The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements (Unaudited)
(Unless otherwise noted, in millions, except per share data)
Note 1: Basis of Presentation
The unaudited consolidated financial statements provided in this report include the accounts of American Water Works Company, Inc. and
all of
its subsidiaries (collectively, “American Water” or the “Company”)
in which a controlling interest is maintained
after the elimination of intercompany accounts and transactions. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not contain certain information and disclosures required by GAAP for comprehensive financial statements. In the opinion of management, all adjustments necessary for a fair statement of the financial position as of June 30, 2016 and results of operations and cash flows for all periods presented have been made. All adjustments are of a normal, recurring nature, except as otherwise disclosed.
The Consolidated Balance Sheet as of December 31, 2015 is derived from the Company's audited consolidated financial statements as of December 31, 2015. The unaudited financial statements and notes included in this report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (“Form 10-K”) which provides a more complete discussion of the Company’s accounting policies, financial position, operating results and other matters. 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
The following recently issued accounting standard has been adopted by the Company as of June 30, 2016:
Standard
|
|
Description
|
|
Date of Adoption
|
|
Application
|
|
Effect on the Consolidated
Financial Statements
(or Other Significant Matters)
|
Accounting for Fees Paid in a Cloud Computing Arrangement
|
|
Clarified accounting guidance for fees paid in a cloud computing arrangement. Software license elements in a cloud computing arrangement should be accounted for consistent with other software licenses. A cloud computing arrangement without a software license is accounted for as a service contract.
|
|
January 1, 2016
|
|
Prospective
|
|
Adoption of this standard did not impact the Company’s results of operations, financial position or cash flows.
|
9
The following recently issued accounting standards are not yet required to be adopted by the Company as of June 30, 2016:
Standard
|
|
Description
|
|
Date of Adoption
|
|
Application
|
|
Effect on the Consolidated
Financial Statements
(or Other Significant Matters)
|
Simplification of Employee Share-Based Payment Accounting
|
|
Simplified accounting and disclosure requirements for share-based payment awards. The updated guidance addresses: (i) the recognition of excess tax benefits and deficiencies; (ii) the classification of excess tax benefits and taxes paid on the Consolidated Statements of Cash Flows; (iii) election of an accounting policy for forfeitures; and (iv) the amount an employer can withhold to cover income taxes and still qualify for equity classification.
|
|
January 1, 2017; early adoption permitted
|
|
Alternative transition methods available
|
|
The Company is evaluating the effect on the financial statements, related disclosures and timing of adoption.
|
Revenue from Contracts with Customers
|
|
Provided new accounting guidance for revenue recognition replacing most existing guidance, including industry-specific guidance. Upon adoption, a company will recognize revenue for the transfer of goods or services to customers equal to the amount it expects to be entitled to receive for those goods or services. The guidance also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments.
|
|
January 1, 2018; early adoption permitted
|
|
Alternative transition methods available
|
|
The Company is evaluating the effect on the financial statements, related disclosures and method of adoption. The Company does not expect to early adopt.
|
Accounting for Leases
|
|
Updated the accounting and disclosure guidance for leasing arrangements. Under this guidance, a lessee will be required to recognize the following for all leases, excluding short-term leases, at the commencement date: (i) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Under the guidance, lessor accounting is largely unchanged.
|
|
January 1, 2019; early adoption permitted
|
|
Modified retrospective
|
|
The Company is evaluating the effect on the financial statements, related disclosures and the timing of adoption.
|
Measurement of Credit Losses
|
|
Updated the accounting guidance on reporting credit losses for financial assets held at amortized cost basis and available-for-sale debt securities. Under this guidance, expected credit losses are required to be measured based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount of financial assets. Also, this guidance requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a direct write-down.
|
|
January 1, 2020; early adoption permitted
|
|
Modified retrospective
|
|
The Company is evaluating the effect on the financial statements, related disclosures and the timing of adoption.
|
Note 3: Acquisitions
During the six months ended June 30, 2016, the Company incurred $24 in acquisition costs, including an aggregate purchase price of $23, net of cash received, for ten closed acquisitions of various regulated water and wastewater systems. Assets acquired, principally utility plant, totaled $30. Liabilities assumed totaled $17, including $8 of contributions in aid of construction and $6 of other long-term liabilities. The Company recorded additional goodwill of $11 associated with two of its acquisitions, which is reported in its Regulated Businesses segment and is expected to be fully deductible for tax purposes. The Company recognized a bargain purchase gain of $1 associated with two of its acquisitions, which was deferred as a regulatory liability.
