-----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, AlpM+VaalHdOZQQg+CD+g4TN5OyDLhc5WUu/9DBj3gqCXlHd09J4DHbL7OGnwi5p b65UcgM4lGyD/x3IbCpszA== 0000318819-98-000005.txt : 19980327 0000318819-98-000005.hdr.sgml : 19980327 ACCESSION NUMBER: 0000318819-98-000005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980326 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-K SEC ACT: SEC FILE NUMBER: 001-03437 FILM NUMBER: 98574374 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-K 1 EXHIBIT INDEX ON PAGES 12-14 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 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. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant at March 9, 1998 was $1,784,168,299. As of March 9, 1998, there were a total of 79,992,518 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 1997 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 7, 1998 are incorporated by reference into Part III of this Form 10-K: Page 2 (beginning with the fifth full paragraph thereon) through page 4, the section entitled "Director Remuneration" on page 6, pages 7 and 8, and pages 12 through 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 1997, 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 1997, 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 4,034 at December 31, 1997. Page 2 Item 1A. Executive Officers of the Registrant The following sets forth the names, ages and business experience during the past five years of the executive officers of the Registrant. No family relationships exist among any of such executive officers, nor do any arrangements or understandings exist between any such executive officer and any other person pursuant to which he was selected as an officer. Name Age Business Experience During Past Five Years J. James Barr 56 President and Chief Executive Officer of the Registrant since March, 1998 and Acting President and Chief Executive Officer of the Registrant from November, 1997 to March, 1998. Vice President and Treasurer of the Registrant prior thereto. Gerald C. Smith 63 Vice President of the Registrant. W. Timothy Pohl 43 General Counsel and Secretary of the Registrant. Joseph F. Hartnett, Jr. 46 Treasurer of the Registrant since January, 1998. Vice President and Treasurer of American Water Works Service Company, Inc., service subsidiary of the Registrant, prior thereto. Robert D. Sievers 44 Comptroller of the Registrant. The executive officers are elected at the annual organizational meeting of the Board of Directors of the Registrant which is held in May. The executive officers serve at the pleasure of the Board of Directors. Successors to officers who resign, die or are removed during the year are elected by the Board. Item 2. Properties The Registrant leases its office space, equipment and furniture from one of its wholly-owned subsidiaries. The office space, equipment and furniture are located in Voorhees, New Jersey and are utilized by the Registrant's directors, officers and staff in the conduct of the Registrant's business. The regulated subsidiaries own, in the states in which they operate, transmission and distribution mains, pump stations, treatment plants, storage tanks, reservoirs and related facilities. Properties are adequately maintained and units of property are replaced as and when necessary. The Registrant considers the properties of its regulated subsidiaries to be in good operating condition. Page 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 1997, 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 1997, 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 1997, 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 4, 1998, appearing on pages 35 through 53 of the 1997 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 fifth full paragraph on page 2 through page 4 and in the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" on page 8 of the definitive Proxy Statement relating to the Registrant's Annual Meeting of Stockholders on May 7, 1998, 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 7, 1998, 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 7, 1998, 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 12 to 14 of this Report on Form 10-K. b) Reports on Form 8-K. During the last quarter of the period covered by this Report on Form 10-K, the Registrant filed no reports on Form 8-K. Page 6 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERICAN WATER WORKS COMPANY, INC. By: J. James Barr, President and Chief Executive Officer DATE: March 5, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature Title Date Principal Executive Officer: J. James Barr President and Chief March 5, 1998 Executive Officer Principal Financial Officer: J. James Barr President and Chief March 5, 1998 Executive Officer Principal Accounting Officer: Robert D. Sievers Comptroller March 5, 1998 Page 7 SIGNATURES (Cont'd.) Directors: William O. Albertini March 5, 1998 J. James Barr March 5, 1998 William R. Cobb March 5, 1998 Elizabeth H. Gemmill March 5, 1998 Henry G. Hager March 5, 1998 Nelson G. Harris March 5, 1998 Marilyn Ware Lewis March 5, 1998 Anthony P. Terracciano March 5, 1998 Paul W. Ware March 5, 1998 Horace Wilkins, Jr. March 5, 1998 Page 8 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT YEAR ENDED DECEMBER 31, 1997 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, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . .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, 1997 . . . . . . . . . 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, 1997 . . . . . . . . . . . . . . . . . . . . . . 39 Consolidated Statement of Capitalization of American Water Works Company, Inc. and Subsidiary Companies at December 31, 1997 and 1996 . . . . . . . . . . . . . . .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, 1997 . . . . . . . . . . . . . . . . . . . 42 Balance Sheet of American Water Works Company, Inc. at December 31, 1997 and 1996 . . . . . . . . . . . . . . . . 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, 1997 . . . . . . 44 Statement of Cash Flows of American Water Works Company, Inc. for each of the three years in the period ended December 31, 1997. . . . . . . . . . . . . . . . 45 Notes to Financial Statements . . . . . . . . . . . . . .46 through 53 *Incorporated by reference from the indicated pages of the 1997 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 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 11 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Prospectuses 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 4, 1998 appearing on page 35 of the Annual Report to Stockholders which is incorporated in this Annual Report on Form 10-K. PRICE WATERHOUSE LLP Philadelphia, Pennsylvania March 23, 1998 Page 12 AMERICAN WATER WORKS COMPANY, INC. INDEX TO EXHIBITS Exhibit Number Description 3 Articles of Incorporation and By-laws (a) Certificate of Incorporation of the Registrant, as amended and restated as of May 15, 1987, is incorporated herein by reference to Exhibit 3(a) to Form 10-K report of the Registrant for 1996. (b) Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant, effective May 9, 1989, is incorporated herein by reference to Exhibit 3(b) to Form 10-K report of the Registrant for 1996. (c) Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant, effective May 3, 1990, is incorporated herein by reference to Exhibit 3(c) to Form 10-K report of the Registrant for 1996. (d) Certificate of Designations of the Registrant, effective February 6, 1991, relating to its Cumulative Preferred Stock, 8.50% Series, is incorporated herein by reference to Exhibit 3(d) to Form 10-K report of the Registrant for 1996. (e) Certificate of Amendment of the Restated Certificate of Incorporation of the Registrant, effective May 2, 1996, is incorporated herein by reference to Exhibit 3(e) to Form 10-K report of the Registrant for 1996. (f) By-laws of the Registrant, as amended to March 5, 1998, are filed herewith. 4 Instruments Defining the Rights of Security Holders, Including Indentures (a) Indenture dated as of November 1, 1977 between the Registrant and The Fidelity Bank (name later changed to First Union National Bank), Trustee, is incorporated herein by reference to Exhibit E to Form 10-K report of the Registrant for 1977. (b) First Supplemental Indenture dated as of December 1, 1989 between the Registrant and Fidelity Bank, National Association (name later changed to First Union National Bank), as Trustee, is incorporated herein by reference to Exhibit 4(i) to Form 10-K report of the Registrant for 1989. Page 13 AMERICAN WATER WORKS COMPANY, INC. INDEX TO EXHIBITS Exhibit Number Description 4 (cont'd.) (c) Second Supplemental Indenture dated as of February 1, 1993 between the Registrant and Fidelity Bank, National Association (name later changed to First Union National Bank), as Trustee, is incorporated herein by reference to Exhibit 4(c) to Form 10-K report of the Registrant for 1992. (d) 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 incorporated herein by reference to Exhibit 10(c) to Form 10-K report of the Registrant for 1996. (d) Supplemental Executive Retirement Plan of the Registrant, as amended and restated July 1, 1997, is filed herewith. (e) Supplemental Retirement Plan of the Registrant, as amended and restated effective July 1, 1997, is filed herewith. Page 14 AMERICAN WATER WORKS COMPANY, INC. INDEX TO EXHIBITS Exhibit Number Description 10 (cont'd.) (f) Long-Term Performance-Based Incentive Plan of the Registrant, effective as of January 1, 1993, is incorporated herein by reference to Exhibit 10(f) to Form 10-K report of the Registrant for 1994. (g) Annual Incentive Plan of the Registrant, effective as of January 1, 1996, is incorporated herein by reference to Exhibit 10(j) to Form 10-K report of the Registrant for 1995. (h) Amendment No. 1 to the Annual Incentive Plan of the Registrant is filed herewith. (i) 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. (j) Agreement between the Registrant and George W. Johnstone dated December 17, 1997, is filed herewith. (k) Stay Incentive Award for J. James Barr dated November 6, 1997, is filed herewith. 13 Annual Report to Security Holders The Registrant's Annual Report to Stockholders for 1997 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, 1997. 23 Consents of Experts and Counsel See "Consent of Independent Accountants" on page 11 of this Form 10-K report. 27 Financial Data Schedule Financial Data Schedule for the fiscal year ended December 31, 1997. EX-3 2 EXHIBIT 3(f) AMERICAN WATER WORKS COMPANY, INC. BY-LAWS ADOPTED APRIL 16, 1970 AS AMENDED TO MARCH 5, 1998 ARTICLE I --------- SHAREHOLDERS ------------ Section 1. [As amended January 2, 1986 and further amended July 6, 1989] The annual meeting of the stockholders of the Corporation shall be held at its office at 1025 Laurel Oak Road, Voorhees, New Jersey, on the first Thursday in May of each year (or if said day be a legal holiday, then on the next succeeding day not a holiday), at eleven o'clock in the forenoon, daylight saving time or standard time whichever shall be legally in effect in the Township of Voorhees, New Jersey, on that date, or on such other date or at such other time or at such other place within the continental United States as may be designated in the notice of the annual meeting, for the purpose of electing directors and for the transaction of such other business as may properly be brought before the meeting. Section 2. [As amended July 6, 1989] Special meetings of the stockholders may be held upon call of the Board of Directors or the Executive Committee or the Chairman of the Board or the President or the holders of the outstanding shares of the Corporation that would be entitled to cast a majority of the votes on the matter or matters to be considered at the special meeting, at such place and at such time and date as may be fixed by the body or person or persons giving such call, and as may be stated in the notice setting forth such call. Section 3. [As amended July 6, 1989] Notice of the place, time and date of every meeting of stockholders shall be delivered personally or mailed at least ten days prior thereto to each stockholder of record entitled to vote at such meeting at his address as it appears on the records of the Corporation. Such further notice shall be given as may be required by law. Section 4. Except as otherwise provided by law or in the Certificate of Incorporation, as amended, of the Corporation, at all meetings of the stockholders the presence in person or the representation by proxy of the holders of the outstanding shares that would be entitled to cast at least a majority of votes on a particular matter shall constitute a quorum for the purpose of considering such matter. If there be no such quorum present for considering a particular matter, the meeting on such matter may be adjourned from time to time, by vote of a majority of those present or represented and entitled to vote on such matter, without notice other than by announcement at the meeting, until such a quorum be present. Section 5. Meetings of the stockholders shall be presided over by the Chairman of the Board, the Vice Chairman of the Board or the President or, if none of such officers is present, by a Vice President or, if no such officer is present, by a chairman to be chosen at the meeting. The Secretary of the Corporation or, in his absence, an Assistant Secretary, or in the absence of both the Secretary and an Assistant Secretary, a person appointed by the Chairman of the meeting shall act as secretary of the meeting. Section 6. Any stockholder entitled to vote at any meeting of stockholders may so vote in person or by proxy, but no proxy shall be acted upon after three years from its date, unless such proxy provides for a longer period. Section 7. [As amended January 2, 1986 and further amended March 5, 1992] At all elections of directors by the stockholders of the Corporation, each stockholder shall be entitled to vote as provided in the Certificate of Incorporation, as amended, of the Corporation. The Chairman of the Board or the chairman of each meeting at which directors are to be elected shall appoint an inspector of election, unless such appointment shall be unanimously waived by those stockholders present or represented by proxy at the meeting and entitled to vote at the election of directors. No director or candidate for the office of director shall be appointed as such inspector. Before undertaking his duties at any such meeting, the inspector shall take and subscribe an oath or affirmation faithfully to execute the duties of inspector at such meeting, with strict impartiality and according to the best of his ability, and shall take charge of the polls and after the balloting shall make a certificate of the result of the vote taken. Section 8. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, or such other action. Section 9. Any action required or permitted to be taken at any meeting of stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous consent shall be given to those stockholders who have not consented in writing. 2 ARTICLE II ---------- BOARD OF DIRECTORS ------------------ Section 1. (a) [As amended January 16, 1975 and further amended May 4, 1989, March 5, 1992 (effective May 7, 1992), September 4, 1997 and March 5, 1998 (effective May 7, 1998)] The Board of Directors shall consist of eleven directors, but the number of directors may be increased or decreased from time to time, within the limits as to the number specified in the Certificate of Incorporation, as amended, of the Corporation, in the manner hereinafter provided for amendment of the by-laws of the Corporation, but subject to Article Eleventh of the Certificate of Incorporation, as amended. (b) [As amended January 16, 1975 and further amended March 5, 1992] A majority of the number of directors shall constitute a quorum; provided, however, no amendment of this sentence shall be adopted which is in violation of the provisions of paragraph (h) of Section 1 of Division D of Article FOURTH of the Certificate of Incorporation, as amended. (c) [As amended January 16, 1975] Commencing with the annual election of directors in the year 1975, no person shall be qualified to serve as a director of the Corporation unless he is the beneficial holder of at least 100 shares of the common stock of the Corporation. (d) [As amended January 16, 1975 and further amended August 26, 1976, December 21, 1978, June 19, 1980, February 16, 1984 (effective June 1, 1984), January 2, 1986 and January 6, 1994] (i) No person shall be eligible for election to the Board of Directors of the Corporation in any year if such person shall be 72 years of age or older on the first day of the year of such election. (ii) Each member of the Board of Directors who ceases to be a director for any reason other than death after reaching the age of 65 shall thereupon become a Director Emeritus and shall serve as a Director Emeritus until the date of the second Annual Meeting following the date when such person first became a Director Emeritus. Each Director Emeritus will have the right to receive notice of meetings and to attend meetings of the Board of Directors and of each Committee thereof on which such Director Emeritus was serving immediately prior to becoming a Director Emeritus but will not have the right to vote on matters which come before the Board of Directors or any committee thereof. Section 2. Vacancies in the Board of Directors shall be filled by a majority of the remaining directors though less than a quorum and a director so chosen shall hold office until the next annual meeting of the stockholders and until the election and qualification of his successor. In case of any increase in the number of directors as provided in Section 1 of this Article II, the stockholders of the Board of Directors (by a majority of the directors constituting the Board prior to such increase), as the case may be, may, at the meeting at which such increase is voted, or at any adjournment or adjournments thereof, elect such additional directors as shall be required, and the directors so chosen shall hold office until the next annual meeting of the stockholders and until the election and qualification of their respective successors. 3 Section 3. Meetings of the Board of Directors shall be held at such place as may from time to time be fixed by resolution of the Board or as may be specified in the call of any meeting. Regular meetings of the Board of Directors shall be held at such times as may from time to time be fixed by resolution of the Board; and special meetings may be held at any time upon the call of the Executive Committee or of the Chairman of the Board or the President, by oral, telegraphic or written notice, duly served on or sent or mailed to each director not less than two days before the meeting. A meeting of the Board may be held without notice immediately after the annual meeting of stockholders at the same place at which such annual meeting is held. Notice need not be given of regular meetings of the Board held at times fixed by resolution of the Board. Section 4. The Board of Directors may, by resolution or resolutions, passed by a majority of the whole Board, designate an Executive Committee, to consist of two or more of the directors, as the Board may from time to time determine. The Executive Committee shall have and may exercise, when the Board is not in session, all the powers of the Board of Directors in the management of the business and affairs of the Corporation, and shall have power to authorize the seal of the Corporation to be affixed to all papers which may require it; provided that the Executive Committee shall not have or exercise any such power or powers if and so long as a "two years' default in preferred dividends," as defined in subdivision (f) of Section 1 of Division D of Article FOURTH of the Certificate of Incorporation, as amended, of the Corporation shall exist. The Executive Committee shall not have power to fill vacancies in the Board, or to change the membership of or to fill vacancies in the said Committee, or to make or amend by-laws of the Corporation. The Board shall have the power at any time to change the membership of the Executive Committee, to fill vacancies in it, or to dissolve it. The Board of Directors shall also have the power to designate one or more alternate members of said Executive Committee, which alternate members shall have power to serve, subject to such conditions as the Board of Directors may prescribe, as a member or members of said Executive Committee during the absence or inability to act of any one or more members of said Committee. The Executive Committee may make rules for the conduct of its business and may appoint such committees and assistants as it shall from time to time deem necessary. A majority of the members of the Executive Committee shall constitute a quorum. Section 5. The Board of Directors may also, by resolution or resolutions, passed by a majority of the whole Board, designate one or more other committees, each such committee to consist of one or more of the directors of the Corporation, which, to the extent provided in said resolution or resolutions, shall have and may exercise the powers of the Board of Directors in the management of the business affairs of the Corporation, and may have power to authorize the seal of the Corporation to be affixed to all papers which may require it; provided that no such committee shall have or exercise any such power or powers if and so long as a "two years' default in preferred dividends," as defined in subdivision (f) of Section 1 of Division D of Article FOURTH of the Certificate of Incorporation, as amended, of the Corporation shall exist. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. A majority of the members of any such committee may determine its action and fix the time and place of its meetings unless the Board of Directors shall otherwise provide. The Board of Directors shall have power at any time to change the membership of, to fill vacancies in, or dissolve any such committee. 