American Water Works Company, Inc. (Form: 10-Q, Received: 11/03/2010 16:27:24)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2010

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

For the transition period from to

Commission file: number 001-34028

AMERICAN WATER WORKS COMPANY, INC.

(Exact name of registrant as specified in its charter)


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

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

(856) 346-8200

(Registrant’s telephone number, including area code)

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

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

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

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

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


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

TABLE OF CONTENTS

AMERICAN WATER WORKS COMPANY, INC.

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED September 30, 2010

INDEX


PART I. FINANCIAL INFORMATION			1

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

PART II. OTHER INFORMATION			42

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

SIGNATURES			44
EXHIBITS INDEX			44

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

PART I. FINANCIAL INFORMATION

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Balance Sheets (Unaudited)

(In thousands, except per share data)


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

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

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

Total current assets		627,399			499,127

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

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

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

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

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Balance Sheets (Unaudited)

(In thousands, except per share data)


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

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

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

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

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

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

Total current liabilities		741,424			607,392

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

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

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

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

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

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Operations and Comprehensive Income (Unaudited)

(In thousands, except per share data)


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

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

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

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

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

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

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

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

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

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

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

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

Diluted	$	0.71		$	0.52		$	1.30		$	(1.62	)

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

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

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

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

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Cash Flows (Unaudited)

(In thousands, except per share data)


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

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

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

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

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

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

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

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

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

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

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)

(In thousands, except per share data)


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

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


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

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

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

American Water Works Company, Inc. and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except per share data)

Note 1: Basis of Presentation

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

Note 2: New Accounting Pronouncements

Fair Value Measurements

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

Consolidation of Variable Interest Entities

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

Note 3: Goodwill

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

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

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

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


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

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


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

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

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

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

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

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

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

•

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

•

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

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

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

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

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

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

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

Note 4: Stockholders’ Equity

Common Stock

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

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

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

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

Stock Based Compensation

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

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


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

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

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

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

Stock Options

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

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

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

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

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


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

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


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

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

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

(a)	Includes stock options issued to retired employees

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

Restricted Stock Units

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

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

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

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

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

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

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

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


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

Nonvested total at September 30, 2010		495		$	22.62

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

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

Employee Stock Purchase Plan

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

Note 5: Long-Term Debt

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


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

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

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

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

(b)

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

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

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

The following long-term debt was issued in 2010:


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

Total issuances							$	273,541

(1)

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

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


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

Total retirements & redemptions							$	196,589

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

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

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


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

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


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

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

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

Note 6: Short-Term Debt

The components of short-term debt are as follows:


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

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

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

Note 7: Income Taxes

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

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

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

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

Note 8: Pension and Other Postretirement Benefits

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


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

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


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

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

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

Note 9: Commitments and Contingencies

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

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

Note 10: Environmental Matters

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

Note 11: Net Income (Loss) per Common Share

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


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

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

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

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

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

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


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

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

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

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

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

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

Note 12: Fair Value of Assets and Liabilities

Fair Value of Financial Instruments

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

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

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

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


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

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

Recurring Fair Value Measurements

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


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

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

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

Total liabilities		—		8,560			—		8,560

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


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

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

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

Total liabilities		—		8,881			—		8,881

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

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

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

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

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

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

Non-recurring Fair Value Measurements

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

Note 13: Segment Information

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

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


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

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

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

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

(1)

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

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


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

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

Income before income taxes						$	202,723


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

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

Income before income taxes						$	141,801


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

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

Income before income taxes						$	374,580


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

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


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

Loss before income taxes			$	(174,581	)

ITEM 2.

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

FORWARD-LOOKING STATEMENTS

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

GENERAL

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

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

OVERVIEW

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Other Matters

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

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

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

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

Results of Operations

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


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

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

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

Operating income		273,955			214,406			59,549

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

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

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

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

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

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

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


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

(1)

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

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


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

Subtotal- General Rate Cases		33.5

Infrastructure Charges:
Pennsylvania		3.1

Subtotal- Infrastructure Charges		3.1

Total	$	36.6

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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


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

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

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

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


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

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

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

Operating supplies and services include the day-to-day expenses of office operation, legal and other professional services, as well as information systems and other office equipment rental charges. For the three months ended September 30, 2010, these costs increased by $2.7 million, or 4.5%, compared to the same period in 2009.


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

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

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

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

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


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

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

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

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


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

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

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


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

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

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

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

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

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

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

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

Results of Operations

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


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

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

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

Operating income		596,003			36,228			559,775

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

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

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

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

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

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


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

(1)

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

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


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

Subtotal- General Rate Cases		148.2

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

Subtotal- Infrastructure Charges		9.2

Total	$	157.4

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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


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

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

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

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


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

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

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

Operating supplies and services include the day-to-day expenses of office operation, legal and other professional services, as well as information systems and other office equipment rental charges. For the nine months ended September 30, 2010, these costs increased by $2.5 million, or 1.4%, compared to the same period in 2009.


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

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

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

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

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


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

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

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

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


	For the nine months ended September 30,
	2010		2009		Increase (Decrease)			Percentage
	(In thousands)
Uncollectible accounts expense	$	16,356	$	17,337	$	(981	)		(5.7	)%
Postage		9,834		9,304		530			5.7	%
Other		10,839		10,048		791			7.9	%

Total	$	37,029	$	36,689	$	340			0.9	%

The decrease in the uncollectible accounts expense was the result of lower uncollectible accounts expense in our Regulated Businesses of $1.0 million due to improved collections in our receivables in excess of 120 days partially offset by increased reserves due to higher revenues.

Other operation and maintenance expenses include casualty and liability insurance premiums and regulatory costs. These costs decreased by $9.3 million, or 23.6%, in 2010.


	For the nine months ended September 30,
	2010		2009		Increase (Decrease)			Percentage
	(In thousands)
Insurance	$	21,351	$	27,496	$	(6,145	)		(22.3	)%
Regulatory expenses		8,827		11,996		(3,169	)		(26.4	)%

Total	$	30,178	$	39,492	$	(9,314	)		(23.6	)%

The decrease in insurance expense is primarily due to the positive resolution of prior years’ claims in 2010 compared to 2009. Regulatory expenses decreased due to the inclusion of $3.5 million of expense for the nine months ended September 30, 2009 which related to rate case expenses associated with our California subsidiary.

Depreciation and amortization Depreciation and amortization expense increased by $15.2 million, or 7.0%, for the nine months ended September 30, 2010 compared to the same period in the prior year as a result of additional utility plant being placed in service.

General taxes General taxes expense, which includes taxes for property, payroll, gross receipts, and other miscellaneous items, increased by 9.8 million, or 6.3%, in the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. This increase was due to higher gross receipts taxes of $5.6 million, primarily in our New Jersey regulated subsidiary and higher payroll taxes of $2.6 million resulting from increased wages and salaries for the nine months ended September 30, 2009 compared to the same period in the prior year.

Impairment charge No impairment charge was recorded for the nine months ended September 30, 2010. For the nine months ended September 30, 2009, we recorded an impairment charge to goodwill of our Regulated Businesses in the amount of $448.2 million and our Non-regulated Business of $1.8 million. The impairment charge, which was recorded in the first quarter of 2009, was primarily related to the high degree of stock market volatility experienced and the sustained period for which the Company’s market price was below its carrying value.

Other income (expenses) Interest expense, net of interest income, which is the primary component of our other income (expenses), increased by $12.5 million, or 5.7%, for the nine months ended September 30, 2010 compared to the same period in 2009. The increase is primarily due to the refinancing of short-term debt with long-term debt during 2009 as well as increased borrowing associated with capital expenditures. As a result of the 2008 market disruptions, the Company’s short-term debt borrowings during the first half of 2009 were higher than usual. During 2009, a significant portion of this debt was refinanced to long-term fixed rate debt whose rates are higher than the short-term rates that existed for the nine months ended September 30, 2009. Partially offsetting this increase was the recognition of $3.6 million of fair value uplift for a debt issuance that was called for early redemption in September 2010. Also, in addition to the increase in interest expense, AFUDC decreased by $3.1 million for the nine months ended September 30, 2010 compared to the same period in 2009 as a result of plant being placed into service, primarily in our Arizona and Indiana regulated subsidiaries. Furthermore, other income increased due to increased joint venture income and changes in the market value of Company-held deferred compensation. Other income (expense) also reflects the release of the remaining balance of a loss reserve of $1.3 million as a result of the resolution of outstanding issues and uncertainties that occurred during the nine months ended September 30, 2010.