10
Note 4: Stockholders’ Equity
Accumulated Other Comprehensive Loss
The following table presents changes in accumulated other comprehensive loss by component, net of tax, for the six months ended June 30, 2016 and 2015, respectively:
|
Defined Benefit Plans
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Employee
Benefit
Plan
Funded
Status
|
|
|
Amortization
of Prior
Service Cost
|
|
|
Amortization
of Actuarial
Loss
|
|
|
Foreign
Currency
Translation
|
|
|
Loss on
Cash Flow
Hedges
|
|
|
Other
Comprehensive
Loss
|
|
Beginning balance as of January 1, 2016
|
$
|
(126
|
)
|
|
$
|
1
|
|
|
$
|
36
|
|
|
$
|
2
|
|
|
$
|
(1
|
)
|
|
$
|
(88
|
)
|
Other comprehensive loss before
reclassifications
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(11
|
)
|
|
|
(11
|
)
|
Amounts reclassified from accumulated
other comprehensive loss
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
Net other comprehensive income (loss)
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
|
|
(11
|
)
|
|
|
(8
|
)
|
Ending balance as of June 30, 2016
|
$
|
(126
|
)
|
|
$
|
1
|
|
|
$
|
39
|
|
|
$
|
2
|
|
|
$
|
(12
|
)
|
|
$
|
(96
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance as of January 1, 2015
|
$
|
(116
|
)
|
|
$
|
1
|
|
|
$
|
31
|
|
|
$
|
3
|
|
|
$
|
(1
|
)
|
|
$
|
(82
|
)
|
Other comprehensive loss before
reclassifications
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
Amounts reclassified from accumulated
other comprehensive loss
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
Net other comprehensive income (loss)
|
|
—
|
|
|
|
—
|
|
|
|
3
|
|
|
|
(1
|
)
|
|
|
—
|
|
|
|
2
|
|
Ending balance as of June 30, 2015
|
$
|
(116
|
)
|
|
$
|
1
|
|
|
$
|
34
|
|
|
$
|
2
|
|
|
$
|
(1
|
)
|
|
$
|
(80
|
)
|
The Company does not reclassify the amortization of defined benefit pension cost components from accumulated other comprehensive loss directly to net income in its entirety. These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension cost. (See Note 7)
The amortization of the loss on cash flow hedges is reclassified to net income attributable to common stockholders during the period incurred and is included in interest, net in the accompanying Consolidated Statements of Operations. (See Note 6)
Anti-dilutive Stock Repurchase Program
In February 2015, the Company’s Board of Directors authorized an anti-dilutive stock repurchase program, which allowed the Company to purchase up to 10.0 shares of its outstanding common stock over an unrestricted period of time. During the six months ended June 30, 2016, the Company repurchased 1.0 shares of common stock in the open market at an aggregate cost of $65 under the program. As of June 30, 2016, there were 6.8 shares of common stock available for repurchase under the program.
11
Note 5: Stock Based Compensation
Stock Options
During the six months ended June 30, 2016, the Company granted non-qualified stock options to certain employees under the Company’s 2007 Omnibus Equity Compensation Plan (the “2007 Plan”). Stock options have a maximum term of seven years, are granted with exercise prices equal to the fair market value of the Company’s common stock on the date of grant, vest ratably over a three-year service period beginning January 1 of the year of the grant and generally are subject to the employee’s continued employment with the Company. Stock options granted are valued using the Black-Scholes option-pricing model.
The following table presents the weighted-average assumptions used in the Black-Scholes option-pricing model and the resulting weighted-average grant date fair value per share of stock options granted during the six months ended June 30, 2016:
Dividend yield
|
|
2.09
|
%
|
Expected volatility
|
|
15.89
|
%
|
Risk-free interest rate
|
|
1.15
|
%
|
Expected life (years)
|
|
4.0
|
|
Exercise price
|
$
|
65.15
|
|
Grant date fair value per share
|
$
|
6.59
|
|
The grant date fair value is amortized through expense over the requisite service period using the straight-line method. As of June 30, 2016, $3 of total unrecognized compensation cost related to the non-vested stock options is expected to be recognized over the weighted-average period of 1.9 years.
The table below summarizes stock option activity for the six months ended June 30, 2016:
|
Shares
(in thousands)
|
|
|
Weighted-
Average
Exercise
Price
(per
share)
|
|
|
Weighted-
Average
Remaining
Life
(years)
|
|
|
Aggregate
Intrinsic Value
|
|
Options outstanding as of January 1, 2016
|
|
1,187
|
|
|
$
|
39.70
|
|
|
|
3.9
|
|
|
$
|
24
|
|
Granted
|
|
339
|
|
|
|
65.15
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
(28
|
)
|
|
|
58.12
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
(374
|
)
|
|
|
33.17
|
|
|
|
|
|
|
|
|
|
Options outstanding as of June 30, 2016
|
|
1,124
|
|
|
$
|
49.10
|
|
|
|
4.5
|
|
|
$
|
40
|
|
Exercisable as of June 30, 2016
|
|
543
|
|
|
$
|
39.11
|
|
|
|
3.1
|
|
|
$
|
25
|
|
The following table summarizes additional information regarding stock options exercised for the six months ended June 30, 2016 and 2015:
|
2016
|
|
|
2015
|
|
Intrinsic value
|
$
|
13
|
|
|
$
|
6
|
|
Exercise proceeds
|
|
12
|
|
|
|
8
|
|
Income tax benefit
|
|
4
|
|
|
|
2
|
|
Restricted Stock Units (“RSUs”)
During the six months ended June 30, 2016, the Company granted RSUs, both with and without performance conditions, to certain employees and RSUs without performance conditions to non-employee directors under the 2007 Plan. The RSUs without performance conditions generally vest ratably over a three-year service period beginning January 1 of the year of grant and are valued at the market value of the Company’s common stock on the date of grant. The RSUs with performance conditions include those with internal performance measures, and separately, certain market thresholds and vest ratably over a three-year performance period beginning January 1 of the year of grant (the “Performance Period”). Distribution of the performance shares is contingent upon the achievement of internal performance measures and, separately, certain market thresholds over the Performance Period. The RSUs with internal performance measures are valued at the market value of the Company’s common stock on the date of grant. The RSUs granted with market conditions are valued using the Monte Carlo simulation model.
