Notes to Consolidated Financial Statements
(Unless otherwise noted, in millions, except per share data)
Note 1: Organization and Operation
American Water Works Company, Inc. (the “Company” or “American Water”) is the holding company for regulated and market-based subsidiaries throughout the United States and Ontario, Canada. The Company’s primary business involves the ownership of utilities that provide water and wastewater services in
16
states in the United States, collectively referred to as the “
Regulated Businesses
.” The Company also operates market-based businesses within
four
, non-reportable operating segments, collectively referred to as the “
Market-Based Businesses
.” These businesses include the Military Services Group, which conducts operation and maintenance (“O&M”) of water and wastewater systems on military bases; the Homeowner Services Group, which primarily provides water and sewer line protection plans for homeowners; the Contract Operations Group, which conducts O&M of water and wastewater facilities for municipalities and industrial customers; and Keystone Clearwater Solutions, LLC (“Keystone”), which provides water services for natural gas exploration and production companies.
Note 2: Significant Accounting Policies
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of American Water and all of its subsidiaries in which a controlling interest is maintained after the elimination of intercompany balances and transactions. The Company uses the equity method to report its investments in joint ventures where it holds up to a
50%
voting interest and cannot exercise control over the operations and policies of the investments. Under the equity method, the Company records its interests as an investment and its percentage share of the investee’s earnings as income or losses.
In July 2015, the Company acquired a
95%
interest in Water Solutions Holdings, LLC, including its wholly-owned subsidiary, Keystone Clearwater Solutions, LLC (collectively referred to as “Keystone”). The outside stockholders’ interest, which is redeemable at the option of the minority owners, is recognized as redeemable noncontrolling interest. The redeemable noncontrolling interest amounted to
$7 million
as of
December 31, 2017
and
2016
, and is included in other long-term liabilities in the accompanying Consolidated Balance Sheets. The net income in
2017
and the net loss in
2016
, respectively, attributable to the noncontrolling interest was not significant. The Company has entered into an agreement whereby it has the option to acquire from the minority owners, and the minority owners have the option to sell to the Company, the remaining
five
percent interest at fair value, upon the occurrence of certain triggering events, or at the defined date of December 31, 2018.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates, assumptions and judgments that affect the Company’s financial condition, results of operations and cash flows. Actual results could differ from these estimates, judgments and assumptions. The Company considers its critical accounting estimates to include: the application of regulatory accounting principles and the related determination and estimation of regulatory assets and liabilities; assumptions used in impairment testing of goodwill and other long-lived assets, including regulatory assets; revenue recognition and the estimates used in the calculation of unbilled revenue; accounting for income taxes and the recently enacted Tax Cuts and Jobs Act (the “TCJA”); benefit plan assumptions; and the judgments and estimates used in the determining loss contingencies. The Company’s critical accounting estimates that are particularly sensitive to change in the near term are amounts reported for regulatory assets and liabilities, goodwill, income taxes, benefit plan assumptions and contingency-related obligations.
Regulation
The Company’s regulated utilities are subject to economic regulation by certain state utility commissions or other entities engaged in utility regulation, collectively referred to as Public Utility Commissions (“PUCs” or “Regulators”). As such, the Company follows authoritative accounting principles required for rate regulated utilities, which requires the effects of rate regulation to be reflected in the Company’s Consolidated Financial Statements. PUCs generally authorize revenue at levels intended to recover the estimated costs of providing service, plus a return on net investments, or rate base. Regulators may also approve accounting treatments, long-term financing programs and cost of capital, capital expenditures, O&M expenses, taxes, transactions and affiliate relationships, reorganizations and mergers, and acquisitions, along with imposing certain penalties or granting certain incentives. Due to timing and other differences in the collection of a regulated utility’s revenue, an incurred cost that would otherwise be charged as an expense by a non-regulated entity, could be deferred as a regulatory asset if it is probable that such cost is recoverable through future rates. Conversely, the authoritative accounting principles require the creation of a regulatory liability for amounts collected in rates to recover costs expected to be incurred in the future, or amounts collected in excess of costs incurred and are refundable to customers. See
Note 6—Regulatory Assets and Liabilities
.