4 Section 6. One or more of members of the Board of Directors or any committee thereof may participate in a meeting of the Board or a committee thereof by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Section 7. [As amended January 16, 1975] In addition to reimbursement of his reasonable expenses incurred in attending meetings or otherwise in connection with his attention to the affairs of the Corporation, each Director and each Director Emeritus as such, and as a member of the Executive Committee or of any other committee of the Board of Directors, shall be entitled to receive such compensation as may be fixed from time to time by the Board of Directors, subject to any applicable restriction imposed by the Certificate of Incorporation, as amended, of the Corporation. Section 8. [As amended February 4, 1987] (a) The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director, officer or employee of the Corporation or a constituent Corporation absorbed in a consolidation or merger or is or was serving at the request of the Corporation or a constituent Corporation absorbed in a consolidation or merger, as a director, officer or employee of another Corporation, partnership, joint venture, trust or other enterprise, including an employee benefit plan, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding to the extent that such person is not otherwise indemnified and to the extent that such indemnification is not prohibited by applicable law. For this purpose the Board of Directors may, and on request of any such person shall be required to, determine in each case whether or not the applicable standards in any applicable statute have been met, or such determination shall be made by independent legal counsel if the Board of Directors so directs or if the Board of Directors is not empowered by statute to make such determination. Expenses incurred by an officer, director or employee of the Corporation in defending a civil or criminal action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding subject to the provisions of any applicable statute. The obligations of the Corporation to indemnify a director, officer or employee under this Article II, including the duty to advance expenses, shall be considered a contract between the Corporation and such individual, and no modification or repeal of any provision of this Article II shall affect, to the detriment of the individual, such obligations of the Corporation in connection with a claim based on any act or failure to act occurring before such modification or repeal. (b) The indemnification and advancement of expenses provided by this Article II shall not be deemed exclusive of any other right to which one indemnified may be entitled, both as to action in such person's official capacity and as to action in another capacity while holding such office, and shall inure to the benefit of the heirs, executors and administrators of any such person. (c) The Board of Directors shall have the power to (i) authorize the Corporation to purchase and maintain, at the Corporation's expense, insurance on behalf of the Corporation and on behalf of others to the extent that power to do so has been or may be granted by statute, and (ii) give other indemnification to the extent permitted by law. 5 ARTICLE III ----------- OFFICERS -------- Section 1. The Board of Directors as soon as may be after its election shall choose a President of the Corporation, one or more Vice Presidents, a Secretary and a Treasurer and from time to time may appoint such Assistant Secretaries, Assistant Treasurers and such other officers, agents and employees as it may deem proper. The President shall be chosen from among the directors. The Board in its discretion may also choose a Chairman of the Board and a Vice Chairman of the Board from among the directors. Section 2. The term of office of each officer shall be one year, or until his successor is elected and qualified or until his earlier resignation or removal. Any officer may resign at any time upon written notice to the Corporation. Any officer may be removed from office at any time by the affirmative vote of a majority of the members of the Board then in office. Section 3. [As amended May 17, 1984 (effective June 1, 1984) and further amended May 4, 1988] The Chairman of the Board shall preside at all meetings of the stockholders (except as otherwise provided by statute) and of the Board of Directors, and shall have such other powers and duties as may from time to time be prescribed by the Board of Directors, but shall not participate in the day-to-day management or operations of the Corporation except as provided in Section 4 of this Article III in the event of a vacancy in the office of President. The Vice Chairman of the Board shall assist the Chairman of the Board in carrying out the Chairman's duties and, in the absence of the Chairman of the Board, shall have the powers and duties of the Chairman of the Board. The Vice Chairman shall also have such other powers and duties as may from time to time be assigned to such officer by the Board of Directors. Section 4. The President shall be the chief executive officer of the Corporation and shall supervise the carrying out of the policies adopted or approved by the Board. He shall have general power to execute bonds, deeds and contracts in the name of the Corporation and to affix the corporate seal; to appoint and fix the compensation of all employees and agents of the Corporation whose appointment is not otherwise provided for; to remove or suspend such employees or agents as shall not have been appointed by the Board of Directors, and to exercise all the powers usually appertaining to the chief executive officer of a corporation, except those required by statute or by these by-laws to be exercised by another officer. In the absence of the Chairman and the Vice Chairman of the Board, he shall preside at all meetings of the stockholders and of the Board of Directors. In the event of a vacancy in the office of President, the powers and duties of the President as chief executive officer of the Corporation shall, without further action of any kind, devolve upon and to the Chairman of the Board. Upon the filling of such vacancy, such powers and duties as chief executive officer shall, without further action of any kind, revert to the President of the Corporation. 6 Section 5. The several Vice Presidents shall perform all such duties and services as shall be assigned to or required of them, from time to time, by the Board of Directors or the President, respectively, and, unless their authority be expressly limited, shall act, in the order of their election, in the place of the President, exercising all his powers and performing his duties, during his absence or disability. Section 6. Subject to such limitations as the Board of Directors may from time to time prescribe, the other officers of the Corporation shall each have such powers and duties as generally pertain to their respective offices, as well as such powers and duties as from time to time may be conferred by the Board of Directors. Any officer, agent or employee of the Corporation may be required to give bond for the faithful discharge of his duties, in such sum and with such surety or sureties as the Board of Directors may from time to time prescribe. ARTICLE IV ---------- CERTIFICATES OF STOCK --------------------- Section 1. [As amended January 2, 1986] The interest of each stockholder of the Corporation shall be evidenced by certificates for shares of stock in such form as the Board of Directors may from time to time prescribe. The shares in the stock of the Corporation shall be transferable on the books of the Corporation by the holder thereof in person or by his attorney, upon compliance with Section 3 below or upon surrender for cancellation of certificates for the same number of shares, with an assignment and power of transfer endorsed thereon or attached thereto, duly executed, and with such proof of the authenticity of the signature as the Corporation or its agents may reasonably require. Section 2. [As amended January 8, 1998] The certificates of stock shall be signed by the Chairman of the Board, the President or a Vice President and by the Secretary or the Treasurer or an Assistant Secretary or an Assistant Treasurer of the Corporation (except that where any such certificate is manually countersigned by a transfer agent other than the Corporation or its employee or by a registrar other than the Corporation or its employee, any other signature on the certificate may be facsimile, engraved or printed), shall be sealed with the seal of the Corporation (or shall bear a facsimile of such seal, engraved or printed) and shall be countersigned and registered in such manner, if any, as the Board of Directors may by resolution prescribe. In case any officer or officers who shall have signed, or whose facsimile signature or signatures shall have been used on any such certificate or certificates, shall cease to be such officer or officers of the Corporation, whether because of death, resignation or otherwise, before such certificate or certificates shall have been delivered by the Corporation, such certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed such certificate or certificates, or whose facsimile signature or signatures shall have been used thereon, had not ceased to be such officer or officers of the Corporation. 7 Section 3. No certificate for shares of stock in the Corporation shall be issued in place of any certificate alleged to have been lost, stolen or destroyed, except upon production of such evidence of such loss, theft or destruction and upon delivery to the Corporation of a bond of indemnity in such amount, upon such terms and with such surety, as the Board of Directors in its discretion may require. ARTICLE V --------- CORPORATE RECORDS ----------------- The books and records of the Corporation may be kept outside of Delaware at such other place or places as the Board of Directors may from time to time determine. ARTICLE VI ---------- CHECKS, NOTES, ETC. ------------------- All checks and drafts on the Corporation bank accounts and all bills of exchange and promissory notes, and all acceptances, obligations and other instruments for the payment of money, shall be signed by such officer or officers or agent or agents or other employee or employees as shall be thereunto authorized from time to time by the Board of Directors. ARTICLE VII ----------- FISCAL YEAR ----------- The fiscal year of the Corporation shall begin on the first day of January in each year and shall end on the thirty-first day of December following. ARTICLE VIII ------------ CORPORATE SEAL -------------- The corporate seal shall have inscribed thereon the name of the Corporation and the words "Incorporated Delaware 1936." In lieu of the corporate seal, when so authorized by the Board of Directors or a duly empowered committee thereof, and permitted by law, a facsimile thereof may be impressed or affixed or reproduced. 8 ARTICLE IX ---------- OFFICES ------- The Corporation and the stockholders and the directors may have offices outside of the State of Delaware at such places as shall be determined from time to time by the Board of Directors. ARTICLE X --------- AMENDMENTS ---------- [As amended May 4, 1989] Subject to the provisions of Section 1 of Division D of Article Fourth and of Article Eleventh of the Certificate of Incorporation, as amended, of the Corporation, the by-laws of the Corporation, regardless of whether made by the stockholders or by the Board of Directors, may be altered, added to, or repealed at any meeting of the Board of Directors or of the stockholders, provided notice of the proposed change is given in the notice of the meeting. No change of the time or place for the annual meeting of the stockholders for the election of directors shall be made except in accordance with the Certificate of Incorporation, as amended, of the Corporation and the laws of Delaware. 9 EX-10 3 EXHIBIT 10(d) AMERICAN WATER WORKS COMPANY, INC. SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN (As Amended and Restated July 1, 1997) -------------------------------------- American Water Works Company, Inc. (the "Company") has adopted on behalf of itself and its subsidiaries the following Supplemental Executive Retirement Plan (the "Plan") to provide benefits, in addition to those provided under the Pension Plan for Employees of American Water Works Company, Inc. and Its Designated Subsidiaries (the "Pension Plan") to certain executive officers of the Company and its subsidiaries as shall be determined from time to time by the Board of Directors of the Company. 1. Effective Date: This Plan was originally effective as of January 1, 1985 and governed benefits for eligible employees whose service terminated between January 1, 1985 and June 30, 1997. This amendment and restatement is effective July 1, 1997 and governs benefits for employees terminating on or after that date. 2. Eligibility: Effective July 1, 1997, only employees who are or who subsequently become officers of the Company or President of any of its subsidiaries and certain other key employees of the Company or any of its subsidiaries shall be eligible for active participation in the Plan. Such employees shall become active participants upon their designation as such by the Compensation and Management Development Committee of the Board of Directors. Individuals whose participation in the Plan would cease effective July 1, 1997 under the preceding sentence shall continue to participate in the Plan. 3. Service Credit: An employee's years of service under this Plan shall be those credited under the Pension Plan unless the Board of Directors has determined that additional service credit should be granted under this Plan. 4. Normal or Late Retirement Benefits: (a) The monthly normal retirement benefit calculated under this Plan at a participant's actual retirement at or after attaining age 62 and completing 10 Years of Service shall be equal to (i) 1.5% of his Average Earnings not in excess of 50% of the Social Security Wage Base multiplied by his Years of Service up to 25 years, plus (ii) 2.2% of his Average Earnings in excess of 50% of the Social Security Wage Base multiplied by his Years of Service up to 25 years, plus (iii) 0.7% of his Average Earnings multiplied by his Years of Service in excess of 25 years. (b) "Average Earnings" means the average of the participant's salary paid and Annual Incentive Plan ("AIP") awards granted during those 36 consecutive months of the 120 months preceding his actual retirement that produce the highest average. An AIP award will be considered granted in the AIP year in which it is earned even though it is paid in the following year. (c) "Social Security Wage Base" means the average of the amount considered "wages" under Section 3121(a)(1) of the Internal Revenue Code, or any applicable provision of any successor laws, for the calendar year including the date as of which a benefit is to be calculated under this paragraph 4 and the preceding four calendar years. 5. Calculation of Benefits Payable: The monthly benefit payable under this Plan shall be the amount calculated under the immediately preceding paragraph reduced by an offset for benefits payable under the Pension Plan or any other defined benefit pension plan of the Company or any prior employer if credit is given under both this Plan and that other plan for the same period of service. In calculating the offsets, any limits imposed on benefits payable under the Pension Plan or any other plan described in the preceding sentence by Internal Revenue Code Section 415, or the applicable provisions of any successor thereto, shall be applied and both in applying these limits and in otherwise calculating the offsets, it shall be assumed that all benefits under the Pension Plan or any other relevant plan will be paid in the form of a joint and 50% surviving spouse's annuity if the participant is married and in the form of a single life annuity with no period certain if the participant is not married. The actuarial factors and assumptions to be used in converting any such benefits to the forms described above shall be those set forth in the Pension Plan. 6. Early Retirement: (a) A participant may elect early retirement after attaining age 55 provided that at retirement his age and Years of Service total at least 70 and further provided that if he has not attained age 62 and completed 10 Years of Service, the Board has approved his early retirement . (b) The early retirement benefit under this Plan shall be calculated in the same manner as the normal retirement benefit, taking into account only service and compensation to the employee's early retirement date. (c) Any Board approved benefit payable upon retirement prior to attaining age 62 and completing 10 Years of Service shall not be reduced on account of early retirement. -2- 7. Vested Benefit: (a) A deferred retirement benefit payable at age 65 shall be provided a surviving participant whose service is terminated after he has attained age 55 and completed 10 or more Years of Service. (b) In the event of a Change in Control, the lump sum present value of the participant's accrued benefit, determined using the same actuarial factors and methods as are applied under the Pension Plan, will be paid to the participant upon the date of the participant's termination of employment following a Change in Control, unless the participant is eligible for and elects another form of benefit. If a surviving vested participant is no longer employed on the date of the Change in Control, the lump sum present value of his benefit will be paid on that unless the participant is eligible for and elects another form of benefit. (c) A "Change in Control" occurs when any person or group acquires or announces an offer for 10% or more of the Company's common stock or when, during any two consecutive calendar years, individuals who at the beginning of such period were members of the Board of Directors cease for any reason to constitute at least a majority of the Board of Directors. 8. Benefits for Inactive Participants: Any participant who becomes ineligible to continue as an active participant in the Plan because he ceases to be eligible under paragraph 2 shall be deemed an inactive participant. If an inactive participant meets the age and service requirements under the Plan while an employee, he shall be entitled to receive a Normal, Early or Disability Retirement Benefit as described in the Plan, provided the benefit shall be calculated taking into account only service and compensation to the date of his becoming an inactive participant, and shall be offset by the benefit payable at his actual retirement under the Pension Plan or any other plan described in paragraph 5 above. 9. Disability Benefit: Upon qualification for a disability benefit under the Pension Plan, a participant shall be entitled to an immediate disability benefit hereunder, in an amount calculated in the same manner as the normal retirement benefit under paragraph 4 above, but based on his service and compensation to the date of his disability and with an offset, calculated in the manner described under "Calculation of Benefits Payable" in paragraph 5 above, for any disability benefits payable under the Pension Plan or any other plan described in paragraph 5 above. -3- 10. Form of Retirement Income Benefit: (a) Married Participant: The benefit payable to a participant who is married on the date his benefit is to commence shall be paid in the form of an annuity for the life of the participant with no period certain. The benefit, if any, payable after the participant's death shall be as specified under the heading "Death Benefits" below. (b) Unmarried Participant: The benefit payable to a participant who is not married on the date his benefit is to commence shall be paid in an annuity for the life of the participant with no period certain. No benefit shall be payable following an unmarried participant's death. (c) Lump Sum Benefit: (1) If the present value of the benefit payable to a participant under this Plan is $5000 or less, that benefit will be paid in a single lump sum. (2) If the present value of the benefit payable to a participant under this Plan, including for a married participant the value of the benefit described in paragraph 12(c), is more than $5000, the participant may elect, in lieu of any other benefits under this Plan, to receive that benefit in a single lump sum. (3) The present value of a benefit shall be determined using the same actuarial methods and factors as are applied under the Pension Plan. 11. Elective Forms of Benefit: A participant may elect, in lieu of receiving the normal form of benefit under paragraph 10, to receive a reduced benefit for his life, in which case his surviving Contingent Annuitant (who may be the participant's spouse or other designated beneficiary) shall be paid a benefit for the Contingent Annuitant's remaining life equal to 50%, 66-2/3%, or 100% of the participant's reduced benefit. The reduced benefit payable to a participant electing the form of benefit payable under this paragraph 11 shall be that percentage of his benefit payable in the normal form under paragraph 10 determined by his attained age and the attained age of his Contingent Annuitant set forth in the Table of Contingent Annuitant Percentages attached to the Pension Plan as Table 2, provided that if the participant's Contingent Annuitant is the participant's spouse, the value of the participant's benefit will include the value of the death benefit described in paragraph 12(c). -4- 12. Death Benefits: (a) Death Benefit Before Retirement: (1) Married Participants: Upon the death, before retirement, but while an active employee, of a married participant who has been credited under this Plan with at least 10 Years of Service, including Years of Service before the Effective Date of this Plan or before his participation in this Plan, the participant's surviving spouse shall be entitled to a benefit equal to the excess of the benefit computed as described in paragraph 4 above, based upon the participant's Years of Service and compensation to the date of his death and the assumption that he had retired on the day before his death, but converted using the actuarial factors specified in the Pension Plan to a joint and 100% surviving spouse benefit over the death benefits payable under the Pension Plan and any other plan described in paragraph 5 above. If the participant had not attained age 55 on the date of his death, his age shall be considered to have been 55 and his spouse's age shall be adjusted to bear the same relationship to age 55 as their actual attained ages bore to each other. This benefit shall terminate upon the earlier of the surviving spouse's death or remarriage. (2) Unmarried Participants: Upon the death, before retirement, but while an active employee, of an unmarried participant who has been credited under this Plan with at least 10 Years of Service, including Years of Service before the Effective Date of this Plan or before his participation in this Plan, the participant's estate shall be entitled to receive the benefit that would have been payable to the participant if he had retired on the day before his death with the Board's approval, and elected a lump sum benefit under paragraph 10(c) above. (b) Death of Vested Participant Before Retirement: There shall be no death benefit payable if a participant dies after terminating service under this Plan, but before becoming eligible to receive a benefit hereunder. (c) Death Benefit After Retirement: Upon a participant's death after retirement under this Plan, unless the participant has elected another form of benefit under paragraph 10 or 11, the participant's spouse at date of retirement shall be entitled to an amount equal to 50% of the benefit being paid to the participant hereunder at the date of his death. This benefit shall continue for the life of the recipient. -5- To record this amendment and restatement of this Plan, American Water Works Company, Inc. and Its Designated Subsidiaries have caused this Plan to be executed, on their behalf, by the appropriate officers of the Company on this 2nd day of October, 1997. AMERICAN WATER WORKS COMPANY, INC. By: George W. Johnstone President and Chief Executive Officer Attest: W. Timothy Pohl General Counsel and Secretary -6- EXHIBIT 10(e) AMERICAN WATER WORKS COMPANY, INC. SUPPLEMENTAL RETIREMENT PLAN (As Amended and Restated Effective July 1, 1997) ------------------------------------------------ American Water Works Company, Inc. (the "Company") has adopted on behalf of itself and its subsidiaries the following Supplemental Retirement Plan (the "Plan") to provide benefits, in addition to those provided under the Pension Plan for Employees of American Water Works Company, Inc. and Its Designated Subsidiaries (the "Pension Plan") to certain employees of the Company and its subsidiaries as shall be determined from time to time by the Board of Directors of the Company. 