12
The following table presents the w
eighted-average assumptions used in the Monte Carlo simulation model for RSUs with market conditions granted during the six months ended June 30, 2016
:
Expected volatility
|
|
15.90
|
%
|
Risk-free interest rate
|
|
0.91
|
%
|
Expected life (years)
|
|
3.0
|
|
Grant date fair value per share
|
$
|
76.88
|
|
During 2013, the Company granted selected employees RSUs with performance conditions (the “2013 RSUs”) comprised of internal performance measures and, separately, market thresholds expressed in the form of a relative total shareholder return. An aggregate of 128 thousand of the 2013 RSUs vested in January 2016. The terms of the 2013 RSUs specified that, so long as the participant continued to be employed by the Company during the Performance Period and to the extent the performance conditions were achieved, the RSUs would vest at target; if the performance conditions were surpassed, up to 175% of the target number of shares would be distributed; and to the extent that the performance thresholds were not met, the award would be forfeited. In January 2016, an additional 74 thousand RSUs were granted and immediately vested because performance thresholds associated with the 2013 RSUs were exceeded.
The table below summarizes RSU activity for the six months ended June 30, 2016:
|
Shares
(in thousands)
|
|
|
Weighted-Average
Grant Date Fair
Value (per share)
|
|
Non-vested total as of January 1, 2016
|
|
436
|
|
|
$
|
46.97
|
|
Granted
|
|
142
|
|
|
|
69.58
|
|
Performance share adjustment
|
|
74
|
|
|
|
39.89
|
|
Vested
(a)
|
|
(250
|
)
|
|
|
42.58
|
|
Forfeited
|
|
(14
|
)
|
|
|
60.04
|
|
Non-vested total as of June 30, 2016
|
|
388
|
|
|
$
|
56.25
|
|
(a)
|
Includes 202 thousand shares related to the 2013 RSUs and 48 thousand shares related to RSUs without performance conditions that vested during the six months ended June 30, 2016.
|
The following table summarizes additional information regarding RSUs issued during the six months ended June 30, 2016 and 2015:
|
2016
|
|
|
2015
|
|
Intrinsic value
|
$
|
15
|
|
|
$
|
16
|
|
Income tax benefit
|
|
2
|
|
|
|
2
|
|
The grant date fair value of the restricted stock awards that vest ratably and have market and/or performance and service conditions are amortized through expense over the requisite service period using the graded-vesting method. RSUs that have no performance conditions are amortized through expense over the requisite service period using the straight-line method. As of June 30, 2016, $8 of total unrecognized compensation cost related to the non-vested RSUs is expected to be recognized over the weighted-average remaining life of 1.3 years.
13
Note 6: Long-Term Debt
The following long-term debt was issued during the six months ended June 30, 2016:
Company
|
|
Type
|
|
Rate
|
|
|
Maturity
|
|
Amount
|
|
Other American Water subsidiaries
|
|
Private activity bonds and government
funded debt
—
fixed rate
|
|
|
1.36%
|
|
|
2026
|
|
$
|
2
|
|
The following long-term debt was retired through sinking fund provisions, optional redemptions or payment at maturity during the six months ended June 30, 2016:
Company
|
|
Type
|
|
Rate
|
|
|
Maturity
|
|
Amount
|
|
American Water Capital Corp.
(a)
|
|
Private activity bonds and government
funded debt—fixed rate
|
|
1.79%-2.90%
|
|
|
2021-2031
|
|
$
|
1
|
|
Other American Water subsidiaries
|
|
Private activity bonds and government
funded debt—fixed rate
|
|
0.00%-5.30%
|
|
|
2016-2041
|
|
|
11
|
|
Other American Water subsidiaries
|
|
Mandatorily redeemable preferred stock
|
|
|
8.49%
|
|
|
2036
|
|
|
1
|
|
Total retirements and redemptions
|
|
|
|
|
|
|
|
|
|
$
|
13
|
|
(a)
|
American Water Capital Corp.
, which is a wholly owned subsidiary of the Company, has a support agreement with the Company that, under certain circumstances, is the functional equivalent of a guarantee
. This indebtedness is considered “debt” for purposes of this support agreement.
|
The Company has three forward starting swap agreements with an aggregate notional amount of $225 to reduce interest rate exposure on debt expected to be issued in 2017. The forward starting swap agreements terminate in December 2017 and have an average fixed rate of 2.29%. The Company has designated the forward starting swap agreements as cash flow hedges and the initial fair value, in addition to any subsequent changes in fair value, are recognized in accumulated other comprehensive loss. Upon termination, the cumulative gain or loss recorded in accumulated other comprehensive loss will be amortized through interest, net over the term of the issued debt.
The Company has an interest rate swap to hedge $100 of its 6.085% fixed-rate debt maturing in 2017. The Company pays variable interest of six-month LIBOR plus 3.422% and the interest rate swap matures with the fixed-rate debt in 2017. The Company has designated the interest rate swap as a fair value hedge accounted for at fair value with gains or losses, as well as the offsetting gains or losses on the hedged item, recognized in interest, net. The net loss recognized by the Company was de minimis for the three and six months ended June 30, 2016 and 2015.
The Company has employed interest rate swaps to fix the interest cost on a portion of its variable-rate debt with an aggregate notional amount of $8. The Company has designated these instruments as economic hedges accounted for at fair value with gains or losses recognized in interest, net. The gain recognized by the Company was de minimis for the three and six months ended June 30, 2016 and 2015.
No ineffectiveness was recognized for the six months ended June 30, 2016 and 2015 related to hedging instruments.