Provision for income taxes Our consolidated provision for income taxes increased $52.0 million, or 54.8%, to $146.9 million for the nine months ended September 30, 2010. The effective tax rates for the nine months ended September 30, 2010 and 2009 were 39.2% and (54.3%) respectively. Included in the 2010 and 2009 income tax expense were tax benefits of $1.6 million and $14.2 million, respectively, attributable to certain discrete items, including the tax effects of the 2009 goodwill impairment charge. The Company’s estimated annual effective tax rate for the nine months ended September 30, 2010 was 39.7% compared to 39.6% for 2009, excluding the impact of the various discrete items.

Net income (loss) Net income for the nine months ended September 30, 2010 was $227.7 million compared to a net loss of $269.5 million for the nine months ended September 30, 2009. The variation between the periods is the result of the aforementioned changes.

Liquidity and Capital Resources

We regularly evaluate cash requirements for current operations, commitments, development activities and capital expenditures. Our business is very capital intensive and requires significant capital resources. A portion of these capital resources are provided by internally generated cash flows from operations. When necessary, we obtain additional funds from external sources in the debt and equity capital markets and through bank borrowings. Our access to external financing on reasonable terms depends on our credit ratings and current business conditions, including that of the water utility industry in general as well as conditions in the debt or equity capital markets. If these business and market conditions deteriorate to the extent that we no longer have access to the capital markets at reasonable terms, we have access to revolving credit facilities with aggregate bank commitments of $850.0 million. We rely on these revolving credit facilities and the capital markets to fulfill our short-term liquidity needs, to issue letters of credit and to back our commercial paper program. Disruptions in the credit markets may discourage lenders from meeting their existing lending

commitments, extending the terms of such commitments or agreeing to new commitments. Market disruptions may also limit our ability to issue debt securities in the capital markets. See the “Credit Facilities and Short-Term Debt” section below for further discussion.

In order to meet our short-term liquidity needs, we primarily issue commercial paper which is backed by AWCC’s revolving credit facilities. AWCC had $814.0 million available as of October 29, 2010, that we can use to fulfill our short-term liquidity needs, to issue letters of credit and back our $135.6 million outstanding commercial paper. As of October 29, 2010, the Company can issue additional commercial paper of $564.4 million. We can provide no assurances that our lenders will meet their existing commitments or that we will be able to access the commercial paper or loan markets in the future on terms acceptable to us or at all.

In addition, our regulated utility subsidiaries receive advances and contributions from customers, home builders and real estate developers to fund construction necessary to extend service to new areas. Advances for construction are refundable for limited periods, which vary according to state regulations, as new customers begin to receive service or other contractual obligations are fulfilled. Amounts which are no longer refundable are reclassified to contributions in aid of construction. Utility plant funded by advances and contributions is excluded from the rate base. Generally, we depreciate contributed property and amortize contributions in aid of construction at the composite rate of the related property. Some of our subsidiaries do not depreciate contributed property, based on regulatory guidelines.

We use our capital resources, including cash, to (i) fund capital requirements, including construction expenditures, (ii) pay off maturing debt, (iii) pay dividends, (iv) fund pension and postretirement welfare obligations and (v) invest in new and existing ventures. We spend a significant amount of cash on construction projects that have a long-term return on investment. Additionally, we operate in rate-regulated environments in which the amount of new investment recovery may be limited, and where such recovery takes place over an extended period of time, as our recovery is subject to regulatory lag. As a result of these factors, our working capital, defined as current assets less current liabilities, was in a net deficit position of $114.0 million as of September 30, 2010. We expect to fund future maturities of long-term debt through cash flow from operations, issuance of debt and issuance of equity. Since we continue to make investments equal to or greater than our cash flows from operating activities, we have no plans to reduce debt significantly.

On February 17, 2009, the American Recovery and Reinvestment Tax Act of 2009, which we refer to as the Act, became law. As a result of the Act, we have applied and will continue, as long as available, to apply for subsidized financing under the Act or other governmental subsidized funds in many of the states where we operate. During the nine months ended September 30, 2010, we received $5.5 million in grants and loans of $3.5 million and $2.0 million, respectively, related to applications filed in 2009. To date we have drawn down $6.5 million in grants and loans, leaving $2.3 million to be drawn in the future. In addition, we were awarded approximately $11.4 million in low-interest financing from the Pennsylvania Infrastructure Investment Authority (“PENNVEST”). These PENNVEST awards will be used to fund a portion of the Rock Run water treatment plant upgrade as well as other specified projects. Also during the three months ended September 30, 2010, we had draws of $0.3 million from a low interest loan through the Ohio State Revolving Loan Authority, bringing the total draws on that loan to date to $1.3 million. Lastly, in 2010, NJAWC applied for $21.0 million of funds through the New Jersey Environmental Infrastructure Trust. As of October 29, 2010, $1.5 million has been awarded, but no funds have been received.

Cash Flows from Operating Activities

Cash flows from operating activities primarily result from the sale of water and wastewater services and, due to the seasonality of operations, are weighted toward the third quarter of each fiscal year. Our future cash flows from operating activities will be affected by economic utility regulation; infrastructure investment; inflation; compliance with environmental, health and safety standards; production costs; customer growth; declining per customer usage of water; and weather and seasonality.

Cash flows from operating activities have been a reliable, steady source of cash funding, sufficient to meet operating requirements, our dividend payments and a portion of our capital expenditures requirements. We will seek access to debt and equity capital markets to meet the balance of our capital expenditure requirements as needed. There can be no assurance that we will be able to access such markets successfully on favorable terms or at all. Operating cash flows can be negatively affected by changes in our rate regulated environments or changes in our customers’ economic outlook and ability to pay for service in a timely manner. We can provide no assurance that our customers’ historical payment pattern will continue in the future. Cash flows from operating activities for the nine months ended September 30, 2010 were $587.0 million compared to $471.6 million for the nine months ended September 30, 2009.

The following table provides a summary of the major items affecting our cash flows from operating activities for the nine months ended September 30, 2010 and 2009:


	For the nine months ended September 30,
	2010			2009
	(In thousands)
Net income (loss)	$	227,673		$	(269,454	)
Add (subtract):
Non-cash operating activities (1)		498,909			872,353
Changes in working capital (2)		(28,816	)		(40,921	)
Pension and postretirement healthcare contributions		(110,739	)		(90,427	)

Net cash flows provided by operations	$	587,027		$	471,551

(1)

Includes (gain) loss on sale of businesses, depreciation and amortization, impairment charges, removal costs net of salvage, provision for deferred income taxes, amortization of deferred investment tax credits, provision for losses on utility accounts receivable, allowance for other funds used during construction, (gain) loss on sale of assets, deferred regulatory costs, amortization of deferred charges and other non-cash items, net, less pension and postretirement healthcare contributions.

(2)	Changes in working capital include changes to accounts receivable and unbilled utility revenue, taxes receivable (including federal income), other current assets, accounts payable, taxes accrued (including federal income), interest accrued and other current liabilities.

The increase in cash flows from operations for the nine months ended September 30, 2010 compared to the same period in 2009 is primarily due to an increase in revenues.

For the nine months ended September 30, 2010 and 2009, we made pension and postretirement benefit contributions to the plan trusts amounting to $81.7 million and $29.0 million, respectively. In October 2010, we made our final pension contribution for 2010 in the amount of $14.9 million. We currently expect to make additional postretirement benefit contributions of $9.7 million for the remainder of 2010.

Currently, we are at an impasse in negotiations of our national benefits agreement with most of the labor unions representing employees in our Regulated Businesses. The current agreement expired on July 31, 2010, however negotiations have not produced a new agreement. The Company has begun to implement our “last best and final offer in order not to disrupt health care coverage for our employees. At this time, we don’t believe that this circumstance will result in a system wide work stoppage. However, management has developed contingency plans that will be implemented as necessary if a work stoppage or strike does occur. Management does not expect that such a work stoppage or strike would have a material adverse impact on our results of operations, financial position or cash flows of the Company.

