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, 2017 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, 2016 is derived from the Company's audited consolidated financial statements as of December 31, 2016. The unaudited consolidated 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, 2016 (“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 Standards
The Company adopted the following accounting standard on January 1, 2017:
Standard
|
|
Description
|
|
Date of
Adoption
|
|
Application
|
|
Estimated 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 simplification in areas such as: (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
|
|
Modified retrospective for the recognition of excess tax benefits and deficiencies; full retrospective for the classification of excess tax benefits and taxes paid on the Consolidated Statements of Cash Flows
|
|
The adoption of this standard resulted in a cumulative effect to increase retained earnings by $21, with an offsetting decrease to deferred income taxes, net. Also, the adoption resulted in a net increase in cash flows from operating activities and a net decrease in cash flows from financing activities of $14 and $18 for the six months ended June 30, 2017 and 2016, respectively, on the Consolidated Statements of Cash Flows.
|
9
The following recently issued accounting standards are not yet required to be adopted by the Company as of June 30, 2017:
Standard
|
|
Description
|
|
Date of
Adoption
|
|
Permitted Application
|
|
Estimated Effect
on the Consolidated
Financial Statements
(or Other Significant
Matters)
|
Revenue from Contracts with Customers
|
|
Changes the criteria for recognizing revenue from a contract with a customer. Replaces existing guidance on revenue recognition, including most industry specific guidance. The objective is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries and across capital markets. The underlying principle is that an entity will recognize revenue to depict the transfer of goods and services to customers at an amount the entity expects to be entitled to in exchange for those goods or services. The guidance also requires a number of disclosures regarding the nature, amount, timing and uncertainty of revenue and the related cash flows.
|
|
January 1, 2018; early adoption permitted
|
|
Full or modified retrospective
|
|
The Company substantially completed its evaluation of the requirements of the new standard based on current interpretations and does not expect there to be a change in the measurement or timing of revenue recognized. The Company continues to monitor for new authoritative and interpretative guidance, which upon release could impact the Company’s current evaluation. The Company plans to adopt the new standard on January 1, 2018 using the modified retrospective method.
|
Classification of Certain Cash Receipts and Cash Payments on the Statement of Cash Flows
|
|
Provides guidance on the presentation and classification in the statement of cash flows for the following cash receipts and payments: (i) debt prepayment or debt extinguishment costs; (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (iii) contingent consideration payments made after a business combination; (iv) proceeds from the settlement of insurance claims; (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (vi) distributions received from equity method investees; (vii) beneficial interests in securitization transactions and (viii) separately identifiable cash flows and application of the predominance principle.
|
|
January 1, 2018; early adoption permitted
|
|
Retrospective
|
|
The Company does not anticipate significant impacts on its consolidated statements of cash flows.
|
Presentation of Changes in Restricted Cash on the Statement of Cash Flows
|
|
Updates the accounting and disclosure guidance for the classification and presentation of changes in restricted cash on the statements of cash flows. The amended guidance requires that the statements of cash flows explain the change during the period in the total of cash, cash equivalents and amounts described as restricted cash or restricted cash equivalents. Restricted cash and restricted cash equivalents will now be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows.
|
|
January 1, 2018; early adoption permitted
|
|
Retrospective
|
|
The Company does not anticipate significant impacts on its consolidated statements of cash flows.
|
Clarifying the Definition of a Business
|
|
Updates the accounting guidance to clarify the definition of a business with the objective of assisting entities with evaluating whether transactions should be accounted for as acquisitions, or disposals, of assets or businesses.
|
|
January 1, 2018; early adoption permitted
|
|
Prospective
|
|
The update could result in more acquisitions being accounted for as asset acquisitions. The effect on the Company's consolidated financial statements will be dependent on the transactions executed by the Company subsequent to adoption.
|
Gains and Losses from the Derecognition of Nonfinancial Assets
|
|
Updated the guidance to clarify the accounting for gains and losses resulting from the derecognition of nonfinancial assets and partial sale of nonfinancial assets. The guidance also clarifies the definition of an in-substance nonfinancial asset.
|
|
January 1, 2018; early adoption permitted
|
|
Full or modified retrospective
|
|
The Company is evaluating the impact on its consolidated financial statements and related disclosures.
|
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
|
|
Updated authoritative guidance requires the service cost component of net periodic benefit cost to be presented in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. The remaining components of net periodic benefit cost are required to be presented separately from the service cost component in an income statement line item outside of operating income. Also, the guidance allows for only the service cost component to be eligible for capitalization. The updated guidance does not impact the accounting for net periodic benefit costs as regulatory assets or liabilities.
|
|
January 1, 2018; early adoption permitted
|
|
Retrospective for the presentation of service cost component; prospective for the capitalization of service cost component
|
|
The Company is evaluating the impact on its consolidated financial statements and related disclosures.