The following table provides a summary of the gross fair value for the Company’s derivative asset and liabilities, as well as the location of the asset and liability balances in the Consolidated Balance Sheets:
Derivative Instruments
|
|
Derivative Designation
|
|
Balance Sheet Classification
|
|
June 30, 2016
|
|
|
December 31, 2015
|
|
Asset Derivative
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
Fair value hedge
|
|
Other long-term assets
|
|
$
|
2
|
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward starting swaps
|
|
Cash flow hedge
|
|
Other long-term liabilities
|
|
$
|
18
|
|
|
$
|
—
|
|
Interest rate swap
|
|
Economic hedge (non-designated)
|
|
Other long-term liabilities
|
|
|
1
|
|
|
|
1
|
|
14
Note 7: Pension and Other Postretirement Benefits
The following table provides the components of net periodic benefit costs:
|
For the Three Months Ended June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Components of net periodic pension benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
8
|
|
|
$
|
10
|
|
|
$
|
16
|
|
|
$
|
19
|
|
Interest cost
|
|
20
|
|
|
|
18
|
|
|
|
40
|
|
|
|
37
|
|
Expected return on plan assets
|
|
(24
|
)
|
|
|
(25
|
)
|
|
|
(48
|
)
|
|
|
(49
|
)
|
Amortization of actuarial loss
|
|
7
|
|
|
|
7
|
|
|
|
14
|
|
|
|
13
|
|
Net periodic pension benefit cost
|
$
|
11
|
|
|
$
|
10
|
|
|
$
|
22
|
|
|
$
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic other postretirement benefit
cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
6
|
|
|
$
|
7
|
|
Interest cost
|
|
8
|
|
|
|
7
|
|
|
|
15
|
|
|
|
15
|
|
Expected return on plan assets
|
|
(7
|
)
|
|
|
(7
|
)
|
|
|
(13
|
)
|
|
|
(13
|
)
|
Amortization of prior service credit
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
Amortization of actuarial loss
|
|
1
|
|
|
|
2
|
|
|
|
2
|
|
|
|
3
|
|
Net periodic other postretirement benefit cost
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
9
|
|
|
$
|
11
|
|
The Company contributed $17 to its defined benefit pension plans in the first six months of 2016 and expects to contribute $16 during the remainder of 2016. In addition, the Company contributed $11 for the funding of its other postretirement plans in the first six months of 2016 and expects to contribute $11 during the remainder of 2016.
Note 8: Commitments and Contingencies
Commitments
On March 29, 2016, Pennsylvania-American Water Company (“PAWC”) entered into an asset purchase agreement with the Sewer Authority of the City of Scranton (“SSA”) to acquire substantially all of the wastewater collection and treatment system assets of the SSA’s system for a total stated purchase price of $195, which includes approximately $38 in assumed cash to be transferred at closing. The SSA is currently subject to a consent decree with the U.S. Environmental Protection Agency (“EPA”) and the Pennsylvania Department of Environmental Protection (“PaDEP”), which requires the SSA to complete significant upgrades to its sewer system at an estimated cost of $140. As a part of the purchase, PAWC will be required to cause the consent decree to be amended to allow it to assume the obligations and liabilities of the SSA thereunder. The acquisition closing is subject to the approval of the Pennsylvania Public Utility Commission, and, with respect to the amendment of the consent decree, the consent of the EPA, PaDEP, the U.S. Department of Justice and the U.S. District Court for the Middle District of Pennsylvania. The Company is working to close this transaction by September 30, 2016.
Contingencies
The Company is routinely involved in legal actions in the normal conduct of its business. As of June 30, 2016, the Company has accrued approximately $7 of probable loss contingencies and has estimated that the maximum amount of losses associated with reasonably possible loss contingencies is $54. For certain matters, the Company is unable to estimate possible losses.
15
West Virginia Elk River Freedom Industries Chemical Spill
On January 9, 2014, a chemical storage tank owned by Freedom Industries, Inc. leaked two substances, 4-methylcyclohexane methanol, or MCHM, and PPH/DiPPH, a mix of polyglycol ethers, into the Elk River near the West Virginia-American Water Company (“WVAWC”) treatment plant intake in Charleston, West Virginia. After having been alerted to the leak of MCHM by the West Virginia Department of Environmental Protection, WVAWC took immediate steps to gather more information about MCHM, augment its treatment process as a precaution, and begin consultations with federal, state and local public health officials. As soon as possible after it was determined that the augmented treatment process would not fully remove the MCHM, a joint decision was reached in consultation with the West Virginia Bureau for Public Health to issue a “Do Not Use” order for all of its approximately 93,000 customer accounts in parts of nine West Virginia counties served by the Charleston treatment plant. The order addressed the use of water for drinking, cooking, washing and bathing, but did not affect continued use of water for sanitation and fire protection. Over the next several days, WVAWC and an interagency team of state and federal officials engaged in extensive sampling and testing to determine if levels of MCHM were below one part per million (1 ppm), a level that the U.S. Centers for Disease Control and Prevention (“CDC”) and the EPA indicated would be protective of public health. Beginning on January 13, 2014, based on the results of the continued testing, the Do Not Use order was lifted in stages to help ensure the water system was not overwhelmed by excessive demand, which could have caused additional water quality and service issues. By January 18, 2014, none of WVAWC’s customers were subject to the Do Not Use order, although CDC guidance suggesting that pregnant women avoid consuming the water until the chemicals were at non-detectable levels remained in place. In addition, based on saved samples taken on or before January 18, 2014, PPH/DiPPH was no longer detected in the water supply as of January 18, 2014. On February 21, 2014, WVAWC announced that all points of testing throughout its water distribution system indicated that levels of MCHM were below 10 parts per billion (10 ppb). The interagency team established 10 ppb as the “non-detect” level of MCHM in the water distribution system based on the measurement capabilities of the multiple laboratories used. WVAWC continued to work with laboratories to test down to below 2 ppb of MCHM and announced on March 3, 2014, that it had cleared the system to below this level.