Property, Plant and Equipment
Property, plant and equipment consists primarily of utility plant. Additions to utility plant and replacement of retirement units of utility plant are capitalized and include costs such as materials, direct labor, payroll taxes and benefits, indirect items such as engineering and supervision, transportation and an allowance for funds used during construction (“AFUDC”). Costs for repair, maintenance and minor replacements are charged to O&M expense as incurred.
The cost of property, plant and equipment is depreciated using the straight-line average remaining life method. The Company’s regulated utilities record depreciation in conformity with amounts approved by PUCs, after regulatory review of the information the Company submits to support its estimates of the assets’ remaining useful lives.
When units of property, plant and equipment are replaced, retired or abandoned, the carrying value is credited against the asset and charged to accumulated depreciation. To the extent the Company recovers cost of removal or other retirement costs through rates after the retirement costs are incurred, a regulatory asset is recorded. In some cases, the Company recovers retirement costs through rates during the life of the associated asset and before the costs are incurred. These amounts result in a regulatory liability being reported based on the amounts previously recovered through customer rates, until the costs to retire those assets are incurred.
The costs incurred to acquire and internally develop computer software for internal use are capitalized as a unit of property. The carrying value of these costs amounted to
$346 million
and
$345 million
as of
December 31, 2017
and
2016
, respectively.
Nonutility property consists primarily of buildings and equipment utilized by the Company for internal operations. This property is stated at cost, net of accumulated depreciation, which calculated using the straight-line method over the useful lives of the assets.
Cash and Cash Equivalents, and Restricted Funds
Substantially all cash is invested in interest-bearing accounts. All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents.
Restricted funds consists primarily of proceeds from financings for the construction and capital improvement of facilities, and deposits for future services under O&M projects. Proceeds are held in escrow or interest-bearing accounts until the designated expenditures are incurred. Restricted funds are classified in the Consolidated Balance Sheets as either current or long-term based upon the intended use of the funds.
The following table provides a reconciliation of the cash and cash equivalents, and restricted funds as presented in the Consolidated Balance Sheets, to the sum of such amounts presented in the Consolidated Statements of Cash Flows for the years ended
December 31
:
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|
|
|
|
2017
|
|
2016
|
Cash and cash equivalents
|
$
|
55
|
|
|
$
|
75
|
|
Restricted funds
|
27
|
|
|
20
|
|
Restricted funds included in other long-term assets
|
1
|
|
|
4
|
|
Cash and cash equivalents, and restricted funds as presented in the Consolidated Statements of Cash Flows
|
$
|
83
|
|
|
$
|
99
|
|
Accounts Receivable and Unbilled Revenues
Accounts receivable include regulated utility customer accounts receivable, which represent amounts billed to water and wastewater customers on a cycle basis. Credit is extended based on the guidelines of the applicable PUCs and collateral is generally not required. Also included are market-based trade accounts receivable and nonutility customer receivables of the regulated subsidiaries. Unbilled revenues are accrued when service has been provided but has not been billed to customers and when costs exceed billings on market-based construction contracts.
Allowance for Uncollectible Accounts
Allowances for uncollectible accounts are maintained for estimated probable losses resulting from the Company’s inability to collect receivables from customers. Accounts that are outstanding longer than the payment terms are considered past due. A number of factors are considered in determining the allowance for uncollectible accounts, including the length of time receivables are past due and previous loss history. The Company generally writes off accounts when they become uncollectible or are over a certain number of days outstanding. See
Note 5—Allowance for Uncollectible Accounts
.
Materials and Supplies
Materials and supplies are stated at the lower of cost or net realizable value. Cost is determined using the average cost method.