|
10
Standard
|
|
Description
|
|
Date of
Adoption
|
|
Permitted Application
|
|
Estimated Effect
on the Consolidated
Financial Statements
(or Other Significant
Matters)
|
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 its consolidated financial statements and related disclosures.
|
Simplification of Goodwill Impairment Testing
|
|
Updated authoritative guidance which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments in the update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying value exceeds the reporting unit's fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.
|
|
January 1, 2020; early adoption permitted
|
|
Prospective
|
|
The Company is considering early adopting this guidance for its next annual goodwill impairment test, which will occur during the fourth quarter of 2017. The Company does not expect the adoption to have a material impact on its consolidated financial statements or related disclosures.
|
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 impact on its consolidated financial statements and related disclosures, as well as the timing of adoption.
|
11
Note 3: Acquisitions
During the six months ended June 30, 2017, the Company closed on ten acquisitions of various regulated water and wastewater systems for a total aggregate purchase price of $42. Included in this total was the Company’s acquisition of all the outstanding capital stock of the Shorelands Water Company, Inc. on April 3, 2017,
for total consideration of $33, in the form of approximately 0.4 shares of the Company’s common stock.
Assets acquired for the aforementioned acquisitions, principally utility plant, totaled $37. Liabilities assumed totaled $21, including $7 of contributions in aid of construction and assumed debt of $7. The Company recorded additional goodwill of $28
associated with three of its acquisitions, which is reported in the Company’s Regulated Businesses segment. The Company also recognized a bargain purchase gain of $2 associated with one of these acquisitions.
The preliminary purchase price allocations related to these acquisitions will be finalized once the valuation of assets acquired has been completed, no later than one year after their acquisition date.
Also, the Company made a non-escrowed deposit of $2 during the first quarter of 2017 related to the acquisition of the McKeesport, Pennsylvania wastewater system, which the Company expects to close by the first quarter of 2018.
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, 2017 and 2016, respectively:
|
Defined Benefit Plans
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
Employee
Benefit Plan
Funded Status
|
|
|
Amortization
of Prior
Service Cost
|
|
|
Amortization
of Actuarial
Loss
|
|
|
Foreign
Currency
Translation
|
|
|
Gain (Loss) on
Cash Flow
Hedges
|
|
|
Other
Comprehensive
Loss
|
|
Beginning balance as of December 31, 2016
|
$
|
(147
|
)
|
|
$
|
1
|
|
|
$
|
42
|
|
|
$
|
2
|
|
|
$
|
16
|
|
|
$
|
(86
|
)
|
Other comprehensive loss
before reclassifications
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
(3
|
)
|
Amounts reclassified from accumulated
other comprehensive loss
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
Net other comprehensive income (loss)
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
(1
|
)
|
|
|
(2
|
)
|
|
|
1
|
|
Ending balance as of June 30, 2017
|
$
|
(147
|
)
|
|
$
|
1
|
|
|
$
|
46
|
|
|
$
|
1
|
|
|
$
|
14
|
|
|
$
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance as of December 31, 2015
|
$
|
(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
|
)
|
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, as a portion of these costs have been capitalized as a regulatory asset. These accumulated other comprehensive income loss components are included in the computation of net periodic pension cost. See Note 8
—
Pension and Other Postretirement Benefits.
The amortization of the loss on cash flow hedges is reclassified to net income during the period incurred and is included in interest, net in the accompanying Consolidated Statements of Operations.
Anti-dilutive Stock Repurchase Program
During the six months ended June 30, 2017, the Company repurchased 0.7 shares of common stock in the open market at an aggregate cost of $54 under the anti-dilutive stock repurchase program authorized by the Company’s Board of Directors in 2015. As of June 30, 2017, there were 6.1 shares of common stock available for repurchase under the program.
12
Note 5: Stock Based Compensation
On May 12, 2017, the Company’s stockholders approved the American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan (the “2017 Omnibus Plan”). A total of 7.2 million shares of common stock may be issued under the 2017 Omnibus Plan. The 2017 Omnibus Plan provides that grants of awards may be in any of the following forms: incentive stock options, nonqualified stock options, stock appreciation rights, stock units, stock awards, other stock-based awards and dividend equivalents, which may be granted only on stock units or other stock-based awards.
