .40 and 41 Consolidated Statement of Common Stockholders' Equity of American Water Works Company, Inc. and Subsidiary Companies for each of the three years in the period ended December 31, 1996 . . . . . . . . . . . . . . . . . . . 42 Balance Sheet of American Water Works Company, Inc. at December 31, 1996 and 1995 . . . . . . . . . . . . . . . . 43 Statement of Income and Retained Earnings of American Water Works Company, Inc. for each of the three years in the period ended December 31, 1996 . . . . . . 44 Statement of Cash Flows of American Water Works Company, Inc. for each of the three years in the period ended December 31, 1996. . . . . . . . . . . . . . . . 45 Notes to Financial Statements . . . . . . . . . . . . . .46 through 53 *Incorporated by reference from the indicated pages of the 1996 Annual Report to Stockholders, which is Exhibit 13 to this Report on Form 10-K. Page 10 AMERICAN WATER WORKS COMPANY, INC. INDEX TO FINANCIAL STATEMENTS (Continued) (2) FINANCIAL STATEMENT SCHEDULES Description Page* Schedule II: Valuation and Qualifying Accounts Allowance for Uncollectible Accounts. . . . . . . 13 Financial Statement Schedules not included in this Report on Form 10-K have been omitted because they are not applicable or the required information is shown in the Financial Statements or notes thereto. *Page number shown refers to the page number in this Report on Form 10-K. Page 11 Report of Independent Accountants on Financial Statement Schedule To the Board of Directors of American Water Works Company, Inc. Our audits of the consolidated financial statements referred to in our report dated February 3, 1997 appearing on page 35 of the 1996 Annual Report to Stockholders of American Water Works Company, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, this Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICE WATERHOUSE LLP Thirty South Seventeenth Street Philadelphia, Pennsylvania 19103 February 3, 1997 Page 12 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Prospectus constituting part of the Registration Statement on Form S-3 (No. 33-59059) and in the Registration Statements on Form S-8 (No. 33-62438, No. 33-52923, and No. 333-14451) of American Water Works Company, Inc. of our report dated February 3, 1997 appearing on page 35 of the Annual Report to Stockholders which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page 11 of this Form 10-K. PRICE WATERHOUSE LLP Thirty South Seventeenth Street Philadelphia, Pennsylvania 19103 March 21, 1997 Page 13 FINANCIAL STATEMENT SCHEDULE II AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES SCHEDULE II - Valuation and Qualifying Accounts Allowance for Uncollectible Accounts Years Ended December 31 (In thousands) Balance Additions Charged to Balance Beginning ------------------------- End of Year of Year Expense (A) Other (B) Deductions (C) Year - ---- --------- ----------- --------- -------------- ------- 1996 $ 1,030 $ 5,479 $ 370 $ 5,764 $ 1,115 1995 999 4,288 4,257 1,030 1994 1,107 3,762 3,870 999 (A) Provisions included in operating expense. (B) Allowance for uncollectible accounts of acquired companies. (C) Amounts written off as uncollectible, net of recovery of amounts previously written off. Page 14 AMERICAN WATER WORKS COMPANY, INC. INDEX TO EXHIBITS Exhibit Number Description 3 Articles of Incorporation and By-laws (a) Certificate of Incorporation of the Registrant, as amended and restated as of May 15, 1987, is filed herewith. (b) Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant, effective May 9, 1989, is filed herewith. (c) Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant, effective May 3, 1990, is filed herewith. (d) Certificate of Designations of the Registrant, effective February 6, 1991, relating to its Cumulative Preferred Stock, 8.50% Series, is filed herewith. (e) Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant, effective May 2, 1996, is filed herewith. (f) By-laws of the Registrant, as amended to January 6, 1994, are incorporated herein by reference to Exhibit 3(e) to Form 10-K report of the Registrant for 1993. 4 Instruments Defining the Rights of Security Holders, Including Indentures (a) Indenture dated as of November 1, 1977 between the Registrant and The Fidelity Bank (name later changed to First Union National Bank), Trustee, is incorporated herein by reference to Exhibit E to Form 10-K report of the Registrant for 1977. (b) First Supplemental Indenture dated as of December 1, 1989 between the Registrant and Fidelity Bank, National Association (name later changed to First Union National Bank), as Trustee, is incorporated herein by reference to Exhibit 4(i) to Form 10-K report of the Registrant for 1989. Page 15 AMERICAN WATER WORKS COMPANY, INC. INDEX TO EXHIBITS Exhibit Number Description 4 (cont'd.) (c) Second Supplemental Indenture dated as of February 1, 1993 between the Registrant and Fidelity Bank, National Association (name later changed to First Union National Bank), as Trustee, is incorporated herein by reference to Exhibit 4(c) to Form 10-K report of the Registrant for 1992. (d) Flip-Over Rights Agreement dated as of March 2, 1989 between the Registrant and Bank of Delaware (name later changed to PNC Bank), as Rights Agent, is incorporated herein by reference to Exhibit 1 to Form 8-A Registration Statement of the Registrant, No. 1-3437-2. (e) Flip-In Rights Agreement dated as of March 2, 1989 between the Registrant and Bank of Delaware (name later changed to PNC Bank), as Rights Agent, is incorporated herein by reference to Exhibit 1 to Form 8-A Registration Statement of the Registrant, No. 1-3437-2. 10 Material Contracts (a) Employees' Stock Ownership Plan of the Registrant and Its Designated Subsidiaries, as Amended and Restated Effective January 1, 1989, is incorporated herein by reference to Exhibit 10(a) to Form 10-K report of the Registrant for 1994. (b) Amendment No. 1 to Employees' Stock Ownership Plan of the Registrant is incorporated herein by reference to Exhibit 10(b) to Form 10-K report of the Registrant for 1995. (c) Amendment No. 2 to Employees' Stock Ownership Plan of the Registrant is filed herewith. (d) Supplemental Executive Retirement Plan of the Registrant, effective as of January 1, 1985, is incorporated herein by reference to Exhibit 19(c) to Form 10-K report of the Registrant for 1985. (e) Amendment No. 1 to Supplemental Executive Retirement Plan of the Registrant is incorporated herein by reference to Exhibit 10(e) to Form 10-K report of the Registrant for 1989. Page 16 AMERICAN WATER WORKS COMPANY, INC. INDEX TO EXHIBITS Exhibit Number Description 10 (cont'd.) (f) Amendment No. 2 to Supplemental Executive Retirement Plan of the Registrant is incorporated herein by reference to Exhibit 10(g) to Form 10-K report of the Registrant for 1990. (g) Amendment No. 3 to Supplemental Executive Retirement Plan of the Registrant is incorporated herein by reference to Exhibit 10(f) to Form 10-K report of the Registrant for 1995. (h) Supplemental Retirement Plan of the Registrant, effective as of April 1, 1989, is incorporated herein by reference to Exhibit 10(f) to Form 10-K report of the Registrant for 1989. (i) Amendment No. 1 to Supplemental Retirement Plan of the Registrant is incorporated herein by reference to Exhibit 10(h) to Form 10-K report of the registrant for 1995. (j) Long-Term Performance-Based Incentive Plan of the Registrant, effective as of January 1, 1993, is incorporated herein by reference to Exhibit 10(f) to Form 10-K report of the Registrant for 1994. (k) Annual Incentive Plan of the Registrant, effective as of January 1, 1996, is incorporated herein by reference to Exhibit 10(j) to Form 10-K report of the Registrant for 1995. (l) Deferred Compensation Plan of the Registrant, effective as of January 1, 1996, is incorporated herein by reference to Exhibit 10(k) to Form 10-K report of the Registrant for 1995. 13 Annual Report to Security Holders The Registrant's Annual Report to Stockholders for 1996 is filed as exhibit hereto solely to the extent portions thereof are specifically incorporated herein by reference. 21 Subsidiaries of the Registrant Subsidiaries of the Registrant as of December 31, 1996. Page 17 AMERICAN WATER WORKS COMPANY, INC. INDEX TO EXHIBITS Exhibit Number Description 23 Consents of Experts and Counsel See "Consent of Independent Accountants" on page 12 of this Form 10-K report. 27 Financial Data Schedule Financial Data Schedule for the fiscal year ended December 31, 1996. EX-3 2 EXHIBIT 3(a) RESTATED CERTIFICATE OF INCORPORATION OF AMERICAN WATER WORKS COMPANY, INC. American Water Works Company, Inc., a Corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: A. The name of the Corporation is American Water Works Company, Inc. The Corporation was originally incorporated under the name American Communities Company, and the original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on August 28, 1936. B. Pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware, this Restated Certificate of Incorporation restates and integrates and further amends the provisions of the Certificate of Incorporation of this Corporation. C. The text of the Restated Certificate of Incorporation as heretofore amended or supplemented is hereby restated and further amended to read in its entirety as follows: First. The name of the Corporation is AMERICAN WATER WORKS COMPANY, INC. Second. The registered office the Corporation in the State of Delaware is to be located at No. 1209 Orange Street, in the City of Wilmington, County of New Castle; and the name and address of its registered agent is The Corporation Trust Company, No. 1209 Orange Street, Wilmington, Delaware 19801. Third. The nature of the business, or objects or purposes to be transacted, promoted or carried on by the Corporation are as follows: 1. To invest in, purchase, acquire, hold, pledge, hypothecate, exchange, sell, deal in, and dispose of, alone or in conjunction with others, stocks, bonds and other evidences of indebtedness and obligations, and evidences of any interest in respect thereof, of any other corporation or corporations, including particularly (without limitation of the generality of the foregoing) any corporation or corporations engaged in the collection, purification, supply and sale of water or controlling corporations so engaged, and while the owner or holder of any such, to exercise all the rights, powers and privileges of ownership in respect thereof; to issue in exchange for any such stocks, bonds and other evidences of indebtedness and obligations, and evidences of any interest in respect thereof, the Corporation's own stocks, bonds or other obligations; to aid by loan, subsidy, guaranty, or otherwise and to cause to be formed, merged or reorganized or liquidated, those issuing or creating any such stocks, bonds or other evidences of indebtedness or obligations, or evidences of any interest in respect thereof, to the extent now or hereafter permitted by law; to do and perform all such acts and things, to the extent now or hereafter permitted by law, as may be necessary or proper to protect, preserve, aid, enhance or improve the investment of the Corporation in any such stocks, bonds or other evidences of indebtedness or obligations, or evidences of any interest in respect thereof, or those issuing or creating the same; and generally to do all things incidental to such business. 1 2. To purchase, acquire, hold, operate, mortgage, pledge, hypothecate, exchange, sell, deal in and dispose of commodities and other personal property and real property, plants, buildings and equipment of every kind, character and description whatsoever and wheresoever situated, and any interest therein, and to render services to, or act as agent for, any other person or corporation. 3. To engage in any industrial, manufacturing, mercantile or trading business of any kind or character. 4. To enter into, make, perform and carry out or cancel and rescind contracts or arrangements of any kind or character for any lawful purposes pertaining to its business with any person, entity, partnership, association, corporation or governmental, municipal or public authority, domestic or foreign. 5. To acquire all or any part of the good will, rights, property and business of any person, entity, partnership, association or corporation heretofore or hereafter engaged in any business similar to any business which the Corporation is authorized to conduct, to pay for the same in cash or in stock, bonds, or other obligations of the Corporation or otherwise, to hold, utilize and in any manner dispose of the whole or any part of the rights and property so acquired, and to assume in connection therewith any liabilities of any such person, entity, partnership, association or corporation and conduct in any lawful manner the whole or any part of the business thus acquired. 6. To make any guaranty respecting stocks, dividends, securities, indebtedness, interest, contracts or other obligations for any lawful purposes pertaining to its business, to the extent permitted to be done by a corporation organized under the laws of the State of Delaware. 7. To borrow or raise moneys for any of the purposes of the Corporation and from time to time without limit as to amount, to draw, make, accept, endorse, execute and issue promissory notes, drafts, bills of exchange, warrants, bonds, debentures and other negotiable or non-negotiable instruments and evidences of indebtedness, and to secure the payment thereof and of the interest thereon by mortgage on, or pledge, conveyance or assignment in trust of, the whole or any part of the assets of the Corporation, real, personal or mixed, including contract rights, whether at the time owned or thereafter acquired, and to sell, pledge or otherwise dispose of such securities or other obligations of the Corporation for its corporate purposes. 8. To purchase, hold, sell, transfer, reissue or cancel the shares of its own capital stock and/or any securities or other obligations of the Corporation, in the manner and to the extent now or hereafter permitted by the laws of the State of Delaware; provided that shares of its own capital stock belonging to the Corporation shall not be voted upon directly or indirectly. 2 9. In general for any lawful purposes pertaining to its business, to have and exercise all the powers conferred by the laws of the State of Delaware upon corporations formed thereunder; and to do any and all of the acts and things herein set forth to the same extent as natural persons could do, and in any part of the world, as principal, factor, agent, contractor, trustee or otherwise, either alone or in company with others; to establish and maintain offices and agencies within, and anywhere outside of, the State of Delaware; and to exercise all or any of its corporate powers and rights in the State of Delaware and in any and all other states, territories, districts, colonies, possessions or dependencies of the United States of America and in any foreign countries. 10. To do everything necessary, proper, advisable or convenient for the accomplishment of any of the purposes or the attainment of any of the objects or the furtherance of any of the powers herein set forth and to do every other act and thing incidental thereto or connected therewith, provided the same be not forbidden by the laws of the State of Delaware. The foregoing clauses shall be construed as powers as well as objects and purposes, and the matters expressed in each clause shall, except as otherwise expressly provided, be in no wise limited by reference to or inference from the terms of any other clause; and the expression of one thing shall not be deemed to exclude another not expressed, although it be of like nature. The Corporation shall be authorized to exercise and enjoy all other powers, rights and privileges granted by an Act of the General Assembly of the State of Delaware entitled "An Act providing a General Corporation Law," approved March 10, 1899, to corporations of this character and all the powers conferred upon such corporations by the laws of the State of Delaware, as in force from time to time, so far as not in conflict herewith, or which may be conferred by all acts heretofore or hereafter amendatory of or supplemental to said Act or said laws; provided, however, that the Corporation shall not in any state, territory, district, possession or country carry on any business, or exercise any powers, which a corporation organized under the laws thereof could not carry on or exercise. Fourth. The total number of shares of all classes of stock which the Corporation shall have authority to issue shall be 80,704,400, of which (a) 1,954,400 shares shall be Cumulative Preferred Stock, of the par value of $25 per share, issuable in series, (b) 750,000 shares shall be Cumulative Preference Stock, of the par value of $25 per share, issuable in series, (c) 3,000,000 shares shall be Cumulative Preferential Stock, of the par value of $35 per share, issuable in series, and (d) 75,000,000 shares shall be Common Stock, of the par value of $1.25 per share. The minimum amount of capital with which the Corporation will commence business is $1,000. The designations and the voting powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, of the Cumulative Preferred Stock, the Cumulative Preference Stock and the Cumulative Preferential Stock, and of certain series thereof, and of the Common Stock, which are fixed by this Certificate of Incorporation, and the express grant of authority to the Board of Directors of 3 the Corporation (hereinafter referred to as the Board of Directors) to fix by resolution or resolutions providing for the issue of other series of the Cumulative Preferred Stock, the Cumulative Preference Stock and the Cumulative Preferential Stock the designations and the voting powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, of such other series which are not fixed by this Certificate of Incorporation, shall be as follows: DIVISION A - CUMULATIVE PREFERRED STOCK 1. Issue in Series. The Cumulative Preferred Stock may be issued at any time or from time to time in any amount, not exceeding in the aggregate (including all shares of any and all series thereof theretofore issued) the total number of shares of Cumulative Preferred Stock hereinabove authorized, as Cumulative Preferred Stock of one or more series, as hereinafter provided. All shares of any one series of Cumulative Preferred Stock shall be alike in every particular, each series thereof shall be distinctly designated by letter or descriptive words, and all series of Cumulative Preferred Stock shall rank equally and be identical in all respects except as permitted by the provisions of Section 2 of this Division A. 2. Creation of Series. Authority is hereby expressly granted to and vested in the Board of Directors at any time or from time to time to issue the Cumulative Preferred Stock as Cumulative Preferred Stock of any series, and in connection with the creation of each such series to fix by the resolution or resolutions providing for the issue of shares thereof the voting powers, designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, of such series, to the full extent now or hereafter permitted by the laws of the State of Delaware, in respect of the matters set forth in the following paragraphs (a) to (i), inclusive: (a) The distinctive designation of such series and the number of shares which shall constitute such series, which number may be increased or decreased (but not below the number of shares thereof then outstanding) from time to time by action of the Board of Directors; (b) The dividend rate per annum of such series, and the date from which dividends on shares of such series shall be cumulative (hereinafter sometimes called the date of cumulation), which date of cumulation shall be identical for all shares of such series; (c) The price or prices at which, and the terms, times and conditions on which, the shares of such series may be redeemed at the option of the Corporation (hereinafter called the optional redemption price); (d) The amount or amounts payable upon the shares of such series in the event of voluntary liquidation, dissolution or winding up of the Corporation; 4 (e) Whether or not the shares of such series shall be entitled to the benefit of a sinking fund or a purchase fund to be applied to the purchase or redemption of shares of such series, and if so entitled, the amount of such fund and the manner of its application, including the price or prices at which the shares of such series may be redeemed or purchased through the application of such fund; (f) Whether or not the shares of such series shall be made convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock of the Corporation, and if made so convertible or exchangeable, the conversion price or prices, or the rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; (g) Whether or not the issue of any additional shares of such series, or any future series in addition to such series, shall be subject to restrictions in addition to the restrictions on the issue of future series imposed by paragraph (c) of Section 7 of this Division A or in the resolution or resolutions fixing the terms of any series of Cumulative Preferred Stock theretofore issued pursuant to this Article Fourth, and the terms of any such additional restrictions; (h) Whether or not the shares of such series shall be entitled to the benefit of limitations restricting the purchase of, the payment of dividends on, or the making of other distributions in respect of stock of any class of the Corporation ranking junior to the Cumulative Preferred Stock as to dividends or assets, and the terms of any such restrictions; and (i) With respect to any series of Cumulative Preferred Stock created after October 1, 1961, whether or not the shares of such series shall have the general power to vote in the election of directors and for all other purposes, and if such power shall be given, the qualifications, limitations and restrictions thereof, but in no event shall the vote per share of such series be greater than the vote per share of the Common Stock. The three series of Cumulative Preferred Stock of the Corporation, respectively designated as Cumulative Preferred Stock, 5 1/2% Series of 1961; Cumulative Preferred Stock, 5% Series; and Cumulative Preferred Stock, 4.90% Series, heretofore created by resolutions of the Board of Directors, shall have the voting powers, preferences and relative, participating, optional or other special rights, and the qualifications, limitations and restrictions thereof, which are applicable to the Cumulative Preferred Stock of all series as set forth in this Article Fourth, and shall also have the terms and provisions set forth in Sections 1 through 3, inclusive, of Division F of this Article Fourth which are applicable to the respective series of such stock referred to therein, being the same terms and provisions as were fixed in each case by resolutions of the Board of Directors creating each of said series. The voting powers, preferences and relative, participating, optional or other special rights, and the qualifications, limitations and restrictions thereof, applicable to the Cumulative Preferred Stock of all series shall be as set forth in the following Sections 3 through 8, inclusive, of this Division A and in Division D of this Article Fourth. 5 3. Dividends. (a) Out of the net profits or net assets of the Corporation legally available therefor the holders of Cumulative Preferred Stock of each series shall be entitled to receive, when and as declared by the Board of Directors, dividends in cash at the rate per annum for such series fixed in accordance with this Article Fourth, and no more, payable on the first days of March, June, September and December in each year (the quarterly periods ending on the first days of such months, respectively, being herein designated as dividend periods), in each case from the date of cumulation of such series, provided, that the initial dividend with respect to any particular series shall be payable on such of said dates as shall be fixed by the Board of Directors; and such dividends shall be cumulative (whether or not in any dividend period or periods there shall be net profits or net assets of the Corporation legally available for the payment of such dividends), so that if at any time full cumulative dividends upon the outstanding Cumulative Preferred Stock of all series to the end of the then current dividend period shall not have been paid or declared and a sum sufficient for the payment thereof set apart for such payment, the amount of the deficiency shall be fully paid, but without interest, or dividends in such amount declared on each such series and a sum sufficient for the payment thereof set apart for such payment, before any sum or sums shall be set aside for or applied to the purchase, redemption or other acquisition of Cumulative Preferred Stock of any series and before any dividend shall be declared or paid upon or set apart for, or any other distribution shall be ordered or made in respect of, the Junior Stock and before any shares of Junior Stock shall be purchased, redeemed, or otherwise acquired by the Corporation. (b) No dividends shall be declared or paid on any particular series of the Cumulative Preferred Stock to the exclusion of any other series thereof and all dividends declared on the Cumulative Preferred Stock of the respective series outstanding shall be declared pro rata, so that the amount of the dividend declared on any particular series of the Cumulative Preferred Stock shall be in the proportion that the annual dividend requirements of the shares of such series bear to the total annual dividend requirements of the Cumulative Preferred Stock of all series at the time outstanding. (c) The holders of the Junior Stock shall not be entitled to receive any dividends until full cumulative dividends to the end of the then current dividend period upon the Cumulative Preferred Stock of all series then outstanding shall have been paid or declared and a sum sufficient for the payment thereof set apart for such payment and until the Corporation shall have complied with the provisions of Section 5 of this Division A in respect of any and all amounts then or theretofore required to be set aside or applied in respect of any sinking fund or purchase fund referred to in said Section 5. (d) In the event of the issue of additional shares of Cumulative Preferred Stock of any then existing series, all dividends paid on the shares of Cumulative Preferred Stock of such series prior to the date of issue of such additional shares thereof, and all dividends declared and payable to holders of record of shares of Cumulative Preferred Stock of such series on any date prior to the date of issue of such additional shares thereof, shall be deemed to have been paid on the additional shares of Cumulative Preferred Stock of such series so issued. 6 4. Preference on Liquidation, etc. In the event of any liquidation or dissolution or winding up of the Corporation the holders of the Cumulative Preferred Stock of each series shall be entitled to receive, out of the assets of the Corporation available for distribution to its stockholders, before any distribution of assets shall be made to the holders of the Junior Stock, (i) if such liquidation, dissolution or winding up shall be involuntary, the sum of $25 per share plus full cumulative dividends thereon to the date of final distribution to the holders of the Cumulative Preferred Stock, and (ii) if such liquidation, dissolution or winding up shall be voluntary, the amount per share fixed in accordance with Divisions A and F of this Article Fourth plus full cumulative dividends thereon to the date of final distribution to the holders of the Cumulative Preferred Stock; and the holders of the Junior Stock shall be entitled, to the exclusion of the holders of the Cumulative Preferred Stock of any and all series, to share in all the assets of the Corporation then remaining as hereinafter provided. If upon any liquidation or dissolution or winding up of the Corporation the net assets of the Corporation shall be insufficient to pay the holders of all outstanding shares of the Cumulative Preferred Stock the full amounts to which they respectively shall be entitled, the holders of shares of Cumulative Preferred Stock of all series shall share ratably in any distribution of assets according to the respective amounts which would be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to the Cumulative Preferred Stock of all series were paid in full. Neither the merger nor consolidation of the Corporation into or with any other corporation, nor the merger or consolidation of any other corporation into or with the Corporation, nor a sale, transfer or lease of all or any part of the assets of the Corporation, shall be deemed to be a liquidation, dissolution or winding up of the Corporation. 5. Sinking and Purchase Fund. Out of any net profits or net assets of the Corporation legally available therefor remaining after full cumulative dividends to the end of the then current dividend period upon the Cumulative Preferred Stock of all series then outstanding shall have been paid or declared and a sum sufficient for the payment thereof set apart for such payment, and before any dividends shall be declared or paid upon or set apart for, or any other distribution shall be ordered or made in respect of, the Junior Stock and before any shares of Junior Stock shall be purchased, redeemed, or otherwise acquired by the Corporation, the Corporation shall set aside, in respect of each series of Cumulative Preferred Stock any shares of which shall at the time be outstanding and in respect of which a sinking fund or purchase fund for the purchase or redemption thereof has been provided in accordance with Divisions A and F of this Article Fourth, the sum or sums then or theretofore required to be set aside by the terms of such resolution or resolutions as a sinking fund or purchase fund, to be applied in the manner specified in the provisions creating such fund. All shares of Cumulative Preferred Stock redeemed or purchased through the application of any such sinking fund or purchase fund shall be cancelled and shall not be reissued. 7 6. Redemption and Retirement. (a) The Cumulative Preferred Stock of all or any series, or any part thereof, at any time outstanding may be redeemed by the Corporation, at its election expressed by resolution of the Board of Directors, at any time or from time to time (which time, when fixed in each case and specified in the notice of redemption, is hereinafter called the redemption date), upon not less than thirty days previous notice to the holders of record of the Cumulative Preferred Stock to be redeemed, given by mail in such manner as may be prescribed by resolution of the Board of Directors, at the optional redemption price or prices fixed in accordance with Divisions A and F of this Article Fourth then applicable to the Cumulative Preferred Stock to be redeemed, plus an amount equal to full cumulative dividends thereon to the redemption date (the aggregate of which amounts is hereinafter in this Section 6 called the redemption price); provided, however, that less than all the Cumulative Preferred Stock of all series then outstanding may be redeemed only after full cumulative dividends to the end of the then current dividend period upon the Cumulative Preferred Stock of all series then outstanding (other than the shares to be redeemed) shall have been paid or declared and a sum sufficient for the payment thereof set apart for such payment. If less than all the outstanding Cumulative Preferred Stock of any series is to be redeemed, the selection of shares for redemption may be made either by lot or pro rata in such manner as may be prescribed by resolution of the Board of Directors. The Corporation may, if it shall so elect, deposit the amount of the redemption price for the account of the holders of Cumulative Preferred Stock entitled thereto with a bank or trust company doing business in the State of New York, or in the Commonwealth of Pennsylvania, and having capital and surplus of at least $5,000,000, at any time prior to the redemption date (the date of such deposit being hereinafter in this Section 6 referred to as the date of deposit). (b) Notice of the Corporation's election to make such deposit, including the date of deposit and the name and address of the bank or trust company with which the deposit has been or will be made, shall be included in the notice of redemption. On and after the redemption date (unless default shall be made by the Corporation in providing moneys for the payment of the redemption price pursuant to the notice of redemption), or, if the Corporation shall make such deposit on or before the date specified therefor in the notice of redemption, then on and after the date of deposit, all dividends on the Cumulative Preferred Stock so called for redemption shall cease to accrue, and, notwithstanding that any certificate for shares of Cumulative Preferred Stock so called for redemption shall not have been surrendered for cancellation, the shares represented thereby shall no longer be deemed outstanding and all rights of the holders thereof as stockholders of the Corporation shall cease and terminate, except the right to receive the redemption price as hereinafter provided and except any conversion or exchange rights not theretofore expired. Such conversion or exchange rights, however, in any event shall cease and terminate upon the redemption date or upon any earlier date fixed in accordance with this Article Fourth for the termination of such rights. At any time on or after the redemption date, or, if the Corporation shall elect to deposit the moneys for such redemption as herein provided, then at any time on or after the date of deposit, which time shall be specified by the Corporation in the notice of redemption but shall not be later than the redemption date, the respective holders of record of the Cumulative Preferred Stock to be redeemed shall be entitled to receive the redemption price upon actual delivery to the Corporation 8 or, in the event of such deposit, to the bank or trust company with which such deposit shall be made, of certificates for the shares to be redeemed, such certificates, if required, to be properly stamped for transfer and duly endorsed in blank or accompanied by proper instruments of assignment and transfer thereof duly endorsed in blank. Any moneys so deposited which shall remain unclaimed by the holders of such Cumulative Preferred Stock at the end of five years after the redemption date shall be paid by such bank or trust company to the Corporation; provided, however, that all moneys so deposited which shall not be required for such redemption because of the exercise of any right of conversion or exchange shall be returned to the Corporation forthwith. Any interest accrued on moneys so deposited shall be paid to the Corporation from time to time. (c) All shares of Cumulative Preferred Stock redeemed pursuant to the provisions of this Section 6 shall be cancelled and shall not be reissued. 