To date, there are 69 pending cases against WVAWC with respect to this matter in the United States District Court for the Southern District of West Virginia or West Virginia Circuit Courts in Kanawha, Boone and Putnam counties. Fifty-three of the state court cases naming WVAWC, and one case naming both WVAWC and American Water Works Service Company, Inc. (“AWWSC,” and together with WVAWC and the Company, the “American Water Defendants”) were removed to the United States District Court for the Southern District of West Virginia. On December 17, 2015, the federal district court entered orders remanding 52 of the previously removed cases back to the West Virginia Circuit Courts for further proceedings (two of the previously removed cases had been dismissed in the interim). Following that order, seven additional cases were filed against WVAWC in West Virginia Circuit Courts in Kanawha and Putnam counties with respect to this matter.
On January 28, 2016, all of the state court cases were referred to West Virginia’s Mass Litigation Panel for further proceedings.
On June 6, 2016, plaintiffs filed a second amended consolidated class action complaint
. The second amended consolidated class action complaint names WVAWC as a defendant and alleges claims of, among other things, negligence, public and private nuisance, trespass, strict liability for abnormally dangerous activity, breach of contract, breach of statutory implied warranty, violation of the West Virginia Consumer Credit Protection Act, strict liability for failure to warn, negligent infliction of emotional distress, medical monitoring and punitive damages. On July 6, 2016,
the
defendants filed an answer in response to these claims. On July 25, 2016, plaintiffs filed a class certification motion seeking certification for liability and damage classes, including businesses and residents who were customers of WVAWC’s Kanawha Valley Treatment Plant (“KVTP”) on January 9, 2014, all West Virginia persons who suffered wage loss as a result of the spill and personal injury and medical monitoring for West Virginia residents within the affected counties that were exposed to contaminated water as a result of the spill.
Four of the cases pending before the federal district court were consolidated for purposes of discovery, and an amended consolidated class action complaint for those cases (the “Federal action”) was filed on December 9, 2014 by several plaintiffs who allegedly suffered economic losses, loss of use of property and tap water or other specified adverse consequences as a result of the Freedom Industries spill, on behalf of a purported class of all persons and businesses supplied with, using, or exposed to water contaminated with Crude MCHM and provided by WVAWC in Logan, Clay, Lincoln, Roane, Jackson, Boone, Putnam, and Kanawha Counties and the Culloden area of Cabell County, West Virginia as of January 9, 2014. The amended consolidated complaint names several individuals and corporate entities as defendants, including the American Water Defendants. The plaintiffs seek unspecified damages for alleged business or economic losses; unspecified damages or a mechanism for recovery to address a variety of alleged costs, loss of use of property, personal injury and other consequences allegedly suffered by purported class members; punitive damages and certain additional relief, including the establishment of a medical monitoring program to protect the purported class members from an alleged increased risk of contracting serious latent disease.
16
On April 9, 2015, the court in the Federal action denied a motion to dismiss all claims against the Company for lack of personal jurisdiction. A separate motion to dismiss filed by AWWSC and WVAWC (and joi
ned by the Company) asserting various legal defenses in the Federal action was resolved by the court on June 3, 2015. The court dismissed three causes of action but denied the motion to dismiss with respect to the remaining causes of actions and allowed th
e plaintiffs to continue to pursue the various claims for damages alleged in their amended consolidated complaint.
On July 6, 2015, the plaintiffs filed a motion seeking certification of a class defined to include persons who resided in dwellings served by the KVTP on January 9, 2014, persons who owned businesses served by the KVTP on January 9, 2014, and hourly employees who worked for such businesses. The plaintiffs sought a class-wide determination of liability against the American Water Defendants, among others, and of damages to the three groups of plaintiffs as a result of the “Do Not Use” order issued after the Freedom Industries spill.
On October 8, 2015, the court in the Federal action granted in part and denied in part the plaintiffs’ class certification motion. The court certified a class addressing the alleged fault of Eastman Chemical for tort claims and the alleged fault of the American Water Defendants for tort and breach of contract claims, as well as the comparative fault of Freedom Industries. However, the court granted the joint motion by defendants to exclude certain expert testimony, disallowing the testimony of plaintiffs’ economic damages experts, and denied class certification as to any damages, including punitive damages. Thus, determination or quantification of damages, if any, would be made in subsequent proceedings on an individual basis.
On December 17, 2015, the court in the Federal action originally entered a scheduling order that provided for the trial on class issues to begin in July 2016. During the first week of January 2016, three additional cases were filed against one or more of the American Water Defendants, as well as others, in the U.S. District Court for the Southern District of West Virginia with respect to this matter.
On March 25, 2016, the court in the Federal action entered an order extending the schedule for events through briefing related to dispositive motions and expert challenges and noting that further events in the case would be set by additional orders to be issued by the court in due course. On May 10, 2016, each of the parties in the Federal action filed motions for summary judgment and motions to exclude experts, followed by responses on June 3, 2016 and final reply memoranda on June 16, 2016. On July 7, 2016, the court in the Federal action rescheduled the trial to begin on October 25, 2016.
