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 June 30, 2012

¨	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 July 26, 2012
Common Stock, $0.01 par value per share		176,430,023 shares

TABLE OF CONTENTS

AMERICAN WATER WORKS COMPANY, INC.

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED June 30, 2012

INDEX


PART I. FINANCIAL INFORMATION			3

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS			3
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			22 – 36
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			36
ITEM 4. CONTROLS AND PROCEDURES			36

PART II. OTHER INFORMATION			36

ITEM 1. LEGAL PROCEEDINGS			36
ITEM 1A. RISK FACTORS			37
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			37
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			37
ITEM 4. MINE SAFETY DISCLOSURE			37
ITEM 5. OTHER INFORMATION			37
ITEM 6. EXHIBITS			37

SIGNATURES			38
EXHIBITS INDEX

EXHIBIT 10.1
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)


	June 30, 2012			December 31, 2011
ASSETS
Property, plant and equipment
Utility plant—at original cost, net of accumulated depreciation of $3,526,087 at June 30 and $3,360,005 at December 31	$	11,233,630		$	10,872,042
Nonutility property, net of accumulated depreciation of $180,568 at June 30 and $164,417 at December 31		153,681			149,056

Total property, plant and equipment		11,387,311			11,021,098

Current assets
Cash and cash equivalents		12,919			14,207
Restricted funds		98,698			32,438
Utility customer accounts receivable		187,738			150,720
Allowance for uncollectible accounts		(13,140	)		(15,319	)
Unbilled utility revenues		161,851			134,938
Other receivables, net		63,195			60,413
Income taxes receivable		5,822			7,672
Materials and supplies		31,712			28,598
Assets of discontinued operations		0			929,858
Other		57,579			54,134

Total current assets		606,374			1,397,659

Regulatory and other long-term assets
Regulatory assets		1,139,223			1,079,661
Restricted funds		13,103			25,503
Goodwill		1,207,572			1,195,069
Other		59,178			57,401

Total regulatory and other long-term assets		2,419,076			2,357,634

TOTAL ASSETS	$	14,412,761		$	14,776,391

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)


	June 30, 2012			December 31, 2011
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock ($.01 par value, 500,000 shares authorized, 176,317 and 175,664 shares outstanding at June 30 and December 31, respectively)	$	1,763		$	1,757
Paid-in-capital		6,198,594			6,180,558
Accumulated deficit		(1,785,039	)		(1,848,801	)
Accumulated other comprehensive loss		(93,890	)		(97,677	)

Common stockholders’ equity		4,321,428			4,235,837
Preferred stock without mandatory redemption requirements		4,547			4,547

Total stockholders’ equity		4,325,975			4,240,384

Long-term debt
Long-term debt		5,203,133			5,339,947
Redeemable preferred stock at redemption value		19,275			21,137

Total capitalization		9,548,383			9,601,468

Current liabilities
Short-term debt		361,972			515,050
Current portion of long-term debt		120,289			28,858
Accounts payable		183,908			243,709
Taxes accrued		39,122			36,606
Interest accrued		57,406			59,067
Liabilities of discontinued operations		0			382,218
Other		255,267			223,597

Total current liabilities		1,017,964			1,489,105

Regulatory and other long-term liabilities
Advances for construction		377,769			386,970
Deferred income taxes		1,434,201			1,288,797
Deferred investment tax credits		28,668			29,427
Regulatory liabilities		352,550			325,829
Accrued pension expense		391,162			411,998
Accrued postretirement benefit expense		234,678			237,086
Other		38,627			38,963

Total regulatory and other long-term liabilities		2,857,655			2,719,070

Contributions in aid of construction		988,759			966,748
Commitments and contingencies (See Note 10)		—			—

TOTAL CAPITALIZATION AND LIABILITIES	$	14,412,761		$	14,776,391

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 June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Operating revenues	$	745,607		$	668,873		$	1,364,161		$	1,265,588

Operating expenses
Operation and maintenance		327,577			327,157			637,581			637,978
Depreciation and amortization		92,329			87,342			184,433			174,220
General taxes		55,282			52,951			112,403			108,449
(Gain) loss on asset dispositions and purchases		(213	)		28			(626	)		296

Total operating expenses, net		474,975			467,478			933,791			920,943

Operating income		270,632			201,395			430,370			344,645

Other income (expenses)
Interest, net		(79,730	)		(78,469	)		(159,384	)		(154,660	)
Allowance for other funds used during construction		5,076			2,535			9,438			5,363
Allowance for borrowed funds used during construction		2,313			1,198			4,394			2,402
Amortization of debt expense		(1,361	)		(1,255	)		(2,627	)		(2,547	)
Other, net		335			680			(281	)		(475	)

Total other income (expenses)		(73,367	)		(75,311	)		(148,460	)		(149,917	)

Income from continuing operations before income taxes		197,265			126,084			281,910			194,728
Provision for income taxes		80,602			51,267			115,995			79,212

Income from continuing operations		116,663			74,817			165,915			115,516
Income (loss) from discontinued operations, net of tax		(9,637	)		6,293			(17,135	)		(8,173	)

Net income	$	107,026		$	81,110		$	148,780		$	107,343

Other comprehensive income, net of tax:
Pension plan amortized to periodic benefit cost:
Prior service cost, net of tax of $28 and $28 for the three months ended and $56 and $56 for the six months ended, respectively	$	44		$	43		$	88		$	87
Actuarial loss, net of tax of $1,167 and $720 for the three months ended and $2,334 and $1,440 for the six months ended, respectively		1,826			1,126			3,651			2,252
Foreign currency translation adjustment		(211	)		93			48			411

Other comprehensive income		1,659			1,262			3,787			2,750

Comprehensive income	$	108,685		$	82,372		$	152,567		$	110,093


Basic earnings per common share: (a)
Income from continuing operations	$	0.66		$	0.43		$	0.94		$	0.66

Income (loss) from discontinued operations, net of tax	$	(0.05	)	$	0.04		$	(0.10	)	$	(0.05	)

Net income	$	0.61		$	0.46		$	0.84		$	0.61

Diluted earnings per common share: (a)
Income from continuing operations	$	0.66		$	0.42		$	0.94		$	0.66

Income (loss) from discontinued operations, net of tax	$	(0.05	)	$	0.04		$	(0.10	)	$	(0.05	)

Net income	$	0.60		$	0.46		$	0.84		$	0.61


Average common shares outstanding during the period:
Basic		176,331			175,469			176,122			175,364

Diluted		177,491			176,419			177,296			176,255

Dividends per common share	$	0.25		$	0.45		$	0.48		$	0.67

(a)	Amounts may not sum due to rounding.

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)


	Six Months Ended June 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	148,780		$	107,343
Adjustments
Depreciation and amortization		184,433			174,220
Provision for deferred income taxes		57,833			69,579
Amortization of deferred investment tax credits		(759	)		(771	)
Provision for losses on utility accounts receivable		7,402			7,774
Allowance for other funds used during construction		(9,438	)		(5,363	)
(Gain) loss on asset dispositions and purchases		(626	)		296
Pension and non-pension post retirement benefits		40,283			35,720
Other, net		(18,922	)		25,475
Changes in assets and liabilities
Receivables and unbilled utility revenues		(75,541	)		(44,705	)
Income taxes receivable		1,850			(3,443	)
Other current assets		665			(35,564	)
Pension and non-pension post retirement benefit contributions		(62,591	)		(72,006	)
Accounts payable		(43,252	)		(14,728	)
Taxes accrued, including income taxes		68,804			15,580
Interest accrued		(2,051	)		(1,306	)
Change in book overdraft		21,515			0
Other current liabilities		(1,514	)		4,295

Net cash provided by operating activities		316,871			262,396

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(476,300	)		(391,792	)
Acquisitions		(44,293	)		(4,769	)
Proceeds from sale of assets and securities		560,010			6,657
Removal costs from property, plant and equipment retirements, net		(24,634	)		(24,038	)
Net restricted funds released		14,886			38,517

Net cash provided by (used in) investing activities		29,669			(375,425	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt		14,730			12,275
Repayment of long-term debt		(158,188	)		(64,208	)
Net (repayments) borrowings under short-term debt agreements		(119,077	)		247,946
Proceeds from issuances of employee stock plans and DRIP		12,594			8,852
Advances and contributions for construction, net of refunds of $6,491 and $8,550 at June 30, 2012 and 2011, respectively		16,720			11,193
Change in bank overdraft position		(34,812	)		(25,411	)
Debt issuance costs		0			(552	)
Redemption of preferred stock		(1,100	)		(6	)
Dividends paid		(80,943	)		(77,105	)
Other		2,248			399

Net cash (used in) provided by financing activities		(347,828	)		113,383

Net (decrease) increase in cash and cash equivalents		(1,288	)		354
Cash and cash equivalents at beginning of period		14,207			13,112

Cash and cash equivalents at end of period	$	12,919		$	13,466

Non-cash investing activity:
Capital expenditures acquired on account but unpaid at quarter-end	$	93,783		$	80,573
Non-cash financing activity:
Long-term debt	$	68,746		$	0
Dividends accrued	$	44,079		$	40,351
Advances and contributions	$	6,188		$	10,027