Note 6: Long-Term Debt
The following long-term debt was issued during the six months ended June 30, 2017:
Company
|
|
Type
|
|
Rate
|
|
|
Maturity
|
|
Amount
|
|
Other American Water subsidiaries
|
|
Private activity bonds and government
funded debt
—
fixed rate
|
|
0.00%-3.92%
|
|
|
2020-2036
|
|
$
|
16
|
|
Other American Water subsidiaries
|
|
Term Loan
|
|
|
4.47%
|
|
|
2021
|
|
|
4
|
|
Total issuances
|
|
|
|
|
|
|
|
|
|
$
|
20
|
|
The following long-term debt was retired through sinking fund provisions, optional redemptions or payment at maturity during the six months ended June 30, 2017:
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%-5.38%
|
|
|
2017-2041
|
|
|
4
|
|
Other American Water subsidiaries
|
|
Mandatorily redeemable preferred stock
|
|
|
8.49%
|
|
|
2036
|
|
|
1
|
|
Total retirements and redemptions
|
|
|
|
|
|
|
|
|
|
$
|
6
|
|
(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 parent company guarantee
. This indebtedness is considered “debt” for purposes of this support agreement.
|
The Company has four forward starting swap agreements with an aggregate notional amount of $300 to reduce interest rate exposure on debt expected to be issued in 2017. These forward starting swap agreements terminate in December 2017 and have an average fixed rate of 2.20%. On February 8, 2017, the Company entered into an additional forward starting swap agreement with a notional amount of $100 to reduce interest rate exposure for a portion of the expected refinancing of the Company’s 5.62% fixed-rate long-term debt maturing in December 2018. This forward starting swap agreement terminates in November 2018 and has an average fixed rate of 2.67%. The Company has designated these
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 gain or loss. Upon termination, the cumulative gain or loss recorded in accumulated other comprehensive gain or 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 this 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 gain and loss recognized by the Company for the three and six months ended June 30, 2017 and 2016 was de minimis.
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 $6. The Company has designated these interest rate swaps as economic hedges accounted for at fair value with gains or losses deferred as a regulatory asset or regulatory liability. The net gain recognized by the Company for the three and six months ended June 30, 2017 and 2016 was de minimis.
No ineffectiveness was recognized for the three and six months ended June 30, 2017 and 2016, related to hedging instruments.
13
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 Bal
ance Sheets:
Derivative Instruments
|
|
Derivative Designation
|
|
Balance Sheet Classification
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Asset Derivative
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward starting swaps
|
|
Cash flow hedge
|
|
Other current assets
|
|
$
|
23
|
|
|
$
|
27
|
|
Forward starting swaps
|
|
Cash flow hedge
|
|
Other long-term assets
|
|
|
2
|
|
|
|
—
|
|
Interest rate swap
|
|
Fair value hedge
|
|
Other current assets
|
|
|
—
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivative
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
Fair value hedge
|
|
Current portion of long-term debt
|
|
$
|
—
|
|
|
$
|
1
|
|
Note 7: Income Taxes
The Company’s effective income tax rate was
41.8%
and
39.1%
for the three months ended June 30, 2017 and 2016, respectively, and 39.5% and 39.4% for the
six months ended June 30, 2017 and 2016, respectively. The effective income tax rate for the three months ended June 30, 2017 increased when compared to the same period in 2016 due to a
one-time, non-cash cumulative charge to the provision for income taxes of $4, primarily the result of legislation enacted in the State of New York during the second quarter of 2017,
and a tax benefit of $3 that was recorded during the second quarter of 2016.
This increase in the effective income tax rate was partially offset for the six months ended June 30, 2017, by a $5 tax benefit from the new accounting standard for employee share-based payment awards which was adopted in the first quarter of 2017. Under this updated guidance, tax benefits or shortfalls related to employee share-based payments awards are recognized in the provision for income taxes, whereas they previously were recorded as additional paid-in capital on the Consolidated Balance Sheet. See Note 2 – New Accounting Standards in the Notes to Consolidated Financial Statements for further discussion on the impacts of the updated guidance.
On April 11, 2017, the State of New York enacted legislation that increased the state income tax rate on the Company’s taxable income attributable to New York. This legislation eliminated the production of water as a qualified manufacturing activity in New York, which effectively increased the state income tax rate in New York. As a result of the legislative change, the Company was required to re-measure its cumulative deferred tax balances using the higher state income tax rate in the second quarter of 2017. This change in legislation was the primary cause of an increase to the Company’s unitary deferred tax liability of $11. The portion of this increase related to the Company’s New York subsidiary calculated on a stand-alone basis was $7, and was offset by a regulatory asset, as the Company believes it is probable of
recovery in future rates. The remaining increase in the deferred tax liability was calculated through state tax apportionment rates and recorded at the consolidated level, resulting in a non-cash, cumulative charge to earnings of
$4
during the second quarter of 2017.
On July 7, 2017, the State of Illinois enacted legislation that would increase the state income tax rate on the Company’s taxable income attributable to Illinois from 7.75% to 9.5%. The effective date of the increase in the state tax rate is July 1, 2017.
As a result of the legislative change, the Company will be required to re-measure its cumulative deferred tax balances using the higher state income tax rate in the third quarter of 2017. The portion of this increase related to the Company’s Illinois subsidiary calculated on a stand-alone basis is expected to be offset by a regulatory asset, as the Company believes it is probable of
recovery in future rates. The remaining increase in the deferred tax liability will be calculated through state tax apportionment rates and recorded at the consolidated level, as a
non-cash, cumulative charge to earnings during the third quarter of 2017
.