7. Restrictions on Certain Corporate Action. (a) So long as any shares of the Cumulative Preferred Stock of any series shall be outstanding, the Corporation shall not, without the consent, given in writing or by resolution adopted at a meeting duly called for that purpose, of the holders of record of at least two-thirds of the number of shares of the Cumulative Preferred Stock of all series then outstanding, considered as a class without regard to series, (1) alter or change the designations or the voting powers, preferences or rights, or the qualifications, limitations or restrictions thereof, of the Cumulative Preferred Stock or of any series thereof in any material respect prejudicial to the holders thereof; provided, however, that any such alteration or change of the designations or of the voting powers, preferences or rights, or the qualifications, limitations or restrictions thereof, of any particular series of the Cumulative Preferred Stock which is not in any material respect prejudicial to the holders of the Cumulative Preferred Stock of any other series may be effected with the consent, given as aforesaid, of the holders of record of at least two-thirds of the number of shares of the particular series of Cumulative Preferred Stock affected by such alteration or change; and provided, further, that nothing in this subparagraph (1) shall require the vote or consent of the holders of the Cumulative Preferred Stock for or in respect of any increase in the authorized number of shares of Common Stock or the creation or increase in the authorized number of shares of any other class of stock which shall rank junior to the Cumulative Preferred Stock as to both dividends and assets; (2) create any new class of stock having preference over the Cumulative Preferred Stock as to dividends or assets, or create any obligation or security of the Corporation convertible into or exchangeable for shares of stock of any class having such preference over the Cumulative Preferred Stock; 9 (3) sell, transfer or lease all, or substantially all, the assets of the Corporation, unless as a part of such transaction or prior thereto the Cumulative Preferred Stock of all series shall be retired or called for redemption and the necessary funds therefor deposited as provided in Section 6 of this Division A; provided, however, that nothing in this subparagraph (3) shall require the vote or consent of the holders of the Cumulative Preferred Stock for or in respect of the creation of any mortgage or pledge of or other lien upon all or any part of the assets of the Corporation; or (4) effect a statutory merger or consolidation of or with any other corporation or corporations; provided, however, that such consent shall not be necessary if as a result of such merger or consolidation: (i) the Corporation shall be the surviving corporation and the Cumulative Preferred Stock then outstanding shall continue to be outstanding; there shall be no alteration or change in the designations or the voting powers, preferences or rights, or the qualifications, limitations or restrictions thereof, of the Cumulative Preferred Stock or any series thereof, in any material respect prejudicial to the holders thereof and the number of authorized shares of Cumulative Preferred Stock or shares being on a parity therewith as to dividends or assets shall not exceed the number of such shares which the Corporation shall have been authorized to issue immediately preceding the date of such merger or consolidation (except with the consent, given in writing or by resolution adopted at a meeting duly called for that purpose, of the holders of record of at least a majority of the number of shares of the Cumulative Preferred Stock of all series then outstanding, considered as a class without regard to series) and there shall not be created any new class of stock having preference over the Cumulative Preferred Stock as to dividends or assets; or (ii) if the Corporation shall not be the surviving corporation, the shares of the Cumulative Preferred Stock of each series then outstanding shall be converted into, or be exchangeable for, a like number of shares of preferred stock of the surviving or resulting corporation which preferred stock shall have substantially the same designations, voting powers, preferences and rights, and qualifications, limitations or restrictions thereof, as the Cumulative Preferred Stock of such series, the number of authorized shares of such preferred stock shall not exceed the number or shares of the Cumulative Preferred Stock of all series which the Corporation shall have been authorized to issue immediately preceding the date of such merger or consolidation (except with the consent, given in writing or by resolution adopted at a meeting duly called for that purpose, of the holders of record of at least a majority of the number of shares of the Cumulative Preferred Stock of all series then outstanding, considered as a class without regard to series) and there shall not be outstanding or created any class of stock of the surviving or resulting corporation having preference over or being on a parity with such preferred stock as to dividends or assets. (b) So long as any shares of the Cumulative Preferred Stock of any series shall be outstanding, the Corporation shall not, without the consent, given in writing or by resolution adopted at a meeting duly called for that purpose, of the holders of record of at least a majority of the number of shares of the Cumulative Preferred Stock of all series then outstanding, considered as a class 10 without regard to series, increase the authorized number of shares of the Cumulative Preferred Stock, or create any new class of stock which shall be on a parity with the Cumulative Preferred Stock as to dividends or assets. (c) (1) So long as any shares of Cumulative Preferred Stock of any series shall be outstanding, the Corporation shall not, without the consent, given in writing or by resolution adopted at a meeting duly called for that purpose, of the holders of record of at least a majority of the number of shares of the Cumulative Preferred Stock of all series then outstanding, considered as a class without regard to series, issue any shares of Cumulative Preferred Stock, in addition to the shares of the first series thereof initially issued by the Corporation, or issue any shares of any new class of stock which shall be on a parity with the Cumulative Preferred Stock as to dividends or assets, unless the consolidated net income of the Corporation and its subsidiaries (as hereinafter defined) for any period of twelve consecutive calendar months during the preceding 18 calendar months preceding a date not more than 60 days prior to the issue of such additional shares of Cumulative Preferred Stock or of such other stock shall have been at least 1.35 times the sum of (i) the annual interest charges on all indebtedness of the Corporation and its subsidiaries to be outstanding immediately after the proposed issue of such additional shares, (ii) the annual dividend requirements on all shares of stock of any class ranking prior to or on a parity with the Cumulative Preferred Stock as to dividends or assets to be outstanding immediately after the proposed issue of such additional shares, (iii) the annual dividend requirements on all shares of preferred stock of subsidiaries to be outstanding immediately after the proposed issuance of such additional shares, and (iv) the annual dividend requirements on all shares of Cumulative Preferred Stock of all series to be outstanding immediately after the proposed issue of such additional shares, provided, however, that any interest and dividends payable to the Corporation or any subsidiary shall be excluded from the foregoing calculation. If all or any part of the proceeds of the additional shares of Cumulative Preferred Stock or such other stock so proposed to be issued are to be coincidentally applied by the Corporation, through subsidiaries, to the acquisition of plants or other properties with a previous record of earnings, or to the acquisition of subsidiaries with a previous record of earnings, there may be added to such consolidated net income of the Corporation and its subsidiaries for such period of twelve months, at the option of the Corporation, an amount equal to the net income of such plants or properties or subsidiaries, for the same twelve months' period, determined by the Board of Directors in a manner consistent with the determination of consolidated net income of the Corporation and its subsidiaries. (2) Before issuing any shares of Cumulative Preferred Stock other than the initial series or before issuing such other stock, there shall be prepared and filed among the permanent records of the Corporation a certificate of an independent public accountant of recognized standing, selected in good faith by the Board of Directors, setting forth the consolidated net income of the Corporation and its subsidiaries, as hereinafter defined, for the twelve months' period selected by the Corporation as the basis for compliance with the requirements of this paragraph (c), setting forth such other financial information as may be necessary to show compliance with the requirements of this paragraph (c), and stating whether, in the opinion of such accountant, such requirements are being complied with. 11 (3) For the purposes of this paragraph (c) the following shall be applicable: (i) The term "consolidated net income of the Corporation and its subsidiaries" shall be deemed to mean the total income (except amortization of premium on debt), whether credited to surplus or otherwise, of the Corporation and its subsidiaries and/or predecessor company or companies from all sources for the period in question, after deducting therefrom all operating and non-operating expenses and charges, including maintenance expenses, such provisions for reserves for retirements, renewals and replacements and for depreciation, obsolescence and depletion as determined by the Board of Directors in accordance with established practice of the Corporation and its subsidiaries, taxes and rentals paid or accrued in respect of the properties, license fees and franchise taxes paid or accrued, and Federal and State taxes based on income paid or accrued, but excluding interest charges on indebtedness of the Corporation and its subsidiaries, dividends on preferred stocks of subsidiaries, amortization of debt discount and expense, and profits or losses on sales of capital assets, amortization of intangibles or property adjustments, write-downs of property, or other adjustments, and similar items. (ii) The term "predecessor company or companies" shall be deemed to mean any company substantially all the property of which shall have been acquired by the Corporation or any subsidiary by purchase, merger or otherwise during the period for which the consolidated net income of the Corporation and its subsidiaries is to be determined and for the purposes hereof shall be deemed to have been owned for the full period considered. (iii) The term "subsidiary" shall mean (A) any corporation of which at least a majority of the voting stock is at the time directly or indirectly owned or controlled by the Corporation, and (B) any corporation of which at least a majority of the voting stock shall at the time be owned or controlled, directly or indirectly, by the Corporation and any subsidiary or subsidiaries as defined in the foregoing clause (A) or by one or more such subsidiaries; provided, however, that in no event shall there be included within the term "subsidiary" any corporation substantially all of the physical properties of which are located outside of the United States of America. (iv) The term "voting stock" shall mean stock entitled under ordinary circumstances to vote for the election of directors and does not mean or include stock so entitled to vote only upon failure to pay dividends thereon or upon some other contingency or for some special purpose or purposes. 8. Definitions. (a) The term "Junior Stock" as used in this Article Fourth shall be deemed to mean all stock of any class of the Corporation ranking junior to the Cumulative Preferred Stock as to dividends or assets. 12 (b) The term "full cumulative dividends" whenever used in this Article Fourth with reference to any share of any series of the Cumulative Preferred Stock shall be deemed to mean (whether or not in any dividend period or any part thereof in respect of which such term is used there shall have been net profits or net assets of the Corporation legally available for the payment of such dividends) that amount which shall be equal to dividends at the rate per share fixed for such series in accordance with Divisions A and F of this Article Fourth, for the period of time elapsed from the date of cumulation of such series to the date as of which full cumulative dividends are to be computed (including the elapsed portion of the current dividend period), less the amount of all dividends paid or deemed paid upon such share. DIVISION B - CUMULATIVE PREFERENCE STOCK 1. Series and Limitations of Variations between Series. The shares of Cumulative Preference Stock may be divided into and issued in series from time to time, as herein provided. All shares of Cumulative Preference Stock of all series shall be of equal rank and all shares of any particular series of Cumulative Preference Stock shall be identical except as to the date or dates from which dividends on such shares shall be cumulative, as permitted by Section 2 of this Division B. The shares of Cumulative Preference Stock of different series, subject to any applicable provisions of law, may vary as to the following terms and provisions, which shall be determined and fixed in the case of each such series at any time prior to the issuance of any shares thereof, in the manner hereinafter in this Section 1 provided: (a) The distinctive designation of such series and the number of shares which shall constitute such series, which number may be increased or decreased (but not below the number of shares thereof then outstanding) from time to time by action of the Board of Directors; (b) The dividend rate per annum of such series, and the date from which dividends on shares of such series shall be cumulative (hereinafter sometimes called the date of cumulation); (c) The price or prices at which, and the terms, times and conditions on which, the shares of such series may be redeemed at the option of the Corporation; (d) The amount or amounts payable upon the shares of such series in the event of voluntary liquidation, dissolution or winding up of the Corporation (hereinafter sometimes called the voluntary liquidation price); (e) Whether or not the shares of such series shall be entitled to the benefit of a sinking fund or a purchase fund to be applied to the purchase or redemption of shares of such series, and if so entitled, the amount of such fund and the manner of its application, including the price or prices at which the shares of such series may be redeemed or purchased through the application of such fund; 13 (f) Whether or not the shares of such series shall be made convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock of the Corporation, and if made so convertible or exchangeable, the conversion price or prices, or the rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; (g) Whether or not the shares of such series shall be entitled to (1) any rights to vote or consent in connection with any particular corporate acts (including, without limiting the generality of the foregoing, the issuance of any additional shares of such series, or any future series in addition to such series) in addition to the rights set forth in Section 6 of this Division B or in any certificate fixing the terms of any series of Cumulative Preference Stock theretofore issued pursuant to this Article Fourth, and the terms of any such rights, or (2) the right to elect directors in the event of "six quarters' default in preference stock dividends" as provided in Section 1 of Division D of this Article Fourth; (h) Whether or not the shares of such series shall be entitled to the benefit of limitations restricting the purchase of, the payment of dividends on, or the making of other distributions in respect of stock of any class of the Corporation ranking junior to the Cumulative Preference Stock as to dividends or assets, and the terms of any such restrictions; and (i) Whether or not the shares of such series shall have the general power to vote in the election of directors and for all other purposes, and if such power shall be given, the qualifications, limitations and restrictions thereof, but in no event shall the vote per share of such series be greater than the vote per share of the Common Stock. The series of Cumulative Preference Stock of the Corporation designated as 5% Cumulative Preference Stock shall have the terms and provisions set forth in this Certificate of Incorporation which are applicable generally to all series of Cumulative Preference Stock, and shall also have the terms and provisions hereinafter set forth in Section 4 of Division F of this Article Fourth. In addition, authority is hereby expressly granted to and vested in the Board of Directors at any time or from time to time, within the then authorized number of shares of Cumulative Preference Stock of all series, to establish or re-establish any unissued shares of Cumulative Preference Stock as shares of Cumulative Preference Stock of any series, to create one or more additional series of Cumulative Preference Stock and to fix the terms and provisions of any such series of Cumulative Preference Stock in the respects in which the shares of any series may vary from the shares of other series of Cumulative Preference Stock as hereinbefore in this Section 1 provided. 2. Dividends. (a) Out of any net profits or net assets of the Corporation legally available therefor remaining after full cumulative dividends to the end of the then current dividend period upon the Cumulative Preferred Stock of all series then outstanding shall have been paid or declared and a sum sufficient for the payment thereof set apart for such payment, and after the Corporation shall have complied with the provisions of the foregoing Section 5 of Division A of this 14 Article Fourth in respect of any and all amounts then or theretofore required to be set aside or applied in respect of any sinking fund or purchase fund referred to in said Section 5, then and not otherwise the holders of Cumulative Preference Stock of each series shall, subject to the provisions of this Article Fourth and of any certificate fixing the terms of any series of the Cumulative Preferred Stock, be entitled to receive, when and as declared by the Board of Directors, dividends in cash at the rate per annum for such series fixed in accordance with this Article Fourth, and no more, payable on the first days of March, June, September and December in each year (the quarterly periods ending on the first days of such months, respectively, being herein designated as dividend periods), in each case from the date of cumulation of such series; provided that the initial dividend with respect to any particular series shall be payable on such of such dates as next succeeds the date of issue of the first shares of such series to be issued, unless otherwise determined by the Board of Directors; and such dividends shall be cumulative (whether or not in any dividend period or periods there shall be net profits or net assets of the Corporation legally available for the payment of such dividends), so that if at any time full cumulative dividends upon the outstanding Cumulative Preference Stock of all series to the end of the then current dividend period shall not have been paid or declared and a sum sufficient for the payment thereof set apart for such payment, the amount of the deficiency shall be fully paid, but without interest, or dividends in such amount declared on each such series and a sum sufficient for the payment thereof set apart for such payment, before any sum or sums shall be set aside for or applied to the purchase, redemption or other acquisition of Cumulative Preference Stock of any series and before any dividend shall be declared or paid upon or set apart for, or any other distribution shall be ordered or made in respect of, Subordinate Stock and before any shares of Subordinate Stock shall be purchased, redeemed, or otherwise acquired by the Corporation. (b) No dividends shall be declared or paid on any particular series of the Cumulative Preference Stock to the exclusion of any other series thereof and all dividends declared on the Cumulative Preference Stock of the respective series outstanding shall be declared pro rata, so that the amount of the dividend declared on any particular series of the Cumulative Preference Stock shall be in the proportion that the annual dividend requirements of the shares of such series bear to the total annual dividend requirements of the Cumulative Preference Stock of all series at the time outstanding. (c) The holders of the Subordinate Stock shall not be entitled to receive any dividends until full cumulative dividends to the end of the then current dividend period upon the Cumulative Preference Stock of all series then outstanding shall have been paid or declared and a sum sufficient for the payment thereof set apart for such payment and until the Corporation shall have complied with the provisions of Section 4 of this Division B in respect of any and all amounts then or theretofore required to be set aside or applied in respect of any sinking fund or purchase fund referred to in said Section 4. (d) Except as otherwise provided in Section 4 of Division F of this Article Fourth with respect to the 5% Cumulative Preference Stock, the date of cumulation of dividends on all shares of all series of Cumulative Preference Stock shall be the quarterly dividend payment date next preceding the date of their issue or, if issued on a quarterly dividend payment date, then such date; provided that the certificate creating any such series may specify that the date of cumulation of dividends on shares of such series shall be the aforesaid date 15 unless the Board of Directors shall determine when authorizing the issuance of particular shares of such series that the date of cumulation of dividends on such shares shall be the date of issue of each share thereof, said date of issue for this purpose to be such date as the Board of Directors shall authorize or fix; and provided further that if shares of any such series, irrespective of the date of cumulation of dividends thereon under the foregoing provisions, be issued after the record date for the payment of a dividend on such Stock in respect of the then current dividend period and prior to the payment date for such dividend, then said Board, when declaring such dividend, may determine that said shares shall not be entitled to participate in said dividend and the date of cumulation of dividends thereon shall be such payment date, anything hereinabove to the contrary notwithstanding; otherwise said dividend or the applicable portion thereof shall be payable on said shares to the registered holder thereof on said payment date from the commencement of said current dividend period or, as the case may be, from the date of issue of said shares, as if such shares had been registered in said holder's name on the record date for said dividend. 3. Preference on Liquidation, etc. In the event of any liquidation or dissolution or winding up of the Corporation, after there shall have been paid or set aside in cash for the holders of the Cumulative Preferred Stock of all series then outstanding the full preferential amounts to which they are entitled under the provisions of this Article Fourth, the holders of the Cumulative Preference Stock of each series shall be entitled to receive, out of the assets of the Corporation available for distribution to its stockholders, before any distribution of assets shall be made to the holders of Subordinate Stock, (i) if such liquidation, dissolution or winding up shall be involuntary, the sum of $25 per share plus full cumulative dividends thereon to the date of final distribution to the holders of the Cumulative Preference Stock, and (ii) if such liquidation, dissolution or winding up shall be voluntary, the voluntary liquidation price plus full cumulative dividends thereon to the date of final distribution to the holders of the Cumulative Preference Stock; and the holders of the Subordinate Stock shall be entitled, to the exclusion of the holders of the Cumulative Preference Stock of any and all series, to share in all the assets of the Corporation then remaining as hereinafter provided. If upon any liquidation or dissolution or winding up of the Corporation the net assets of the Corporation shall be insufficient to pay the holders of all outstanding shares of the Cumulative Preference Stock the full amounts to which they respectively shall be entitled, the holders of shares of Cumulative Preference Stock of all series shall share ratably in any distribution of assets according to the respective amounts which would be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to the Cumulative Preference Stock of all series were paid in full. Neither the merger nor consolidation of the Corporation into or with any other corporation, nor the merger or consolidation of any other corporation into or with the Corporation, nor a sale, transfer or lease of all or any part of the assets of the Corporation, shall be deemed to be a liquidation, dissolution or winding up of the Corporation. 16 4. Sinking and Purchase Funds. Out of any net profits or net assets of the Corporation legally available therefor remaining after full cumulative dividends to the end of the then current dividend period upon the Cumulative Preference Stock of all series then outstanding shall have been paid or declared and a sum sufficient for the payment thereof set apart for such payment, and before any dividends shall be declared or paid upon or set apart for, or any other distribution shall be ordered or made in respect of, Subordinate Stock and before any shares of Subordinate Stock shall be purchased, redeemed, or otherwise acquired by the Corporation, the Corporation shall set aside, in respect of each series of Cumulative Preference Stock any shares of which shall at the time be outstanding and in respect of which a sinking fund or purchase fund for the purchase or redemption thereof has been provided in accordance with this Article Fourth, the sum or sums then or theretofore required to be set aside as a sinking fund or purchase fund, to be applied in the manner specified in the provisions creating such fund. 5. Redemption and Retirement. (a) The Cumulative Preference Stock of all or any series, or any part thereof, at any time outstanding may, subject to any applicable restrictions with respect to the redemption of shares ranking junior to the Cumulative Preferred Stock as to dividends or assets, be redeemed by the Corporation, at its election expressed by resolution of the Board of Directors, at any time or from time to time (which time, when fixed in each case and specified in the notice of redemption, is hereinafter called the redemption date), upon not less than 30 days previous notice to the holders of record of the Cumulative Preference Stock to be redeemed, given by mail in such manner as may be prescribed by resolution of the Board of Directors, at the optional redemption price or prices then applicable to the Cumulative Preference Stock to be redeemed, plus an amount equal to full cumulative dividends thereon to the redemption date (the aggregate of which amounts is hereinafter in this Section 5 called the redemption price); provided, however, that less than all the Cumulative Preference Stock of all series then outstanding may be redeemed only after full cumulative dividends to the end of the then current dividend period upon the Cumulative Preference Stock of all series then outstanding (other than the shares to be redeemed) shall have been paid or declared and a sum sufficient for the payment thereof set apart for such payment. If less than all the outstanding Cumulative Preference Stock of any series is to be redeemed, the selection of shares for redemption may be made either by lot or pro rata in such manner as may be prescribed by resolution of the Board of Directors. The Corporation may, if it shall so elect, deposit the amount of the redemption price for the account of the holders of Cumulative Preference Stock entitled thereto with a bank or trust company doing business in the State of New York, or in the Commonwealth of Pennsylvania, and having capital and surplus of at least $5,000,000, at any time prior to the redemption date (the date of such deposit being hereinafter in this Section 5 referred to as the date of deposit). 17 (b) Notice of the Corporation's election to make such deposit, including the date of deposit and the name and address of the bank or trust company with which the deposit has been or will be made, shall be included in the notice of redemption. On and after the redemption date (unless default shall be made by the Corporation in providing moneys for the payment of the redemption price pursuant to the notice of redemption), or, if the Corporation shall make such deposit on or before the date specified therefor in the notice of redemption, then on and after the date of deposit, all dividends on the Cumulative Preference Stock so called for redemption shall cease to accrue, and, notwithstanding that any certificate for shares of Cumulative Preference Stock so called for redemption shall not have been surrendered for cancellation, the shares represented thereby shall no longer be deemed outstanding and all rights of the holders thereof as stockholders of the Corporation shall cease and terminate, except the right to receive the redemption price as hereinafter provided and except any conversion or exchange rights not theretofore expired. Such conversion or exchange rights, however, in any event shall cease and terminate upon the redemption date or upon any earlier date duly fixed for the termination of such rights. At any time on or after the redemption date, or, if the Corporation shall elect to deposit the moneys for such redemption as herein provided, then at any time on or after the date of deposit, which time shall be specified by the Corporation in the notice of redemption but shall not be later than the redemption date, the respective holders of record of the Cumulative Preference Stock to be redeemed shall be entitled to receive the redemption price upon actual delivery to the Corporation or, in the event of such deposit, to the bank or trust company with which such deposit shall be made, of certificates for the shares to be redeemed, such certificates, if required, to be properly stamped for transfer and duly endorsed in blank or accompanied by proper instruments of assignment and transfer thereof duly endorsed in blank. Any moneys so deposited which shall remain unclaimed by the holders of such Cumulative Preference Stock at the end of five years after the redemption date shall be paid by such bank or trust company to the Corporation; provided, however, that all moneys so deposited which shall not be required for such redemption because of the exercise of any right of conversion or exchange shall be returned to the Corporation forthwith. Any interest accrued on moneys so deposited shall be paid to the Corporation from time to time. 6. Restrictions on Certain Corporate Action. (a) So long as any shares of the Cumulative Preference Stock of any series shall be outstanding, the Corporation shall not, without the consent, given in writing or by resolution adopted at a meeting duly called for that purpose, of the holders of record of at least two-thirds of the number of shares of the Cumulative Preference Stock of all series then outstanding, considered as a class without regard to series, (1) alter or change the designations or the voting powers, preferences or rights, or the qualifications, limitations or restrictions thereof, of the Cumulative Preference Stock or of any series thereof in any material respect prejudicial to the holders thereof; provided, however, that any such alteration or change of the designations or of the voting powers, preferences or rights, or the qualifications, limitations or restrictions thereof, of any particular series of the Cumulative Preference Stock which is not in any material respect prejudicial to the holders of the Cumulative Preference Stock of any other series may be effected with 18 the consent, given as aforesaid, of the holders of record of at least two-thirds of the number of shares of the particular series of Cumulative Preference Stock affected by such alteration or change; and provided, further, that nothing in this subparagraph (1) shall require the vote or consent of the holders of the Cumulative Preference Stock for or in respect of any increase in the authorized number of shares of Common Stock or the creation or increase in the authorized number of shares of any other class of stock which shall rank junior to the Cumulative Preference Stock as to both dividends and assets; (2) create any new class of stock having preference over the Cumulative Preference Stock as to dividends or assets, or create any obligation or security of the Corporation convertible into or exchangeable for shares of stock of any class having such preference over the Cumulative Preference Stock; (3) sell, transfer or lease all, or substantially all, the assets of the Corporation, unless as a part of such transaction or prior thereto the Cumulative Preference Stock of all series shall be retired or called for redemption and the necessary funds therefor deposited as provided in Section 5 of this Division B; provided, however, that nothing in this subparagraph (3) shall require the vote or consent of the holders of the Cumulative Preference Stock for or in respect of the creation of any mortgage or pledge of or other lien upon all or any part of the assets of the Corporation; or (4) effect a statutory merger or consolidation of or with any other corporation or corporations; provided, however, that such consent shall not be necessary if as a result of such merger or consolidation: (i) the Corporation shall be the surviving corporation and the Cumulative Preference Stock then outstanding shall continue to be outstanding; there shall be no alteration or change in the designations or the voting powers, preferences or rights, or the qualifications, limitations or restrictions thereof, of the Cumulative Preference Stock or any series thereof, in any material respect prejudicial to the holders thereof and the number of authorized shares of Cumulative Preference Stock or shares being on a parity therewith as to dividends or assets shall not exceed the number of such shares which the Corporation shall have been authorized to issue immediately preceding the date of such merger or consolidation (except with the consent, given in writing or by resolution adopted at a meeting duly called for that purpose, of the holders of record of at least a majority of the number of shares of the Cumulative Preference Stock of all series then outstanding, considered as a class without regard to series) and there shall not be created any new class of stock having preference over the Cumulative Preference Stock as to dividends or assets; or (ii) if the Corporation shall not be the surviving corporation, the shares of the Cumulative Preference Stock of each series then outstanding shall be converted into, or be exchangeable for, a like number of shares of preference stock of the surviving or resulting corporation which preference stock shall have substantially the same designations, voting powers, preferences and rights, and qualifications, limitations or restrictions thereof, as the Cumulative Preference Stock of such series, the number of authorized shares of such preference stock shall not exceed the number of shares of the Cumulative Preference Stock of all series which the Corporation shall have been 19 authorized to issue immediately preceding the date of such merger or consolidation (except with the consent, given in writing or by resolution adopted at a meeting duly called for that purpose, of the holders of record of at least a majority of the number of shares of the Cumulative Preference Stock of all series then outstanding, considered as a class without regard to series) and there shall not be outstanding or created any class of stock of the surviving or resulting corporation having preference over or being on a parity with such preference stock as to dividends or assets. (b) So long as any shares of Cumulative Preference Stock of any series shall be outstanding, the Corporation shall not, without the consent, given in writing or by resolution adopted at a meeting duly called for that purpose, of the holders of record of at least a majority of the number of shares of Cumulative Preference Stock of all series then outstanding, considered as a class without regard to series, (1) increase the authorized number of shares of Cumulative Preferred Stock or increase the authorized number of shares of Cumulative Preference Stock; (2) create any new class of stock ranking on a parity with the Cumulative Preference Stock as to dividends or assets; or (3) issue any shares of Cumulative Preference Stock, in addition to the shares of 5% Cumulative Preference Stock issued by the Corporation upon the merger of Northeastern Water Company into the Corporation, or issue any shares of any new class of stock which shall be on a parity with the Cumulative Preference Stock as to dividends or assets, unless the consolidated net income of the Corporation and its subsidiaries (as hereinafter defined) for any period of twelve consecutive calendar months during the preceding 18 calendar months preceding a date not more than 60 days prior to the issue of such additional shares of Cumulative Preference Stock or of such other stock shall have been at least 1.25 times the sum of (w) the annual interest charges on all indebtedness of the Corporation and its subsidiaries to be outstanding immediately after the proposed issue of such additional shares, (x) the annual dividend requirements on all shares of stock of any class ranking prior to or on a parity with the Cumulative Preference Stock as to dividends or assets to be outstanding immediately after the proposed issue of such additional shares, (y) the annual dividend requirements on all shares of preferred stock of subsidiaries to be outstanding immediately after the proposed issuance of such additional shares, and (z) the annual dividend requirements on all shares of Cumulative Preference Stock of all series to be outstanding immediately after the proposed issuance of such additional shares; provided, however, that any interest and dividends payable to the Corporation or any subsidiary shall be excluded from the foregoing calculation. Before issuing any shares of Cumulative Preference Stock other than the shares thereof issued upon such merger or before issuing such other stock, there shall be prepared and filed among the permanent records of the Corporation a certificate of an independent public accountant of recognized standing, selected in good faith by the Board of Directors, setting forth such information as may be necessary to show compliance with the requirements of this subparagraph (3), and stating whether, in the opinion of such accountant, 20 such requirements are being complied with. For purposes of this subparagraph (3) the following shall be applicable: (i) The term "consolidated net income of the Corporation and its subsidiaries" shall be deemed to mean the total income (except amortization of premium on debt), whether credited to surplus or otherwise, of the Corporation and its subsidiaries from all sources for the period in question, after deducting therefrom all operating and non-operating expenses and charges, including maintenance expenses, such provisions for reserves for retirements, renewals and replacements and for depreciation, obsolescence and depletion as is determined by the Board of Directors in accordance with established practice of the Corporation and its subsidiaries, taxes and rentals paid or accrued in respect of the properties, license fees and franchise taxes paid or accrued, and Federal and State taxes based on income paid or accrued, but excluding interest charges on indebtedness of the Corporation and its subsidiaries, dividends on preferred stocks of subsidiaries, amortization of debt discount and expense, and profits or losses on sales of capital assets, amortization of intangibles or property adjustments, write-downs of property, or other adjustments, and similar items. In case, within or after the period for which the computation of consolidated net income of the Corporation and its subsidiaries is made pursuant to this subparagraph (3), the Corporation or any subsidiary shall have acquired any property (either directly or through the acquisition of a subsidiary or by merger of any entity into or with the Corporation), such acquired property may be treated as having been owned by the Corporation for the whole of such period of computation and the net income thereof for such period may, at the option of the Corporation, be included in the consolidated net income of the Corporation and its subsidiaries, and there shall be excluded, in computing such consolidated net income, an amount equal to the net income estimated to be applicable to any property sold or disposed of by the Corporation or any of its subsidiaries after the beginning of such period of computation. (ii) The term "subsidiary" shall mean (A) any corporation of which at least a majority of the voting stock is at the time directly or indirectly owned or controlled by the Corporation, and (B) any corporation of which at least a majority of the voting stock shall at the time be owned or controlled, directly or indirectly, by the Corporation and any subsidiary or subsidiaries as defined in the foregoing clause (A) or by one or more such subsidiaries; provided, however, that in no event shall there be included within the term "subsidiary" any corporation substantially all of the physical properties of which are located outside of the United States of America. (iii) The term "voting stock" shall mean stock entitled under ordinary circumstances to vote for the election of directors and does not mean or include stock so entitled to vote only upon failure to pay dividends thereon or upon some other contingency or for some special purpose or purposes. 21 7. Definitions. (a) The term "Subordinate Stock" as used in this Article Fourth shall be deemed to mean all stock of any class of the Corporation ranking junior to the Cumulative Preference Stock as to dividends or assets. (b) The term "full cumulative dividends" whenever used in this Article Fourth with reference to any share of any series of the Cumulative Preference Stock shall be deemed to mean (whether or not in any dividend period or any part thereof in respect of which such term is used there shall have been net profits or net assets of the Corporation legally available for the payment of such dividends) that amount which shall be equal to dividends at the rate per share fixed for such series in accordance with this Article Fourth for the period of time elapsed from the date of cumulation of such series to the date as of which full cumulative dividends are to be computed (including the elapsed portion of the current dividend period), less the amount of all dividends paid upon such share DIVISION B-1 - CUMULATIVE PREFERENTIAL STOCK 1. Series and Limitations of Variations between Series. The shares of Cumulative Preferential Stock may be divided into and issued in series from time to time, as herein provided. All shares of Cumulative Preferential Stock of all series shall be of equal rank and all shares of any particular series of Cumulative Preferential Stock shall be identical except as to the date or dates from which dividends on such shares shall be cumulative, as permitted by Section 2 of this Division B-1. The shares of Cumulative Preferential Stock of different series, subject to any applicable provisions of law, may vary as to the following terms and provisions, which shall be determined and fixed in the case of each such series at any time prior to the issuance of any shares thereof, in the manner hereinafter in this Section 1 provided: (a) The distinctive designation of such series and the number of shares which shall constitute such series, which number may be increased or decreased (but not below the number of shares thereof then outstanding) from time to time by action of the Board of Directors; (b) The dividend rate per annum of such series, and the date from which dividends on shares of such series shall be cumulative (hereinafter sometimes called the date of cumulation); (c) The price or prices at which, and the terms, times and conditions on which, the shares of such series may be redeemed at the option of the Corporation; (d) The amount or amounts payable upon the shares of such series in the event of involuntary liquidation, dissolution or winding up of the Corporation (hereinafter sometimes called the involuntary liquidation price), and the amount or amounts payable upon the shares of such series in the event of voluntary liquidation, dissolution or winding up of the Corporation (hereinafter sometimes called the voluntary liquidation price); 22 (e) Whether or not the shares of such series shall be entitled to the benefit of a sinking fund or a purchase fund to be applied to the purchase or redemption of shares of such series, and if so entitled, the amount of such fund and the manner of its application, including the price or prices at which the shares of such series may be redeemed or purchased through the application of such fund; (f) Whether or not the shares of such series shall be made convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock of the Corporation, and if made so convertible or exchangeable, the conversion price or prices, or the rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; (g) Whether or not the shares of such series shall be entitled to (1) any rights not theretofore granted to shares of Cumulative Preferential Stock to vote or consent in connection with any particular corporate acts and the terms of any such rights, or (2) the right to elect directors in the event of "six quarters' default in preferential stock dividends" as provided in Section 1 of Division D of this Article Fourth; (h) Whether or not the shares of such series shall be entitled to the benefit of limitations restricting the purchase of, the payment of dividends on, or the making of other distributions in respect of stock of any class of the Corporation ranking junior to the Cumulative Preferential Stock as to dividends or assets, and the terms of any such restrictions; (i) Whether or not the shares of such series shall have the general power to vote in the election of directors and for all other purposes, and if such power shall be given, the qualifications, limitations and restrictions thereof, but in no event shall the vote per share of such series be greater than the vote per share of the Common Stock; and (j) Whether or not the shares of such series shall have any rights to subscribe to shares of any class of stock of the Corporation, and the terms of any such rights. Authority is hereby expressly granted to and vested in the Board of Directors at any time or from time to time, within the then authorized number of shares of Cumulative Preferential Stock of all series, to establish or re-establish any unissued shares of Cumulative Preferential Stock as shares of Cumulative Preferential Stock of any series, to create one or more additional series of Cumulative Preferential Stock and to fix the terms and provisions of any such series of Cumulative Preferential Stock in the respects in which the shares of any series may vary from the shares of other series of Cumulative Preferential Stock as hereinbefore in this Section 1 provided. 