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 Redemption Requirements		Total Stockholders’ Equity
	Shares		Par Value		Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Shares			At Cost					Total Stockholders’ Equity
Balance at December 31, 2011		175,664	$	1,757	$	6,180,558	$	(1,848,801	)	$	(97,677	)		0		$	0		$	4,547	$	4,240,384
Net income		—		—		—		148,780			—			—			—			—		148,780
Direct stock reinvestment and purchase plan, net of expense of $6		30		0		1,022		—			—			—			—			—		1,022
Employee stock purchase plan		26		0		1,056		—			—			31			1,046			—		2,102
Stock-based compensation activity		597		6		15,958		(399	)		—			(31	)		(1,046	)		—		14,519
Other comprehensive income, net of tax of $2,390		—		—		—		—			3,787			—			—			—		3,787
Dividends		—		—		—		(84,619	)		—			—			—			—		(84,619	)

Balance at June 30, 2012		176,317	$	1,763	$	6,198,594	$	(1,785,039	)	$	(93,890	)		0		$	0		$	4,547	$	4,325,975


	Common Stock				Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Treasury Stock						Preferred Stock of Subsidiary Companies Without Mandatory Redemption Requirements		Total Stockholders’ Equity
	Shares		Par Value		Paid-in Capital		Accumulated Deficit			Accumulated Other Comprehensive Loss			Shares			At Cost					Total Stockholders’ Equity
Balance at December 31, 2010		174,996	$	1,750	$	6,156,675	$	(1,959,235	)	$	(71,446	)		(1	)	$	(19	)	$	4,547	$	4,132,272
Net income		—		—		—		107,343			—			—			—			—		107,343
Direct stock reinvestment and purchase plan, net of expense of $9		34		0		948		—			—			—			—			—		948
Employee stock purchase plan		59		1		1,586		—			—			—			—			—		1,587
Stock-based compensation activity		349		3		10,838		(392	)		—			1			19			—		10,468
Other comprehensive income, net of tax of $1,496		—		—		—		—			2,750			—			—			—		2,750
Dividends		—		—		—		(117,456	)		—			—			—			—		(117,456	)

Balance at June 30, 2011		175,438	$	1,754	$	6,170,047	$	(1,969,740	)	$	(68,696	)		0		$	0		$	4,547	$	4,137,912

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 June 30, 2012, the Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2012 and 2011, the Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011, and the Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2012 and 2011, 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, 2011. 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.

During the fourth quarter of 2011, the Company discovered errors in the Company’s calculations of gains or losses on discontinued operations that originated in the first and second quarters of 2011. As a result, the Company recorded after-tax charges totaling $24,555, which included associated parent company goodwill, to reduce the net asset values of those businesses to their net realizable values. These charges were recognized within discontinued operations and net income and included in the operating results for the year ended December 31, 2011. In the footnotes to the Consolidated Financial Statements for the period ended December 31, 2011, the Company corrected the presentation of the first and second quarters of 2011. Additionally the Company reflected this correction in the corresponding prior periods presented in the Consolidated Statements of Operations and Comprehensive Income for the three and six-month periods ended June 30, 2012. The write-downs included in the first and second quarters of 2011 totaled $21,099 and $3,456, respectively.

Note 2: New Accounting Pronouncements

The following recently announced accounting standards have been adopted by the Company and have been included in the consolidated results of operations, financial position or footnotes of the accompanying Consolidated Financial Statements:

Fair Value Measurements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued updated accounting guidance related to fair value measurements and disclosures that result in common fair value measurements and disclosures between U.S. Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards. This new guidance amends current fair value measurement and disclosure guidance to increase transparency around valuation inputs and investment categorization. This guidance is effective for interim and annual periods beginning on January 1, 2012 and is required to be applied prospectively. The adoption of this guidance did not have a significant impact on the Company’s results of operations, financial position or cash flows.

Comprehensive Income

In June 2011, the FASB issued guidance on the presentation of comprehensive income. The new guidance allows an entity to present components of net income and other comprehensive income in either one continuous statement or two separate but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. In December 2011, the FASB deferred the requirement to present reclassification adjustments of other comprehensive income on the face of the income statement. The new guidance is effective for the Company beginning on January 1, 2012. As the Company already presents the components of net income and other comprehensive income in one continuous statement, the adoption of the new guidance did not have an impact on its results of operations, financial position or cash flows.

Testing Goodwill for Impairment

In September 2011, the FASB updated the accounting guidance related to testing goodwill for impairment. This update permits an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test that is currently in place. Under the new guidance, an entity will not be required to calculate the fair value of a reporting unit unless the entity determines, based on the qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This update is effective for annual and interim goodwill impairment tests performed by the Company beginning on January 1, 2012. The adoption of this update is not expected to have a significant impact on its results of operations, financial position or cash flows.

Note 3: Acquisitions and Divestitures

Acquisitions

As of June 30, 2012, the Company closed on five acquisitions of various regulated water and wastewater systems for a total aggregate purchase price of $44,293. Included in this total was the Company’s May 1, 2012 acquisition of all of the capital stock of Aqua New York, Inc. (the “Acquisition”) for a total cash purchase price of $39,273 plus assumed liabilities, subject to post-closing purchase price adjustments that may occur during the second half of 2012. The Acquisition, which expanded the Company’s service area in the state of New York, added approximately 50,000 customers to regulated operations.

The Acquisition was accounted for as a business combination; accordingly, operating results from May 1, 2012 were included in the Company’s results of operations. The preliminary purchase price was allocated to the net tangible and intangible assets based upon their estimated fair values at the date of acquisition. The Company’s regulatory practice has been followed whereby property, plant and equipment (rate base) is considered fair value for business combination purposes. Similarly, regulatory assets and liabilities acquired have been recorded at book value and are subject to regulatory approval where applicable. The acquired debt and employee benefit plans have been fair valued using common valuation techniques. The acquired debt has been valued in a manner consistent with the Company’s Level 2 and Level 3 pre-acquisition debt. (See Note 13) The Company has recognized employee benefit plan liabilities on the acquisition date for the funded status of defined-benefit plans assumed as part of the business combination. The pro forma impact of this acquisition would not have been material to the Company’s results of operations for the three and six months ended June 30, 2012 and 2011, respectively. Total assets acquired in the Acquisition were $106,911, including $58,669 of plant, $32,884 of regulatory assets, $2,855 of other assets and $12,503 of goodwill; liabilities assumed totaled $67,638, including long-term debt of $25,215, $15,377 of regulatory liabilities, $15,029 of deferred taxes, $2,307 of other liabilities and $9,710 of pension and postretirement welfare liabilities.

Divestitures

As part of the Company’s strategic review of its business investments, it has previously entered into agreements to sell assets or stock of certain subsidiaries.

In January 2012, the Company completed the close of the sale of its Arizona and New Mexico subsidiaries. Initial sales proceeds were $461,057, and the Company recorded no gain or loss at the time of the sale closing. In June 2012, as part of post-closing adjustments to finalize the sale, the Company remitted $2,448 to the purchaser, and recorded a pretax loss on sale for the same amount.

In May 2012, the Company completed the close of the sale of its Ohio subsidiary. Initial sales proceeds were $101,083 and are subject to post-closing adjustments. The Company recorded a pretax loss on sale of $5,166, primarily due to pension settlement costs calculated at closing.

As disclosed in Note 1 included herein, the Company previously revised its 2011 first quarter results for an after-tax impairment charge of $21,099, which was recorded as an asset impairment charge to reduce parent company goodwill that had been allocated to the Arizona and New Mexico subsidiaries. An additional $3,456 after-tax asset impairment charge was recorded in the Company’s 2011 second quarter results for parent company goodwill allocated to the Ohio subsidiary transaction.

In June 2011, the Company completed the sale of the assets of its Texas subsidiary for sale proceeds of $6,245. In the first quarter of 2011, the Company had previously recognized an after-tax impairment charge of $552 for parent company goodwill allocated to the Texas subsidiary.

Charges recorded in connection with the discontinued operations include estimates that are subject to subsequent adjustments.

A summary of discontinued operations presented in the Consolidated Statements of Operations and Comprehensive Income follows:


	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012			2011
Operating revenues	$	3,160		$	45,329	$	19,377		$	83,456
Total operating expenses, net		15,465			33,101		27,918			81,266

Operating income (loss)		(12,305	)		12,228		(8,541	)		2,190
Other income (expenses), net		(47	)		118		(167	)		410

Income (loss) from discontinued operations before income taxes		(12,352	)		12,346		(8,708	)		2,600
Provision (benefit) for income taxes		(2,715	)		6,053		8,427			10,773

Income (loss) from discontinued operations, net of tax	$	(9,637	)	$	6,293	$	(17,135	)	$	(8,173	)

There were no assets or liabilities of discontinued operations at June 30, 2012. Assets and liabilities of discontinued operations at December 31, 2011 include the following:


Assets:
Total property, plant and equipment	$	833,023
Current assets		21,906
Regulatory assets		43,849
Goodwill		29,608
Other		1,472

Total assets of discontinued operations	$	929,858


Liabilities:
Long-term debt	$	11,697
Current portion of long-term debt		12,839
Other current liabilities		29,530
Advances for construction		205,034
Regulatory liabilities		4,617
Other		15,540
Contributions in aid of construction		102,961

Total liabilities of discontinued operations	$	382,218

Note 4: Goodwill

The Company’s annual goodwill impairment test is conducted at November 30 of each calendar year. 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.