14
Note 8: 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,
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Components of net periodic pension benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
17
|
|
|
$
|
16
|
|
Interest cost
|
|
20
|
|
|
|
20
|
|
|
|
40
|
|
|
|
40
|
|
Expected return on plan assets
|
|
(23
|
)
|
|
|
(24
|
)
|
|
|
(47
|
)
|
|
|
(48
|
)
|
Amortization of actuarial loss
|
|
9
|
|
|
|
7
|
|
|
|
18
|
|
|
|
14
|
|
Net periodic pension benefit cost
|
$
|
14
|
|
|
$
|
11
|
|
|
$
|
28
|
|
|
$
|
22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic other postretirement benefit
cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
5
|
|
|
$
|
6
|
|
Interest cost
|
|
6
|
|
|
|
8
|
|
|
|
13
|
|
|
|
15
|
|
Expected return on plan assets
|
|
(6
|
)
|
|
|
(7
|
)
|
|
|
(13
|
)
|
|
|
(13
|
)
|
Amortization of prior service credit
|
|
(4
|
)
|
|
|
—
|
|
|
|
(9
|
)
|
|
|
(1
|
)
|
Amortization of actuarial loss
|
|
2
|
|
|
|
1
|
|
|
|
5
|
|
|
|
2
|
|
Net periodic other postretirement benefit cost
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
1
|
|
|
$
|
9
|
|
The Company made contributions for the funding of its defined benefit pension plans of $10 and $8 for the three months ended June 30, 2017 and 2016, respectively, and $20 and $17 for the six months ended June 30, 2017 and 2016, respectively, and expects to contribute $20
during the remainder of 2017. In addition, the Company made contributions for the funding of its other postretirement plans of $2 and $6 for the three months ended June 30, 2017 and 2016, respectively, and $3 and $11 for the six months ended June 30, 2017 and 2016, respectively, and expects to contribute $3 during the remainder of 2017.
Note 9: Commitments and Contingencies
Contingencies
The Company is routinely involved in legal actions incident to the normal conduct of its business. As of June 30, 2017, the Company has accrued approximately $139 of probable loss contingencies and has estimated that the maximum amount of losses associated with reasonably possible loss contingencies that can be reasonably estimated is $28. For certain matters, claims and actions, the Company is unable to estimate possible losses. The Company believes that damages or settlements, if any, recovered by plaintiffs in such matters, claims or actions, other than as described in this Note 9, will not have a material adverse effect on the Company.
West Virginia Elk River Freedom Industries Chemical Spill
Background
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 (“DEP”), 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. By January 18, 2014, none of WVAWC’s customers were subject to the Do Not Use order.
15
Following the Freedom Industries chemical spill, numerous lawsuits were filed against WVAWC and certain other Company affiliated entities (collectively, the “American Water Defendants”) with respect to th
is matter in the U.S. District Court
for the Southern District of West Virginia or West Virginia Circuit Courts in Kanawha, Boone and Putnam counties, and to date, 74 cases remain pending. Four of the cases pending before the U.S. district court were conso
lidated for purposes of discovery, and an amended consolidated class action complaint for those cases (the “Federal action”) was filed in December 2014 by several plaintiffs.
On January 28, 2016, all of the then-filed state court cases were referred to Wes
t Virginia’s Mass Litigation Panel for further proceedings, which have been stayed pending the negotiation by the parties and approval by the court in the Federal action of a global agreement to settle all of such cases, as described below. On July 7, 2016
, the court in the Federal action scheduled trial to begin on October 25, 2016, but the court has granted several continuances of the trial, which is currently postponed indefinitely in light of the binding global agreement in principle described below.
Th
e Mass Litigation Panel has also stayed its proceedings until October 23, 2017.
WVAWC Binding Global Agreement in Principle to Settle Claims
On October 31, 2016, the court in the Federal action approved the preliminary principles, terms and conditions of a binding global agreement in principle to settle claims (the “Settlement”) among the American Water Defendants, and all class members, putative class members, claimants and potential claimants (collectively, the “Plaintiffs”), arising out of the Freedom Industries chemical spill. The terms of the Settlement propose a global federal and state resolution of all litigation and potential claims against the American Water Defendants and their insurers. A claimant may elect to opt out of any final settlement agreement, in which case such claimant will not receive any benefit from or be bound by the terms of the Settlement. Under the terms and conditions of the Settlement and any subsequent final settlement agreement, the American Water Defendants have not admitted, and will not admit, any fault or liability for any of the allegations made by the Plaintiffs in any of the actions to be resolved.