2. Dividends. (a) Out of any net profits or net assets of the Corporation legally available therefor remaining after full cumulative dividends to the end of the then current dividend period upon the Cumulative Preferred Stock and the Cumulative Preference Stock of all series then outstanding shall have been paid 23 or declared and a sum sufficient for the payment thereof set apart for such payment, and after the Corporation shall have complied with the provisions of the foregoing Section 5 of Division A and Section 4 of Division B of this Article Fourth in respect of any and all amounts then or theretofore required to be set aside or applied in respect of any sinking fund or purchase fund referred to in said Section 5 and said Section 4, then and not otherwise the holders of Cumulative Preferential Stock of each series shall, subject to the provisions of this Article Fourth and of any certificate fixing the terms of any series of the Cumulative Preferred Stock or the Cumulative Preference Stock, be entitled to receive, when and as declared by the Board of Directors, dividends in cash at the rate per annum for such series fixed in accordance with this Article Fourth, and no more, payable on the first days of March, June, September and December in each year (the quarterly periods ending on the first days of such months, respectively, being herein designated as dividend periods), in each case from the date of cumulation of such series; provided that the initial dividend with respect to any particular series shall be payable on such of such dates as next succeeds the date of issue of the first shares of such series to be issued, unless otherwise determined by the Board of Directors; and such dividends shall be cumulative (whether or not in any dividend period or periods there shall be net profits or net assets of the Corporation legally available for the payment of such dividends), so that if at any time full cumulative dividends upon the outstanding Cumulative Preferential Stock of all series to the end of the then current dividend period shall not have been paid or declared and a sum sufficient for the payment thereof set apart for such payment, the amount of the deficiency shall be fully paid, but without interest, or dividends in such amount declared on each such series and a sum sufficient for the payment thereof set apart for such payment, before any sum or sums shall be set aside for or applied to the purchase, redemption or other acquisition of Cumulative Preferential Stock of any series and before any dividend shall be declared or paid upon or set apart for, or any other distribution shall be ordered or made in respect of, Sub-Preferential Stock and before any shares of Sub-Preferential Stock shall be purchased, redeemed, or otherwise acquired by the Corporation. (b) No dividends shall be declared or paid on any particular series of the Cumulative Preferential Stock to the exclusion of any other series thereof and all dividends declared on the Cumulative Preferential Stock of the respective series outstanding shall be declared pro rata, so that the amount of the dividend declared on any particular series of the Cumulative Preferential Stock shall be in the proportion that the annual dividend requirements of the shares of such series bear to the total annual dividend requirements of the Cumulative Preferential Stock of all series at the time outstanding. (c) The holders of the Sub-Preferential Stock shall not be entitled to receive any dividends until full cumulative dividends to the end of the then current dividend period upon the Cumulative Preferential Stock of all series then outstanding shall have been paid or declared and a sum sufficient for the payment thereof set apart for such payment and until the Corporation shall have complied with the provisions of Section 4 of this Division B-1 in respect of any and all amounts then or theretofore required to be set aside or applied in respect of any sinking fund or purchase fund referred to in said Section 4. 24 (d) The date of cumulation of dividends on all shares of all series of Cumulative Preferential Stock shall be the quarterly dividend payment date next preceding the date of their issue or, if issued on a quarterly dividend payment date, then such date; provided that the certificate creating any such series may specify that the date of cumulation of dividends on shares of such series shall be the aforesaid date unless the Board of Directors when authorizing the issuance of particular shares of such series shall provide for a different date of cumulation of dividends; and provided further that if shares of any such series, irrespective of the date of cumulation of dividends thereon under the foregoing provisions, be issued after the record date for the payment of a dividend on such Stock in respect of the then current dividend period and prior to the payment date for such dividend, then said Board, when declaring such dividend, may determine that said shares shall not be entitled to participate in said dividend and the date of cumulation of dividends thereon shall be such payment date, anything hereinabove to the contrary notwithstanding; otherwise said dividend or the applicable portion thereof shall be payable on said shares to the registered holder thereof on said payment from the commencement of said current dividend period or, as the case may be, from the date of issue of said shares, as if such shares had been registered in said holder's name on the record date for said dividend. 3. Preference on Liquidation, etc. In the event of any liquidation or dissolution or winding up of the Corporation, after there shall have been paid or set aside in cash for the holders of the Cumulative Preferred Stock and the Cumulative Preference Stock of all series then outstanding the full preferential amounts to which they are entitled under the provisions of this Article Fourth, the holders of the Cumulative Preferential Stock of each series shall be entitled to receive, out of the assets of the Corporation available for distribution to its stockholders, before any distribution of assets shall be made to the holders of Sub-Preferential Stock, (i) if such liquidation, dissolution or winding up shall be involuntary, the applicable involuntary liquidation price plus full cumulative dividends thereon to the date of final distribution to the holders of the Cumulative Preferential Stock, and (ii) if such liquidation, dissolution or winding up shall be voluntary, the applicable voluntary liquidation price plus full cumulative dividends thereon to the date of final distribution to the holders of the Cumulative Preferential Stock; and the holders of the Sub-Preferential Stock shall be entitled, to the exclusion of the holders of the Cumulative Preferential Stock of any and all series, to share in all the assets of the Corporation then remaining as hereinafter provided. If upon any liquidation or dissolution or winding up of the Corporation the net assets of the Corporation shall be insufficient to pay the holders of all outstanding shares of the Cumulative Preferential Stock the full amounts to which they respectively shall be entitled, the holders of shares of Cumulative Preferential Stock of all series shall share ratably in any distribution of assets according to the respective amounts which would be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to the Cumulative Preferential Stock of all series were paid in full. Neither the merger nor consolidation of the Corporation into or with any other corporation, nor the merger or consolidation of any other corporation into or with the Corporation, nor a sale, transfer or lease of all or any part of the assets of the Corporation, shall be deemed to be a liquidation, dissolution or winding up of the Corporation. 25 4. Sinking and Purchase Funds. Out of any net profits or net assets of the Corporation legally available therefor remaining after full cumulative dividends to the end of the then current dividend period upon the Cumulative Preferential Stock of all series then outstanding shall have been paid or declared and a sum sufficient for the payment thereof set apart for such payment, and before any dividends shall be declared or paid upon or set apart for, or any other distribution shall be ordered or made in respect of, Sub-Preferential Stock and before any shares of Sub-Preferential Stock shall be purchased, redeemed, or otherwise acquired by the Corporation, the Corporation shall set aside, in respect of each series of Cumulative Preferential Stock any shares of which shall at the time be outstanding and in respect of which a sinking fund or purchase fund for the purchase or redemption thereof has been provided in accordance with this Article Fourth, the sum or sums then or theretofore required to be set aside as a sinking fund or purchase fund, to be applied in the manner specified in the provisions creating such fund. 5. Redemption. (a) The Cumulative Preferential Stock of all or any series, or any part thereof, at any time outstanding may, subject to any applicable restrictions with respect to the redemption of shares ranking junior to the Cumulative Preferred Stock or the Cumulative Preference Stock as to dividends or assets, be redeemed by the Corporation, at its election expressed by resolution of the Board of Directors, at any time or from time to time (which time, when fixed in each case and specified in the notice of redemption, is hereinafter called the redemption date), upon not less than 30 days previous notice to the holders of record of the Cumulative Preferential Stock to be redeemed, given by mail in such manner as may be prescribed by resolution of the Board of Directors, at the optional redemption price or prices then applicable to the Cumulative Preferential Stock to be redeemed, plus an amount equal to full cumulative dividends thereon to the redemption date (the aggregate of which amounts is hereinafter in this Section 5 called the redemption price); provided, however, that less than all the Cumulative Preferential Stock of all series then outstanding may be redeemed only after full cumulative dividends to the end of the then current dividend period upon the Cumulative Preferential Stock of all series then outstanding (other than the shares to be redeemed) shall have been paid or declared and a sum sufficient for the payment thereof set apart for such payment. If less than all the outstanding Cumulative Preferential Stock of any series is to be redeemed, the selection of shares for redemption may be made either by lot or pro rata in such manner as may be prescribed by resolution of the Board of Directors. The Corporation may, if it shall so elect, deposit the amount of the redemption price for the account of the holders of Cumulative Preferential Stock entitled thereto with a bank or trust company doing business in the State of New York, or in the Commonwealth of Pennsylvania, and having capital and surplus of at least $5,000,000, at any time prior to the redemption date (the date of such deposit being hereinafter in this Section 5 referred to as the date of deposit). 26 (b) Notice of the Corporation's election to make such deposit, including the date of deposit and the name and address of the bank or trust company with which the deposit has been or will be made, shall be included in the notice of redemption. On and after the redemption date (unless default shall be made by the Corporation in providing moneys for the payment of the redemption price pursuant to the notice of redemption), or, if the Corporation shall make such deposit on or before the date specified therefor in the notice of redemption, then on and after the date of deposit, all dividends on the Cumulative Preferential Stock so called for redemption shall cease to accrue, and, notwithstanding that any certificate for shares of Cumulative Preferential Stock so called for redemption shall not have been surrendered for cancellation, the shares represented thereby shall no longer be deemed outstanding and all rights of the holders thereof as stockholders of the Corporation shall cease and terminate, except the right to receive the redemption price as hereinafter provided and except any conversion, exchange or subscription rights not theretofore expired. Such conversion or exchange rights, however, in any event shall cease and terminate upon the redemption date or upon any earlier date duly fixed for the termination of such rights. At any time on or after the redemption date, or, if the Corporation shall elect to deposit the moneys for such redemption as herein provided, then at any time on or after the date of deposit, which time shall be specified by the Corporation in the notice of redemption but shall not be later than the redemption date, the respective holders of record of the Cumulative Preferential Stock to be redeemed shall be entitled to receive the redemption price upon actual delivery to the Corporation or, in the event of such deposit, to the bank or trust company with which such deposit shall be made, of certificates for the shares to be redeemed, such certificates, if required, to be properly stamped for transfer and duly endorsed in blank or accompanied by proper instruments of assignment and transfer thereof duly endorsed in blank. Any moneys so deposited which shall remain unclaimed by the holders of such Cumulative Preferential Stock at the end of five years after the redemption date shall be paid by such bank or trust company to the Corporation; provided, however, that all moneys so deposited which shall not be required for such redemption because of the exercise of any right of conversion or exchange shall be returned to the Corporation forthwith. Any interest accrued on moneys so deposited shall be paid to the Corporation from time to time. 6. Definitions. (a) The term "Sub-Preferential Stock" as used in this Article Fourth shall be deemed to mean all stock of any class of the Corporation ranking junior to the Cumulative Preferential Stock as to dividends or assets. (b) The term "full cumulative dividends" whenever used in this Article Fourth with reference to any share of any series of the Cumulative Preferential Stock shall be deemed to mean (whether or not in any dividend period or any part thereof in respect of which such term is used there shall have been net profits or net assets of the Corporation legally available for the payment of such dividends) that amount which shall be equal to dividends at the rate per share fixed for such series in accordance with this Article Fourth for the period of time elapsed from the date or dates of cumulation of shares of such series to the date as of which full cumulative dividends are to be computed (including the elapsed portion of the current dividend period), less the amount of all dividends paid upon such share. 27 DIVISION C - COMMON STOCK 1. Dividends. Out of any net profits or net assets of the Corporation legally available therefor remaining after full cumulative dividends to the end of the then current dividend period upon the Cumulative Preferred Stock, the Cumulative Preference Stock and the Cumulative Preferential Stock of all series of each class of stock then outstanding shall have been paid or declared and a sum sufficient for the payment thereof set apart for such payment, and after setting aside the sum or sums then or theretofore required to be set aside as a sinking fund or purchase fund provided for any one or more series of the Cumulative Preferred Stock, the Cumulative Preference Stock and the Cumulative Preferential Stock, then and not otherwise the holders of the Common Stock shall, subject to the provisions of this Article Fourth and of any certificate fixing the terms of any series of the Cumulative Preferred Stock, the Cumulative Preference Stock or the Cumulative Preferential Stock, be entitled to receive such dividends as may from time to time be declared by the Board of Directors. 2. Distribution of Assets. In the event of any liquidation, dissolution or winding up of the Corporation, after there shall have been paid or set aside in cash for the holders of the Cumulative Preferred Stock, the holders of the Cumulative Preference Stock and the holders of the Cumulative Preferential Stock the full preferential amounts to which they are entitled under the provisions of this Article Fourth, the holders of the Common Stock shall be entitled to receive pro rata all of the remaining assets of the Corporation available for distribution to its stockholders. DIVISION D - VOTING RIGHTS 1. (a) Except as otherwise required by the laws of the State of Delaware and as otherwise provided in this Division D or elsewhere in this Article Fourth or in any certificate creating any series of any class of stock of the Corporation, and subject to the provisions of the by-laws of the Corporation, as from time to time amended, with respect to the closing of the transfer books and the fixing of a record date for the determination of stockholders entitled to vote, the holders of the Common Stock and the holders of such of the series of Cumulative Preferred Stock, Cumulative Preference Stock and Cumulative Preferential Stock, if any, as shall have been granted such power pursuant to this Article Fourth or to any certificate creating any series of any class of stock of the Corporation shall exclusively possess voting power in the election of directors and for all other purposes, and the holders of the other series of Cumulative Preferred Stock, Cumulative Preference Stock and Cumulative Preferential Stock shall have no voting power and shall not be entitled to any notice of any meeting of stockholders. (b) If at the time of any annual meeting of stockholders for the election of directors a "year's default in preferred dividends", as hereinafter defined, shall exist, the holders of the Cumulative Preferred Stock, voting separately as a class and without regard to series, shall have the right to elect two members of the Board of Directors; provided that if at the time of any annual meeting of 28 stockholders for the election of directors a "two years' default in preferred dividends", as hereinafter defined, shall exist, the holders of the Cumulative Preferred Stock, voting separately as a class and without regard to series, shall have the right to elect the smallest number of directors necessary to constitute a majority of the Board of Directors. In either such event the holders of the Cumulative Preferred Stock, as such, voting separately as a class, shall not be entitled to vote in the election of any of the other directors of the Corporation, and the holders of the other classes of stock shall be entitled to elect the remaining members of the Board of Directors as provided in this Division D, but the holders of such other classes of stock shall not, as such, be entitled to vote in the election of the directors of the Corporation to be elected by the holders of the Cumulative Preferred Stock; and any other provision of this Certificate of Incorporation or of any certificate creating any series of Cumulative Preferred Stock to the contrary notwithstanding, if and so long as a "default in preferred dividends", as hereinafter defined, shall exist, the holders of such series of the Cumulative Preferred Stock, if any, as shall have been granted the general power to vote in the election of directors pursuant to this Article Fourth shall be entitled to vote as holders of the Cumulative Preferred Stock and shall not be entitled to vote with the holders of the Common Stock in the election of directors or for any other purposes pertinent to the provisions of this Division D. (c) If at the time of any annual meeting of stockholders for the election of directors a "six quarters' default in preference stock dividends," as hereinafter defined, shall exist, the holders, if any, of the "special voting series", as hereinafter defined, of Cumulative Preference Stock shall have the right, voting separately as a class and without regard to series, to elect two members of the Board of Directors. In such event the holders of the "special voting series" of Cumulative Preference Stock shall not be entitled to vote, as such, in the election of any other directors of the Corporation, and the holders of the other classes of stock shall be entitled to elect the remaining members of the Board of Directors as provided in this Division D; but the holders of such other classes of stock shall not, as such, be entitled to vote in the election of directors of the Corporation to be elected by the holders of the "special voting series" of Cumulative Preference Stock; and any other provision of this Certificate of Incorporation or of any certificate creating any series of Cumulative Preference Stock to the contrary notwithstanding, if and so long as a "default in preference stock dividends," as hereinafter defined, shall exist, the holders of such "special voting series" of Cumulative Preference Stock, if any, as shall have been granted the general power to vote in the election of directors pursuant to this Article Fourth shall be entitled to vote as the holders of the Cumulative Preference Stock and shall not be entitled to vote with the holders of the Common Stock in the election of directors or for any other purposes pertinent to the provisions of this Division D. (d) If at the time of any annual meeting of stockholders for the election of directors a "six quarters' default in preferential stock dividends," as hereinafter defined, shall exist, the holders, if any, of the "special voting series", as hereinafter defined, of Cumulative Preferential Stock shall have the right, voting separately as a class and without regard to series, to elect two members of the Board of Directors. In such event the holders of the "special voting series" of Cumulative Preferential Stock shall not be entitled to vote, as such, in the election of any other directors of the Corporation, and the holders of the other classes of stock shall be entitled to elect the remaining 29 members of the Board of Directors as provided in this Division D; but the holders of such other classes of stock shall not, as such, be entitled to vote in the election of directors of the Corporation to be elected by the holders of the "special voting series" of Cumulative Preferential Stock; and any other provision of this Certificate of Incorporation or of any certificate creating any series of Cumulative Preferential Stock to the contrary notwithstanding, if and so long as a "default in preferential stock dividends," as hereinafter defined, shall exist, the holders of such "special voting series" of Cumulative Preferential Stock, if any, as shall have been granted the general power to vote in the election of directors pursuant to this Article Fourth shall be entitled to vote as the holders of the Cumulative Preferential Stock and shall not be entitled to vote with the holders of the Common Stock in the election of directors or for any other purposes pertinent to the provisions of this Division D. (e) Any Preferred Director shall continue to serve as such director until the next annual meeting of stockholders and until his successor shall be elected and qualified, unless prior to the end of such term a default in preferred dividends shall cease to exist, in which event the term of all Preferred Directors shall terminate and the resulting vacancies, if any, in the Board of Directors shall be filled by the Common Directors. So long as a default in preferred dividends shall exist, any vacancy in the office of a Preferred Director shall be filled for the unexpired term by a majority of the remaining Preferred Directors (or, if there is only one remaining Preferred Director, by that Director) or, if there shall at the time be no Preferred Director in office, by the remaining members of the Board of Directors. Any Preference Stock Director shall continue to serve as such director until the next annual meeting of stockholders and until his successor shall be elected and qualified, unless prior to the end of such term a default in preference stock dividends shall cease to exist, in which event the term of all Preference Stock Directors shall terminate, and the resulting vacancies, if any, in the Board of Directors shall be filled by the Common Directors. So long as a default in preference stock dividends shall exist, any vacancy in the office of a Preference Stock Director shall be filled for the unexpired term by the remaining Preference Stock Director or, if there shall at the time be no Preference Stock Director in office, by the remaining members of the Board of Directors. Any Preferential Stock Director shall continue to serve as such director until the next annual meeting of stockholders and until his successor shall be elected and qualified, unless prior to the end of such term a default in preferential stock dividends shall cease to exist, in which event the term of all Preferential Stock Directors shall terminate, and the resulting vacancies, if any, in the Board of Directors shall be filled by the Common Directors. So long as a default in preferential stock dividends shall exist, any vacancy in the office of a Preferential Stock Director shall be filled for the unexpired term by the remaining Preferential Stock Director or, if there shall at the time be no Preferential Stock Director in office, by the remaining members of the Board of Directors. Any vacancy in the office of a Common Director shall be filled for the unexpired term by a majority of the remaining Common Directors or, if at the time there shall be no Common Director in office or if there are an even number of Common Directors in office and it is not possible within 30 days after the vacancy occurred to fill the vacancy by a majority vote of the remaining Common Directors, then any such vacancy or vacancies shall be filled at a special meeting of the holders of the Common Stock which shall promptly be called by the Secretary. 30 (f) For the purposes of this Section 1, a "year's default in preferred dividends" shall be deemed to exist whenever at the time of any annual meeting of stockholders for the election of directors the amount of full cumulative dividends upon the shares of any series of the Cumulative Preferred Stock shall be equivalent to four quarterly dividends or more, up to and including seven quarterly dividends, and a "two-years' default in preferred dividends" shall be deemed to exist whenever at the time of any annual meeting for the election of directors the amount of full cumulative dividends upon the shares of any series of the Cumulative Preferred Stock shall be equivalent to eight quarterly dividends or more. If a "year's default in preferred dividends" shall exist, such default in preferred dividends shall be deemed to exist thereafter until, but only until, full cumulative dividends on all shares of Cumulative Preferred Stock of all series then outstanding shall have been paid to the end of the last preceding quarterly dividend period. If a "two years' default in preferred dividends" shall exist, such default shall be deemed to exist thereafter until either (i) full cumulative dividends on all shares of Cumulative Preferred Stock of all series then outstanding shall have been paid to the end of the last preceding dividend period, or (ii) until the date when the aggregate of the "available dividend income of the Corporation", as hereinafter defined (calculated from the first date when the amount of full cumulative dividends on all shares of Cumulative Preferred Stock of all series then outstanding was equivalent to eight quarterly dividends) exceeds the amount of full cumulative dividends on all shares of Cumulative Preferred Stock of all series then outstanding (calculated to the end of the last preceding quarterly dividend period), whichever shall first occur. For the purposes of this Section 1, the term "available dividend income" of the Corporation for the period under consideration shall be deemed to mean the sum of: (i) the lesser of (A) 75% of the net income (but not losses) for such period which would be available for dividends on the common stock of each operating subsidiary owned by the Corporation or any subsidiary, or (B) the amount which would be available under applicable state law, indenture, charter or other dividend restrictions for payment to the Corporation or any subsidiary during such period in the form of dividends on the common stock of each operating subsidiary owned by the Corporation or any subsidiary, excluding, in each case, any cash dividends received by the Corporation or a subsidiary on common stock of an operating subsidiary; plus (ii) all income of the Corporation during such period from all sources other than dividends on common stock of subsidiaries; plus (iii) all income of each non-operating subsidiary of the Corporation during such period from all sources other than dividends on common stock of operating subsidiaries; after deducting from such sum the total of: 31 (x) all expenses and charges of the Corporation and all expenses and charges of its non-operating subsidiaries (but only to the extent of the income available to each such non-operating subsidiary for the payment of such expenses and charges) for such period, including fixed charges and income and franchise taxes paid or accrued; plus (y) all dividends paid on the Cumulative Preferred Stock during such period; all as determined in accordance with generally accepted accounting practices followed by the Corporation in reports required to be filed by the Corporation with the Securities and Exchange Commission or other similar governmental body with which the Corporation is required to file periodic reports, or, if there is no such governmental body, with the New York Stock Exchange; provided, that in making such determination, there shall be included all items of income whether credited to surplus or otherwise, but there shall be excluded any profits or losses on sales of investments (after reflecting applicable expenses and taxes), any charges arising in connection with or resulting from amortization of intangibles or property adjustments, any write-downs of property or similar adjustments, and any write-downs or other adjustments of the carrying value of investments in subsidiaries. For the purposes of this Section 1, the term "common stock" of any subsidiary (including an operating subsidiary) shall mean stock (including capital stock if only one class of stock be outstanding), whether or not voting stock, not limited as to the amount payable thereon upon any liquidation, dissolution or winding up of the issuing corporation, and the term "operating subsidiary" shall mean any subsidiary, as defined in Section 7 of Division A of this Article Fourth, principally engaged in the ownership and operation of water supply and distribution systems. (g) For the purposes of this Article Fourth, the following terms shall have the following meanings: (i) "special voting series" as applied to the Cumulative Preference Stock shall mean all series of the Cumulative Preference Stock which have been granted in Division F of this Article Fourth or in any certificate creating any series of Cumulative Preference Stock the right to vote for directors in the event of a "six quarters' default in preference stock dividends" as provided in this Section 1; (ii) "special voting series" as applied to the Cumulative Preferential Stock shall mean all series of the Cumulative Preference Stock which have been granted in Division F of this Article Fourth or in any certificate creating any series of Cumulative Preferential Stock the right to vote for directors in the event of a "six quarters' default in preferential stock dividends" as provided in this Section 1; (iii) "Common Director" shall mean a director elected by the holders of the Common Stock and the holders of any series of Cumulative Preferred Stock, Cumulative Preference Stock or Cumulative Preferential Stock which shall have been granted and then possess the general power to vote in the election of directors pursuant to this Article Fourth or to any certificate creating any series of such Stocks, all voting together as a class; 32 (iv) "Preferred Director" shall mean a director elected by the holders of the Cumulative Preferred Stock, voting separately as a class; (v) "Preference Stock Director" shall mean a director elected by the holders of the "special voting series" of Cumulative Preference Stock, voting separately as a class; (vi) "Preferential Stock Director" shall mean a director elected by the holders of the "special voting series" of Cumulative Preferential Stock, voting separately as a class; (vii) "default in preferred dividends," otherwise unqualified, shall mean the failure to pay full cumulative dividends on all shares of all Cumulative Preferred Stock then outstanding to the end of the last preceding quarterly dividend period; (viii) "default in preference stock dividends," otherwise unqualified, shall mean the failure to pay full cumulative dividends on all shares of all "special voting series" of Cumulative Preference Stock then outstanding to the end of the last preceding quarterly dividend period; (ix) "default in preferential stock dividends," otherwise unqualified, shall mean the failure to pay full cumulative dividends on all shares of all "special voting series" of Cumulative Preferential Stock then outstanding to the end of the last preceding quarterly dividend period; (x) "six quarters' default in preference stock dividends" shall be deemed to exist whenever at the time of any annual meeting of stockholders for the election of directors the amount of full cumulative dividends upon the shares of any "special voting series" of Cumulative Preference Stock shall be equivalent to six quarterly dividends or more. If a "six quarters' default in preference stock dividends" shall exist, such default shall be deemed to exist thereafter until, but only until, full cumulative dividends on all shares of Cumulative Preference Stock of all series then outstanding shall have been paid to the end of the last preceding quarterly dividend period; and (xi) "six quarters' default in preferential stock dividends" shall be deemed to exist whenever at the time of any annual meeting of stockholders for the election of directors the amount of full cumulative dividends upon the shares of any "special voting series" of Cumulative Preferential Stock shall be equivalent to six quarterly dividends or more. If a "six quarters' default in preferential stock dividends" shall exist, such default shall be deemed to exist thereafter until, but only until, full cumulative dividends on all shares of Cumulative Preferential Stock of all series then outstanding shall have been paid to the end of the last preceding quarterly dividend period. (h) If and so long as a "two years' default in preferred dividends", as defined in this Section 1, shall exist, (i) a majority of the Board of Directors of the Corporation shall constitute a quorum for all purposes, unless the by-laws shall specify a lesser number, and (ii) no amendment of the by-laws of the Corporation shall be effected by the Board of Directors which would (x) change the number of directors necessary to constitute a quorum of the Board of 33 Directors without the consent, given in writing or by resolution adopted at a meeting of stockholders (of which at least ten days' written notice of the proposed amendment of the by-laws was given), of the holders of at least a majority of the shares of Common Stock then outstanding, or (y) change the date of the annual meeting for the election of directors. (i) Nothing in this Section 1 shall be deemed to prevent an amendment of the by-laws of the Corporation, in the manner therein provided, which shall increase the number of directors of the Corporation so as to provide additional places on the Board of Directors for either one or both of the two directors so to be elected by the holders of the Cumulative Preferred Stock or either one or both of the two directors to be elected by the holders of the "special voting series" of Cumulative Preference Stock or either one or both of the two directors to be elected by the holders of the "special voting series" of Cumulative Preferential Stock, or so as to increase the number of directors to be elected by the holders of the Common Stock, nor shall anything in this Section 1 be deemed to prevent any other change in the number of the directors of the Corporation, in case a "year's default in preferred dividends," or a "two years' default in preferred dividends", or a "six quarters' default in preference stock dividends", or a "six quarters' default in preferential stock dividends", shall occur. (j) So long as a default in preferred dividends shall exist, the presence in person or by proxy of the holders of 25% of the outstanding shares of the Cumulative Preferred Stock, considered as a class without regard to series, shall be required to constitute a quorum of such class at any meeting of stockholders or at any meeting of the holders of shares of Cumulative Preferred Stock called for the purpose of electing a Preferred Director; provided, however, that a majority of the holders of the Cumulative Preferred Stock who are present in person or represented by proxy at any such meeting at which there shall be no quorum of such class shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, solely for the purpose of electing a Preferred Director at an adjourned session of such meeting at which there shall be a quorum of such class. So long as a default in preference stock dividends shall exist, the presence in person or by proxy of the holders of 25% of the outstanding shares of the "special voting series" of Cumulative Preference Stock, considered as a class and without regard to series, shall be required to constitute a quorum of such "special voting series" at any meeting of stockholders or at any meeting of the holders of the shares of such "special voting series" called for the purpose of electing a Preference Stock Director; provided, however, that a majority of the holders of such "special voting series" who are present in person or represented by proxy at any such meeting at which there shall be no quorum of such "special voting series" shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, solely for the purpose of electing a Preference Stock Director at an adjourned session of such meeting at which there shall be a quorum of such "special voting series". So long as a default in preferential stock dividends shall exist, the presence in person or by proxy of the holders of 25% of the outstanding shares of the "special voting series" of Cumulative Preferential Stock, considered as a class and without regard to series, shall be required to constitute a quorum of such "special voting series" at any meeting of stockholders or at any meeting of 34 the holders of the shares of such "special voting series" called for the purpose of electing a Preferential Stock Director; provided, however, that a majority of the holders of such "special voting series" who are present in person or represented by proxy at any such meeting at which there shall be no quorum of such "special voting series" shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, solely for the purpose of electing a Preferential Stock Director at an adjourned session of such meeting at which there shall be a quorum of such "special voting series". So long as a default in preferred dividends or a default in preference stock dividends or a default in preferential stock dividends shall exist, the presence in person or by proxy of the holders of shares entitled to cast a majority of the votes in the election of a Common Director shall be required to constitute a quorum of such shares at any meeting of stockholders at which the holders of such shares shall be entitled to vote for the election of directors of the Corporation. No delay or failure by the holders of any class of stock to elect one or more of the directors they shall be entitled as a class to elect shall invalidate the election of the members of the Board of Directors elected by the holders of any other class of stock of the Corporation. Holders of Cumulative Preferred Stock shall be entitled to notice of each meeting of stockholders at which they shall have the right to elect a Preferred Director. The holders of the "special voting series" of Cumulative Preference Stock shall be entitled to notice of each meeting of stockholders at which they shall have the right to elect a Preference Stock Director. The holders of the "special voting series" of Cumulative Preferential Stock shall be entitled to notice of each meeting of stockholders at which they shall have the right to elect a Preferential Stock Director. (k) So long as a default in preferred dividends shall exist, the provisions of this Section 1 with respect to the election of directors by the holders of the Cumulative Preferred Stock, voting as a class as aforesaid, shall be controlling, notwithstanding any other provisions of this Certificate of Incorporation inconsistent with such provisions of this Section 1. So long as a default in preference stock dividends shall exist, except as otherwise required by reason of the preceding sentence, the provisions of this Section l with respect to the election of directors by the holders of the "special voting series" of the Cumulative Preference Stock, voting as a class as aforesaid, shall be controlling at all times, notwithstanding any other provision of this Certificate of Incorporation (except the preceding sentence) inconsistent with such provisions of this Section 1. So long as a default in preferential stock dividends shall exist, except as otherwise required by reason of the two preceding sentences, the provisions of this Section l with respect to the election of directors by the holders of the "special voting series" of the Cumulative Preferential Stock, voting as a class as aforesaid, shall be controlling at all times, notwithstanding any other provision of this Certificate of Incorporation (except the two preceding sentences) inconsistent with such provisions of this Section 1. 