1. Effective Date: This Plan was originally effective as of April 1, 1989 and governed benefits for eligible employees whose service terminated between July 1, 1989 and June 30, 1997. This amendment and restatement is effective July 1, 1997 and governs benefits for employees terminating on or after that date. 2. Eligibility: Effective July 1, 1997, key employees of the Company or any of its subsidiaries may participate in this Plan only upon action after such date by the Compensation and Management Development Committee of the Board of Directors designating them as eligible to participate in the Plan. Individuals whose participation in the Plan would cease effective July 1, 1997 under the preceding sentence shall continue to participate in the Plan until the earlier of their termination of employment or July 1, 2002. 3. Service Credit: An employee's Years of Service under this Plan shall be those credited under the Pension Plan. 4. Normal or Late Retirement Benefit: (a) The monthly retirement benefit payable under this Plan to a participant who retires after having attained at least age 65 and after having been a participant for 5 or more years shall be equal to (i) 1.85% of his Final Average Earnings not in excess of the Social Security Wage Base multiplied by 1.3333 times his Years of Service up to 15 years, plus (ii) 2.1% of his Final Average Earnings in excess of the Social Security Wage Base multiplied by 1.3333 times his Years of Service up to 15 years, plus (iii) 1.85% of his Final Average Earnings not in excess of the Social Security Wage Base multiplied by 0.5 times his Years of Service in excess of 15 years and up to 25 years, plus (iv) 2.1% of his Final Average Earnings in excess of the Social Security Wage Base multiplied by 0.5 times his Years of Service in excess of 15 years and up to 25 years, plus (v) 0.7% of his Final Average Earnings multiplied by his Years of Service in excess of 25 years. (b) "Final Average Earnings" means the average of the participant's salary paid and Annual Incentive Plan ("AIP") awards granted during those 60 months taken into account in computing the participant's benefit under the Pension Plan. An AIP award will be considered granted in the AIP year in which it is earned even though it is paid in the following year. (c) "Social Security Average Wage Base" means the average of the amount considered "wages" under Section 3121(a)(1) of the Internal Revenue Code, or any applicable provision of any successor laws for the calendar year including the date as of which a benefit is to be calculated under this paragraph 4 and the preceding four calendar years. 5. Calculation of Benefits Payable: The monthly benefit payable under this Plan shall be the amount calculated under the immediately preceding paragraph offset by benefits payable under the Pension Plan. In calculating the offsets, any limits imposed on benefits payable under the Pension Plan by Internal Revenue Code Section 401(a)(17) or 415, or the applicable provisions of any successor thereto, shall be applied. It shall also be assumed that all benefits under the Pension Plan will be paid in the form of a single life annuity with no period certain. 6. Early Retirement: (a) A participant may elect early retirement after attaining age 55 provided that at retirement his age and Years of Service total at least 70. (b) The early retirement benefit under this Plan shall be calculated in the same manner as the normal retirement benefit, taking into account only service and compensation to the employee's early retirement date. (c) Any benefit payable upon retirement prior to attaining age 65 shall be reduced in accordance with the table of early retirement factors contained in the Pension Plan as in effect at the time of the participant's retirement. 7. Vested Benefit: (a) A deferred retirement benefit shall be provided a participant whose service is terminated after he has attained age 55 and completed 5 Years of Service. The benefit payable under this paragraph 7(a) shall be payable to a surviving participant at age 65. -2- (b) In the event of a Change in Control, the lump sum present value of the participant's accrued benefit, determined using the same actuarial factors and methods as are applied under the Pension Plan, will be paid to the participant upon the date of the participant's termination of employment following a Change in Control, unless the participant is eligible for and elects another form of benefit. If a surviving vested participant is no longer employed on the date of the Change in Control, the lump sum present value of his benefit will be paid on that unless the participant is eligible for and elects another form of benefit. (c) A "Change in Control" occurs when any person or group acquires or announces an offer for 10% or more of the Company's common stock or when, during any two consecutive calendar years, individuals who at the beginning of such period were members of the Board of Directors cease for any reason to constitute at least a majority of the Board of Directors. (d) Benefits for Inactive Participants: Any participant who is declared ineligible to participate in the Plan by the Compensation and Management Development Committee of the Board of Directors shall be deemed an inactive participant. If an inactive participant meets the age and service requirements under this Plan, while an employee, he shall be entitled to receive a Normal, Early or Disability Retirement Benefit under paragraphs 4, 6 or 8, respectively, provided the benefit shall be calculated taking into account only service and compensation to the date of his becoming an inactive participant and shall be offset by the benefit payable at his actual retirement under the Pension Plan. 8. Disability Benefit: Upon completing 5 Years of Service and qualifying for a disability benefit under the Pension Plan (assuming the 10 Years of Service requirement did not apply) a participant shall be entitled to an immediate disability benefit hereunder, in an amount calculated in the same manner as the normal retirement benefit under paragraph 4 above, but based on his service and compensation to the date of his disability and with an offset, calculated in the manner described under "Calculation of Benefits Payable" in paragraph 5 above, for any disability benefits payable under the Pension Plan. The disability benefit shall be payable until the earlier of the participant's death or the participant's ceasing to be disabled. 9. Normal Form of Benefit: (a) Subject to paragraph 9(b) the form of benefit payable to an unmarried participant or to a married participant who does not elect the form of benefit described in paragraph 10 shall be an annuity for the life of the participant with no period certain. No benefit shall be payable following the death of a participant receiving benefits in the normal form. -3- (b) If the present value of the benefit payable to a participant is $5000 or less, determined using the same actuarial methods and factors as are applied under the Pension Plan, that benefit will be paid in a single lump sum. 10. Elective Form of Benefit for Married Participants: A participant may elect, in lieu of receiving the normal form of benefit under paragraph 9, to receive a reduced benefit for his life, in which case his surviving Contingent Annuitant (who may be the participant's spouse or other designated beneficiary) shall be paid a benefit for the Contingent Annuitant's remaining life equal to 50%, 66-2/3%, or 100% of the participant's reduced benefit. The reduced benefit payable to a participant electing the form of benefit payable under this paragraph 10 shall be that percentage of his benefit payable in the normal form under paragraph 9 determined by his attained age and the attained age of his Contingent Annuitant set forth in the Table of Contingent Annuitant Percentages attached to the Pension Plan as Table 2. 11. Death Benefits Before Retirement: Upon the death, before retirement, but while an active employee, of a participant who has been credited under this Plan with at least 10 Years of Service, the participant's surviving spouse shall be entitled to a benefit equal to the excess of (i) the benefit computed as described in paragraph 4 above, based upon the participant's Years of Service and compensation to the date of his death and the assumption that he had retired on the day before his death, but converted using the actuarial factors specified in the Pension Plan to a joint and 100% surviving spouse benefit over (ii) the death benefits payable under the Pension Plan. If the participant had not attained age 55 on the date of his death, his age shall be considered to have been 55 and his spouse's age shall be adjusted to bear the same relationship to age 55 as their actual attained ages bore to each other. This benefit shall terminate upon the surviving spouse's death. Upon the death, before retirement, but while an active employee, of a participant who has been credited under this Plan with more than 5 but less than 10 Years of Service, the participant's surviving spouse shall be entitled to a benefit equal to the excess of (i) the benefit computed as described in paragraph 4 above, based upon the participant's Years of Service and compensation to the date of his death and the assumption that he had retired on the day before his death, but converted to a joint and 50% surviving spouse benefit and reduced for early commencement as necessary in accordance with the actuarial factors in the Pension Plan over (ii) the death benefits payable under the Pension Plan and any other plan described in paragraph 5 above. If the participant had not attained age 55 on the date of his death, his age shall be considered to have been 55 and his spouse's age shall be adjusted to bear the same relationship to age 55 as their actual attained ages bore to each other. This benefit shall terminate upon the surviving spouse's death. -4- 12. Death of Vested Participant Before Retirement: There shall be no death benefit payable if a participant dies after terminating service under this Plan, but before becoming eligible to receive a benefit hereunder. To record this amendment and restatement of this Plan, American Water Works Company, Inc. and Its Designated Subsidiaries have caused this Plan to be executed, on their behalf, by the appropriate officers of the Company on this 2nd day of October, 1997. AMERICAN WATER WORKS COMPANY, INC. By: George W. Johnstone President and Chief Executive Officer Attest: W. Timothy Pohl General Counsel and Secretary -5- EXHIBIT 10(h) AMENDMENT NO. 1 TO THE AMERICAN WATER WORKS COMPANY, INC. ANNUAL INCENTIVE PLAN Pursuant to the authority reserved to it in Section 3(h) of the Annual Incentive Plan, the Board of Directors of American Water Works Company, Inc. hereby amends the Annual Incentive Plan as follows: 1. Section 5 of the Annual Incentive Plan is deleted in its entirety and the following is inserted in lieu thereof: "Awards shall be payable in cash as soon as practicable after the consolidated financial results, and other goals for the Incentive Year have been determined and certified. Each Eligible Participant's annual award, if any, will be included as earnings under all Company-sponsored retirement plans, whether qualified or non-qualified, in accordance with the terms of the relevant plan as in effect from time to time. Eligible Participants may be permitted to defer receipt of their awards under and in accordance with the provisions of the American Water Works Company, Inc. Deferred Compensation Plan." 2. This amendment is effective as of January 1, 1998. To record the adoption of this Amendment No. 1 to the Annual Incentive Plan, American Water Works Company, Inc. has caused its corporate name and seal to be affixed hereto this 5th day of February, 1998. AMERICAN WATER WORKS COMPANY, INC. By: J. James Barr, Acting President and Chief Executive Officer Attest: W. Timothy Pohl, General Counsel and Secretary EXHIBIT 10(j) December 17, 1997 Mr. George W. Johnstone 81 Foxwood Drive Moorestown, NJ 08057 Dear George: As we have discussed, you have announced your intention to retire from American Water Works Company, Inc. (the "Company"). The purpose of this letter is to describe the various agreements that have been reached between you and the Company regarding your retirement from the Company and to further describe our respective obligations thereafter. 1. You are retiring from all of your positions with the Company and its affiliates, including but not limited to your positions as Chief Executive Officer, President, and member of the Board of Directors of the Company and any committee or subcommittee thereof, effective November 6, 1997 (the "Effective Date"), and will cease to be an employee of the Company in any capacity on January 1, 1998. Between November 6, 1997 and December 31, 1997, you will use and be paid your accrued vacation amount. 2. For the period commencing on the Effective Date and ending on the second anniversary of that date (the "Consulting Period") you agree to make yourself reasonably available to the Chairman or the Chief Executive Officer of the Company for consultation on business matters from time to time and to cooperate with the Company in supplying data, information, and expertise within your special knowledge or competence and otherwise assist the Company in a proper and appropriate fashion in the protection of its interests. The Company will reimburse you for reasonable out-of-pocket expenses (such as hotel and travel expenses) incurred by you in providing such services. 3. The Company agrees to pay you the following: a. an amount equal to $482,000 per year, payable from January 1, 1998 through December 31, 1999, in accordance with the Company's standard payroll practices for the payment of salary to its senior executives; b. an amount equal to the greater of (i) your annual incentive target bonus for the year ending December 31, 1997 (i.e. $108,300) under the Company's Annual Incentive Plan (the "Annual Plan") or (ii) an amount equal to the bonus otherwise payable to you under the Annual Plan based on your employment by the Company through December 31, 1997 (including the portion of such bonus otherwise mandatorily deferred thereunder), payable in equal monthly installments 2 over the period commencing as soon as practicable after the date such amount is finally determined and ending on December 31, 1999; and c. all amounts otherwise deferred, in years ending prior to January 1, 1997, pursuant to the mandatory deferral requirement of the Annual Plan, payable in accordance with the terms of the Annual Plan and any elections that you have made thereunder with respect to the distribution of such deferred amounts. 4. With respect to your participation in the Company's Long-Term Performance-Based Incentive Plan (the "Long-Term Plan"), the Company agrees to the following: a. Pursuant to the Long-Term Plan, the 64,250 shares of unvested restricted stock previously granted to you under the Long-Term Plan shall vest and be conveyed to you as of January 1, 1998, without restriction. b. An amount equal to the sum of (i) the number of shares of restricted stock that would otherwise have been awarded to you in respect of the period ended December 31, 1997 under the Long-Term Plan (the "Award Period"), based on your employment through that date, multiplied by the closing price of a share of Company common stock on the date such stock would have been issued as restricted stock under the Long-Term Plan in respect of the Award Period, plus (ii) the cash payment that would have been made under the Long-Term Plan in respect of the Award Period, based on your employment by the Company through December 31, 1997. Such sum shall be payable in equal monthly installments over a period commencing as soon as practicable after the date that the sum is finally determined and ending on December 31, 1999. 5. You will receive an annual amount, payable in equal monthly installments, commencing January 1, 1998 and continuing for the remainder of your lifetime, equal to $322,000 (with a 50% survivor annuity payable to your current spouse should she survive you), consisting of your benefit otherwise payable under the Company's Pension Plan and an enhanced benefit under the Company's Supplemental Executive Retirement Plan. This benefit will be appropriately increased if the payment to you under paragraph 3(b) exceeds $108,000. 6. As of January 1, 1998, you will be eligible to participate in the Company's postretirement welfare benefit plans (e.g. medical plans) as in effect from time to time thereafter, and you will receive all amounts otherwise payable under all of the Company's benefit plans and programs (e.g. qualified pension, ESOP, and 401(k) plans) applicable to you, in accordance with the terms and conditions thereof, provided that nothing in this paragraph shall result in any duplication of benefits. 3 7. You agree to abide to the following terms and conditions regarding confidentiality, noncompetition, and other related issues: a. Confidentiality. (i) You will not, at any time, without prior written consent of the Company, divulge, disclose or make accessible to any other person, firm, partnership, corporation or other entity any Confidential Information pertaining to the business of the Company or any of its affiliates except (A) while acting as a consultant for the Company, in the business of and for the benefit of the Company, (B) when required to do so by a court of competent jurisdiction, by any governmental agency having supervisory authority over the business of the Company, or by any administrative body or legislative body (including a committee thereof) with jurisdiction to order you to divulge, disclose or make accessible such information, or (C) while consulting with your immediate family, your legal counsel and your financial advisor(s); and (ii) you will assist and cooperate in good faith (including testimony) in connection with any litigation and disputes arising out of actions involving the Company or any of its affiliates, of which you have any knowledge or information. For purposes of this paragraph 7(a), "Confidential Information" will mean this Agreement, the Release, and non-public information which became known to you during the period of, or arising out of, your employment with the Company, concerning the financial data, strategic business plans, product development (or other proprietary product data), personnel information pertaining to present and former employees of the Company or its affiliates, and other non-public, proprietary and confidential information of the Company, its affiliates or customers, that, in any case, is not otherwise available to the public (other than by your breach of the terms hereof). Without limiting the generality of the foregoing, Confidential Information shall include trade secrets, customer and supplier lists, marketing plans, data concerning any engineering and administrative services pertaining to the business of the Company which is presently provided by the Company or contemplated by the Company for the future, and non-public data pertaining to the acquisition by the Company of opportunities to provide services to new customers and clients including privatization or joint venture activities. b. Noncompetition. Accordingly, you agree that, prior to January 1, 2000, without the prior written consent of the Company, you will not: (i) directly or indirectly, either as principal, manager, agent, consultant, officer, stockholder, partner, investor, lender or employee or in any other capacity, carry on, be engaged in or have any financial interest in, any business world-wide which is in competition with the business of the Company or with any 4 group, division or affiliate of the Company or act in a manner adversely to the interests of the Company; (ii) directly or indirectly solicit, contact or communicate with any customers of the Company who have been customers of the Company for two years preceding your termination of employment with the Company for the purpose of engaging in the business which is presently provided by, or contemplated by, the Company; or (iii) on your own behalf or on behalf of any person, firm or company, directly or indirectly, hire any person who has been employed by the Company or any of its affiliates at any time during the 12 months immediately preceding such hiring. c. For purposes of this paragraph 7, a business will be deemed to be in competition with the Company if it is involved in the purchase, sale or other dealing in any property or the rendering of any service purchased, sold, dealt in or rendered by the Company as a part of the business of the Company at the time of your termination of employment. Moreover, for the purposes of this paragraph 7, actions which will be considered to be engaging in a business which is in competition with the business of the Company also include identifying, facilitating or advising others about the acquisition of opportunities to provide such services to new customers and clients (including privatization and joint venture activities). Nothing in this paragraph 7 will be construed so as to preclude you from investing in any publicly held company, provided your beneficial ownership of any class of such company's securities does not exceed 2% of the outstanding securities of such class, nor from continuing to hold your current positions on the Boards of Directors of the Mellon Bank and the American Water Works Research Foundation. d. You agree that this covenant not to compete is reasonable under the circumstances and will not interfere with your ability to earn a living or to otherwise meet your financial obligations. You and the Company agree that if in the opinion of any court of competent jurisdiction such restraint is not reasonable in any respect, such court will have the right, power and authority to excise or modify such provision or provisions of this covenant as so amended. You agree that any breach of the covenants contained in this paragraph 7 would irreparably injure the Company. e. You agree that prior to January 1, 2000 you will not (except as required by law) directly or indirectly make any disparaging statement, or release any information, or encourage others to make any statement or release any information that is designed to embarrass or criticize the Company, its affiliates, associates, directors or shareholders, or its personnel policies and practices to any of the Company's customers, competitors, employees, former employees, or the press or other media in any country; 5 provided, that it will not be a violation of this paragraph 7(e) for you to make truthful statements when required to do so by a court of law, by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body (including a committee thereof) with the jurisdiction to order you to divulge, disclose or make accessible such information. Similarly, the Company agrees during such period not to make any disparaging statement, or release any information, or encourage others to make any statement or release any information that is designed to embarrass or criticize you or your performance of your duties and responsibilities while employed with the Company. f. You agree that prior to January 1, 2000 you will not engage in any contact with the media with respect to the Company, its affiliates, their employees, their shareholders or their directors without the prior written consent of the Company. g. (i) If you breach any of the covenants contained in this paragraph 7, you agree that the Company may, in addition to pursuing any other remedies it may have in law or in equity, cease making any payments otherwise required by this Agreement (except for payments under Section 5 hereof, which shall not be reduced or eliminated in the event of such breach) and obtain an injunction against you from any court having jurisdiction over the matter restraining any further violation of this Agreement by you. (ii) The Company and you recognize that each party will have no adequate remedy at law for breach by the other of any of the covenants set forth in this paragraph 7 and that in the event of any breach of these covenants, the Company and you hereby agree and consent that the other will be entitled to seek a decree of specific performance, mandamus or other appropriate remedy to enforce the performance of such covenants. 