Goodwill
Goodwill represents the excess of the purchase price paid over the estimated fair value of the assets acquired and liabilities assumed in the acquisition of a business. Goodwill is not amortized, but is tested for impairment at least annually or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Goodwill is primarily associated with the acquisition of the Company by RWE Aktiengesellschaft in 2003 and the acquisition of Keystone in 2015, and has been assigned to reporting units based on the fair values at the date of the acquisitions. The reporting units in the
Regulated Businesses
segment are aggregated into a single reporting unit. The
Market-Based Businesses
is comprised of
four
non-reportable reporting units. The Company’s annual impairment test is performed as of
November 30
of each year, in conjunction with the completion of the Company’s annual business plan. The Company assesses qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If based on qualitative factors, the fair value of the reporting unit is more likely than not greater than the carrying amount, no further testing is required. If the Company bypasses the qualitative assessment or performs the qualitative assessment, but determines that it is more likely than not that its fair value is less than its carrying amount, a quantitative two-step, fair value-based test is performed.
The first step compares the estimated fair value of the reporting unit to its respective net carrying value, including goodwill, on the measurement date. If the estimated fair value of any reporting unit is less than such reporting unit’s carrying value, then the second step is performed to measure the amount of the impairment loss (if any) for such reporting unit.
The second step requires an allocation of fair value to the individual assets and liabilities using purchase price allocation accounting guidance in order to determine the implied fair value of goodwill. If the implied fair value of goodwill is less than the carrying amount for the reporting unit, an impairment loss is recorded as a reduction to goodwill and a charge to operating expense. Application of the goodwill impairment test requires management judgment, including the identification of reporting units and determining the fair value of the reporting unit. Management estimates fair value using a combination of a discounted cash flow analysis and market multiples analysis. Significant assumptions used in these fair value analyses include discount and growth rates and projected terminal values.
The Company believes the assumptions and other considerations used to value goodwill to be appropriate. However, if experience differs from the assumptions and considerations used in its analysis, the resulting change could have a material adverse impact on the Consolidated Financial Statements. See
Note 7—Goodwill and Other Intangible Assets
.
Long-Lived Assets
Long-lived assets include land, buildings, equipment and long-term investments. Long-lived assets, other than investments and land, are depreciated over their estimated useful lives, and are reviewed for impairment whenever changes in circumstances indicate the carrying value of the asset may not be recoverable. Such circumstances would include items such as a significant decrease in the market value of a long-lived asset, a significant adverse change in the manner the asset is being used or planned to be used or in its physical condition, or a history of operating or cash flow losses associated with the use of the asset. In addition, changes in the expected useful life of these long-lived assets may also be an impairment indicator. When such events or changes occur, the Company estimates the fair value of the asset from future cash flows expected to result from the use and, if applicable, the eventual disposition of the asset and compares that to the carrying value of the asset. If the carrying value is greater than the fair value, an impairment loss is recorded.
The Company believes the assumptions and other considerations used to evaluate the carrying value of long-lived assets are appropriate. However, if actual experience differs from the assumptions and considerations used in its estimates, the resulting change could have a material adverse impact on the Consolidated Financial Statements.
The key variables to determine fair value include assumptions regarding sales volume, rates, operating costs, labor and other benefit costs, capital additions, assumed discount rates and other economic factors. These variables require significant management judgment and include inherent uncertainties, since they are forecasting future events. If such assets are considered impaired, an impairment loss is recognized equal to the amount by which the asset’s carrying value exceeds its fair value.
The long-lived assets of the regulated utility subsidiaries are tested on a separate entity basis for impairment testing as they are integrated state-wide operations that do not have the option to curtail service and generally have uniform tariffs. A regulatory asset is charged to earnings if and when future recovery in rates of that asset is no longer probable.
The Company holds other investments including investments in privately held companies and investments in joint ventures accounted for using the equity method. The Company’s investments in privately held companies and joint ventures are classified as other long-term assets in the accompanying Consolidated Balance Sheets.