35 2. At all elections of directors by the stockholders of the Corporation, each holder of any class of stock of the Corporation, as such, shall be entitled to as many votes as shall equal the number of his shares of such class entitled to vote for directors multiplied by the number of directors to be elected by the holders of such class, as such, and he may cast all of such votes for a single director or may distribute them among the number of directors to be elected as aforesaid, or any two or more of them as he may see fit; provided that if in Division F of this Article Fourth or in any certificate creating any series of the Cumulative Preferred Stock or Cumulative Preference Stock or Cumulative Preferential Stock, the shares of any such series are given less than one vote per share in the election of directors, each holder of the stock of any such series of Cumulative Preferred Stock when voting with the Common Stock in any election of directors during the absence of a "default in preferred dividends" and each holder of the stock of any such series of Cumulative Preference Stock when voting with the Common Stock in any election of directors during the absence of a "default in preference stock dividends" and each holder of the stock of any such series of Cumulative Preferential Stock when voting with the Common Stock in any election of directors during the absence of a "default in preferential stock dividends" shall, in each case, be entitled to as many votes as the number of his shares of any such series shall entitle him to vote in the election of directors multiplied by the number of directors to be elected by the holders of the Common Stock and the holders of such series, and he may cast all of such votes for a single director of may distribute them among the number of directors to be elected as aforesaid, or any two or more of them as he may see fit; and provided further, that any provision of this Section 2 to the contrary notwithstanding, the rights of the holders of any series of Cumulative Preferred Stock in respect of any election of directors at a time when the holders of such series vote with the Common Stock in the election of directors during the absence of such a "default in preferred dividends", and the rights of the holders of any series of Cumulative Preference Stock in respect of any election of directors at a time when the holders of such series vote with the Common Stock in the election of directors during the absence of a "default in preference stock dividends", and the rights of the holders of any series of Cumulative Preferential Stock in respect of any election of directors at a time when the holders of such series vote with the Common Stock in the election of directors during the absence of a "default in preferential stock dividends", shall always be subject to such qualifications, limitations and restrictions as are prescribed in the certificate creating such series. 3. Unless otherwise mandatorily required by law, or by this Certificate of Incorporation, or by a certificate creating any series of Cumulative Preferred Stock or Cumulative Preference Stock or Cumulative Preferential Stock, the vote or consent of the holders of shares constituting a majority of the total vote of all shares having voting power for the election of directors and for all other purposes at the time issued and outstanding shall be sufficient in all respects to authorize, effect, or validate any action required to be authorized, effected or validated by vote or consent of the stockholders of the Corporation. The authorized number of shares of Cumulative Preferential Stock may be increased or decreased by the affirmative vote of the holders of record of not less than a majority of the shares of stock of the Corporation having the general power to vote for the election of directors and for all other purposes. Except to the extent that any series of the Cumulative Preferential Stock shall have been granted the general power to vote in the election of directors and for all other purposes, no holders of shares of any series of the Cumulative Preferential 36 Stock shall have any right to vote or consent for or in respect of any increase or decrease in the authorized number of shares of any class of stock (whether ranking senior to, on a parity with, or junior to the Cumulative Preferential Stock as to dividends or assets or whether now existing or hereafter created) or for or in respect of the creation of any new class of stock ranking junior to the Cumulative Preferential Stock as to dividends or assets. DIVISION E - GENERAL 1. Anything contained herein or in any certificate creating any series of Cumulative Preferred Stock, Cumulative Preference Stock or Cumulative Preferential Stock to the contrary notwithstanding, the rights of the holders of all classes of stock of the Corporation in respect of dividends shall at all times be subject to the power of the Board of Directors from time to time to set aside such reserves and to make such other provisions, if any, as said Board shall deem to be necessary or advisable for working capital, for advances to and investments in subsidiaries, for expansion of the Corporation's business (including the acquisition of real and personal property for that purpose) and for any other purpose of the Corporation. 2. The net consideration received by the Corporation upon the issuance of shares of its capital stock in excess of the par value of said shares shall be credited to a capital surplus account. Capital surplus so created shall not be available for the payment of cash dividends on the Common Stock of the Corporation. 3. (a) Except as otherwise provided in Division F of this Article Fourth or in any certificate creating any series of Cumulative Preferential Stock, no holder of Cumulative Preferred Stock, Cumulative Preference Stock or Cumulative Preferential Stock of the Corporation shall, as such holder, have any right to purchase or subscribe for (i) any stock of any class, or any warrant or warrants, option or options or other instrument or instruments that shall confer upon the holder or holders thereof the right to subscribe for or purchase or receive from the Corporation any stock of any class or classes which the Corporation may issue or sell, whether or not such stock shall be convertible into or exchangeable for any other stock of the Corporation of any class or classes and whether or not such stock shall be unissued shares authorized by the Certificate of Incorporation or by any amendment thereto or shares of stock of the Corporation acquired by it after the issue thereof, or (ii) any obligation which the Corporation may issue or sell that shall be convertible into or exchangeable for any shares of stock of the Corporation of any class or classes, or to which shall be attached or appurtenant any warrant or warrants, option or options or other instrument or instruments that shall confer upon the holder or holders of such obligation the right to subscribe for or purchase or receive from the Corporation any shares of its stock of any class or classes. (b) Upon any issue for money or other consideration of any stock of the Corporation that may be authorized from time to time, no holder of stock, irrespective of the kind of such stock, shall (except as otherwise provided in Division F of this Article Fourth or in any certificate creating any series of Cumulative Preferential Stock) have any preemptive or other right to subscribe for, purchase or receive any proportionate or other share of the stock so issued, but the Board of Directors may dispose of all or any portion of such stock as and when it may determine free of any such rights, whether by offering 37 the same to stockholders or by sale or other disposition as said Board may deem advisable; provided, however, that if the Board of Directors shall determine to offer any new or additional shares of Common Stock, or any security convertible into Common Stock, for money, other than by a public offering of all of such shares or an offering of all of such shares to or through underwriters or investment bankers who shall have agreed promptly to make a public offering of such shares, the same shall first be offered pro rata to the holders of the then outstanding shares of Common Stock, and to the holders of the then outstanding shares of any other class (or series thereof) of capital stock that has expressly been granted subscription rights, upon terms not less favorable to the purchaser (without deduction of such reasonable compensation, allowance or discount for the sale, underwriting or purchase as may be fixed by the Board of Directors) than those on which the Board of Directors issues and disposes of such stock or securities to other than such holders of Common Stock and such holders of any such other class (or series); and provided further, that the time within which such preemptive rights shall be exercised may be limited by the Board of Directors to such time as to said Board may seem proper, not less, however, than twenty days after mailing of notice that such stock rights are available and may be exercised. DIVISION F - TERMS AND PROVISIONS OF OUTSTANDING SERIES OF CUMULATIVE PREFERRED STOCK, 5% CUMULATIVE PREFERENCE STOCK AND 4.10% CONVERTIBLE CUMULATIVE PREFERENTIAL STOCK 1. Cumulative Preferred Stock, 5 1/2% Series of 1961. In addition to the terms and provisions set forth in this Certificate of Incorporation which are applicable to all series of Cumulative Preferred Stock, the Cumulative Preferred Stock, 5 1/2% Series of 1961 shall have the following terms and provisions: (a) The designation of such series of Cumulative Preferred Stock of the par value of $25 per share shall be Cumulative Preferred Stock, 5 1/2% Series of 1961 (hereinafter called the 1961 Series Stock), and the number of shares which shall constitute such series shall be 50,000 shares. (b) The dividend rate of the 1961 Series Stock shall be 5 1/2% per annum upon the par value thereof, the date from which dividends on shares of the 1961 Series Stock shall be cumulative shall be the date of issue of said 250,000 shares, and the initial dividend shall be payable December 1, 1961. (c) (1) The shares of the 1961 Series Stock shall be subject to redemption at the option of the Corporation, on the terms and conditions specified in Section 6 of Division A of this Article Fourth, at any time or from time to time, at the applicable redemption prices set forth below plus, as provided in said Section 6, an amount equal to full cumulative dividends thereon to the redemption date, except that shares of the 1961 Series Stock shall not be redeemable at the option of the Corporation prior to September 1, 1966 by the use of the proceeds from, or in anticipation of the receipt of the proceeds from, borrowings or the sale of securities by the Corporation at a cost of less than 5 1/2% per annum. 38 (2) The prices at which the shares of the 1961 Series Stock may be redeemed at the option of the Corporation except as hereinbelow provided, shall be as follows: Period Redemption Price (both dates inclusive) Per Share ----------------------------------------- ---------------- Date of issue to August 31, 1964 ........ $26.375 September 1, 1964 to August 31, 1967..... 26.00 September 1, 1967 to August 31, 1970..... 25.625 September 1, 1970 to August 31, 1980..... 25.25 September 1, 1980 and thereafter ........ 25.00 (3) If shares of the 1961 Series Stock shall be redeemed at the option of the Corporation by the use of the proceeds from, or in anticipation of the receipt of the proceeds from, (A) the sale or other disposition by the Corporation of any of its fixed assets or of securities of any of its subsidiaries [as defined in subparagraph (3)(iii) of paragraph (c) of Section 7 of Division A of this Article Fourth], or (B) a distribution paid or payable to the Corporation by a subsidiary upon its dissolution or partial or total liquidation or in connection with a reduction of its capital following a sale of assets of such subsidiary, the redemption price shall be as follows: Period Redemption Price (both dates inclusive) Per Share ----------------------------------------- ---------------- Date of issue to August 31, 1964 ........ $25.6875 September 1, 1964 to August 31, 1967 .... 25.50 September l, 1967 to August 31, 1970 .... 25.3125 September 1, 1970 to August 31, 1980 .... 25.125 September 1, 1980 and thereafter ........ 25.00 (d) The amounts payable upon the shares of the 1961 Series Stock in the event of any voluntary liquidation or dissolution or winding up of the Corporation shall be an amount equal to the redemption price (exclusive of dividends) specified in subparagraph (2) of paragraph (c) of this Section 1 then in effect, plus, as provided in Section 4 of Division A of this Article Fourth, an amount equal to full cumulative dividends thereon to the date of final distribution to the holders of the Cumulative Preferred Stock. (e) As a sinking fund for the 1961 Series Stock, the Corporation shall, so long as any shares of the 1961 Series Stock shall be outstanding, set aside, out of any funds legally available therefor, on or before July 25 of each of the years beginning with the year 1966 to and including the year 1991, sums sufficient to redeem on the next September 1 at the par value thereof, plus full cumulative dividends thereon to the redemption date, shares of the 1961 Series Stock having the following aggregate par values: 39 1966..................... $208,300 1967..................... 208,300 1968..................... 208,400 1969..................... 208,300 1970..................... 208,300 1971..................... 208,400 1972 and thereafter...... 250,000 In the event the number of shares constituting the 1961 Series Stock shall be increased at any time by action of the Board of Directors pursuant to paragraph (a) of Section 2 of Division A of this Article Fourth, the number of shares of the 1961 Series Stock to be redeemed annually by operation of the sinking fund on each September 1 after the July 25 next following the date of such increase shall be equal to 3-1/3% of the increased number of shares to and including September 1, 1971 and 4% of the increased number of shares on each September 1 thereafter (subject to adjustment in each case to the nearest whole share). The Corporation shall be entitled to receive a credit against the foregoing obligation to redeem on any date when such redemption is required to be made, for the aggregate par value of the number of shares of the 1961 Series Stock which shall have theretofore been purchased by it at a cost not exceeding the redemption price for sinking fund purposes and which shall not have been previously so credited. Sums so set aside for the sinking fund for the 1961 Series Stock shall be applied to the redemption of shares of 1961 Series Stock on the applicable September 1 in the same manner and with the same effect as set forth in Section 6 of Division A of this Article Fourth. All shares of the 1961 Series Stock so redeemed or purchased and credited against the foregoing obligation to redeem shall be cancelled by the Corporation and shall not be reissued. (f) So long as any shares of the 1961 Series Stock shall be outstanding, the Corporation shall not declare or pay or set apart any dividend (other than dividends payable in Junior Stock) on its Junior Stock, nor order or make any other distribution in respect of its Junior Stock, nor purchase, redeem or otherwise acquire any shares of its Junior Stock, unless, after giving effect thereto, the aggregate of (1) the total net income of the Corporation earned after December 31, 1960, computed as hereinafter stated (provided that, if such computation shall result in an accumulated net loss for any particular period, such net loss shall be deducted from the amounts referred to in clauses (2) and (3) following), plus (2) $4,250,000, plus (3) the net amount received by the Corporation after December 31, 1960 on the issue or sale of any shares of its Junior Stock, shall exceed the aggregate of (i) all dividends (other than dividends payable in Junior Stock) and other distributions declared, paid or made by the Corporation after December 31, 1960 on its shares of Junior Stock of all classes, and (ii) an amount equal to the cost to the Corporation of any shares of its Junior Stock purchased, redeemed or otherwise acquired by it after December 31, 1960. As used in this paragraph (f), the term "net income of the Corporation" shall be deemed to mean the total income of the Corporation from all sources for the period in 40 question, whether recorded in the accounts as income or surplus transactions, including all gains on the sale or other disposition of assets, after deducting therefrom all expenses and charges, including all losses on the sale or other disposition of assets, all franchise taxes paid or accrued and all Federal and State taxes based on income paid or accrued, but excluding any dividends declared or paid on the stock of the Corporation of any class, any amortization of capital stock expense, any write-downs, write-ups, or other adjustments of the carrying value of its investments in subsidiaries, and similar items, all as determined by the Board of Directors in accordance with generally accepted accounting principles consistently applied. (g) The 1961 Series Stock shall not be convertible into any other shares of the Corporation. 2. Cumulative Preferred Stock, 5% Series. In addition to the terms and provisions set forth in this Certificate of Incorporation which are applicable to all series of Cumulative Preferred Stock, the Cumulative Preferred Stock, 5% Series shall have the following terms and provisions: (a) The designation of such series of Cumulative Preferred Stock of the par value of $25 per share shall be Cumulative Preferred Stock, 5% Series (hereinafter called the 5% Series Stock), and the number of shares which shall constitute such series shall be 101,777 shares. (b) The dividend rate of the 5% Series Stock shall be 5% per annum upon the par value thereof, the date from which dividends on each share of the 5% Series Stock shall be cumulative shall be January 1, 1962, and the initial dividend on each of said shares shall be payable on the first day of March, June, September or December next following the date of its issue. (c) (1) The shares of the 5% Series Stock shall be subject to redemption at the option of the Corporation, on the terms and conditions specified in Section 6 of Division A of this Article Fourth, at any time or from time to time, at the applicable redemption prices set forth below plus, as provided in said Section 6, an amount equal to full cumulative dividends thereon to the redemption date, except that shares of the 5% Series Stock shall not be redeemable at the option of the Corporation prior to January 1, 1967. (2) The prices at which the shares of the 5% Series Stock may be redeemed at the option of the Corporation shall be as follows: Period Redemption Price (both dates inclusive) Per Share ----------------------------------------- ---------------- January 1, 1967 to December 31, 1969..... $25.75 January 1, 1970 to December 31, 1972..... 25.50 January 1, 1973 and thereafter........... 25.25 41 (d) The amounts payable upon the shares of the 5% Series Stock in the event of any voluntary liquidation or dissolution or winding up of the Corporation shall be: (1) $26 per share if the date of final distribution to the holders of Cumulative Preferred Stock pursuant to such liquidation, dissolution or winding up is prior to January 1, 1967, and (2) if the date of final distribution to the holders of Cumulative Preferred Stock pursuant to such liquidation, dissolution or winding up is after December 31, 1966, an amount equal to the redemption price specified in subparagraph (2) of paragraph (c) of this Section 2 in effect on such date, plus, in each case, as provided in Section 4 of Division A of this Article Fourth, an amount equal to full cumulative dividends thereon to the date of such final distribution. (e) In addition to the voting rights to which the shares of Cumulative Preferred Stock are entitled as otherwise provided in this Article Fourth and subject to the qualifications, limitations and restrictions thereof as therein set forth, the shares of 5% Series Stock shall have the general power to vote in the election of directors and for all other purposes on the basis of one-tenth of a vote per share. (f) The 5% Series Stock shall not be convertible into any other shares of the Corporation. No sinking fund shall be established for the purchase or redemption of shares of the 5% Series Stock. 3. Cumulative Preferred Stock, 4.90% Series. In addition to the terms and provisions set forth in this Certificate of Incorporation which are applicable to all series of Cumulative Preferred Stock, the Cumulative Preferred Stock, 4.90% Series shall have the following terms and provisions: (a) The designation of such series of Cumulative Preferred Stock of the par value of $25 per share shall be Cumulative Preferred Stock, 4.90% Series (hereinafter called the 4.90% Series Stock), and the number of shares which shall constitute such series shall be 134,400 shares. (b) The dividend rate of the 4.90% Series Stock shall be 4.90% per annum upon the par value thereof, the date from which dividends on shares of the 4.90% Series Stock shall be cumulative shall be the date of issue of the first of said shares to be issued, and the initial dividend shall be payable on September l, 1963. (c) (l) The shares of the 4.90% Series Stock shall be subject to redemption at the option of the Corporation, on the terms and conditions specified in Section 6 of Division A of this Article Fourth at any time or from time to time, at the applicable redemption prices set forth below plus, as provided in said Section 6, an amount equal to full cumulative dividends thereon to the redemption date, except that shares of the 4.90% 42 Series Stock shall not be redeemable at the option of the Corporation prior to June 1, 1968 by the use of the proceeds from, or in anticipation of the receipt of the proceeds from, borrowings or the sale of securities by the Corporation at a cost of less than 4.90% per annum. (2) The prices at which the shares of the 4.90% Series Stock may be redeemed at the option of the Corporation, except as hereinbelow provided, shall be as follows: Period Redemption Price (both dates inclusive) Per Share ----------------------------------------- ---------------- Date of issue to May 31, 1966............ $26.225 June 1, 1966 to May 31, 1969............. 25.90 June 1, 1969 to May 31, 1972............. 25.40 June 1, 1972 to May 31, 1975............. 25.25 June 1, 1975 to May 31, 1978............. 25.15 June 1, 1978 and thereafter.............. 25.00 (3) If shares of the 4.90% Series Stock shall be redeemed at the option of the Corporation by the use of the proceeds from, or in anticipation of the receipt of the proceeds from (A) the sale or other disposition by the Corporation of any of its fixed assets or of securities of any of its subsidiaries [as defined in subparagraph (3) (iii) of paragraph (c) of Section 7 of Division A of this Article Fourth] or (B) a distribution paid or payable to the Corporation by a subsidiary upon its dissolution or partial or total liquidation or in connection with a reduction of its capital following a sale of assets with a reduction of its capital following a sale of assets of such subsidiary, the redemption price shall be as follows: Period Redemption Price (both dates inclusive) Per Share ----------------------------------------- ---------------- Date of issue to May 31, 1966............ $25.6125 June 1, 1966 to May 31, 1969............. 25.45 June 1, 1969 to May 31, 1972............. 25.20 June 1, 1972 to May 31, 1975............. 25.125 June 1, 1975 to May 31, 1978............. 25.075 June 1, 1978 and thereafter.............. 25.00 (d) The amounts payable upon the shares of the 4.90% Series Stock in the event of any voluntary liquidation or dissolution or winding up of the Corporation shall be an amount equal to the redemption price (exclusive of dividends) specified in subparagraph (c)(2) hereof then in effect, plus, as provided in Section 4 of Division A of this Article Fourth, an amount equal to full cumulative dividends thereon to the date of final distribution to the holders of the Cumulative Preferred Stock. 43 (e) As a sinking fund for the 4.90% Series Stock, the Corporation shall, so long as any shares of the 4.90% Series Stock shall be outstanding, set aside, out of any funds legally available therefor, on or before April 25 of each of the years beginning with the year 1968 to and including the year 1993, sums sufficient to redeem on the next June 1 at the par value thereof, plus full cumulative dividends thereon to the redemption date, the following numbers of such shares: commencing on June 1, 1968 and continuing thereafter to and including June 1, 1973, 3-1/3% of the largest number of such shares at any one time theretofore outstanding; and on each June 1 thereafter, 4% of the largest number of such shares at any one time theretofore outstanding (subject to adjustment in each case to the nearest whole share). The Corporation shall be entitled to receive a credit against the foregoing obligation to redeem on any date when such redemption is required to be made, for the aggregate par value of the number of shares of the 4.90% Series Stock which shall have theretofore been purchased by it at a cost not exceeding the redemption price for sinking fund purposes and which shall not have been previously so credited. Sums so set aside for the sinking fund for the 4.90% Series Stock shall be applied to the redemption of shares of 4.90% Series Stock on the applicable June 1 in the same manner and with the same effect as set forth in Section 6 of Division A of this Article Fourth. All shares of the 4.90% Series Stock so redeemed or purchased and credited against the foregoing obligation to redeem shall be cancelled by the Corporation and shall not be reissued. (f) So long as any shares of the 4.90% Series Stock shall be outstanding, the Corporation shall not declare or pay or set apart any dividend (other than dividends payable in stock) on its Common Stock, nor order or make any other distribution in respect of its Common Stock, nor purchase, redeem or otherwise acquire any shares of its Common Stock, if, after giving effect thereto, the sum of the Common Stock and surplus of the Company shall be less than $27,000,000. As used in this paragraph (f), the term "Common Stock and surplus of the Company" shall mean the sum of the par or stated value of all outstanding Common Stock of the Company, all paid-in premiums on stock and all paid-in surplus, capital surplus, earned surplus and other surplus accounts of the Company, all as would be shown in a balance sheet of the Company prepared in accordance with generally accepted accounting practice consistently maintained; provided that in determining surplus for this purpose, no additions or deductions shall be made for any charges or credits to surplus made after December 31, 1962 and representing any write up, write down or other adjustment of the carrying value of the Company's assets including investment in subsidiaries, and all such surplus shall be calculated as of the end of a monthly period ended not more than 120 days prior to the date of the transaction in respect of which such determination is made. (g) The 4.90% Series Stock shall not be convertible into any other shares of the Corporation. 44 4. 5% Cumulative Preference Stock. In addition to the terms and provisions set forth in this Certificate of Incorporation which are applicable to all series of Cumulative Preference Stock, the 5% Cumulative Preference Stock shall have the following terms and provisions: (a) The designation of such series of Cumulative Preference Stock of the par value of $25 per share shall be 5% Cumulative Preference Stock (hereinafter referred to as this Series) and the number of shares which shall constitute this Series shall be 365,158 shares. (b) The dividend rate of this Series shall be 5% per annum upon the par value thereof; and the date from which dividends shall be cumulative shall be the effective date of the merger of Northeastern Water Company into the Corporation; provided that dividends on any shares of this Series issued in addition to the shares thereof issued upon the effectiveness of said merger shall commence to accrue from the date of issue of said additional shares, said date of issue for this purpose to be such date as the Board of Directors shall authorize or fix. (c) (i) The shares of this Series shall be subject to redemption at the option of the Corporation, on the terms and conditions specified in Section 5 of Division B of Article Fourth of this Certificate of Incorporation, at any time or from time to time, at the applicable redemption prices set forth below plus, as provided in said Section 4, an amount equal to full cumulative dividends thereon to the redemption date. (ii) The prices at which the shares of this Series may be redeemed at the option of the Corporation shall be as follows: Period Redemption Price (both dates inclusive) Per Share ----------------------------------------- ---------------- Date of issue to December 31, 1962....... $26.25 January 1, 1963 to December 31, 1963..... 26.00 January 1, 1964 to December 31, 1964..... 25.75 January 1, 1965 to December 31, 1965..... 25.50 January 1, 1966 to December 31, 1966..... 25.25 January 1, 1967 and thereafter........... 25.00 (d) The amounts payable upon the shares of this Series in the event of any voluntary liquidation or dissolution or winding up of the Corporation shall be an amount equal to the redemption price (exclusive of dividends) specified in paragraph (c)(ii) of this Section 4 then in effect, plus, as provided in Section 3 of Division B of Article Fourth of this Certificate of Incorporation, an amount equal to full cumulative dividends thereon to date of final distribution to the holders of the Cumulative Preference Stock. (e) Holders of the shares of this Series shall have the right to vote for directors in the event of "six quarters' default in preference stock dividends" as provided in Section 1 of Division D of this Article Fourth. 45 (f) Shares of this Series shall not be convertible into any other shares of the Corporation. No sinking fund or purchase fund shall be established for the redemption or purchase of shares of this Series. 5. 4.10% Convertible Cumulative Preferential Stock. In addition to the terms and provisions set forth in this Certificate of Incorporation which are applicable to all series of Cumulative Preferential Stock, the 4.10% Convertible Cumulative Preferential Stock shall have the following terms and provisions: (a) The designation of such series of Cumulative Preferential Stock of the par value of $35 per share shall prior to March 1, 1970 be 4.10% Cumulative Preferential Stock and on and after March 1, 1970 be 4.10% Convertible Cumulative Preferential Stock. Such series is hereinafter called the 4.10% Preferential Stock and the number of shares which shall constitute such series shall be 656,218 shares. (b) The dividend rate of the 4.10% Preferential Stock shall be 4.10% per annum upon the par value thereof, and no more; and the date from which dividends shall be cumulative on shares of such series shall be the quarterly dividend payment date next preceding the date of issue of such shares or, if issued on a quarterly dividend payment date, then such date; provided that the Board of Directors may determine when authorizing the issuance of particular shares of such series that the date of cumulation of dividends on such shares shall be the date of issue of each of such shares, said date of issue for this purpose to be such date as the Board of Directors shall authorize and fix; and provided further that January 15, 1965 shall be the date of cumulation of dividends on all shares of such series which are issued prior to the record date for the determination of stockholders entitled to the first dividend on shares of such series. (c) No shares of the 4.10% Preferential Stock shall be subject to redemption prior to March 1, 1975. On and after March 1, 1975, the shares of 4.10% Preferential Stock may be redeemed at the option of the Corporation, at any time or from time to time, on the terms and conditions specified in Section 5 of Division B-1 of this Article Fourth. If redeemed on or after March 1, 1975 and before March 1, 1980 the redemption price shall be $40.00 per share, and if redeemed on or after March 1, 1980 the redemption price shall be $37.50 per share, plus in each case, as provided in said Section 5, an amount equal to full cumulative dividends thereon to the redemption date. (d) The amounts payable upon the shares of 4.10% Preferential Stock in the event of any voluntary or involuntary liquidation or dissolution or winding up of the Corporation shall be $30 per share plus, as provided in Section 3 of Division B-1 of this Article Fourth, an amount equal to full cumulative dividends thereon to the date of final distribution to the holders of the Cumulative Preferential Stock, and no more. (e) The 4.10% Preferential Stock shall not be entitled to the benefit of any sinking fund or purchase fund. 46 (f) (1) On and after March 1, 1970, the shares of 4.10% Preferential Stock shall be convertible, at the option of the respective holders thereof, into fully paid and nonassessable shares of the Common Stock of the Corporation, in accordance with the provisions of this paragraph (f). The rate of such conversion shall be one and three-tenths shares of Common Stock for each one share of 4.10% Preferential Stock, subject to the further provisions of this paragraph(f). (2) Any holder of shares of 4.10% Preferential Stock electing to exercise the conversion privilege with respect to any of such shares shall surrender the certificate therefor at the principal office of any Transfer Agent for said Stock, with the form of written notice to the Corporation endorsed on such certificate of his election to convert such shares of 4.10% Preferential Stock into Common Stock duly filled out and executed, and, if necessary under the circumstances of such conversion, with such certificate properly endorsed for, or accompanied by duly executed instruments of, transfer (and such other transfer papers as said Transfer Agent may reasonably require). The Corporation or such Transfer Agent may require, as a condition to the exercise of such conversion privilege, the payment of a sum equal to any transfer tax or other governmental charge (but not including any tax payable upon the issue of stock deliverable upon such conversion) that may be imposed or required by law upon any transfer incidental or prior thereto, or the submission of proper proof that the same has been paid. The conversion privilege shall be deemed to have been exercised, and the shares of Common Stock issuable upon such conversion shall, subject to the provisions of subparagraph 4 of this paragraph (f), be deemed to have been issued, upon the date of receipt by such Transfer Agent for conversion of the certificate representing such shares of 4.10% Preferential Stock with the requirements for conversion satisfied, except that if the conversion privilege may not be exercised at the time of such receipt, it shall be deemed to have been exercised on the first date thereafter on which such privilege may be exercised; and the person entitled to receive the Common Stock issuable upon such conversion shall on the date such conversion privilege is deemed to have been exercised and thereafter be treated for all purposes as the record holder of such Common Stock and shall on the same date cease to be treated for any purpose as the record holder of such 4.10% Preferential Stock so converted. The conversion privilege shall also be subject to the following terms and conditions: (i) if any shares of 4.10% Preferential Stock shall be called for redemption, the conversion privilege in respect of such shares shall terminate at the close of business on the last business day next preceding the date fixed for the redemption of such shares; (ii) if the Corporation shall at any time be liquidated, dissolved or wound up, the conversion privilege shall terminate at the close of business on the last business day next preceding the effective date of such liquidation, dissolution or winding up; (iii) if a certificate for 4.10% Preferential Stock is surrendered for conversion on a date which is less than five business days preceding the date fixed for the determination of holders of Common Stock entitled to receive rights to subscribe for or purchase shares of Common Stock or other securities of the Corporation 47 convertible into its Common Stock, then the effective date of conversion shall be the business day next succeeding the date fixed for such determination; and (iv) no adjustment or payment will be made upon conversion of 4.10% Preferential Stock for dividends accrued thereon or for dividends upon the Common Stock issuable upon such conversion. (3) The Corporation shall not be required, in connection with any conversion of 4.10% Preferential Stock, to issue a fraction of a share of its Common Stock nor to deliver any stock certificate representing a fraction thereof, but in lieu thereof the Corporation may make a cash payment equal to such fraction multiplied by the market price of the Common Stock determined as hereinafter set forth, or the Corporation may issue non-dividend bearing, non-voting Common Stock scrip (exchangeable for Common Stock, during the life of such scrip as hereinbelow specified, when surrendered in amounts aggregating a full share) in such form, bearer or registered, in such denominations, and containing such other terms and provisions as the Board of Directors of the Corporation may from time to time determine prior to the issue thereof. The market price of the Common Stock for the purpose of computing payments to be made for fractional shares shall be the closing sales price (or if there were no sales, the closing bid price) on the principal stock exchange on which the Common Stock is listed or, if the Common Stock is not so listed, the closing bid price on the New York over-the-counter market; such price shall be determined as of the close of business on the last business day of each week and such price as so determined shall continue in effect during the next succeeding week. Common Stock scrip issued as aforesaid shall not entitle the holder thereof to any dividends or to any voting rights or other rights as a stockholder of the Corporation, and all rights represented by such scrip shall terminate six years after the date of the conversion of shares of 4.10% Preferential Stock in connection with which such scrip was issued. (4) As soon as practicable after the effective date of conversion of any 4.10% Preferential Stock into Common Stock, the Corporation shall deliver to the person entitled thereto, at the principal office of the Transfer Agent for the 4.10% Preferential Stock at which such Stock was surrendered for conversion as aforesaid, certificates representing the shares of Common Stock and the cash or Common Stock scrip, if any, to which such person shall be entitled on such conversion. Nothing herein shall be construed to give any holder of 4.10% Preferential Stock surrendering the same for conversion the right to receive any additional shares of Common Stock or other property which results from an adjustment in conversion rights under the provisions of subparagraphs 5 or 6 of this paragraph (f) until holders of Common Stock are entitled to receive the shares or other property giving rise to the adjustment. The Corporation shall not be required to deliver certificates for shares of its Common Stock or new certificates for unconverted shares of its 4.10% Preferential Stock while the stock transfer books for such respective classes of stock are duly closed for any purpose; but the right of surrendering shares of 4.10% Preferential Stock for conversion shall not be suspended during any period that the stock transfer books of either of such classes of stock are closed. 