Edgar Filing: American Water Works Company, Inc.

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Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2010

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

For the transition period from to

Commission file: number 001-34028

AMERICAN WATER WORKS COMPANY, INC.

(Exact name of registrant as specified in its charter)


Delaware		51-0063696
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

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

(856) 346-8200

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

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

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

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

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


Class		Outstanding at October 29, 2010
Common Stock, $0.01 par value per share		174,873,174 shares

TABLE OF CONTENTS

AMERICAN WATER WORKS COMPANY, INC.

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED September 30, 2010

INDEX


PART I. FINANCIAL INFORMATION			1

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS			1-19
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			20 - 41
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			42
ITEM 4. CONTROLS AND PROCEDURES			42

PART II. OTHER INFORMATION			42

ITEM 1. LEGAL PROCEEDINGS			42
ITEM 1A. RISK FACTORS			42
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			42
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			42
ITEM 4. [RESERVED]			42
ITEM 5. OTHER INFORMATION			42
ITEM 6. EXHIBITS			43

SIGNATURES			44
EXHIBITS INDEX			44

EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2
EXHIBIT 101

PART I. FINANCIAL INFORMATION

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Balance Sheets (Unaudited)

(In thousands, except per share data)


	September 30, 2010			December 31, 2009
ASSETS
Property, plant and equipment
Utility plant—at original cost, net of accumulated depreciation of $3,349,819 at September 30 and $3,168,078 at December 31	$	10,872,916		$	10,523,844
Nonutility property, net of accumulated depreciation of $133,694 at September 30 and $117,245 at December 31		140,431			153,549

Total property, plant and equipment		11,013,347			10,677,393

Current assets
Cash and cash equivalents		23,501			22,256
Restricted funds		99,974			41,020
Utility customer accounts receivable		201,354			149,417
Allowance for uncollectible accounts		(21,182	)		(19,035	)
Unbilled utility revenues		150,927			130,262
Non-Regulated trade and other receivables, net		81,671			75,086
Income taxes receivable		6,394			17,920
Materials and supplies		31,345			29,521
Other		53,415			52,680

Total current assets		627,399			499,127

Regulatory and other long-term assets
Regulatory assets		1,011,554			952,020
Restricted funds		26,330			20,212
Goodwill		1,250,692			1,250,381
Other		54,353			53,518

Total regulatory and other long-term assets		2,342,929			2,276,131

TOTAL ASSETS	$	13,983,675		$	13,452,651

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

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Balance Sheets (Unaudited)

(In thousands, except per share data)


	September 30, 2010			December 31, 2009
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock ($.01 par value, 500,000 shares authorized, 174,860 and 174,630 shares outstanding at September 30 and December 31, respectively)	$	1,749		$	1,746
Paid-in-capital		6,151,349			6,140,077
Accumulated deficit		(1,960,806	)		(2,076,287	)
Accumulated other comprehensive loss		(61,086	)		(64,677	)

Common stockholders’ equity		4,131,206			4,000,859
Preferred stock without mandatory redemption requirements		4,547			4,557

Total stockholders’ equity		4,135,753			4,005,416

Long-term debt
Long-term debt		5,371,548			5,288,180
Redeemable preferred stock at redemption value		23,802			23,946

Total capitalization		9,531,103			9,317,542

Current liabilities
Short-term debt		181,841			119,497
Current portion of long-term debt		43,984			54,068
Accounts payable		166,388			138,609
Taxes accrued, including income taxes of $0 at September 30 and $1,777 at December 31		57,002			45,552
Interest accrued		103,119			60,128
Other		189,090			189,538

Total current liabilities		741,424			607,392

Regulatory and other long-term liabilities
Advances for construction		617,147			633,509
Deferred income taxes		1,050,293			851,677
Deferred investment tax credits		31,415			32,590
Regulatory liabilities		337,296			322,281
Accrued pension expense		388,876			431,010
Accrued postretirement benefit expense		230,214			236,045
Other		45,575			47,325

Total regulatory and other long-term liabilities		2,700,816			2,554,437

Contributions in aid of construction		1,010,332			973,280
Commitments and contingencies (See Note 9)		—			—

TOTAL CAPITALIZATION AND LIABILITIES	$	13,983,675		$	13,452,651

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

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Operations and Comprehensive Income (Unaudited)

(In thousands, except per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Operating revenues	$	786,946		$	679,956		$	2,046,222		$	1,842,866

Operating expenses
Operation and maintenance		378,034			340,862			1,053,320			985,861
Depreciation and amortization		79,431			74,854			232,156			216,939
General taxes		55,316			50,618			164,610			154,814
(Gain) loss on sale of assets		210			(784	)		133			(976	)
Impairment charge		0			0			0			450,000

Total operating expenses, net		512,991			465,550			1,450,219			1,806,638

Operating income		273,955			214,406			596,003			36,228

Other income (expenses)
Interest, net		(74,858	)		(74,124	)		(232,307	)		(219,791	)
Allowance for other funds used during construction		2,586			2,290			7,144			9,208
Allowance for borrowed funds used during construction		1,814			1,674			4,465			5,537
Amortization of debt expense		(1,285	)		(2,135	)		(3,233	)		(5,158	)
Other, net		511			(310	)		2,508			(605	)

Total other income (expenses)		(71,232	)		(72,605	)		(221,423	)		(210,809	)

Income (loss) before income taxes		202,723			141,801			374,580			(174,581	)
Provision for income taxes		78,609			50,165			146,907			94,873

Net income (loss)	$	124,114		$	91,636		$	227,673		$	(269,454	)

Other comprehensive income, net of tax:
Pension plan amortized to periodic benefit cost:
Prior service cost, net of tax of $13 and $7 for the three months ended and $38 and $22 for the nine months ended, respectively		20			11			59			34
Actuarial loss, net of tax of $698 and $958 for the three months ended and $2,094 and $2,874 for the nine months ended, respectively		1,092			1,499			3,276			4,496
Foreign currency translation adjustment		348			503			256			1,377

Other comprehensive income		1,460			2,013			3,591			5,907

Comprehensive income (loss)	$	125,574		$	93,649		$	231,264		$	(263,547	)

Income (loss) per common share:
Basic	$	0.71		$	0.52		$	1.30		$	(1.62	)

Diluted	$	0.71		$	0.52		$	1.30		$	(1.62	)

Average common shares outstanding during the period:
Basic		174,859			174,595			174,785			165,992

Diluted		175,062			174,691			174,919			165,992

Dividends per common share	$	0.22		$	0.21		$	0.64		$	0.61

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

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Cash Flows (Unaudited)

(In thousands, except per share data)


	Nine Months Ended September 30,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	227,673		$	(269,454	)
Adjustments
Depreciation and amortization		232,156			216,939
Impairment charge		0			450,000
Amortization of removal costs net of salvage		32,225			30,417
Provision for deferred income taxes		175,090			104,373
Amortization of deferred investment tax credits		(1,175	)		(1,204	)
Provision for losses on utility accounts receivable		16,218			17,791
Allowance for other funds used during construction		(7,144	)		(9,208	)
Loss (gain) on sale of assets		133			(976	)
Pension and non-pension post retirement benefits		67,007			82,246
Other, net		(15,601	)		(18,025	)
Changes in assets and liabilities
Receivables and unbilled utility revenues		(93,258	)		(52,798	)
Income taxes receivable		11,526			0
Other current assets		(2,559	)		(25,771	)
Pension and non-pension post retirement benefit contributions		(110,739	)		(90,427	)
Accounts payable		(6,548	)		(9,123	)
Taxes accrued, including income taxes		5,716			13,652
Interest accrued		42,991			44,451
Other current liabilities		13,316			(11,332	)

Net cash provided by operating activities		587,027			471,551

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(522,090	)		(592,894	)
Acquisitions		(1,670	)		(650	)
Proceeds from sale of assets and securities		150			1,127
Removal costs from property, plant and equipment retirements, net		(28,270	)		(20,167	)
Net restricted funds released		45,928			87,623
Other		0			(1,250	)

Net cash used in investing activities		(505,952	)		(526,211	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt		162,541			336,994
Repayment of long-term debt		(196,449	)		(176,032	)
Net borrowings (repayments) under short-term debt agreements		78,998			(223,375	)
Proceeds from issuance of common stock (net of 2009 expenses of $7,824)		0			242,301
Proceeds from employee stock plan issuances and DRIP		3,823			1,583
Advances and contributions for construction, net of refunds of $28,775 and $20,041 at September 30, 2010 and 2009		4,975			13,349
Change in cash overdraft position		(16,654	)		(34,354	)
Debt issuance costs		(5,089	)		(6,713	)
Redemption of preferred stock		(150	)		(140	)
Dividends paid		(111,825	)		(100,664	)

Net cash (used in) provided by financing activities		(79,830	)		52,949

Net increase (decrease) in cash and cash equivalents		1,245			(1,711	)
Cash and cash equivalents at beginning of period		22,256			9,542

Cash and cash equivalents at end of period	$	23,501		$	7,831

Non-cash investing activity:
Capital expenditures acquired on account but unpaid at quarter-end	$	96,383		$	51,267
Non-cash financing activity:
Long-term debt	$	111,000		$	151,431
Advances and contributions	$	21,474		$	64,383

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

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)

(In thousands, except per share data)


	Common Stock				Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Treasury Stock					Preferred Stock of Subsidiary Companies Without Mandatory			Total Stockholders’ Equity
	Shares		Par Value		Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Shares		At Cost			Redemption Requirements			Total Stockholders’ Equity
Balance at December 31, 2009		174,630	$	1,746	$	6,140,077	$	(2,076,287	)	$	(64,677	)		0	$	0		$	4,557		$	4,005,416
Net income		—		—		—		227,673			—			—		—			—			227,673
Stock-based compensation and DRIP activity, net of expenses of $69		230		3		11,272		(367	)		—			0		0			—			10,908
Preferred stock redemption		—		—		—		—			—			—		—			(10	)		(10	)
Other comprehensive income, net of tax of $2,132		—		—		—		—			3,591			—		—			—			3,591
Dividends		—		—		—		(111,825	)		—			—		—			—			(111,825	)

Balance at September 30, 2010		174,860	$	1,749	$	6,151,349	$	(1,960,806	)	$	(61,086	)		0	$	0		$	4,547		$	4,135,753


Balance at December 31, 2008		160,000	$	1,600	$	5,888,253	$	(1,705,594	)	$	(82,251	)		0	$	(7	)	$	4,557		$	4,106,558
Net loss		—		—		—		(269,454	)		—			—		—			—			(269,454	)
Common stock offering, net of expenses of $7,824		14,500		145		242,156		—			—			—		—			—			242,301
Stock-based compensation activity		100		1		7,362		(208	)		—			0		6			—			7,161
Other comprehensive income, net of tax of $2,896		—		—		—		—			5,907			—		—			—			5,907
Dividends		—		—		—		(100,664	)		—			—		—			—			(100,664	)

Balance at September 30, 2009		174,600	$	1,746	$	6,137,771	$	(2,075,920	)	$	(76,344	)		0	$	(1	)	$	4,557		$	3,991,809

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

American Water Works Company, Inc. and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except per share data)

Note 1: Basis of Presentation

The accompanying Consolidated Balance Sheet of American Water Works Company, Inc. and Subsidiary Companies (the “Company”) at September 30, 2010, the Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2010 and 2009, the Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009, and the Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2010 and 2009, are unaudited, but reflect all adjustments, which are, in the opinion of management, necessary to present fairly the consolidated financial position, the consolidated changes in stockholders’ equity, the consolidated results of operations and comprehensive income, and the consolidated cash flows for the periods presented. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Because they cover interim periods, the unaudited consolidated financial statements and related notes to the consolidated financial statements do not include all disclosures and notes normally provided in annual financial statements and, therefore, should be read in conjunction with the Company’s Consolidated Financial Statements and related Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the year, due primarily to the seasonality of the Company’s operations.