The proposed aggregate pre-tax amount of the Settlement is $126, of which $65 would be contributed by WVAWC, and the remainder would be contributed by certain of the Company’s general liability insurance carriers. The Company has general liability insurance under a series of policies underwritten by a number of individual carriers. Two of these insurance carriers, which provide an aggregate of $50 in insurance coverage to the Company under these policies, were requested, but presently have not agreed, to participate in the Settlement. The Company and WVAWC are vigorously pursuing their rights to insurance coverage from these non-participating carriers for any contributions by WVAWC to the Settlement. In this regard, WVAWC filed a lawsuit against one of these carriers alleging that the carrier’s failure to agree to participate in the Settlement constitutes a breach of contract, and the Company is pursuing mandatory arbitration against the other non-participating carrier.
The preliminary terms of the Settlement intend to establish a two-tier settlement fund for the payment of claims, comprised of (i) a simple claim fund, which is also referred to as the “guaranteed fund,” of $76, of which $51 will be contributed by WVAWC, including insurance deductibles, and $25 would be contributed by one of the Company’s general liability insurance carriers, and (ii) an individual review claim fund of up to $50, of which up to $14 would be contributed by WVAWC and $36 would be contributed by a number of the Company’s general liability insurance carriers. Separately, up to $25 would be contributed to the guaranteed fund by another defendant to the Settlement.
As a result of these events, the Company recorded a charge to earnings, net of insurance receivables, of $65 ($39 after-tax) in the third quarter of 2016. The settlement amount of $126 is reflected in Accrued Liabilities and the offsetting insurance receivable is reflected in Other Current Assets in the Consolidated Balance Sheet as of June 30, 2017. The Company intends to fund WVAWC’s contributions to the Settlement through existing sources of liquidity, although no contribution by WVAWC will be required unless and until the terms of the Settlement are finally approved by the court in the Federal action. Furthermore, under the terms of the Settlement, WVAWC has agreed that it will not seek rate recovery from the Public Service Commission of West Virginia for approximately $4 in direct response costs expensed in 2014 by WVAWC relating to the Freedom Industries chemical spill as well as for amounts paid by WVAWC under the Settlement.
The Company’s insurance policies operate under a layered structure where coverage is generally provided in the upper layers after claims have exhausted lower layers of coverage. The $36 to be contributed by a number of the Company’s general liability insurance carriers to the individual review claim fund, as noted above, is from higher layers of the insurance structure than the two insurance carriers that were requested, but presently have not agreed, to participate in the Settlement. Any recovery by WVAWC or the Company from the non-participating carriers would reimburse WVAWC for its contributions to the guaranteed fund.
On April 27, 2017, the parties filed with the court in the Federal action a proposed settlement agreement providing details of the terms of the Settlement consistent with those described above. The parties also requested that the court in the Federal action grant preliminary approval of the Settlement.
16
On July 6, 2017, the court in the Federal action issued an opinion denying without prejudice the joint motion for preliminary approval of the Settlement.
The court in the Federal action found the overall amount and structure of the Settlement to be fair, adequate and reasonable, but it declined to preliminarily approve the Settlement on several grounds, including the fairness of the methodology for allocati
ng payments among members of the business class, the nature of the claims appeal process and the timing of the payment of claims that are subject to appeal, and the fairness of setting of fixed payments for the medical claims class. The American Water Defe
ndants intend to work with the Plaintiffs to propose acceptable alternative provisions to the Settlement Agreement to satisfy the concerns of the court in the Federal action.
If and when preliminary approval of the Settlement is obtained, notice of the ter
ms of the Settlement would then be provided to members of the settlement class. Following the notice period, the court in the Federal action would hold a fairness hearing to consider final approval of the Settlement.
Other Related Proceedings
Additionally, investigations with respect to the matter have been initiated by the U.S. Chemical Safety and Hazard Investigation Board (the “CSB”), 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.
In May 2014, the PSC issued an Order initiating a General Investigation into certain matters relating to WVAWC’s response to the Freedom Industries chemical spill. Three parties 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. On January 26, 2017, WVAWC and the other parties agreed to resolve the General Investigation and filed a joint stipulation with the PSC containing the terms of the settlement. The parties to the joint stipulation filed a proposed order with the PSC on February 8, 2017. On June 15, 2017, the PSC entered an order accepting the joint stipulation that had been filed by the parties in January 2017 as a reasonable basis for resolving the General Investigation and removing the proceeding from the docket. The PSC’s order did not require WVAWC to take any further action with respect to the matters covered by the General Investigation. The PSC order concludes the General Investigation.