48 (5) The conversion rate set forth hereinabove shall be subject to adjustment from time to time in certain instances, as follows: (i) if the Corporation shall at any time effect a subdivision of its Common Stock, by reclassification or otherwise, then in each such case the conversion rate then in effect shall be increased proportionately, and in like manner if the Corporation shall effect any combination of Common Stock, by reclassification or otherwise, then in each such case the conversion rate then in effect shall be decreased proportionately; in each such case the adjustment in the conversion rate shall be effective at the time that such subdivision or combination shall become effective; and (ii) if the Corporation shall at any time pay a dividend, or make a distribution, upon its Common Stock in Common Stock, then in each such case, from and after the record date for determining the stockholders entitled to receive such dividend, the conversion rate then in effect shall be increased in proportion to the increase in the number of outstanding shares of Common Stock through such dividend. For purposes of the preceding sentence, if the Corporation issues as a dividend a security which is convertible into Common Stock without the payment to the Corporation of any consideration other than the surrender of such convertible security, then the issuance of Common Stock upon the conversion of such convertible security shall be considered the payment of a dividend in Common Stock, but no adjustment in the conversion rate of the 4.10% Preferential Stock shall be made by reason of the issuance of Common Stock under the circumstances just referred to until the amount of such adjustment, cumulated since the last adjustment in the conversion rate made by reason of the issuance of Common Stock under such circumstances, shall be at least .01 of a share of Common Stock, and any such adjustment shall become effective at the close of business on the date of issuance of the Common Stock that gives rise to such adjustment. (6) In case of any reclassification or change of the Common Stock of the Corporation (other than a change in par value thereof, or a change from par value to no par value, or a case provided for in clauses (i) or (ii) of subparagraph (5) of this paragraph (f)), or in case of a merger or consolidation in which the Corporation is not the continuing corporation, provision shall be made so that holders of 4.10% Preferential Stock shall thereafter have the right to convert each share of such Stock into the kind and amount of shares of stock and/or other securities or property receivable upon such reclassification, change, merger or consolidation by a holder of the number and kind of shares of capital stock of the Corporation into which such share of 4.10% Preferential Stock might have been converted immediately prior to such reclassification, change, merger or consolidation. In any such case, provision shall be made as and to the extent the Board of Directors may determine for the application of the adjustments provided for in subparagraphs (5) and (6) of this paragraph (f) after such reclassification, change, merger or consolidation. (7) Whenever the conversion rate is required to be adjusted as provided in this paragraph (f): 49 (i) the Corporation shall forthwith prepare a certificate setting forth such adjusted conversion rate and the facts upon which such adjustment is based, and such certificate shall forthwith be filed with the Transfer Agents for the 4.10% Preferential Stock and the Transfer Agents for the Common Stock and thereafter (until further adjusted) the adjusted conversion rate shall be as set forth in said certificate; and (ii) the Corporation shall mail to each holder of record of 4.10% Preferential Stock notice of such adjusted conversion rate. (8) So long as any shares of the 4.10% Preferential Stock shall remain outstanding and the holders thereof shall have the right to convert said shares in accordance with the provisions of this paragraph (f), the Corporation shall at all times reserve from the authorized and unissued shares of its Common Stock a sufficient number of shares to provide for such conversions. (9) As a condition precedent to the taking of any action that would cause an adjustment requiring the issuance upon the conversion of 4.10% Preferential Stock of shares of capital stock with an aggregate par value in excess of the 4.10% Preferential Stock so converted, the Corporation will take any corporate action which the Board of Directors may, with the advice of counsel, determine to be necessary in order that the Corporation may validly and legally issue fully paid and nonassessable shares of such capital stock at such adjusted conversion price. (10) Whenever reference is made in this paragraph (f) to the Common Stock of the Corporation, such reference is to the Common Stock of the Corporation as such stock exists on the date of filing and recording pursuant to Section 151 of the Delaware General Corporation Law of the certificate creating the 4.10% Preferential Stock, or to stock into which such Common Stock may be changed from time to time. (g) (1) So long as any shares of the 4.10% Preferential Stock shall be outstanding, the Corporation shall not, without the consent, given in writing or by resolution adopted at a meeting duly called for that purpose, of the holders of record of at least two-thirds of the number of shares of the 4.10% Preferential Stock and of any other series of the Cumulative Preferential Stock then outstanding which have similar voting rights, voting separately as a class and without regard to series, (i) alter or change the preferences, special rights or powers given to the 4.10% Preferential Stock and such other series so as to affect the 4.10% Preferential Stock and such other series adversely; provided, however, that any such change of the preferences, special rights or powers of the 4.10% Preferential Stock which does not affect adversely any other series of the Cumulative Preferential Stock may be effected with the consent, given as aforesaid, of the holders of record of at least two-thirds of the number of shares of 4.10% Preferential Stock then outstanding; (ii) increase or decrease the par value of the 4.10% Preferential Stock; or 50 (iii) create any new class of stock having preference over the Cumulative Preferential Stock as to dividends or assets; provided, however, that no such consent by holders of 4.10% Preferential Stock shall be required in order for the Corporation to take any corporate action with respect to which such holders of 4.10% Preferential Stock have the right to object and, upon complying with procedures prescribed by the Delaware General Corporation Law, to become entitled to payment of the appraised value of such shares (it not being the intent of this provision, however, to limit in any manner the voting rights expressly granted to holders of shares of 4.10% Preferential Stock by the Delaware General Corporation Law); and provided further, however, that, except for the general power to vote in the election of directors and for all other purposes granted to the 4.10% Preferential Stock in paragraph (i) below, no holders of 4.10% Preferential Stock shall have any right to vote or consent for or in respect of any increase or decrease in the authorized number of shares of any class of stock (whether ranking senior to, on a parity with, or junior to the Cumulative Preferential Stock as to dividends or assets or whether now existing or hereafter created) or for or in respect of the creation of any new class of stock ranking on a parity with or junior to the Cumulative Preferential Stock as to dividends or assets. (2) Holders of 4.10% Preferential Stock shall have the right to vote for directors in the event of a "six quarters' default in Preferential Stock dividends" as provided in Section 1 of Division D of Article Fourth of this Certificate of Incorporation. (h) Holders of the shares of 4.10% Preferential Stock shall not be entitled to the benefit of any additional limitations restricting the purchase of, the payment of dividends on, or the making of other distributions in respect of stock of any class of the Corporation ranking junior to the Cumulative Preferential Stock as to dividends or assets. (i) In addition to the voting rights to which the holders of shares of 4.10% Preferential Stock are entitled as otherwise provided in Article Fourth of this Certificate of Incorporation and in paragraph (g) above, and subject to the qualifications, limitations and restrictions thereof as therein set forth, the holders of shares of 4.10% Preferential Stock shall have the general power to vote in the election of directors and for all other purposes on the basis of one-tenth of a vote per share. (j) If the Corporation shall at any time offer shares of its Common Stock to holders of its then outstanding Common Stock at a price less than $27 per share, the Corporation shall grant each holder of the then outstanding shares of 4.10% Preferential Stock proportionate subscription rights (i) based on the number of full shares of Common Stock of the Corporation into which such holder's shares of 4.10% Preferential Stock are convertible at the time fixed for determination of holders of Common Stock to whom such offer shall be made, and (ii) in the manner and upon the conditions that the Board of Directors shall deem appropriate in order to afford all holders of 4.10% Preferential Stock a similar subscription privilege to that granted the holders of the Common Stock. For purposes only of determining the number of shares of Common Stock to which the holders of 4.10% Preferential Stock may subscribe, the 4.10% Preferential Stock will be deemed convertible immediately upon its issuance. 51 Fifth: The names and places of residence of the incorporators are as follows: Names Places of Residence ---------------------- ------------------- Oliver B. Merrill, Jr. 17 East 97th Street, New York, N. Y. J. Edward Mount 308 East 79th Street, New York, N. Y. Robert T. Kimberlin 1 University Place, New York, N. Y. Sixth: The Corporation is to have perpetual existence. Seventh: The private property of the stockholders shall not be subject to the payment of corporate debts to any extent whatever. Eighth: 1. All corporate powers of the Corporation shall be exercised by the Board of Directors, except as otherwise provided by law. The Board of Directors may, by resolution or resolutions passed by a majority of the whole Board, designate one or more committees, each committee to consist of two or more of the directors of the Corporation, which, to the extent provided in said resolution or resolutions or in the by-laws of the Corporation, shall have and may exercise the powers of the Board of Directors in the management of the business and affairs of the Corporation, and may have power to authorize the seal of the Corporation to be affixed to all papers which may require it, provided that no such committee shall have or exercise any such power or powers if and so long as a "two years' default in preferred dividends", as defined in Section 1 of Division D of Article Fourth hereof, shall exist. 2. In furtherance of and not in limitation of the powers conferred upon the Board of Directors by law, the Board of Directors is expressly authorized, without action by the stockholders: (a) To issue, from time to time, and to sell or otherwise dispose of any and all bonds, debentures, notes and other obligations of the Corporation and, subject to the provisions of Divisions A and B of Article Fourth hereof, to issue, from time to time, and to sell or otherwise dispose of any and all shares of its stock of any class, in such amounts, for such consideration (not less than the par value thereof in the case of stock having a par value) and upon such terms as the Board of Directors shall determine, and to mortgage or pledge any and all property and assets of the Corporation, then owned or thereafter acquired, as security for the payment of any such bonds, debentures, notes or other obligations. (b) Subject to the provisions of paragraph (a) of Section 7 of Division A and paragraph (a) of Section 6 of Division B of Article Fourth hereof, to sell, assign, convey or otherwise dispose of any part of the property, assets and business of the Corporation if less than substantially the whole thereof, on such terms and conditions as the Board of Directors shall determine. 52 (c) Subject to the provisions of Section 2 of Division E of Article Fourth hereof, to fix the amount to be reserved by the Corporation over and above its capital stock paid in and to fix and determine and vary the amount of the working capital of the Corporation, and to direct and determine the use and disposition of the working capital and any surplus or net profits over and above the capital stock paid in. (d) To determine to what extent and at what times and places and under what conditions and regulations the accounts and books of the Corporation, or any of them, shall be opened to the inspection of the stockholders, and no stockholder shall have any right to inspect any account, book, or document of the Corporation except as conferred by statute or as authorized by resolution of the Board of Directors. (e) To establish, amend, alter or repeal and put into effect and carry out such plan or plans, of general application, as the Board may determine from time to time with respect to pensions, retirement allowances, life, accident and other insurance and similar matters for officers and employees of the Corporation and its subsidiaries in consideration for or in recognition of the services rendered or to be rendered by such officers and employees. 3. The number of directors of the Corporation shall be fixed from time to time by, or in the manner provided in, the by-laws but shall never be less than nine. Subject to the provisions of Division D of Article Fourth hereof, in case of any increase in the number of directors, the additional directors shall be elected as may be provided in the by-laws. 4. Any director of the Corporation may be removed for cause in such manner as may be provided in the by-laws. 5. The directors and stockholders may hold their meetings and have an office or offices outside the State of Delaware if the by-laws so provide. 6. None of the directors need be a stockholder of the Corporation, except as otherwise provided in the by-laws, or a resident of the State of Delaware. Elections of directors need not be by ballot if the by-laws so provide. 7. In addition to reimbursement of his reasonable expenses incurred in attending meetings or otherwise in connection with his attention to the affairs of the Corporation, each director as such, and as a member of the Executive Committee or of any other committee of the Board of Directors, shall be entitled to receive such remuneration as may be fixed from time to time by the Board of Directors. 8. Subject to (i) any limitations that may be imposed by the stockholders and (ii) the provisions of Division D of Article Fourth hereof, the Board of Directors may make by-laws and from time to time may alter, amend or repeal any by-laws, but any by-laws made by the Board of Directors or the stockholders may be altered, amended or repealed by the stockholders at any annual meeting or at any special meeting, provided that notice of such proposed alteration, amendment or repeal is included in the notice of such special meeting. 53 9. A director of the Corporation shall not, in the absence of fraud, be disqualified by his office from dealing or contracting with the Corporation either as vendor, purchaser or otherwise, nor in the absence of fraud, shall any contract or other transaction of the Corporation be affected or invalidated in any way by the fact that any of the directors of the Corporation are in anywise interested in or connected with any other party to such contract or transaction or are themselves parties to such contract or transaction; provided, however, that such interest and connection either shall be fully disclosed to a meeting of the Board of Directors, or of a committee thereof having authority in the premises, at which such contract or transaction is authorized, confirmed or approved, or shall at the time be otherwise known to the directors present at such meeting, and provided further that there shall be present at the meeting of the Board of Directors, or such committee, authorizing, confirming or approving such contract or transaction, and such contract or transaction shall be authorized, confirmed or approved by the vote of, directors not so interested or connected constituting a majority of the directors then in office. No director of the Corporation shall be liable to the Corporation or to any stockholder or creditor thereof or to any other person, for any loss incurred under or by reason of any contract or transaction of the Corporation, and no such director shall be accountable for any gains or profits realized therefrom, provided, however, that any such contract or transaction shall, at the time it was entered into, have been a reasonable one to have been entered into and shall have been upon terms that at the time were fair, and provided further that, if such director shall have been so interested or connected as to such contract or transaction, such contract or transaction shall have been authorized, confirmed or approved as aforesaid after the disclosure or knowledge of such interest or connection as aforesaid. A director of the Corporation shall not be deemed interested in or connected with a party to a contact or transaction between the Corporation and a parent, subsidiary or affiliated corporation by reason of the fact that he is also a director, officer or stockholder of such parent, subsidiary or affiliated corporation. 10. Nothing in this Certificate of Incorporation contained shall be deemed to restrict any power which, as a matter of law, the Board of Directors or any committee thereof would otherwise have to act by written consent signed by all members of the Board or of such committee, as the case may be. 11. No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the General Corporation Law of the State of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. Any repeal or modification of this Section 11 of Article Eighth by the stockholders of the Corporation shall be prospective only, and shall not affect, to the detriment of any director, any limitation on the personal liability of a director of the Corporation existing at the time of such repeal or modification. 54 Ninth: Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this Corporation under the provisions of section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. Tenth: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate in the manner now or hereafter prescribed by statute, and all rights herein conferred upon the stockholders, except as otherwise herein expressly provided, are granted subject to this reservation. D. The effective date of this Restated Certificate of Incorporation is May 15, 1987. Upon the effective date, each of the issued shares of Common Stock of the Company, par value $2.50 per share (including any shares thereof held in the treasury of the Company), shall be changed and reclassified into two shares of Common Stock of the Company, par value $1.25 per share, and the aggregate amount of capital of the Company represented by said shares of Common Stock, par value $2.50 per share, shall be and become the capital represented by said shares of Common Stock, par value $1.25 per share. IN WITNESS WHEREOF, this Restated Certificate of Incorporation has been signed under the seal of the Company this 6th day of May, 1987. AMERICAN WATER WORKS COMPANY, INC. By James V. LaFrankie President (Seal) Attest: George H. Roberts Secretary 55 EXHIBIT 3(b) AMERICAN WATER WORKS COMPANY, INC. CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION American Water Works Company, Inc., a corporation organized and existing under the laws of the State of Delaware (the "Company"), does hereby certify: FIRST: That the Board of Directors of the Company, at a meeting thereof held on March 2, 1989, adopted a resolution declaring it advisable that the Restated Certificate of Incorporation, as amended, of the Company be further amended as follows: 1. Article Tenth of the Restated Certificate of Incorporation, as amended, shall be amended to read in its entirety as follows: "TENTH: The Board of Directors of the Corporation, when evaluating any proposal from another party involving: (i) a tender offer for any securities of the Corporation, (ii) a merger or consolidation of the Corporation with or into any other person, (iii) a sale, lease, exchange or other disposition by the Corporation, or any subsidiary of the Corporation, whether or not in partial or complete liquidation, of all or any substantial part of the assets of the Corporation to or with any other person, (iv) any issuance or transfer by the Corporation or any subsidiary of the Corporation of any securities of the Corporation having voting power (whether generally or upon the happening of any contingency), or any securities or instruments convertible into or exchangeable for securities having voting power, to any other person in exchange for securities, cash or other property or a combination thereof, or (v) any other transaction having an effect similar to any of the foregoing upon the properties, operations or control of the Corporation, shall, in connection with the exercise of its judgment in determining what is in the best interests of the Corporation and its stockholders, give due consideration to the following: (1) the character, integrity, business philosophy and financial status of the other party or parties to the transaction; (2) the consideration to be received by the Corporation or its stockholders in connection with such transaction, as compared to: (a) the current market price or value of the Corporation's properties or securities; (b) the estimated future value of the Corporation, its properties or securities; - 2 - (c) such other measures of the value of the Corporation, its properties or securities as the Board of Directors may deem appropriate; (3) the projected social, legal and economic effects of the proposed action or transaction upon the Corporation, its employees, suppliers, regulatory agencies and customers and the communities in which the Corporation and its subsidiaries do business; (4) the general desirability of the continuance of the Corporation as an independent entity; and (5) such other factors as the Board of Directors may deem relevant. In giving such consideration to the foregoing factors, the Board of Directors and each individual director shall be deemed to be performing their duly authorized duties and acting in good faith and in the best interests of the Corporation." 2. Article Eighth, Paragraph 4, of the Restated Certificate of Incorporation, as amended, shall be amended to read in its entirety as follows: "4. No director of the Corporation may be removed except for cause, and the vote of the holders of a majority of the outstanding shares of all classes of capital stock of the Corporation entitled to vote generally in the election of directors, considered for this purpose as one class, shall be required to remove a director for cause. Cause for removal shall be deemed to exist only if the director whose removal is proposed has been convicted in a court of competent jurisdiction of a felony or has been adjudged by a court of competent jurisdiction to be liable for gross negligence or misconduct in the performance of such director's duty to the Corporation, and such conviction or adjudication has become final and non-appealable." - 3 - 3. A new Article Eleventh shall be added to the restated Certificate of Incorporation, as amended, to read in its entirety as follows: "ELEVENTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by statute, and all rights herein conferred upon the stockholders, except as otherwise herein expressly provided, are granted subject to this reservation. Any provision in this Certificate of Incorporation or in the By-laws of the Corporation to the contrary notwithstanding, no provisions of Article Eighth, Paragraph 4, or of Articles Tenth or Eleventh of this Certificate of Incorporation, or Article II, Section l(a) or Article X of the By-laws of the Corporation, shall be altered, amended, supplemented or repealed by the stockholders of the Corporation, and no provision of this Certificate of Incorporation or of the By-laws of the Corporation inconsistent with such provisions shall be adopted by the stockholders of the Corporation, except by the affirmative vote of the holders of at least 80% of the voting power of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, considered for this purpose as one class. This Article Eleventh shall not limit the right of the Board of Directors to amend the By-laws of the Corporation." SECOND: That thereafter, an annual meeting of stockholders of the Company was duly called and held on May 4, 1989, upon notice in accordance with Section 222 of the General Corporation law of the State of Delaware, at which meeting the necessary number of votes as required by statute were voted in favor of each of the amendments. THIRD: That said amendments were duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. - 4 - IN WITNESS WHEREOF, the Company has caused its corporate seal to be hereunto affixed and this Certificate to be executed by James V. LaFrankie, its President and by W. Timothy Pohl, its Secretary, this 4th day of May, 1989. American Water Works Company, Inc. By: James V. LaFrankie President [Corporate Seal] Attest: W. Timothy Pohl Secretary - 5 - EXHIBIT 3(c) AMERICAN WATER WORKS COMPANY, INC. CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION American Water Works Company, Inc., a corporation organized and existing under the laws of the State of Delaware (the "Company"), does hereby certify: FIRST: That the Board of Directors of the Company, at a meeting thereof held on January 4, 1990, adopted resolutions declaring it advisable that the Restated Certificate of Incorporation, as amended, of the Company be further amended as follows: 1. The first paragraph of Article Fourth of the Restated Certificate of Incorporation, as amended, shall be amended to read in its entirety as follows: "FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue shall be 105,616,800, of which (a) 1,866,800 shares shall be Cumulative Preferred Stock, of the par value of $25 per share, issuable in series, (b) 750,000 shares shall be Cumulative Preference Stock, of the par value of $25 per share, issuable in series, (c) 3,000,000 shares shall be Cumulative Preferential Stock, of the par value of $35 per share, issuable in series, and (d) 100,000,000 shares shall be Common Stock, of the par value of $1.25 per share." 2. Section 3 of Division E of Article Fourth of the Restated Certificate of Incorporation, as amended, shall be amended to read in its entirety as follows: "3.(a) No holder of Cumulative Preferred Stock, Cumulative Preference Stock or Cumulative Preferential Stock of the Corporation shall, as such holder, have any right to purchase or subscribe for (i) any stock of any class, or any warrant or warrants, option or options, or other instrument or instruments that shall confer upon the holder or holders thereof the right to subscribe for or purchase or receive from the Corporation any stock of any class or classes which the Corporation may issue or sell, whether or not such stock shall be convertible into or exchangeable for any other stock of the Corporation of any class or classes and whether or not such stock shall be unissued shares authorized by the Certificate of Incorporation or by any amendment thereto or shares of stock of the Corporation acquired by it after the issue thereof, or (ii) any obligation which the Corporation may issue or sell that shall be convertible into or exchangeable for any shares of stock of the Corporation of any class or classes, or to which shall be attached or appurtenant any warrant or warrants, option or options, or other instrument or instruments that shall confer upon the holder or holders of such obligation the right to subscribe for or purchase or receive from the Corporation any shares of its stock of any class or classes. (b) Upon any issue for money or other consideration of any stock of the Corporation that may be authorized from time to time, no holder of stock, irrespective of the kind of such stock, shall have any preemptive or other right to subscribe for, purchase or receive any proportionate or other share of the stock so issued, and the Board of Directors may dispose of all or any portion of such stock as and when it may determine free of any such rights, whether by offering the same to stockholders or by sale or other disposition as said Board may deem advisable." 3. Subparagraph (j) of the first paragraph of Section 1 of Division B-1 of Article Fourth of the Restated Certificate of Incorporation, as amended, shall be deleted in its entirety. 4. Subparagraph (h) of the first paragraph of Section 1 of Division B-1 of Article Fourth of the Restated Certificate of Incorporation, as amended, shall be amended by inserting the word "and" following the semi- colon at the end of the subparagraph. 5. Subparagraph (i) of the first paragraph of Section 1 of Division B-1 of Article Fourth of the Restated Certificate of Incorporation, as amended, shall be amended by deleting the semi-colon and the following word "and" at the end of the subparagraph and inserting a period in lieu thereof. SECOND: That thereafter, an annual meeting of stockholders of the Company was duly called and held on May 3, 1990, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of votes as required by statute were voted in favor of each of the amendments. THIRD: That said amendments were duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Company has caused its corporate seal to be hereunto affixed and this Certificate to be executed by James V. LaFrankie, its President, and by W. Timothy Pohl, its Secretary, this 3rd day of May, 1990. American Water Works Company, Inc. By: James V. LaFrankie President (Corporate Seal) Attest: W. Timothy Pohl Secretary EXHIBIT 3(d) AMERICAN WATER WORKS COMPANY, INC. CERTIFICATE OF DESIGNATIONS American Water Works Company, Inc., a corporation organized under the laws of the State of Delaware (the "Company"), does hereby certify: THAT the Board of Directors of the Company, at a meeting thereof held on January 3, 1991, duly adopted the following resolution: RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of Directors of the Corporation by the provisions of the Restated Certificate of Incorporation, as amended, of the Company, the Board of Directors hereby creates a series of Cumulative Preferred Stock of the par value of $25 per share of the Corporation from the authorized but unissued Cumulative Preferred Stock and hereby fixes the number of shares which shall constitute such series and the voting powers, designations, preferences and relative, participating, optional or other special rights, qualifications, limitations or restrictions thereof, of the shares of such series as follows: In addition to the terms and provisions set forth in the Restated Certificate of Incorporation, as amended, which are applicable to all series of Cumulative Preferred Stock, the Cumulative Preferred Stock, 8.50% Series shall have the following terms and provisions: (a) The designation of such series of Cumulative Preferred Stock of the par value of $25 per share shall be Cumulative Preferred Stock, 8.50% Series(hereinafter called the 8.50% Preferred Stock), and the number of shares which shall constitute such series shall be 1,600,000 shares. (b) The dividend rate of the 8.50% Preferred Stock shall be 8.50% per annum upon the par value thereof, the date from which dividends on shares of the 8.50% Preferred Stock shall be cumulative shall be the date of issue of the first of said shares to be issued, and the initial dividend shall be payable on June 1, 1991. (c) The shares of the 8.50% Preferred Stock shall be redeemed by the Corporation on December 1, 2000 at the par value thereof plus, as provided in Section 6 of Division A of Article Fourth an amount equal to full cumulative dividends thereon to the redemption date; provided, however, the shares of the 8.50% Preferred Stock shall not be otherwise subject to redemption at the option of the Corporation. (d) The amounts payable upon the shares of the 8.50% Preferred Stock in the event of any voluntary liquidation or dissolution or winding up of the Corporation shall be an amount equal to the par value per share (exclusive of dividends) plus, as provided in Section 4 of Division A of Article Fourth, an amount equal to full cumulative dividends thereon to the date of final distribution to the holders of the Cumulative Preferred Stock. (e) No sinking fund or purchase fund shall be established for the purchase or redemption of shares of the 8.50% Preferred Stock. (f) The shares of the 8.50% Preferred Stock shall not be convertible into any other shares of the Corporation. (g) The shares of the 8.50% Preferred Stock shall not be entitled to the benefit of any limitations restricting the purchase of, the payment of dividends on, or the making of other distributions in respect of stock of any class of the Corporation ranking junior to the Cumulative Preferred Stock as to dividends or assets in addition to those set forth in Division A of Article Fourth. (h) Except as otherwise provided in Division D of Article Fourth, the shares of the 8.50% Preferred Stock shall not have the general power to vote in the election of directors and for other purposes. IN WITNESS WHEREOF, the Company has caused its corporate seal to be hereunto affixed and this Certificate of Designations to be executed by James V. LaFrankie, its President, and by W. Timothy Pohl, its Secretary, this 4th day of February, 1991. AMERICAN WATER WORKS COMPANY, INC. By: James V. LaFrankie,President ATTEST: W. Timothy Pohl, Secretary 2 EXHIBIT 3(e) AMERICAN WATER WORKS COMPANY, INC. CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION American Water Works Company, Inc., a corporation organized and existing under the laws of the State of Delaware (the "Company"), does hereby certify: FIRST: That the Board of Directors of the Company, at a meeting thereof held on March 7, 1996, adopted a resolution declaring it advisable that the Restated Certificate of Incorporation, as amended, of the Company be further amended as follows: The first paragraph of Article Fourth of the Restated Certificate of Incorporation, as amended, shall be amended to read in its entirety as follows: "FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue shall be 305,520,000 of which (a) 1,770,000 shares shall be Cumulative Preferred Stock, of the par value of $25 per share, issuable in series, (b) 750,000 shares shall be Cumulative Preference Stock, of the par value of $25 per share, issuable in series, (c) 3,000,000 shares shall be Cumulative Preferential Stock, of the par value of $35 per share, issuable in series, and (d) 300,000,000 shares shall be Common Stock, of the par value of $1.25 per share." SECOND: That thereafter, an annual meeting of stockholders of the Company was duly called and held on May 2, 1996, upon notice in accordance with Section 222 of the General Corporation Law of the State of Delaware, at which meeting the necessary number of votes as required by statute were voted in favor of the amendment. THIRD: That said amendment was duly adopted in accordance with the provisions of Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Company has caused its corporate seal to be hereunto affixed and this Certificate to be executed by George W. Johnstone, its President and Chief Executive Officer, and by W. Timothy Pohl, its General Counsel and Secretary, this 2nd day of May, 1996. AMERICAN WATER WORKS COMPANY, INC. By: George W. Johnstone President and Chief Executive Officer (Corporate Seal) Attest: W. Timothy Pohl General Counsel and Secretary 2 EX-10 3 EXHIBIT 10(c) AMENDMENT NO. 2 TO THE EMPLOYEES' STOCK OWNERSHIP PLAN OF AMERICAN WATER WORKS COMPANY, INC. AND ITS DESIGNATED SUBSIDIARIES (As Amended Effective January 1, 1989) Pursuant to the power reserved to it in Section 13.1 of the Employees' Stock Ownership Plan of American Water Works Company, Inc. and its Designated Subsidiaries, as amended effective January 1, 1989, ("Plan"), American Water Works Company, Inc. hereby amends the Plan, effective January 1, 1995, as follows: 1. SECTION 1.40 is hereby deleted in its entirety and the following is inserted in lieu thereof: Section 1.40 "Subsidiary" means any corporation, association or business trust, 50% or more of whose voting stock (not including shares having voting power only upon the happening of an event of default) is or was owned, directly or indirectly, by American Water Works Company, Inc., or by any corporation which was a constituent in a merger, consolidation, liquidation, transfer of substantially all of its assets in exchange for stock, or similar combination of corporations with or into the Company. 2. SECTION 2.1 is hereby deleted in its entirety and the following is inserted in lieu thereof: 2.1 Eligibility Rule. Except as provided in Section 2.2, an Employee shall be eligible to participate in the Plan beginning on the January 1 following his date of hire. 3. SECTION 10.11 is hereby added as follows: 10.11 Distributions Pursuant to a Qualified Domestic Relations Order ("QDRO"). Unless otherwise provided by the QDRO, an Alternate Payee shall be entitled to elect any of the distribution options available under Section 10 to a "Terminated Participant". To record the adoption of this Amendment No. 2 to the Plan, American Water Works Company has affixed its corporate name and seal this 3rd day of July, 1996. AMERICAN WATER WORKS COMPANY, INC. By: George W. Johnstone President and Chief Executive Officer (Corporate Seal) Attest: W. Timothy Pohl General Counsel and Secretary 2 EX-13 4 EXHIBIT 13 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- Consolidated Summary of Selected Financial Data (Dollars in thousands, except per share amounts; adjusted for 1996 stock split)