The fair values of long-term investments are dependent on the financial performance and solvency of the entities in which the Company invests, as well as volatility inherent in the external markets. If such assets are considered impaired, an impairment loss is recognized equal to the amount by which the asset’s carrying value exceeds its fair value.
Advances for Construction and Contributions in Aid of Construction
Regulated utility subsidiaries may receive advances for construction and contributions in aid of construction from customers, home builders and real estate developers to fund construction necessary to extend service to new areas.
Advances are refundable for limited periods of time as new customers begin to receive service or other contractual obligations are fulfilled. Included in other current liabilities as of
December 31, 2017
and
2016
in the accompanying Consolidated Balance Sheets are estimated refunds of
$23 million
and
$21 million
, respectively. Those amounts represent expected refunds during the next 12-month period.
Advances that are no longer refundable are reclassified to contributions. Contributions are permanent collections of plant assets or cash for a particular construction project. For ratemaking purposes, the amount of such contributions generally serves as a rate base reduction since the contributions represent non-investor supplied funds.
Generally, the Company depreciates utility plant funded by contributions and amortizes its contributions balance as a reduction to depreciation expense, producing a result which is functionally equivalent to reducing the original cost of the utility plant for the contributions. In accordance with applicable regulatory guidelines, some of the Company’s utility subsidiaries do not amortize contributions, and any contribution received remains on the balance sheet indefinitely. Amortization of contributions in aid of construction was
$27 million
,
$27 million
and
$26 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Recognition of Revenues
Revenues of the regulated utility subsidiaries are recognized as water and wastewater services are provided, and include amounts billed to customers on a cycle basis and unbilled amounts based on estimated usage from the date of the meter reading associated with the latest customer bill to the end of the accounting period. The Company also recognizes revenue when it is probable that future recovery of previously incurred costs or future refunds that are to be credited to customers will occur through the ratemaking process.
The Company has agreements with the U.S. government to operate and maintain water and wastewater systems at various military bases pursuant to
50
-year contracts (“military agreements”). These contracts also include construction components that are accounted for separately from the O&M components.
Nine
of the military agreements are subject to periodic price redetermination adjustments and modifications for changes in circumstance. The remaining
four
agreements are subject to annual price adjustments under a mechanism similar to price redeterminations. Additionally, the Company has agreements ranging in length from
one
to
25
years with municipalities and businesses in various industries to operate and maintain water and wastewater systems (“O&M agreements”). Revenues from operations and management services are recognized as services are provided. See
Note 15—Commitments and Contingencies
.
Revenues from construction projects are recognized over the contract term based on the costs incurred to date during the period compared to the total estimated costs over the entire contract. Losses on contracts are recognized during the period in which the loss first becomes probable and estimable. Revenues recognized during the period in excess of billings on construction contracts are recorded as unbilled revenue. Billings in excess of revenues recognized on construction contracts are recorded as other current liabilities until the recognition criteria are met. Changes in contract performance and related estimated contract profitability may result in revisions to costs and revenues and are recognized in the period in which revisions are determined.
Income Taxes
American Water and its subsidiaries participate in a consolidated federal income tax return for U.S. tax purposes. Members of the consolidated group are charged with the amount of federal income tax expense determined as if they filed separate returns.
Certain income and expense items are accounted for in different time periods for financial reporting than for income tax reporting purposes. The Company provides deferred income taxes on the difference between the tax basis of assets and liabilities and the amounts at which they are carried in the financial statements. These deferred income taxes are based on the enacted tax rates expected to be in effect when these temporary differences are projected to reverse. In addition, the regulated utility subsidiaries recognize regulatory assets and liabilities for the effect on revenues expected to be realized as the tax effects of temporary differences, previously flowed through to customers, reverse.
Investment tax credits have been deferred by the regulated utility subsidiaries and are being amortized to income over the average estimated service lives of the related assets.