Cash Flows from Investing Activities

Cash flows used in investing activities were as follows for the periods indicated:


	For the nine months ended September 30,
	2010			2009
	(In thousands)
Net capital expenditures	$	(522,090	)	$	(592,894	)
Other investing activities, net (1)		16,138			66,683

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

(1)

Includes allowances for other funds used during construction, acquisitions, proceeds from the sale of assets and securities, proceeds from the sale of discontinued operations, removal costs from property, plant and equipment retirements, receivables from affiliates, restricted funds and investment in equity investee.

Cash flows used in investing activities for the nine months ended September 30, 2010 and 2009 were $506.0 million and $526.2 million, respectively. Capital expenditures decreased $70.8 million to $522.1 million for the nine months ended September 30, 2010 from $592.9 million for the nine months ended September 30, 2009. This decrease was the result of delayed construction in 2010, due to the severe weather conditions in certain states in which we operate in the first quarter of 2010 as well as a decrease in water treatment plant expenditures, as a number of facilities were under construction in 2009 and had significant expenditures. We estimate that Company-funded capital investment will be approximately $800 million to $1 billion in 2010. Based on current projections for the remainder of 2010, we believe we will be at the lower end of this range. We intend to invest capital prudently to provide essential services to our regulated customer base, while working with regulators in the various states in which we operate to have the opportunity to earn an appropriate rate of return on our investment and a return of our investment.

The change in “Other investing activities” in 2010 is the result of the change in the net restricted funds released attributable primarily to the drawdown of the restricted funds by our Kentucky and Pennsylvania operating companies.

Our infrastructure investment plan consists of both infrastructure renewal programs, where we replace infrastructure as needed, and major capital investment projects, where we construct new water and wastewater treatment and delivery facilities to meet new customer growth and water quality regulations. An integral aspect of our strategy is to seek growth through tuck-ins and other acquisitions which are complementary to our existing business and support the continued geographical diversification and growth of our operations. Generally, acquisitions are funded initially with short-term debt and later refinanced with the proceeds from long-term debt or equity offerings.

Our projected capital expenditures and other investments are subject to periodic review and revision to reflect changes in economic conditions and other factors.

In 2008, the Kentucky Public Service Commission approved Kentucky American Water’s application for a certificate of convenience and necessity to construct a 20.0 million gallon per day treatment plant on the Kentucky River and a 30.6 mile pipeline to meet Central Kentucky’s water supply deficit with total estimated construction costs of $164 million. Projects costs amounting to $162 million were placed in service during September 2010.

In regards to our business transformation initiative to enhance existing processes and upgrade supporting outdated systems, in the second quarter of 2010, we completed our evaluation of appropriate software solutions and selected SAP AG for our enterprise-wide system. Additionally, in October 2010, we selected a nationally recognized system integrator with experience in both SAP and large system implementations. For the remainder of 2010, we expect to work with the system integrator to analyze our business requirements and align them with the SAP supporting applications.

Current estimates indicate that costs for the program could total up to $280 million. The current goal is to have all applications implemented by the end of 2014. Any capital expenditures associated with this initiative are included in the $800 million to $1 billion capital investment spending outlined above.

Our investing activities could require considerable capital resources which we have generated through operations and attained through financing activities. We can provide no assurance that the resources will be sufficient to meet our expected investment needs and may be required to delay or reevaluate our investment plans.

Cash Flows from Financing Activities

Our financing activities, whose primary purpose is to fund capital expenditures, include the issuance of long-term and short-term debt, primarily through our wholly-owned financing subsidiary, AWCC. We intend to access the capital markets on a regular basis, subject to market conditions. In addition, new infrastructure may be financed with customer advances and contributions for construction (net of refunds).

The following long-term debt was issued in the first nine months of 2010:


Company	Type	Interest Rate			Maturity		Use of Proceeds		Amount (In thousands)
American Water Capital Corp.	Private activity bonds and government funded debt – fixed rate		5.38	%		2040		a	$	26,000
American Water Capital Corp.	Private activity bonds and government funded debt – fixed rate		5.25	%		2040		b		25,000
American Water Capital Corp.	Private activity bonds and government funded debt – fixed rate		5.25	%		2040		c		35,000
American Water Capital Corp.	Private activity bonds and government funded debt – fixed rate		4.85	%		2040		d		25,000
American Water Capital Corp.	Private activity bonds and government funded debt – fixed rate		5.25	%		2028		e		10,635
Other subsidiaries	Private activity – fixed rate		4.45% - 5.60	%		2023-2034		f		150,000
Other subsidiaries	Private activity – fixed rate		0.00% - 2.31	%		2021-2030		g		1,906

Total issuances									$	273,541

Note: Private activity type defined as private activity bonds and government funded debt.

(a)

On June 24, 2010, AWCC closed an offering of $26 million in tax-exempt water facility revenue bonds issued by Owen County, Kentucky. The bonds have a coupon rate of 5.38% with a maturity of 2040 and a 10-year call option. The proceeds from the bond offering will be used to repay short-term debt related to the construction of the water treatment and transmission facility located in Owen County, Kentucky, as well as to pay remaining costs of acquisition, construction, installation and equipping of the water treatment and transmission facility.

(b)

On May 27, 2010, AWCC closed an offering of $25 million in tax-exempt water facility revenue bonds issued by the Illinois Finance Authority. The bonds have a coupon rate of 5.25% with a maturity of 2040 and a 10-year call option. The proceeds from the bond offering will be used to fund water facility projects in Champaign, Livingston, Logan, Madison, Peoria, and St. Clair counties in Illinois.

(c)

On August 18, 2010, AWCC closed an offering of $35 million in tax-exempt bonds issued through the State of California Pollution Control Financing Authority. The bonds have a coupon rate of 5.25% with a 30-year maturity and a 10-year call option. The proceeds from bond offering will be used to fund specific California-American Water Company projects.

(d)

On September 16, 2010, AWCC closed an offering of $25 million in tax-exempt water facility revenue bonds issued through the Indiana Finance Authority. The bonds have a coupon rate of 4.85% with a 30-year maturity and a 10-year call option. The proceeds from the bonds will be used to fund a water facility project in Indiana-American Water Company’s service territory.

(e)	Represents $10.6 million of variable rate debt that was held in the Company’s treasury at June 30, 2010 because no investors were willing to purchase the bonds. On July 27, 2010, this variable rate debt was remarketed as fixed rate bonds with a coupon rate of 5.25% and a maturity date of 2028.

(f)

On July 9, 2010, our operating subsidiary, New Jersey American-Water Company, Inc. (NJAWC), closed on a refunding of four outstanding bonds issuances. To accomplish this refunding, the New Jersey Economic Development Authority issued three new services of bonds on behalf of NJAWC. The new bonds have coupon rates of 5.60%, 5.10% and 4.45% and maturities of 2034, 2023 and 2023, respectively.

(g)	Proceeds received from various financing/development authorities. The proceeds will be used to fund certain projects

The following long-term debt was retired through optional redemption, sinking fund provisions or payment at maturity during the first nine months of 2010:


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

Total retirements & redemptions							$	196,589

As previously noted, on July 9, 2010, our New Jersey regulated subsidiary closed on a refunding of four outstanding bond issues totaling $150 million. The new bonds have coupon rates of 5.60%, 5.10% and 4.45% and mature in 2034, 2023 and 2023, respectively. Estimated annual interest expense savings of $1.2 million are expected as a result of this refunding and has been taken into consideration during the on-going negotiations in connection with the current outstanding rate case.

In July 2010, we entered into an interest rate swap agreement with a notional amount of $100.0 million. This interest rate swap agreement effectively converted the interest on $100.0 million of outstanding 6.085% fixed rate debt maturing 2017 to a variable rate of six-month LIBOR plus 3.422%. This interest rate swap agreement was designated as a fair value hedge in accordance with authoritative accounting guidance. Subject to market conditions at the time, we would consider entering into additional agreements of this nature in the foreseeable future. For the three and nine months ended September 30, 2010, the net impact of the interest rate swap, including the hedge ineffectiveness portion, reduced interest expense by $0.2 million.

As previously noted, on November 1, 2010, our New Jersey regulated subsidiary closed on refinancing of two outstanding bond issues totaling $75.0 million. The new bonds have interest rates of 4.88% and 4.70% and mature in 2029 and 2025. Estimated annual interest expense savings of $0.7 million have been taken into consideration during the on-going negotiations in connection with the current outstanding rate case.