Note 2: New Accounting Pronouncements

Fair Value Measurements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that requires new disclosures of (i) the amounts of significant transfers into and out of Level 1 and Level 2 of the fair value hierarchy and the reasons for those transfers and (ii) information in the reconciliation of recurring Level 3 measurements (those using significant unobservable inputs) about purchases, sales, issuances, and settlements on a gross basis. This update also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. This guidance is effective for interim and annual periods beginning after December 15, 2009, except for the requirement to disclose information about purchases, sales, issuances and settlements in the reconciliation of Level 3 measurements, which does not become effective until interim and annual periods beginning after December 15, 2010. As this guidance clarifies and provides for additional disclosure requirements only, the adoption of this guidance does not have an impact on the Company’s results of operations, financial position or cash flows.

Consolidation of Variable Interest Entities

In June 2009, the FASB issued authoritative guidance that replaces the quantitative-based risk and rewards calculation for determining which reporting entity has a controlling financial interest in a variable interest entity with a qualitative approach. This revised guidance also requires additional disclosures about a reporting entity’s involvement in variable interest entities. This guidance is effective for the Company beginning January 1, 2010. These changes did not have an impact on the Company’s results of operations, financial position or cash flows; however, these changes could impact the accounting for the Company’s interests in a variable interest entity in the future.

Note 3: Goodwill

At September 30, 2010 the Company’s goodwill totaled $1,250,692. The Company’s annual goodwill impairment test is conducted at November 30 of each calendar year and interim reviews are performed when the Company determines that a triggering event that would more likely than not reduce the fair value of a reporting unit below its carrying value has occurred. The Company concluded no such triggering event occurred during the nine months ended September 30, 2010. Accordingly, no interim review was performed for this period.

During the first quarter of 2009, the Company’s stock price experienced a high degree of volatility and, as of March 31, 2009, had a sustained period for which it was below historical averages and 10% below the market price employed in the Company’s 2008 annual goodwill impairment test. Having considered both qualitative and quantitative factors, management concluded that this sustained decline in market value below the market value that existed at the 2008 annual impairment test was an interim triggering event and performed an interim impairment test. The Company’s calculated market capitalization at March 31, 2009 was $1,186,000 below its aggregated carrying value of its reporting units.

Management concluded the fair value of certain of the Company’s reporting units were below their carrying values as of March 31, 2009. Upon completing the impairment calculation, the Company recognized $450,000 as a goodwill impairment charge for the three months ended March 31, 2009.

The following table summarizes the nine-month changes in the Company’s goodwill by reporting unit:


	Regulated Unit					Non-Regulated Units					Consolidated
	Cost		Accumulated Impairment			Cost		Accumulated Impairment			Cost		Accumulated Impairment			Total Net
Balance at January 1, 2010	$	3,565,913	$	(2,443,628	)	$	235,715	$	(107,619	)	$	3,801,628	$	(2,551,247	)	$	1,250,381
Reclassifications and other activity		36		0			275		0			311		0			311

Balance at September 30, 2010	$	3,565,949	$	(2,443,628	)	$	235,990	$	(107,619	)	$	3,801,939	$	(2,551,247	)	$	1,250,692


Balance at January 1, 2009	$	3,565,215	$	(1,995,380	)	$	235,549	$	(105,867	)	$	3,800,764	$	(2,101,247	)	$	1,699,517
Impairment losses		0		(448,248	)		0		(1,752	)		0		(450,000	)		(450,000	)
Reclassifications and other activity		550		0			0		0			550		0			550

Balance at September 30, 2009	$	3,565,765	$	(2,443,628	)	$	235,549	$	(107,619	)	$	3,801,314	$	(2,551,247	)	$	1,250,067

The Company may be required to recognize an impairment of goodwill in the future due to market conditions or other factors related to the Company’s performance. These market events could include a decline over a period of time of the Company’s stock price, a decline over a period of time in valuation multiples of comparable water utilities, the lack of an increase in the Company’s market price consistent with its peer companies, or decreases in control premiums. A decline in the forecasted results in our business plan, such as changes in rate case results or capital investment budgets or changes in our interest rates, could also result in an impairment charge. Recognition of impairments of a significant portion of goodwill would negatively affect the Company’s reported results of operations and total capitalization, the effect of which could be material and could make it more difficult to maintain its credit ratings, secure financing on attractive terms, maintain compliance with debt covenants and meet expectations of our regulators.

The Company uses a two-step impairment test to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any). The step 1 calculation used to identify potential impairment compares the calculated fair value for each of the Company’s reporting units to their respective net carrying values (book values), including goodwill, on the measurement date. If the fair value of any reporting unit is less than such reporting unit’s carrying value, then step 2 is performed to measure the amount of the impairment loss (if any) for such reporting unit.

The step 2 calculation of the impairment test compares, by reporting unit, the implied fair value of the goodwill to the carrying value of goodwill. The implied fair value of goodwill is equal to the excess of the fair value of each reporting unit above the fair value of such reporting unit’s identified assets and liabilities. If the carrying value of goodwill exceeds the implied fair value of goodwill for any reporting unit, an impairment loss is recognized in an amount equal to the excess (not to exceed the carrying value of goodwill) for that reporting unit.

The determination of the fair value of each reporting unit and the fair value of each reporting unit’s assets and liabilities is performed as of the measurement date using observable market data before and after the measurement date (if that subsequent information is relevant to the fair value on the measurement date).

The estimated fair value of the Regulated reporting unit for step 1 is based on a combination of the following valuation techniques:

•

observable trading prices of comparable equity securities of publicly-traded water utilities considered by us to be the Company’s peers; and

•

discounted cash flow models developed from the Company’s internal forecasts.

The estimated fair values of the Non-Regulated reporting units are determined entirely on the basis of discounted cash flow models.

The first valuation technique applies average peer multiples to the Regulated reporting unit’s historic and forecasted cash flows. The peer multiples are calculated using the average trading prices of comparable equity securities of publicly-traded water utilities, their published cash flows and forecasts of market price and cash flows for those peers.

The second valuation technique forecasts each reporting unit’s five-year cash flows using an estimated long-term growth rate and discounts these cash flows at their respective estimated weighted average cost of capital.

In conjunction with step 1, the Company also reconciles the difference between the calculated market capitalization and the aggregate carrying value of the reporting units to ensure that any excess is supportable by relevant market information. The Company makes certain assumptions, which it believes to be appropriate, that support this reconciliation. The Company considers, in addition to the listed trading price of the Company’s shares, the applicability of a control premium to the Company’s shares and certain other factors the Company deems appropriate. As a result, the Company may conclude that the Company’s fair value exceeds what the Company might otherwise have concluded had it relied on market price alone.

In addition, given recent market conditions, management determined that it is appropriate for the Company to consider the average of the Company’s closing market price over a thirty day period rather than using a particular date to calculate its market capitalization.

If step 2 of the impairment test is required, the Company determines the fair value of the applicable reporting unit’s assets and liabilities. The fair values of the applicable debt are highly dependent upon market conditions surrounding the measurement date. For the step 2 calculations of the fair value of debt, the Company uses observable prices of instruments and indices that have risks similar to those instruments being valued, adjusted to compensate for differences in credit profile, collateral, tax treatment and call features, to calculate the fair value of each reporting unit’s debt.

Note 4: Stockholders’ Equity

Common Stock

On March 23, 2010, the Company filed a Form S-3 Registration Statement with the SEC to register 5,000 shares of the Company’s common stock issuable under American Water Stock Direct, a dividend reinvestment and direct stock purchase plan (the “DRIP”). Under the DRIP, stockholders may reinvest cash dividends and purchase additional Company common stock, up to certain limits, through a transfer agent without commission fees. The Company’s transfer agent may buy newly issued shares directly from the Company or shares held in the Company’s treasury. The transfer agent may also buy shares in the public markets or in privately negotiated transactions. Purchases generally will be made and credited to DRIP accounts once each week. The Company issued 40 shares of common stock with proceeds of $869 during the first nine months of 2010 under the DRIP.

In March and June 2010, the Company made a cash dividend payment of $0.21 per share to all common shareholders of record as of February 18, 2010 and May 18, 2010, amounting to $36,679 and $36,689, respectively. In September 2010, the Company made a cash dividend payment of $0.22 per share to all common shareholders of record as of August 18, 2010, amounting to $38,457.

In March 2009 and June 2009, the Company made a cash dividend payment of $0.20 per share to all common shareholders of record as of February 18, 2009 and May 18, 2009, amounting to $32,000 and $32,006, respectively. In September 2009, the Company made a cash dividend payment of $0.21 per share to all common shareholders of record as of August 18, 2009, amounting to $36,658.

On October 29, 2010, the Company declared a quarterly cash dividend payment of $0.22 per share payable on December 1, 2010 to all shareholders of record as of November 18, 2010.

Stock Based Compensation

The Company has granted stock option and restricted stock unit awards to non-employee directors, officers and other key employees of the Company pursuant to the terms of its 2007 Omnibus Equity Compensation Plan (the “Plan”). As of September 30, 2010, a total of 11,723 shares are available for grant under the Plan. Shares issued under the Plan may be authorized but unissued shares of Company stock or reacquired shares of Company stock, including shares purchased by the Company on the open market for purposes of the Plan.

The Company recognizes compensation expense for stock awards over the vesting period of the award. The following table presents stock-based compensation expense recorded in operations and maintenance expense in the accompanying Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Stock options	$	1,323		$	705		$	3,177		$	2,536
Restricted stock units		1,551			746			4,437			2,942
Employee stock purchase plan		94			97			265			307

Stock-based compensation in operation and maintenance expense		2,968			1,548			7,879			5,785
Income tax benefit		(1,157	)		(604	)		(3,073	)		(2,257	)

After-tax stock-based compensation expense	$	1,811		$	944		$	4,806		$	3,528

There were no significant stock-based compensation costs capitalized during the nine months ended September 30, 2010 and 2009, respectively.

Stock Options

Stock options granted in 2008 included 1,470 stock options that were subject to performance-based vesting requirements. In February 2009, the Company cancelled 311 of these stock options related to the first performance vesting period because the performance goals were not fully met at December 31, 2008. In February 2010, the Company cancelled 459 of these stock options related to the second performance vesting period because the second performance goals were not fully met at December 31, 2009. The Company continues to recognize expense on the remaining stock options during the service period, which ends December 31, 2010.

In the first quarter of 2010, the Company granted 867 non-qualified stock options to certain employees under the Plan. The stock options vest ratably over a three-year service period from January 1, 2010. These awards have no performance vesting conditions and the grant date fair value is amortized through expense over the requisite service period using the straight-line method.

On August 15, 2010, the Company’s Board of Directors elected a new President and Chief Executive Officer (“CEO”) of the Company. In connection with his election to these offices, the Company’s new CEO was granted 25 non-qualified stock options that cliff vest two years from the date of grant. Additionally, he was granted 53 non-qualified stock options that vest ratably over a three-year period beginning January 1, 2010. These awards have no performance vesting conditions and the grant date fair value is amortized through expense over the requisite service period using the straight-line method.

Also on August 15, 2010, the Company’s former President and Chief Executive Officer resigned as an officer and director of the Company. Pursuant to his resignation, the Company cancelled options to purchase 33 shares of Company stock, accelerated the vesting of 247 options, extended the termination dates of vested options and recognized additional expense related to the modifications that is recorded in operations and maintenance expense in the accompanying Consolidated Statements of Operations for the three and nine months ended September 30, 2010.