For the years ended December 31, 1996 1995 1994 1993 1992 =============================================================================================== Revenues Water service Residential $ 510,050 $ 451,143 $ 431,225 $ 399,916 $ 360,800 Commercial 197,314 175,792 169,532 159,335 147,983 Industrial 62,153 54,423 53,049 50,490 47,492 Public and other 101,816 92,565 90,436 84,861 79,196 Other water revenues 7,935 5,902 6,502 5,579 5,372 - ----------------------------------------------------------------------------------------------- 879,268 779,825 750,744 700,181 640,843 Wastewater service 15,378 14,953 13,933 12,143 11,391 Management fees -- 8,042 5,564 5,213 5,126 - ----------------------------------------------------------------------------------------------- $ 894,646 802,820 $ 770,241 $ 717,537 $ 657,360 ====================================================================== Water sales (million gallons) Residential 119,900 117,128 113,950 104,721 97,992 Commercial 63,491 61,726 60,901 57,880 55,587 Industrial 36,129 34,171 34,735 33,040 32,681 Public and other 27,764 26,968 26,953 25,172 24,349 - ----------------------------------------------------------------------------------------------- 247,284 239,993 236,539 220,813 210,609 ====================================================================== Net income $ 101,674 92,061 $ 78,652 $ 75,387 $ 68,160 Earnings per common share on average shares outstanding $1.31 $1.32 $1.17 $1.15 $1.04 Common dividends paid per share $ .70 $ .64 $ .54 $ .50 $ .46 AT YEAR-END Customers (thousands) 1,884 1,720 1,706 1,685 1,548 Total assets $4,032,156 $3,403,141 $3,172,237 $2,948,069 $2,415,805 Preferred stocks with mandatory redemption requirements American Water Works Company, Inc. $ 40,000 $ 40,000 $ 40,000 $ 40,000 $ 40,480 Subsidiaries 41,060 42,326 43,737 46,515 50,895 Long-term debt American Water Works Company, Inc. $ 116,000 $ 116,000 $ 131,000 $ 131,000 $ 73,200 Subsidiaries 1,600,394 1,268,649 1,177,043 1,056,404 870,940 Market price per share of common stock at year-end $20.63 $19.44 $13.50 $15.00 $13.69
22 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- Management's Discussion and Analysis DESCRIPTION OF THE BUSINESS THE COMPANY The principal business of American Water Works Company is the ownership of common stock of companies providing water supply service. THE SERVICE COMPANY The American Water Works Service Company, a subsidiary, provides professional services as required to affiliated companies. These services include accounting, engineering, operations, finance, water quality, information systems, personnel administration and training, purchasing, insurance, safety, and community relations. This arrangement, which provides these services at cost, affords affiliated companies support otherwise unavailable economically or on a timely basis. The regulated companies with less than 100,000 customers have a greater need to draw on these services than do larger companies. THE REGULATED COMPANIES The 22 regulated subsidiary companies provide water service to approximately 7 million people in more than 800 communities in 21 states. As public utilities, each company is subject to the rules of both federal and state environmental protection agencies, particularly with respect to the quality of the water they distribute. In addition, with the exception of Michigan-American Water Company, which is not rate-regulated, the regulated companies function under economic regulations prescribed by state regulatory commissions. THE FINANCIAL COMPANIES American International Water Services Company owns a 50% interest in AmericanAnglian Environmental Technologies, a joint venture with Anglian Water Plc., a British water and wastewater utility. AmericanAnglian provides both technical expertise and financing resources to communities in Pennsylvania, North and South Carolina and Virginia to operate and upgrade their water and wastewater systems. In December 1995, AmericanAnglian Environmental Technologies acquired the Company's American Commonwealth Management Services Company subsidiary. American Commonwealth Management Services provides management and operating services, at a profit, to non-affiliated water and wastewater systems. These services are provided under contract to various authorities, utilities, and businesses in Pennsylvania, Massachusetts, Delaware and Florida. American Commonwealth Management Services also owns facilities to regenerate carbon used for water filtration and those capabilities are being marketed to water utilities throughout the country. Massachusetts Capital Resources Company is a subsidiary of the Company formed for the specific purpose of financing the construction of a water treatment plant in Hingham, Massachusetts. In 1996, Massachusetts Capital Resources leased this facility to an affiliated regulated company for 40 years. Occoquan Land Corporation owns land, buildings, and equipment, most of which are leased to affiliated companies. Greenwich Water System is a subsidiary of the Company that owns the common stock of the regulated companies in Connecticut, Massachusetts, New Hampshire, New York and a portion of the common stock of the regulated company in Pennsylvania. American Commonwealth Company is a subsidiary of the Company that owns a portion of the common stock of the regulated company in New Jersey. THE PHILOSOPHY OF AMERICAN WATER WORKS COMPANY American Water Works Company is dedicated to providing the best possible water service at an affordable cost consistent with adequate compensation for investors and reasonable wages and benefits for its personnel. We believe there is an unalterable link between quality service, responsive regulation, and financial success. Three basic principles are observed under this management philosophy: 1. The preservation and efficient utilization of capital assets are best assured by a management approach that draws upon prudent planning, builds consensus and acts decisively on a timely basis. 2. A regulated subsidiary must exhibit the ability to attract the capital it requires as a prerequisite to the initiation of construction of facilities needed to meet water service demands. 3. The ability to attract needed capital is dependent upon consistently achieving adequate earnings. This dictates an aggressive pursuit of regulatory decisions acknowledging this principle. In accordance with this philosophy, the Company seeks to enhance the value of its shareholders' investment through consistent earnings growth. The market value of the Company's common stock is subject to the volatility present in the stock market, as well as to the vagaries of the national economy. The true worth of this stock should be measured by the intrinsic value of the tangible assets of American Water Works and the worth of the organization put in place by the management team. These assets are used to provide a service which is essential for urban living. There is no substitute for water. 23 - --------------------------------------------------------------------------- Management's Discussion and Analysis THE INVESTMENT STRATEGY OF AMERICAN WATER WORKS COMPANY The business of the Company is the investment in common stock of water utilities. The purpose of this business is to protect and enhance the value of our shareholders' investment through growth in earnings and dividends per share. We seek to accomplish this purpose without diluting existing shareholders' investment. Viewed over the long term, we believe this strategy has and will continue to maximize the total return to our shareholders. The value of the investment in the Company has increased due to earnings growth. Earnings growth has resulted from increased investment by the Company in its subsidiaries funded by the sale of securities and reinvestment of income. This reinvestment defers shareholder payment of income taxes so earnings growth can be compounded on a larger investment base. It also permits consistent and reliable dividend increases. Investors preferring a greater current yield can supplement their cash flow by occasionally selling a portion of their enhanced investment in the Company. The following chart reflects the results of this investment strategy: [ID: GRAPHIC -- BAR CHART SHOWING THE FOLLOWING VALUES ON A SCALE OF 0% TO 15%] COMPOUND ANNUAL GROWTH RATES 1991 -- 1996 Investment in subsidiaries ... 12.7% Operating revenue ............ 7.1% Earnings per share ........... 2.8% Dividends per share .......... 10.2% Book value per share ......... 7.9% The Company's investment in its subsidiaries has increased from $693 million at year-end 1991 to $1.3 billion at year-end 1996. The top schedule on page 25 defines how this has been accomplished. This analysis illustrates that the growth in the Company's investment in its subsidiaries has been accomplished by subsidiary earnings retention, the investment of a portion of the dividends received by the Company from subsidiaries, the sale of securities and bank loans. Earnings to common shareholders have risen from $69.9 million in 1991 to $97.7 million in 1996. Income to common shareholders of the Company is influenced by three factors: 1. The amount of investment by the Company 2. The rate of return on that investment 3. The costs to operate the Company The bottom schedule on page 25 demonstrates the source of change since 1991 in income to common stock. This analysis demonstrates that the growth in earnings over this period is the direct result of new investment in subsidiaries. Fluctuations in the rate of return are the result of the influence of weather conditions on sales volume and the response of utility regulation to the economic climate. The cost to operate the Company has increased $5.3 million over this five-year period. SYSTEM GROWTH AND DEVELOPMENT CAPITAL SPENDING PROGRAM The investment in new facilities in 1996 totaled $274 million, which was 17% below 1995 construction expenditures of $331 million. Construction activity planned for 1997 totals $383 million. Expenditures recorded in any given year are influenced by many factors, including the economy, regulation, material delivery and weather conditions. It is anticipated that approximately $1.7 billion will be invested in new facilities between now and the end of the year 2001. These expenditures will support ongoing programs to comply with regulations promulgated to ensure water quality and protect the environment, to keep pace with the development of our service territories and to replace plants as necessary. We expect the investment in this construction program to be recognized in regulatory decisions. Source of supply improvements in 1996 accounted for approximately 4% of the year's construction expenditures. Projects included groundwater development in several locations in Indiana to meet growing customer demands. New wells in Clovis, New Mexico and several replacement wells in California were constructed to 24 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- Analysis of Growth in Investment Subsidiaries
(000) 1996 1995 1994 1993 1992 ======================================================================================================== Investment in subsidiaries at December 31 $1,261,532 $1,003,088 $898,219 $810,372 $749,513 Investment in subsidiaries at January 1 1,003,088 898,219 810,372 749,513 693,312 - -------------------------------------------------------------------------------------------------------- Change during the year $ 258,444 $ 104,869 $ 87,847 $ 60,859 $ 56,201 ======================================================== Sources of additional investment Undistributed earnings of subsidiaries $ 31,605 $ 26,315 $ 24,532 $ 18,984 $ 19,401 Investment by the Company in subsidiary securities 226,839 78,554 63,315 41,875 36,800 - -------------------------------------------------------------------------------------------------------- Change during the year $ 258,444 $ 104,869 $ 87,847 $ 60,859 $ 56,201 ======================================================== Net income of subsidiaries $ 113,760 $ 103,497 $ 89,449 $ 84,248 $ 75,260 Return on January 1 investment in subsidiaries 11.3% 11.5% 11.0% 11.2% 10.9% Subsidiaries' common stock dividend payout ratio 72% 75% 73% 77% 74% - -------------------------------------------------------------------------------------------------------- Dividends to the Company from subsidiaries 82,155 77,182 64,917 65,264 55,859 - -------------------------------------------------------------------------------------------------------- Company's use of cash Preferred dividends 3,984 3,984 3,984 3,996 4,019 Other cash requirements 9,518 9,765 10,744 7,556 6,630 - -------------------------------------------------------------------------------------------------------- 13,502 13,749 14,728 11,552 10,649 - -------------------------------------------------------------------------------------------------------- Available for common dividends 68,653 63,433 50,189 53,712 45,210 Common dividends declared 51,299 42,500 34,386 31,130 28,609 Cash payout ratio 75% 67% 69% 58% 63% Available after dividends 17,354 20,933 15,803 22,582 16,601 Cash at January 1 119 17,647 23,302 78 15 - -------------------------------------------------------------------------------------------------------- 17,473 38,580 39,105 22,660 16,616 Investment in securities of subsidiaries (226,839) (78,554) (63,315) (41,875) (36,800) Notes and advances to subsidiaries 10 10 4,510 1,010 5,210 - -------------------------------------------------------------------------------------------------------- (209,356) (39,964) (19,700) (18,205) (14,974) - -------------------------------------------------------------------------------------------------------- Net bank borrowings 34,400 3,700 -- (21,255) 11,425 Proceeds from long-term debt -- -- -- 81,000 -- Proceeds from common stock 189,999 36,383 37,347 5,442 5,307 Redemption of securities (15,000) -- -- (23,680) (1,680) - -------------------------------------------------------------------------------------------------------- 209,399 40,083 37,347 41,507 15,052 - -------------------------------------------------------------------------------------------------------- Cash at December 31 $ 43 $ 119 $ 17,647 $ 23,302 $ 78 ========================================================
Analysis of Change in Income
(000) 1996 1995 1994 1993 1992 ======================================================================================================== Net income to common stock-current year $ 97,690 $ 88,077 $ 74,668 $ 71,391 $ 64,141 Net income to common stock-prior year 88,077 74,668 71,391 64,141 69,890 - -------------------------------------------------------------------------------------------------------- Change in income 9,613 13,409 3,277 7,250 (5,749) Change in Company operating cost 650 639 1,924 1,738 317 - -------------------------------------------------------------------------------------------------------- Change in investment income $ 10,263 $ 14,048 $ 5,201 $ 8,988 $ (5,432) ======================================================== Sources of change in investment income Additional investment in subsidiaries $ 11,893 $ 10,122 $ 6,718 $ 6,317 $ 6,154 Change in rate of return on investment (1,630) 3,926 (1,517) 2,671 (11,586) - -------------------------------------------------------------------------------------------------------- Total change in investment income $ 10,263 $ 14,048 $ 5,201 $ 8,988 $ (5,432) ========================================================
25 - --------------------------------------------------------------------------- Management's Discussion and Analysis maintain supply capabilities. In 1996, upgrades to the Bargh Dam in Greenwich, Connecticut were initiated to meet more stringent regulatory requirements. Projects are also being undertaken to interconnect both the St. Charles, Missouri and Bel Air, Maryland systems with adjacent water systems to provide a cost-effective supplement to existing sources of supply. Investment in treatment and pumping facilities comprised approximately 28% of 1996 construction expenditures. Construction was completed on the 30 million gallons-per-day Delaware River Regional Water Treatment Plant in New Jersey that will supplement community water supplies in three counties in southern New Jersey. Additionally, construction was completed on a new 7 million gallons-per-day facility which will treat existing surface and groundwater supplies in Hingham, Massachusetts. A regional 5 million gallons-per-day treatment plant, which serves Mercer and Summers counties in West Virginia, was completed in 1996. Significant production improvements were completed in East St. Louis and Granite City, Illinois; Brownsville, Pennsylvania; and Chattanooga, Tennessee. During 1996, the Crawfordsville, Franklin and Noblesville, Indiana systems and Peoria, Illinois system began an aggressive program of treatment improvements and expansion at their facilities. The improvement of the Yardley and Norristown, Pennsylvania treatment plants are two additional major projects initiated in 1996. Transmission and distribution facilities accounted for approximately 39% of the 1996 construction expenditures. The most prominent individual projects included major pipeline reinforcement in the Paradise Valley, Arizona and Monterey, California systems. Significant main extensions were also undertaken in Charleston, West Virginia, to expand West Virginia-American's role as a regional water supplier, and in Pennsylvania, to add new customers throughout the state. Pipeline installations continued throughout the American Water System to maintain adequate pressures, fire flows and reliability. Also, booster stations and storage tanks were completed at a number of operating systems during the year including tanks in Monterey, California; Chattanooga, Tennessee; and Franklin, Indiana. Engineering planning remained focused on the importance of having adequate source of supply and production facilities in every service area. This goal has been achieved at most systems and was aggressively addressed at the locations where additional supply is needed due to existing source limitations, projected growth, or regional opportunities. Detailed source of supply and production planning was undertaken for the systems in Greenwich, Connecticut; Jeffersonville/New Albany, Noblesville, Shelbyville, and Crawfordsville, Indiana; Lexington, Kentucky; Short Hills, New Jersey; Frackville, Pennsylvania; the Harrisburg West Shore area of Pennsylvania; St. Charles County, Missouri; as well as regional programs underway for Boone, Fayette and Putnam County, West Virginia. In addition, the Company's formal Comprehensive Planning Study program completed reports for Illinois-American Water Company, which encompasses seven service areas, and for Iowa-American Water Company. Studies are underway for the regulated companies in California, Indiana, Missouri, and Pennsylvania, in total encompassing 58 separate service areas. Also, a Comprehensive Planning Study has been initiated for the recently acquired Scranton-Wilkes Barre system in Pennsylvania.
CONSTRUCTION EXPENDITURES BY CATEGORY (000) 1996 1995 1994 1993 1992 ======================================================================================= Water plant Sources of supply $ 10,798 $ 18,156 $ 11,511 $ 8,054 $ 9,110 Treatment and pumping 77,071 125,350 82,700 51,332 53,303 Transmission and distribution 107,145 110,600 108,929 77,998 80,357 Services, meters and fire hydrants 47,946 45,835 40,506 34,401 33,989 General structures and equipment 29,029 29,602 20,703 19,585 17,935 Wastewater plant 1,805 1,219 1,390 1,746 2,885 - --------------------------------------------------------------------------------------- $273,794 $330,762 $265,739 $193,116 $197,579 ================================================
26 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- ACQUISITIONS OF WATER SYSTEMS In addition to the investment of capital in facilities which are absolutely essential to safe and reliable water service, the Company continues to search for opportunities to acquire water systems that represent the prospect for enhanced shareholder value. In that regard, on February 16, 1996, Pennsylvania-American Water Company, a subsidiary of the Company, acquired the water utility operations of Pennsylvania Gas and Water Company (now known as PG Energy Inc.) for $409.4 million. The acquired operations, which include 10 water treatment plants and 36 reservoirs, serve 400,000 people in Wilkes-Barre, Scranton and surrounding communities in northeastern Pennsylvania. With Pennsylvania-American's other service territories, primarily in the western and central-southeastern parts of the commonwealth, the Company believes that the addition of this large northeastern operation has increased this subsidiary's geographical diversity, will allow greater operational synergy and offers opportunities for further growth in this region. Pennsylvania-American also paid $.7 million for water systems in eastern and western Pennsylvania, increasing the population it serves by another 1,300 during 1996. On December 23, 1996, New Jersey-American Water Company completed its acquisition of the Howell Township Municipal Water System for $35.4 million. The system, which serves 18,000 people, is located between the Company's existing Monmouth County and Lakewood operations and will allow those two systems to be connected. The acquired assets will be used to serve all of the Company's Monmouth and Ocean County customers, thereby avoiding construction costs that would otherwise be required to meet regulatory requirements for a reliable water supply. In addition, New Jersey-American paid $0.1 million for a water system in Pemberton, Burlington County, serving a population of 1,400 people in 1996. In 1996, Illinois-American Water Company paid $1.0 million for six water systems. Nearly 4,000 people are served by the systems acquired in various parts of the state. West Virginia-American Water Company paid $0.8 million for three water systems in 1996. These systems, including the Pinch Public Service District in Kanawha County, will serve nearly 8,000 people. RESULTS OF OPERATIONS The Company's experience in assessing the impact of inflation on its business indicates that with timely rate increases authorized by regulators, revenue will likely keep pace with inflation. Inflation did not significantly impact the Company's financial position or results of operations in 1994 through 1996, and it is not expected to materially affect 1997 results. The results of operations for the Company for the year ended December 31, 1996 reflect the results of operations of the acquired business in northeastern Pennsylvania subsequent to the purchase date of February 16, 1996.
OPERATING REVENUES (000) 1996 1995 1994 =============================================================== Water service $879,268 $779,825 $750,744 Wastewater service 15,378 14,953 13,933 Authority management fees -- 8,042 5,564 - --------------------------------------------------------------- $894,646 $802,820 $770,241 ==================================
CONSOLIDATED OPERATING REVENUES Revenues in 1996 totaled $894.6 million and were 11% above those for 1995, reflecting the Company's acquisition in February of the water utility operations in northeastern Pennsylvania, which increased operating revenues by $56.6 million in 1996. Revenues in 1996 also were helped by strong water sales in the West and Midwest, which partially offset weather-related weakness in the East. The volume of water sold increased 3% to 247 billion gallons in 1996 compared with 240 billion gallons in 1995. The acquisition added 10.9 billion gallons of water sales volume in 1996. Rate authorizations adjusted the water service rates in effect for 11 regulated companies during 1996. These authorizations are expected to increase annual revenues by $62.9 million. Operating revenues for 1996 included approximately $43.7 million which resulted from these rate orders. Three rate adjustments have been authorized for regulated subsidiaries so far in 1997 which will generate approximately $3.3 million of additional annual revenues. Five applications are awaiting regulatory decisions. If granted in full, they would produce additional annual revenues of $26.7 million. Later in 1997, Pennsylvania-American Water Company will file its first rate increase application following its 1996 acquisition of water utility operations in the northeastern part of the commonwealth. 27 - --------------------------------------------------------------------------- Management's Discussion and Analysis On March 13, 1996, the New Jersey Board of Public Utilities approved a $39.5 million per annum rate increase for New Jersey-American Water Company, including $13.4 million in annual revenues anticipated from potential wholesale customers. The increase reflects the completion of the Delaware River Water Treatment Plant that delivers water throughout the southern New Jersey area by way of a 29-mile pipeline. This regional project was designed partly as a supply source for certain municipal water systems that have been mandated by the state to reduce their intake from an aquifer that is suffering from declining water levels. The actual revenues that New Jersey-American receives will depend on many factors, including the number of potential wholesale customers that ultimately enter into contracts to use water from the project as their alternative source of supply and the volume of water sold. A subsequent appeal has been filed with the Superior Court of New Jersey, Appellate Division, within the time provided in the applicable court rules. The appeal has challenged the design of the tariff, but not the level of revenues established by the New Jersey Board of Public Utilities order. New Jersey-American is contesting this appeal, and in the opinion of its management, such appeal is not likely to succeed. However, should this appeal be upheld, management believes the result would not have a material adverse effect on the operating results or financial position of the Company. Revenues of $802.8 million in 1995 were 4% above those for 1994. Eleven regulated companies received rate orders in 1995, authorizing increases in annual revenues aggregating $17.3 million. Operating revenues for 1995 included approximately $5.9 million which resulted from these rate orders. The 240 billion gallons of water sold in 1995 was a 1% increase compared to 1994.
PERCENTAGE OF WATER REVENUES BY CUSTOMER CLASS 1996 1995 1994 ============================================================== Residential 58.0% 57.9% 57.4% Commercial 22.4% 22.5% 22.6% Industrial 7.1% 7.0% 7.1% Public and other 11.6% 11.9% 12.0% Other water revenues .9% .7% .9% - -------------------------------------------------------------- 100.0% 100.0% 100.0% ===============================
RESIDENTIAL Residential water service revenues in 1996 amounted to $510.1 million, an increase of 13% over those for 1995. This 1996 revenue improvement followed an increase of 5% in 1995. The volume of water sold to residential customers increased by 2% in 1996 to 119.9 billion gallons. The average unit price of residential water increased by 10% in 1996 and by 2% in 1995. COMMERCIAL Revenues from commercial customers in 1996 rose by 12% to $197.3 million, following an increase of 4% in 1995. Commercial customers purchased 63.5 billion gallons of water in 1996, 3% more than in 1995. The average unit price of water increased by 9% in 1996, up from a 3% increase in 1995. INDUSTRIAL Industrial water use of 36.1 billion gallons in 1996 was 6% higher than in 1995. Revenues from industrial sales in the amount of $62.2 million were 14% above those recorded in 1995 due to an 8% increase in the average unit price of water. In 1995, revenues from industrial sales were 3% above those for 1994 due to a 4% increase in the average unit price of water. PUBLIC AND OTHER Public and other revenues in 1996 increased by 10% to $101.8 million following an increase of 2% in 1995. Revenues derived from municipal governments for fire protection services and customers requiring special private fire service facilities totaled $41.3 million in 1996, exceeding 1995 revenue from these customers by 13%. The 27.8 billion gallons of water sold to governmental entities and resale customers was 3% greater than the quantities sold in 1995. Revenues generated by these sales totaled $60.5 million and exceeded 1995 revenues by 8%.
PERCENTAGE OF WATER SALES (GALLONS) BY CUSTOMER CLASS 1996 1995 1994 =============================================================== Residential 48.5% 48.8% 48.2% Commercial 25.7% 25.7% 25.7% Industrial 14.6% 14.3% 14.7% Public and other 11.2% 11.2% 11.4% - --------------------------------------------------------------- 100.0% 100.0% 100.0% ================================
WASTEWATER SERVICE REVENUES Regulated subsidiaries provided wastewater collection service to portions of the Company's service area in New Jersey, Pennsylvania, Missouri and Indiana. Revenues from these services amounted to $15.4 million in 1996, compared with $15.0 million in 1995 and $13.9 million in 1994. MANAGEMENT FEES These fees represent charges for management services provided to public water and wastewater systems by American Commonwealth Management Services Company. In late December 1995, American Commonwealth Management Services was acquired by AmericanAnglian Environmental Technologies, a joint venture in which a subsidiary of the Company owns a 50% interest. 28 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- Management fees of $8.0 million were received for these services in 1995 compared with fees of $5.6 million in 1994. In 1996 a comparable level of management fees were received by AmericanAnglian.
OPERATING EXPENSES (000) 1996 1995 1994 ==================================================================== Operation and maintenance expenses $425,170 $402,362 $391,539 Depreciation and amortization 93,413 79,977 72,892 General taxes 82,017 76,208 73,085 - -------------------------------------------------------------------- $600,600 $558,547 $537,516 ==================================
CONSOLIDATED OPERATING EXPENSES Operating expenses in 1996 increased by 8% to $600.6 million, following a 4% increase in 1995. The acquisition of the water utility operations in northeastern Pennsylvania increased operating expenses by $30.8 million in 1996. Operation and maintenance expenses totaled $425.2 million in 1996, 6% higher than in 1995. These expenses had increased by 3% in 1995. The northeastern Pennsylvania acquisition increased operation and maintenance expenses by $19.8 million in 1996. Employee-related costs, representing 46% of operation and maintenance expenses, increased by 1% in 1996 and 2% in 1995. The primary components of employee-related costs are wage and salary expenses, which were up 3% to $153.3 million in 1996 following a 3% increase in 1995. The number of employees at year-end totaled 4,065, which was 8% above the employment level of 3,777 at the close of 1995 and 2% above the 3,992 employees at the end of 1994. The Company added 294 new employees due to the northeastern Pennsylvania acquisition in 1996. In 1995, because of the change in ownership of American Commonwealth Management Services Company and the sale of the assets of the Ohio Suburban Water Company, 79 employees left the Company. Excluding the effect of these acquisitions and dispositions, the Company's workforce has decreased by 212 employees or 5% since year-end 1993, as the result of continued efforts to improve operating efficiencies. Group insurance expenses, which include the cost of providing current health care and life insurance benefits as well as the expected cost of providing postretirement benefits, increased by 3% to $34.8 million in 1996 after a 12% decrease in 1995. The fluctuation in group insurance expense is attributable to the timing of the rate recovery permitted by regulatory authorities of the additional cost resulting from the adoption in 1993 of a new accounting standard requiring the Company to accrue the cost of postretirement benefits in a manner similar to that used to account for pensions. Postretirement benefit expense in excess of the amount recovered in rates is deferred when it is probable that recovery of such costs will be included in future revenues. In 1996, this expense increased as the portion of postretirement costs that were deferred pending future recovery decreased in comparison to 1995. These costs had declined in 1995 because of rate decisions allowing an increased portion of these expenses to be deferred and recovered in rates in future periods. Health care expenses have been moderated by certain cost containment measures, including required contributions from employees and early retirees toward the cost of health care benefits. In 1996, the Company implemented plan revisions that encourage plan participants to take advantage of a managed care plan option. Employees and early retirees not selecting the managed care plan option are required to make additional contributions. Pension expense decreased by 39% in 1996 to $5.7 million following a 54% increase in 1995. Pension cost is deferred by certain subsidiaries when it is probable such costs will be recovered in future water service rates as contributions are made to the plan. Cash contributions of $4.3 in 1996, $10 million in 1995 and $4.8 million in 1994 were made to the pension plan. Pension expense declined in 1996 reflecting the decrease in contributions resulting from the plan reaching full funded status. In 1995 the plan experienced a large gain in connection with the demutualization of an insurance company. Pension expense had increased in 1995 in conjunction with the resumption of contributions in mid-1994, after a period of several years during which no contributions were made due to the funded status of the plan.
OPERATION AND MAINTENANCE EXPENSES (000) 1996 1995 1994 ==================================================================== Employee-related costs $193,798 $191,151 $187,735 Fuel and power 34,654 33,282 33,216 Purchased water 45,069 44,114 40,375 Chemicals 17,693 14,974 13,089 Waste disposal 14,145 12,234 11,994 Maintenance materials and services 24,559 22,258 22,115 Operating supplies and services 60,626 54,416 53,399 Customer billing and accounting 19,998 16,917 14,809 Other 14,628 13,016 14,807 - -------------------------------------------------------------------- $425,170 $402,362 $391,539 ==================================
Expenses associated with the collection, treatment, and pumping of water include the cost of fuel and power, water purchased from other suppliers, chemicals for water treatment and purification, and waste disposal. These costs increased by 7% in 1996 after a 6% rise in 1995. 29 - --------------------------------------------------------------------------- Management's Discussion and Analysis The unit cost of water produced increased 4% in both 1996 and 1995. The 1996 increase in the unit cost of production reflects increased volume and associated increases in fuel and power, chemicals and waste disposal. Higher purchased water costs, reflecting increased volume and rate increases authorized for other utilities supplying water to several subsidiaries, were primarily responsible for the rise in the 1995 unit cost of production. Maintenance materials and services, which include emergency repairs as well as costs for preventive maintenance, increased by 10% in 1996 following a 1% increase in 1995. Operating supplies and services include the day-to-day expenses of office operation, legal and other professional services, as well as information systems and other office equipment rental charges. These costs increased by 11% in 1996 after a 2% increase in 1995. Customer billing and accounting charges increased by 18% in 1996 and by 14% in 1995. These costs increased in 1996 and 1995 because of a change from quarterly to monthly billing in several service areas. Other operation and maintenance expenses include regulatory costs and system-wide casualty and liability insurance premiums. These expenses increased by 12% in 1996 after decreasing by 12% in 1995. Regulatory costs vary from year-to-year because of changing levels of rate case activity and different amortization periods for these costs. Casualty insurance premiums fluctuate as a result of claims experience. Depreciation and amortization increased by 17% in 1996 and 10% in 1995. The higher depreciation expense in both years was primarily due to growth in utility plant in service, including the 1996 acquisition in northeastern Pennsylvania. General taxes, which include gross receipts, franchise, property, capital stock, payroll and other taxes, increased by 8% in 1996 after a 4% rise in 1995. Gross receipts and franchise taxes, which are a function of revenues, increased by 7% in 1996. Property and capital stock taxes are assessed on the basis of tax values assigned to assets and capitalization. These taxes in 1996 were 11% above those in 1995 due to higher property values and tax rate increases. Payroll taxes increased by 5% in 1996 due to the increase in the number of employees. CONSOLIDATED OTHER INCOME AND INCOME DEDUCTIONS The total allowance for funds used during construction recorded in 1996 was $11.7 million, which was 45% lower than in 1995. This decrease was due to the completion of New Jersey-American Water Company's Delaware River Regional Water Treatment Plant which began operation in early 1996. Interest expense rose 17% to $136.8 million in 1996 compared to 1995, primarily due to an increase in total debt to fund construction of new water service assets and the acquisition of the acquired business in northeastern Pennsylvania. This expense had increased by 6% in 1995. During 1995 the Company resolved its litigation with the Grafton Water District in Massachusetts to recover the fair market value of the water utility taken through eminent domain by the District in 1988. In 1990, a jury awarded the Company $5.6 million for these assets. Since that time, the District pursued various appeals, all of which resulted in reaffirmation of the jury award. In addition to the approximately $1.1 million paid by the District in 1988, the Company received $6.6 million which included the remainder of the jury award and $2.1 million in interest. Other income in 1996 includes a $1.8 million gain on the disposition of a condemned parcel of property. CONSOLIDATED INCOME TAXES Income taxes increased by 11% in 1996, following a 15% increase in 1995. The 1996 and 1995 increases in income taxes are due to higher taxable income. Details regarding the components of the total amount of state and federal income taxes, and a reconciliation of statutory to reported income tax expense are included in Note 12 to the financial statements.
SUMMARY OF TAXES (000) 1996 1995 1994 ======================================================================== Gross receipts and franchise taxes $ 35,684 $ 33,272 $ 32,168 Property and capital stock taxes 31,971 28,868 27,245 Payroll taxes 12,060 11,524 11,521 Other general taxes 2,302 2,544 2,151 State income taxes 9,227 8,079 7,718 Federal income taxes 54,601 49,567 42,194 - ------------------------------------------------------------------------ $145,845 $133,854 $122,997 ==================================
CONSOLIDATED NET INCOME Consolidated net income in 1996 totaled $101.7 million, a 10% increase over net income in 1995, which included an after-tax gain of $3.9 million related to the settlement of litigation in Massachusetts. Consolidated net income in 1995 was 17% above that recorded in 1994. Consolidated net income to common stock totaled $97.7 million in 1996 and was 11% above that reported for 1995. Without the gain from the settlement of litigation in 1995, consolidated net income to common stock in 1996 increased by 16% above that in 1995. Consolidated net income to common stock reported in 1995 had increased by 13%. 30 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - ---------------------------------------------------------------------------
CAPITALIZATION COMMON PREFERRED LONG-TERM (000) EQUITY STOCK DEBT ======================================================================= Company 1996 $1,057,874 $ 51,673 $ 116,136 1995 818,939 51,673 131,064 1994 733,440 51,673 131,071 1993 655,275 51,673 131,074 1992 609,572 52,153 73,275 - ----------------------------------------------------------------------- Regulated Subsidiaries 1996 $1,212,238 $ 49,048 $1,619,948 1995 953,718 50,325 1,260,389 1994 855,961 51,738 1,251,101 1993 768,921 54,532 1,060,776 1992 705,419 60,093 966,171 - ----------------------------------------------------------------------- Consolidated 1996 $1,057,874 $ 99,012 $1,773,538 1995 818,939 100,287 1,428,970 1994 733,440 101,698 1,381,972 1993 655,275 104,490 1,192,809 1992 609,572 109,529 1,036,604 - -----------------------------------------------------------------------
CAPITALIZATION RATIOS COMMON PREFERRED LONG-TERM (000) EQUITY STOCK DEBT ======================================================================= Company 1996 86% 4% 10% 1995 82% 5% 13% 1994 80% 6% 14% 1993 78% 6% 16% 1992 83% 7% 10% - ----------------------------------------------------------------------- Regulated Subsidiaries 1996 42% 2% 56% 1995 42% 2% 56% 1994 40% 2% 58% 1993 41% 3% 56% 1992 41% 3% 56% - ----------------------------------------------------------------------- Note: Long-term debt includes amounts due within one year.