Court-directed mediations were held at the end of September 2015 and June 2016 with the assistance of private mediators. Representatives of the American Water Defendants, Eastman Chemical, and the plaintiffs in both the Federal action and the state actions, as well as insurance carriers for certain of the defendants, participated in these mediation sessions. No resolution was reached and no further mediation discussions have been scheduled to date.
Additionally, investigations with respect to the matter have been initiated by the Chemical Safety Board, the U.S. Attorney’s Office for the Southern District of West Virginia, the West Virginia Attorney General, and the Public Service Commission of West Virginia (the “PSC”). As a result of the U.S. Attorney’s Office investigation, Freedom Industries and six former Freedom Industries employees (three of whom also were former owners of Freedom Industries), pled guilty to violations of the federal Clean Water Act.
On May 21, 2014, the PSC issued an Order initiating a General Investigation into certain matters relating to WVAWC's response to the Freedom Industries spill. Three parties have intervened in the proceeding, including the Consumer Advocate Division of the PSC and two attorney-sponsored groups, including one sponsored by some of the plaintiffs’ counsel involved in the civil litigation described above. WVAWC has filed testimony regarding its response to the spill and is subject to discovery from PSC staff and the intervenors as part of the General Investigation. Several disputes have arisen between WVAWC and the intervenors regarding, among other things, the scope of the discovery and the maintenance of confidentiality with regard to certain WVAWC emergency planning documents. In addition, the intervenors and PSC staff filed expert testimony in support of their assertions that WVAWC did not act reasonably with respect to the Freedom Industries spill, and WVAWC has asserted that some of the testimony is outside the scope of the PSC proceeding. On May 23, 2016, the PSC entered an order setting a procedural schedule and ruling on outstanding motions related to discovery and the scope of testimony. Hearings have been scheduled to begin on November 15, 2016.
The Company believes that the causes of action asserted against the American Water Defendants in the lawsuits described above are without merit and continues to vigorously defend itself in these proceedings. Given the current stage of these proceedings, the Company cannot reasonably estimate the amount of any reasonably possible losses or a range of such losses related to these proceedings.
17
Missouri Infrastructure System Replacement Surcharge Litigation
On March 8, 2016, the Western District of the Missouri Court of Appeals ruled that the Missouri Public Service Commission (“MoPSC”) did not have statutory authority to issue an order in June 2015 approving an infrastructure system replacement surcharge (“ISRS”) for Missouri-American Water Company (“MAWC”), a wholly owned subsidiary of the Company. The court held that the MoPSC’s June 2015 order authorizing the ISRS increase was invalid because St. Louis County did not have a population of at least one million residents, as
required by the statute. MAWC’s motion for rehearing or transfer filed with the Court of Appeals was denied on May 3, 2016. MAWC believes that the MoPSC’s June 2015 order authorizing the collection of ISRS revenues was lawful and will continue to challenge the ruling of the Court of Appeals. On June 28, 2016, the Missouri Supreme Court granted MAWC’s application to transfer the case from the Court of Appeals to the Missouri Supreme Court, and as a result of that order, the March 8, 2016 ruling of the Court of Appeals has been vacated. As of June 30, 2016, the Company has determined the range of reasonably possible loss associated with this matter to be zero to $26.
Other than as described in the “Contingencies” subsection of this Note 8, the Company believes that damages or settlements to be paid by the Company, if any, in claims or actions will not, individually or in the aggregate, have a material adverse effect on the Company.
N
ote 9: Earnings per Common Share
The following is a reconciliation of the numerator and denominator for basic and diluted earnings per share (“EPS”) calculations:
|
For the Three Months Ended June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
$
|
137
|
|
|
$
|
123
|
|
|
$
|
219
|
|
|
$
|
203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
—
Basic
|
|
178
|
|
|
|
180
|
|
|
|
178
|
|
|
|
180
|
|
Effect of dilutive common stock equivalents
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average common shares outstanding—Diluted
|
|
178
|
|
|
|
180
|
|
|
|
178
|
|
|
|
180
|
|
The effect of dilutive common stock equivalents is related to the RSUs and non-qualified stock options granted under the 2007 Plan, and shares purchased under the Company’s Nonqualified Employee Stock Purchase Plan.
Note 10: Fair Value of Financial Assets and Liabilities
Fair Value of Financial Instruments
The Company used the following methods and assumptions to estimate its fair value disclosures for financial instruments:
Current assets and current liabilities—The carrying amounts reported in the accompanying Consolidated Balance Sheets for current assets and current liabilities, including revolving credit debt, due to the short-term maturities and variable interest rates, approximate their fair values.
Preferred stock with mandatory redemption requirements and long-term debt—The fair values of preferred stock with mandatory redemption requirements and long-term debt are categorized within the fair value hierarchy based on the inputs that are used to value each instrument. The fair value of long-term debt classified as Level 1 is calculated using quoted prices in active markets. Level 2 instruments are valued using observable inputs and Level 3 instruments are valued using observable and unobservable inputs. The fair values of instruments classified as Level 2 and 3 are determined by a valuation model that is based on a conventional discounted cash flow methodology and utilizes assumptions of current market rates. As a portion of the Company’s debts do not trade in active markets, the Company calculated a base yield curve using a risk-free rate (a U.S. Treasury securities yield curve) plus a credit spread that is based on the following two factors: (i) an average of the Company’s own publicly-traded debt securities and (ii) the current market rates for U.S. Utility A debt securities. The Company used these yield curve assumptions to derive a base yield for the Level 2 and Level 3 securities. Additionally, the Company adjusted the base yield for specific features of the debt securities including call features, coupon tax treatment and collateral for the Level 3 instruments.