The following table presents the weighted average assumptions used in the pricing model for 2010 grants and the resulting weighted average grant date fair value of stock options granted:


Dividend yield		3.83	%
Expected volatility		31.77	%
Risk-free interest rate		2.14	%
Expected life (years)		4.29
Exercise price	$	22.01
Grant date fair value	$	4.33

Stock options granted under the Plan have maximum terms of seven years, vest over periods ranging from one to three years, and are granted with exercise prices equal to the market value of the Company’s common stock on the date of grant. As of September 30, 2010, $4,166 of total unrecognized compensation cost related to the non-vested stock options is expected to be recognized over the weighted-average period of 1.4 years. The following table summarizes stock option activity for the nine months ended September 30, 2010:


	Shares			Weighted Average Exercise Price (per share)		Weighted Average Remaining Life (years)		Aggregate Intrinsic Value
Options outstanding at January 1, 2010		2,724		$	21.19
Granted		945			22.01
Cancelled		(459	)		21.50
Forfeited or expired		(135	)		21.48
Exercised		(64	)		21.33

Options outstanding at September 30, 2010		3,011		$	21.39		5.00	$	5,675

Exercisable at September 30, 2010 (a)		1,048		$	21.23		4.27	$	2,135

(a)	Includes stock options issued to retired employees

Cash received for stock options exercised during the nine months ended September 30, 2010 was $1,230 and the intrinsic value of the options was $52.

Restricted Stock Units

Restricted stock units granted in 2008 included 190 restricted stock units that were subject to performance-based vesting requirements. In February 2009, the Company cancelled 39 of these restricted stock units related to the first performance vesting period because the performance goals were not fully met at December 31, 2008. In February 2010, the Company cancelled 60 of these restricted stock units related to the second performance vesting period because the second performance goals were not fully met at December 31, 2009. The Company continues to recognize expense on the remaining restricted stock units during the service period, which ends December 31, 2010.

In the first quarter of 2010, the Company granted 243 restricted stock units to certain employees under the Plan. The restricted stock units vest ratably over the three year performance period beginning January 1, 2010 (the “Performance Period”); however, distribution of the shares is contingent upon the achievement of internal performance measures and, separately, certain market thresholds over the Performance Period. The restricted stock units granted with performance and service conditions are valued at the market value of the Company’s common stock on the date of grant. The restricted stock units granted with market and service conditions are valued using a Monte Carlo model.

On May 7, 2010, the Company granted 19 restricted stock units to non-employee directors under the Plan. The restricted stock units vested on the date of grant; however, distribution of the shares will be made within 30 days of the earlier of August 11, 2011 or the participant’s separation from service. The grant date fair value of these restricted stock units was $20.71.

On August 27, 2010, the Company’s new CEO was granted 12 restricted stock units that vest over the period beginning August 27, 2010 and ending December 31, 2010; however, distribution of the shares is contingent upon the achievement of internal performance measures and, separately, certain market thresholds over the vesting period. The restricted stock units granted with performance and service conditions are valued at the market value of the Company’s common stock on the date of grant. The restricted stock units granted with market and service conditions are valued using a Monte Carlo model.

Also in August 2010, the Company accelerated the vesting of 12 restricted stock units granted in 2008 to the Company’s former CEO. Additionally the Company cancelled 9 restricted stock units granted in 2009 and 2010, the remaining outstanding awards will be subject to the Company’s achievement of internal performance measures and certain market thresholds over the applicable three-year performance periods as if he had remained in the employ of the Company during the entire performance periods. The Company recognized additional expense related to the modifications that is recorded in operations and maintenance expense in the accompanying Consolidated Statements of Operations for the three and nine months ended September 30, 2010.

On September 24, 2010, the Company granted 6 restricted stock units to non-employee directors under the Plan. The restricted stock units vested on the date of grant; however, distribution of the shares will be made within 30 days of the earlier of October 15, 2011 or the participant’s separation from service. The grant date fair value of these restricted stock units was $23.49.

The value of restricted stock awards at the date of the grant is amortized through expense over the requisite service period using the straight-line method for the restricted stock units with service and/or performance vesting. The grant date fair value of the restricted stock awards that have (a) market and/or performance and service conditions and (b) vest ratably is amortized through expense over the requisite service period using the graded-vesting method. As of September 30, 2010, $3,474 of total unrecognized compensation cost related to the non-vested restricted stock units is expected to be recognized over the weighted-average remaining life of 0.8 years.

The following table summarizes restricted stock unit activity for the nine months ended September 30, 2010:


	Shares			Weighted Average Grant Date Fair Value (per share)
Nonvested total at January 1, 2010		402		$	21.77
Granted		280			23.23
Distributed		(55	)		20.68
Cancelled		(60	)		21.50
Forfeited		(26	)		23.03
Undistributed vested awards		(46	)		22.45

Nonvested total at September 30, 2010		495		$	22.62

The aggregate intrinsic value of restricted stock units distributed during the nine months ended September 30, 2010 was $1,179, on which the Company recognized an income tax benefit of $14 which has been recorded in the accompanying Consolidated Balance Sheets.

If dividends are declared with respect to shares of the Company’s common stock before the restricted stock units are distributed, the Company credits a liability for the value of the dividends that would have been paid if the restricted stock units were shares of Company common stock. When the restricted stock units are distributed, the Company pays the employee a lump sum cash payment equal to the value of the dividend equivalents accrued. The Company accrued dividend equivalents totaling $367 and $208 to retained earnings during the nine months ended September 30, 2010 and 2009, respectively.

Employee Stock Purchase Plan

Under the Nonqualified Employee Stock Purchase Plan (the “ESPP”), employees can use payroll deductions to acquire Company stock at the lesser of 90% of the fair market value of (a) the beginning or (b) the end of each three-month purchase period. As of September 30, 2010 there were 1,740 shares of common stock reserved for issuance under the ESPP. During the nine months ended September 30, 2010, the Company issued 92 shares under the ESPP.

Note 5: Long-Term Debt

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


	Rate			Weighted Average Rate			Maturity Date		September 30, 2010		December 31, 2009
Long-term debt of American Water Capital Corp. (“AWCC”)
Private activity bonds and government funded debt(a)
Fixed rate		4.85%-6.75	%		5.72	%		2018-2040	$	322,610	$	200,975
Senior notes
Fixed rate		5.39%-10.00	%		6.26	%		2011-2039		3,087,701		3,115,853
Long-term debt of other subsidiaries
Private activity bonds and government funded debt
Fixed rate		0.00%-6.20	%		4.53	%		2011-2039		1,192,003		1,197,611
Floating rate(b)		0.85%-1.05	%		0.91	%		2015		8,560		8,560
Mortgage bonds
Fixed rate		5.48%-9.71	%		7.48	%		2011-2039		744,736		754,966
Mandatory redeemable preferred stock		4.60%-9.75	%		8.39	%		2013-2036		24,067		24,207
Notes payable and other(c)		4.90%-14.57	%		7.50	%		2011-2026		6,008		6,561

Long-term debt										5,385,685		5,308,733
Unamortized debt discount, net(d)										50,114		57,461
Fair value adjustment to interest rate hedge										3,535		0

Total long-term debt									$	5,439,334	$	5,366,194

(a)	As of December 31, 2009, the Company held $10,635 of floating rate debt in its treasury, as it had not been able to re-issue the debt to investors at acceptable interest rates. On July 27, 2010, the Company re-issued this debt as fixed rate of 5.25% due 2028.

(b)

Represents variable rate tax-exempt bonds remarketed for periods up to 270 days. The $8,560 balance is classified as current portion of long-term debt in the accompanying Consolidated Balance Sheets because it was repurchased by the Company during the first quarter of 2009 when no investor was willing to purchase it at market rates. This debt was subsequently remarketed as floating rate debt in the second quarter of 2009.

(c)	Includes capital lease obligations of $5,230 and $5,679 at September 30, 2010 and December 31, 2009, respectively.

(d)	Includes fair value adjustments previously recognized in acquisition purchase accounting.

The following long-term debt was issued in 2010:


Company	Type	Interest Rate			Maturity		Amount
American Water Capital Corp. (1)	Private activity bonds and government funded debt – fixed rate		4.85%-5.38	%		2028-2040	$	121,635
Other subsidiaries	Private activity bonds and government funded debt – fixed rate		0.00%-5.60	%		2021-2034		151,906

Total issuances							$	273,541

(1)

Includes $111,000 of proceeds from issuances which are initially kept in Trust, pending the Company’s certification that it has incurred qualifying capital expenditures. These issuances have been presented as a non-cash financing activity on the accompanying Consolidated Statements of Cash Flows. Subsequent release of all or a lesser portion of these funds by the applicable Trust are reflected as the release of restricted funds, and are included in investing activities in the accompanying Consolidated Statement of Cash Flows.

The following long-term debt was retired through optional redemption or payment at maturity during 2010:


Company	Type	Interest Rate			Maturity		Amount
American Water Capital Corp.	Senior notes-fixed rate		6.00%-6.87	%		2011-2039	$	28,152
Other subsidiaries	Private activity bonds and government funded debt-fixed rate		0.00%-6.88	%		2010-2036		157,514
Other subsidiaries	Mortgage bond		7.86%-8.98	%		2010-2011		10,230
Other subsidiaries	Mandatory redeemable preferred stock		4.60%-6.00	%		2013-2019		140
Other	Capital leases & other							553

Total retirements & redemptions							$	196,589

Interest, net includes interest income of approximately $2,531 and $7,450 for the three and nine months ended September 30, 2010, respectively, and $2,404 and $7,366 for the three and nine months ended September 30, 2009, respectively.

On July 12, 2010, the Company entered into an interest rate swap to hedge $100,000 of its 6.085% fixed rate debt maturing 2017. The Company will pay variable interest of six-month LIBOR plus 3.422%. The Company uses a combination of fixed-rate and variable-rate debt to manage interest rate exposure.

At September 30, 2010 and December 31, 2009, the Company had a $100,000 and $0 notional amount variable interest rate swap fair value hedge outstanding, respectively. The following table provides a summary of the derivative fair value balance recorded by the Company as of September 30, 2010 and the line item in the Consolidated Balance Sheet in which such amount is recorded:


	September 30, 2010		December 31, 2009
Balance sheet classification
Regulatory and other long-term assets
Other	$	3,228	$	0
Long-term debt
Long-term debt	$	3,535	$	0

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


	Gain (Loss) on Swap		Gain (Loss) on Borrowings			Hedge Ineffectiveness
Income Statement Classification	Three Months Ended September 30, 2010		Three Months Ended September 30, 2010			Three Months Ended September 30, 2010
Interest, net	$	3,228	$	(3,535	)	$	(307	)

	Gain (Loss) on Swap		Gain (Loss) on Borrowings			Hedge Ineffectiveness
Income Statement Classification	Nine Months Ended September 30, 2010		Nine Months Ended September 30, 2010			Nine Months Ended September 30, 2010
Interest, net	$	3,228	$	(3,535	)	$	(307	)

On November 1, 2010, a regulated subsidiary of the Company closed on a refinancing of two bond issues of $35,000 and $40,000 with maturity dates in 2029 and 2025 and interest rates of 4.88% and 4.70%, respectively.

Note 6: Short-Term Debt

The components of short-term debt are as follows:


	September 30, 2010		December 31, 2009
Commercial paper, net of $7 and $5 discount, respectively	$	163,993	$	84,995
Bank overdraft		17,848		34,502

Total short-term debt	$	181,841	$	119,497

The Company had no outstanding borrowings on its revolving credit line as of September 30, 2010 and December 31, 2009, respectively.

Note 7: Income Taxes

The Company’s estimated annual effective tax rate for the nine months ended September 30, 2010 was 39.7% compared to 39.6% for the nine months ended September 30, 2009, excluding various discrete items including goodwill impairment. The Company’s actual effective tax rates for the three months ended September 30, 2010 and 2009 were 38.8% and 35.4%, respectively. The Company’s actual effective rates for the nine months ended September 30, 2010 and 2009 were 39.2% and (54.3%), respectively.

The 2009 nine month rate reflects the tax effects of goodwill impairments as discrete items as the Company considers these charges as infrequently occurring or unusual.