LIQUIDITY AND CAPITAL RESOURCES Internal sources of cash flow are provided by retention of a portion of earnings, amortization of deferred charges, deferral of taxes and depreciation. Internal cash generation is influenced by weather patterns, economic conditions and the timing of rate relief. When internal cash generation is not sufficient to meet corporate obligations on a timely basis, external sources of funds are utilized. The availability and cost of external cash reflect the consistency and reliability of earnings. External sources of cash consist of short-term bank loans, the sale of securities -- bonds, preferred stock and common stock -- as well as advances and contributions from developers. THE PARENT COMPANY The Company pays all of its administrative and interest expenses, and pays dividends on all classes of stock from the dividends received from investments in its subsidiary companies. Remaining funds are retained for additional investment in subsidiaries. Investments are made when prospective returns are expected to continue at an adequate level or the potential for satisfactory earnings has been exhibited. Periodically, it is necessary to supplement cash flow with short-term bank loans. These loans are repaid as internal sources of cash allow and with proceeds from the issuance of new securities. In May 1996, the Company sold 3,643,100 shares of common stock at $37.625 per share in a public offering. Concurrently with the public offering, certain members of the Ware family, who were already substantial shareholders, agreed to purchase 556,900 shares of common stock at the price available to the public, less underwriting discounts and commissions, in a private offering. Including the effect of the July 1996 stock split, these offerings increased by 8,400,000 shares the number of the Company's shares of common stock outstanding. The Company used the net proceeds of $152.7 million from the sale of the common stock to invest in the equity of Pennsylvania-American Water Company, which in turn reduced short-term indebtedness incurred to finance its acquisition of water utility operations in northeastern Pennsylvania. 31 - --------------------------------------------------------------------------- Management's Discussion and Analysis The Company's Dividend Reinvestment and Stock Purchase Plan allows shareholders and customers of the regulated subsidiaries to purchase up to $5,000 of common stock each month directly from the Company at the then prevailing market price. Common dividends in the amount of $5.5 million were reinvested during 1996, which resulted in the issuance of 283,332 new shares of common stock. Proceeds received from optional cash purchases of 1,277,765 new shares of common stock totaled $24.2 million in 1996. Another 132,458 shares of common stock were issued in connection with the Employees' Stock Ownership Plan, 241,572 shares were issued in connection with the Long-Term Performance-Based Incentive Plan, and 259,505 shares of common stock were issued in connection with a 401(k) Savings Plan for Employees in return for cash contributions from employees totaling $3.0 million and Company contributions with a value of $2.1 million. The Company invested a total of $226.8 million, including the $152.7 million invested in Pennsylvania-American in connection with its acquisition, in common stock of subsidiaries during 1996. It also increased its equity investment in subsidiaries by $31.6 million from the earnings retained by them. Also, the Company repaid a $15 million bond that matured in 1996. The Company plans to continue to use short-term bank borrowings, as cash requirements warrant it, to finance additional investment in subsidiaries. Common stock also is expected to be issued in connection with the continuation of the Company's Dividend Reinvestment and Stock Purchase Plan, the Employees' Stock Ownership Plan, the Savings Plan for Employees and the Long-Term Performance-Based Incentive Plan. THE SUBSIDIARY COMPANIES Regulated subsidiary companies fund construction programs and supplement cash flow by borrowing from banks under individual credit lines established annually. Ample credit lines are available to provide funds needed for 1997 construction requirements and to maintain bank borrowings not yet refinanced on a long-term basis. Bank borrowings are repaid with the proceeds obtained from selling bonds and preferred stock either publicly or to institutional investors on a private placement basis, and selling common stock to the Company. Security offerings are made when they are of marketable size, meet indenture and charter requirements and can compete successfully in the capital market. In order to compete successfully, the individual company must have exhibited satisfactory earnings. Capitalization and dividend payout ratios are maintained within a range found acceptable for investor-owned water companies. During 1996, seven subsidiaries issued $197.4 million of taxable mortgage bonds at interest rates between 6.81% and 7.84%. Two subsidiaries issued tax-exempt debt totaling $51 million at interest rates of 6.00% and 5.85%. Proceeds from the sale of the bonds were used to repay bank loans, fund construction programs, and to refinance existing debt. Pennsylvania-American also assumed $141 million of long-term debt in connection with its acquisition of water utility assets in northeastern Pennsylvania. Aggregate bank borrowings of subsidiaries at year-end 1996 amounted to $109.3 million compared to $144.9 million at year-end 1995. During 1996, subsidiaries made mandatory payments to sinking funds in amounts adequate to retire $44.9 million of debt and redeem $1.3 million of preferred stocks. The subsidiary companies plan to fund construction programs, acquisitions and repay bank borrowings and maturing bonds with the issuance of approximately $187 million of long-term debt and $80 million of common stock to the Company in 1997. The combined amount of subsidiary bank borrowings and bonds maturing within one year during 1997 is expected to remain at approximately the current level. A discussion of the subsidiary companies' capital spending programs begins on page 24. REGULATION ECONOMIC Nineteen state commissions regulate the Company's utility subsidiaries. They have broad authority to establish rates for service, prescribe service standards, review and approve rules and regulations and, in most instances, they must approve long-term financing programs prior to their completion. The jurisdiction exercised by each commission is prescribed by state legislation and therefore varies from state to state. Since December 1995, water utilities in the state of Michigan are no longer subject to economic regulation. The commissioners in Arizona are elected by the voting public. The three directors of the Tennessee Regulatory Authority are appointed by the Governor, the Speaker of the Senate, and the Speaker of the House of Representatives. In Virginia, members of the State Corporation Commission are elected by a joint vote of the two houses of the general assembly. All other state commissioners regulating subsidiaries are appointed by the governors of the respective states and usually require approval by the state legislature. Commissions range in size from three to seven members. The background of the individuals serving in these important positions covers a broad spectrum. 32 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- Economic regulation deals with many competing, if not conflicting, public pressures. Rate adjustments normally are initiated by the regulated entity. Public hearings, which are basically financial fact-finding sessions, are conducted. The purpose of this process is to set rates for service which assure the financial viability of the regulated entity while ensuring customers high quality service at reasonable cost. A rate case focuses on four areas: o The amount of investment in facilities which provide public service o The operating and maintenance costs associated with providing that service o The capital costs for the funds used to provide the facilities which serve the public o The tariff design which allocates revenue requirements equitably across the customer base Prudent management dictates that a water utility anticipate the time required for the regulatory process and file for rate adjustments which will reflect the cost of providing service at the time the authorized rates become effective. Requests that regulators deal with single issue cost increases as they occur have met with limited success. Recovery of such costs is therefore normally delayed for the time required to move through the full regulatory process. The regulated subsidiaries aggressively pursue various methods of offsetting the adverse financial impact of regulatory lag. Certain subsidiaries have received rate orders allowing recovery of interest and depreciation expense related to the period of time from when a major construction project was placed in service until new rates reflecting the cost of the project went into effect. Several subsidiaries also now recover in rates a return on plant before it is in service instead of capitalizing an allowance for funds during construction. During the past year, 11 subsidiaries were authorized by regulatory agencies to increase rates for service. In each of these decisions, the principal issue addressed was rate base additions that result from continued investment in essential water service facilities. Some of the specific regulatory decisions reached in 1996 were as follows: o The New Jersey Board of Public Utilities, after extensive deliberation, concluded that the New Jersey-American Water Company acted reasonably and prudently in designing the largest water supply project ever constructed in the state. The project was initiated at the direction of the New Jersey Department of Environmental Protection as part of a statewide water supply management program. Recognizing the benefits of New Jersey-American's role as a regional water supplier, the decision permits the Company to defer for future recovery an amount equal to one-half of any anticipated revenue from non-franchise customers not actually received. o In Indiana, the Utility Regulatory Commission concluded that the purchase price paid by the Indiana-American Water Company in 1993 to acquire Indiana Cities Water Company, which recognized the market value of the acquired company, was properly includable in fair value rate base. o The West Virginia Public Service Commission authorized the West Virginia-American Water Company to increase rates in 1996, and pre-approved future rate increases to be effective in 1997 and 1998. In addition, West Virginia-American may seek further rate increases to reflect major construction projects in rate base. The Public Utility Commission of Ohio authorized a similar periodic rate increase approach for the Ohio-American Water Company. o In Pennsylvania, legislation was enacted which authorized the Public Utility Commission to establish tariff procedures for implementing surcharges between general rate decisions that reflect the cost of replacing aging distribution system infrastructure as incurred by regulated water utilities. American Water Works System personnel participate in regulatory conferences and meetings, including those conducted by regional regulatory associations. Our goal in this effort is to increase understanding of the industry and its unique regulatory requirements. The Company appreciates the thoughtful work of the Water Committee of the National Association of Regulatory Utility Commissioners. Its initiatives and the growing public awareness of the importance of adequate water supply have led to progressive regulation which has allowed utility subsidiaries to address, on a timely basis, water supply issues which otherwise would still be unresolved. 33 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- Management's Discussion and Analysis ENVIRONMENTAL Two areas of environmental regulation impact the water utility industry. The regulation of drinking water quality is legislated under the Safe Drinking Water Act, which most recently was amended in August of 1996. The regulation of wastes generated during the drinking water treatment process is legislated under the Clean Water Act, Resource Conservation and Recovery Act, and Toxic Substances Control Act. The Clean Water Act, which is expected to be amended by Congress in 1997, deals with discharges of waste to the nation's waters. The two other acts deal with disposal of waste products. Water utilities, individually and through industry associations, follow the development of these legislative mandates closely, and provide technical guidance to Congress on areas of improvement. By far, the Safe Drinking Water Act has the most potential for impact on water utilities, and has as its objective the improvement of public health. The regulated subsidiaries are, as a matter of policy, committed to compliance with all applicable environmental mandates and routinely support environmental protection initiatives. All environmental regulations promulgated under these acts are done so by the United States Environmental Protection Agency (EPA). As part of the regulatory development process, EPA solicits comments, and the American Water Works System regularly provides technical advice regarding proposed regulations. Its broad operating experience and current research effort afford the American Water Works System the unique opportunity to assist EPA in developing the most practical regulation possible. EPA has been working on several regulations, such as more stringent microbial control, more extensive limits for disinfection by-products, a limit for radon, and disinfection of ground waters. When Congress amended the Safe Drinking Water Act in 1996, it required EPA to proceed with all these regulations and more. For the first time, the Safe Drinking Water Act provides funding for improvements to water quality, forces EPA to better protect drinking water sources of supply from contamination, requires development of a national water plant operator certification program, requires water quality reports to consumers, and prohibits non-viable water systems from going into business. The American Water Works System supported these provisions and welcomes changes that improve service to customers and public health protection. As these new regulations go into effect, it is expected that the use of chlorine in water treatment will be modified. EPA is promoting less use of chlorine because of the potential for chlorinated by-products to be toxic. However, in most cases, EPA also desires greater disinfection to better protect against a waterborne disease outbreak due to microbes that are not easily disinfected. For many utilities, both objectives will only be reached by using a different disinfectant, such as ozone. However, ozone also creates some toxic by-products. So all water utilities will be faced with balancing microbial risk with chemical risk while holding down treatment costs, both capital and operating. Clearly the future is for less chlorine, but for many utilities, by-product limits can be reached without the need for ozone or some other very capital-intensive technology. The responsibility for monitoring compliance with the regulations promulgated by EPA rests with the individual states. In some instances, state regulations have established standards that are more demanding than the federal standards. All waste from the regulated subsidiaries' water treatment processes are either recycled or discharged. Solid wastes are disposed in accordance with current best practices, and with the proper permits from the authorities. Most solid wastes are disposed of in landfills, and some are taken to local sewage plants for treatment. In several instances, water treatment wastes are discharged to a river in accordance with state permits. 34 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- - --------------------------------------------------------------------------- Report of Independent Accountants TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF AMERICAN WATER WORKS COMPANY, INC. In our opinion, the accompanying consolidated balance sheet and consolidated statement of capitalization and the related consolidated statements of income and retained earnings, of cash flows and of common stockholders' equity of American Water Works Company, Inc. and Subsidiary Companies and the accompanying balance sheet and the related statements of income and retained earnings and of cash flows of American Water Works Company, Inc., present fairly, in all material respects, the consolidated financial position of American Water Works Company, Inc. and Subsidiary Companies and the financial position of American Water Works Company, Inc. at December 31, 1996 and 1995, and the consolidated results of operations and cash flows of American Water Works Company, Inc. and Subsidiary Companies for each of the three years in the period ended December 31, 1996, and the results of operations and cash flows of American Water Works Company, Inc. for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP Thirty South Seventeenth Street Philadelphia, Pennsylvania February 3, 1997 35 - --------------------------------------------------------------------------- Consolidated Balance Sheet (Dollars in thousands)
At December 31, 1996 1995 ============================================================================== ASSETS Property, plant and equipment Utility plant -- at original cost less accumulated depreciation $3,453,950 $2,884,681 Utility plant acquisition adjustments 52,156 35,121 Nonutility property, net of accumulated depreciation 31,302 20,144 Excess of cost of investments in subsidiaries over book equity at acquisition 22,690 22,638 - ------------------------------------------------------------------------------ 3,560,098 2,962,584 - ------------------------------------------------------------------------------ Current assets Cash and cash equivalents 12,974 23,717 Customer accounts receivable 67,293 61,786 Allowance for uncollectible accounts (1,115) (1,030) Unbilled revenues 53,868 47,790 Miscellaneous receivables 4,787 4,571 Materials and supplies 11,063 9,599 Deferred vacation pay 10,400 9,374 Other 7,994 8,563 - ------------------------------------------------------------------------------ 167,264 164,370 - ------------------------------------------------------------------------------ Regulatory and other long-term assets Regulatory asset -- income taxes recoverable through rates 177,064 172,265 Debt and preferred stock expense 28,736 20,753 Deferred pension expense 18,340 16,468 Deferred postretirement benefit expense 11,852 11,418 Deferred treatment plant costs 8,388 -- Deferred water utility billings 6,808 -- Tank painting costs 10,224 8,901 Funds restricted for construction 5,791 13,927 Other 37,591 32,455 - ------------------------------------------------------------------------------ 304,794 276,187 - ------------------------------------------------------------------------------ $4,032,156 $3,403,141 =================================
36 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - ---------------------------------------------------------------------------
1996 1995 ============================================================================== CAPITALIZATION AND LIABILITIES Capitalization Common stockholders' equity $1,057,874 $ 818,939 Preferred stocks with mandatory redemption requirements 40,000 40,000 Preferred stocks without mandatory redemption requirements 11,673 11,673 Preferred stocks of subsidiaries with mandatory redemption requirements 41,060 42,326 Preferred stocks of subsidiaries without mandatory redemption requirements 6,279 6,288 Long-term debt American Water Works Company, Inc. 116,000 116,000 Subsidiaries 1,600,394 1,268,649 - ------------------------------------------------------------------------------ 2,873,280 2,303,875 - ------------------------------------------------------------------------------ Current liabilities Bank debt 147,390 148,639 Current portion of long-term debt 57,144 44,321 Accounts payable 36,786 43,300 Taxes accrued, including federal income 10,803 13,098 Interest accrued 32,128 26,263 Accrued vacation pay 10,564 9,512 Other 40,155 35,940 - ------------------------------------------------------------------------------ 334,970 321,073 - ------------------------------------------------------------------------------ Regulatory and other long-term liabilities Advances for construction 129,466 131,141 Deferred income taxes 382,592 356,608 Deferred investment tax credits 37,345 38,515 Accrued pension expense 35,702 30,834 Accrued postretirement benefit expense 10,034 9,100 Other 4,081 3,658 - ------------------------------------------------------------------------------ 599,220 569,856 - ------------------------------------------------------------------------------ Contributions in aid of construction 224,686 208,337 - ------------------------------------------------------------------------------ Commitments and contingencies -- -- - ------------------------------------------------------------------------------ $4,032,156 $3,403,141 ================================= The accompanying notes are an integral part of these financial statements.
37 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- Consolidated Statement of Income and Retained Earnings (Dollars in thousands, except per share amounts; adjusted for 1996 stock split)
For the years ended December 31, 1996 1995 1994 ============================================================================== CONSOLIDATED INCOME Operating revenues $894,646 $802,820 $770,241 - ------------------------------------------------------------------------------ Operating expenses Operation and maintenance 425,170 402,362 391,539 Depreciation and amortization 93,413 79,977 72,892 General taxes 82,017 76,208 73,085 - ------------------------------------------------------------------------------ 600,600 558,547 537,516 - ------------------------------------------------------------------------------ Operating income 294,046 244,273 232,725 Allowance for other funds used during construction 6,540 11,771 5,890 Gain from eminent domain litigation -- 6,600 -- Other income 3,301 1,844 2,383 - ------------------------------------------------------------------------------ 303,887 264,488 240,998 - ------------------------------------------------------------------------------ Income deductions Interest 136,760 117,042 110,088 Allowance for borrowed funds used during construction (5,202) (9,573) (4,570) Amortization of debt expense 1,497 1,273 1,229 Preferred dividends of subsidiaries 3,616 3,698 3,814 Other deductions 1,714 2,341 1,873 - ------------------------------------------------------------------------------ 138,385 114,781 112,434 - ------------------------------------------------------------------------------ Income before income taxes 165,502 149,707 128,564 Provision for income taxes 63,828 57,646 49,912 - ------------------------------------------------------------------------------ Net income 101,674 92,061 78,652 Dividends on preferred stocks 3,984 3,984 3,984 - ------------------------------------------------------------------------------ Net income to common stock $ 97,690 $ 88,077 $ 74,668 ============================== Average shares of common stock outstanding (thousands) 74,609 66,764 63,836 Earnings per common share on average shares outstanding $ 1.31 $ 1.32 $ 1.17 ============================== CONSOLIDATED RETAINED EARNINGS Balance at beginning of year $622,061 $578,051 $539,539 Add: net income 101,674 92,061 78,652 Deduct: adjustment for 1996 stock split on shares issued during the year 6,269 1,567 1,770 - ------------------------------------------------------------------------------ 717,466 668,545 616,421 - ------------------------------------------------------------------------------ Deduct: dividends Preferred stock 3,528 3,528 3,528 Preference stock 456 456 456 Common stock -- $.70 per share in 1996, $.64 per share in 1995, $.54 per share in 1994 51,299 42,500 34,386 - ------------------------------------------------------------------------------ 55,283 46,484 38,370 - ------------------------------------------------------------------------------ Balance at end of year $662,183 $622,061 $578,051 ============================== The accompanying notes are an integral part of these financial statements.
38 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- Consolidated Statement of Cash Flows (Dollars in thousands)
For the years ended December 31, 1996 1995 1994 ============================================================================== CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 101,674 $ 92,061 $ 78,652 Adjustments Depreciation and amortization 93,413 79,977 72,892 Provision for deferred income taxes 22,288 15,344 17,482 Provision for losses on accounts receivable 5,479 4,288 3,762 Allowance for other funds used during construction (6,540) (11,771) (5,890) Employee benefit expenses less than funding (849) (6,643) (1,999) Deferred revenues, net (1,125) (17) 138 Deferred tank painting costs (2,544) (1,675) (2,308) Deferred rate case expense (1,897) (3,032) (2,171) Amortization of deferred charges 8,533 6,995 7,726 Other, net (2,347) 1,617 (1,500) Changes in assets and liabilities, net of effects from acquisitions Accounts receivable (5,175) (14,897) (5,759) Unbilled revenues (1,543) 9,897 (389) Other current assets 612 (785) 364 Accounts payable (6,514) (329) 11,985 Taxes accrued, including federal income (2,591) (254) 1,554 Interest accrued 3,465 (33) 3,070 Other current liabilities 4,178 8,353 (265) - ------------------------------------------------------------------------------ Net cash from operating activities 208,517 179,096 177,344 - ------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Construction expenditures (273,732) (330,762) (265,673) Allowance for other funds used during construction 6,540 11,771 5,890 Water system acquisitions (302,447) (5,738) (6,011) Proceeds from the disposition of property, plant and equipment 4,649 16,307 3,013 Removal costs from property, plant and equipment retirements (8,264) (7,204) (6,375) Funds restricted for construction activity 8,136 12,286 (20,314) - ------------------------------------------------------------------------------ Net cash used in investing activities (565,118) (303,340) (289,470) - ------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt 248,459 132,450 196,400 Proceeds from common stock, net of issuance costs 186,451 33,544 35,037 Net borrowings (repayments) under line-of-credit agreements (1,249) 66,214 (111,195) Advances and contributions for construction, net of refunds 17,829 19,296 22,586 Debt issuance costs (4,187) (1,735) (4,076) Repayment of long-term debt (44,887) (85,452) (7,303) Redemption of preferred stocks (1,275) (1,411) (2,792) Dividends paid (55,283) (46,484) (38,370) - ------------------------------------------------------------------------------ Net cash from financing activities 345,858 116,422 90,287 - ------------------------------------------------------------------------------ Net decrease in cash and cash equivalents (10,743) (7,822) (21,839) Cash and cash equivalents at beginning of year 23,717 31,539 53,378 - ------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 12,974 $ 23,717 $ 31,539 =============================== Cash paid during the year for: Interest, net of capitalized amount $ 134,084 $ 119,676 $ 108,653 =============================== Income taxes $ 49,197 $ 44,191 $ 34,429 =============================== The accompanying notes are an integral part of these financial statements.
39 - --------------------------------------------------------------------------- Consolidated Statement of Capitalization (Dollars in thousands, except per share amounts; adjusted for 1996 stock split)
At December 31, 1996 1995 ============================================================================== COMMON STOCKHOLDERS' EQUITY: Common stock -- $1.25 par value, authorized 300,000,000 shares, outstanding 78,421,302 shares in 1996 and 67,826,670 shares in 1995 $ 98,027 $ 84,783 Paid-in capital 298,448 114,161 Retained earnings 662,183 622,061 Unearned compensation (784) (2,066) - ------------------------------------------------------------------------------ 1,057,874 818,939 - ------------------------------------------------------------------------------ At December 31, 1996, common shares reserved for issuance in connection with the Company's stock plans were 60,923,162 shares for the Stockholder Rights Plan, 7,041,231 shares for the Dividend Reinvestment and Stock Purchase Plan, 937,240 shares for the Employees' Stock Ownership Plan, 314,961 shares for the Savings Plan for Employees and 458,428 shares for the Long-Term Performance-Based Incentive Plan. PREFERRED STOCKS WITH MANDATORY REDEMPTION REQUIREMENTS: Cumulative preferred stock -- $25 par value, authorized 1,770,000 shares 8.50% series (non-voting), outstanding 1,600,000 shares, due for redemption at par value on December 1, 2000 40,000 40,000 - ------------------------------------------------------------------------------ PREFERRED STOCKS WITHOUT MANDATORY REDEMPTION REQUIREMENTS: Cumulative preferred stock -- $25 par value 5% series, outstanding 101,777 shares 2,544 2,544 Cumulative preference stock -- $25 par value, authorized 750,000 shares 5% series (non-voting), outstanding 365,158 shares 9,129 9,129 Cumulative preferential stock -- $35 par value, authorized 3,000,000 shares, no outstanding shares -- -- - ------------------------------------------------------------------------------ 11,673 11,673 - ------------------------------------------------------------------------------ PREFERRED STOCKS OF SUBSIDIARIES: Dividend rate 3.9% to less than 5% 7,029 7,523 5% to less than 6% 5,573 5,719 6% to less than 7% 2,091 2,285 7% to less than 8% 2,320 2,370 8% to less than 9% 24,874 24,907 9% to less than 10% 4,752 4,970 10% to less than 11% 700 840 - ------------------------------------------------------------------------------ 47,339 48,614 - ------------------------------------------------------------------------------
Preferred stock agreements of certain subsidiaries require annual sinking fund payments in varying amounts and permit redemption at various prices at the option of the subsidiaries on thirty days' notice, or, in the event of involuntary liquidation, at par value plus accrued dividends. Sinking fund payments for the next five years will amount to $1,321 in 1997, $1,315 in 1998, $1,247 in 1999, $1,149 in 2000, and $1,074 in 2001. Redemptions of preferred stock amounted to $1,275 in 1996 and $1,411 in 1995. 40 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - ---------------------------------------------------------------------------
CURRENT MATURITIES 1996 1995 ============================================================================== LONG-TERM DEBT OF AMERICAN WATER WORKS COMPANY, INC.: 9.06% Series B-2 debentures, due December 1, 1999 -- $ 35,000 $ 35,000 7.41% Series C debentures, due May 1, 2003 -- 81,000 81,000 - ------------------------------------------------------------------------------ -- 116,000 116,000 - ------------------------------------------------------------------------------ Capital lease obligations to a subsidiary were $95 in 1996 and $40 in 1995. LONG-TERM DEBT OF SUBSIDIARIES: Interest Rate 1% to less than 2% 131 2,258 -- 4% to less than 5% 374 5,217 326 5% to less than 6% 46 118,599 112,646 6% to less than 7% 234 356,070 276,304 7% to less than 8% 282 592,218 297,323 8% to less than 9% 31,600 172,200 203,800 9% to less than 10% 23,004 288,017 311,021 10% to less than 11% 455 64,770 65,225 14% to less than 15% 700 -- 700 - ------------------------------------------------------------------------------ 58,826 1,599,349 1,267,345 Capital leases 318 1,045 1,304 - ------------------------------------------------------------------------------ $ 57,144 1,600,394 1,268,649 - ------------------------------------------------------------------------------ $2,873,280 $2,303,875 ========================
Maturities of long-term debt of subsidiaries, including sinking fund requirements, during the next five years will amount to $57,144 in 1997, $25,138 in 1998, $18,026 in 1999, $37,057 in 2000 and $107,531 in 2001. Long-term debt of subsidiaries is substantially secured by utility plant and by a pledge of certain securities of subsidiaries and affiliates. The accompanying notes are an integral part of these financial statements. 41 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- Consolidated Statement of Common Shareholders' Equity (Dollars in thousands, except per share amounts; adjusted for 1996 stock split)
Common Stock Common --------------------- Paid-in Retained Unearned Stockholders' Shares Par Value Capital Earnings Compensation Equity ============================================================================================================== BALANCE AT DECEMBER 31, 1993 62,487,486 $78,109 $ 37,627 $539,539 $ -- $ 655,275 Net income -- -- -- 78,652 -- 78,652 Dividend reinvestment 302,508 378 3,910 (189) -- 4,099 Stock purchase 2,185,072 2,732 26,993 (1,367) -- 28,358 Employees' stock ownership plan 164,708 206 2,283 (103) -- 2,386 Savings plan for employees 178,600 223 2,392 (111) -- 2,504 Incentive plan -- -- 2,798 -- (2,262) 536 Dividends: Preferred stocks -- -- -- (3,984) -- (3,984) Common stock, $.54 per share -- -- -- (34,386) -- (34,386) - -------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 65,318,374 81,648 76,003 578,051 (2,262) 733,440 Net income -- -- -- 92,061 -- 92,061 Dividend reinvestment 339,086 424 4,576 (212) -- 4,788 Stock purchase 1,809,872 2,262 24,936 (1,131) -- 26,067 Employees' stock ownership plan 154,730 193 2,363 (96) -- 2,460 Savings plan for employees 204,608 256 2,940 (128) -- 3,068 Incentive plan -- -- 3,343 -- 196 3,539 Dividends: Preferred stocks -- -- -- (3,984) -- (3,984) Common stock, $.64 per share -- -- -- (42,500) -- (42,500) - -------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 67,826,670 84,783 114,161 622,061 (2,066) 818,939 Net income -- -- -- 101,674 -- 101,674 Common stock offering 8,400,000 10,500 147,436 (5,250) -- 152,686 Dividend reinvestment 283,332 354 5,222 (90) -- 5,486 Stock purchase 1,277,765 1,597 23,211 (596) -- 24,212 Employees' stock ownership plan 132,458 166 2,428 (83) -- 2,511 Savings plan for employees 259,505 325 4,878 (99) -- 5,104 Incentive plan 241,572 302 1,112 (151) 1,282 2,545 Dividends: Preferred stocks -- -- -- (3,984) -- (3,984) Common stock, $.70 per share -- -- -- (51,299) -- (51,299) - -------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 78,421,302 $98,027 $298,448 $662,183 $ (784) $1,057,874 ========================================================================== The accompanying notes are an integral part of these financial statements.
42 AMERICAN WATER WORKS COMPANY, INC. - --------------------------------------------------------------------------- Balance Sheet (Dollars in thousands)
At December 31, 1996 1995 =========================================================================== ASSETS Investments in subsidiaries Securities $1,261,532 $1,003,088 Notes and advances 100 110 - --------------------------------------------------------------------------- 1,261,532 1,003,198 - --------------------------------------------------------------------------- Current assets Cash and cash equivalents 43 119 Other receivable from subsidiaries 907 2,673 Other 190 157 - --------------------------------------------------------------------------- 1,140 2,949 - --------------------------------------------------------------------------- Deferred debits Deferred income taxes 3,377 2,922 Debt expense 236 291 Preferred stock expense 184 231 Other 6 11 - --------------------------------------------------------------------------- 3,803 3,455 - --------------------------------------------------------------------------- Other long-term assets 9,788 8,982 - --------------------------------------------------------------------------- $1,276,363 $1,018,584 ============================ CAPITALIZATION AND LIABILITIES Capitalization Common stockholders' equity $1,057,874 $ 818,939 Preferred stocks with mandatory redemption requirements 40,000 40,000 Preferred stocks without mandatory redemption requirements 11,673 11,673 Long-term debt 116,095 116,040 - --------------------------------------------------------------------------- 1,225,642 986,652 - --------------------------------------------------------------------------- Current liabilities Bank debt 38,100 3,700 Current portion of long-term debt 41 15,024 Interest accrued 1,569 1,502 Taxes accrued, including federal income 31 -- Other 915 1,345 - --------------------------------------------------------------------------- 40,656 21,571 - --------------------------------------------------------------------------- Other long-term liabilities 10,065 10,361 - --------------------------------------------------------------------------- Commitments and contingencies -- -- - --------------------------------------------------------------------------- $1,276,363 $1,018,584 ============================ The accompanying notes are an integral part of these financial statements.
43 AMERICAN WATER WORKS COMPANY, INC. - --------------------------------------------------------------------------- Statement of Income and Retained Earnings (Dollars in thousands, except per share amounts; adjusted for 1996 stock split)
For the years ended December 31, 1996 1995 1994 ============================================================================== INCOME Income from subsidiaries Equity in earnings of subsidiaries Dividends $ 82,155 $ 77,182 $ 64,917 Undistributed earnings 31,605 26,315 24,532 - ------------------------------------------------------------------------------ 113,760 103,497 89,449 Interest 6 7 154 Other income 503 1,147 510 - ------------------------------------------------------------------------------ 114,269 104,651 90,113 - ------------------------------------------------------------------------------ Expenses Operating and administrative expenses 8,003 8,086 6,897 General taxes 252 239 232 Interest 11,639 11,027 10,642 Amortization of debt expense 55 56 56 - ------------------------------------------------------------------------------ 19,949 19,408 17,827 - ------------------------------------------------------------------------------ Income before income taxes 94,320 85,243 72,286 Provision for income taxes (7,354) (6,818) (6,366) - ------------------------------------------------------------------------------ Net income 101,674 92,061 78,652 Dividends on preferred stocks 3,984 3,984 3,984 - ------------------------------------------------------------------------------ Net income to common stock $ 97,690 $ 88,077 $ 74,668 ============================== Average shares of common stock outstanding (thousands) 74,609 66,764 63,836 Earnings per common share on average shares outstanding $ 1.31 $ 1.32 $ 1.17 ============================== RETAINED EARNINGS Balance at beginning of year $622,061 $578,051 $539,539 Add: net income 101,674 92,061 78,652 Deduct: adjustment for 1996 stock split on shares issued during the year 6,269 1,567 1,770 - ------------------------------------------------------------------------------ 717,466 668,545 616,421 - ------------------------------------------------------------------------------ Deduct: dividends Preferred stock 3,528 3,528 3,528 Preference stock 456 456 456 Common stock -- $.70 per share in 1996, $.64 per share in 1995, $.54 per share in 1994 51,299 42,500 34,386 - ------------------------------------------------------------------------------ 55,283 46,484 38,370 - ------------------------------------------------------------------------------ Balance at end of year $662,183 $622,061 $578,051 ============================== The accompanying notes are an integral part of these financial statements.
44 AMERICAN WATER WORKS COMPANY, INC. - --------------------------------------------------------------------------- Statement of Cash Flows (Dollars in thousands)
For the years ended December 31, 1996 1995 1994 ============================================================================== CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 101,674 $ 92,061 $ 78,652 Adjustments Undistributed earnings of subsidiaries (31,605) (26,315) (24,532) Other, net 1,210 1,620 1,558 Changes in assets and liabilities Receivables from subsidiaries 2,979 4 49 Other current assets (82) (28) (272) Taxes accrued, including federal income 50 (71) (495) Interest accrued 67 88 36 Other current liabilities (400) 595 (106) - ------------------------------------------------------------------------------ Net cash from operating activities 73,893 67,954 54,890 - ------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Investment in subsidiaries' common stock (226,839) (78,554) (63,315) Repayment of promissory notes by subsidiaries 10 10 4,510 Other (1,209) (501) (684) - ------------------------------------------------------------------------------ Net cash used in investing activities (228,038) (79,045) (59,489) - ------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from common stock, net of issuance costs 189,999 36,383 37,347 Dividends paid (55,283) (46,484) (38,370) Net borrowings under line-of-credit agreements 34,400 3,700 -- Repayment of long-term debt (15,033) (23) (15) Other (14) (13) (18) - ------------------------------------------------------------------------------ Net cash from (used in) financing activities 154,069 (6,437) (1,056) - ------------------------------------------------------------------------------ Net decrease in cash and cash equivalents (76) (17,528) (5,655) Cash and cash equivalents at beginning of year 119 17,647 23,302 - ------------------------------------------------------------------------------ Cash and cash equivalents at end of year $ 43 $ 119 $ 17,647 =============================== Cash paid (received) during the year for: Interest $ 11,572 $ 10,939 $ 10,606 =============================== Income taxes $ (6,905) $ (5,844) $ (5,848) =============================== The accompanying notes are an integral part of these financial statements.