The CSB is an independent investigatory agency with no regulatory mandate or ability to issue fines or citations; rather, the CSB can only issue recommendations for further action. In response to the Freedom Industries chemical spill, the CSB commenced an investigation shortly thereafter. On September 28, 2016, the CSB issued and adopted its investigation report in which it recommended that the Company conduct additional source water protection activities. The Company provided written comments to the CSB’s report suggesting that the recommendation made to the Company would be better directed to the U.S. Environmental Protection Agency in order to promote industry-wide implementation of the CSB’s recommendation. On February 15, 2017, the Company filed a response to the CSB’s recommendation. On April 4, 2017, the CSB indicated that the implementation by the Company of source water protection activities resolved the first two parts of the CSB’s recommendation. The CSB also noted that compliance by the Company with the third part of its recommendation is ongoing and that closure of this part is contingent upon completion of updated contingency planning for the Company’s water utilities outside of West Virginia. In light of public response to its original September 2016 investigation report, on May 11, 2017, the CSB issued a new version of this report. The primary substantive change addressed CSB’s factual evaluation of the duration and volume of contamination from the leaking tank, decreasing its estimate of the leak time but increasing the volume estimate by 10%. No substantive changes were made to the conclusions and recommendations in the original report.
On March 16, 2017, the Lincoln County (West Virginia) Commission (the “LCC”) passed a county ordinance entitled the “Lincoln County, WV Comprehensive Public Nuisance Investigation and Abatement Ordinance.” The ordinance establishes a mechanism that Lincoln County believes will allow it to pursue criminal or civil proceedings for the “public nuisance” it alleges was caused by the Freedom Industries chemical spill. On April 20, 2017, the LCC filed a complaint in Lincoln County state court against WVAWC and certain other defendants not affiliated with the Company, alleging that the Freedom Industries chemical spill caused a public nuisance in Lincoln County. On June 12, 2017, the Mass Litigation Panel entered an order granting a motion to transfer this case to its jurisdiction and stayed the case consistent with the existing stay order. The complaint seeks an injunction against WVAWC that would require the creation of various databases and public repositories of documents related to this chemical spill, as well as further study and risk assessments regarding the alleged exposure by Lincoln County residents to the released chemicals. WVAWC believes that the lawsuit is without merit and intends to vigorously contest the claims and allegations raised in the complaint.
17
California Public Utilities Commission Residential Rate Design Proceeding
In December 2016, the California Public Utilities Commission (the “CPUC”) issued a final decision in a proceeding involving California-American Water Company, the Company’s wholly owned subsidiary (“Cal Am”), adopting a new residential rate design for Cal Am’s Monterey District. The decision allowed for recovery by Cal Am of $32 in under-collections in the water revenue adjustment mechanism/modified cost balancing account (“WRAM/MCBA”) over a five-year period, plus interest, and modified existing conservation and rationing plans. In its decision, the CPUC noted concern regarding Cal Am’s residential tariff administration, specifically regarding the lack of verification of customer-provided information about the number of residents per household. This information was used for generating billing determinants under the tiered rate system. As a result, the CPUC kept this proceeding open to address several issues, including whether Cal Am’s residential tariff administration violated a statute, rule or CPUC decision, and if so, whether a penalty should be imposed.
On February 24, 2017, Cal Am, the Monterey Peninsula Water Management District, the CPUC’s Office of Ratepayer Advocates, and the Coalition of Peninsula Businesses filed for CPUC approval of a joint settlement agreement (the “Joint Settlement Agreement”), which among other things, proposed to resolve the CPUC’s residential tariff administration concerns by providing for a waiver by Cal Am of $0.5 of cost recovery for residential customers through the WRAM/MCBA in lieu of a penalty. Approval of the Joint Settlement Agreement, which is required for it to take effect, remains pending before the CPUC.
On March 28, 2017, the administrative law judge assigned to the proceeding issued a ruling stating there was sufficient evidence to conclude, on a preliminary basis, that Cal Am’s administration of the residential tariff violated certain provisions of the California Public Utilities Code and a CPUC decision. The ruling ordered Cal Am to show cause why it should not be penalized for these administrative violations and directed the settling parties to address whether the cost recovery waiver in the Joint Settlement Agreement was reasonable compared to a potential penalty range described by the administrative law judge. During hearings held on April 13-14, 2017, the administrative law judge clarified that this potential penalty range is $3 to $179 (calculated as a continuing violation dating back to 2000 and applying penalties of up to $20 thousand per day until January 1, 2012 and penalties of up to $50 thousand per day thereafter, reflecting a 2012 change to the relevant statute). The administrative law judge also noted that a per diem penalty may not be appropriate, as Cal Am’s monthly billing practices did not allow Cal Am to update customer-provided information for billing purposes on a daily basis. The administrative law judge has set further hearings in this proceeding for August 17, 2017, and has permitted certain of the parties, including Cal Am, to submit additional written testimony on the issue of whether Cal Am should be penalized, and if so, the reasonable amount of any such penalty.
As of June 30, 2017, the portions of this loss contingency that are probable and/or reasonable possible have been determined to be immaterial to the Company and have been included in the aggregate maximum amounts described above in the first paragraph of “Contingencies” in this Note 9.