The Patient Protection and Affordable Care Act (the “PPACA”) became law on March 23, 2010, and the Health Care and Education Reconciliation Act of 2010 became law on March 30, 2010, which makes various amendments to certain aspects of the PPACA (together, the “Acts”). The PPACA effectively changes the tax treatment of federal subsidies paid to sponsors of retiree health benefit plans that provide a benefit that is at least actuarially equivalent to the benefits under Medicare Part D. As a result of the Acts, these subsidy payments will effectively become taxable in tax years beginning after December 31, 2012.

Although this change does not take effect immediately, companies are required to recognize the full accounting impact in their financial statements in the period in which the legislation was enacted. As a result, in the first quarter of 2010, the Company followed its original accounting for the underfunded status of other postretirement benefits for the Medicare Part D adjustment and recorded a reduction in its deferred tax assets and an increase in its regulatory assets amounting to $27,128.

Note 8: Pension and Other Postretirement Benefits

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2009			2010			2009
Components of net periodic pension benefit cost
Service cost	$	7,669		$	7,107		$	23,006		$	21,320
Interest cost		16,901			15,730			50,702			47,189
Expected return on plan assets		(14,189	)		(10,556	)		(42,564	)		(31,668	)
Amortization of:
Prior service cost		81			45			242			136
Actuarial loss		4,476			5,992			13,427			17,976

Net periodic pension benefit cost	$	14,938		$	18,318		$	44,813		$	54,953


Components of net periodic other postretirement benefit cost
Service cost	$	3,665		$	3,293		$	10,997		$	9,879
Interest cost		8,037			7,295			24,112			21,885
Expected return on plan assets		(6,093	)		(4,659	)		(18,279	)		(13,978	)
Amortization of:
Transition obligation		43			43			130			130
Prior service (credit) cost		(295	)		(296	)		(885	)		(886	)
Actuarial loss		2,040			2,289			6,119			6,866

Net periodic other postretirement benefit cost	$	7,397		$	7,965		$	22,194		$	23,896

The Company contributed $81,700 to its defined benefit pension plan in the first nine months of 2010. In October, the Company contributed $14,900 completing 2010 contributions. In addition, the Company contributed $29,039 for the funding of its other postretirement plans in the first nine months of 2010 and expects to contribute $9,680 during the balance of 2010.

Note 9: Commitments and Contingencies

The Company is also routinely involved in legal actions incident to the normal conduct of its business. At September 30, 2010, the Company has accrued approximately $4,300 as probable costs and it is reasonably possible that additional losses could range up to $12,900 for these matters. For certain matters, the Company is unable to estimate possible losses. The Company believes that damages or settlements, if any, recovered by plaintiffs in such claims or actions will not have a material adverse effect on the Company’s results of operations, financial position or cash flows.

The Company enters into agreements for the provision of services to water and wastewater facilities for the United States military, municipalities and other customers. The Company’s military services agreements expire between 2051 and 2060 and have remaining performance commitments as measured by estimated remaining contract revenue of $2,104,000 at September 30, 2010. The Company’s Operations and Maintenance agreements with municipalities and other customers expire between 2010 and 2048 and have remaining performance commitments as measured by estimated remaining contract revenue of $1,243,000 at September 30, 2010. Some of the Company’s long-term contracts to operate and maintain a municipality’s, federal government’s or other party’s water or wastewater treatment and delivery facilities include responsibility for certain major maintenance for some of those facilities, in exchange for an annual fee. Unless specifically required to perform certain maintenance activities, the maintenance costs are recognized when the maintenance is performed.

Note 10: Environmental Matters

The Company’s water and wastewater operations are subject to federal, state, local and foreign requirements relating to environmental protection and as such the Company periodically becomes subject to environmental claims in the normal course of business. 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. Remediation costs accrued amounted to $6,730 and $7,947 at September 30, 2010 and December 31, 2009, respectively. Included in the balance of the accrual was $6,600 at September 30, 2010 and $7,700 at December 31, 2009 related to a conservation agreement entered into by a subsidiary of the Company with the National Oceanic and Atmospheric Administration (“NOAA”) requiring the Company to, among other provisions, implement certain measures to protect the steelhead trout and its habitat in the Carmel River watershed in the state of California. The Company has agreed to pay $1,100 annually from 2010 through 2016; the 2010 payment was made in June. The payments will be used to improve habitat conditions for the steelhead trout in the Carmel River Watershed and will end upon a regional desalinization plant becoming operational and the subsidiary’s diversions from the Carmel River coming within permitted limits. The Company pursues recovery of incurred costs through all appropriate means, including regulatory recovery through customer rates. The Company’s Regulatory assets at September 30, 2010 include $11,026 related to the NOAA agreement, including an additional $3,500 granted for recovery during the three months ended September 30, 2010.

Note 11: Net Income (Loss) per Common Share

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Basic
Net income (loss)	$	124,114	$	91,636	$	227,673	$	(269,454	)
Less: Distributed earnings to common shareholders (a)		38,580		36,719		112,155		100,865
Less: Distributed earnings to participating securities		13		4		36		0

Undistributed earnings		85,521		54,913		115,482		(370,319	)
Undistributed earnings allocated to common shareholders (b)		85,491		54,907		115,444		(370,319	)
Undistributed earnings allocated to participating securities		30		6		38		0

Total income (loss) available to common shareholders, basic (a) + (b)	$	124,071	$	91,626	$	227,599	$	(269,454	)

Weighted average common shares outstanding, basic		174,859		174,595		174,785		165,992

Basic net income (loss) per common share	$	0.71	$	0.52	$	1.30	$	(1.62	)

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Diluted
Total income (loss) available to common shareholders, basic	$	124,071	$	91,626	$	227,599	$	(269,454	)
Undistributed earnings allocated to participating securities		30		6		38		0

Total income (loss) available to common shareholders, diluted	$	124,101	$	91,632	$	227,637	$	(269,454	)

Weighted average common shares outstanding, basic		174,859		174,595		174,785		165,992
Stock-based compensation:
Restricted stock units		183		92		128		0
Stock options		18		0		5		0
Employee stock purchase plan		2		4		1		0

Weighted average common shares outstanding, diluted		175,062		174,691		174,919		165,992

Diluted net income (loss) per commons share	$	0.71	$	0.52	$	1.30	$	(1.62	)

Options to purchase 1,873 and 2,122 shares of the Company’s common stock were excluded from the calculation of diluted common shares outstanding because they were anti-dilutive for the three-month periods ended September 30, 2010 and 2009, respectively. There were 144 and 83 restricted stock units excluded from the calculation of diluted common shares outstanding for the three months ended September 30, 2010 and 2009, respectively, because certain performance conditions were not satisfied. Additionally 633 stock options were excluded from the three months ended September 30, 2009 diluted common shares outstanding calculation because certain performance conditions were not met. Options to purchase 1,873 shares of the Company’s common stock and 147 restricted stock units were excluded from the calculation of diluted common shares outstanding for the nine months ended September 30, 2010 because they were anti-dilutive. All of the potentially dilutive securities were excluded from the nine months ended September 30, 2009 because they were anti-dilutive.

Note 12: Fair Value of Assets and Liabilities

Fair Value of Financial Instruments

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

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

Preferred stock with mandatory redemption requirements and long-term debt: The fair values of preferred stock with mandatory redemption requirements and long-term debt are determined by a valuation model which is based on a conventional discounted cash flow methodology and utilizes assumptions of current market rates. As a majority of the Company’s debts do not trade in active markets, the fair values are highly dependent upon market conditions surrounding the measurement date. The Company calculated a base yield curve using a risk-free rate (a US Treasury securities yield curve) plus a credit spread that is based on the following two factors: an average of the Company’s own publicly-traded debt securities and the current market rates for US Utility BBB+ debt securities. The Company used these yield curve assumptions to derive a base yield and then adjusted the base yield for specific features of the debt securities for differences in credit profile, collateral, tax treatment and call features.

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


As of September 30, 2010	Carrying Amount		Fair Value
Preferred stocks with mandatory redemption requirements	$	24,020	$	28,503
Long-term debt (excluding capital lease obligations)		5,410,084		6,263,710

As of December 31, 2009	Carrying Amount		Fair Value
Preferred stocks with mandatory redemption requirements	$	24,164	$	26,257
Long-term debt (excluding capital lease obligations)		5,336,351		5,633,384

Recurring Fair Value Measurements

The following table presents assets and liabilities measured and recorded at fair value on a recurring basis and their level within the fair value hierarchy as of September 30, 2010 and December 31, 2009, respectively:


	At Fair Value as of September 30, 2010
Recurring Fair Value Measures	Level 1		Level 2			Level 3		Total
Assets:
Restricted funds	$	126,304		—			—	$	126,304
Rabbi trust investments		—	$	1,808			—		1,808
Deposits		1,513		—			—		1,513
Mark-to-market derivative asset		—		3,228			—		3,228

Total assets		127,817		5,036			—		132,853

Liabilities:
Deferred compensation obligation		—		8,560			—		8,560

Total liabilities		—		8,560			—		8,560

Total net assets (liabilities)	$	127,817	$	(3,524	)		—	$	124,293


	At Fair Value as of December 31, 2009
Recurring Fair Value Measures	Level 1		Level 2			Level 3		Total
Assets:
Restricted funds	$	61,232		—			—	$	61,232
Rabbi trust investments		—	$	2,551			—		2,551
Deposits		11,612		—			—		11,612

Total assets		72,844		2,551			—		75,395

Liabilities:
Deferred compensation obligation		—		8,881			—		8,881

Total liabilities		—		8,881			—		8,881

Total net assets (liabilities)	$	72,844	$	(6,330	)		—	$	66,514

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

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

Deposits – Deposits includes escrow funds and certain other deposits held in trust. The Company includes cash deposits in other current assets. The December 31, 2009 balance included $10,170 for an escrow account related to an agreement the Company’s New Jersey regulated subsidiary had entered into with the City of Trenton, New Jersey to purchase certain assets of Trenton’s water system located in four surrounding townships. The purchase agreement was contested in litigation with a group of Trenton residents, and ultimately put to a voter referendum. The result of the referendum was unfavorable to the Company, and as a result, the agreement to purchase the assets has been terminated. The escrow deposit, plus accrued interest, was returned to the Company on June 30, 2010.

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

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

Non-recurring Fair Value Measurements

As discussed in Note 3, the Company recognized a goodwill impairment charge of $450,000 for the nine months ended September 30, 2009. The Company’s goodwill valuation model includes significant unobservable inputs and falls within level 3 of the fair value hierarchy.

Note 13: Segment Information

The Company has two operating segments which are also the Company’s two reportable segments referred to as the Regulated Businesses and Non-Regulated Businesses segments.

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


	As of or for the Three Months Ended September 30, 2010
	Regulated		Non-Regulated		Other			Consolidated
Net operating revenues	$	713,080	$	80,310	$	(6,444	)	$	786,946
Depreciation and amortization		72,373		1,854		5,204			79,431
Total operating expenses, net		448,694		71,499		(7,202	)		512,991
Adjusted EBIT (1)		264,935		9,157
Total assets		12,186,238		244,394		1,553,043			13,983,675
Capital expenditures		193,540		1,271		0			194,811

	As of or for the Three Months Ended September 30, 2009
	Regulated		Non-Regulated		Other			Consolidated
Net operating revenues	$	620,999	$	65,233	$	(6,276	)	$	679,956
Depreciation and amortization		69,382		1,522		3,950			74,854
Total operating expenses, net		417,568		59,086		(11,104	)		465,550
Adjusted EBIT (1)		203,898		6,563
Total assets		11,490,753		242,709		1,612,247			13,345,709
Capital expenditures		191,921		799		0			192,720

	As of or for the Nine Months Ended September 30, 2010
	Regulated		Non-Regulated		Other			Consolidated
Net operating revenues	$	1,834,883	$	230,153	$	(18,814	)	$	2,046,222
Depreciation and amortization		211,709		5,562		14,885			232,156
Total operating expenses, net		1,263,191		214,285		(27,257	)		1,450,219
Adjusted EBIT (1)		573,381		18,504
Total assets		12,186,238		244,394		1,553,043			13,983,675
Capital expenditures		516,598		5,492		0			522,090

	As of or for the Nine Months Ended September 30, 2009
	Regulated		Non-Regulated		Other			Consolidated
Net operating revenues	$	1,673,346	$	187,029	$	(17,509	)	$	1,842,866
Depreciation and amortization		203,231		4,296		9,412			216,939
Impairment charge		0		0		450,000			450,000
Total operating expenses, net		1,215,511		171,587		419,540			1,806,638
Adjusted EBIT (1)		459,355		16,665
Total assets		11,490,753		242,709		1,612,247			13,345,709
Capital expenditures		589,371		3,523		0			592,894

(1)

Management evaluates the performance of its segments and allocates resources based on several factors, of which the primary measure is Adjusted EBIT. Adjusted EBIT does not represent cash flow for periods presented and should not be considered as an alternative to net income as an indicator of the Company’s operating performance or as an alternative to cash flows as a source of liquidity. Adjusted EBIT as defined by the Company may not be comparable with Adjusted EBIT as defined by other companies.