The Company recognizes accrued interest and penalties related to tax positions as a component of income tax expense and accounts for sales tax collected from customers and remitted to taxing authorities on a net basis. See
Note 13—Income Taxes
.
Allowance for Funds Used During Construction
AFUDC is a non-cash credit to income with a corresponding charge to utility plant that represents the cost of borrowed funds or a return on equity funds devoted to plant under construction. The regulated utility subsidiaries record AFUDC to the extent permitted by the PUCs. The portion of AFUDC attributable to borrowed funds is shown as a reduction of interest, net in the accompanying Consolidated Statements of Operations. Any portion of AFUDC attributable to equity funds would be included in other income (expenses) in the accompanying Consolidated Statements of Operations. AFUDC is summarized in the following table for the years ended
December 31
:
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2017
|
|
2016
|
|
2015
|
Allowance for other funds used during construction
|
$
|
19
|
|
|
$
|
15
|
|
|
$
|
13
|
|
Allowance for borrowed funds used during construction
|
8
|
|
|
6
|
|
|
8
|
|
Environmental Costs
The Company’s water and wastewater operations and the operations of its
Market-Based Businesses
are subject to U.S. federal, state, local and foreign requirements relating to environmental protection, and as such, the Company periodically becomes subject to environmental claims in the normal course of business. Environmental expenditures that relate to current operations or provide a future benefit are expensed or capitalized as appropriate. Remediation costs that relate to an existing condition caused by past operations are accrued, on an undiscounted basis, when it is probable that these costs will be incurred and can be reasonably estimated. A conservation agreement entered into by a subsidiary of the Company with the National Oceanic and Atmospheric Administration in 2010 and amended in 2017 required the Company to, among other provisions, implement certain measures to protect the steelhead trout and its habitat in the Carmel River watershed in the State of California. The Company agreed to pay
$1 million
annually commencing in 2010 with the final payment being made in 2021. Remediation costs accrued amounted to
$6 million
and
less than $1 million
as of
December 31, 2017
and
2016
, respectively.
Derivative Financial Instruments
The Company uses derivative financial instruments for purposes of hedging exposures to fluctuations in interest rates. These derivative contracts are entered into for periods consistent with the related underlying exposures and do not constitute positions independent of those exposures. The Company does not enter into derivative contracts for speculative purposes and does not use leveraged instruments.
All derivatives are recognized on the balance sheet at fair value. On the date the derivative contract is entered into, the Company may designate the derivative as a hedge of the fair value of a recognized asset or liability (fair-value hedge) or a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash-flow hedge).
Changes in the fair value of a fair-value hedge, along with the gain or loss on the underlying hedged item, are recorded in current-period earnings. The gains and losses on the effective portion of cash-flow hedges are recorded in other comprehensive income, until earnings are affected by the variability of cash flows. Any ineffective portion of designated cash-flow hedges is recognized in current-period earnings.
Cash flows from derivative contracts are included in net cash provided by operating activities in the accompanying Consolidated Statements of Cash Flows.
New Accounting Standards
The following recently issued accounting standards have been adopted by the Company as of
December 31, 2017
:
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Standard
|
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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 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.
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January 1, 2017
|
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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
|
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The cumulative effect of adoption increased retained earnings by $21 million, with an offsetting decrease to deferred income taxes, net. Adoption also increased cash flows from operating activities and decreased cash flows from financing activities by $17 million, $13 million and $16 million for the years ended December 31, 2017, 2016 and 2015, respectively, on the Consolidated Statements of Cash Flows.
|
Classification of Certain Cash Receipts and Cash Payments on the Statement of Cash Flows
|
|
Provides guidance on the presentation and classification in the Consolidated Statements 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.
|
|
December 31, 2017
|
|
Retrospective
|
|
Adoption resulted in the change in the presentation of a $34 million make-whole premium payment from operating activities to financing activities on the Consolidated Statements of Cash Flows for the year ended December 31, 2017, as compared to the third quarter 2017 Form 10-Q. See Note 10- Long-Term Debt in the Notes to Consolidated Financial Statements for further information regarding this make-whole premium payment.