In the first quarter of 2011, the Company assessed fair value, including allocated goodwill, and recorded impairments of $21,099 for the pending sales of its Arizona and New Mexico subsidiaries, and $552 for the pending sale of the Company’s assets of its Texas subsidiary. These impairment charges were included in operating results of discontinued operations. (see Note 3 above)

The following table summarizes the six-month changes in goodwill of the Company’s continuing operations by reporting unit:


	Regulated Unit						Market-Based Operations					Consolidated
	Cost			Accumulated Impairment			Cost		Accumulated Impairment			Cost			Accumulated Impairment			Total Net
Balance at January 1, 2012	$	3,399,368		$	(2,332,670	)	$	235,990	$	(107,619	)	$	3,635,358		$	(2,440,289	)	$	1,195,069
Goodwill from acquisitions		12,503			0			0		0			12,503			0			12,503

Balance at June 30, 2012	$	3,411,871		$	(2,332,670	)	$	235,990	$	(107,619	)	$	3,647,861		$	(2,440,289	)	$	1,207,572


Balance at January 1, 2011	$	3,399,884		$	(2,332,670	)	$	235,990	$	(107,619	)	$	3,635,874		$	(2,440,289	)	$	1,195,585
Reclassifications and other activity		(75	)		0			0		0			(75	)		0			(75	)

Balance at June 30, 2011	$	3,399,809		$	(2,332,670	)	$	235,990	$	(107,619	)	$	3,635,799		$	(2,440,289	)	$	1,195,510

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 the Company’s business plan, such as changes in rate case results or capital investment budgets or changes in the Company’s 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 the Company’s regulators.

Note 5: Stockholders’ Equity

Common Stock

In March 2010, the Company established 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. As of June 30, 2012, there were 4,843 shares available for future issuance under the DRIP. The following table summarizes information regarding issuances under the DRIP for the six months ended June 30, 2012 and 2011:


	2012		2011
Shares of common stock issued		30		34
Cash proceeds received	$	1,028	$	957

Cash dividend payments made during the three-month periods ended March 31 and June 30 were as follows:


	2012		2011
Dividends per share, three months ended:

March 31	$	0.23	$	0.22
June 30		0.23		0.22

Total dividends paid, three months ended:

March 31	$	40,414	$	38,525
June 30		40,529		38,580

On May 11, 2012, the Company declared a quarterly cash dividend payment of $0.25 per share payable on September 3, 2012 to all shareholders of record as of July 6, 2012. As of June 30, 2012, the Company had accrued dividends totaling $44,079 included in other current liabilities in the accompanying Consolidated Balance Sheets.

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 June 30, 2012, a total of 10,215 shares were 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 operation and maintenance expense in the accompanying Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2012 and 2011:


	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Stock options	$	860		$	802		$	1,706		$	1,628
Restricted stock units		2,014			1,699			3,304			2,904
Employee stock purchase plan		121			111			253			208

Stock-based compensation in operation and maintenance expense		2,995			2,612			5,263			4,740
Income tax benefit		(1,169	)		(1,019	)		(2,053	)		(1,849	)

After-tax stock-based compensation expense	$	1,826		$	1,593		$	3,210		$	2,891

There were no significant stock-based compensation costs capitalized during the six months ended June 30, 2012 and 2011, respectively.

Stock Options

In the first six months of 2012, the Company granted non-qualified stock options to certain employees under the Plan. The stock options vest ratably over the three-year service period beginning January 1, 2012. 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. The following table presents the weighted-average assumptions used in the pricing model for 2012 grants and the resulting weighted-average grant date fair value per share of stock options granted:


Dividend yield		2.70	%
Expected volatility		28.35	%
Risk-free interest rate		0.78	%
Expected life (years)		4.4
Exercise price	$	34.14
Grant date fair value per share	$	6.11

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 June 30, 2012, $5,243 of total unrecognized compensation cost related to the non-vested stock options is expected to be recognized over the weighted-average period of 1.8 years.

The following table summarizes stock option activity for the six months ended June 30, 2012:


	Shares			Weighted- Average Exercise Price (per share)		Weighted- Average Remaining Life (years)		Aggregate Intrinsic Value
Options outstanding at January 1, 2012		3,112		$	22.70
Granted		649			34.14
Forfeited or expired		(68	)		27.08
Exercised		(457	)		21.68

Options outstanding at June 30, 2012		3,236		$	25.05		4.4	$	29,876

Exercisable at June 30, 2012		1,921		$	21.96		3.4	$	23,665

The following table summarizes additional information regarding stock options exercised during the six months ended June 30, 2012 and 2011:


	2012		2011
Intrinsic value	$	5,594	$	1,893
Exercise proceeds		9,896		6,517
Income tax benefit		1,443		253

Restricted Stock Units

In the first six months of 2012, the Company granted restricted stock units to certain employees under the Plan. The restricted stock units vest ratably over the three-year performance period beginning January 1, 2012 (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. Weighted-average assumptions used in the Monte Carlo simulation for the 2012 grants are as follows:


Expected volatility	22.47	%
Risk-free interest rate	0.43	%
Expected life (years)	3

The grant date fair value of the restricted stock awards that vest ratably and have market and/or performance and service conditions is amortized through expense over the requisite service period using the graded-vesting method. As of June 30, 2012, $5,948 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 1.1 years.

The following table summarizes restricted stock unit activity for the six months ended June 30, 2012:


	Shares			Weighted-Average Grant Date Fair Value (per share)
Nonvested total at January 1, 2012		577		$	25.09
Granted		172			37.40
Vested		(182	)		23.01
Forfeited		(17	)		29.69
Cancelled		(2	)		22.08

Nonvested total at June 30, 2012		548		$	29.51

The following table summarizes additional information regarding restricted stock units distributed during the six months ended June 30, 2012 and 2011:


	2012		2011
Intrinsic value	$	5,804	$	1,695
Income tax benefit		798		99

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 participant a lump sum cash payment equal to the value of the dividend equivalents accrued. The Company accrued dividend equivalents totaling $399 and $392 to retained earnings during the six months ended June 30, 2012 and 2011, 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 June 30, 2012 there were 1,535 shares of common stock reserved for issuance under the ESPP. During the six months ended June 30, 2012, the Company issued 57 shares under the ESPP.

Note 6: 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		June 30, 2012		December 31, 2011
Long-term debt of American Water Capital Corp. (“AWCC”) (a)
Private activity bonds and government funded debt
Fixed rate	4.85%-6.75%		5.72	%		2018-2040	$	322,610	$	322,610
Senior notes
Fixed rate	5.39%-10.00%		6.25	%		2013-2040		3,089,409		3,089,409
Long-term debt of other subsidiaries
Private activity bonds and government funded debt
Fixed rate	0.00%-6.20%		4.77	%		2012-2041		1,159,519		1,206,332
Mortgage bonds
Fixed rate	5.48%-9.71%		7.40	%		2012-2039		697,800		697,800
Mandatory redeemable preferred stock	8.47%-9.75%		8.61	%		2019-2036		21,001		22,101
Notes payable and other (b)	9.49%-12.17%		11.70	%		2013-2026		1,478		1,691

Long-term debt								5,291,817		5,339,943
Unamortized debt discount, net (c)								43,497		43,888
Fair value adjustment to interest rate hedge								7,383		6,111

Total long-term debt							$	5,342,697	$	5,389,942

(a)	AWCC, which is a wholly-owned subsidiary of the Company, has a strong support agreement with its parent that, under certain circumstances, is the functional equivalent of a guarantee.

(b)	Includes capital lease obligations of $1,149 and $1,264 at June 30, 2012 and December 31, 2011, respectively.

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

The following long-term debt was issued in 2012:


Company	Type	Interest Rate	Maturity	Amount
Other subsidiaries (1)	Private activity bonds and government funded debt – fixed rate	0.00%-5.00%	2013-2041	$	83,476

Total issuances				$	83,476

(1)

Included in the issuance amount above was $68,746, which was initially kept in Trust pending the Company’s certification that it has incurred qualifying capital expenditures. These issuances have been presented as non-cash in the accompanying Consolidated Statements of Cash Flows. Subsequent releases 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 Statements of Cash Flows.

The following long-term debt was retired through optional redemption or payment at maturity during 2012:


Company	Type	Interest Rate	Maturity	Amount
Other subsidiaries	Mortgage bonds – fixed rate	7.95%	2012	$	4,200
Other subsidiaries	Private activity bonds and government funded debt – fixed rate	0.00%-5.90%	2012-2041		153,775
Other subsidiaries	Mandatory redeemable preferred stock	4.60%-6.00%	2013-2019		1,100
Other	Capital leases and other				213

Total retirements and redemptions				$	159,288

Other activity of long-term debt during the first six months of 2012 includes debt assumed in an acquisition totaling $25,215 (see Note 3).