The following table reconciles Adjusted EBIT, as defined by the Company, to income (loss) before income taxes:


	For the Three Months Ended September 30, 2010
	Regulated			Non-Regulated		Total Segments
Adjusted EBIT	$	264,935		$	9,157	$	274,092
Add:
Allowance for other funds used during construction		2,586			—		2,586
Allowance for borrowed funds used during construction		1,814			—		1,814
Less:
Interest, net		(61,548	)		274		(61,274	)
Amortization of debt expense		(1,145	)		0		(1,145	)

Segments’ income before income taxes	$	206,642		$	9,431		216,073
Interest, net							(13,584	)
Other							234

Income before income taxes						$	202,723


	For the Three Months Ended September 30, 2009
	Regulated			Non-Regulated		Total Segments
Adjusted EBIT	$	203,898		$	6,563	$	210,461
Add:
Allowance for other funds used during construction		2,290			—		2,290
Allowance for borrowed funds used during construction		1,674			—		1,674
Less:
Interest, net		(57,710	)		690		(57,020	)
Amortization of debt expense		(1,995	)		0		(1,995	)

Segments’ income before income taxes	$	148,157		$	7,253		155,410
Interest, net							(17,104	)
Other							3,495

Income before income taxes						$	141,801


	For the Nine Months Ended September 30, 2010
	Regulated			Non-Regulated		Total Segments
Adjusted EBIT	$	573,381		$	18,504	$	591,885
Add:
Allowance for other funds used during construction		7,144			—		7,144
Allowance for borrowed funds used during construction		4,465			—		4,465
Less:
Interest, net		(185,437	)		1,175		(184,262	)
Amortization of debt expense		(2,816	)		0		(2,816	)

Segments’ income before income taxes	$	396,737		$	19,679		416,416
Interest, net							(48,045	)
Other							6,209

Income before income taxes						$	374,580


	For the Nine Months Ended September 30, 2009
	Regulated			Non-Regulated		Total Segments
Adjusted EBIT	$	459,355		$	16,665	$	476,020
Add:
Allowance for other funds used during construction		9,208			—		9,208
Allowance for borrowed funds used during construction		5,537			—		5,537
Less:
Interest, net		(171,527	)		2,389		(169,138	)
Amortization of debt expense		(4,739	)		0		(4,739	)

Segments’ income before income taxes	$	297,834		$	19,054		316,888


	For the Nine Months Ended September 30, 2009
	Regulated	Non-Regulated	Total Segments
Impairment charge				(450,000	)
Interest, net				(50,653	)
Other				9,184

Loss before income taxes			$	(174,581	)

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Certain matters within this Quarterly Report on Form 10-Q include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements included in this Form 10-Q, other than statements of historical fact, may constitute forward-looking statements. Forward-looking statements can be identified by the use of words such as “may,” “should,” “will,” “could,” “estimates,” “predicts,” “potential,” “continue,” “anticipates,” “believes,” “plans,” “expects,” “future” and “intends” and similar expressions. Forward-looking statements may involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance to differ from those projected in the forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Factors that could cause or contribute to differences in results and outcomes from those in our forward-looking statements include, without limitation, those items discussed in the “Risk Factors” section or other sections in the Company’s Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (“SEC”), and subsequent periodic reports, including this report. All forward-looking statements are expressly qualified in their entirety by such risk factors. We undertake no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

GENERAL

American Water Works Company, Inc. (herein referred to as “American Water” or the “Company”) is the largest investor-owned United States water and wastewater utility company, as measured both by operating revenue and population served. Our primary business involves the ownership of water and wastewater utilities that provide water and wastewater services to residential, commercial and industrial customers. Our Regulated Businesses that provide these services are generally subject to economic regulation by state regulatory agencies in the states in which they operate. We report the results of these businesses in our Regulated Businesses segment. We also provide services that are not subject to economic regulation by state regulatory agencies. We report the results of these businesses in our Non-Regulated Businesses segment. For further description of our businesses see the “Business” section found in our Form 10-K for the year ended December 31, 2009 filed with the SEC.

You should read the following discussion in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and in our Form 10-K for the year ended December 31, 2009 as updated or amended in subsequent filed reports with the SEC.

OVERVIEW

Financial Results American Water’s net income was $124.1 million for the three months ended September 30, 2010 as compared to net income of $91.6 million for the three months ended September 30, 2009. Diluted earnings per average common share were $0.71 for the three months ended September 30, 2010 compared to $0.52 for the three months ended September 30, 2009.

American Water’s net income was $227.7 million for the nine months ended September 30, 2010 compared to a net loss of $269.5 million for the nine months ended September 30, 2009. The Company recognized goodwill impairment charges, net of tax, of $443.0 million for the nine months ended September 30, 2009. Diluted earnings per average common share was $1.30 for the nine months ended September 30, 2010 compared to a diluted loss of ($1.62) for the nine months ended September 30, 2009.

Revenues for the three months ended September 30, 2010 increased by $107.0 million compared to the same period in the prior year. This was primarily due to increased revenues in our Regulated Businesses of $92.1 million, which was mainly attributable to rate increases and increased consumption, and an increase in our Non-Regulated Businesses’ revenues of $15.1 million, which was primarily attributable to higher revenues in the Contract Operations Group of $13.2 million. The increase in Contract Operations Group revenues was primarily due to revenues of $9.3 million attributable to our entry into the industrial Operations and Maintenance (“O&M”) market through an acquisition in December of 2009, hereafter referred to as the “ Contract Operations’ Acquisition,” and increased military contract revenues of $8.1 million due to incremental contract work at two military bases as well as new contracts at two additional bases.

Operating expenses for the three months ended September 30, 2010 were $513.0 million compared to $465.6 million for the three months ended September 30, 2009. This $47.4 million increase was primarily driven by increased operating expenses in our Regulated Businesses’ operation and maintenance costs of $23.8 million due to an increase in production and employee costs, increased operating and maintenance expenses in our Non-Regulated Businesses of $10.9 million corresponding to an increase in revenue, higher depreciation expense of $4.6 million and increased general taxes of $4.7 million for the three months ended September 30, 2010 compared to the same period in the prior year.

Income tax expense increased by $28.4 million, which was mainly the result of higher taxable income for the three months ended September 30, 2010.

Revenues for the nine months ended September 30, 2010 increased by $203.4 million compared to the same period in the prior year. This was primarily due to increased revenues in our Regulated Businesses of $161.5 million, which was largely attributable to rate increases and increased consumption, and an increase in our Non-Regulated Businesses revenues of $43.1 million, which was primarily attributable to higher revenues in the Contract Operations Group of $38.6 million. The increase in Contract Operations Group revenues was primarily due to revenues of $30.1 million attributable to the Contract Operations’ Acquisition as well as increased military contract revenues of $15.8 million partially offset by lower O&M and design and build contract revenues. The increase in the military contract revenues was mainly attributable to incremental contract work at two military bases as well as new contracts at two additional bases.

Operating expenses for the nine months ended September 30, 2010 were $1,450.2 million compared to $1,806.6 million for the nine months ended September 30, 2009. Excluding the impairment charge of $450.0 million, all other operating expenses totaled $1,356.6 million for the nine months ended September 30, 2009. The $93.6 million increase from 2009 to 2010 was primarily driven by an increase in our Non-Regulated Businesses of $42.7 million and increased operating expenses in our Regulated Businesses of $47.7 million for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. The increase in the Non-Regulated Businesses’ operating expenses was primarily the result of higher operating and maintenance expenses of $39.4 million, corresponding with the increased revenue. The Regulated Businesses’ increase in operating expenses was mainly driven by higher operations and maintenance expenses of $30.7 million primarily as a result of increased production and employee related costs, higher depreciation expense of $8.5 million and increased general taxes of $7.8 million.

Other items affecting income (loss) before income taxes for the nine months ended September 30, 2010 as compared to the same period in the prior year include increased interest expense of $12.5 million attributable to the 2009 issuances of long-term debt and decreased allowance for funds used during construction (“AFUDC”) of $3.1 million attributable to construction projects being placed in service in certain of our subsidiaries. Other income was higher compared to 2009 by $3.1 million which was attributable to the release of the remaining balance of a loss reserve of $1.3 million as well as changes in the market value of Company-held deferred compensation. In addition, income tax expense increased by $52.0 million, which was mainly the result of higher taxable income for the nine months ended September 30, 2010. Additionally, the income tax expense included tax benefits of $7.0 million associated with the impairment charge recorded in the nine months ended September 30, 2009

Rate Case Development During the three months ended September 30, 2010, we received authorization for additional annualized revenues from a general rate case in a Virginia subsidiary of $0.6 million and additional annualized revenue of $0.2 million from a general rate increase in Michigan. In addition, new rates which would provide for an additional $25.8 million and $6.9 million of annualized revenues were put into effect under bond subject to refund for our Kentucky and Virginia subsidiaries, respectively. There is no assurance that the bonded amount, or any portion thereof, will be approved. In addition to the above general rate case increases, additional annualized revenues of $3.1 million and $0.2 million resulting from infrastructure charges in our Pennsylvania and New York subsidiaries, respectively, became effective. On February 25, 2010, our New Jersey subsidiary filed a petition with the Board of Public Utilities (“Board”) for approval to recover rates through a surcharge of approximately $3.3 million on an annual basis for an increase in purchased water and sewer treatment cost. On August 4, 2010, the Board authorized the Company to recover in rates a surcharge of approximately $3.1 million on an annual basis for purchased water and sewer treatment costs.

During the three months ended September 30, 2010, we filed one general rate case for our operating subsidiary in Tennessee requesting additional annualized revenues of $10.0 million.

In October 2010, additional annualized revenue of $3.6 million and $5.4 million resulting from infrastructure charges in our Pennsylvania and Indiana subsidiaries, respectively, became effective.

As of October 29, 2010, including the three states for which interim rates are in effect, we were awaiting final orders in nine states requesting additional annualized revenues of $216.7 million. There is no assurance that the filed amount, or any portion thereof, of any requested increases will be granted.

Financing Activities During the nine months ended September 30, 2010, we met our capital resource requirements with internally generated cash as well as funds from external sources primarily through commercial paper borrowings under our credit facilities.

On July 9, 2010, our New Jersey regulated subsidiary closed on a refunding of four outstanding bond issues totaling $150.0 million. In order to accomplish the refunding, the New Jersey Economic Development Authority issued three new series of bonds on behalf of our New Jersey regulated subsidiary. The new bonds have coupon rates of 5.60%, 5.10% and 4.45% and mature in 2034, 2023 and 2023, respectively. Also, in July 2010, we entered into an interest rate swap agreement with a notional amount of $100.0 million, the purpose of which was to mitigate interest cost at the parent company relating to debt that was incurred by our prior owners and was not used in any manner to finance the cash needs of our subsidiaries. On July 27, 2010, we remarketed the $10.6 million of variable rate debt that was held in the Company’s treasury as fixed rate bonds with a coupon rate of 5.25% and a maturity date of 2028.