Missouri Infrastructure System Replacement Surcharge Litigation
In March 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 believes that the MoPSC’s June 2015 order authorizing the collection of ISRS revenues is lawful. In June 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 2016 ruling of the Court of Appeals was vacated.
On March 14, 2017, in a unanimous decision, the Missouri Supreme Court dismissed the case as moot, finding that there were no longer any ISRS funds in dispute because MAWC had completed a rate case during the appellate process and the disputed charges were now incorporated in base rates. On May 30, 2017, the Missouri Supreme Court denied a Motion for Rehearing filed by the Missouri Office of Public Counsel, which action concluded the litigation in this matter.
Dunbar, West Virginia Water Main Break Class Action Litigation
On the evening of June 23, 2015, a 36-inch pre-stressed concrete transmission water main, installed in the early 1970s, failed. The water main is part of WVAWC’s West Relay pumping station located in the City of Dunbar. The failure of the main caused water outages and low pressure to up to approximately 25,000 WVAWC customers. In the early morning hours of June 25, 2015, crews completed a repair, but that same day, the repair developed a leak. On June 26, 2015, a second repair was completed and service was restored that day to approximately 80% of the impacted customers, and to the remaining approximately 20% by the next morning. The second repair showed signs of leaking but the water main was usable until June 29, 2015 to allow tanks to refill. The system was reconfigured to maintain service to all but approximately 3,000 customers while a final repair was completed safely on June 30, 2015. Water service was fully restored on July 1, 2015 to all customers affected by this event.
18
On June 2, 2017, a class action complaint was filed in West Virginia Circuit Court in Kanawha County
against WVAWC on behalf of a purported class of residents and business owners who lost water service or pressure as a result of the Dunbar main break. The complaint alleges breach of contract by WVAWC for failure to supply water, violation of West Virgini
a law regarding the sufficiency of WVAWC’s facilities and negligence by WVAWC in the design, maintenance and operation of the water system. The plaintiff seeks unspecified alleged damages on behalf of the class for lost profits, annoyance and inconvenience
, and loss of use, as well as punitive damages for willful, reckless and wanton behavior in not addressing the risk of pipe failure and a large outage.
The Company and WVAWC believe that WVAWC has valid, meritorious defenses to the claims raised in this class action complaint. WVAWC intends to vigorously defend itself against these allegations. Given the current stage of this proceeding, the Company cannot reasonably estimate the amount of any reasonably possible losses or a range of such losses related to this proceeding.
N
ote 10: Earnings per Common Share
The following is a reconciliation of the numerator and denominator for basic and diluted earnings per share calculations:
|
For the Three Months Ended June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
$
|
131
|
|
|
$
|
137
|
|
|
$
|
224
|
|
|
$
|
219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
—
Basic
|
|
178
|
|
|
|
178
|
|
|
|
178
|
|
|
|
178
|
|
Effect of dilutive common stock equivalents
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
Weighted-average common shares outstanding—Diluted
|
|
179
|
|
|
|
178
|
|
|
|
179
|
|
|
|
178
|
|
The effect of dilutive common stock equivalents is related to restricted stock units and performance stock units granted under the 2007 and 2017 Omnibus Equity Compensation Plans, as well as shares purchased under the Company’s Nonqualified Employee Stock Purchase Plan.
Note 11: 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 Level 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.
19
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 i
n the fair value hierarchy), and fair values of the financial instruments were as follows:
|
Carrying
|
|
|
At Fair Value as of June 30, 2017
|
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Preferred stock with mandatory redemption requirements
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14
|
|
|
$
|
14
|
|
Long-term debt (excluding capital lease obligations)
|
|
6,333
|
|
|
|
4,007
|
|
|
|
1,348
|
|
|
|
1,847
|
|
|
|
7,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
At Fair Value as of December 31, 2016
|
|
|
Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Preferred stock with mandatory redemption requirements
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15
|
|
|
$
|
15
|
|