18
The carrying amounts, including fair value adjustments previously recognized in acquisition purchase
accounting and a fair value adjustment related to the Company’s interest rate swap fair value hedge (which is classified as Level 2 in the fair value hierarchy), and fair values of the financial instruments were as follows:
|
Carrying
|
|
|
At Fair Value as of June 30, 2016
|
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Preferred stock with mandatory redemption
requirements
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18
|
|
|
$
|
18
|
|
Long-term debt (excluding capital lease obligations)
|
|
5,902
|
|
|
|
3,617
|
|
|
|
1,455
|
|
|
|
2,068
|
|
|
|
7,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
At Fair Value as of December 31, 2015
|
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Preferred stock with mandatory redemption
requirements
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18
|
|
|
$
|
18
|
|
Long-term debt (excluding capital lease obligations)
|
|
5,914
|
|
|
|
3,397
|
|
|
|
1,419
|
|
|
|
1,941
|
|
|
|
6,757
|
|
Recurring Fair Value Measurements
The following table presents assets and liabilities measured and recorded at fair value on a recurring basis and their level in the fair value hierarchy:
|
At Fair Value as of June 30, 2016
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted funds
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
30
|
|
Rabbi trust investments
|
|
12
|
|
|
—
|
|
|
—
|
|
|
|
12
|
|
Deposits
|
|
6
|
|
|
—
|
|
|
—
|
|
|
|
6
|
|
Mark-to-market derivative asset
|
—
|
|
|
|
2
|
|
|
—
|
|
|
|
2
|
|
Total assets
|
|
48
|
|
|
|
2
|
|
|
—
|
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation obligation
|
|
12
|
|
|
—
|
|
|
—
|
|
|
|
12
|
|
Mark-to-market derivative liabilities
|
—
|
|
|
|
19
|
|
|
—
|
|
|
|
19
|
|
Total liabilities
|
|
12
|
|
|
|
19
|
|
|
—
|
|
|
|
31
|
|
Total net assets (liabilities)
|
$
|
36
|
|
|
$
|
(17
|
)
|
|
$
|
—
|
|
|
$
|
19
|
|
|
At Fair Value as of December 31, 2015
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted funds
|
$
|
27
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
27
|
|
Rabbi trust investments
|
|
12
|
|
|
—
|
|
|
—
|
|
|
|
12
|
|
Deposits
|
|
1
|
|
|
—
|
|
|
—
|
|
|
|
1
|
|
Mark-to-market derivative asset
|
—
|
|
|
|
2
|
|
|
—
|
|
|
|
2
|
|
Other investments
|
|
4
|
|
|
—
|
|
|
—
|
|
|
|
4
|
|
Total assets
|
|
44
|
|
|
|
2
|
|
|
—
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation obligation
|
|
11
|
|
|
—
|
|
|
—
|
|
|
|
11
|
|
Mark-to-market derivative liability
|
—
|
|
|
|
1
|
|
|
—
|
|
|
|
1
|
|
Total liabilities
|
|
11
|
|
|
|
1
|
|
|
—
|
|
|
|
12
|
|
Total net assets
|
$
|
33
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
34
|
|
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. Long-term restricted funds of $6 were included in other long-term assets as of June 30, 2016 and December 31, 2015.
19
Rabbi trust investments—The Company’s rabbi trust investments consist primarily of equity and fixed income indexed funds from whic
h supplemental executive retirement plan benefits and deferred compensation obligations can be paid. The Company includes these assets in other long-term assets.
Deposits—Deposits include escrow funds and certain other deposits held in trust. The Company includes cash deposits in other current assets.
Deferred compensation obligations—The Company’s deferred compensation plans allow participants to defer certain cash compensation into notional investment accounts. The Company includes such plans in other long-term liabilities. The value of the Company’s deferred compensation obligations is based on the market value of the participants’ notional investment accounts. The notional investments are comprised primarily of mutual funds, which are based on observable market prices.
Mark-to-market derivative asset and liability—The Company utilizes fixed-to-floating interest-rate swaps, typically designated as fair-value hedges, to achieve a level of variable-rate debt as a percentage of total debt. The Company also employs derivative financial instruments in the form of variable-to-fixed interest rate swaps and forward starting interest rate swaps, classified as economic hedges and cash flow hedges, respectively, in order to fix the interest cost on existing or forecasted 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. The Company includes the mark-to-market derivative assets and liability in other long-term assets and other long-term liabilities, respectively.
Other investments—Other investments primarily represent money market funds used for active employee benefits. The Company includes other investments in other current assets.
Note 11: Segment Information
The Company operates its businesses primarily through one reportable segment, the Regulated Businesses segment. The Company also operates businesses that provide a broad range of related and complementary water and wastewater services in non-regulated markets, which includes four operating segments that individually do not meet the criteria of a reportable segment. These four non-reportable operating segments are collectively presented as our “Market-Based Businesses”.
“Other” includes corporate costs that are not allocated to the Company’s operating segments, eliminations of inter-segment transactions, fair value adjustments and associated income and deductions related to acquisitions that have not been allocated to the operating segments for evaluation of performance and allocation of resource purposes.