|
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 Consolidated 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.
|
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December 31, 2017
|
|
Retrospective
|
|
Adoption resulted in the inclusion of restricted funds and related changes in the total of cash and cash equivalents, and restricted funds on the Consolidated Statements of Cash Flows. Total restricted funds amounted to $28 million, $24 million and $27 million as of December 31, 2017, 2016, 2015, respectively. The adoption also resulted in an increase in net cash used in investing activities previously reported of $3 million for the year ended December 31, 2016, and a decrease of $6 million for the year ended December 31, 2015.
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The following recently issued accounting standards have not yet been adopted by the Company as of
December 31, 2017
:
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Standard
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Description
|
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Date of
Adoption
|
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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.
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January 1, 2018
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Full or modified retrospective
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The adoption will not result in material impact to the Consolidated Financial Statements as there are no material changes to the timing or recognition of revenue. The Company plans to adopt using the modified retrospective method.
|
Clarifying the Definition of a Business
|
|
Updated 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.
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January 1, 2018
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Prospective
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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 acquisitions that close subsequent to adoption.
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Standard
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Description
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Date of
Adoption
|
|
Application
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|
Estimated Effect on the Consolidated
Financial Statements
(or Other Significant Matters)
|
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
|
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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 only allows for 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.
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January 1, 2018
|
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Retrospective for the presentation of net periodic benefit cost components in the income statement; prospective for the capitalization of net periodic benefit costs components in total assets.
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The Company expects to reclassify net periodic benefit costs, other than the service cost component of approximately $9 million, $5 million and $5 million for the years ended December 31, 2017, 2016 and 2015, respectively, to Other, net in its Consolidated Statements of Operations. The Company expects to record the non-service cost component probable of recovery from (or payable to) customers as a regulatory asset (or regulatory liability) accordingly.
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Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
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Permits entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act to retained earnings.
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January 1, 2019; early adoption permitted
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In the period of adoption or retrospective.
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The Company is evaluating the impact on the Consolidated Financial Statements, as well as the timing of adoption.
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Accounting for Leases
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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.
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January 1, 2019; early adoption permitted
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Modified retrospective
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The Company is evaluating the effect on its Consolidated Financial Statements.
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Accounting for Hedging Activities
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Updated the accounting and disclosure guidance for hedging activities, which allows for more financial and nonfinancial hedging strategies to be eligible for hedge accounting. Under this guidance, a qualitative effectiveness assessment is permitted for certain hedges if an entity can reasonably support an expectation of high effectiveness throughout the term of the hedge, provided that an initial quantitative test establishes that the hedge relationship is highly effective. Also, for cash flow hedges determined to be highly effective, all changes in the fair value of the hedging instrument will be recorded in other comprehensive income with a subsequent reclassification to earnings when the hedged item impacts earnings.
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January 1, 2019; early adoption permitted
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Modified retrospective for adjustments related to the measurement of ineffectiveness for cash flow hedges; prospective for the updated presentation and disclosure requirements.
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The Company does not expect the adoption to have a material impact on its Consolidated Financial Statements based on the hedges held as of the balance sheet date. The Company is evaluating the timing of adoption.
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Simplification of Goodwill Impairment Testing
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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.
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January 1, 2020; early adoption permitted
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Prospective
|
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The Company is evaluating the impact on its Consolidated Financial Statements, as well as the timing of adoption.
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Measurement of Credit Losses
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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.
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January 1, 2020; early adoption permitted
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Modified retrospective
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The Company is evaluating the impact on its Consolidated Financial Statements, as well as the timing of adoption.
|
Reclassifications
Certain reclassifications have been made to prior periods in the accompanying Consolidated Financial Statements and notes to conform to the current presentation.