8. The Company agrees to provide you with legal counsel and to indemnify you, in accordance with and to the fullest extent permitted by applicable law, as it may exist from time to time, if you became a party or are threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal administrative or investigative ("Action"), by reason of the fact that you were a director, officer, employee or agent of the Company or are or were serving at the request of the Company as a director, officer, employee or agent of another corporation (including but not limited to a subsidiary or affiliate of the Company), against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonable incurred in connection with any Action. The Company also agrees to continue 6 your coverage under the applicable Company's Directors and Officers Liability Policies. 9. All payments due under this Letter Agreement shall be subject to withholding taxes and any other applicable deductions as required by law and may be reduced accordingly. 10. You and the Company agree that this Letter Agreement shall be binding upon and inure to the benefit of your heirs and representatives and the assigns and successors of the Company, but neither this Letter Agreement nor any rights or obligations hereunder shall be assignable or otherwise subject to hypothecation by you (except by will or by operation of the laws of intestate succession) or by the Company, except that the Company shall assign this Letter Agreement to any successor (whether by merger, purchase or otherwise) to all or substantially all of the stock, assets or businesses of the Company and the Company shall require such successor to assume expressly and agree to perform this Letter Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. 11. You agree to execute a release substantially in the form attached hereto as a condition to the receipt of any payment hereunder. 12. This Agreement will be construed and interpreted in accordance with the laws of the State of Delaware without regard to rules pertaining to conflict of laws. 7 13. This Agreement may be executed in counterparts. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first written above. 12/17/97 George W. Johnstone American Water Works Company, Inc.: Marilyn Ware Lewis By: Marilyn Ware Lewis Title: Chairman of the Board RELEASE ------- George Johnstone hereby covenants and agrees not to sue or commence any other proceeding against American Water Works Company, Inc. (the "Company") or any of the Company's predecessors, successors, assigns, agents, fiduciaries, parents, subsidiaries, divisions, affiliates, administrators, representatives, attorneys, officers, directors, trustees, stockholders, employees or agents (collectively the "Company Group") in any court of law or equity or before any administrative agency with respect to any matter arising from his employment or separation from employment, with the Company, or otherwise, including but not limited to rights or claims arising under Title VII of the Civil Rights Act of 1964, as amended, the Age Discrimination in Employment Act, the Reconstruction Era Civil Rights Act, the Fair Labor Standards Act, the Employee Retirement Income Security Act, the Worker Adjustment and Retraining Act, the Rehabilitation Act, the Americans with Disabilities Act, and any and all other federal, state or local laws pertaining to employment, as well as any and all claims under state contract or tort law, at any time through the date of execution of this Release; provided, however, that this covenant not to sue does not affect Mr. Johnstone's future right to enforce appropriately the terms of this Release and, pursuant hereto, the Agreement (as defined below) in a court of competent jurisdiction. For and in consideration of the payments and other benefits described in the attached Letter Agreement dated December 17, 1997 ("Agreement") and for other good and valuable consideration, Mr. Johnstone hereby releases and forever discharges, and by this instrument does release and forever discharge, the Company and the Company Group, other than as set forth in the Agreement, from any and all debts, obligations, promises, covenants, agreements, contracts, endorsements, bonds, controversies, suits, or causes whatsoever arising from his employment or separation from employment, with the Company, or otherwise, including but not limited to rights or claims arising under Title VII of the Civil Rights Act of 1964, as amended, the Age Discrimination in Employment Act, the Reconstruction Era Civil Rights Act, the Fair Labor Standards Act, the Employee Retirement Income Security Act, the Worker Adjustment and Retraining Act, the Rehabilitation Act, the Americans with Disabilities Act, and any and all other federal, state or local laws pertaining to employment, as well as any and all claims under state contract or tort law, at any time through the date of execution of this Release. In consideration for the releases and other commitments provided herein and in the Agreement by Mr. Johnstone, the Company, on behalf of itself, its present, past, and future shareholders, directors, and officers, and its subsidiaries, affiliates, successors, assigns, and agents, does hereby knowingly and voluntarily release and discharge Mr. Johnstone, 2 his heirs, executors, administrators, assigns, and agents, from and against all charges, complaints, claims, cross-claims, counterclaims, third-party claims, contribution claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts, and expenses, of any nature whatsoever, known or unknown, foreseen or unforeseen, matured or unmatured, which, at any time up to and including the date hereof, exists, have existed or may arise from any claims arising out of or in any way related to Mr. Johnstone's employment with and/or actions taken on behalf of, the Company or its affiliates or subsidiaries which the Company, any of its present, past, and future shareholders, directors or officers, or any of its subsidiaries, affiliates, successors, assigns or agents had, has or at any time hereafter may have or hold against Mr. Johnstone, his heirs, executors, administrators, assigns or agents. The Company agrees that it will not commence any action or proceeding and that it will not seek or be entitled to any award of equitable or monetary relief in any action or proceeding brought on its behalf, that arises out of the matters released by the Company hereby, except as necessary to enforce the Agreement or this Release. Mr. Johnstone and the Company expressly understand and agree that the payments to and benefits received by Mr. Johnstone pursuant to the attached Agreement shall be in lieu of any and all other amounts to which Mr. Johnstone might be entitled under any employment agreement or otherwise from the Company or the Company Group as of the date of execution of the Agreement and, without limiting the generality of the foregoing, Mr. Johnstone hereby expressly waives any right or claim that he may have or assert to employment or reinstatement to employment, or to payment for back pay, front pay, interest, bonuses, damages, accrued vacation, accrued sick leave, accrued personal days, medical, dental, optical or hospitalization benefits, accidental death and dismemberment benefits, disability benefits, pension claim contributions or benefits, thrift or stock plan contributions or benefits, education benefits, life insurance benefits, preferential loan rate, overtime, compensatory time, outplacement, severance pay and/or attorney fees, except as otherwise provided in the Agreement. Also, Mr. Johnstone agrees he will not apply for employment with the Company or Company Group. Mr. Johnstone understands that he must not disclose the terms of this Release and the attached Agreement to anyone other than his immediate family, his legal counsel, and his financial advisor(s), and that he must immediately inform his immediate family, his legal counsel, and his financial advisor(s) that they are also prohibited from disclosing the terms of this Release and attached Agreement; provided, however, that in the event such terms are breached by either party, such terms may be disclosed in order to resolve any dispute with respect to such breach. 3 Mr. Johnstone understands and agrees that the Company's payment of money and other benefits to him and his signing of this Release does not in any way indicate that he has any viable claims against the Company or the Company Group or that the Company or the Company Group admits any liability to him whatsoever. Mr. Johnstone has read this Release carefully, has been given at least 21 days to consider all of its terms, has been advised to consult with an attorney and other advisors of his choice, and fully understand that by signing below he is giving up any right which he may have to sue or bring any other claims against the Company and the Company Group. Mr. Johnstone has not been forced or pressured in any manner whatsoever to sign this Release, and he agrees to all of its terms voluntarily. Mr. Johnstone understands that he has seven (7) days from the date he has signed this Release below to revoke this Release, that this Release will not become effective until the 8th day following the date that he has signed this Release, and that the Company will have no obligation to extend the payments and other benefits set forth in the attached unless this Release becomes effective. 12/17/97 George Johnstone Date AMERICAN WATER WORKS COMPANY, INC.: December 17, 1997 Marilyn Ware Lewis Date By: Marilyn Ware Lewis Title: Chairman of the Board EXHIBIT 10(k) Stay Incentive Award for J. James Barr o Award of 11,000 Company stock units ($250,250 based on $22.75 stock price) would be payable in a cash lump sum on the third anniversary of the Retirement Date based on the closing price on such anniversary date, provided executive has not voluntarily terminated employment with the Company or been terminated for cause by the Company prior to such date. o Dividend equivalents would be reinvested in additional Company stock units based on closing price on dividend payment date. o Accelerated lump sum payment would be made in the event of executive's involuntary termination without cause or termination due to death or disability. o Company may elect to settle units in Company stock and/or convert units to Company restricted stock provided shareholder approval is obtained and auditors confirm no adverse impact on "pooling" eligibility will occur. November 6, 1997 EX-13 4 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- Consolidated Summary of Selected Financial Data (Dollars in thousands, except per share amounts)
FOR THE YEARS ENDED DECEMBER 31, 1997 1996 1995 1994 1993 ===================================================================================================== Revenues Water service Residential $ 546,972 $ 510,050 $ 451,143 $ 431,225 $ 399,916 Commercial 207,126 197,314 175,792 169,532 159,335 Industrial 63,389 62,153 54,423 53,049 50,490 Public and other 112,766 101,816 92,565 90,436 84,861 Other water revenues 9,037 7,935 5,902 6,502 5,579 - ----------------------------------------------------------------------------------------------------- 939,290 879,268 779,825 750,744 700,181 Wastewater service 14,909 15,378 14,953 13,933 12,143 Management fees -- -- 8,042 5,564 5,213 - ----------------------------------------------------------------------------------------------------- $ 954,199 $ 894,646 $ 802,820 $ 770,241 $ 717,537 ============================================================== Water sales (million gallons) Residential 124,339 119,900 117,128 113,950 104,721 Commercial 64,726 63,491 61,726 60,901 57,880 Industrial 36,354 36,129 34,171 34,735 33,040 Public and other 30,310 27,764 26,968 26,953 25,172 - ----------------------------------------------------------------------------------------------------- 255,729 247,284 239,993 236,539 220,813 ============================================================== Net income $ 119,128 $ 101,674 $ 92,061 $ 78,652 $ 75,387 Basic and diluted earnings per common share on average shares outstanding $1.45 $1.31 $1.32 $1.17 $1.15 Common dividends paid per share $.76 $.70 $.64 $.54 $.50 AT YEAR-END Customers (thousands) 1,900 1,884 1,720 1,706 1,685 Total assets $4,314,286 $4,032,156 $3,403,141 $3,172,237 $2,948,069 Preferred stocks with mandatory redemption requirements American Water Works Company, Inc. $ 40,000 $ 40,000 $ 40,000 $ 40,000 $ 40,000 Subsidiaries 39,734 41,060 42,326 43,737 46,515 Long-term debt American Water Works Company, Inc. $ 116,000 $ 116,000 $ 116,000 $ 131,000 $ 131,000 Subsidiaries 1,754,766 1,600,394 1,268,649 1,177,043 1,056,404 MARKET DATA Market price per share of common stock at year-end $27.31 $20.63 $19.44 $13.50 $15.00 Average shares outstanding (thousands) 79,144 74,540 66,544 63,836 62,278 Average daily trading volume 81,838 93,169 56,467 54,148 54,643 Annual trading volume (thousands) 20,705 23,673 14,230 13,645 13,825 Annual trading volume as a percentage of average outstanding shares 26% 32% 21% 21% 22% P/E ratio* 15.80 15.14 11.73 11.94 12.41 Dividend yield* 3.32% 3.53% 4.13% 3.86% 3.50% *Based on average month-end closing prices on stock
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 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, finance, water quality, information systems, human resource administration and training, purchasing, insurance placement, workplace safety, and management services. This arrangement, which provides these services at cost, affords affiliated companies professional and technical talent otherwise unavailable economically or on a timely basis. The Utility Companies The 22 regulated utility subsidiaries provide water service to approximately 7 million people in 859 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, the utility companies function under economic regulations prescribed by state regulatory commissions. The Finance Companies American International Water Services Company owns a 50% interest in AmericanAnglian Environmental Technologies, a joint venture with Anglian Water, North America, a North American affiliate of a British water and wastewater utility. AmericanAnglian provides both technical expertise and financing resources to communities in Pennsylvania, North Carolina, New York 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 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 utility subsidiary for 40 years. Occoquan Land Corporation owns land, buildings, and equipment, most of which are leased to affiliated companies. Greenwich Water System is a subsidiary of the Company that owns the common stock of the utility subsidiaries in Connecticut, Massachusetts, New Hampshire, New York and a portion of the common stock of the utility subsidiary in Pennsylvania. American Commonwealth Company is a subsidiary of the Company that owns a portion of the common stock of the utility subsidiary in New Jersey. The American Water System The combination of the company, the service company, and the utility subsidiaries constitutes the American Water System -- a system that has functioned well for over 50 years. Each utility subsidiary functions independently, yet shares in the benefits of size and identity afforded by the American Water System. THE PHILOSOPHY OF AMERICAN WATER WORKS COMPANY American Water Works Company is dedicated to providing the best possible water service at a reasonable cost consistent with adequate compensation for investors and reasonable wages and benefits for its personnel. We believe there is an unalterable link between quality service, responsive regulation, and financial success. Three basic principles are observed under this management philosophy: 1. The preservation and efficient utilization of capital assets are best assured by a management approach that draws upon prudent planning, builds consensus and acts decisively on a timely basis. 2. A utility subsidiary must exhibit the ability to attract the capital it requires as a prerequisite to the initiation of construction of facilities needed to meet water service demands. 3. The ability to attract needed capital is dependent upon consistently achieving adequate earnings. This dictates an aggressive pursuit of regulatory decisions acknowledging this principle. In accordance with this philosophy, the Company seeks to enhance the value of its shareholders' investment through consistent earnings growth. The market value of the Company's common stock is subject to the volatility present in the stock market, as well as to the vagaries of the national economy. The true worth of this stock should be measured by the intrinsic value of the tangible assets of American Water Works and the worth of the organization put in place by the management team. These assets are used to provide a service which is essential for community life. There is no substitute for water. 23 - --------------------------------------------------------------------------- Management's Discussion and Analysis THE INVESTMENT STRATEGY OF AMERICAN WATER WORKS COMPANY The business of the Company is the investment in common stock of water utilities. The purpose of this business is to protect and enhance the value of our shareholders' investment through growth in earnings and dividends per share. [ID -- PHOTO] W. TIMOTHY POHL, ESQUIRE General Counsel and Secretary We seek to accomplish this purpose without diluting existing shareholders' investment. Viewed over the long term, we believe this strategy has and will continue to provide a basis for total return to our shareholders that is attractive in comparison with other utility investment opportunities. The value of the investment in the Company has increased due to earnings growth. Earnings growth has resulted from increased investment by the Company in its subsidiaries funded by the sale of securities and reinvestment of income. This reinvestment defers shareholder payment of income taxes so earnings growth can be compounded on a larger investment base. It also permits consistent and reliable dividend increases. Investors preferring a greater current yield can supplement their cash flow by occasionally selling a portion of their enhanced investment in the Company. The following chart reflects the results of this investment strategy: [ID -- GRAPHIC, SHOWING THE FOLLOWING VALUES] COMPOUND ANNUAL GROWTH RATES 1992 -- 1997 Investment in subsidiaries ....... 12.8% Operating revenue ................ 7.7% Earnings per share ............... 6.9% Dividends per share .............. 10.4% Book value per share ............. 7.9% The Company's investment in its subsidiaries has increased from $750 million at year-end 1992 to $1.4 billion at year-end 1997. The schedule at the top of page 25 illustrates that the growth in the Company's investment in its subsidiaries has been accomplished by subsidiary earnings retention, the investment of a portion of the dividends received by the Company from subsidiaries and the sale of securities and bank loans. Earnings to common shareholders have risen from $64.1 million in 1992 to $115.1 million in 1997. Income to common shareholders of the Company is influenced by three factors: 1. The amount of investment by the Company 2. The rate of return on that investment 3. The costs to operate the Company The schedule at the bottom of page 25 demonstrates that the growth in earnings over this period is the direct result of new investment in subsidiaries. Fluctuations in the rate of return are the result of the influence of weather conditions on sales volume and the response of utility regulation to the economic climate. The cost to operate the Company has increased $6.5 million over this five-year period. AmericanAnglian Environmental Technologies, the joint venture with Anglian Water Plc. has as its mission to develop business opportunities evolving from the consideration of privatization initiatives by government entities. That consideration of privatization involves provision of contract services to municipal utilities and investment in water resource infrastructure. Pricing and revenues under such contracts are not regulated. The joint venture operates in a very competitive marketplace, and seeks out business opportunities that are worthwhile. The AmericanAnglian Environmental Technologies joint venture bid successfully and obtained operations contracts in two major competitions. The first resulted in a contract with the city of Buffalo, New York, for operation of the Buffalo Water System. The second was a contract for water utility operations at Evansville, Indiana, and was secured by EA2 Systems, a regional partnership between AmericanAnglian and Environmental Management Corporation. SYSTEM GROWTH AND DEVELOPMENT Capital Spending Program The investment in new facilities in 1997 totaled $352 million, which was 29% above 1996 construction expenditures of $274 million. Construction activity planned for 1998 totals $424 million. [ID -- PHOTO] GERALD C. SMITH Vice President 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 2002. 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 facilities as necessary. We expect the full investment in this construction program to be recognized in regulatory decisions. Source of supply improvements in 1997 accounted for 24 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- Analysis of Growth in Investment in Subsidiaries