From time to time and as market conditions warrant, we may engage in long-term debt retirements via tender offers, open market repurchases or other viable alternatives to strengthen our balance sheets.

Credit Facilities and Short-Term Debt

The components of short-term debt were as follows:


	September 30, 2010
	(In thousands)
Commercial paper, net	$	163,993
Bank overdraft		17,848

Total short-term debt	$	181,841

At September 30, 2010, AWCC had the following sub-limits and available capacity under the revolving credit facility and indicated amounts of outstanding commercial paper.


	Credit Facility Commitment		Available Credit Facility Capacity		Letter of Credit Sublimit		Available Letter of Credit Capacity		Outstanding Commercial Paper (Net of Discount)		Credit Line Borrowings
	(In thousands)		(In thousands)		(In thousands)		(In thousands)		(In thousands)		(In thousands)
September 30, 2010	$	850,000	$	814,038	$	150,000	$	114,038	$	163,993		—

Interest rates on advances under the revolving credit facility are based on either prime or LIBOR plus an applicable margin based upon our credit ratings, as well as total outstanding amounts under the agreement at the time of the borrowing. The current spread over LIBOR is 22.5 basis points and the maximum spread over LIBOR is 55 basis points.

The weighted average interest rate on short-term borrowings for the nine months ended September 30, 2010 was approximately 0.42% compared to 0.85% for the nine months ended September 30, 2009.

AWCC has entered into a $10.0 million committed revolving line of credit with PNC Bank, N.A which expires on December 31, 2010, unless extended. Currently, we expect to renew this line of credit at similar interest rates prior to the termination date. This line is used primarily for short-term working capital needs. Interest rates on advances under this line of credit are based on one month LIBOR plus 175 basis points. In addition, there is a fee of 25 basis points charged quarterly on the portion of the commitment that is undrawn. As of October 29, 2010, we had no outstanding borrowings under this revolving line of credit. If this line of credit were not extended beyond its current maturity date of December 31, 2010, AWCC would continue to have access to its $840.0 million unsecured revolving credit facility described below.

AWCC, our finance subsidiary, entered into an $840.0 million senior unsecured credit facility syndicated among a group of 11 banks with JPMorgan Chase Bank, N.A. acting as administrative agent.


Bank	Commitment Amount Through September 15, 2012		Commitment Amount Through September 15, 2013
Bank	(In thousands)
JPMorgan Chase Bank, N.A.	$	115,000	$	—
Citibank, N.A.		115,000		115,000
Citizens Bank of Pennsylvania		80,000		80,000
Credit Suisse		80,000		80,000
William Street Commitment Corporation		80,000		80,000
Bank of America, N.A.		80,000		80,000
Morgan Stanley Bank		80,000		80,000
UBS Loan Finance LLC		80,000		80,000
National City Bank		50,000		50,000
PNC Bank, National Association		40,000		40,000
The Bank of New York Mellon		40,000		—

	$	840,000	$	685,000

If any lender defaults in its obligation to fund advances, the Company may request the other lenders to assume the defaulting lender’s commitment or replace such defaulting lender by designating an assignee willing to assume the commitment, however the remaining lenders have no obligation to assume a defaulting lender’s commitment and we can provide no assurances that we will replace a defaulting lender. As of October 29, 2010, AWCC had no outstanding borrowings under its lines of credit, $36.0 million of outstanding letters of credit under this credit facility and $135.6 million of commercial paper outstanding.

Capital Structure

Our capital structure was as follows:


	At September 30, 2010			At December 31, 2009
Common stockholders’ equity and preferred stock without mandatory redemption rights		42	%		42	%
Long-term debt and redeemable preferred stock at redemption value		56	%		56	%
Short-term debt and current portion of long-term debt		2	%		2	%

		100	%		100	%

Debt Covenants

Our debt agreements contain financial and non-financial covenants. To the extent that we are not in compliance, we or our subsidiaries may be restricted in our ability to pay dividends, issue debt or access our revolving credit lines. We were in compliance with our covenants as of September 30, 2010. However our California and Ohio subsidiaries did not meet the interest coverage test of at least 1.5x for the twelve months ended September 30, 2010 under the mortgage indenture and therefore they would be unable to issue new secured debt. Our failure to comply with restrictive covenants under our credit facilities could trigger repayment obligations. Long-term debt indentures contain a number of covenants that, among other things, limit, subject to certain exceptions, the Company from issuing debt secured by the Company’s assets.

The revolving credit facility requires us to maintain a ratio of consolidated debt to consolidated capitalization of not more than 0.70 to 1.00. As of September 30, 2010, our ratio was 0.58 and therefore we were in compliance with the ratio.

Security Ratings

Our access to the capital markets, including the commercial paper market, and respective financing costs in those markets depend on the securities ratings of the entity that is accessing the capital markets. We primarily access the capital markets, including the commercial paper market, through AWCC. However, we do issue debt at our regulated subsidiaries, primarily in the form of tax exempt securities, to lower our overall cost of debt. The following table shows the Company’s securities ratings as of September 30, 2010:


Securities	Moody’s Investors Service		Standard & Poor’s Ratings Service
Senior unsecured debt		Baa2		BBB+
Commercial paper		P2		A2

Moody’s rating outlook for both American Water and AWCC is stable.

On July 28, 2010, Standard & Poor’s reaffirmed its ratings.

A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency and each rating should be evaluated independently of any other rating. Security ratings are highly dependent upon our ability to generate cash flows in an amount sufficient to service our debt and meet our investment plans. We can provide no assurances that our ability to generate cash flow is sufficient to maintain our existing ratings. None of our borrowings are subject to default or prepayment as a result of the downgrading of these security ratings, although such a downgrading could increase fees and interest charges under our credit facilities.

As part of the normal course of business, we routinely enter into contracts for the purchase and sale of water, energy, fuels and other services. These contracts either contain express provisions or otherwise permit us and our counterparties to demand adequate assurance of future performance when there are reasonable grounds for doing so. In accordance with the contracts and applicable contract law, if we are downgraded by a credit rating agency, especially if such downgrade is to a level below investment grade, it is possible that a counterparty would attempt to rely on such a downgrade as a basis for making a demand for adequate assurance of future performance. Depending on the Company’s net position with a counterparty, the demand could be for the posting of collateral. In the absence of expressly agreed provisions that specify the collateral that must be provided, the obligation to supply the collateral requested will be a function of the facts and circumstances of the Company’s situation at the time of the demand. If we can reasonably claim that we are willing and financially able to perform our obligations, it may be possible to argue successfully that no collateral should be posted or that only an amount equal to two or three months of future payments should be sufficient. We do not expect to post any collateral which will have a material adverse impact on the Company’s results of operation, financial position or cash flows.

Dividends

Our board of directors has adopted a dividend policy to distribute to our stockholders a portion of our net cash provided by operating activities as regular quarterly dividends, rather than retaining that cash for other purposes. Generally, our policy is to distribute 50% to 70% of our net income annually. We expect that dividends will be paid every March, June, September and December of each fiscal year to holders of record approximately 15 days prior to the distribution date. Since the dividends on our common stock will not be cumulative, only declared dividends will be paid.

On March 1, 2010, the Company made a cash dividend payment of $0.21 per share to all common shareholders of record as of February 18, 2010, amounting to $36.7 million. On June 1, 2010, the Company made a cash dividend payment of $0.21 per share to all common shareholders of record as of May 18, 2010, amounting to $36.7 million. On September 1, 2010, the Company made a cash dividend payment of $0.22 per share to all common shareholders of record as of August 18, 2010, amounting to $38.5 million.

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

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

On March 23, 2010, we announced a dividend reinvestment and direct stock purchase plan which enables stockholders to reinvest cash dividends and purchase additional Company common shares without any brokerage commissions or service charges.

Current Credit Market Position

The Company believes it has sufficient liquidity should there be a disruption of the capital and credit markets. The Company funds liquidity needs for capital investment, working capital and other financial commitments through cash flows from operations, public and private debt offerings, commercial paper markets and credit facilities with $850.0 million in aggregate total commitments from a diversified group of banks. As of October 29, 2010, we had $814.0 million available to fulfill our short-term liquidity needs, to issue letters of credit and back our outstanding commercial paper. As of October 29, 2010, the Company can issue additional commercial paper of $564.4 million which is backed by the credit facilities. The Company closely monitors the financial condition of the financial institutions associated with its credit facilities.