On July 2, 2012, the Company redeemed $86,090 of outstanding bonds maturing in 2028 and 2029 with interest rates ranging from 5.00% to 5.10%. In addition, on July 6, 2012 the Company redeemed $2,827 of preferred stock without mandatory redemption requirements with interest rates ranging from 5.00% to 5.75%. The redemptions were made using commercial paper borrowings.

Interest income included in interest, net is summarized below:


	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Interest income	$	2,821	$	2,754	$	5,633	$	5,403

The Company previously entered into an interest-rate swap to hedge $100,000 of its 6.085% fixed-rate debt maturing 2017. The Company pays variable interest of six-month LIBOR plus 3.422%. This fixed rate and variable rate interest swap is accounted for as a fair value hedge. The swap matures with the fixed-rate debt in 2017. The Company uses a combination of fixed-rate and variable-rate debt to manage interest rate exposure.

At June 30, 2012 and December 31, 2011, the Company had a $100,000 notional amount variable interest-rate swap fair value hedge outstanding. The following table provides a summary of the derivative fair value balance recorded by the Company and the line item in the Consolidated Balance Sheets in which such amount is recorded:


	June 30, 2012		December 31, 2011
Regulatory and other long-term assets
Other	$	7,088	$	5,824
Long-term debt
Long-term debt		7,383		6,111

For derivative instruments that are designated as 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. 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:


	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			20111
Interest, net
Gain (loss) on swap	$	1,497		$	2,767		$	1,263		$	1,614
Gain (loss) on borrowing		(1,549	)		(2,420	)		(1,272	)		(1,433	)
Hedge ineffectiveness		(52	)		347			(9	)		181

Note 7: Short-Term Debt

The components of short-term debt are as follows:


	June 30, 2012		December 31, 2011
Commercial paper, net of $28 and $52 discount at June 30 and December 31, respectively	$	361,972	$	481,048
Bank overdraft		0		34,002

Total short-term debt	$	361,972	$	515,050

Prior to January 1, 2012, the Company had overdraft protection provided by a revolving credit line with PNC Bank, N.A. The Company did not renew this credit line at December 31, 2011. Accordingly, the Company’s outstanding checks on its cash accounts with PNC Bank, N.A. are classified, as of January 1, 2012, as other current liabilities in the accompanying Consolidated Balance Sheets, and changes in those accounts are included in operating activities for 2012 in the accompanying Consolidated Statements of Cash Flows.

Note 8: Income Taxes

The Company’s estimated annual effective tax rate for the six months ended June 30, 2012 was 40.2% compared to 40.5% for the six months ended June 30, 2011, excluding various discrete items. The Company’s actual effective tax rates on continuing operations were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Actual effective tax rate on continuing operations		40.9	%		40.7	%		41.1	%		40.7	%

Note 9: Pension and Other Postretirement Benefits

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Components of net periodic pension benefit cost
Service cost	$	8,507		$	8,411		$	17,014		$	16,821
Interest cost		17,521			17,261			35,042			34,523
Expected return on plan assets		(19,618	)		(18,027	)		(39,237	)		(36,054	)
Amortization of:
Prior service cost		180			181			361			361
Actuarial loss		7,403			4,637			14,805			9,275

Net periodic pension benefit cost	$	13,993		$	12,463		$	27,985		$	24,926



	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Components of net periodic other postretirement benefit cost
Service cost	$	3,525		$	3,484		$	7,051		$	6,969
Interest cost		7,858			7,804			15,716			15,609
Expected return on plan assets		(7,141	)		(7,194	)		(14,281	)		(14,389	)
Amortization of:
Prior service credit		(478	)		(481	)		(957	)		(962	)
Actuarial loss		2,385			1,784			4,769			3,567

Net periodic other postretirement benefit cost	$	6,149		$	5,397		$	12,298		$	10,794

The Company contributed $47,600 to its defined benefit pension plans in the first six months of 2012 and expects to contribute $49,928 during the balance of 2012. In addition, the Company contributed $14,991 for the funding of its other postretirement plans in the first six months of 2012 and expects to contribute $15,083 during the balance of 2012.

Note 10: Commitments and Contingencies

The Company is routinely involved in legal actions incident to the normal conduct of its business. At June 30, 2012, the Company has accrued approximately $3,200 as probable costs and it is reasonably possible that additional losses could range up to $32,200 for these matters. For certain matters, the Company is unable to estimate possible losses. The Company believes that damages or settlements recovered by plaintiffs in such claims or actions, if any, 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 $1,986,000 at June 30, 2012. The military contracts are subject to customary termination provisions held by the U.S. Federal Government prior to the agreed upon contract expiration. The Company’s Operations and Maintenance agreements with municipalities and other customers expire between 2012 and 2048 and have remaining performance commitments as measured by estimated remaining contract revenue of $1,032,000 at June 30, 2012. 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 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 11: 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. Environmental expenditures that relate to current operations or provide a future benefit are expensed or capitalized as

appropriate. Remediation costs that relate to an existing condition caused by past operations are accrued, on an undiscounted basis, when it is probable that these costs will be incurred and can be reasonably estimated. Remediation costs accrued amounted to $4,400 and $5,500 at June 30, 2012 and December 31, 2011, respectively. The accrual relates 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 Company pursues recovery of incurred costs through all appropriate means, including regulatory recovery through customer rates. The Company’s regulatory assets at June 30, 2012 and December 31, 2011 include $9,041 and $9,187 respectively, related to the NOAA agreement.

Note 12: Earnings 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 income from continuing operations, income (loss) from discontinued operations, and net income and weighted-average common shares outstanding for calculating basic earnings per share:


	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012			2011
Basic:
Income from continuing operations	$	116,663		$	74,817	$	165,915		$	115,516
Income (loss) from discontinued operations, net of tax		(9,637	)		6,293		(17,135	)		(8,173	)
Net income		107,026			81,110		148,780			107,343
Less: Distributed earnings to common shareholders		40,744			38,810		81,308			77,461
Less: Distributed earnings to participating securities		19			19		34			35

Undistributed earnings		66,263			42,281		67,438			29,847
Undistributed earnings allocated to common shareholders		66,235			42,261		67,411			29,834
Undistributed earnings allocated to participating securities		28			20		27			13

Total income from continuing operations available to common shareholders, basic	$	116,616		$	74,778	$	165,854		$	115,468

Total income available to common shareholders, basic	$	106,979		$	81,071	$	148,719		$	107,295

Weighted-average common shares outstanding, basic		176,331			175,469		176,122			175,364

Basic earnings per share: (a)
Income from continuing operations	$	0.66		$	0.43	$	0.94		$	0.66

Income (loss) from discontinued operations, net of tax	$	(0.05	)	$	0.04	$	(0.10	)	$	(0.05	)

Net income	$	0.61		$	0.46	$	0.84		$	0.61

(a)	Amounts may not sum due to rounding.

Diluted earnings 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 the common stock equivalents 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 income from continuing operations, income (loss) from discontinued operations and net income and weighted-average common shares outstanding for calculating diluted earnings per share:


	Three Months Ended June 30,					Six Months Ended June 30,
	2012			2011		2012			2011
Diluted:
Total income from continuing operations available to common shareholders, basic	$	116,616		$	74,778	$	165,854		$	115,468
Income (loss) from discontinued operations, net of tax		(9,637	)		6,293		(17,135	)		(8,173	)
Total income available to common shareholders, basic		106,979			81,071		148,719			107,295
Undistributed earnings allocated to participating securities		28			20		27			13
Total income from continuing operations available to common shareholders, diluted	$	116,644		$	74,798	$	165,881		$	115,481

Total income available to common shareholders, diluted	$	107,007		$	81,091	$	148,746		$	107,308

Weighted-average common shares outstanding, basic		176,331			175,469		176,122			175,364
Stock-based compensation:
Restricted stock units		573			475		550			443
Stock options		586			473		623			446
Employee stock purchase plan		1			2		1			2

Weighted-average common shares outstanding, diluted		177,491			176,419		177,296			176,255

Diluted earnings per share: (a)
Income from continuing operations	$	0.66		$	0.42	$	0.94		$	0.66

Income (loss) from discontinued operations, net of tax	$	(0.05	)	$	0.04	$	(0.10	)	$	(0.05	)

Net income	$	0.60		$	0.46	$	0.84		$	0.61

(a)	Amounts may not sum due to rounding.

The following potentially dilutive common stock equivalents were not included in the earnings per share calculations because they were anti-dilutive:


	Three Months Ended June 30,				Six Months Ended June 30,
	2012		2011		2012		2011
Stock options		634		729		634		729
Restricted stock units where certain performance conditions were not met		63		139		63		140

Note 13: 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 amounts 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, approximate 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 categorized within the fair value hierarchy based on the inputs that are used to value each instrument. The fair value of long-term debt classified as Level 1 is calculated using quoted prices in active markets. Level 2 instruments are valued using observable inputs and Level 3 instruments are valued using observable and unobservable inputs. The fair values of instruments classified as Level 2 and 3 are determined by a valuation model that is based on a conventional discounted cash flow methodology and utilizes assumptions of current market rates. The Company calculated a base yield curve using a risk-free rate (a U.S. 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 U.S. Utility BBB+ debt securities. The Company used these yield curve assumptions to derive a base yield for the Level 2 and Level 3 securities. Additionally, the Company adjusted the base yield for specific features of the debt securities including call features, coupon tax treatment and collateral for the Level 3 instruments.