(000) 1997 1996 1995 1994 1993 ======================================================================================================= Investment in subsidiaries at December 31 $1,366,016 $1,261,532 $1,003,088 $898,219 $810,372 Investment in subsidiaries at January 1 1,261,532 1,003,088 898,219 810,372 749,513 - ------------------------------------------------------------------------------------------------------- Change during the year $ 104,484 $ 258,444 $ 104,869 $ 87,847 $ 60,859 ========================================================== Sources of additional investment Undistributed earnings of subsidiaries $ 36,335 $ 31,605 $ 26,315 $ 24,532 $ 18,984 Investment by the Company in subsidiary securities 68,149 226,839 78,554 63,315 41,875 - ------------------------------------------------------------------------------------------------------- Change during the year $ 104,484 $ 258,444 $ 104,869 $ 87,847 $ 60,859 ========================================================== Net income of subsidiaries $ 132,762 $ 113,760 $ 103,497 $ 89,449 $ 84,248 Return on January 1 investment in subsidiaries 10.5% 11.3% 11.5% 11.0% 11.2% Subsidiaries' common stock dividend payout ratio 73% 72% 75% 73% 77% - ------------------------------------------------------------------------------------------------------- Dividends to the Company from subsidiaries 96,427 82,155 77,182 64,917 65,264 - ------------------------------------------------------------------------------------------------------- Company's use of cash Preferred dividends 3,984 3,984 3,984 3,984 3,996 Other cash requirements 13,396 12,375 9,765 10,744 7,556 - ------------------------------------------------------------------------------------------------------- 17,380 16,359 13,749 14,728 11,552 - ------------------------------------------------------------------------------------------------------- Available for common dividends 79,047 65,796 63,433 50,189 53,712 Common dividends declared 60,084 51,299 42,500 34,386 31,130 Cash payout ratio 76% 78% 67% 69% 58% Available after dividends 18,963 14,497 20,933 15,803 22,582 Cash at January 1 43 119 17,647 23,302 78 - ------------------------------------------------------------------------------------------------------- 19,006 14,616 38,580 39,105 22,660 Investment in securities of subsidiaries (68,149) (226,839) (78,554) (63,315) (41,875) Notes and advances to subsidiaries 10 10 10 4,510 1,010 - ------------------------------------------------------------------------------------------------------- (49,133) (212,213) (39,964) (19,700) (18,205) - ------------------------------------------------------------------------------------------------------- Net bank borrowings 21,400 34,400 3,700 -- (21,255) Proceeds from long-term debt -- -- -- -- 81,000 Proceeds from common stock 28,041 192,856 36,383 37,347 5,442 Redemption of securities -- (15,000) -- -- (23,680) - ------------------------------------------------------------------------------------------------------- 49,441 212,256 40,083 37,347 41,507 - ------------------------------------------------------------------------------------------------------- Cash at December 31 $ 308 $ 43 $ 119 $ 17,647 $ 23,302 ==========================================================
Analysis of Change in Income (000) 1997 1996 1995 1994 1993 ======================================================================================================= Net income to common stock-current year $115,144 $97,690 $88,077 $74,668 $71,391 Net income to common stock-prior year 97,690 88,077 74,668 71,391 64,141 - ------------------------------------------------------------------------------------------------------- Change in income 17,454 9,613 13,409 3,277 7,250 Change in Company operating cost 1,548 650 639 1,924 1,738 - ------------------------------------------------------------------------------------------------------- Change in investment income $19,002 $10,263 $14,048 $ 5,201 $ 8,988 ======================================================= Sources of change in investment income Additional investment in subsidiaries $27,198 $11,893 $10,122 $ 6,718 $ 6,317 Change in rate of return on investment (8,196) (1,630) 3,926 (1,517) 2,671 - ------------------------------------------------------------------------------------------------------- Total change in investment income $19,002 $10,263 $14,048 $ 5,201 $ 8,988 =======================================================
25 - --------------------------------------------------------------------------- Management's Discussion and Analysis approximately 5% of the year's construction expenditures. Projects included groundwater development in Hampton, New Hampshire and Bel Air, Maryland, and in several locations in Indiana to meet growing customer demands. Additional supply was obtained for the rapidly developing community of St. Charles, Missouri through an interconnection with St. Louis which was drilled under the Missouri River. New wells in Clovis, New Mexico, and several replacement wells in California, Illinois and Indiana were constructed to maintain supply capabilities. Structural and hydraulic upgrades to the Bargh Dam in Greenwich, Connecticut were completed in 1997 to comply with more stringent regulatory requirements. Investment in treatment and pumping facilities comprised approximately 27% of the 1997 construction expenditures. Construction was completed for three iron removal facilities in Crawfordsville, Noblesville and Franklin, Indiana. Significant capacity and/or reliability upgrades were completed for treatment plants in Yardley, Pennsylvania; Greenwood, Indiana; Peoria, Illinois; Monterey, California; Marion, Ohio and Chattanooga, Tennessee. Multiple phased plant upgrades continued or commenced in Norristown, Pennsylvania; Brownsville, Pennsylvania; Huntington, West Virginia; East St. Louis, Illinois; and Davenport, Iowa. Transmission and distribution facilities accounted for approximately 37% of the 1997 construction expenditures. The most predominant individual projects included a supply to Rome, Illinois from the Peoria, Illinois system; connecting Oxford and Washington, New Jersey; significant pipeline installation for the southern Indiana regional water supply project and a pipeline connecting the Monmouth and Ocean County systems in New Jersey. Additionally, several extensions were made to the Tri-County regional pipeline in southern New Jersey to serve additional communities. Significant distribution system infrastructure expansion was undertaken in Putnam and Fayette Counties in West Virginia to further expand West Virginia-American Water Company's role as a regional water supplier. Pipeline installation 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 utility subsidiaries during the year including tanks in Duarte, California; Yardley and Coolbaugh Township, Pennsylvania; Greenwood, Indiana; Joplin, Missouri; Cape May Court House, New Jersey; and Tiffin and Lawrence County, Ohio. The Company's formal Comprehensive Planning Study program continued with reports completed for the Seymour and Sullivan, Indiana systems; Connellsville, Indiana, Kittanning, McDonald, Monongahela, Moshannon Valley, Uniontown, Valley, Washington and White Deer systems in Pennsylvania; and Brunswick, Mexico, Platte County, St. Charles, and Warrensburg systems in Missouri. Studies are underway for the utility subsidiaries in Arizona, California, Indiana, New Jersey, Ohio, Pennsylvania, and Tennessee, which will encompass 42 separate service areas. In addition to the Company's formal Comprehensive Planning Study program, engineering planning focused on detailed source of supply and production analysis in those systems where existing source limitations, projected growth, and regional opportunities point to the need for new facilities. These systems included Monterey, California; Greenwich, Connecticut; Jeffersonville/New Albany, Indiana; Lexington, Kentucky; Short Hills, New Jersey; Monmouth and Ocean Counties, New Jersey; and Paradise Valley, Arizona.
CONSTRUCTION EXPENDITURES BY CATEGORY (000) 1997 1996 1995 1994 1993 ========================================================================================= Water plant Sources of supply $ 16,725 $ 10,798 $ 18,156 $ 11,511 $ 8,054 Treatment and pumping 95,709 77,071 125,350 82,700 51,332 Transmission and distribution 131,835 107,145 110,600 108,929 77,998 Services, meters and fire hydrants 58,349 47,946 45,835 40,506 34,401 General structures and equipment 45,170 29,029 29,602 20,703 19,585 Wastewater plant 4,649 1,805 1,219 1,390 1,746 - ----------------------------------------------------------------------------------------- $352,437 $273,794 $330,762 $265,739 $193,116 ====================================================
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 reliable water service, the Company continues to search for opportunities to acquire water and wastewater systems that represent the prospect for enhanced shareholder value. In 1997, 25 new acquisitions were initiated by utility subsidiaries. Of these 25, nine were concluded during the year, adding a population of almost 15,000 served by utility subsidiaries in Kentucky and West Virginia. Fifteen acquisitions are awaiting regulatory approval. When concluded, these will add a service population of almost 50,000 people to utility subsidiaries serving California, Illinois, New Jersey, Pennsylvania and West Virginia. The largest acquisition underway is in Hawaii involving the purchase of East Honolulu Community Services, Inc., a suburban Honolulu wastewater utility located on the eastern tip of Oahu. This system is being purchased from Maunalua Associates, a subsidiary of Kemper Corporation, in a transaction valued at $18.4 million. The acquisition has been approved by the Public Utility Commission of Hawaii with closing anticipated on April 1, 1998. East Honolulu Community Services provides wastewater treatment service for Hawaii Kai, a community of 28,600 people. The system includes a 5.2 million gallon per day treatment plant, which provides tertiary wastewater treatment, seven pumping stations and approximately 100 miles of collection pipe. For the latest fiscal year ended December 31, 1997, EHCS had unaudited revenues of $6.3 million, net income of $.8 million and total assets of $17.1 million. 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 1995 through 1997, and it is not expected to materially affect 1998 results. [ID -- PHOTO] ROBERT D. SIEVERS Comptroller 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. The results of operations for the Company for the year ended December 31, 1997 reflect twelve months of the results of operations of the acquired business in northeastern Pennsylvania. The 1996 results of operations included ten and one-half months subsequent to the purchase date of February 16, 1996. OPERATING REVENUES (000) 1997 1996 1995 ================================================================ Water service $939,290 $879,268 $779,825 Wastewater service 14,909 15,378 14,953 Management fees -- -- 8,042 - ---------------------------------------------------------------- $954,199 $894,646 $802,820 ==================================== Consolidated Operating Revenues Revenues in 1997 totaled $954.2 million and were 7% above those for 1996, reflecting increased sales volume, due to favorable weather conditions in the East and California, combined with rate increases authorized for various subsidiaries in the latter part of 1996 and in 1997. The volume of water sold increased over 3% to 256 billion gallons in 1997 compared with 247 billion gallons in 1996. The northeastern Pennsylvania acquisition increased operating revenues by $7.4 million and added 1.8 billion gallons of water sales volume in 1997. Rate authorizations adjusted the water service rates in effect for 12 utility subsidiaries during 1997. These authorizations are expected to increase annual revenues by $53.3 million. Operating revenues for 1997 included approximately $12.9 million which resulted from these rate orders. Two rate adjustments have been authorized for utility subsidiaries so far in 1998 which will generate approximately $1.7 million of additional annual revenues. Four applications are awaiting regulatory decisions. If granted in full, they would produce additional annual revenues of $34.4 million. On October 2, 1997, the Pennsylvania Public Utility Commission approved a settlement agreement among all parties in the rate proceeding initiated by the Company's Pennsylvania subsidiary. As a result, the subsidiary instituted rates for service that are designed to produce additional annual revenues of $27.5 million. An important aspect of this rate proceeding was the recognition of the subsidiary's February 1996 acquisition of water service assets in northeastern Pennsylvania. Revenues of $894.6 million in 1996 were 11% above those for 1995. Eleven utility companies received rate orders in 1996, authorizing increases in annual revenues aggregating $62.9 million. Operating revenues for 1996 included approximately $43.7 million which resulted from these rate orders. The 247 billion gallons of water sold in 1996 was a 3% increase compared to 1995. 27 - --------------------------------------------------------------------------- Management's Discussion and Analysis PERCENTAGE OF WATER REVENUES BY CUSTOMER CLASS 1997 1996 1995 ================================================================ Residential 58.2% 58.0% 57.9% Commercial 22.1% 22.4% 22.5% Industrial 6.7% 7.1% 7.0% Public and other 12.0% 11.6% 11.9% Other water revenues 1.0% .9% .7% - ---------------------------------------------------------------- 100.0% 100.0% 100.0% ================================== Residential Residential water service revenues in 1997 amounted to $547.0 million, an increase of 7% over those for 1996. This 1997 revenue improvement followed an increase of 13% in 1996. The volume of water sold to residential customers increased by 4% in 1997 to 124.3 billion gallons. The average unit price of residential water increased by 4% in 1997 and by 10% in 1996. Commercial Revenues from commercial customers in 1997 rose by 5% to $207.1 million, following an increase of 12% in 1996. Commercial customers purchased 64.7 billion gallons of water in 1997, 2% more than in 1996. The average unit price of water increased by 3% in 1997, down from a 9% increase in 1996. Industrial Industrial water use of 36.4 billion gallons in 1997 was 1% higher than in 1996. Revenues from industrial sales in the amount of $63.4 million were 2% above those recorded in 1996 due to a 1% increase in the average unit price of water. In 1996, revenues from industrial sales were 14% above those for 1995 due to an 8% increase in the average unit price of water. Public and Other Public and other revenues in 1997 increased by 11% to $112.8 million following an increase of 10% in 1996. Revenues derived from municipal governments for fire protection services and customers requiring special private fire service facilities totaled $43.7 million in 1997, exceeding 1996 revenue from these customers by 6%. The 30.3 billion gallons of water sold to governmental entities and resale customers was 9% greater than the quantities sold in 1996. Revenues generated by these sales totaled $69.1 million and exceeded 1996 revenues by 14%. PERCENTAGE OF WATER SALES (GALLONS) BY CUSTOMER CLASS 1997 1996 1995 ================================================================ Residential 48.6% 48.5% 48.8% Commercial 25.3% 25.7% 25.7% Industrial 14.2% 14.6% 14.3% Public and other 11.9% 11.2% 11.2% - ---------------------------------------------------------------- 100.0% 100.0% 100.0% ================================== Wastewater Service Revenues Utility 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 $14.9 million in 1997, compared with $15.4 million in 1996 and $15.0 million in 1995. 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. In 1997 and 1996 a comparable level of management fees were received by AmericanAnglian. OPERATING EXPENSES (000) 1997 1996 1995 =================================================================== Operation and maintenance expenses $428,779 $425,170 $402,362 Depreciation and amortization 103,660 93,413 79,977 General taxes 87,860 82,017 76,208 - ------------------------------------------------------------------- $620,299 $600,600 $558,547 ==================================== Consolidated Operating Expenses Operating expenses in 1997 increased by 3% to $620.3 million, following an 8% increase in 1996. The acquisition of the water utility operations in northeastern Pennsylvania increased operating expenses by $30.8 million in 1996. Operation and maintenance expenses totaled $428.8 million in 1997, 1% higher than in 1996. These expenses had increased by 6% in 1996. The northeastern Pennsylvania acquisition increased operation and maintenance expenses by $19.8 million in 1996. Employee-related costs, representing 45% of operation and maintenance expenses, decreased by 1% in 1997 and increased by 1% in 1996. The primary components of employee-related costs are wage and salary expenses, which were up 3% to $157.7 million in 1997 following a 3% increase in 1996. The number of employees at year-end totaled 4,034, which was approximately equal to the employment level of 4,065 at the close of 1996 and 7% above the 3,777 employees at the end of 1995. 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 173 employees or 4% since year-end 1994, as the result of continued efforts to improve operating efficiencies. 28 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- 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, decreased by 12% to $30.5 million in 1997 after a 3% increase in 1996. The 1997 decrease is the result of favorable claims experience in addition to health care expenses being moderated by cost containment measures. In 1996, the Company implemented plan revisions that encourage plan participants to take advantage of a managed care plan option. Employees and early retirees not selecting the managed care plan option are required to make additional contributions. The fluctuation in group insurance expense can also be 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. Pension expense decreased by 42% in 1997 to $3.3 million following a 39% decrease in 1996. Pension cost is deferred by certain subsidiaries when it is probable such costs will be recovered in future water service rates as contributions are made to the plan. There were no cash contributions in 1997. Cash contributions of $4.3 million in 1996 and $10 million in 1995 were made to the pension plan. Pension expense declined in 1997 and 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. OPERATION AND MAINTENANCE EXPENSES (000) 1997 1996 1995 =================================================================== Employee-related costs $191,505 $193,798 $191,151 Fuel and power 36,603 34,654 33,282 Purchased water 44,661 45,069 44,114 Chemicals 16,940 17,693 14,974 Waste disposal 14,167 14,145 12,234 Maintenance materials and services 26,761 24,559 22,258 Operating supplies and services 63,091 60,626 54,416 Customer billing and accounting 22,067 19,998 16,917 Other 12,984 14,628 13,016 - ------------------------------------------------------------------- $428,779 $425,170 $402,362 ==================================== Expenses associated with the collection, treatment, and pumping of water include the cost of fuel and power, water purchased from other suppliers, chemicals for water treatment and purification, and waste disposal. These costs increased by 1% in 1997 after a 7% rise in 1996. The unit cost of water produced decreased 3% in 1997 and increased 4% in 1996. The 1997 decrease in the unit cost of production reflects the decreased purchased water and chemical costs in 1997. Higher fuel and power, chemicals and waste disposal costs were primarily responsible for the rise in the 1996 unit cost of production. Maintenance materials and services, which include emergency repairs as well as costs for preventive maintenance, increased by 9% in 1997 following a 10% increase in 1996. 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 4% in 1997 after an 11% increase in 1996. Customer billing and accounting charges increased by 10% in 1997 and by 18% in 1996. These costs increased in 1997 and 1996 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 decreased by 11% in 1997 after increasing by 12% in 1996. 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 11% in 1997 and 17% in 1996. 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 7% in 1997 after an 8% rise in 1996. Gross receipts and franchise taxes, which are a function of revenues, increased by 5% in 1997. Property and capital stock taxes are assessed on the basis of tax values assigned to assets and capitalization. These taxes in 1997 were 11% above those in 1996 due to higher property values and tax rate increases. Payroll taxes increased by 3% in 1997. Consolidated Other Income and Income Deductions The total allowance for funds used during construction recorded in 1997 was $11.8 million, which was approximately the same as 1996. The $9.6 million decrease in 1996 was due to the completion of New Jersey-American Water Company's Tri-County Water Treatment Plant which began operation in early 1996. Interest expense rose 7% to $145.8 million in 1997 compared to 1996. This expense had increased by 17% in 1996. The increase in 1996 was 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. 29 - --------------------------------------------------------------------------- Management's Discussion and Analysis 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. After that, 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 in 1995 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 17% in 1997, following an 11% increase in 1996. The 1997 and 1996 increases in income taxes are due to higher taxable income and the reversal of flow-through differences primarily relating to depreciation. Details regarding the components of the total amount of state and federal income taxes, and a reconciliation of statutory to reported income tax expense are included in Note 12 to the financial statements. SUMMARY OF TAXES (000) 1997 1996 1995 ======================================================================== Gross receipts and franchise taxes $ 37,580 $ 35,684 $ 33,272 Property and capital stock taxes 35,466 31,971 28,868 Payroll taxes 12,433 12,060 11,524 Other general taxes 2,381 2,302 2,544 State income taxes 10,269 9,227 8,079 Federal income taxes 64,444 54,601 49,567 - ------------------------------------------------------------------------ $162,573 $145,845 $133,854 ==================================== Consolidated Net Income Consolidated net income in 1997 totaled $119.1 million, a 17% increase over net income in 1996. Consolidated net income in 1996 was 10% above that recorded in 1995, which included an after-tax gain of $3.9 million related to the settlement of litigation in Massachusetts. Consolidated net income to common stock of $115.1 million in 1997 increased by 18% over the amount reported in 1996. 