The Company expects to have access to liquidity in the capital markets on favorable terms before the maturity dates of its current credit facilities and the Company does not expect a significant number of its lenders to default on their commitments thereunder. In addition, the Company can delay major capital investments or pursue financing from other sources to preserve liquidity, if necessary. The Company believes it can rely upon cash flows from operations to meet its obligations and fund its minimum required capital investments for an extended period of time.

Market Risk

We are exposed to market risk associated with changes in commodity prices, equity prices and interest rates. We are exposed to risks from changes in interest rates as a result of our issuance of variable and fixed rate debt and commercial paper. We manage our interest rate exposure by limiting our variable rate exposure and by monitoring the effects of market changes in interest rates. We

also have the ability to enter into financial derivative instruments, which could include instruments such as, but not limited to, interest rate swaps, swaptions, and U.S. Treasury lock agreements to manage and mitigate interest rate risk exposure. As of September 30, 2010, a hypothetical increase of interest rates by 1% associated with variable-rate debt and commercial paper would result in a $0.4 million decrease in our pre-tax earnings for the year ended December 31, 2010.

As previously noted above, in July 2010, we entered into an interest rate swap agreement with a notional amount of $100.0 million. This agreement effectively converted the interest on $100.0 million of outstanding 6.085% fixed rate debt maturing 2017 to a variable rate of six-month LIBOR plus 3.422%. We entered into this interest rate swap to mitigate interest cost at the parent company relating to debt that was incurred by our prior owners and was not used in any manner to finance the cash needs of our subsidiaries. As the swap interest rates are fixed through April 2011, a hypothetical 1% increase in the interest rates associated with the interest swap agreement would result in no impact on our pre-tax earnings for the year December 31, 2010. This calculation holds all other variables constant and assumes only the discussed changes in interest rates.

Our risks associated with price increases for chemicals, electricity and other commodities are reduced through contractual arrangements and the ability to recover price increases through rates. Non-performance by these commodity suppliers could have a material adverse impact on our results of operations, cash flows and financial position.

The market price of our common stock may experience fluctuations, many of which are unrelated to our operating performance. In particular, our stock price may be affected by general market movements as well as developments specifically related to the water and wastewater industry. These could include, among other things, interest rate movements, quarterly variations or changes in financial estimates by securities analysts and governmental or regulatory actions. This volatility may make it difficult for us to access the capital markets in the future through additional offerings of our common stock, regardless of our financial performance, and such difficulty may preclude us from being able to take advantage of certain business opportunities or meet business obligations.

We are exposed to credit risk through our water, wastewater and other water-related activities for both our Regulated and Non-Regulated Businesses. Our Regulated Businesses serve residential, commercial, industrial and municipal customers while our Non-Regulated Businesses engage in business activities with developers, government entities and other customers. Our primary credit risk is exposure to customer default on contractual obligations and the associated loss that may be incurred due to the nonpayment of customer accounts receivable balances. Our credit risk is managed through established credit and collection policies which are in compliance with applicable regulatory requirements and involve monitoring of customer exposure and the use of credit risk mitigation measures, such as letters of credit or prepayment arrangements. Our credit portfolio is diversified with no significant customer or industry concentrations. In addition, our Regulated Businesses are generally able to recover all prudently incurred costs including uncollectible customer accounts receivable expenses and collection costs through rates.

The Company’s retirement trust assets are exposed to the market prices of fixed income and equity securities. Changes to the retirement trust asset value can impact the Company’s pension and other benefits expense, funded status and future minimum funding requirements. Our risk is reduced through our ability to recover pension and other benefit costs through rates. In addition, pension and other benefits liabilities decrease as fixed income asset values decrease (fixed income yields rise) since the rate at which we discount pension and other retirement trust asset future obligations is highly correlated to fixed income yields.

We are also exposed to a potential national economic recession or further deterioration in local economic conditions in the markets in which we operate. The credit quality of our customer accounts receivable is dependent on the economy and the ability of our customers to manage through unfavorable economic cycles and other market changes. In addition, as a result of the downturn in the economy and heightened sensitivity of the impact of additional rate increases on certain customers, there can be no assurances that regulators will grant sufficient rate authorizations. Therefore our ability to fully recover operating expenses, recover our investment and provide an appropriate return on invested capital made in our Regulated Businesses may be adversely impacted.

Application of Critical Accounting Policies and Estimates

Our financial condition, results of operations and cash flows are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates,” in our Form 10-K for the year ended December 31, 2009 filed with the SEC for a discussion of the critical accounting policies.

Recent Accounting Pronouncements

See Part I, Item 1—Financial Statements (Unaudited)—Note 2—New Accounting Pronouncements in this Quarterly Report on Form 10-Q for a discussion of new accounting standards recently adopted or pending adoption.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to market risks in the normal course of business, including changes in interest rates and equity prices. For further discussion of market risks see “Market Risk” in Part I, Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

American Water Works Company, Inc. maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Our management, including the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) of the Exchange Act) as of September 30, 2010 pursuant to 15d-15(e) under the Exchange Act.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2010, our disclosure controls and procedures were effective at a reasonable level of assurance. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the nine months ended September 30, 2010, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

Previously reported under Part I, Item 3 “Legal Proceedings” in the Company’s Form 10-K for the year ended December 31, 2009.

In addition, in October, 2010 a proceeding was commenced against American Water Canada Corporation, our Canadian subsidiary, and its client alleging the violation of the Ontario Safe Drinking Water Act, in connection with the temporary failure of an alum pump used for disinfection of the Elgin Area drinking water system. The Company believes it has valid defenses to these allegations and intends to vigorously defend them. While it is possible the consequence of the proceeding could result in penalties, the Company does not anticipate they will be material.

ITEM 1A.

RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in the “Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2009, and our other public filings, which could materially affect our business, financial condition or future results. There have been no material changes from risk factors previously disclosed in “Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2009 and our quarterly report for the period ended June 30, 2010 filed on August 4, 2010.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.

[RESERVED]

ITEM 5.

OTHER INFORMATION

None

ITEM 6.

EXHIBITS


Exhibit Number		Exhibit Description

*10.1		American Water Works Company, Inc. Executive Severance Policy, dated as of December 16, 2008

*10.2		American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan September 2010 Form of Stock Unit Grant Agreement for Non-Employee Directors

*31.1		Certification of Jeffry Sterba, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act

*31.2		Certification of Ellen C. Wolf, Senior Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act

*32.1		Certification of Jeffry Sterba, President and Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act

*32.2		Certification of Ellen C. Wolf, Senior Vice President and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act

101		The following financial statements from American Water Works Company, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010, filed with the Securities and Exchange Commission on November 3, 2010, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations and Comprehensive Income: (iii) the Consolidated Statements of Cash Flows; (iv) the Consolidated Statement of Changes in Stockholders’ Equity; and (vi) the Notes to Consolidated Financial Statements.

*	filed herewith.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


		American Water Works Company, Inc.
		(Registrant)

November 3, 2010		/s/ Jeffry Sterba
(Date)		Jeffry Sterba
		President and Chief Executive Officer
		(Principal Executive Officer)

November 3, 2010		/s/ Ellen C. Wolf
(Date)		Ellen C. Wolf
		Senior Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

EXHIBIT INDEX


Exhibit Number		Exhibit Description

*10.1		American Water Works Company, Inc. Executive Severance Policy, dated as of December 16, 2008

*10.2		American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan September 2010 Form of Stock Unit Grant Agreement for Non-Employee Directors

*31.1		Certification of Jeffry Sterba, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act

*31.2		Certification of Ellen C. Wolf, Senior Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act

*32.1		Certification of Jeffry Sterba, President and Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act

*32.2		Certification of Ellen C. Wolf, Senior Vice President and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act

101		The following financial statements from American Water Works Company, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2010, filed with the Securities and Exchange Commission on November 3, 2010, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations: (iii) the Consolidated Statements of Cash Flows; (iv) the Consolidated Statement of Changes in Stockholders’ Equity; (v) the Consolidated Statements of Comprehensive Income and (vi) the Notes to Consolidated Financial Statements.

*	filed herewith.