Also during the three months ended September 30, 2010, American Water Capital Corp. (“AWCC”) closed on two offerings totaling $60 million. The first offering of $35 million in tax-exempt bonds issued through the State of California Pollution Control Financing Authority was closed on August 18, 2010 and has a coupon rate of 5.25% with a 30-year maturity and a 10-year call option. The proceeds from this bond offering are required to be used to fund specific California-American Water Company projects. The second offering of $25 million in tax-exempt water facility revenue bonds issued through the Indiana Finance Authority was closed on September 16, 2010 and has a coupon rate 4.85% with a 30-year maturity and a 10-year call option. The proceeds from this bond offering are required to be used to fund water facility projects in Indiana-American Water Company’s service territory.

On November 1, 2010, our New Jersey regulated subsidiary closed on a refinancing of two bond issues of $35.0 million and $40.0 million, with original coupon rates of 5.95% and 5.60% and maturity dates of 2029 and 2025, respectively. The two new bond issues of $35.0 million and $40.0 million have interest rates of 4.88% and 4.70% and maturity dates of 2029 and 2025, respectively.

Other Matters

Dividend On March 1, 2010 and June 2, 2010, the Company made cash dividend payments of $0.21 per share to all common shareholders of record as of February 18, 2010 and May 18, 2010, respectively. On September 1, 2010, the Company made a cash dividend payment of $0.22 per share to all common shareholders of record as of August 18, 2010, amounting to $38.5 million.

In March and June of 2009, the Company made cash dividend payments of $0.20 per share to all common shareholders of record as of February 18, 2009 and May 18, 2009, respectively. In September 2009, the Company made a cash dividend payment of $0.21 per share to all common shareholders of record as of August 18, 2009, amounting to $36.7 million.

On October 29, 2010, the Company declared a quarterly cash dividend payment of $0.22 per share payable on December 1, 2010 to all shareholders of record as of November 18, 2010.

On October 19, 2010, the California Public Utilities Commission issued new rules governing affiliate transactions and the use of regulated utility assets for non tariffed utility services. Potential impacts of the new rules on the Company and California–American Water Company’s operations and relationships with its affiliates are currently under review.

Results of Operations

Three Months Ended September 30, 2010 Compared To Three Months Ended September 30, 2009


	For the three months ended September 30,						Favorable (Unfavorable) Change
(In thousands, except per share data)	2010			2009			Favorable (Unfavorable) Change
Operating revenues	$	786,946		$	679,956		$	106,990

Operating expenses
Operation and maintenance		378,034			340,862			(37,172	)
Depreciation and amortization		79,431			74,854			(4,577	)
General taxes		55,316			50,618			(4,698	)
(Gain) loss on sale of assets		210			(784	)		(994	)

Total operating expenses, net		512,991			465,550			(47,441	)

Operating income		273,955			214,406			59,549

Other income (expenses)
Interest, net		(74,858	)		(74,124	)		(734	)
Allowance for other funds used during construction		2,586			2,290			296

Allowance for borrowed funds used during construction		1,814			1,674			140
Amortization of debt expense		(1,285	)		(2,135	)		850
Other, net		511			(310	)		821

Total other income (expenses)		(71,232	)		(72,605	)		1,373

Income before income taxes		202,723			141,801			60,922
Provision for income taxes		78,609			50,165			(28,444	)

Net income	$	124,114		$	91,636		$	32,478

Income per common share:
Basic	$	0.71		$	0.52
Diluted	$	0.71		$	0.52
Average common shares outstanding during the period:
Basic		174,859			174,595
Diluted		175,062			174,691

The following table summarizes certain financial information for our Regulated and Non-Regulated Businesses for the periods indicated (without giving effect to inter-segment eliminations):


	For the three months ended September 30,
	2010				2009
	Regulated Businesses		Non-Regulated Businesses		Regulated Businesses		Non-Regulated Businesses
	(In thousands)
Operating revenues	$	713,080	$	80,310	$	620,999	$	65,233
Adjusted EBIT(1)	$	264,935	$	9,157	$	203,898	$	6,563

(1)

Adjusted EBIT, a non-GAAP measure, is defined as earnings before interest and income taxes from continuing operations. Management evaluates the performance of its segments and allocates resources based on several factors, of which the primary measure is Adjusted EBIT. Adjusted EBIT does not represent cash flow for the periods presented and should not be considered as an alternative to net income as an indicator of the Company’s operating performance or as an alternative to cash flows as a source of liquidity. Adjusted EBIT as defined by the Company may not be comparable with Adjusted EBIT as defined by other companies. For the reconciliation of Adjusted EBIT, as defined by the Company, to income before income taxes, see Financial Statement Note 13.

Operating revenues Our primary business involves the ownership of water and wastewater utilities that provide water and wastewater services to residential, commercial and industrial customers as well as sales to public authorities. The table below details the additional annualized revenues resulting from rate authorizations, including infrastructure charges, which were granted in the third quarter of 2010.


	Annualized Rate Increases Granted
	(In millions)
State
General rate case:
Kentucky*	$	25.8
Virginia*		7.5
Michigan		0.2

Subtotal- General Rate Cases		33.5

Infrastructure Charges:
Pennsylvania		3.1

Subtotal- Infrastructure Charges		3.1

Total	$	36.6

*	Rate case not yet finalized; however, new rates were put into effect under bond subject to refund for the total Kentucky amount of $25.8 million and $6.9 million of the Virginia amount. There is no assurance that the bonded amount, or any portion thereof, will be approved.

Operating revenues increased by $107.0 million, or 15.7%, for the three months ended September 30, 2010 compared to the three months ended September 30, 2009. Regulated Businesses’ revenues increased by $92.1 million, or 14.8%, for the three months ended September 30, 2010 compared to the same period in the prior year. The Non-Regulated Businesses’ revenues for the three months ended September 30, 2010 increased by $15.1 million, or 23.1%, compared to the three months ended September 30, 2009.

The increase in the Regulated Businesses for the three months ended September 30, 2010 compared to the three months ended September 30, 2009 was primarily due to rate increases obtained through rate authorizations for a number of our operating companies of which the third quarter 2010 impact was approximately $52.8 million. Revenues for the three months ended September 30, 2010 increased by approximately $37.6 million due to higher demand as compared to the same period in the prior year. Most of this consumption increase occurred in our regulated subsidiaries in the Mid-Atlantic region of the United States as a result of the warmer/drier weather. Offsetting these increases was a decrease in surcharge and balancing account revenues of $1.6 million.

The increase in revenues from the Non-Regulated Businesses was primarily attributable to higher revenues in our Contract Operations Group totaling $13.2 million as a result of the Contract Operations’ Acquisition which contributed $9.3 million to the increase as well as incremental revenues associated with military construction and O&M projects of $8.1 million partially offset by lower revenues associated with our O&M and design and build contracts.

The following table sets forth the percentage of Regulated Businesses’ revenues and water sales volume by customer class:


	For the three months ended September 30,
	2010				2009 *				2010				2009 *
	Operating Revenues								Water Sales Volume
	(Dollars in thousands, gallons in millions)
Customer Class
Water service:
Residential	$	414,505	58.1	%	$	353,397	56.9	%		65,010	53.4	%		60,714	53.6	%
Commercial		143,305	20.1	%		126,515	20.4	%		27,983	23.0	%		26,265	23.2	%
Industrial		31,431	4.4	%		27,955	4.5	%		11,876	9.8	%		10,149	9.0	%
Public and other		84,249	11.8	%		74,779	12.0	%		16,742	13.8	%		16,114	14.2	%
Other water revenues		4,972	0.7	%		6,820	1.1	%		—	—			—	—

Total water revenues		678,462	95.1	%		589,466	94.9	%		121,611	100.0	%		113,242	100.0	%

Wastewater service		23,900	3.4	%		22,655	3.7	%
Other revenues		10,718	1.5	%		8,878	1.4	%

	$	713,080	100.0	%	$	620,999	100.0	%

Certain reclassifications have been made between customer classes to conform with 2010 presentation.

The following discussion related to water services indicates the increase or decrease in the Regulated Businesses’ revenues and associated water sales volumes in gallons by customer class.

Water Services – Water service operating revenues from residential customers for the three months ended September 30, 2010 totaled $414.5 million, a $61.1 million increase, or 17.3%, over the same period of 2009, mainly due to rate increases and an increase in sales volume. The volume of water sold to residential customers increased by 7.1% for the three months ended September 30, 2010 to 65.0 billion gallons, from 60.7 billion gallons for the same period in 2009. We believe this increase is attributable to warmer and drier weather during the quarter primarily in the Mid-Atlantic region of the United States compared to the three months ended September 30, 2009.

Water service operating revenues from commercial water customers for the three months ended September 30, 2010 increased by $16.8 million, or 13.3%, to $143.3 million mainly due to rate increases in addition to an increase in sales volume compared to the same period in 2009. The volume of water sold to commercial customers increased by 6.5% for the three months ended September 30, 2010 to 28.0 billion gallons, from 26.3 billion gallons for the three months ended September 30, 2009.

Water service operating revenues from industrial customers totaled $31.4 million for the three months ended September 30, 2010, an increase of $3.5 million, or 12.4%, from those recorded for the same period of 2009 mainly due to rate increases in addition to an increase in sales volume. The volume of water sold to industrial customers totaled 11.9 billion gallons for the three months ended September 30, 2010, an increase of 17.0% from the 10.1 billion gallons for the three months ended September 30, 2009. We believe this increase to be associated with slight improvements in the economic environment in communities that we serve.

Water service operating revenues from public and other customers, including municipal governments, other governmental entities and resale customers increased $9.5 million, or 12.7%, for the three months ended September 30, 2010 to $84.2 million compared to the same period in the prior year mainly due to rate increases. Revenues from municipal governments for fire protection services and customers requiring special private fire service facilities totaled $31.2 million for the three months ended September 30, 2010, an increase of $2.2 million over the same period of 2009. Revenues generated by sales to governmental entities and resale customers for the three months ended September 30, 2010 totaled $53.0 million, an increase of $7.2 million from the three months ended September 30, 2009.

Wastewater services – Our subsidiaries provide wastewater services in 12 states. Revenues from these services increased by $1.2 million, or 5.5%, to $23.9 million for the three months ended September 30, 2010. The increase was attributable to increases in rates charged to customers in a number of our operating companies.

Other revenues – Other revenues include such items as reconnection charges, initial application service fees, rental revenues, revenue collection services for others and similar items. For the three months ended September 30, 2010, other revenues increased by $1.8 million mainly due to an increase in work for a managed contract as well as rental revenue compared to the same period in the prior year.

Operation and maintenance Operation and maintenance expense increased $37.2 million, or 10.9%, for the three months ended September 30, 2010 compared to the same period in the prior year.

Operation and maintenance expenses for the three months ended September 30, 2010 and 2009, by major expense category, were as follows:


	For the three months ended September 30,
	2010		2009		Increase (Decrease)		Percentage
	(In thousands)
Production costs	$	95,746	$	86,673	$	9,073		10.5	%
Employee-related costs		157,085		139,633		17,452		12.5	%
Operating supplies and services		62,937		60,227		2,710		4.5	%
Maintenance materials and services		37,270		31,723		5,547		17.5	%
Customer billing and accounting		12,909		12,690		219		1.7	%
Other		12,087		9,916		2,171		21.9	%

Total	$	378,034	$	340,862	$	37,172		10.9	%

As is noted in the various expense category commentaries below, a driver of the increase in operations and maintenance expense is higher expenses in our Non-Regulated Businesses associated with the combined effects of our Contract Operations’ Acquisition and its related reorganization and transitional costs totaling $8.5 million.