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. CAPITALIZATION COMMON PREFERRED LONG-TERM (000) EQUITY STOCK DEBT ============================================================= Company 1997 $1,142,416 $51,673 $ 116,461 1996 1,057,874 51,673 116,136 1995 818,939 51,673 131,064 1994 733,440 51,673 131,071 1993 655,275 51,673 131,074 - ------------------------------------------------------------- Utility Subsidiaries 1997 $1,313,674 $47,697 $1,742,544 1996 1,212,238 49,048 1,619,948 1995 953,718 50,325 1,260,389 1994 855,961 51,738 1,251,101 1993 768,921 54,532 1,060,776 - ------------------------------------------------------------- Consolidated 1997 $1,142,416 $ 97,663 $1,895,914 1996 1,057,874 99,012 1,773,538 1995 818,939 100,287 1,428,970 1994 733,440 101,698 1,381,972 1993 655,275 104,490 1,192,809 - ------------------------------------------------------------- CAPITALIZATION RATIOS COMMON PREFERRED LONG-TERM EQUITY STOCK DEBT ============================================================= Company 1997 87% 4% 9% 1996 86% 4% 10% 1995 82% 5% 13% 1994 80% 6% 14% 1993 78% 6% 16% - ------------------------------------------------------------- Utility Subsidiaries 1997 42% 2% 56% 1996 42% 2% 56% 1995 42% 2% 56% 1994 40% 2% 58% 1993 41% 3% 56% - ------------------------------------------------------------- Note: Long-term debt includes amounts due within one year. LIQUIDITY AND CAPITAL RESOURCES Internal cash flow from operations is influenced by weather patterns, economic conditions and the timing of rate relief. When operating cash flow is not sufficient to meet corporate obligations on a timely basis, external sources of funds are utilized. The availability and low cost of external cash reflect the consistency and reliability of earnings. External sources of cash consist of bank loans, the sale of securities -- bonds, preferred stock and common stock -- as well as improvements funded by developers and others, such as governmental agencies. 30 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- The Parent Company As a holding company, American Water Works pays its administrative expenses, interest costs, and dividends on all classes of stock from the dividends received from its subsidiary companies. Remaining funds are retained for additional investment in subsidiaries. Investments are made when prospective returns on the capital are expected to continue at an adequate level or the potential for satisfactory earnings has been exhibited. [ID -- PHOTO] JOSEPH F. HARTNETT, JR. Treasurer 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 common equity. Additionally, from time to time the Company issues long-term debt to repay short-term loans. Such a refinancing is contemplated for the second quarter of 1998. The Company's Dividend Reinvestment and Stock Purchase Plan allows shareholders and customers of the utility subsidiaries to purchase up to $5,000 of common stock each month directly from the Company at the then prevailing market price. Common dividends in the amount of $6.6 million were reinvested during 1997, which resulted in the issuance of 291,236 new shares of common stock. Proceeds received from optional cash purchases of 555,109 new shares of common stock totaled $12.5 million in 1997. Another 134,182 shares of common stock were issued in connection with the Employees' Stock Ownership Plan, 60,843 shares were issued in connection with the Long-Term Performance-Based Incentive Plan, and 222,940 shares of common stock were issued in connection with a 401(k) Savings Plan for Employees in return for cash contributions from employees totaling $2.7 million and Company contributions with a value of $2.3 million. Subsidiary companies retained $36.3 million of their earnings during 1997. Additionally, the Company invested a total of $68.1 million in new common equity in the subsidiaries during the year. The Company plans to continue to use short-term bank borrowings for peak cash requirements, as necessary. Common stock also is expected to be issued in connection with the continuation of the Company's Dividend Reinvestment and Stock Purchase Plan, the Employees' Stock Ownership Plan, the Savings Plan for Employees and the Long-Term Performance-Based Incentive Plan. The Subsidiary Companies Utility subsidiary companies fund construction programs and supplement cash flow by borrowing from banks under individual credit lines established annually. Ample credit lines are available to provide funds needed for 1998 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 1997, utility subsidiaries issued $119.7 million of taxable mortgage bonds at interest rates between 6.85% and 7.80%. One utility subsidiary issued tax-exempt debt totaling $60 million at an interest rate of 5.375%. Proceeds from the sale of the bonds were used to repay bank loans, fund construction programs, and to refinance existing debt. Aggregate bank borrowings of utility subsidiaries at year-end 1997 amounted to $75.3 million compared to $109.3 million at year end 1996. During 1997, subsidiaries made mandatory payments to sinking funds in amounts adequate to retire $57.3 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 $200 million of long-term debt to outside investors and $100 million of common stock to the Company in 1998. The combined amount of subsidiary bank borrowings and bonds maturing within one year during 1998 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. Commissions range in size from three to seven members. The commissioners in Arizona are elected by the voting public. The three directors of the Tennessee Regulatory Authority are appointed by the Governor, the Speaker of the Senate, and the Speaker of the House of Representatives. In Virginia, members of the State Corporation Commission are elected by a joint vote of the two houses of the general assembly. All other state commissioners regulating subsidiaries are appointed by the governors of the respective states and usually require approval by the state legislature. The background of the individuals serving in these important positions covers a broad spectrum. 31 - --------------------------------------------------------------------------- Management's Discussion and Analysis In November 1996, voters in New Mexico approved a constitutional referendum abolishing the New Mexico Public Utility Commission. A new state regulatory commission will be implemented consisting of 5 elected Commissioners from 5 state districts. The New Mexico legislature has passed enabling legislation for the new Commission, to go into effect January 1, 1999. Economic regulation deals with many competing, if not conflicting, public pressures. Rate adjustments normally are initiated by the utility entity. Public hearings, which are basically financial fact-finding sessions, are conducted. The purpose of this process is to set rates for service which assure the financial viability of the utility 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. The utility subsidiaries aggressively pursue various methods of offsetting the adverse financial impact of regulatory lag. Certain subsidiaries have received rate orders allowing recovery of interest and depreciation expense related to the interim period 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 utility plant before it is in service instead of capitalizing an allowance for funds used during construction. Additionally, utility subsidiaries with multiple operating districts within a state have pursued statewide uniform rates. This is a concept that sets identical rates for service throughout the service territory. This concept mitigates the impact of water system replacements and renewals on the rates of individual operating districts. During the past year, 12 subsidiaries were authorized by regulatory agencies to increase rates for service by an annual amount of $53.3 million. In most of these decisions, the primary factor for price increases was to reflect a return on the investment made in the essential water service facilities. Some of the specific regulatory decisions received in 1997 were as follows: o On October 2, 1997 the Pennsylvania Public Utility Commission approved a settlement agreement allowing Pennsylvania-American Water Company to increase its rates by $27.5 million. This order placed into effect rates recognizing the full investment on the water assets in northeastern Pennsylvania acquired in 1996 and approved a statewide uniform tariff for approximately 97% of Pennsylvania-American's customers. In December 1996, the Pennsylvania Legislature passed into law a provision allowing all regulated water utilities, including Pennsylvania-American, to place in effect rates to cover investments in infrastructure replacement. This provision, called the Distribution System Improvements Charge (DSIC), will reduce the impact of regulatory lag. The purpose of DSIC is to provide revenues to cover the costs of capital and income taxes on non-revenue producing, non-expense reducing distribution system infrastructure replacements placed into service between rate cases. The DSIC has been approved by the Pennsylvania Public Utility Commission. It may be implemented quarterly, but may not increase rates more than 5% prior to being included in the base rates of the Company. o Illinois-American Water Company received a rate decision on December 22, 1997 from the Illinois Commerce Commission granting additional revenues of $7.3 million based on a stipulation agreement. Notable in the stipulation and decision was continued support for movement toward a statewide uniform tariff for Illinois-American. The Commission also approved a large user tariff that will aid the Company in retaining large users over a long term. o The Indiana Utility Regulatory Commission authorized additional revenues of $6.1 million for Indiana-American Water Company on December 11, 1997. The Commission's decision approved a significant step toward implementing statewide uniform pricing by Indiana-American Water Company. The language of the Commission's decision indicated the Commission's recognition of the benefits of the concept. ADDITIONAL ANNUAL REVENUES AUTHORIZED BY RATE DECISIONS (000) 1997 1996 1995 ============================================================== Arizona $ 739 $ -- $ 239 California 1,354 3,556 637 Connecticut -- 1,899 -- Illinois 7,301 999 3,835 Indiana 6,101 2,636 -- Iowa -- -- 632 Kentucky 1,050 1,515 1,475 Maryland 31 202 -- Massachusetts -- 5,376 291 Michigan -- -- 130 Missouri 2,707 -- 1,923 New Jersey 2,157 39,486 -- New York -- -- 295 Ohio 952 1,106 -- Pennsylvania 27,450 -- 7,831 Tennessee -- 1,405 -- Virginia 717 -- -- West Virginia 2,698 4,704 55 - -------------------------------------------------------------- $53,257 $62,884 $17,343 =================================== 32 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- American Water System personnel participate in regulatory conferences and meetings, including those conducted by regional regulatory associations. The goal in this effort is to increase understanding of the industry and its unique regulatory requirements. The Company appreciates the thoughtful work of the Water Committee of the National Association of Regulatory Utility Commissioners. Its initiatives and the growing public awareness of the importance of adequate water supply have led to progressive regulation which has allowed utility subsidiaries to address, on a timely basis, water supply issues which otherwise would still be unresolved. Environmental Two areas of environmental regulation impact the water utility industry. The regulation of drinking water quality is legislated under the Safe Drinking Water Act, which most recently was amended in August of 1996. The regulation of wastes generated during the drinking water treatment process is legislated under the Clean Water Act, Resource Conservation and Recovery Act, and Toxic Substances Control Act. Water utilities, individually and through industry associations, follow the development of these legislative mandates closely, and provide technical guidance to Congress on areas of improvement. By far, the Safe Drinking Water Act has the most potential for impact on water utilities, and has as its objective the improvement of public health. The utility subsidiaries are, as a matter of policy, committed to compliance with all applicable environmental mandates and routinely support environmental protection initiatives. All environmental regulations promulgated under these acts are done by the United States Environmental Protection Agency (EPA). As part of the regulatory development process, EPA solicits comments, and the American Water System regularly provides technical advice regarding proposed regulations. Its broad operating experience and current research effort afford the American Water System the unique opportunity to assist EPA in developing the most practical regulation possible. EPA has been working on several regulations, such as more stringent microbial control, more extensive limits for disinfection by-products, limits for arsenic and radon, and disinfection of ground waters. Additionally, EPA has been finalizing regulations regarding Cryptosporidium oocysts that can occur in surface waters. Utility subsidiaries have already implemented appropriate steps to voluntarily comply with pending regulations. This included installation of state-of-the-art monitoring equipment, which improved our ability to ascertain water quality. Much of this work has been done in partnership with EPA. Thus, data is being developed that assists EPA in finalizing its regulations. Both the Service Company's Quality Control and Research Laboratory in Belleville, Illinois, and laboratories at utility subsidiaries, are expanding to address regulations EPA will adopt. In anticipation of EPA's Information Collection Rule which went into effect in July, 1997, analytical resources have been put in place to provide all required analytical work for affected utility subsidiaries. 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 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 as a disinfectant in water treatment will be modified. EPA is committed to lowering chlorinated by-products, which will result in less usage of chlorine. EPA also desires greater disinfection to better protect against a waterborne disease outbreak due to microbes that are not easily disinfected. For many utilities, both objectives could be reached by using a different disinfectant, such as ozone. However, ozone also creates some toxic by-products. Use of membranes, such as reverse osmosis, can attain both objectives, but cost is very high. Our research has continued to focus on the most important public health topics. Cryptosporidium research concentrated on developing better test methods, better understanding of disinfection and removal efficiencies, and monitoring the occurrence around the American Water System, which will position us for decisions to comply with EPA's announced regulation in late 1998. Viruses also have been a major topic of study. Our research is looking for viruses in groundwaters all across the country. That data will be correlated to both geology and distance to virus sources, such as septic tanks. This investigation will help form the basis for EPA's regulation in a couple of years. Research is also being done to identify better treatment methods to remove organic matter in order to lower disinfection by-products, which will prepare utility subsidiaries to implement EPA's next set of more stringent disinfection by-product regulations, due in late 1998. 33 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- Management's Discussion and Analysis Two newly found contaminants created public concern in 1997. A chemical used in solid rocket fuel (perchlorate) and an oxygenated gasoline additive (MTBE) were found in some groundwater in California. Our Quality Control and Research Laboratory set up test methods for both contaminants and began monitoring all wells around the American Water System. The results of that monitoring will be shared with EPA. If the national occurrence and potential health effects warrant, EPA will regulate these two contaminants in the future. The responsibility for implementing and enforcing the regulations promulgated by EPA rests with the individual states. In some instances, state regulations have established standards that are more demanding than the federal standards. All waste from the utility subsidiaries' water treatment processes are either recycled or discharged. Solid wastes are disposed in accordance with current best practices, and with the proper permits from the authorities. Most solid wastes are disposed of in landfills, and some are taken to local sewage plants for treatment. In several instances, water treatment wastes are discharged to a river in accordance with state permits. Year 2000 Issues Many computer systems in use today were designed and developed without regard to the impact of the upcoming century change. Computer programs and devices often use only two digits for the year to identify dates. As a result, computer systems may fail completely or create erroneous results unless corrective measures are taken. The Company is currently implementing two new software packages for financial and customer service applications that are year 2000 compliant. Although the decision to purchase and implement this software was based on an analysis of all of the Company's current and future systems requirements, once the decision was made these two projects became the core of our year 2000 compliance plan. Mid-range and personal computer upgrades related to these projects also ensure that many of our computerized devices are year 2000 compliant. Replacement of financial and customer service software that was developed by the Company many years ago with these two new software packages makes the year 2000 problem less complex for the Company to address by eliminating the need to revise large amounts of computer code. In addition to the new software packages being implemented, other critical computerized operations include treatment plant automation systems and devices used to record meter readings. All critical software and devices will be tested by Company personnel in the coming months to ensure that they will not be adversely affected by the century change. Interfaces used to exchange information with banks and other entities will also be tested to ensure compliance. This testing is expected to be completed by the end of 1998, although the implementation of new customer service software will continue into 1999. Some of the Company's current customer software will also be made year 2000 compliant in case implementation of the replacement software is delayed. The cost of the new financial and customer service software, implementation consulting services, and the related cost of upgrading and replacing computer equipment will be capitalized by the utility subsidiaries and included in future rate increase requests. Costs for specific year 2000 remediation programs will be charged to expense unless they meet the requirements for deferral as regulatory assets. However, these current period expenses are not expected to be materially different from the usual ongoing level of information systems related expenses. New Accounting Standards In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), and Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" (SFAS 131), were issued by the Financial Accounting Standards Board requiring implementation for periods beginning after December 15, 1997. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The adoption of SFAS 130 will require the Company to report certain items previously reflected as charges and credits to stockholders' equity as "other comprehensive income" in the consolidated statement of income and retained earnings and the consolidated statement of common stockholders' equity. Adoption of SFAS 130 effective January 1, 1998 requires reclassification of financial statements for earlier periods which are provided for comparative purposes. SFAS 130 will not have any effect on the results of operations or the financial position of the Company. SFAS 131 establishes standards for reporting information about operating segments based upon products and services, geographic areas and major customers. The adoption of SFAS 131 will not require significant additional reporting as the Company's utility subsidiaries represent similar entities offering substantially identical services to similar customers. Forward Looking Information This annual report, including management's discussion and analysis, contains certain forward looking statements regarding the Company's results of operations and financial position. These forward looking statements are based on current information and expectations, and are subject to risks and uncertainties which could cause the Company's actual results to differmaterially from expected results. 