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Exhibit 10.1


Title:		Executive Severance Policy
Functional Area:		Human Resources
Policy Number:		N/A

SCOPE

This policy applies only to executive employees (limited to Management Level 1, 2 and 3) of American Water Works Company, Inc. and its regulated subsidiaries, including, for purposes of this policy, American Water Works Service Company, Inc. (together “American Water” or the “Company”) who receive a written notification of eligibility from the Senior Vice President of Human Resources and who are not otherwise covered by an agreement that provides for severance benefits in the event of a covered termination. For purposes of this policy, employees who have received such notice and are not covered by an agreement that provides for severance benefits, will be referred to as “Eligible Executive.”

POLICY STATEMENT

Business Objective :

The purpose of this Executive Severance Policy (this “Policy”) is to set forth the severance benefits that will be provided to eligible executive employees of American Water Works Company, Inc. and any of its subsidiaries (collectively referred to as the “Company”). The Company specifically reserves its right to amend, modify or terminate this Policy at any time (with or without notice) and at its sole discretion.

Statement :

An Eligible Executive shall be entitled to the severance benefits provided for under this Policy in the event the Eligible Executive’s employment with the Company is involuntarily terminated by the Company and said termination is not for “Cause”. For purposes of this Policy, the determination of whether an Eligible Executive’s employment was terminated for “Cause” shall be determined at the sole discretion of the Board and the decision of the Board shall be final and binding. An Eligible Executive shall not be entitled to any benefits under this Policy in the event his or her employment with the Company is terminated for any reason other than an involuntary termination by the Company not for Cause, such as, but not limited to, terminations for Cause, terminations resulting from death, disability, voluntary resignations or constructive terminations.

Before an Eligible Executive receives any severance benefits provided for under this Policy, the Eligible Executive will be required to execute a Severance Agreement and General Release (“Release”) waiving any claims against the Company and agreeing to restrictive covenants dealing with confidentiality, non-solicitation and non-competition. The Company shall have no obligation to an Eligible Executive under this Policy unless and until the Eligible Executive timely executes a Release and any applicable revocation period has expired without the Eligible Executive revoking such Release.

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For purposes of this Policy, an Eligible Executive whose employment is involuntarily terminated by the Company not for Cause and who executes (and does not revoke) the required Release will be referred to as a “Participant.”

This Policy supersedes and hereby voids any prior severance policy covering Eligible Executives. The Board of Directors of American Water Works Company, Inc. (the “Board”) shall have complete authority, in its sole discretion (subject to the express provisions of this Policy) to interpret this Policy and to make any determinations necessary or advisable for the administration of this Policy.

Severance Pay

Each Participant shall receive severance pay, which shall be paid to such Participant in the form of base salary continuation for the duration of the Severance Period based on the Participant’s annual base salary in effect as of the Termination Date. For purposes of this Policy, the “Termination Date” shall refer to the effective date of a Participant’s termination of employment with the Company, which shall be the last day the Participant is employed by the Company.

Payments made under this policy shall be made in regular payroll installments, net of applicable taxes and other deductions, for the duration of the Severance Period, as defined below, commencing within 60 days following the Participant’s Termination Date, unless delay is required as described below.

The Severance Period

The “Severance Period” for Eligible Executives under this Policy is as follows:


Management Level (Grade)		Severance Period
Management Level - 1		18 months
Management Level - 2 and 3		12 months

Annual Incentive Plan (AIP)

Each Participant shall receive a pro rata AIP award for the year in which the Termination Date occurs to the extent such payment is provided for under the terms of the applicable AIP. AIP eligibility terminates on the Termination Date, and therefore, no AIP award shall be earned or accrued during the Severance Period.

Equity Grants

The terms and conditions set forth in a Participant’s equity awards for shares of the common stock of the Company shall govern with respect to the consequence the Participant’s termination of employment shall have on such awards after the Participant’s Termination Date.

Health, Dental and Vision Coverage

Provided the Release is executed and not revoked, a Participant will receive Company-paid COBRA benefits consistent with the chart below.

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Salary Level

Minimum

Company-paid

COBRA Benefits

At least 5 yrs of

service, but less

than 10 yrs

10 or more years of

service

ML1 –L3

8 weeks

12 weeks

16 weeks

At the end of the period of Company-paid COBRA benefits, COBRA coverage may be continued by the Participant at his or her own expense, for the remaining balance of the statutory coverage period.

If a Participant is otherwise eligible to retire at the time of termination, he or she may, if eligible for retiree healthcare, begin retiree healthcare at the appropriate contribution levels after the Company-paid COBRA period expires.

Nonqualified Deferred Compensation Plans/Qualified Retirement Plans

A Participant shall be deemed to have accrued service as of his or her Termination Date equivalent to his or her Severance Period under any applicable nonqualified defined benefit retirement plans in which he or she participated as of the Termination Date solely for purposes of determining whether the Participant is vested (e.g., 5 years of service), but not for any other purpose. A Participant will not accrue additional service for any purpose under any of the Company’s qualified defined benefit pension plans at any time after the Termination Date or receive any Company contributions under such plans after the Termination Date. The timing of payment of the Participant’s benefit under all nonqualified deferred compensation plans and qualified plans in which he or she participated prior to the Termination Date shall be governed by the terms of such plan.

Life Insurance

During the Severance Period, a Participant shall continue to participate in any employee life insurance plan sponsored by Company under which he or she was covered as of the Termination Date, subject to the same terms and conditions as are applicable to then-current active employees of the Company during the Severance Period.

Employee Assistance Plan

During the Severance Period, a Participant shall continue to be eligible to participate in the Employee Assistance Plan provided by Company, subject to the same terms and conditions as are applicable to then-current active employees of the Company during the Severance Period.

Perquisites

All executive perquisites shall terminate effective as of the Participant’s Termination Date.

Outplacement Services

Each Participant shall be entitled to outplacement services through a designated provider arranged by the Company for a period of twelve (12) months following the Termination Date. All outplacement services provided by the Company shall be subject to terms and conditions as

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shall be determined at the sole discretion of the Company. No cash shall be paid in lieu of outplacement services.

409A

Notwithstanding anything to the contrary in this Policy, if any payments and benefits provided to a Participant under this Policy are deemed to constitute deferred compensation subject to the requirements of Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), then if on the Participant’s Termination Date the Participant is deemed to be a “specified employee” for purposes of Section 409A(a)(2)(B)(i) of the Code, any payments and benefits due to the Participant under this Policy that are subject to such requirements that would otherwise have been payable at any time during the six-month period immediately following the Participant’s Termination Date shall not be paid to the Participant during such 6 month period, but instead shall be paid to the Participant in a lump sum within 30 days following the expiration of such six-month period.

This Policy is intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”). To this end, the Company’s 409A Compliance Practice is incorporated herein, and to the extent any payments under this Policy are subject to Section 409A of the Code, the terms of the 409A Compliance Practice will supersede this Policy.

MONITORING

The Senior Vice President of Human Resources and the Director of Compensation and Benefits are responsible for assuring compliance with this policy.

REPORTING/METRICS

The Senior Vice President of Human Resources and the Director of Compensation shall advise the Board timely of any actions taken under this policy.

CONSEQUENCE OF NON-COMPLIANCE

Any employee who violates or circumvents this policy may be subject to disciplinary action up to and including termination .

WAIVER

Any deviation or waiver from or exception to this policy requires the prior written approval of the Chair of the Board Compensation Committee.

REFERENCES

Section 409 A Compliance Practice (pending).

DEFINITIONS

None.

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REVIEW/UPDATE

Review of this policy will not exceed three years – 12/16/2011.

Approved by:

Board of Directors of American Water Works Co., Inc.


Original Adopted:		06/14/2006
Revised Adopted:		12/16/2008
Date of Last Review:		12/16/2008
Effective Date:		12/16/2008
Prepared By:		Human Resources

Disclaimer

American Water reserves the right to change, revise or discontinue this Policy for any reason or no reason whatsoever. No employee, manager or other agent of American Water, other than the Service Company Board (and, if applicable, the executive having authority to approve this Policy) has the authority to enter into any agreement contrary to this Policy.

This policy is not intended to create any contractual rights or duties and will be applied at the Company’s sole discretion.

Employment with the Company is “at-will”. That means that either you or the Company can terminate employment at any time, for any reason or no reason at all, with or without cause or notice.