Production costs, including fuel and power, purchased water, chemicals and waste disposal increased by $9.1 million, or 10.5%, for the three months ended September 30, 2010 compared to the same period in the prior year. Production costs, by major expense type were as follows:


	For the three months ended September 30,
	2010		2009		Increase (Decrease)		Percentage
	(In thousands)
Fuel and power	$	33,166	$	30,804	$	2,362		7.7	%
Purchased water		34,618		29,367		5,251		17.9	%
Chemicals		19,061		18,130		931		5.1	%
Waste disposal		8,901		8,372		529		6.3	%

Total	$	95,746	$	86,673	$	9,073		10.5	%

Fuel and power costs increased in our Regulated Businesses by $2.1 million primarily due to higher electricity and fuel prices as well as increased production volumes. The increase in purchased water is primarily associated with our Regulated Businesses and is attributable to rate increases resulting from higher costs incurred by our suppliers. The majority of this purchased water increase is in states which permit us to pass-through this increase to our customers outside of a full rate proceeding. The increase in chemical costs is primarily attributable to increased consumption slightly offset by lower chemical costs in our Regulated Businesses as a result of favorable contract pricing.

Employee-related costs including wage and salary, group insurance, and pension expense increased $17.5 million or 12.5% for the three months ended September 30, 2010, compared to the same period in the prior year. These employee-related costs represented 41.6% and 41.0% of operation and maintenance expenses for the three months ended September 30, 2010 and 2009, respectively.


	For the three months ended September 30,
	2010		2009		Increase (Decrease)			Percentage
	(In thousands)
Salaries and wages	$	114,991	$	99,778	$	15,213			15.2	%
Pensions		15,849		13,573		2,276			16.8	%
Group insurance		20,647		20,575		72			0.3	%
Other benefits		5,598		5,707		(109	)		(1.9	)%

Total	$	157,085	$	139,633	$	17,452			12.5	%

The increase in salaries and wages can be attributed to additional employees as a result of the Contract Operations’ Acquisition, totaling approximately $3.9 million, as well as wage increases, higher incentive compensation, increased severance expenses and increased overtime costs in certain of our regulated operating companies. Pension expense increased for the three months ended September 30, 2010 due to increased pension contributions by certain of our regulated operating companies whose costs are recovered based on Employee Retirement Income Security Act of 1974 (“ERISA”) minimum funding requirements. This increase was partially offset by a decrease in the amortization of actuarial losses attributable to higher than expected returns on plan assets in 2009.

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. For the three months ended September 30, 2010, these costs increased by $2.7 million, or 4.5%, compared to the same period in 2009.


	For the three months ended September 30,
	2010		2009*		Increase (Decrease)			Percentage
	(In thousands)
Contracted services	$	23,869	$	20,578	$	3,291			16.0	%
Office supplies and services		16,652		15,855		797			5.0	%
Transportation		8,611		8,763		(152	)		(1.7	)%
Rents		6,149		5,793		356			6.1	%
Other		7,656		9,238		(1,582	)		(17.1	)%

Total	$	62,937	$	60,227	$	2,710			4.5	%

* Certain reclassifications have been made between categories in order for 2009 to conform with 2010 presentation.

Contracted services increased for the three months ended September 30, 2010 compared to the same period in 2009 primarily due to increased construction related activity in the Contract Operations Group related to military contracts which corresponds with the increased revenues. Office supplies and services increased primarily due to the Contract Operations’ Acquisition. The decrease in the “Other” category is mainly attributable to the establishment of a regulatory asset for a $3.5 million payment previously made by our California operating company to the California Department of Fish and Game (“CDFG”) on behalf of the National Oceanographic and Atmospheric Administration (“NOAA”) as a result of an advice letter issued by the California Public Utility Commission which now allows for rate recovery of such payment. This reduction was offset by reserves of $1.4 million for costs deemed not recoverable at this time in one of our operating companies as well as increased costs associated with the Contract Operations’ Acquisition.

Maintenance materials and services, which include emergency repairs as well as costs for preventive maintenance, increased $5.5 million or by 17.5%, for the three months ended September 30, 2010 compared to the same period in the prior year.


	For the three months ended September 30,
	2010		2009		Increase (Decrease)		Percentage
	(In thousands)
Maintenance services and supplies	$	26,543	$	21,450	$	5,093		23.7	%
Removal costs, net		10,727		10,273		454		4.4	%

Total	$	37,270	$	31,723	$	5,547		17.5	%

The Regulated Businesses’ maintenance materials and service costs increased by $3.7 million for the three months ended September 30, 2010. In addition to higher removal costs, maintenance services and supplies increased due to higher levels of meter testing, pump, tank and well maintenance, and paving costs throughout our regulated subsidiaries. The Non-Regulated Businesses’ expense increased $1.8 million primarily due to increased costs in our Homeowner Services Group, associated with an increase in its customer base.

Customer billing and accounting expenses increased by $0.2 million, or 1.7% for the three months ended September 30, 2010 compared to the same period in the prior year.


	For the three months ended September 30,
	2010		2009		Increase (Decrease)			Percentage
	(In thousands)
Uncollectible accounts expense	$	5,884	$	5,924	$	(40	)		(0.7	)%
Postage		3,327		3,261		66			2.0	%
Other		3,698		3,505		193			5.5	%

Total	$	12,909	$	12,690	$	219			1.7	%

Other operation and maintenance expenses include casualty and liability insurance premiums and regulatory costs. These costs decreased by $2.2 million, or 21.9%, in 2010.


	For the three months ended September 30,
	2010		2009		Increase (Decrease)			Percentage
	(In thousands)
Insurance	$	9,084	$	6,904	$	2,180			31.6	%
Regulatory expenses		3,003		3,012		(9	)		(0.3	)%

Total	$	12,087	$	9,916	$	2,171			21.9	%

The increase in insurance expense is primarily due to favorable claims experience in 2009.

Depreciation and amortization Depreciation and amortization expense increased by $4.6 million, or 6.1%, for the three months ended September 30, 2010 compared to the same period in the prior year as a result of additional utility plant being placed in service.

General taxes General taxes expense, which includes taxes for property, payroll, gross receipts, and other miscellaneous items, increased by $4.7 million, or 9.3%, in the three months ended September 30, 2010 compared to the three months ended September 30, 2009. This increase was mainly due to higher gross receipts taxes of $1.9 million, primarily in our New Jersey regulated subsidiary. Also contributing to the increase were higher payroll taxes resulting from the increase in salaries and wages as well as increased capital stock and property tax expenses.

Other income (expenses) Interest expense, net of interest income, which is the primary component of our other income (expenses), increased by $0.7 million, or 1.0%, for the three months ended September 30, 2010 compared to the same period in the prior year. The increase is primarily due to the refinancing of short-term debt with long-term debt during 2009 as well as increased borrowing associated with capital expenditures. During 2009 a significant portion of this debt was refinanced to long-term fixed rate debt whose rates are higher than the short-term rates that existed for the three months ended September 30, 2009. This increase was offset by the recognition of $3.6 million of the fair value uplift for a debt issuance that was called for early redemption in July 2010.

Provision for income taxes The effective tax rates for the three months ended September 30, 2010 and 2009 were 38.8% and 35.4% respectively. Our consolidated provision for income taxes increased $28.4 million, or 56.7%, to $78.6 million for the three months ended September 30, 2010. The increase is primarily due to the fact that the 2009 effective tax rate included an impact of tax law changes in one of our subsidiaries as well as other discrete items.

Net income Net income for the three months ended September 30, 2010 was $124.1 million compared to a net income of $91.6 million for the three months ended September 30, 2009. The variation between the periods is the result of the aforementioned changes.

Results of Operations

Nine Months Ended September 30, 2010 Compared To Nine Months Ended September 30, 2009


	For the nine months ended September 30,						Favorable (Unfavorable) Change
(In thousands, except per share data)	2010			2009			Favorable (Unfavorable) Change
Operating revenues	$	2,046,222		$	1,842,866		$	203,356

Operating expenses
Operation and maintenance		1,053,320			985,861			(67,459	)
Depreciation and amortization		232,156			216,939			(15,217	)
General taxes		164,610			154,814			(9,796	)
Gain (loss) on sale of assets		133			(976	)		(1,109	)
Impairment charge		0			450,000			450,000

Total operating expenses, net		1,450,219			1,806,638			356,419

Operating income		596,003			36,228			559,775

Other income (expenses)
Interest, net		(232,307	)		(219,791	)		(12,516	)
Allowance for other funds used during construction		7,144			9,208			(2,064	)
Allowance for borrowed funds used during construction		4,465			5,537			(1,072	)
Amortization of debt expense		(3,233	)		(5,158	)		1,925
Other, net		2,508			(605	)		3,113

Total other income (expenses)		(221,423	)		(210,809	)		(10,614	)

Income (loss) before income taxes		374,580			(174,581	)		549,161
Provision for income taxes		146,907			94,873			(52,034	)

Net income (loss)	$	227,673		$	(269,454	)	$	497,127

Income (loss) per common share:
Basic	$	1.30		$	(1.62	)
Diluted	$	1.30		$	(1.62	)
Average common shares outstanding during the period:
Basic		174,785			165.992
Diluted		174,919			165,992

The following table summarizes certain financial information for our Regulated and Non-Regulated Businesses for the periods indicated (without giving effect to inter-segment eliminations):


	For the nine months ended September 30,
	2010				2009
	Regulated Businesses		Non-Regulated Businesses		Regulated Businesses		Non-Regulated Businesses
	(In thousands)
Operating revenues	$	1,834,883	$	230,153	$	1,673,346	$	187,029
Adjusted EBIT(1)	$	573,381	$	18,504	$	459,355	$	16,665

(1)

Adjusted EBIT, a non-GAAP measure, is defined as earnings before interest and income taxes from continuing operations. Management evaluates the performance of its segments and allocates resources based on several factors, of which the primary measure is Adjusted EBIT. Adjusted EBIT does not represent cash flow for the periods presented and should not be considered as an alternative to net income as an indicator of the Company’s operating performance or as an alternative to cash flows as a source of liquidity. Adjusted EBIT as defined by the Company may not be comparable with Adjusted EBIT as defined by other companies. For the reconciliation of Adjusted EBIT, as defined by the Company, to income (loss) before income taxes, see Financial Statement Note 13.

Operating revenues Our primary business involves the ownership of water and wastewater utilities that provide water and wastewater services to residential, commercial and industrial customers as well as sales to public authorities. The table below details the annualized revenues resulting from rate authorizations, including infrastructure charges, which were granted during the first nine months of 2010.


	Annualized Rate Increases Granted
	(In millions)
State
General rate case:
Illinois	$	40.7
Indiana		31.5
Missouri		24.8
Kentucky*		25.8
California		14.6
Virginia*		7.5
Ohio		2.6
New Mexico		0.5
Michigan		0.2

Subtotal- General Rate Cases		148.2

Infrastructure Charges:
Pennsylvania		4.9
Missouri		3.2
Illinois		0.7
New York		0.4

Subtotal- Infrastructure Charges		9.2

Total	$	157.4

*	Rate case not yet finalized; however, new rates were put into effect under bond subject to refund for the total Kentucky amount of $25.8 million and $6.9 million of the Virginia amount. There is no assurance that the bonded amount, or any portion thereof, will be approved.

Our results of operations are significantly impacted by rates authorized by the state regulatory commissions in the states in which we operate. Operating revenues increased by $203.4 million, or 11.0%, for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. Regulated Businesses’ revenues increased by $161.5 million, or 9.7%, for the nine months ended September 30, 2010 compared to the same period in the prior year. The Non-Regulated Businesses’ revenues for the nine months ended September 30, 2010 increased by $43.1 million, or 23.1%, compared to the nine months ended September 30, 2009.