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, 1997 and 1996, 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, 1997, 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, 1997, 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 4, 1998 35 - --------------------------------------------------------------------------- Consolidated Balance Sheet (Dollars in thousands) At December 31, 1997 1996 =========================================================================== ASSETS Property, plant and equipment Utility plant -- at original cost less accumulated depreciation $3,713,390 $3,453,950 Utility plant acquisition adjustments, net 58,976 52,156 Nonutility property, net of accumulated depreciation 32,942 31,302 Excess of cost of investments in subsidiaries over book equity at acquisition 22,745 22,690 - --------------------------------------------------------------------------- 3,828,053 3,560,098 - --------------------------------------------------------------------------- Current assets Cash and cash equivalents 12,661 12,974 Customer accounts receivable 67,318 67,293 Allowance for uncollectible accounts (1,249) (1,115) Unbilled revenues 55,750 53,868 Miscellaneous receivables 5,673 4,787 Materials and supplies 11,415 11,063 Deferred vacation pay 11,132 10,400 Other 10,158 7,994 - --------------------------------------------------------------------------- 172,858 167,264 - --------------------------------------------------------------------------- Regulatory and other long-term assets Regulatory asset -- income taxes recoverable through rates 181,566 177,064 Debt and preferred stock expense 30,216 28,736 Deferred pension expense 22,163 18,340 Deferred postretirement benefit expense 11,372 11,852 Deferred treatment plant costs 7,690 8,388 Deferred water utility billings 4,013 6,808 Tank painting costs 10,531 10,224 Funds restricted for construction 5,340 5,791 Other 40,484 37,591 - --------------------------------------------------------------------------- 313,375 304,794 - --------------------------------------------------------------------------- $4,314,286 $4,032,156 =========================== 36 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- 1997 1996 =========================================================================== CAPITALIZATION AND LIABILITIES Capitalization Common stockholders' equity $1,142,416 $1,057,874 Preferred stocks with mandatory redemption requirements 40,000 40,000 Preferred stocks without mandatory redemption requirements 11,673 11,673 Preferred stocks of subsidiaries with mandatory redemption requirements 39,734 41,060 Preferred stocks of subsidiaries without mandatory redemption requirements 6,256 6,279 Long-term debt American Water Works Company, Inc. 116,000 116,000 Subsidiaries 1,754,766 1,600,394 - --------------------------------------------------------------------------- 3,110,845 2,873,280 - --------------------------------------------------------------------------- Current liabilities Bank debt 134,762 147,390 Current portion of long-term debt 25,148 57,144 Accounts payable 42,766 36,786 Taxes accrued, including federal income 14,409 10,803 Interest accrued 33,404 32,128 Accrued vacation pay 11,239 10,564 Other 44,725 40,155 - --------------------------------------------------------------------------- 306,453 334,970 - --------------------------------------------------------------------------- Regulatory and other long-term liabilities Advances for construction 127,457 129,466 Deferred income taxes 418,248 382,592 Deferred investment tax credits 36,239 37,345 Accrued pension expense 41,079 32,212 Accrued postretirement benefit expense 10,034 10,034 Other 6,197 7,571 - --------------------------------------------------------------------------- 639,254 599,220 - --------------------------------------------------------------------------- Contributions in aid of construction 257,734 224,686 - --------------------------------------------------------------------------- Commitments and contingencies -- -- - --------------------------------------------------------------------------- $4,314,286 $4,032,156 ========================== 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) For the years ended December 31, 1997 1996 1995 =========================================================================== CONSOLIDATED INCOME Operating revenues $954,199 $894,646 $802,820 - --------------------------------------------------------------------------- Operating expenses Operation and maintenance 428,779 425,170 402,362 Depreciation and amortization 103,660 93,413 79,977 General taxes 87,860 82,017 76,208 - --------------------------------------------------------------------------- 620,299 600,600 558,547 - --------------------------------------------------------------------------- Operating income 333,900 294,046 244,273 Allowance for other funds used during construction 7,035 6,540 11,771 Gain from eminent domain litigation -- -- 6,600 Other income 1,353 3,301 1,844 - --------------------------------------------------------------------------- 342,288 303,887 264,488 - --------------------------------------------------------------------------- Income deductions Interest 145,766 136,760 117,042 Allowance for borrowed funds used during construction (4,715) (5,202) (9,573) Amortization of debt expense 1,614 1,497 1,273 Preferred dividends of subsidiaries 3,522 3,616 3,698 Other deductions 2,260 1,714 2,341 - --------------------------------------------------------------------------- 148,447 138,385 114,781 - --------------------------------------------------------------------------- Income before income taxes 193,841 165,502 149,707 Provision for income taxes 74,713 63,828 57,646 - --------------------------------------------------------------------------- Net income 119,128 101,674 92,061 Dividends on preferred stocks 3,984 3,984 3,984 - --------------------------------------------------------------------------- Net income to common stock $115,144 $ 97,690 $ 88,077 ================================= Average shares of basic common stock outstanding (thousands) 79,144 74,540 66,544 Basic earnings per common share on average shares outstanding $1.45 $1.31 $1.32 ================================= Diluted earnings per common share on average shares outstanding $1.45 $1.31 $1.32 ================================= CONSOLIDATED RETAINED EARNINGS Balance at beginning of year $662,183 $622,061 $578,051 Add: net income 119,128 101,674 92,061 Deduct: adjustment for 1996 stock split on shares issued during the year -- 6,269 1,567 - --------------------------------------------------------------------------- 781,311 717,466 668,545 - --------------------------------------------------------------------------- Deduct: dividends Preferred stock 3,528 3,528 3,528 Preference stock 456 456 456 Common stock -- $.76 per share in 1997, $.70 per share in 1996, $.64 per share in 1995 60,084 51,299 42,500 - --------------------------------------------------------------------------- 64,068 55,283 46,484 - --------------------------------------------------------------------------- Balance at end of year $717,243 $662,183 $622,061 ================================= 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, 1997 1996 1995 =========================================================================== CASH FLOWS FROM OPERATING ACTIVITIES Net income $119,128 $101,674 $ 92,061 Adjustments Depreciation and amortization 103,660 93,413 79,977 Provision for deferred income taxes 31,850 22,288 15,344 Provision for losses on accounts receivable 6,650 5,479 4,288 Allowance for other funds used during construction (7,035) (6,540) (11,771) Employee stock plan expenses 6,301 5,165 6,800 Employee benefit expenses greater (less) than funding 1,243 (849) (6,643) Deferred revenues, net -- (1,125) (17) Deferred tank painting costs (1,834) (2,544) (1,675) Deferred rate case expense (2,219) (1,897) (3,032) Amortization of deferred charges 8,862 8,533 6,995 Other, net (3,099) (7,512) (5,183) Changes in assets and liabilities, net of effects from acquisitions Accounts receivable (7,427) (5,175) (14,897) Unbilled revenues (1,882) (1,543) 9,897 Other current assets (2,516) 612 (785) Accounts payable 5,980 (6,514) (329) Taxes accrued, including federal income 3,606 (2,591) (254) Interest accrued 1,276 3,465 (33) Other current liabilities 4,570 4,178 8,353 - --------------------------------------------------------------------------- Net cash from operating activities 267,114 208,517 179,096 - --------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Construction expenditures (352,437) (273,732) (330,762) Allowance for other funds used during construction 7,035 6,540 11,771 Water system acquisitions (3,072) (302,447) (5,738) Proceeds from the disposition of property, plant and equipment 3,717 4,649 16,307 Removal costs from property, plant and equipment retirements (12,855) (8,264) (7,204) Funds restricted for construction activity 451 8,136 12,286 - --------------------------------------------------------------------------- Net cash used in investing activities (357,161) (565,118) (303,340) - --------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from long-term debt 179,700 248,459 132,450 Proceeds from common stock, net of issuance costs 23,040 186,451 33,544 Net borrowings (repayments) under line-of-credit agreements (12,628) (1,249) 66,214 Advances and contributions for construction, net of refunds 25,893 17,829 19,296 Debt issuance costs (3,530) (4,187) (1,735) Repayment of long-term debt (57,324) (44,887) (85,452) Redemption of preferred stocks (1,349) (1,275) (1,411) Dividends paid (64,068) (55,283) (46,484) - --------------------------------------------------------------------------- Net cash from financing activities 89,734 345,858 116,422 - --------------------------------------------------------------------------- Net decrease in cash and cash equivalents (313) (10,743) (7,822) Cash and cash equivalents at beginning of year 12,974 23,717 31,539 - --------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 12,661 $ 12,974 $ 23,717 ================================= Cash paid during the year for: Interest, net of capitalized amount $146,794 $134,084 $119,676 ================================= Income taxes $ 56,269 $ 49,197 $ 44,191 ================================= Common stock issued in lieu of cash in connection with the Employee Stock Ownership Plan, the Savings Plan for Employees and the Long-Term Performance-Based Incentive Plan totaled $5,438 in 1997, $8,093 in 1996 and $2,839 in 1995. Capital lease obligations of $62 were recorded in 1996. The accompanying notes are an integral part of these financial statements. 39 - --------------------------------------------------------------------------- Consolidated Statement of Capitalization (Dollars in thousands, except per share amounts) At December 31, 1997 1996 =========================================================================== COMMON STOCKHOLDERS' EQUITY: Common stock -- $1.25 par value, authorized 300,000,000 shares, outstanding 79,685,612 shares in 1997 and 78,421,302 shares in 1996 $ 99,607 $ 98,027 Paid-in capital 326,382 298,448 Retained earnings 717,243 662,183 Unearned compensation (816) (784) - --------------------------------------------------------------------------- 1,142,416 1,057,874 - --------------------------------------------------------------------------- At December 31, 1997, common shares reserved for issuance in connection with the Company's stock plans were 60,923,162 shares for the Stockholder Rights Plan, 6,194,886 shares for the Dividend Reinvestment and Stock Purchase Plan, 803,058 shares for the Employees' Stock Ownership Plan, 92,021 shares for the Savings Plan for Employees and 397,585 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% 6,545 7,029 5% to less than 6% 5,429 5,573 6% to less than 7% 1,957 2,091 7% to less than 8% 2,270 2,320 8% to less than 9% 24,695 24,874 9% to less than 10% 4,534 4,752 10% to less than 11% 560 700 - --------------------------------------------------------------------------- 45,990 47,339 - --------------------------------------------------------------------------- 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 $1,465 in 1998, $1,397 in 1999, $1,299 in 2000, $1,224 in 2001 and $1,032 in 2002. Redemptions of preferred stock amounted to $1,349 in 1997 and $1,275 in 1996. 40 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- CURRENT MATURITIES 1997 1996 =========================================================================== 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 $366 in 1997 and $95 in 1996. LONG-TERM DEBT OF SUBSIDIARIES: Interest rate 1% to less than 2% $ 118 2,140 2,258 4% to less than 5% 391 4,825 5,217 5% to less than 6% 49 178,361 118,599 6% to less than 7% 249 375,821 356,070 7% to less than 8% 2,149 689,779 592,218 8% to less than 9% 1,100 171,100 172,200 9% to less than 10% 20,354 267,663 288,017 10% to less than 11% 455 64,315 64,770 - --------------------------------------------------------------------------- 24,865 1,754,004 1,599,349 Capital leases 283 762 1,045 - --------------------------------------------------------------------------- $25,148 1,754,766 1,600,394 - --------------------------------------------------------------------------- $3,110,845 $2,873,280 ====================== Maturities of long-term debt of subsidiaries, including sinking fund requirements, during the next five years will amount to $25,148 in 1998, $18,026 in 1999, $37,057 in 2000, $107,531 in 2001 and $133,556 in 2002. 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 Stockholders' Equity (Dollars in thousands, except per share amounts)
Common Stock Common --------------------- Paid-in Retained Unearned Stockholders' Shares Par Value Capital Earnings Compensation Equity =============================================================================================================== 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 Net income -- -- -- 119,128 -- 119,128 Dividend reinvestment 291,236 364 6,235 -- -- 6,599 Stock purchase 555,109 693 11,777 -- -- 12,470 Employees' stock ownership plan 134,182 168 2,761 -- -- 2,929 Savings plan for employees 222,940 279 4,741 -- -- 5,020 Incentive plan 60,843 76 2,420 -- (32) 2,464 Dividends: Preferred stocks -- -- -- (3,984) -- (3,984) Common stock, $.76 per share -- -- -- (60,084) -- (60,084) - --------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 79,685,612 $99,607 $326,382 $717,243 $(816) $1,142,416 ===========================================================================
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, 1997 1996 =========================================================================== ASSETS Investments in subsidiaries Securities $1,366,016 $1,261,532 Notes and advances 90 100 - --------------------------------------------------------------------------- 1,366,106 1,261,632 - --------------------------------------------------------------------------- Current assets Cash and cash equivalents 308 43 Other receivable from subsidiaries 1,767 907 Other 500 190 - --------------------------------------------------------------------------- 2,575 1,140 - --------------------------------------------------------------------------- Deferred debits Deferred income taxes 4,212 3,377 Debt expense 191 236 Preferred stock expense 137 184 Other 2 6 - --------------------------------------------------------------------------- 4,542 3,803 - --------------------------------------------------------------------------- Other long-term assets 12,907 9,788 - --------------------------------------------------------------------------- $1,386,130 $1,276,363 ====================== CAPITALIZATION AND LIABILITIES Capitalization Common stockholders' equity $1,142,416 $1,057,874 Preferred stocks with mandatory redemption requirements 40,000 40,000 Preferred stocks without mandatory redemption requirements 11,673 11,673 Long-term debt 116,366 116,095 - --------------------------------------------------------------------------- 1,310,455 1,225,642 - --------------------------------------------------------------------------- Current liabilities Bank debt 59,500 38,100 Current portion of long-term debt 95 41 Interest accrued 1,760 1,569 Taxes accrued, including federal income 34 31 Other 760 915 - --------------------------------------------------------------------------- 62,149 40,656 - --------------------------------------------------------------------------- Other long-term liabilities 13,526 10,065 - --------------------------------------------------------------------------- Commitments and contingencies -- -- - --------------------------------------------------------------------------- $1,386,130 $1,276,363 ====================== 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) For the years ended December 31, 1997 1996 1995 =========================================================================== INCOME Income from subsidiaries Equity in earnings of subsidiaries Dividends $ 96,427 $ 82,155 $ 77,182 Undistributed earnings 36,335 31,605 26,315 - --------------------------------------------------------------------------- 132,762 113,760 103,497 Interest 6 6 7 Other income 585 503 1,147 - --------------------------------------------------------------------------- 133,353 114,269 104,651 - --------------------------------------------------------------------------- Expenses Operating and administrative expenses 9,431 8,003 8,086 General taxes 266 252 239 Interest 12,629 11,639 11,027 Amortization of debt expense 45 55 56 - --------------------------------------------------------------------------- 22,371 19,949 19,408 - --------------------------------------------------------------------------- Income before income taxes 110,982 94,320 85,243 Provision for income taxes (8,146) (7,354) (6,818) - --------------------------------------------------------------------------- Net income 119,128 101,674 92,061 Dividends on preferred stocks 3,984 3,984 3,984 - --------------------------------------------------------------------------- Net income to common stock $115,144 $ 97,690 $ 88,077 ================================= Average shares of basic common stock outstanding (thousands) 79,144 74,540 66,544 Basic earnings per common share on average shares outstanding $1.45 $1.31 $1.32 ================================= Diluted earnings per common share on average shares outstanding $1.45 $1.31 $1.32 ================================= RETAINED EARNINGS Balance at beginning of year $662,183 $622,061 $578,051 Add: net income 119,128 101,674 92,061 Deduct: adjustment for 1996 stock split on shares issued during the year -- 6,269 1,567 - --------------------------------------------------------------------------- 781,311 717,466 668,545 - --------------------------------------------------------------------------- Deduct: dividends Preferred stock 3,528 3,528 3,528 Preference stock 456 456 456 Common stock -- $.76 per share in 1997, $.70 per share in 1996, $.64 per share in 1995 60,084 51,299 42,500 - --------------------------------------------------------------------------- 64,068 55,283 46,484 - --------------------------------------------------------------------------- Balance at end of year $717,243 $662,183 $622,061 ================================= 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, 1997 1996 1995 =========================================================================== CASH FLOWS FROM OPERATING ACTIVITIES Net income $119,128 $101,674 $ 92,061 Adjustments Undistributed earnings of subsidiaries (36,335) (31,605) (26,315) Employee stock plan expenses 585 451 1,673 Other, net 961 877 (53) Changes in assets and liabilities Receivables from subsidiaries -- 4 4 Other current assets (310) (82) (28) Taxes accrued, including federal income 3 50 (71) Interest accrued 191 67 88 Other current liabilities (155) (400) 595 - --------------------------------------------------------------------------- Net cash from operating activities 84,068 71,036 67,954 - --------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Investment in subsidiaries' common stock (68,149) (226,839) (78,554) Repayment of promissory notes by subsidiaries 10 10 10 Other (950) (1,209) (501) - --------------------------------------------------------------------------- Net cash used in investing activities (69,089) (228,038) (79,045) - --------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from common stock, net of issuance costs 28,041 192,856 36,383 Dividends paid (64,068) (55,283) (46,484) Net borrowings under line-of-credit agreements 21,400 34,400 3,700 Repayment of long-term debt (73) (15,033) (23) Other (14) (14) (13) - --------------------------------------------------------------------------- Net cash from (used in) financing activities (14,714) 156,926 (6,437) - --------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 265 (76) (17,528) Cash and cash equivalents at beginning of year 43 119 17,647 - --------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 308 $ 43 $ 119 ================================= Cash paid (received) during the year for: Interest $ 12,438 $ 11,572 $ 10,939 ================================= Income taxes $ (7,105) $ (6,905) $ (5,844) ================================= Common stock issued in lieu of cash in connection with the Long-Term Performance-Based Incentive Plan totaled $437 in 1997 and $1,688 in 1996. 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 utility subsidiaries provides water and wastewater service in 21 states. The Company however, reflects one reportable segment for financial statement purposes as the Company's utility subsidiaries represent similar entities offering substantially identical services to similar customers. Wastewater service has not been reflected as a reportable segment as revenues, net income and assets associated with this service are less than 10% of those for the Company as a whole. As public utilities, the utility companies function under rules and regulations prescribed by state regulatory commissions. NOTE 2: SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of the parent company and all subsidiaries. Intercompany accounts and transactions are eliminated. Parent company financial statements reflect the equity method of accounting for investments in common stock of subsidiaries (cost plus equity in subsidiaries' undistributed earnings since acquisition). Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Regulation The utility subsidiaries have incurred various costs and received various credits which have been reflected as regulatory assets and liabilities on the Company's consolidated balance sheet. Accounting for such costs and credits as regulatory assets and liabilities is in accordance with Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS 71). This statement sets forth the application of generally accepted accounting principles for those companies whose rates are established by or are subject to approval by an independent third-party regulator. Under SFAS 71, utility companies defer costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that those costs and credits will be recognized in the rate making process in a period different from the period in which they would have been reflected in income by an unregulated company. These deferred regulatory assets and liabilities are then reflected in the income statement in the period in which the same amounts are reflected in the rates charged for service. Property, Plant and Equipment Additions to utility plant and replacements of retirement units of property are capitalized. Costs include material, direct labor and such indirect items as engineering and supervision, payroll taxes and benefits, transportation and an allowance for funds used during construction. Repairs, maintenance and minor replacements of property are charged to current operations. The cost of property units retired in the ordinary course of business plus removal cost (less salvage) is charged to accumulated depreciation. The cost of property, plant and equipment is generally depreciated using the straight-line method over the estimated service lives of the assets. 