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


			At Fair Value as of June 30, 2012
Recurring Fair Value Measures	Carrying Amount		Level 1		Level 2		Level 3		Total
Preferred stocks with mandatory redemption requirements	$	20,925	$	0	$	0	$	27,013	$	27,013
Long-term debt (excluding capital lease obligations)		5,320,623		2,375,384		1,623,486		2,686,345		6,685,215


As of December 31, 2011	Carrying Amount		Fair Value
Preferred stocks with mandatory redemption requirements	$	22,036	$	26,458
Long-term debt (excluding capital lease obligations)		5,366,642		6,230,547

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 June 30, 2012 and December 31, 2011, respectively:


	At Fair Value as of June 30, 2012
Recurring Fair Value Measures	Level 1		Level 2			Level 3		Total
Assets:
Restricted funds	$	111,801		—			—	$	111,801
Rabbi trust investments		—	$	501			—		501
Deposits		1,866		—			—		1,866
Mark-to-market derivative asset		—		7,088			—		7,088

Total assets	$	113,667	$	7,589			—	$	121,256

Liabilities:
Deferred compensation obligation		—	$	9,342			—	$	9,342

Total liabilities		—	$	9,342			—	$	9,342

Total net assets (liabilities)	$	113,667	$	(1,753	)		—	$	111,914


	At Fair Value as of December 31, 2011
Recurring Fair Value Measures	Level 1		Level 2			Level 3		Total
Assets:
Restricted funds	$	57,941		—			—	$	57,941
Rabbi trust investments		—	$	518			—		518
Deposits		2,287		—			—		2,287
Mark-to-market derivative asset		—		5,824			—		5,824

Total assets	$	60,228	$	6,342			—	$	66,570

Liabilities:
Deferred compensation obligation		—	$	9,036			—	$	9,036

Total liabilities		—	$	9,036			—	$	9,036

Total net assets (liabilities)	$	60,228	$	(2,694	)		—	$	57,534

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 the balance sheet date 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 include escrow funds and certain other deposits held in trust. The Company includes cash deposits in other current assets.

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.

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.

Note 14: Segment Information

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

The following table includes the Company’s summarized segment information from continuing operations, except as noted below:


	As of or for the Three Months Ended June 30, 2012
	Regulated Businesses		Market-Based Operations		Other			Consolidated
Net operating revenues	$	667,601	$	82,795	$	(4,789	)	$	745,607
Depreciation and amortization		84,702		1,649		5,978			92,329
Total operating expenses, net		406,417		73,982		(5,424	)		474,975
Income (loss) from continuing operations before income taxes		204,874		9,738		(17,347	)		197,265
Total assets		12,434,806		281,572		1,696,383			14,412,761
Assets of discontinued operations (included in total assets above)		0		0		0			0
Capital expenditures		242,859		75		0			242,934
Capital expenditures of discontinued operations (included in above)		185		0		0			185


	As of or for the Three Months Ended June 30, 2011
	Regulated Businesses		Market-Based Operations		Other			Consolidated
Net operating revenues	$	594,441	$	82,424	$	(7,992	)	$	668,873
Depreciation and amortization		79,797		1,727		5,818			87,342
Total operating expenses, net		400,719		75,753		(8,994	)		467,478
Income (loss) from continuing operations before income taxes		138,020		7,259		(19,195	)		126,084
Total assets		12,537,877		264,985		1,519,416			14,322,278
Assets of discontinued operations (included in total assets above)		906,547		7,188		4,428			918,163
Capital expenditures		214,045		1,336		0			215,381
Capital expenditures of discontinued operations (included in above)		5,139		26		0			5,165


	As of or for the Six Months Ended June 30, 2012
	Regulated Businesses		Market-Based Operations		Other			Consolidated
Net operating revenues	$	1,209,476	$	163,376	$	(8,691	)	$	1,364,161
Depreciation and amortization		169,490		3,330		11,613			184,433
Total operating expenses, net		801,059		144,747		(12,015	)		933,791
Income (loss) from continuing operations before income taxes		295,290		20,208		(33,588	)		281,910
Total assets		12,434,806		281,572		1,696,383			14,412,761
Assets of discontinued operations (included in total assets above)		0		0		0			0
Capital expenditures		476,057		243		0			476,300
Capital expenditures of discontinued operations (included in above)		2,884		0		0			2,884


	As of or for the Six Months Ended June 30, 2011
	Regulated Businesses		Market-Based Operations		Other			Consolidated
Net operating revenues	$	1,122,722	$	157,806	$	(14,940	)	$	1,265,588
Depreciation and amortization		158,377		3,496		12,347			174,220
Total operating expenses, net		795,066		144,027		(18,150	)		920,943
Income (loss) from continuing operations before income taxes		215,082		14,933		(35,287	)		194,728
Total assets		12,537,877		264,985		1,519,416			14,322,278
Assets of discontinued operations (included in total assets above)		906,547		7,188		4,428			918,163
Capital expenditures		390,017		1,775		0			391,792
Capital expenditures of discontinued operations (included in above)		11,019		84		0			11,103

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, 2011 filed with the Securities and Exchange Commission (“SEC”), as well as in Item IA of Part II of this Quarterly Report. We undertake no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

General

American Water Works Company, Inc. (herein referred to as “American Water” or the “Company”) is the largest investor-owned United States water and wastewater utility company, as measured both by operating revenue and population served. Our primary business involves the ownership of water and wastewater utilities that provide water and wastewater services to residential, commercial, industrial and other customers. Our Regulated Businesses that provide these services are generally subject to economic regulation by state regulatory agencies (“PUCs”) in the states in which they operate. We report the results of these businesses in our Regulated Businesses segment. We also provide services that are not subject to economic regulation by state regulatory agencies. We report the results of these businesses in our Market-Based Operations segment. For further description of our businesses see the “Business” section found in our Form 10-K for the year ended December 31, 2011 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, 2011 filed with the SEC.

Overview

All financial information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), reflects only continuing operations. As previously disclosed in our Form 10-K for the year ended December 31, 2011, as part of our portfolio optimization initiative, we entered into agreements to sell our regulated subsidiaries in Arizona, New Mexico, Ohio and our regulated water and wastewater systems in Texas. The sale of the Texas subsidiary assets was completed in June 2011. In the first quarter of 2012, we completed the divestiture of the Arizona and New Mexico subsidiaries, and on May 1, 2012, we completed the divestiture of our Ohio subsidiary. Also, on December 31, 2011, we completed the sale of Applied Water Management, Inc. (“AWM”), which was part of our Contract Operations line of business within our Market-Based Operations segment. Therefore, the financial results of these entities have been presented as discontinued operations for all periods, unless otherwise noted. Additionally, during the fourth quarter of 2011, we discovered errors in our calculations of gains or losses on discontinued operations that originated in the first and second quarters of 2011. As a result, we recorded after-tax charges totaling $24.6 million, which included associated parent company goodwill, to reduce the net asset values of those businesses to their net realizable values. These charges were recognized within discontinued operations and net income and included in the operating results for the year ended December 31, 2011. The write-down included in the first and second quarters of 2011 totaled $21.1 million and $3.5 million, respectively, and are reflected, where necessary, in the amounts reported for the three and six months ended June 30, 2011.

Financial Results. For the three months ended June 30, 2012, we reported net income of $107.0 million, or diluted earnings per share (“EPS”) of $0.60 compared to $81.1 million, or diluted EPS of $0.46 for the comparable period in 2011. Income from continuing operations was $116.7 million for the second quarter of 2012 compared to $74.8 million in the second quarter of 2011. Diluted income from continuing operations per average common share was $0.66 for the second quarter of 2012 as compared to $0.42 for the second quarter of 2011.

For the six months ended June 30, 2012, our net income amounted to $148.8 million, or diluted earnings per share of $0.84 compared to $107.3 million, or diluted EPS of $0.61 for the comparable period in 2011. Income from continuing operations was $165.9 million for the six months ended June 30, 2012 compared to $115.5 million for the same period in 2011. Diluted income from continuing operations per average common share was $0.94 for the six months ended June 30, 2012 as compared to $0.66 for the first six months of 2011.

The primary drivers contributing to these increases in net income from continuing operations for both the three and six months ended June 30, 2012 were increased revenues in our Regulated Businesses resulting from rate increases and higher demand, as well as slightly higher revenues in our Market-Based Operations segment. Partially offsetting these increases were higher depreciation and amortization expense and general taxes. For further details, see “Consolidated Results of Operations and Variances” and “Segment Results” below.

In 2012, our focus is on executing our portfolio optimization initiative, actively addressing regulatory lag and declining usage, continuing to make efficient use of capital and continuing to improve our regulated operation and maintenance (“O&M”) efficiency ratio. Also, in 2012, we look to grow our Market-Based Operations with a focus on the Homeowners Services Group and Military Contract Operations and to optimize our municipal contract operations business model to provide for value creation for both American Water and the municipality. The progress that we have made in the first six months of 2012 with respect to three of these objectives is described below. In regards to our other 2012 goals not explicitly outlined below, we continue to make progress.