The following tables include the Company’s summarized segment information:
|
As of or for the Three Months Ended June 30, 2016
|
|
|
Regulated
Businesses
|
|
|
Market-Based
Businesses
|
|
|
Other
|
|
|
Consolidated
|
|
Operating revenues
|
$
|
716
|
|
|
$
|
115
|
|
|
$
|
(4
|
)
|
|
$
|
827
|
|
Depreciation and amortization
|
|
109
|
|
|
|
4
|
|
|
|
2
|
|
|
|
115
|
|
Total operating expenses, net
|
|
434
|
|
|
|
98
|
|
|
|
(4
|
)
|
|
|
528
|
|
Interest, net
|
|
(63
|
)
|
|
|
1
|
|
|
|
(19
|
)
|
|
|
(81
|
)
|
Income from continuing operations before
income taxes
|
|
221
|
|
|
|
22
|
|
|
|
(18
|
)
|
|
|
225
|
|
Provision for income taxes
|
|
86
|
|
|
|
9
|
|
|
|
(7
|
)
|
|
|
88
|
|
Net income attributable to common stockholders
|
|
135
|
|
|
|
13
|
|
|
|
(11
|
)
|
|
|
137
|
|
Total assets
|
|
15,780
|
|
|
|
523
|
|
|
|
1,403
|
|
|
|
17,706
|
|
|
|
|
|
As of or for the Three Months Ended June 30, 2015
|
|
|
Regulated
Businesses
|
|
|
Market-Based
Businesses
|
|
|
Other
|
|
|
Consolidated
|
|
Operating revenues
|
$
|
687
|
|
|
$
|
100
|
|
|
$
|
(5
|
)
|
|
$
|
782
|
|
Depreciation and amortization
|
|
102
|
|
|
|
1
|
|
|
|
6
|
|
|
|
109
|
|
Total operating expenses, net
|
|
428
|
|
|
|
83
|
|
|
|
(7
|
)
|
|
|
504
|
|
Interest, net
|
|
(61
|
)
|
|
|
1
|
|
|
|
(16
|
)
|
|
|
(76
|
)
|
Income from continuing operations before
income taxes
|
|
199
|
|
|
|
18
|
|
|
|
(13
|
)
|
|
|
204
|
|
Provision for income taxes
|
|
77
|
|
|
|
6
|
|
|
|
(2
|
)
|
|
|
81
|
|
Net income attributable to common stockholders
|
|
122
|
|
|
|
12
|
|
|
|
(11
|
)
|
|
|
123
|
|
Total assets
(a)
|
|
14,778
|
|
|
|
329
|
|
|
|
1,489
|
|
|
|
16,596
|
|
20
|
As of or for the Six Months Ended June 30, 2016
|
|
|
Regulated
Businesses
|
|
|
Market-Based
Businesses
|
|
|
Other
|
|
|
Consolidated
|
|
Operating revenues
|
$
|
1,350
|
|
|
$
|
229
|
|
|
$
|
(9
|
)
|
|
$
|
1,570
|
|
Depreciation and amortization
|
|
217
|
|
|
|
7
|
|
|
|
7
|
|
|
|
231
|
|
Total operating expenses, net
|
|
864
|
|
|
|
202
|
|
|
|
(9
|
)
|
|
|
1,057
|
|
Interest, net
|
|
(127
|
)
|
|
|
1
|
|
|
|
(35
|
)
|
|
|
(161
|
)
|
Income from continuing operations before
income taxes
|
|
364
|
|
|
|
32
|
|
|
|
(35
|
)
|
|
|
361
|
|
Provision for income taxes
|
|
142
|
|
|
|
13
|
|
|
|
(13
|
)
|
|
|
142
|
|
Net income attributable to common stockholders
|
|
222
|
|
|
|
19
|
|
|
|
(22
|
)
|
|
|
219
|
|
Total assets
|
|
15,780
|
|
|
|
523
|
|
|
|
1,403
|
|
|
|
17,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the Six Months Ended June 30, 2015
|
|
|
Regulated
Businesses
|
|
|
Market-Based
Businesses
|
|
|
Other
|
|
|
Consolidated
|
|
Operating revenues
|
$
|
1,302
|
|
|
$
|
187
|
|
|
$
|
(9
|
)
|
|
$
|
1,480
|
|
Depreciation and amortization
|
|
202
|
|
|
|
2
|
|
|
|
12
|
|
|
|
216
|
|
Total operating expenses, net
|
|
852
|
|
|
|
159
|
|
|
|
(13
|
)
|
|
|
998
|
|
Interest, net
|
|
(122
|
)
|
|
|
1
|
|
|
|
(30
|
)
|
|
|
(151
|
)
|
Income from continuing operations before
income taxes
|
|
333
|
|
|
|
30
|
|
|
|
(26
|
)
|
|
|
337
|
|
Provision for income taxes
|
|
130
|
|
|
|
11
|
|
|
|
(7
|
)
|
|
|
134
|
|
Net income attributable to common stockholders
|
|
203
|
|
|
|
19
|
|
|
|
(19
|
)
|
|
|
203
|
|
Total assets
(a)
|
|
14,778
|
|
|
|
329
|
|
|
|
1,489
|
|
|
|
16,596
|
|
(a)
|
The information has been revised to reflect the retrospective application of ASU 2015-15 Presentation of Debt Issuance Costs and ASU 2015-17 Income Taxes, which were early adopted in 2015.
|
Note 12: Subsequent Events
On July 1, 2016, the Company entered into a forward starting swap agreement with a notional amount of $75 to reduce interest rate exposure on debt expected to be issued in 2017. The forward starting swap agreement terminates in December 2017 and has a fixed rate of 1.9%.
21