Neither this policy nor any oral statement will create a right of continued employment. Any employment contract must be in writing and must be signed by the President of American Water, or his or her designee.

This Policy supersedes and voids all previous policies and practices, which may be inconsistent in any way with that stated herein.

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Exhibit 10.2

FORM FOR NON-EMPLOYEE DIRECTORS

SEPTEMBER 2010 GRANT

AMERICAN WATER WORKS COMPANY, INC.

2007 OMNIBUS EQUITY COMPENSATION PLAN

STOCK UNIT GRANT

This STOCK UNIT GRANT, dated as of (the “ Date of Grant ”), is delivered by American Water Works Company, Inc. (the “ Company ”) to (the “ Participant ”).

RECITALS

WHEREAS, the Committee (as defined in the American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan) has determined to grant each non-employee member of the Board of Directors of the Company (the “ Board ”) who is a non-employee director of the Company a stock unit grant that will be converted to shares of common stock of the Company, par value $0.01 per share, (the “ Company Stock ”) at a later date;

WHEREAS, the Participant is a non-employee director on the Board; and

WHEREAS, the Committee has determined that the stock unit grant granted to the Participant shall be issued under the American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan (the “ Plan ”) and the terms and conditions of such stock unit shall be memorialized in this grant (the “ Grant ”).

NOW, THEREFORE, the parties to this Grant, intending to be legally bound hereby, agree as follows:

1. Grant of Stock Units . Subject to the terms and conditions set forth in this Grant and the Plan, the Company hereby grants to the Participant units (the “ Stock Units ”). Each Stock Unit shall be a phantom right and shall be equivalent to one share of Company Stock on the applicable distribution date, as described in Paragraph 4 below.

2. Stock Unit Account . The Company shall establish and maintain a Stock Unit account as a bookkeeping account on its records (the “ Stock Unit Account ”) for the Participant and shall record in such Stock Unit Account the number of Stock Units granted to the Participant. The Participant shall not have any interest in any fund or specific assets of the Company by reason of this grant or the Stock Unit Account established for the Participant.

3. Vesting . The Participant shall be fully vested in the Stock Units credited to the Participant’s Stock Unit Account pursuant to this Grant on the Date of Grant.

4. Distribution . Unless an election is made pursuant to Paragraph 5 below, the Stock Units shall be converted to shares of Company Stock and distributed by the Company within thirty (30) days following the earlier of (i) October 15, 2011 (the “ Specified Date ”) (or, if applicable, the Deferred Date, as defined in Paragraph 5 below), (ii) the Participant’s separation from service (within the meaning of section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ”)) with the Company (the “ Separation from Service Date ”), or (iii) the date of a Change of Control (as defined below) (the “ Change of Control Date ”). At the time of distribution, all Stock Units shall be converted to an equivalent number of shares of Company Stock, and the Participant shall receive a single sum distribution of such shares of Company Stock, which shall be issued under the Plan. For purposes of this Grant, the term “Change of Control” shall mean as such term is defined in the Plan, except that a Change of Control shall not be deemed to have occurred for purposes of this Grant unless the event constituting the Change of Control constitutes a change in ownership or effective control of the Company, or in the ownership of a substantial portion of the assets of the Company, within the meaning of section 409A of the Code and its corresponding regulations

5. Deferrals . The Participant may make an irrevocable election to defer the Specified Date (or further defer the Deferred Date (as defined below), if applicable) of all of the Stock Units, plus dividend equivalents earned on such Stock Units as described in Paragraph 6 below, to a later date, provided that (i) the election shall not take effect until at least twelve (12) months after the date on which the election is made, (ii) the deferred Specified Date cannot be earlier than five (5) years from the original Specified Date under Paragraph 4 (or five (5) years from the applicable Deferred Date, if a subsequent deferral of a Deferred Date is being made), and (iii) the election must be made no less than twelve (12) months prior to the date of the Specified Date (or twelve (12) months prior to the previously applicable Deferred Date, if a subsequent deferral of a Deferred Date is being made). To defer the Specified Date, the Participant must elect to defer 100% of the Stock Units, including corresponding dividend equivalents, granted to the Participant under this Grant and complete the deferral election form provided to the Participant by the Committee, in the form attached hereto as Exhibit A or as may subsequently modified in the discretion of the Committee. If the Participant desires to make a further deferral, the Participant must make such election on a separate form provided by the Committee for such purpose. Any such election shall be made in accordance with section 409A of the Code and any corresponding guidance and regulations issued under section 409A of the Code. Notwithstanding a Participant’s election pursuant to this Paragraph, if the Separation from Service Date or Change of Control Date occurs prior to the Deferred Date, the distribution of the Participant’s Stock Units, plus corresponding dividend equivalents, will be the occurrence of the Separation from Service Date or Change of Control Date, whichever is earlier. If a Specified Date is delayed one or more times pursuant to this Paragraph 6, the new Specified Date shall be referred to as the “Deferred Date.”

6. Dividend Equivalents . Until the earlier of the Specified Date (or the Deferred Date, if elected), Separation from Service Date or Change of Control Date, if any dividends are declared with respect to the shares of Company Stock, the Company shall credit to a dividend equivalent account (the “ Dividend Equivalent Account ”) the value of the dividends that would have been

distributed if the Stock Units credited to the Participant’s Stock Unit Account at the time of the declaration of the dividend were shares of Company Stock. At the same time that the Stock Units are converted to shares of Company Stock and distributed to the Participant, the Company shall pay to the Participant a lump sum cash payment equal to the value of the dividends credited to the Participant’s Dividend Equivalent Account. No interest shall accrue on any dividend equivalents credited to the Participant’s Dividend Equivalent Account.

7. Change of Control . Except as set forth above, the provisions set forth in the Plan applicable to a Change of Control (as defined in the Plan) shall apply to the Stock Units, and, in the event of a Change of Control, the Committee may take such actions as it deems appropriate pursuant to the Plan and is consistent with the requirements of section 409A of the Code.

8. Acknowledgment by Participant . By accepting this Grant, the Participant acknowledges that with respect to any right to distribution pursuant to this Grant, the Participant is and shall be an unsecured general creditor of the Company without any preference as against other unsecured general creditors of the Company, and the Participant hereby covenants for himself or herself, and anyone at any time claiming through or under the Participant not to claim any such preference, and hereby disclaims and waives any such preference which may at any time be at issue, to the fullest extent permitted by applicable law. The Participant also hereby agrees to be bound by the terms and conditions of the Plan and this Grant. The Participant further agrees to be bound by the determinations and decisions of the Committee with respect to this Grant and the Plan and the Participant’s rights to benefits under this Grant and the Plan, and agrees that all such determinations and decisions of the Committee shall be binding on the Participant, his or her beneficiaries and any other person having or claiming an interest under this Grant and the Plan on behalf of the Participant.

9. Restrictions on Issuance or Transfer of Shares of Company Stock .

(a) The obligation of the Company to deliver shares of Company Stock upon the distribution of the Stock Units shall be subject to the condition that if at any time the Committee shall determine in its discretion that the listing, registration or qualification of the shares of Company Stock upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the issuance of shares of Company Stock, the shares of Company Stock may not be issued in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. The issuance of shares of Company Stock and the payment of cash to the Participant pursuant to this Grant is subject to any applicable taxes and other laws or regulations of the United States or of any state having jurisdiction thereof.

(b) As a condition to receive any shares of Company Stock upon conversion of the Stock Units, the Participant agrees:

(i) to be bound by the Company’s policies regarding the limitations on the transfer of such shares, and understands that there may be certain times during the year that the Participant will be prohibited from selling, transferring, pledging, donating, assigning, mortgaging, hypothecating or otherwise encumbering the shares; and

(ii) that the shares of Company Stock obtained by the Participant upon the distribution of the Stock Units shall not be tradeable until the Participant owns enough shares, measured using the average price per share of all shares of Company Stock the Participant owns outright, stock or stock units held in deferred compensation plans, including tax-qualified retirement plans, and time-based restricted stock, to meet or exceed 300% of the Participant’s annual retainer.