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. Pension expense in excess of the amount contributed to the pension plan is deferred by certain subsidiaries. These 46 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- costs will be recovered in future service rates as contributions are made to the pension plan. Postretirement benefit expense in excess of the amount recovered in rates through 1997 has been deferred by certain subsidiaries. These costs are now recognized in the rates charged for water service and will be fully recovered over a 20-year period ending in 2012 as authorized by the regulatory authorities. Deferred treatment plant costs consist of operating expenses, including depreciation and property taxes, and the carrying charges associated with several water treatment plants and related facilities acquired in 1996 (see Pennsylvania Acquisition in note 3) from the time the assets were placed in service until recovery of such costs is allowed in future service rates. These costs have been recognized in the rates charged for water service and are being amortized over a 10-year period as authorized by the regulatory authorities. Deferred water utility billings represent revenue which will be recovered from customers in future years under the terms of qualified phase-in plans pursuant to the provisions of Statement of Financial Accounting Standards No. 92, "Utility Enterprises -- Accounting for Phase-In Plans." These regulatory assets have been recorded in accordance with the terms of rate orders received by the previous owners of water utility assets that were acquired in 1996 (see Pennsylvania Acquisition in note 3). The deferred billings are scheduled to conclude in 2001. Tank painting costs are generally deferred and amortized to current operations on a straight-line basis over periods ranging from 4 to 20 years, as authorized by the regulatory authorities in their determination of rates charged for service. Other Current Liabilities Other current liabilities at December 31, 1997 and 1996 include payables to banks of $14,307 and $10,468, respectively, which represent checks issued but not presented to the banks for payment, net of the related bank balance. Advances and Contributions in Aid of Construction Utility subsidiaries may receive advances and contributions to fund construction necessary to extend service to new areas. As determined by the regulatory authorities, advances for construction are refundable for limited periods of time as new customers begin to receive service. Amounts which are no longer refundable are reclassified to contributions in aid of construction. Utility plant funded by advances and contributions is excluded from rate base and is generally not depreciated for rate making purposes. Generally, advances and contributions received during the period 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 utility subsidiaries also recognize regulatory assets and liabilities for the effect on revenues expected to be realized as the tax effects of temporary differences previously flowed through to customers reverse. Investment tax credits have been deferred and are being amortized to income over the average estimated service lives of the related assets. Allowance for Funds Used During Construction (AFUDC) AFUDC is a non-cash credit to income with a corresponding charge to utility plant which represents the cost of borrowed funds and a return on equity funds devoted to plant under construction. The utility subsidiaries record AFUDC to the extent permitted by the regulatory authorities. Environmental Costs Environmental expenditures that relate to current operations or provide a future benefit are expensed or capitalized as appropriate. Remediation costs that relate to an existing condition caused by past operations are accrued when it is probable that these costs will be incurred and can be reasonably estimated. Asset Impairment Long-lived assets and certain identifiable intangible assets held and used by the Company are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets, on a separate entity basis, may not be recoverable. If the sum of the future cash flows expected to result from the use of the assets and their eventual disposition is less than the carrying amount of the assets, an impairment loss is recognized. Measurement of an impairment loss is based on the fair value of the assets. A regulatory asset is charged to earnings if and when future recovery in rates of that asset is no longer probable. 47 - --------------------------------------------------------------------------- Notes to Financial Statements (Dollars in thousands, except per share amounts) Earnings Per Share The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share." This statement is effective for financial statements for both interim and annual periods ending after December 15, 1997. The average number of shares used to calculate diluted earnings per share includes 76,996 and 68,802 of potential common shares issuable in connection with the Company's Long-Term Performance-Based Incentive Plan (see note 9) in 1997 and 1996, respectively. New Accounting Standards In June 1997, Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130), and Statement of Financial Accounting Standards No. 131, "Disclosure about Segments of an Enterprise and Related Information" (SFAS 131), were issued by the Financial Accounting Standards Board requiring implementation for periods beginning after December 15, 1997. SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The adoption of SFAS 130 will require the Company to report certain items previously reflected as charges and credits to stockholders' equity as "other comprehensive income" in the consolidated statement of income and retained earnings and the consolidated statement of common stockholders' equity. Adoption of SFAS 130 effective January 1, 1998 requires reclassification of financial statements for earlier periods which are provided for comparative purposes. SFAS 130 will not have any effect on the results of operations or the financial position of the Company. SFAS 131 establishes standards for reporting information about operating segments based upon products and services, geographic areas and major customers. The adoption of SFAS 131 will not require significant additional reporting as the Company's utility subsidiaries represent similar entities offering substantially identical services to similar customers. Reclassification Certain reclassifications have been made to conform previously reported data to the current presentation. NOTE 3: ACQUISITIONS AND DISPOSITIONS East Honolulu, Hawaii Acquisition On August 26, 1997, the Company agreed to acquire the common stock of East Honolulu Community Services, Inc. (EHCS) from Maunalua Associates, Inc., a subsidiary of Kemper Corporation, for $18,400. EHCS is a suburban Honolulu wastewater utility that serves 10,000 customers. For the latest fiscal year ended December 31, 1997, EHCS had unaudited revenues of $6,275, net income of $789 and total assets of $17,117. The Company expects to complete this transaction on or about April 1, 1998. Northeastern Pennsylvania Acquisition On February 16, 1996, the Company's subsidiary, Pennsylvania-American Water Company, acquired the water utility operations of Pennsylvania Gas and Water Company (now known as PG Energy Inc.) for $409,400. The acquired operations, which include 10 water treatment plants and 36 reservoirs, serve 132,000 customers in northeastern Pennsylvania. The acquisition was accounted for as a purchase, and the accompanying financial statements reflect the results of operations of the acquired business subsequent to the purchase date. The purchase price consisted of $262,500 in cash and the assumption of $146,900 of PG Energy Inc.'s liabilities, including $141,000 of its long-term debt. The cash payment was funded with short-term debt that was subsequently repaid with the proceeds from the Company's common stock offering (see note 7) and a portion of the proceeds from Pennsylvania-American's offering of $150,000 of 30-year, 7.8% General Mortgage Bonds in 1996. 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. After that 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. 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. 48 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- NOTE 4: 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 5: UTILITY PLANT The components of utility plant by category at December 31 are as follows: 1997 1996 ========================================================================= Water plant Sources of supply $ 215,321 $ 187,358 Treatment and pumping 1,052,944 956,858 Transmission and distribution 2,016,300 1,890,080 Services, meters and fire hydrants 757,729 702,906 General structures and equipment 281,523 266,440 Wastewater plant 33,124 31,267 Construction work in progress 111,808 101,874 - ------------------------------------------------------------------------- 4,468,749 4,136,783 Less-accumulated depreciation 755,359 682,833 - ------------------------------------------------------------------------- $3,713,390 $3,453,950 ======================= NOTE 6: 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 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 6), 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. 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 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 49 - --------------------------------------------------------------------------- Notes to Financial Statements (Dollars in thousands, except per share amounts) 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 $1,674 for 1997, $1,427 for 1996 and $1,408 for 1995 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. Effective January 1, 1998 the Company will match 50% of the first 4% of each employee's wages contributed to the plan. The Company expensed matching contributions to the plan totaling $2,304 for 1997, $2,198 for 1996 and $1,429 for 1995. 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 The Company and its subsidiaries have a Long-Term Performance-Based Incentive Plan. Under the plan, designated executives and other key employees are eligible to receive awards if performance cycle goals based on earnings-per-share growth and total return to Company stockholders, in comparison to a designated peer group of water companies, are met. The plan is administered by the Compensation and Management Development Committee of the Board of Directors. The Committee will determine the value or range of values, including the maximum value, of awards to each participant. Awards may be paid in the form of cash, restricted shares of common stock, or a combination of both. The cost of the plan is being charged to expense over each three-year performance cycle. Such expense was $2,715 in 1997, $1,950 in 1996 and $5,386 in 1995. 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: 1997 1996 1995 =========================================================================== Service cost-benefits earned during the year $ 11,657 $ 12,820 $ 8,332 Interest cost on projected benefit obligation 29,887 28,189 25,560 Actual return on plan assets (52,721) (35,343) (94,167) Net amortization and deferral 16,829 1,311 67,768 - --------------------------------------------------------------------------- Net pension cost $ 5,652 $ 6,977 $ 7,493 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. Due to the funded status of the plan there were no contributions made in 1997. The Company made contributions of $4,307 in 1996 and $9,993 in 1995. Pension plan assets are invested in a number of investments including a guaranteed interest contract with a major insurance company, equity mutual funds, United States Government securities and publicly traded bonds. 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 over the last three years. 50 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- The following table reconciles plan assets and liabilities to the funded status of the plan at December 31: 1997 1996 =========================================================================== Plan assets at fair value $441,218 $404,321 ======================= Actuarial present value of benefit obligations: Vested benefits $345,872 $304,800 Non-vested benefits 8,377 6,895 - --------------------------------------------------------------------------- Accumulated benefit obligation 354,249 311,695 Effect of projected future salary increases 95,576 82,870 - --------------------------------------------------------------------------- Total projected benefit obligation $449,825 $394,565 ====================== Projected benefit obligation less than (in excess) of plan assets $ (8,607) $ 9,756 Unrecognized net transition asset (11,763) (14,116) Unrecognized prior service cost 2,008 2,180 Unrecognized net gain (10,482) (21,012) - --------------------------------------------------------------------------- Accrued pension cost $(28,844) $(23,192) ======================= Discount rate assumption 7.00% 7.50% 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 $2,200 for 1997, $1,299 for 1996 and $1,163 for 1995. At December 31, 1997, the projected benefit obligation for these plans totaled $15,295. Accrued as a pension liability on the balance sheet is $12,235 representing $8,678 of accrued pension cost and an unfunded accumulated benefit obligation in excess of accrued pension cost of $3,557. 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: 1997 1996 1995 =========================================================================== Service cost-benefits earned during the year $ 4,992 $ 5,848 $ 4,641 Interest cost on accumulated postretirement benefit obligation 11,230 11,545 11,637 Actual return on plan assets (12,232) (3,545) (2,450) Net amortization and deferral 12,406 5,325 5,196 - --------------------------------------------------------------------------- Net postretirement benefit cost $16,396 $19,173 $19,024 ============================== Assumed asset earnings rate 7.90% 7.90% 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 $16,396 in 1997, $17,892 in 1996 and $19,024 in 1995. 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: 1997 1996 =========================================================================== Plan assets at fair value $ 85,452 $ 63,664 ======================= Actuarial present value of postretirement benefit obligations: Retirees and dependents $ 70,954 $ 64,718 Fully eligible active plan participants 5,241 4,633 Other active plan participants 91,160 80,584 - --------------------------------------------------------------------------- Total accumulated postretirement benefit obligation $167,355 $149,935 ======================= Accumulated postretirement benefit obligation in excess of plan assets $(81,903) $(86,271) Unrecognized transition obligation 85,904 91,631 Unrecognized prior service costs 8,556 11,585 Unrecognized net gain (22,591) (26,979) - --------------------------------------------------------------------------- Accrued postretirement benefit cost $(10,034) $(10,034) ======================= Discount rate assumption 7.00% 7.50% 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 6.5% annual rate in 1998 that is assumed to decrease gradually to a 5.5% annual rate in 2000 and remain at that level thereafter for the comprehensive plan, a constant 5.5% annual rate for the managed care plan and an 8.0% annual rate in 1998 that is assumed to decrease gradually to a 5.5% annual rate in 2003 and remain at that level thereafter for pre-acquisition retirees of the Pennsylvania water utility operations acquired in 1996 (see Pennsylvania Acquisition in note 3). A one-percentage-point increase in the health care cost trend rate would have increased the accumulated 51 - --------------------------------------------------------------------------- Notes to Financial Statements (Dollars in thousands, except per share amounts) postretirement benefit obligation by $22,700 at January 1, 1998 and the aggregate of the service and interest cost components of postretirement benefit costs for 1997 by $2,800. NOTE 11: GENERAL TAXES Components of general tax expense for the years presented in the consolidated statement of income are as follows: 1997 1996 1995 ========================================================================== Gross receipts and franchise $37,580 $35,684 $33,272 Property and capital stock 35,466 31,971 28,868 Payroll 12,433 12,060 11,524 Other general 2,381 2,302 2,544 - -------------------------------------------------------------------------- $87,860 $82,017 $76,208 ============================= NOTE 12: INCOME TAXES Components of income tax expense for the years presented in the consolidated statement of income are as follows: 1997 1996 1995 =========================================================================== STATE INCOME TAXES: Current $ 7,514 $ 8,291 $ 7,938 Deferred Current 146 99 59 Non-current 2,609 837 82 - --------------------------------------------------------------------------- $10,269 $ 9,227 $ 8,079 ============================== FEDERAL INCOME TAXES: Current $35,259 $33,219 $34,485 Deferred Current (56) (69) (180) Non-current 30,484 22,694 16,505 Amortization of deferred investment tax credits (1,243) (1,243) (1,243) - --------------------------------------------------------------------------- $64,444 $54,601 $49,567 ============================== A reconciliation of income tax expense at the statutory federal income tax rate to actual income tax expense is as follows: 1997 1996 1995 =========================================================================== Income tax at statutory rate $67,845 $57,926 $52,397 Increases (decreases) resulting from -- State taxes, net of federal taxes 6,675 5,998 5,252 Flow through differences 1,143 742 556 Amortization of investment tax credits (1,243) (1,243) (1,243) Subsidiary preferred dividends 1,198 1,230 1,258 Other, net (905) (825) (574) - --------------------------------------------------------------------------- Actual income tax expense $74,713 $63,828 $57,646 ============================== The following table provides the components of the net deferred tax liability at December 31: 1997 1996 =========================================================================== DEFERRED TAX ASSETS: Advances and contributions $149,058 $137,904 Deferred investment tax credits 13,862 14,355 Other 14,205 19,001 - --------------------------------------------------------------------------- 177,125 171,260 - --------------------------------------------------------------------------- DEFERRED TAX LIABILITIES: Utility plant, principally due to depreciation differences 496,827 452,824 Income taxes recoverable through rates 71,475 70,410 Other 27,071 30,618 - --------------------------------------------------------------------------- 595,373 553,852 - --------------------------------------------------------------------------- $418,248 $382,592 ======================= As of December 31, 1997 and 1996, the parent company had no material temporary differences. No valuation allowances were required on deferred tax assets at December 31, 1997 and 1996. NOTE 13: LEASES The Company has entered into operating leases involving certain facilities and equipment. Rental expenses under operating leases were $9,199 for 1997, $8,973 for 1996 and $8,985 for 1995. Capital leases currently in effect are not significant. At December 31, 1997, the minimum annual future rental commitment under operating leases that have initial or remaining noncancellable lease terms in excess of one year are $5,765 in 1998, $4,744 in 1999, $3,660 in 2000, $2,418 in 2001 and $1,613 in 2002. 52 AMERICAN WATER WORKS COMPANY, INC. AND SUBSIDIARY COMPANIES - --------------------------------------------------------------------------- NOTE 14: COMMITMENTS AND CONTINGENCIES Construction programs of subsidiaries for 1998 are estimated to cost approximately $424,000. Commitments have been made in connection with certain construction programs. The Company is routinely involved in condemnation proceedings and legal actions relating to several utility subsidiaries. In the opinion of management, none of these matters will have a material adverse effect, if any, on the financial position or results of operations of the Company. NOTE 15: COMPENSATING BALANCES AND BANK DEBT During 1997 the Company and its subsidiaries maintained lines of credit with various banks. The total of the unused lines of credit at December 31, 1997 was $55,500 for the Company and $252,085 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 1997 was $171,337, and the average amount outstanding during the year was $155,629. The weighted average annual interest rate on these borrowings during 1997 was 6.17%, and the interest rate at December 31, 1997 was 5.89%. 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 1997 AMOUNT FAIR VALUE ======================================================================== Preferred stocks of the Company with mandatory redemption requirements $40,000 $42,879 Preferred stocks of subsidiaries with mandatory redemption requirements 39,734 43,069 Long-term debt of the Company 116,000 120,116 Long-term debt of subsidiaries 1,778,869 1,919,923 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 NOTE 17: QUARTERLY FINANCIAL DATA (UNAUDITED) Summarized quarterly financial data for 1997 and 1996 are as follows: FIRST SECOND THIRD FOURTH 1997 QUARTER QUARTER QUARTER QUARTER ===================================================================== Operating revenues $213,357 $237,915 $266,012 $236,915 Operating income 64,903 86,574 104,908 77,515 Net income 18,030 31,640 43,491 25,967 Net income to common stock 17,034 30,644 42,495 24,971 Basic and diluted net income per common share $.22 $.39 $.54 $.31 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 Basic and diluted net income per common share $.23 $.35 $.45 $.27 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 AmWtrWks A Wat pr A Wat pf - --------------------------------------------------------------------------- 1997 High Low High Low High Low =========================================================================== 1st quarter $24-1/2 $19-7/8 $22 $18-3/4 $19-1/2 $18 2nd quarter 22-3/8 20-5/8 20-1/4 18-1/2 20 18-1/4 3rd quarter 22-1/2 20-3/4 20-1/2 19-1/4 21 19 4th quarter 29-11/16 20-11/16 21-3/4 19-1/4 21 19-1/4 Quarterly dividend paid per share $.19 $.3125 $.3125 Number of shareholders at December 31, 1997 41,123 226 769 - --------------------------------------------------------------------------- 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 $.175 $.3125 $.3125 Number of shareholders at December 31, 1996 39,002 251 840 - --------------------------------------------------------------------------- The common and 5% preferred stocks have voting rights. [RECYCLE LOGO] This Annual Report is printed on recycled paper. Design/Production: The Creative Department, Inc. Copywriting: Gerard F. Reimel Photography: Michael Furman, cover; H. Mark Weidman, editorial section; Mi Mi Janosy, portraits 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, 1997. 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 99.78 Indiana-American Water Company, Inc. Indiana 100 Iowa-American Water Company Delaware 94.98 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 95.92** Tennessee-American Water Company Tennessee 99.81 Virginia-American Water Company Virginia 100 West Virginia-American Water Company West Virginia 99.95 Bluefield Valley Water Works Company Virginia 100 - --------------------------------------------------------------------------- * Includes 7.32% 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-31-1997 DEC-31-1997 PER-BOOK 3,713,390 114,663 172,858 272,891 40,484 4,314,286 99,607 325,566 717,243 1,142,416 79,734 17,929 1,870,766 134,762 0 0 25,148 0 0 0 1,043,531 4,314,286 954,199 74,713 620,299 695,012 259,187 5,707 264,894 145,766 119,128 3,984 115,144 60,084 138,127 267,114 1.45 1.45
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