Portfolio Optimization Initiative. We continue to execute our plan for optimizing our Regulated Businesses’ portfolio. In the first quarter of 2012, we completed the sale of our regulated operations in Arizona and New Mexico. On May 1, 2012, we completed the divestiture of our Ohio subsidiary, which served approximately 58,000 customers.

Also, on May 1, 2012, we completed our purchase of seven regulated water systems in New York, for $39.3 million in cash plus assumed liabilities of $67.6 million. This acquisition added approximately 50,000 customers to our New York regulated operations.

Addressing Regulatory Lag and Declining Usage. During the second quarter of 2012, we filed a general rate case in Tennessee requesting additional annualized revenues of approximately $10.6 million. Also, during the three months ended June 30, 2012, we were granted additional annualized revenues from general rate cases totaling $60.4 million.

On May 1, 2012, our New Jersey rate case, which we filed in the third quarter of 2011, was approved by the Board of Public Utilities. The new rates were effective May 1, 2012. On June 6, 2012, the Indiana Utility Regulatory Commission (“IURC”) issued an order adjusting rates on a statewide basis for Indiana American Water. The IURC order became effective June 15, 2012. On June 7, 2012, our California general rate case was approved by California’s Public Utilities Commission (“CPUC”), authorizing a total of approximately $28.5 million in additional annualized revenues for 2012. The increased revenue requirement was retroactively effective back to January 1, 2012.

Also, in April, 2012, additional annualized revenues of $1.7 million resulting from infrastructure charges for our Pennsylvania subsidiary became effective.

The table below provides further details of annualized revenues, assuming a constant volume, resulting from rate authorizations granted:


	Annualized Rate Increases Granted
	For the three months ended		For the six months ended
	June 30, 2012		June 30, 2012
	(In millions)
State
General Rate Cases:
New Jersey	$	30.0	$	30.0
Missouri		—		24.0
New York (a)		—		5.6
Iowa		—		2.8
Indiana		1.9		1.9
California		28.5		28.5
Other		—		0.2

Total General Rate Cases	$	60.4	$	93.0

Infrastructure Charges
Pennsylvania	$	1.7	$	1.7
Other	$	0.3	$	0.3

Total Infrastructure charges	$	2.0	$	2.0

a) Amount includes $3.0 million increase effective April 1, 2012. The remainder of the $5.6 million annualized revenue increase of $1.4 million and $1.2 million will become effective April 1, 2013 and April 1, 2014, respectively.

On July 1, 2012, additional annualized revenue of $3.0 million resulting from infrastructure charges in our Pennsylvania subsidiary became effective. Also on July 20, 2012, our New Jersey subsidiary filed a Foundational Filing for a Distribution System Improvement Charge.

On July 12, 2012, the CPUC approved California’s cost of capital application. This approval is retroactive to January 1, 2012 and is estimated to provide additional annualized revenues of $4.4 million. Also, on July 12, 2012, interim rates which would provide for an additional $6.0 million of annualized revenues, including $5.7 million of jurisdictional revenue under bond and subject to refund, were put into effect for our Virginia subsidiary. There is no assurance that the bonded amount, or any portion thereof, will be approved.

As of July 31, 2012, we are awaiting final orders in three states, requesting additional annualized revenues of $54.1 million. There is no assurance that all, or any portion of any requested increase, will be granted.

In regards to another regulatory matter, in June 2012, the CPUC approved our request to permanently remove the San Clemente Dam from the Carmel River on the Monterey Peninsula. The estimated project construction cost is $83 million, of which $49 million will be recovered from rate payers and $34 million will come from the State Coastal Conservancy. This decision also permitted California-American Water Company rate recovery of approximately $27 million in historical costs.

Continue Improvement in O&M Efficiency Ratio for our Regulated Businesses. Our O&M efficiency ratio (a non-GAAP measure) is calculated only on our Regulated operations and is defined as operation and maintenance expense divided by operating revenues where both operation and maintenance expense and operating revenues are adjusted for purchased water expense. Our operating efficiency ratio was 37.9% for the three months ended June 30, 2012 compared to 43.2% for the three months ended June 30, 2011. Our operating efficiency ratio was 41.2% for the six months ended June 30, 2012 compared to 45.5% for the same period in 2011.

The improvement in our O&M efficiency ratio was driven by our continued focus on operating expense control as well as an increase in revenue relating to rate cases and increased customer usage. We evaluate our operating performance using this measure because management believes it is one measure of the efficiency of our regulated operations. This information is intended to enhance an investor’s overall understanding of our operating performance. The O&M efficiency ratio is not a measure defined under GAAP and may not be comparable to other companies’ operating measures and should not be used in place of the GAAP information provided elsewhere in this report. The following table provides a reconciliation that compares operation and maintenance expense and operating revenues, as determined in accordance with GAAP, to Adjusted Regulated O&M expense and Adjusted Regulated Operating Revenues, and also shows our operating efficiency ratio for the three and six months ended June 30, 2012 as compared to the same periods in 2011:

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


	For the three months ended June 30,						For the six months ended June 30,
	2012			2011			2012			2011
	(In thousands)
Total O&M expense	$	327,577		$	327,157		$	637,581		$	637,978
Less:
O&M expense – Market-Based Operations		71,118			72,702			138,891			137,238
O&M expense – Other		(13,572	)		(16,928	)		(29,272	)		(35,596	)

Total Regulated O&M expense		270,031			271,383			527,962			536,336
Less: Regulated purchased water		27,597			25,565			50,007			46,380

Adjusted Regulated O&M expense(a)	$	242,434		$	245,818		$	477,955		$	489,956


Total Operating Revenues	$	745,607		$	668,873		$	1,364,161		$	1,265,588
Less:
Operating revenues – Market-Based Operations		82,795			82,424			163,376			157,806
Operating revenues – Other		(4,789	)		(7,992	)		(8,691	)		(14,940	)

Total Regulated operating revenues		667,601			594,441			1,209,476			1,122,722
Less: Regulated purchased water expense*		27,597			25,565			50,007			46,380


Adjusted Regulated operating revenues(b)	$	640,004		$	568,876		$	1,159,469		$	1,076,342


Regulated O&M efficiency ratio(a)/(b)		37.9	%		43.2	%		41.2	%		45.5	%

*	Calculation assumes purchased water revenues approximate purchased water expenses.

Other Matters

Business Transformation Project

On August 1, 2012, our new business systems associated with Phase I of our business transformation project went live. Phase I consisted of the roll-out of the Enterprise Resource Planning systems, which encompass applications that will handle human resources, finance, and supply chain/procurement management. Phase II consists of the roll-out of a new Enterprise Asset Management system, which will manage an asset’s lifecycle, and a Customer Information system, which contains all billing and data pertaining to American Water’s customers for our Regulated segment. Phase II is expected to be completed by December 31, 2013. As we make adjustments to our operations as a result of this project, we may incur incremental expenses prior to realizing the benefits of a more efficient workforce and operating structure. A project of this size will have an impact on our control environment. Although efforts have been made to minimize any adverse impact, we cannot assure that all such impacts have been mitigated. Through June 30, 2012, we have spent $211.5 million on the project with $71.7 million spent in 2012. Expenditures associated with the project are included in the estimated capital investment spending of $900 million for 2012 and $800 million to $1 billion in 2013.

Consolidated Results of Operations and Variances


	For the three months ended June 30,									For the six months ended June 30,
	(In thousands, except per share data)
(In thousands)	2012			2011			Favorable (Unfavorable) Change			2012			2011			Favorable (Unfavorable) Change
Operating revenues	$	745,607		$	668,873		$	76,734		$	1,364,161		$	1,265,588		$	98,573

Operating expenses
Operation and maintenance		327,577			327,157			(420	)		637,581			637,978			397
Depreciation and amortization		92,329			87,342			(4,987	)		184,433			174,220			(10,213	)
General taxes		55,282			52,951			(2,331	)		112,403			108,449			(3,954	)
(Gain) loss on asset dispositions and purchases		(213	)		28			241			(626	)		296			922

Total operating expenses, net		474,975			467,478			(7,497	)		933,791			920,943			(12,848	)

Operating income		270,632			201,395			69,237			430,370			344,645			85,725

Other income (expenses)
Interest, net		(79,730	)		(78,469	)		(1,261	)		(159,384	)		(154,660	)		(4,724	)
Allowance for other funds used during construction		5,076			2,535			2,541			9,438			5,363			4,075
Allowance for borrowed funds used during construction		2,313			1,198			1,115			4,394			2,402			1,992
Amortization of debt expense		(1,361	)		(1,255	)		(106	)		(2,627	)		(2,547	)		(80	)
Other, net		335			680			(345	)		(281	)		(475	)		194

Total other income (expenses)		(73,367	)		(75,311	)		1,944			(148,460	)		(149,917	)		1,457

Income from continuing operations before income taxes		197,265			126,084			71,181			281,910			194,728			87,182
Provision for income taxes		80,602			51,267			(29,335	)		115,995			79,212			(36,783	)