Long-term debt (excluding capital lease obligations)
|
|
6,320
|
|
|
|
3,876
|
|
|
|
1,363
|
|
|
|
1,805
|
|
|
|
7,044
|
|
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, 2017
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted funds
|
$
|
29
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
29
|
|
Rabbi trust investments
|
|
13
|
|
|
—
|
|
|
—
|
|
|
|
13
|
|
Deposits
|
|
3
|
|
|
—
|
|
|
—
|
|
|
|
3
|
|
Mark-to-market derivative assets
|
—
|
|
|
|
25
|
|
|
—
|
|
|
|
25
|
|
Other investments
|
|
2
|
|
|
—
|
|
|
—
|
|
|
|
2
|
|
Total assets
|
|
47
|
|
|
|
25
|
|
|
—
|
|
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation obligations
|
|
15
|
|
|
—
|
|
|
—
|
|
|
|
15
|
|
Mark-to-market derivative liabilities
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
Total liabilities
|
|
15
|
|
|
|
—
|
|
|
—
|
|
|
|
15
|
|
Total net assets (liabilities)
|
$
|
32
|
|
|
$
|
25
|
|
|
$
|
—
|
|
|
$
|
57
|
|
|
At Fair Value as of December 31, 2016
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted funds
|
$
|
24
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24
|
|
Rabbi trust investments
|
|
12
|
|
|
—
|
|
|
—
|
|
|
|
12
|
|
Deposits
|
|
3
|
|
|
—
|
|
|
—
|
|
|
|
3
|
|
Mark-to-market derivative assets
|
—
|
|
|
|
28
|
|
|
—
|
|
|
|
28
|
|
Other investments
|
|
1
|
|
|
—
|
|
|
—
|
|
|
|
1
|
|
Total assets
|
|
40
|
|
|
|
28
|
|
|
—
|
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation obligations
|
|
13
|
|
|
—
|
|
|
—
|
|
|
|
13
|
|
Mark-to-market derivative liabilities
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total liabilities
|
|
13
|
|
|
—
|
|
|
—
|
|
|
|
13
|
|
Total net assets (liabilities)
|
$
|
27
|
|
|
$
|
28
|
|
|
$
|
—
|
|
|
$
|
55
|
|
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 $1 and $4 were included in other long-term assets as of June 30, 2017 and December 31, 2016, respectively.
20
Rabbi trust investments—The Company’s rabbi trust investments consist of equity and index funds from which supplemental executive retirement plan benefits and deferred compensation obligations can be paid. The Company includes these assets in other long-te
rm assets.
Deposits—Deposits include escrow funds and certain other deposits held in trust. The Company includes cash deposits in other current assets.
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 targeted 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.
Other investments—Other investments primarily represent money market funds used for active employee benefits. The Company includes other investments 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.
Note 12: Segment Information
The Company conducts its business primarily through one reportable segment, the Regulated Businesses segment. The Company also operates several businesses that provide a broad range of related and complementary water and wastewater services in four operating segments that individually do not meet the criteria of a reportable segment in accordance with GAAP. These four non-reportable operating segments are collectively presented as the Company’s “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, 2017
|
|
|
Regulated
Businesses
|
|
|
Market-Based
Businesses
|
|
|
Other
|
|
|
Consolidated
|
|
Operating revenues
|
$
|
746
|
|
|
$
|
103
|
|
|
$
|
(5
|
)
|
|
$
|
844
|
|
Depreciation and amortization
|
|
119
|
|
|
|
4
|
|
|
|
3
|
|
|
|
126
|
|
Total operating expenses, net
|
|
453
|
|
|
|
89
|
|
|
|
(6
|
)
|
|
|
536
|
|
Interest, net
|
|
67
|
|
|
|
(1
|
)
|
|
|
19
|
|
|
|
85
|
|
Income from continuing operations before income taxes
|
|
230
|
|
|
|
15
|
|
|
|
(19
|
)
|
|
|
226
|
|
Provision for income taxes
|
|
90
|
|
|
|
7
|
|
|
|
(2
|
)
|
|
|
95
|
|
Net income attributable to common stockholders
|
|
140
|
|
|
|
9
|
|
|
|
(18
|
)
|
|
|
131
|
|
Total assets
|
|
16,982
|
|
|
|
570
|
|
|
|
1,414
|
|
|
|
18,966
|
|
|
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
|
|
21
|
As of or for the Six Months Ended June 30, 2017
|
|
|
Regulated
Businesses
|
|
|
Market-Based
Businesses
|
|
|
Other
|
|
|
Consolidated
|
|
Operating revenues
|
$
|
1,405
|
|
|
$
|
206
|
|
|
$
|
(11
|
)
|
|
$
|
1,600
|
|
Depreciation and amortization
|
|
236
|
|
|
|
8
|
|
|
|
6
|
|
|
|
250
|
|
Total operating expenses, net
|
|
894
|
|
|
|
183
|
|
|
|
(12
|
)
|
|
|
1,065
|
|
Interest, net
|
|
133
|
|
|
|
(1
|
)
|
|
|
38
|
|
|
|
170
|
|
Income from continuing operations before income taxes
|
|
384
|
|
|
|
25
|
|
|
|
(38
|
)
|
|
|
371
|
|
Provision for income taxes
|
|
150
|
|
|
|
10
|
|
|
|
(13
|
)
|
|
|
147
|
|
Net income attributable to common stockholders
|
|
234
|
|
|
|
15
|
|
|
|
(25
|
)
|
|
|
224
|
|
Total assets
|
|
16,982
|
|
|
|
570
|
|
|
|
1,414
|
|
|
|
18,966
|
|
|
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
|
|
22