45 - --------------------------------------------------------------------------- Notes to Financial Statements (Dollars in thousands, except per share amounts) NOTE 1: ORGANIZATION AND OPERATION American Water Works Company, Inc. through its regulated subsidiaries provides water and wastewater service in 21 states. As public utilities, the regulated companies function under rules and regulations prescribed by state regulatory commissions. NOTE 2: SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the parent company and all subsidiaries. Intercompany accounts and transactions are eliminated. Parent company financial statements reflect the equity method of accounting for investments in common stock of subsidiaries (cost plus equity in subsidiaries' undistributed earnings since acquisition). USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. REGULATION The regulated subsidiaries have incurred various costs and received various credits which have been reflected as regulatory assets and liabilities on the Company's consolidated balance sheet. Accounting for such costs and credits as regulatory assets and liabilities is in accordance with Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71). This statement sets forth the application of generally accepted accounting principles for those companies whose rates are established by or are subject to approval by an independent third-party regulator. Under SFAS No. 71, regulated companies defer costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that those costs and credits will be recognized in the rate-making process in a period different from the period in which they would have been reflected in income by an unregulated company. These deferred regulatory assets and liabilities are then reflected in the income statement in the period in which the same amounts are reflected in the rates charged for service. PROPERTY, PLANT AND EQUIPMENT Additions to utility plant and replacements of retirement units of property are capitalized. Costs include material, direct labor and such indirect items as engineering and supervision, payroll taxes and benefits, transportation and an allowance for funds used during construction. Repairs, maintenance and minor replacements of property are charged to current operations. The cost of property units retired in the ordinary course of business plus removal cost (less salvage) is charged to accumulated depreciation. The cost of property, plant and equipment is generally depreciated using the straight-line method over the estimated service lives of the assets. Utility plant acquisition adjustments include the difference between the purchase price of utility plant and its original cost (less accumulated depreciation) and are being amortized over a period of 40 years. Utility plant acquisition adjustments and the excess of cost of investments in subsidiaries over book equity at acquisition, prior to October 31, 1970, are not being amortized because in the opinion of management there has been no diminution in value. CASH AND CASH EQUIVALENTS Substantially all of the Company's cash is invested in interest bearing accounts. The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents consist primarily of investment grade commercial paper, bank certificates of deposit and United States Government securities. Cash equivalents are stated at cost plus accrued interest which approximates market value. MATERIALS AND SUPPLIES Materials and supplies are stated at average cost. REGULATORY AND OTHER LONG-TERM ASSETS The Company has recorded a regulatory asset for the additional revenues expected to be realized as the tax effects of temporary differences previously flowed through to customers reverse. These temporary differences are primarily related to the difference between book and tax depreciation on property placed in service before the adoption by the regulatory authorities of full normalization for rate making purposes. The regulatory asset for income taxes recoverable through rates is net of the reduction expected in future revenues as deferred taxes previously provided, attributable to the difference between the state and federal income tax rates under prior law and the current statutory rates, reverse over the average remaining service lives of the related assets. Debt expense is amortized over the lives of the respective issues. Call premiums on the redemption of long-term debt, as well as unamortized debt expense, are deferred and amortized to the extent they will be recovered through future service rates. Expenses of preferred stock issues without sinking fund provisions are amortized over 30 years from date of issue; expenses of issues with sinking fund provisions are charged to operations as shares are retired. 46 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- Pension expense in excess of the amount contributed to the pension plan is deferred by certain subsidiaries. These costs will be recovered in future service rates as contributions are made to the pension plan. Postretirement benefit expense in excess of the amount recovered in rates is deferred by certain subsidiaries. These costs will be reflected in future service rates within approximately five years from the January 1, 1993 adoption of Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," and the combined deferral recovery period will not exceed approximately 20 years. Deferred treatment plant costs consist of operating expenses, including depreciation and property taxes, and the carrying charges associated with several water treatment plants and related facilities acquired in 1996 (see Pennsylvania Acquisition in note 4) from the time the assets were placed in service until recovery of such costs is allowed in future service rates. A portion of these costs has been recognized in the rates charged for water service and is being amortized over a 10-year period ending in 2003 as authorized by the regulatory authorities. Recovery of the remaining costs is expected to be allowed by the regulatory authorities in future service rates. Deferred water utility billings represent revenue which will be recovered from customers in future years under the terms of qualified phase-in plans pursuant to the provisions of Statement of Financial Accounting Standards No. 92, "Regulated Enterprises--Accounting for Phase-In Plans." These regulatory assets have been recorded in accordance with the terms of rate orders received by the previous owners of water utility assets that were acquired in 1996 (see Pennsylvania Acquisition in note 4). The deferred billings are scheduled to conclude in 1998. Tank painting costs are generally deferred and amortized to current operations on a straight-line basis over periods ranging from 4 to 20 years, as authorized by the regulatory authorities in their determination of rates charged for service. OTHER CURRENT LIABILITIES Other current liabilities at December 31, 1996 and 1995 include payables to banks of $10,468 and $9,818, respectively, which represent checks issued but not presented to the banks for payment, net of the related bank balance. ADVANCES AND CONTRIBUTIONS IN AID OF CONSTRUCTION Regulated subsidiaries may receive advances and contributions to fund construction necessary to extend service to new areas. As determined by the regulatory authorities, advances for construction are refundable for limited periods of time as new customers begin to receive service. Amounts which are no longer refundable are reclassified to contributions in aid of construction. Utility plant funded by advances and contributions is excluded from rate base and is generally not depreciated for rate making purposes. Generally, advances and contributions received during the period of January 1, 1987 through June 12, 1996 have been included in taxable income and the related property is depreciable for tax purposes. As a result of a tax law change advances and contributions received subsequent to June 12, 1996 are excluded from taxable income. RECOGNITION OF REVENUES Service revenues for financial reporting purposes include amounts billed to customers on a cycle basis and unbilled amounts based on estimated usage from the date of the latest meter reading to the end of the accounting period. INCOME TAXES The Company and its subsidiaries participate in a consolidated federal income tax return. Federal income tax expense for financial reporting purposes is provided on a separate return basis, except that the federal income tax rate applicable to the consolidated group is applied to separate company taxable income and the benefit of net operating losses, principally at the parent company level, is recognized currently. Certain income and expense items are accounted for in different time periods for financial reporting than for income tax reporting purposes. Deferred income taxes have been provided on the difference between the tax bases of assets and liabilities and the amounts at which they are carried in the financial statements. These deferred income taxes are based on the enacted tax rates to be in effect when such temporary differences are expected to reverse. The regulated subsidiaries also recognize regulatory assets and liabilities for the effect on revenues expected to be realized as the tax effects of temporary differences previously flowed through to customers reverse. Investment tax credits have been deferred and are being amortized to income over the average estimated service lives of the related assets. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFUDC) AFUDC is a non-cash credit to income with a corresponding charge to utility plant which represents the cost of borrowed funds and a return on equity funds devoted to plant under construction. The regulated subsidiaries record AFUDC to the extent permitted by the regulatory authorities. 47 - --------------------------------------------------------------------------- Notes to Financial Statements (Dollars in thousands, except per share amounts) ENVIRONMENTAL COSTS Environmental expenditures that relate to current operations or provide a future benefit are expensed or capitalized as appropriate. Remediation costs that relate to an existing condition caused by past operations are accrued when it is probable that these costs will be incurred and can be reasonably estimated. ASSET IMPAIRMENT Long-lived assets and certain identifiable intangible assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, or a separate entity basis, may not be recoverable. If the sum of the future cash flows expected to result from the use of the assets and their eventual disposition is less than the carrying amount of the assets, an impairment loss is recognized. Measurement of an impairment loss is based on the fair value of the assets. A regulatory asset is charged to earnings if and when future recovery in rates of that asset is no longer probable. RECLASSIFICATION Certain reclassifications have been made to conform previously reported data to the current presentation. NOTE 3: STOCK SPLIT On July 3, 1996, the Board of Directors declared a two-for-one common stock split, in conjunction with an increase in the number of shares of common stock the Company is authorized to issue from 100,000,000 shares to 300,000,000 shares approved at the Company's Annual Meeting of Stockholders held May 2, 1996. The stock split was paid in the form of a 100% stock dividend whereby each holder of shares of common stock received one additional share of common stock for each share owned. The stock dividend was paid on July 25, 1996 to shareholders of record on July 15, 1996. The transaction had no effect on total stockholders' equity. The number of shares and the amounts for common stock, retained earnings, net income per share, and dividends paid per share of common stock have been restated to reflect the effect of the stock split. NOTE 4: ACQUISITIONS AND DISPOSITIONS PENNSYLVANIA ACQUISITION On February 16, 1996, the Company's subsidiary, Pennsylvania-American Water Company, acquired the water utility operations of Pennsylvania Gas and Water Company (now known as PG Energy Inc.) for $409,400. The acquired operations, which include 10 water treatment plants and 36 reservoirs, serve 132,000 customers in northeastern Pennsylvania. The acquisition was accounted for as a purchase, and the accompanying financial statements reflect the results of operations of the acquired business subsequent to the purchase date. The purchase price consisted of $262,500 in cash and the assumption of $146,900 of PG Energy Inc.'s liabilities, including $141,000 of its long-term debt. The cash payment was funded with short-term debt that was subsequently repaid with the proceeds from the Company's common stock offering (see note 7) and a portion of the proceeds from Pennsylvania- American's offering of $150,000 of 30-year, 7.8% General Mortgage Bonds. The unaudited pro forma results listed below were prepared as if the acquisition and related offerings had occurred on January 1, 1995, and include the historical results of the company and of the acquired operations. The unaudited pro forma information is not necessarily indicative of the results of operations that might have occurred had the acquisition actually taken place on the date indicated, or of future results of operations of the combined entities:
Year Ended December 31, 1996 1995 =========================================================== Revenues $902,190 $869,126 Net income 102,176 99,153 Earnings per common share $ 1.26 $ 1.27
HOWELL TOWNSHIP, NEW JERSEY ACQUISITION On December 23, 1996, the Company's subsidiary, New Jersey-American Water Company, acquired the water utility assets of Howell Township, New Jersey, at a total cost of $35,400. The system which serves 6,000 customers is located between New Jersey-American's existing Monmouth County and Lakewood operations. GRAFTON, MASSACHUSETTS EMINENT DOMAIN PROCEEDING During the second quarter of 1995, the Company resolved its litigation with the Grafton Water District in Massachusetts to recover the fair market value of the water utility taken through eminent domain by the District in 1988. In 1990, a jury awarded the Company $5,600 for these assets that had served 2,300 customers. Since that time, the District pursued various appeals, all of which resulted in reaffirmation of the jury award. In addition to the $1,100 paid by the District in 1988, the Company received $6,600 which includes the remainder of the jury award and $2,100 in interest. This produced a gain in 1995 of $3,900, or $.06 per share, after applicable income taxes. 48 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- OHIO SUBURBAN WATER COMPANY EMINENT DOMAIN PROCEEDING On September 29, 1995, the City of Huber Heights acquired, under threat of taking through eminent domain, the assets of the Ohio Suburban Water Company for $14,400. Ohio Suburban, which had served 14,600 customers, was acquired by the Company's subsidiary in Ohio as part of an acquisition of Midwestern water utilities in 1993. The sale of these assets, in accordance with a sales agreement providing for the Company to recoup the entire investment that it made only two years before, did not have an adverse financial effect on the Company. NOTE 5: JOINT VENTURE A subsidiary of the Company owns a 50 percent interest in AmericanAnglian Environmental Technologies, a joint venture with Anglian Water Plc., a British water and wastewater utility. AmericanAnglian provides both technical expertise and financing resources to communities to operate and upgrade their water and wastewater systems. The results of the joint venture are accounted for by the Company under the equity method. In December 1995, half of the common stock of the Company's American Commonwealth Management Services Company subsidiary was sold to Anglian Water Plc. for $1,174 in cash. The Company and Anglian then transferred ownership of American Commonwealth Management Services to their AmericanAnglian joint venture. American Commonwealth Management Services provides management and operating services, at a profit, to non-affiliated water and wastewater systems. It also owns facilities to regenerate carbon used for water filtration and those capabilities are being marketed to affiliated and non-affiliated water utilities. NOTE 6: UTILITY PLANT The components of utility plant by category at December 31 are as follows:
1996 1995 ================================================================== Water plant Sources of supply $ 187,358 $ 147,159 Treatment and pumping 956,858 669,161 Transmission and distribution 1,890,080 1,550,687 Services, meters and fire hydrants 702,906 595,156 General structures and equipment 266,440 213,070 Wastewater plant 31,267 29,451 Construction work in progress 101,874 270,824 - ------------------------------------------------------------------ 4,136,783 3,475,508 Less-accumulated depreciation 682,833 590,827 - ------------------------------------------------------------------ $3,453,950 $2,884,681 ========================
NOTE 7: COMMON STOCK OFFERING On May 9, 1996, the Company sold 3,643,100 shares of common stock at $37.625 per share in a public common stock offering. Concurrently with, and conditioned upon the completion of this offering, certain members of families that are existing large holders of common stock (the "Ware Family Buyers") agreed to purchase from the Company and the Company agreed to sell to the Ware Family Buyers 556,900 shares of common stock at the price available to the public, less underwriting discounts and commissions, in a private offering. Including the effect of the July 1996 stock split (see note 3), these offerings increased by 8,400,000 shares the number of the Company's shares of common stock outstanding. The net proceeds from the offerings were $152,700, after deducting the underwriting discounts and commissions and offering expenses payable by the Company. The Ware Family Buyers include William R. Cobb, Marilyn Ware Lewis and Paul W. Ware, who are directors of the Company. NOTE 8: COMMON STOCKHOLDERS' EQUITY DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN The Company's Dividend Reinvestment and Stock Purchase Plan provides for optional cash purchases of newly issued common stock of the Company. In addition to permitting record holders of common stock to have all or part of their dividends automatically reinvested in additional shares of common stock, the plan permits stockholders to purchase up to five thousand dollars of common stock each month directly from the Company. In 1994, initial costs of $507 associated with a plan amendment providing for optional cash purchase of stock were charged to paid-in capital. The plan was amended, as of March 1, 1996, to provide for new shares purchased under the plan to be priced at the applicable average market price. Until March 1, 1996, shares purchased with reinvested dividends or optional cash purchases were priced at 95% of the applicable average market price. STOCKHOLDER RIGHTS PLAN Each share of the Company's common stock has one Flip-Over Right and one Flip-In Right (the "Rights") attached. The Rights will not be exercisable until such time as a person or group (an "Acquiring Person") acquires or announces an offer for 25% or more of the Company's common stock. The Rights will then entitle the holder to buy from the Company one-half share of the Company's common stock for twenty dollars. Thereafter, if the Company is acquired in a merger or business combination in which the Company does not 49 - --------------------------------------------------------------------------- Notes to Financial Statements (Dollars in thousands, except per share amounts) survive, or if 50% or more of the Company's assets or earning power are sold or transferred, each Flip-Over Right will become the right to buy, at twice its then current exercise price, that number of shares of the acquiring person's common stock which at that time have a market value of four times the then current exercise price of the Flip-Over Right. If an Acquiring Person (i) acquires beneficial ownership of 35% or more of the Company's common stock, (ii) acquires the Company in a merger or business combination transaction in which the Company survives and its stock is not changed or (iii) engages in certain self-dealing transactions, each Flip-In Right not owned by the acquiror will become the right to buy, at twice its then current exercise price, that number of shares of the Company's common stock which at that time have a market value of four times the then current price of the Flip-In Right. The Rights are redeemable, in whole, but not in part, by the Company at a price of $.00025 per Right under certain circumstances. The Rights do not have voting or dividend rights and, until they become exercisable, have no dilutive effect on the earnings per share of the Company. NOTE 9: EMPLOYEE STOCK PLANS EMPLOYEES' STOCK OWNERSHIP PLAN The Company and its subsidiaries have an Employees' Stock Ownership Plan which provides for beneficial ownership of Company common stock by all employees who are not included in a bargaining unit. Each participating employee can elect to contribute an amount that does not exceed 2% of their wages for the preceding year. In addition to the employee's participation, the Company makes a contribution equivalent to 1/2% of each participant's qualified compensation for the preceding year, and matches 100% of the contribution by each participant. The Company expensed contributions of $1,427 for 1996, $1,408 for 1995 and $1,366 for 1994 that it made to the plan. The trustee of the plan may purchase shares of the Company's common stock from the Company, in the open market, or in a private transaction. SAVINGS PLAN FOR EMPLOYEES The Company and its subsidiaries have a 401(k) Savings Plan for Employees for all employees who have more than six months of service. Employee contributions are invested at the direction of the employee in one or more funds including a fund consisting entirely of common stock of the Company. The Company currently matches 45% of the first 4% of each employee's wages contributed to the plan. The Company expensed matching contributions to the plan totaling $2,198 for 1996, $1,429 for 1995 and $999 for 1994. All of the Company's matching contributions are invested in the fund of Company common stock. The trustee of the plan may purchase shares of the Company's common stock at the prevailing market price, from the Company in the open market, or in a private transaction. LONG-TERM PERFORMANCE-BASED INCENTIVE PLAN In 1994, the Company and its subsidiaries implemented a Long-Term Performance-Based Incentive Plan effective as of January 1, 1993. Under the plan, designated executives and other key employees will be eligible to receive awards if performance cycle goals based on earnings-per-share growth and total return to Company stockholders, in comparison to a designated peer group of water companies, are met. The plan is administered by the Compensation and Management Development Committee of the Board of Directors. The Committee will determine the value or range of values, including the maximum value, of awards to each participant. Awards may be paid in the form of cash, restricted shares of common stock, or a combination of both. The cost of the plan is being charged to expense over the three-year performance cycle. Such expense was $1,950 in 1996, $5,386 in 1995 and $914 in 1994. The market value of common stock expected to be awarded under the plan has been recorded as unearned compensation and is shown as a separate component of common stockholders' equity. NOTE 10: POSTRETIREMENT BENEFITS PENSION BENEFITS The Company and its subsidiaries have a noncontributory defined benefit pension plan covering substantially all employees. Benefits under the plan are based on the employee's years of service and average annual compensation for those 60 consecutive months of employment which yield the highest average. The following table provides pension cost components and the expected long-term rate of return on plan assets used in determining net pension cost:
1996 1995 1994 ================================================================ Service cost-benefits earned during the year $ 12,820 $ 8,332 $ 10,240 Interest cost on projected benefit obligation 28,189 25,560 24,360 Actual return on plan assets (35,343) (94,167) (9,383) Net amortization and deferral 1,311 67,768 (15,472) - ---------------------------------------------------------------- Net pension cost $ 6,977 $ 7,493 $ 9,745 ============================== Assumed asset earnings rate 8.50% 8.50% 8.50%
The Company's funding policy is to contribute at least the minimum amount required by the Employee Retirement Income Security Act of 1974. The Company made contributions to the plan of $4,307 in 1996, $9,993 in 1995 and $4,750 in 1994. Pension plan assets are invested in a number of investments including a guaranteed interest 50 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- contract with a major insurance company, equity mutual funds, United States Government securities and publicly traded bonds. In November 1995, the plan received 2,000,000 shares of common stock from Allmerica Financial Corporation in connection with the demutualization of its State Mutual Life Assurance Company subsidiary. State Mutual, as a mutual insurance company, was owned by its policyholders. The shares of Allmerica Financial received by the plan were subsequently sold, resulting in a net gain of approximately $47,000 to the plan. The actual return on plan assets also reflects the higher than expected returns in the general capital markets in 1996 and 1995. The following table reconciles plan assets and liabilities to the funded status of the plan at December 31:
1996 1995 ============================================================= Plan assets at fair value $404,321 $376,508 =================== Actuarial present value of benefit obligations: Vested benefits $304,800 $300,475 Non-vested benefits 6,895 7,873 - ------------------------------------------------------------- Accumulated benefit obligation 311,695 308,348 Effect of projected future salary increases 82,870 89,036 - ------------------------------------------------------------- Total projected benefit obligation $394,565 $397,384 =================== Projected benefit obligation less than (in excess) of plan assets $ 9,756 $(20,876) Unrecognized net transition asset (14,116) (16,468) Unrecognized prior service cost 2,180 919 Unrecognized net (gain) loss (21,012) 15,904 - ------------------------------------------------------------- Accrued pension cost $(23,192) $(20,521) =================== Discount rate assumption 7.50% 7.00% Compensation growth rate assumption 5.00% 5.00%
The Company also has two unfunded supplemental non-qualified pension plans that provide additional retirement benefits to certain employees of the Company and its subsidiaries. Pension costs for the supplemental plans were $1,299 for 1996, $1,163 for 1995 and $1,344 for 1994. At December 31, 1996, the projected benefit obligation for these plans totaled $12,510. Accrued as a pension liability on the balance sheet is $9,020 representing $6,994 of accrued pension cost and an unfunded accumulated benefit obligation in excess of accrued pension cost of $2,026. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company and its subsidiaries provide certain life insurance benefits for retired employees and certain health care benefits for retired employees and their dependents. Substantially all employees may become eligible for these benefits if they reach retirement age while still working for the Company. Retirees and their dependents under age 65 can elect either a comprehensive medical plan under which covered expenses are paid at 80% after an annual deductible has been satisfied or a managed care plan that requires copayments. Employees who elect to retire prior to attaining age 65 are generally required to make contributions towards their medical coverage until attaining age 65. Retirees and their dependents age 65 and over are covered by a Medicare supplement plan. The following table provides postretirement benefit cost components and the expected long-term rate of return used in determining net postretirement benefit cost:
1996 1995 1994 =================================================================== Service cost-benefits earned during the year $ 5,848 $ 4,641 $ 5,759 Interest cost on accumulated postretirement benefit obligation 11,545 11,637 10,374 Actual return on plan assets (3,545) (2,450) (975) Net amortization and deferral 5,325 5,196 5,648 - ------------------------------------------------------------------- Net postretirement benefit cost $19,173 $19,024 $20,806 =========================== Assumed asset earnings rate 7.9% 7.70% 7.70%
The transition obligation of $122,115 at January 1, 1993 is being amortized over 20 years. The Company made contributions to trust funds established for its postretirement benefit plans of $17,892 in 1996, $19,024 in 1995 and $20,806 in 1994. The Company's policy is to fund postretirement benefit costs accrued. Plan assets are invested in a mutual fund comprised of high quality debt securities, equity mutual funds and a bond money market fund. The following table reconciles the funded status of the plan with the liability included in the consolidated balance sheet at December 31:
1996 1995 ====================================================================== Plan assets at fair value $ 63,664 $ 47,446 ====================== Actuarial present value of postretirement benefit obligations: Retirees and dependents $ 64,718 $ 60,248 Fully eligible active plan participants 4,633 4,363 Other active plan participants 80,584 88,080 - ---------------------------------------------------------------------- Total accumulated postretirement benefit obligation $ 149,935 $ 152,691 ====================== Accumulated postretirement benefit obligation in excess of plan assets $ (86,271) $(105,245) Unrecognized transition obligation 91,631 97,357 Unrecognized prior service costs 11,585 -- Unrecognized net gain (26,979) (1,212) - ---------------------------------------------------------------------- Accrued postretirement benefit cost $ (10,034) $ (9,100) ====================== Discount rate assumption 7.50% 7.00% Compensation growth rate assumption 5.00% 5.00%
The health care cost trend rate, used to calculate the Company's cost for postretirement health care benefits, is a 7.0% annual rate in 1997 that is assumed to decrease 51 - --------------------------------------------------------------------------- Notes to Financial Statements (Dollars in thousands, except per share amounts) gradually to a 5.5% annual rate for 2000 and remain at that level thereafter for the comprehensive plan and a constant 5.5% annual rate for the managed care plan. A one-percentage-point increase in the health care cost trend rate would have increased the accumulated postretirement benefit obligation by $20,300 at January 1, 1997 and the aggregate of the service and interest cost components of postretirement benefit costs for 1996 by $3,200. NOTE 11: GENERAL TAXES Components of general tax expense for the years presented in the consolidated statement of income are as follows:
1996 1995 1994 =========================================================== Gross receipts and franchise $35,684 $33,272 $32,168 Property and capital stock 31,971 28,868 27,245 Payroll 12,060 11,524 11,521 Other general 2,302 2,544 2,151 ============================= $82,017 $76,208 $73,085 =============================
NOTE 12: INCOME TAXES Components of income tax expense for the years presented in the consolidated statement of income are as follows:
1996 1995 1994 ============================================================ STATE INCOME TAXES: Current $ 8,291 $ 7,938 $ 7,399 Deferred Current 99 59 97 Non-current 837 82 222 - ------------------------------------------------------------ $ 9,227 $ 8,079 $ 7,718 ============================== FEDERAL INCOME TAXES: Current $ 33,219 $ 34,485 $ 24,930 Deferred Current (69) (180) 4 Non-current 22,694 16,505 18,511 Amortization of deferred investment tax credits (1,243) (1,243) (1,251) - ------------------------------------------------------------ $ 54,601 $ 49,567 $ 42,194 ==============================
A reconciliation of income tax expense at the statutory federal income tax rate to actual income tax expense is as follows:
1996 1995 1994 ========================================================================== Income tax at statutory rate $57,926 $52,397 $44,997 Increases (decreases) resulting from -- State taxes, net of federal taxes 5,998 5,252 5,017 Flow through differences 742 556 874 Amortization of investment tax credits (1,243) (1,243) (1,251) Subsidiary preferred dividends 1,230 1,258 1,297 Other, net (825) (574) (1,022) - -------------------------------------------------------------------------- Actual income tax expense $63,828 $57,646 $49,912 ==============================
The following table provides the components of the net deferred tax liability at December 31:
1996 1995 =================================================================== DEFERRED TAX ASSETS: Advances and contributions $137,904 $132,613 Deferred investment tax credits 14,355 14,811 Other 19,001 16,066 - ------------------------------------------------------------------- 171,260 163,490 - ------------------------------------------------------------------- DEFERRED TAX LIABILITIES: Utility plant, principally due to depreciation differences 452,824 427,938 Income taxes recoverable through rates 70,410 66,429 Other 30,618 25,731 - ------------------------------------------------------------------- 553,852 520,098 - ------------------------------------------------------------------- $382,592 $356,608 ===================
As of December 31, 1996 and 1995, the parent company had no material temporary differences. No valuation allowances were required on deferred tax assets at December 31, 1996 and 1995. NOTE 13: LEASES The Company has entered into operating leases involving certain facilities and equipment. Rental expenses under operating leases were $8,973 for 1996, $8,985 for 1995 and $8,264 for 1994. Capital leases currently in effect are not significant. At December 31, 1996, the minimum annual future rental commitment under operating leases that have initial or remaining noncancellable lease terms in excess of one year are $4,677 in 1997, $3,438 in 1998, $2,441 in 1999, $1,683 in 2000 and $902 in 2001. 52 AMERICAN WATER WORKS COMPANY, INC., AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- NOTE 14: COMMITMENTS AND CONTINGENCIES Construction programs of subsidiaries for 1997 are estimated to cost approximately $383,000. Commitments have been made in connection with certain construction programs. The Company is routinely involved in condemnation proceedings and legal actions relating to several regulated subsidiaries. In the opinion of management, none of these matters will have a material adverse effect, if any, on the financial position or results of operations of the Company. NOTE 15: COMPENSATING BALANCES AND BANK DEBT During 1996 the Company and its subsidiaries maintained lines of credit with various banks. The total of the unused lines of credit at December 31, 1996 was $34,400 for the Company and $179,484 for the subsidiaries. Borrowings under such lines of credit generally are payable on demand and bear interest at variable rates. None of the agreements with lending banks have compensating balance requirements. The maximum amount of short-term bank borrowings outstanding during 1996 was $438,836, and the average amount outstanding during the year was $234,706. The weighted average annual interest rate on these borrowings during 1996 was 6.04%, and the interest rate at December 31, 1996 was 5.76%. NOTE 16: FAIR VALUES OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Current assets and current liabilities: The carrying amount reported in the balance sheet for current assets and current liabilities, including bank debt, approximates their fair values. Preferred stocks with mandatory redemption requirements and long-term debt: The fair values of the Company's preferred stocks with mandatory redemption requirements and long-term debt are estimated using discounted cash flow analyses based on the Company's current incremental financing rates for similar types of securities. The carrying amounts and fair values of the Company's financial instruments at December 31 are as follows:
CARRYING 1996 AMOUNT FAIR VALUE =========================================================================== Preferred stocks of the Company with mandatory redemption requirements $ 40,000 $ 43,197 Preferred stocks of subsidiaries with mandatory redemption requirements 41,060 44,977 Long-term debt of the Company 116,000 120,783 Long-term debt of subsidiaries 1,656,175 1,772,384
CARRYING 1995 AMOUNT FAIR VALUE =========================================================================== Preferred stocks of the Company with mandatory redemption requirements $ 40,000 $ 42,496 Preferred stocks of subsidiaries with mandatory redemption requirements 42,326 49,242 Long-term debt of the Company 131,000 140,632 Long-term debt of subsidiaries 1,296,339 1,455,561
NOTE 17: QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 1996 stock split, are as follows:
FIRST SECOND THIRD FOURTH 1996 QUARTER QUARTER QUARTER QUARTER =========================================================================== Operating revenues $198,189 $228,621 $247,616 $220,220 Operating income 55,425 76,797 91,545 70,279 Net income 17,031 26,505 36,306 21,832 Net income to common stock 16,035 25,509 35,310 20,836 Net income per common share $.23 $.35 $.45 $.27
FIRST SECOND THIRD FOURTH 1995 QUARTER QUARTER QUARTER QUARTER =========================================================================== Operating revenues $180,844 $200,662 $222,961 $198,353 Operating income 48,010 63,791 78,139 54,333 Net income 13,547 27,425 32,599 18,490 Net income to common stock 12,551 26,429 31,603 17,494 Net income per common share $.19 $.40 $.47 $.26
53 RANGE OF MARKET PRICES AWK is the trading symbol of American Water Works Company, Inc. on the New York Stock Exchange on which the Common Stock, 5% Preferred Stock and 5% Preference Stock of the Company are traded. Common Stock 5% Preferred Stock 5% Preference Stock - --------------------------------------------------------------------------- Newspaper listing AmWtr A Wat pr A Wat pf - --------------------------------------------------------------------------- 1996 High Low High Low High Low =========================================================================== 1st quarter $20-1/4 $18-1/4 $20 $18-1/2 $21-1/2 $18-1/2 2nd quarter 20-1/8 17-3/4 19-3/4 17 21-5/8 18 3rd quarter 22 19-1/2 19-1/2 17-3/4 20-1/2 17-1/2 4th quarter 21-3/4 18-7/8 18-1/4 18 22-1/2 18 Quarterly dividend paid per share 17-1/2 cents 31-1/4 cents 31-1/4 cents Number of shareholders at December 31, 1996 39,002 251 840 - --------------------------------------------------------------------------- 1995 =========================================================================== 1st quarter $14-3/4 $13-3/8 $19 $17 $19 $17 2nd quarter 16 14-1/4 19 17-1/8 19 17-3/4 3rd quarter 16-3/8 14-5/8 19-1/2 18 19-5/8 18 4th quarter 19-5/8 15-1/4 20-1/2 17-3/4 19-1/2 18 Quarterly dividend paid per share 16 cents 31-1/4 cents 31-1/4 cents Number of shareholders at December 31, 1995 32,653 275 936 - --------------------------------------------------------------------------- The common and 5% preferred stocks have voting rights. The common stock amounts have been adjusted for the 1996 stock split. [RECYCLE LOGO] This Annual Report is printed on recycled paper. 57 EX-21 5 EXHIBIT 21 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES Subsidiaries of the Registrant The following list includes the Registrant and all of its subsidiaries as of December 31, 1996. The voting stock of each company shown indented is owned, to the extent indicated by the percentage, by the company immediately above which is not indented to the same degree. All subsidiaries of the Registrant appearing in the following table are included in the consolidated financial statements of the Registrant and its subsidiaries. Percentage State of Voting Stock Name of Company Incorporation Owned American Water Works Company, Inc. American Commonwealth Company Delaware 100 American International Water Services Co. Delaware 100 American Water Works Service Company, Inc. Delaware 100 California-American Water Company California 100 Greenwich Water System, Inc. Delaware 100 Connecticut-American Water Company Connecticut 100 Hampton Water Works Company New Hampshire 100 Massachusetts-American Water Company Massachusetts 100 New York-American Water Company, Inc. New York 100 The Salisbury Water Supply Company Massachusetts 100 Illinois-American Water Company Illinois 99.75 Indiana-American Water Company, Inc. Indiana 100 Iowa-American Water Company Delaware 94.92 Kentucky-American Water Company Kentucky 100 Maryland-American Water Company Maryland 100 Massachusetts Capital Resources Company Delaware 100 Missouri-American Water Company Missouri 100 New Jersey-American Resources Company New Jersey 100 New Jersey-American Water Company, Inc. New Jersey 100* New Mexico-American Water Company, Inc. New Mexico 99.98 Michigan-American Water Company Michigan 100 Occoquan Land Corporation Virginia 100 Ohio-American Water Company Ohio 100 Paradise Valley Water Company Arizona 100 Pennsylvania-American Water Company Pennsylvania 95.86** Tennessee-American Water Company Tennessee 99.87 Virginia-American Water Company Virginia 100 West Virginia-American Water Company West Virginia 99.94 Bluefield Valley Water Works Company Virginia 100 - --------------------------------------------------------------------------- * Includes 7.82% which is owned by American Commonwealth Company, an affiliate of the Registrant. ** Includes .17% and 2.26% which are owned by American Commonwealth Company and Greenwich Water System, Inc., respectively, affiliates of the Registrant. EX-27 6
OPUR1 0000318819 W. TIMOTHY POHL 1,000 12-MOS DEC-31-1996 DEC-31-1996 PER-BOOK 3,453,950 106,148 167,264 267,203 37,591 4,032,156 98,027 297,664 662,183 1,057,874 81,060 17,952 1,716,394 147,390 0 0 57,144 0 0 0 954,342 4,032,156 894,646 63,828 600,600 664,428 230,218 8,216 238,434 136,760 101,674 3,984 97,690 51,299 125,498 208,517 1.31 0
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