The increase in revenues from the Regulated Businesses for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 was primarily due to rate increases obtained through rate authorizations for a number of our operating companies of which the year-to-date 2010 impact was approximately $107.7 million. In addition, for the nine months ended September 30, 2010, surcharge and balancing account revenues increased by $3.8 million and sewer and fire service revenues increased by $2.0 million compared to the same period in the prior year. Revenues for the nine months ended September 30, 2010 increased by approximately $41.1 million due to higher demand as compared to the same period in the prior year, mainly due to increased volumes in our subsidiaries in the Mid-Atlantic region of the United States.

The net increase in revenues from the Non-Regulated Businesses was primarily attributable to an increase in Contract Operations Group revenues primarily due to higher revenues totaling $30.1 million resulting from the Contract Operations’ Acquisition as well as incremental revenues associated with military construction and O&M projects of $15.8 million as a result of being fully operational at Fort Hood and Fort Polk and the addition of Fort Meade and Fort Belvoir contracts. These increases were partially offset by lower revenues associated with our O&M and design and build contracts. In addition, our Homeowner Services Group revenues increased by $4.2 million mainly as a result of increased product penetration within its existing customer base.

The following table sets forth the percentage of Regulated Businesses’ revenues and water sales volume by customer class:


	For the nine months ended September 30,
	2010				2009 *				2010				2009*
	Operating Revenues								Water Sales Volume
	(Dollars in thousands, gallons in millions)
Customer Class
Water service:
Residential	$	1,050,833	57.3	%	$	958,263	57.3	%		156,493	52.6	%		154,150	53.3	%
Commercial		356,619	19.4	%		326,242	19.5	%		67,046	22.6	%		65,149	22.5	%
Industrial		85,451	4.7	%		76,402	4.5	%		30,822	10.4	%		27,404	9.5	%
Public and other		223,417	12.2	%		205,651	12.3	%		42,960	14.4	%		42,430	14.7	%
Other water revenues		19,741	1.1	%		16,805	1.0	%		—	—			—	—

Total water revenues		1,736,061	94.7	%		1,583,363	94.6	%		297,321	100.0	%		289,133	100.0	%

Wastewater service		70,372	3.8	%		66,397	4.0	%
Other revenues		28,450	1.5	%		23,586	1.4	%

	$	1,834,883	100.0	%	$	1,673,346	100.0	%

Certain reclassifications have been made between customer classes to conform with 2010 presentation.

The following discussion related to water services indicates the increase in the Regulated Businesses’ revenues and associated water sales volumes in gallons by customer class.

Water Services – Water service operating revenues from residential customers for the nine months ended September 30, 2010 totaled $1,050.8 million, a $92.6 million increase, or 9.7%, over the same period of 2009, mainly due to rate increases and an increase in sales volume. The volume of water sold to residential customers increased by 1.5% for the nine months ended September 30, 2010 to 156.5 billion gallons, from 154.2 billion gallons for the same period in 2009. We believe this increase is attributable to warmer and drier weather in the Mid-Atlantic region of the United States primarily in the third quarter of 2010 compared to the same period in the prior year.

Water service operating revenues from commercial water customers for the nine months ended September 30, 2010 increased by $30.4 million, or 9.3%, to $356.6 million, mainly due to rate increases in addition to an increase in sales volume compared to the same period in 2009. The volume of water sold to commercial customers increased by 2.9% for the nine months ended September 30, 2010, to 67.0 billion gallons, from 65.1 billion gallons for the nine months ended September 30, 2009.

Water service operating revenues from industrial customers totaled $85.5 million for the nine months ended September 30, 2010, an increase of $9.0 million, or 11.8%, from those recorded for the same period of 2009 mainly due to rate increases in addition to an increase in sales volume. The volume of water sold to industrial customers totaled 30.8 billion gallons for the nine months ended September 30, 2010, an increase of 12.5% from the 27.4 billion gallons for the nine months ended September 30, 2009.

Water service operating revenues from public and other customers, including municipal governments, other governmental entities and resale customers increased $17.8 million, or 8.6%, for the nine months ended September 30, 2010 to $223.4 million from $205.7 million in the same period in 2009 mainly due to rate increases. Revenues from municipal governments for fire protection services and customers requiring special private fire service facilities totaled $90.0 million for the nine months ended September 30, 2010, an increase of $5.3 million over the same period of 2009. Revenues generated by sales to governmental entities and resale customers for the nine months ended September 30, 2010 totaled $133.4 million, an increase of $12.5 million from the nine months ended September 30, 2009.

Wastewater services – Our subsidiaries provide wastewater services in 12 states. Revenues from these services increased by $4.0 million, or 6.0%, to $70.4 million for the nine months ended September 30, 2010, from $66.4 million for the same period of 2009. The increase was attributable to increases in rates charged to customers in a number of our operating companies.

Other revenues – Other revenues include such items as reconnection charges, initial application service fees, rental revenues, revenue collection services for others and similar items. For the nine months ended September 30, 2010, these revenues increased by $4.9 million mainly due to an increase in work for a managed contract as well as rental revenue compared to the same period in the prior year.

Operation and maintenance Operation and maintenance expense increased $67.5 million, or 6.8%, for the nine months ended September 30, 2010 compared to the same period in the prior year.

Operation and maintenance expenses for the nine months ended September 30, 2010 and 2009, by major expense category, were as follows:


	For the nine months ended September 30,
	2010		2009		Increase (Decrease)			Percentage
	(In thousands)
Production costs	$	250,122	$	232,861	$	17,261			7.4	%
Employee-related costs		445,675		405,404		40,271			9.9	%
Operating supplies and services		178,159		175,687		2,472			1.4	%
Maintenance materials and services		112,157		95,728		16,429			17.2	%
Customer billing and accounting		37,029		36,689		340			0.9	%
Other		30,178		39,492		(9,314	)		(23.6	)%

Total	$	1,053,320	$	985,861	$	67,459			6.8	%

As is noted in the various expense category commentaries below, a major driver of the increase in operations and maintenance expense is higher expenses in our Non-Regulated Businesses associated with the combined effects of our Contracts Operations’ Acquisition and its related reorganization and transitional costs of $29.3 million.

Production costs, including fuel and power, purchased water, chemicals and waste disposal increased by $17.3 million, or 7.4%, for the nine months ended September 30, 2010 compared to the same period in the prior year. Production costs, by major expense type were as follows:


	For the nine months ended September 30,
	2010		2009		Increase (Decrease)			Percentage
	(In thousands)
Fuel and power	$	88,574	$	84,196	$	4,378			5.2	%
Purchased water		85,636		74,568		11,068			14.8	%
Chemicals		47,597		49,519		(1,922	)		(3.9	)%
Waste disposal		28,315		24,578		3,737			15.2	%

Total	$	250,122	$	232,861	$	17,261			7.4	%

The increase in our fuel and power costs was primarily driven by higher costs in our Non-Regulated Business of $3.0 million, most of which is attributable to our Contract Operations’ Acquisition. Fuel and power costs increased in the Regulated Business by $1.4 million primarily corresponding with the increase in usage. The increase in purchased water, which is primarily associated with our Regulated Businesses, is due to rate increases resulting from higher costs incurred by our suppliers. The majority of this purchased water increase is in states which permit us to pass-through this increase to our customers outside of a full rate proceeding. The decrease in chemical costs is primarily attributable to lower chemical costs in our Regulated Businesses as a result of favorable contract pricing. Waste disposal costs increased primarily due to increased rates in one of our Regulated operating companies as well as higher disposal costs attributable to the Contract Operations’ Acquisition, which accounted for $1.6 million of the increase.

Employee-related costs including wage and salary, group insurance, and pension expense increased $40.3 million, or 9.9%, for the nine months ended September 30, 2010, compared to the same period in the prior year. These employee-related costs represented 42.3% and 41.1% of operation and maintenance expenses for the nine months ended September 30, 2010 and 2009, respectively.


	For the nine months ended September 30,
	2010		2009		Increase (Decrease)			Percentage
	(In thousands)
Salaries and wages	$	326,622	$	288,550	$	38,072			13.2	%
Pensions		40,609		41,873		(1,264	)		(3.0	)%
Group insurance		60,267		59,285		982			1.7	%
Other benefits		18,177		15,696		2,481			15.8	%

Total	$	445,675	$	405,404	$	40,271			9.9	%

The increase in salaries and wages and other benefits was primarily due to the addition of employees as a result of the Contract Operations’ Acquisition totaling approximately $12.3 million and $2.2 million, respectively. The remainder of the increase in salaries and wages was due to wage increases, higher incentive compensation and severance expense as well as increased overtime costs of $3.9 million in certain of our regulated operating companies. Pension expense decreased for the nine months ended September 30, 2010 due to a decrease in the amortization of actuarial losses attributable to higher than expected returns on plan assets in 2009. This increase was partially offset by increased pension contributions by certain of our regulated operating companies whose costs are recovered based on Employee Retirement Income Security Act of 1974 (“ERISA”) minimum funding requirements.

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. For the nine months ended September 30, 2010, these costs increased by $2.5 million, or 1.4%, compared to the same period in 2009.


	For the nine months ended September 30,
	2010		2009*		Increase (Decrease)			Percentage
	(In thousands)
Contracted services	$	59,744	$	59,442	$	302			0.5	%
Office supplies and services		50,998		47,565		3,433			7.2	%
Transportation		25,005		22,497		2,508			11.1	%
Rents		18,681		16,473		2,208			13.4	%
Other		23,731		29,710		(5,979	)		(20.1	)%

Total	$	178,159	$	175,687	$	2,472			1.4	%

Certain reclassifications have been made between categories in order for 2009 to conform with 2010 presentation.

Contracted services increased slightly for the nine months ended September 30, 2010 compared to the same period in 2009 due to increased construction activity in the Contract Operations Group related to military contracts. Offsetting this increase was lower temporary labor expenses due to the filling of vacant positions and a reduction in our legal and accounting expenses. Office supplies and services increased primarily due to costs related to marketing programs for our Homeowner Services Group in addition to our Contract Operations’ Acquisition. The increase in transportation costs was due to higher gasoline prices during the nine months ended September 30, 2010 compared to the same period in 2009. The decrease in the “Other” category is primarily due to the aforementioned advice letter approval for rate recovery of a $3.5 million payment to the CDFG on behalf of NOAA in the third quarter of 2010.

Maintenance materials and services, which include emergency repairs as well as costs for preventive maintenance, increased $16.4 million, or by 17.2%, for the nine months ended September 30, 2010 compared to the same period in the prior year.


	For the nine months ended September 30,
	2010		2009		Increase (Decrease)		Percentage
	(In thousands)
Maintenance services and supplies	$	79,932	$	65,311	$	14,621		22.4	%
Removal costs, net		32,225		30,417		1,808		5.9	%

Total	$	112,157	$	95,728	$	16,429		17.2	%

The Regulated Businesses’ maintenance materials and service costs increased by $8.2 million for the nine months ended September 30, 2010. In addition to higher removal costs, tank painting expenses for our New Jersey subsidiary were higher by $1.5 million. The remaining increase for the Regulated Business was due to higher levels of meter testing, pump, tank and well maintenance, and paving costs throughout our regulated subsidiaries. The Non-Regulated Businesses’ expense increased $8.2 million primarily due to an increased cost for Homeowner Services Group of $2.6 million associated with an increase in its customer base, higher maintenance expenses in the Contract Operations Group including increased cost associated with the Contract Operations’ Acquisition of $2.4 million and our military contracts resulting from incremental construction projects and growth mainly related to the Fort Meade and Fort Belvoir locations.

Customer billing and accounting expenses increased by $0.3 million, or 0.9%, for the nine months ended September 30, 2010 compared to the same period in the prior year.


	For the nine months ended September 30,
	2010		2009		Increase (Decrease)			Percentage
	(In thousands)
Uncollectible accounts expense	$	16,356	$	17,337	$	(981	)		(5.7

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company