10. Grant Subject to Plan Provisions . This Grant is made pursuant to the Plan, the terms of which are incorporated herein by reference, and in all respects shall be interpreted in accordance with the Plan. In the event of any contradiction, distinction or difference between this Grant and the terms of the Plan, the terms of the Plan will control. Except as otherwise defined in this Grant, capitalized terms used in this Grant shall have the meanings set forth in the Plan. This Grant is subject to the interpretations, regulations and determinations concerning the Plan established from time to time by the Committee in accordance with the provisions of the Plan, including, but not limited to, provisions pertaining to (i) rights and obligations with respect to withholding taxes, (ii) the registration, qualification or listing of the shares of Company Stock, (iii) changes in capitalization of the Company, and (iv) other requirements of applicable law. The Committee shall have the authority to interpret and construe this Grant pursuant to the terms of the Plan, its decisions shall be conclusive as to any questions arising hereunder and the Participant’s acceptance of this Grant is the Participant’s agreement to be bound by the interpretations and decisions of the Committee with respect to this Grant and the Plan.

11. No Rights as Stockholder . The Participant shall not have any rights as a stockholder of the Company, including the right to any cash dividends (except as provided in Paragraph 6), or the right to vote, with respect to any Stock Units.

12. No Rights to Continued Employment or Service . This Grant shall not confer upon the Participant any right to be retained in the employment or service of the Employer (as defined in the Plan) and shall not interfere in any way with the right to terminate the Participant’s employment or service at any time. The right to terminate at will the Participant’s employment or service at any time for any reason is specifically reserved.

13. Assignment and Transfers . No Stock Units or dividend equivalents awarded to the Participant under this Grant may be transferred, assigned, pledged, or encumbered by the Participant and the Stock Units and dividend equivalents shall be distributed during the lifetime of the Participant only for the benefit of the Participant. Any attempt to transfer, assign, pledge, or encumber the Stock Units or dividend equivalents under this Grant by the Participant shall be null, void and without effect. The rights and protections of the Company hereunder shall extend to any successors or assigns of the Company. This Grant may be assigned by the Company without the Participant’s consent.

14. Withholding . To the extent required by applicable law, the Participant shall be required to pay to the Company, or make other arrangements satisfactory to the Company to provide for the payment of, any federal, state, local or other taxes that the Company is required to withhold with respect to the Grant, vesting or distribution of the Stock Units and dividend equivalents.

15. Effect on Other Benefits . The value of shares of Company Stock and dividend equivalents distributed with respect to the Stock Units shall not be considered eligible earnings for purposes of any other plans maintained by the Employer. Neither shall such value be considered part of the Participant’s compensation for purposes of determining or calculating other benefits that are based on compensation, such as life insurance.

16. Applicable Law . The validity, construction, interpretation and effect of this Grant shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the conflicts of laws provisions thereof.

17. Notice . Any notice to the Company provided for in this instrument shall be addressed to the Company in care of the General Counsel at the Company’s corporate headquarters, and any notice to the Participant shall be addressed to such Participant at the current address shown on the records of the Company, or to such other address as the Participant may designate to the Company in writing. Any notice shall be delivered by hand, sent by telecopy or enclosed in a properly sealed envelope addressed as stated above, registered and deposited, postage prepaid, in a post office regularly maintained by the United States Postal Service.

18. Section 409A of the Code .

(a) This Grant is intended to comply with the requirements of section 409A of the Code and shall be interpreted and administered to avoid any penalty sanctions under section 409A of the Code. If any distribution cannot be provided or made at the time specified herein or as elected by the Participant, then such distribution shall be provided in full at the earliest time thereafter when such sanctions cannot be imposed. Unless a valid election is made pursuant to Paragraph 5 above, in no event may the Participant designate the calendar year of distribution.

(b) Notwithstanding any provision to the contrary in this Grant, if any of the distributions under this Grant are payable to the Participant upon separation from service (within the meaning of section 409A of the Code) from the Employer, then if at the time of the Participant’s separation from service the Participant is a “specified employee” (as such term is defined in section 409A(2)(B)(i) of the Code and its corresponding regulations) as determined by the Company (or any successor thereto) in its sole discretion in accordance with its specified employee determination policy, then all distributions to the Participant pursuant to this Grant shall be postponed for a period of six (6) months following the Participant’s separation from service from the Employer. The postponed amounts shall be distributed to the Participant in a lump sum within thirty (30) days after the date that is six (6) months following the Participant’s separation from service from the Employer, and any amounts distributable to the Participant after the expiration of such six (6) month period under this Grant shall continue to be distributed to the Participant in accordance with the terms of this Grant. If the Participant dies during such six-month period and prior to the distribution of the postponed amounts hereunder, the amounts delayed on account of section 409A of the Code shall be distributed to the personal representative of the Participant’s estate within sixty (60) days after the date of the Participant’s death, and any amounts not delayed shall be distributed to the personal representative of the Participant’s estate in accordance with the terms of this Grant.

[ SIGNATURE PAGE FOLLOWS ]

IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Grant, effective as of the Date of Grant.

AMERICAN WATER WORKS COMPANY, INC.

By: Jeffry E. Sterba

Its: President and CEO

EXHIBIT A

SUBSEQUENT DEFERRAL ELECTION FORM

PART A. TIME OF DISTRIBUTION

I, , (the “ Participant ”) hereby irrevocably elect to have all of the Stock Units, plus corresponding dividend equivalents, (the “ Deferred Units ”) granted to me pursuant to the Stock Unit Grant, dated as of , 20 , (the “ Grant ”) under the American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan (the “ Plan ”) that would have been distributed by American Water Works Company, Inc. to me on the Specified Date (as defined in the Grant), instead be distributed to me on the deferred date designated below (the “ Deferred Date ”), which date must be at least five (5) years later than the Specified Date, and this election is at least twelve (12) months prior to the Specified Date (to make this deferral election you must defer all of the Stock Units, plus corresponding dividend equivalents, granted to you pursuant the Grant, meaning there is no partial deferral):

Number of Stock

Units, and Dividend

Equivalents, to be

Further Deferred

(All Must Be

Deferred)

Original Specified Date

(Election Must Be Made at

Least 12 Months Prior to the

Specified Date)

Deferred Date

(Must be a date that is at least

five years later than the

Original Specified Date)

100%

October 15, 2011

PART B. ACKNOWLEDGMENT

I understand and expressly agree that (i) the Deferred Date for the Deferred Units shall be the date I specified in Part A above (which is a date that is at least five (5) years later than the original Specified Date), and (ii) I will not be entitled to receive distribution of the Deferred Units on an earlier date, except in the event that the Separation from Service Date (as defined in the Grant) or the Change of Control Date (as defined in the Grant) occurs prior to the Deferred Date. I also understand and expressly agree that this deferral election is irrevocable, is being made at least twelve (12) months prior to the original Specified Date, and shall not take effect until twelve (12) months after the date on which I make this election. Lastly, I understand and agree that this deferral election applies to 100% of the Stock Units, and corresponding dividend equivalents, granted to me pursuant to the Grant.


PARTICIPANT SIGNATURE

Participant:		Date:

Receipt Acknowledged:

By:

Title:		Date:

A-1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

(Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended,

as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)

I, Jeffry Sterba, certify that:

1. I have reviewed this quarterly report on Form 10-Q of American Water Works Company, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13-a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financing reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 3, 2010


By:		/s/ Jeffry Sterba
		Jeffry Sterba
		President and Chief Executive Officer
		(Principal Executive Officer)

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER AND CHIEF ACCOUNTING OFFICER

(Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended,

as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)

I, Ellen C. Wolf, certify that:

1. I have reviewed this quarterly report on Form 10-Q of American Water Works Company, Inc.;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 3, 2010


By:		/s/ Ellen C. Wolf
		Ellen C. Wolf
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer)

Exhibit 32.1

AMERICAN WATER WORKS COMPANY, INC.

CERTIFICATION

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of American Water Works Company, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jeffry Sterba, President and Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


By:		/s/ Jeffry Sterba
		Jeffry Sterba
		President and Chief Executive Officer (Principal Executive Officer)

November 3, 2010

Exhibit 32.2

AMERICAN WATER WORKS COMPANY, INC.

CERTIFICATION

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of American Water Works Company, Inc. (the “Company”) on Form 10-Q for the period ended September 30, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ellen C. Wolf, Senior Vice President and Chief Financial Officer, of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By:

/s/ Ellen C. Wolf

Ellen C. Wolf

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)

November 3, 2010