Income from continuing operations		116,663			74,817			41,846			165,915			115,516			50,399
Income (loss) from discontinued operations, net of tax		(9,637	)		6,293			(15,930	)		(17,135	)		(8,173	)		(8,962	)

Net income	$	107,026		$	81,110		$	25,916		$	148,780		$	107,343		$	41,437

Basic earnings per common share:(a)
Income from continuing operations	$	0.66		$	0.43					$	0.94		$	0.66

Income from discontinued operations, net of tax	$	(0.05	)	$	0.04					$	(0.10	)	$	(0.05	)

Net income	$	0.61		$	0.46					$	0.84		$	0.61


Diluted earnings per common share:(a)
Income from continuing operations	$	0.66		$	0.42					$	0.94		$	0.66

Income from discontinued operations, net of tax	$	(0.05	)	$	0.04					$	(0.10	)	$	(0.05	)

Net income	$	0.60		$	0.46					$	0.84		$	0.61


Average common shares outstanding during the period:
Basic		176,331			175,469						176,122			175,364

Diluted		177,491			176,419						177,296			176,255

(a)	Amounts may not sum due to rounding

The following is a discussion of the consolidated results of operations for the three and six months ended June 30, 2012 compared to the three and six months ended June 30, 2011:

Three Months Ended June 30, 2012 Compared To Three Months Ended June 30, 2011

Operating revenues. Consolidated operating revenues for the three months ended June 30, 2012 increased $76.7 million, or 11.5%, compared to the same period in 2011 and is mainly attributable to a $73.2 million increase in our Regulated Businesses segment mainly as a result of rate increases as well as increased usage in the second quarter of 2012. For further information, see the respective “Operating Revenues” discussions within the “Segment Results.”

Operation and maintenance. Consolidated operation and maintenance expense for the three months ended June 30, 2012 increased by $0.4 million, or 0.1%, compared to the same period in 2011. For further information, see the respective “Operation and Maintenance” discussions within the “Segment Results.”

Depreciation and amortization. Depreciation and amortization expense increased by $5.0 million, or 5.7%, for the three months ended June 30, 2012 compared to the same period in the prior year as a result of additional utility plant placed in service.

General taxes. General taxes expense, which includes taxes for property, payroll, gross receipts, and other miscellaneous items, increased by $2.3 million, or 4.4%, for the three months ended June 30, 2012 compared to the three months ended June 30, 2011. This increase was principally due to higher property taxes of $1.8 million, primarily related to our recently acquired New York properties.

Other income (expenses). Other expenses decreased by $1.9 million, or 2.6%, for the three months ended June 30, 2012 compared to the same period in the prior year. This decrease is attributable to an increase in allowance for funds used during construction (“AFUDC”) of $3.7 million, which is mainly attributable to increased construction activity, including the replacement of a water treatment facility in our New Jersey regulated subsidiary. Partially offsetting this decrease was an increase in interest expense, net of interest income, of $1.3 million, or 1.6%, for the three months ended June 30, 2012 compared to the same period in the prior year, primarily attributable to higher interest expense associated with our interest rate swap and incremental interest expense on borrowings associated with certain restricted funds in 2012.

Provision for income taxes. Our consolidated provision for income taxes increased $29.3 million, or 57.2%, to $80.6 million for the three months ended June 30, 2012. The effective tax rates for the three months ended June 30, 2012 and 2011 were 40.9% and 40.7%, respectively.

Income (loss) from discontinued operations, net of tax. As noted above, the financial results of our regulated water and wastewater systems in Arizona, New Mexico, Texas and Ohio, as well as those of our AWM subsidiary within the Market-Based Operations segment, have been classified as discontinued operations for all periods presented. The increase in the loss from discontinued operations, net of tax is primarily attributable to the disposition of our Ohio subsidiary, which accounted for $5.2 million, and a $2.4 million pre-tax sales price adjustment in connection with the disposition of our Arizona and New Mexico subsidiaries. Additionally, the 2011 amount included net income associated with the discontinued operations for the period and a benefit of $3.2 million related to the cessation of depreciation for our Arizona, New Mexico, and Texas subsidiaries offset by $3.5 million after-tax write-down recorded in the second quarter of 2011 to reduce the net asset values of certain of the discontinued operations. Under GAAP, operations that are considered discontinued operations cease to depreciate their assets.

Six Months Ended June 30, 2012 Compared To Six Months Ended June 30, 2011

Operating revenues. Consolidated operating revenues for the six months ended June 30, 2012 increased $98.6 million, or 7.8%, compared to the same period in 2011. This change reflects an $86.8 million increase in our Regulated Businesses segment, which was mainly attributable to rate increases and usage, and a $5.6 million increase in our Market-Based Operations segment, which was due to contract growth and price increases in homeowner services, and incremental revenues associated with military construction and operations. For further information, see the “Operating Revenues” discussions within the “Segment Results.”

Operation and maintenance. Consolidated operation and maintenance expense for the six months ended June 30, 2012 decreased $0.4 million, or 0.1%, compared to the same period in 2011. For further information, see the “Operation and Maintenance” discussions within the “Segment Results.”

Depreciation and amortization. Depreciation and amortization expense increased by $10.2 million, or 5.9%, for the six months ended June 30, 2012 compared to the same period in the prior year as a result of additional utility plant placed in service.

General taxes. General taxes expense increased by $4.0 million, or 3.6%, for the six months ended June 30, 2012 compared to the six months ended June 30, 2011. This increase was principally due to higher property taxes of $2.2 million, which is primarily related to our recently acquired New York properties, as well as higher payroll and gross receipt taxes.

Other income (expenses). Other expenses decreased by $1.5 million, or 1.0%, for the six months ended June 30, 2012 compared to the same period in the prior year and is primarily attributable to an increase in AFUDC of $6.1 million related to increased construction activity,

including the water treatment facility replacement project in our New Jersey subsidiary. Partially offsetting this decrease was an increase in interest expense, net of interest income, of $4.7 million, or 3.1%, for the six months ended June 30, 2012 compared to the same period in the prior year. This increase is mainly attributable to accelerated amortization recorded in 2011 of $3.1 million in unamortized debt discounts associated with debt that was redeemed during the first quarter of 2011, as well as higher interest expense associated with our interest rate swap and incremental interest expense on borrowings associated with certain restricted funds.

Provision for income taxes. Our consolidated provision for income taxes increased $36.8 million, or 46.4%, to $116.0 million for the six months ended June 30, 2012. The effective tax rates for the six months ended June 30, 2012 and 2011 were 41.1% and 40.7%, respectively.

Income (loss) from discontinued operations, net of tax. As noted above, the financial results of our regulated water and wastewater systems in Arizona, New Mexico, Texas and Ohio as well as those of our AWM subsidiary within the Market-Based Operations segment, have been classified as discontinued operations for all periods presented. The increase in loss from discontinued operations, net of tax is primarily related to the disposition of our Ohio subsidiary, $9.7 million in charges for income taxes resulting from the divestiture of our Arizona and New Mexico subsidiaries and the $2.4 million pre-tax sales price adjustment in connection with the disposition of our Arizona and New Mexico subsidiaries. Additionally, the 2011 amount included net income as a result of the operations of those subsidiaries and an after-tax benefit of $7.9 million related to the cessation of depreciation for our Arizona, New Mexico, and Texas subsidiaries. Under GAAP, operations that are considered discontinued operations cease to depreciate their assets. Partially offsetting the 2011 income (loss) from discontinued operations, net of tax amount was $24.6 million after-tax write-downs recorded in 2011 to reduce the net asset values of certain of our discontinued operations.

Segment Results

We have two operating segments that are also our reportable segments: the Regulated Businesses and the Market-Based Operations. We evaluate the performance of our segments and allocate resources based on several factors, with the primary measure being income from continuing operations before income taxes.

Regulated Segment

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


	For the three months ended June 30,							For the six months ended June 30,
	2012		2011		Increase (Decrease)			2012		2011		Increase (Decrease)
	(In thousands)
Operating revenues	$	667,601	$	594,441	$	73,160		$	1,209,476	$	1,122,722	$	86,754
Operation and maintenance expense		270,031		271,383		(1,352	)		527,962		536,336		(8,374	)
Operating expenses, net		406,417		400,719		5,698			801,059		795,066		5,993
Income from continuing operations before income taxes		204,874		138,020		66,854			295,290		215,082		80,208

Operating revenues. Our primary business involves the ownership of water and wastewater utilities that provide services to residential, commercial, industrial and other customers. This business is generally subject to state regulation and our results of operations are impacted significantly by rates authorized by the regulatory commissions in the states in which we operate.

Operating revenues increased by $73.2 million, or 12.3%, for the three months ended June 30, 2012 and $86.8 million, or 7.7%, for the six months ended June 30, 2012, respectively, as compared to the same periods in 2011. The increase in revenues was primarily due to rate increases obtained through rate authorizations for a number of our operating companies, higher demand, additional revenues associated with acquisitions and a retroactive adjustment in the second quarter of 2012 totaling $7.2 million resulting from the issuance of a final rate order in California.

The impact of rate increases on revenues was approximately $32.0 million and $52.2 million for the three and six months ending June 30, 2012, respectively. The increase in revenues associated with higher demand amounted to approximately $27 million and $21 million for the three and six months ended June 30, 2012, respectively, which is attributable to increased customer consumption in 2012 compared to 2011, which we believe is primarily attributable to the warmer/drier weather in the second quarter of 2012. Lastly, revenues were higher by $7.9 million and $8.5 million for the three and six months ended June 30, 2012, respectively, compared to the same period in 2011 as a result of acquisitions, with the most significant being our New York acquisition in the second quarter of 2012.

The following table provides information regarding the Regulated Businesses’ revenues and billed water sales volume by customer class:


	For the three months ended June 30,
	2012				2011				2012				2011
	Operating Revenues								Billed Water Sales Volume
	(Dollars in thousands)								(Gallons in millions)
Customer Class
Water service:
Residential	$	383,879	57.5	%	$	335,772	56.5	%		45,304	51.0	%		42,473	51.0	%
Commercial		130,917	19.6	%		117,829	19.8	%		20,371	23.0	%		19,103	22.9	%
Industrial		35,860	5.4	%		30,391	5.1	%		9,754	11.0	%		9,491	11.4	%
Public and other		79,567	11.9	%		74,796	12.6	%		13,353	15.0	%		12,193	14.7	%
Other water revenues		7,960	1.2	%		6,020	1.0	%		—	—			—	—

Total water revenues		638,183	95.6	%		564,808	95.0	%		88,782	100.0	%		83,260	100.0	%

Wastewater service		19,669	2.9	%		19,411	3.3	%
Other revenues		9,749	1.5	%		10,222	1.7	%

	$	667,601	100.0	%	$	594,441	100.0	%


	For the six months ended June 30,
	2012				2011				2012				2011
	Operating Revenues								Billed Water Sales Volume
	(Dollars in thousands)								(Gallons in millions)
Customer Class
Water service:
Residential	$	689,776	57.0	%	$	633,217	56.4	%		83,779	50.7	%		81,610	50.7	%
Commercial		237,589	19.6	%		219,069	19.5	%		37,656	22.8	%		36,453	22.7	%
Industrial		62,788	5.2	%		57,049	5.1	%		18,729	11.3	%		18,761	11.7	%
Public and other		150,848	12.5	%		144,842	12.9	%		25,079	15.2	%		24,026	14.9	%
Other water revenues		10,699	0.9	%		11,318	1.0	%		—	—			—	—

Total water revenues		1,151,700	95.2	%		1,065,495	94.9	%		165,243	100.0	%		160,850	100.0	%

Wastewater service		38,790	3.2	%		37,902	3.4	%
Other revenues		18,986	1.6	%		19,325	1.7	%

	$	1,209,476	100.0	%	$	1,122,722	100.0	%

Water Services – Water service operating revenues from residential customers for the three months ended June 30, 2012 increased by $48.1 million, or 14.3%, compared to the three months ended June 30, 2011. For the six months ended June 30, 2012 these revenues increased by $56.6 million, or 8.9%, over the same period in 2011. The increases are primarily due to rate increases as well as increased sales volumes. For the three months ended June 30, 2012, the volume of water sold to residential customers increased by 6.7% compared to the same period in 2011. For the six months ended June 30, 2012, the volume sold to these customers increased by 2.7% as compared to the same period in 2011. We believe this higher consumption for both the three and six month periods is driven by the warmer/drier weather in June 2012 in our eastern and midwestern operating states as compared to June 2011. Also contributing to the increased sales volumes was the additional consumption resulting from our New York acquisition.

Water service operating revenues from commercial water customers for the three months ended June 30, 2012 increased by $13.1 million, or 11.1%, compared to the same period in 2011. For the six months ended June 30, 2012, these revenues increased by $18.5 million, or 8.5%, to $237.6 million, compared to June 30, 2011. These increases were mainly due to rate increases as well as increased sales volume. The volume of water sold to commercial customers increased by 6.6% and 3.3% for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011.

Water service operating revenues from industrial customers, increased $5.5 million, or 18.0%, for the three months ended June 30, 2012 compared to those recorded for the same period of 2011, mainly due to rate increases and an increase in sales volume. For the three months ended June 30, 2012, the volume of water sold to industrial customers increased by 2.8% compared to the same

period in 2011. For the six months ended June 30, 2012, water service operating revenues from industrial customers increased $5.7 million, or 10.1%, compared to the same period of 2011 and is primarily due to rate increases. The volume of water sold to industrial customers for the six months ended June 30, 2012 decreased 0.2% compared to the six months ended June 30, 2011.

Water service operating revenues from public and other customers, including municipal governments, other governmental entities and resale customers increased $4.8 million, or 6.4%, and $6.0 million, or 4.1%, for the three and six months ended June 30, 2012, respectively, mainly due to increased sale volumes.

Wastewater services – Our subsidiaries provide wastewater services in nine states. Revenues from these services increased by $0.3 million, or 1.3%, to $19.7 million for the three months ended June 30, 2012, compared to the same period of 2011. Revenues from these services for the six months ended June 30, 2012 increased by $0.9 million, or 2.3%, to $38.8 million, compared to the same period of 2011. The increases in both periods were primarily attributable to rate increases in a number of our operating companies.

Operation and maintenance. Operation and maintenance expense decreased $1.4 million, or 0.5%, for the three months ended June 30, 2012, compared to the three months ended June 30, 2011. Operation and maintenance expense decreased $8.4 million, or 1.6%, for the six months ended June 30, 2012, compared to the same period in the prior year. The following table provides information regarding operation and maintenance expense for the three and six months ended June 30, 2012 and 2011, by major expense category:


	For the three months ended June 30,										For the six months ended June 30,
	2012		2011*		Increase (Decrease)			Percentage			2012		2011*		Increase (Decrease)			Percentage
	(Dollars in thousands)
Production costs	$	67,427	$	65,711	$	1,716			2.6	%	$	125,887	$	124,284	$	1,603			1.3	%
Employee-related costs		117,647		119,909		(2,262	)		(1.9	%)		233,008		242,491		(9,483	)		(3.9	%)
Operating supplies and services		46,294		47,475		(1,181	)		(2.5	%)		94,869		96,302		(1,433	)		(1.5	%)
Maintenance materials and services		15,922		16,187		(265	)		(1.6	%)		32,056		33,642		(1,586	)		(4.7	%)
Customer billing and accounting		10,337		12,761		(2,424	)		(19.0	%)		19,407		20,859		(1,452	)		(7.0	%)
Other		12,404		9,340		3,064			32.8	%		22,735		18,758		3,977			21.2	%

Total	$	270,031	$	271,383	$	(1,352	)		(0.5	%)	$	527,962	$	536,336	$	(8,374	)		(1.6	%)

*	Certain reclassifications have been made between categories in order for 2011 to conform with 2012 presentation.

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

Production costs by major expense type were as follows:


	For the three months ended June 30,										For the six months ended June 30,
	2012		2011		Increase (Decrease)			Percentage			2012		2011		Increase (Decrease)			Percentage
	(Dollars in thousands)
Fuel and power	$	21,008	$	21,401	$	(393	)		(1.8	%)	$	41,108	$	41,470	$	(362	)		(0.9	%)
Purchased Water		27,597		25,565		2,032			7.9	%		50,007		46,380		3,627			7.8	%
Chemicals		12,522		11,728		794			6.8	%		22,030		22,005		25			0.1	%
Waste disposal		6,300		7,017		(717	)		(10.2	%)		12,742		14,429		(1,687	)		(11.7	%)

Total	$	67,427	$	65,711	$	1,716			2.6	%	$	125,887	$	124,284	$	1,603			1.3	%

Overall production costs increased for the three and six months ended June 30, 2012 compared to the same periods in the prior year, resulting from increased production and sales during the second quarter of 2012. This increase was partially offset by lower fuel and power costs attributable to favorable pricing in 2012 compared to 2011 in one of our regulated operating subsidiaries.

Employee-related costs, including salaries and wages, group insurance, and pension expense, decreased $2.3 million, or 1.9%, for the three months ended June 30, 2012 compared to the same period in the prior year. These employee-related costs represent approximately 44% of operation and maintenance expense for the three months ended June 30, 2012 and 2011. Employee related costs also decreased $9.5 million, or 3.9%, for the six months ended June 30, 2012 compared to the same period in the prior year. These employee-related costs represent approximately 44% and 45%, of operation and maintenance expense for the six months ended June 30, 2012 and 2011, respectively. The following table provides information with respect to components of employee-related costs for the three and six months ended June 30, 2012 and 2011:


	For the three months ended June 30,										For the six months ended June 30,
	2012		2011		Increase (Decrease)			Percentage			2012		2011		Increase (Decrease)			Percentage
	(In thousands)
Salaries and wages	$	82,530	$	81,227	$	1,303			1.6	%	$	160,918	$	161,876	$	(958	)		(0.6	%)
Pensions		14,484		15,685		(1,201	)		(7.7	%)		27,823		32,841		(5,018	)		(15.3	%)
Group insurance		16,562		18,550		(1,988	)		(10.7	%)		35,431		38,719		(3,288	)		(8.5	%)
Other benefits		4,071		4,447		(376	)		(8.5	%)		8,836		9,055		(219	)		(2.4	%)
																&nbs

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