Note 3: Acquisitions
During
2017
, the Company closed on
18
acquisitions of various regulated water and wastewater systems for a total aggregate purchase price of
$210 million
. This included the acquisition of the wastewater system assets of the Municipal Authority of the City of McKeesport, Pennsylvania, on
December 18, 2017
. Assets acquired, principally utility plant, totaled
$207 million
. Liabilities assumed totaled
$23 million
, including
$9 million
of contributions in aid of construction and assumed debt of
$7 million
. The Company recorded additional goodwill of
$29 million
associated with
four
of its acquisitions, which is reported in its
Regulated Businesses
segment. Of this total goodwill, approximately
$1 million
is expected to be deductible for tax purposes. Additionally, the Company recognized a bargain purchase gain of
$3 million
associated with
three
of the 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.
During
2016
, the Company closed on
15
acquisitions of various regulated water and wastewater systems for a total aggregate purchase price of
$199 million
. This included the acquisition of substantially all of the wastewater collection and treatment assets of the Sewer Authority of the City of Scranton, Pennsylvania (“Scranton”) in December 2016. Assets acquired, principally utility plant, totaled
$194 million
. Liabilities assumed totaled
$30 million
, including
$14 million
of contributions in aid of construction and assumed debt of
$6 million
. During
2016
, the Company recorded additional goodwill of
$43 million
associated with
five
of its acquisitions, which is reported in its
Regulated Businesses
segment. Of this total goodwill, approximately
$31 million
is expected to be deductible for tax purposes. Additionally, during
2017
the Company recorded a measurement period adjustment of
$5 million
, increasing the goodwill recognized from the Scranton acquisition.
During
2015
, the Company closed on
14
acquisitions of various regulated water and wastewater systems for a total aggregate purchase price of
$64 million
. Assets acquired, principally utility plant, totaled
$90 million
. Liabilities assumed totaled
$26 million
, including
$10 million
of contributions in aid of construction and assumed debt of
$1 million
. The Company recorded additional goodwill of
$3 million
associated with four of its acquisitions, which is reported in its
Regulated Businesses
segment and is expected to be fully deductible for tax purposes. The Company also recognized a bargain purchase gain of
$3 million
associated with five of its acquisitions, of which
$1 million
was deferred as a regulatory liability.
During
2015
, the Company also closed on the Keystone acquisition, which is included as part of the
Market-Based Businesses
, for a total purchase price of
$133 million
, net of cash received. The fair value of identifiable assets acquired and liabilities assumed was
$56 million
and
$7 million
, respectively, and principally included the acquisition of nonutility property of
$25 million
, accounts receivable and unbilled revenues of
$18 million
and intangible assets of
$12 million
. The purchase price allocation, which is based on the estimated fair value of net assets acquired, resulted in the Company recording redeemable noncontrolling interest of
$7 million
and additional goodwill of
$91 million
. This goodwill is expected to be fully deductible for tax purposes.
The pro forma impact of our acquisitions was not material to our Consolidated Statements of Operations for the years ended
December 31, 2017
and
2016
.
Note 4: Property, Plant and Equipment
The following table summarizes the major classes of property, plant and equipment by category as of
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Range of Remaining
Useful Lives
|
|
Weighted Average
Useful Life
|
Utility plant:
|
|
|
|
|
|
|
|
Land and other non-depreciable assets
|
$
|
151
|
|
|
$
|
147
|
|
|
|
|
|
Sources of supply
|
798
|
|
|
734
|
|
|
2 to 127 Years
|
|
45 years
|
Treatment and pumping facilities
|
3,356
|
|
|
3,218
|
|
|
3 to 101 Years
|
|
37 years
|
Transmission and distribution facilities
|
9,583
|
|
|
9,043
|
|
|
9 to 156 Years
|
|
72 years
|
Services, meters and fire hydrants
|
3,754
|
|
|
3,504
|
|
|
5 to 90 Years
|
|
30 years
|
General structures and equipment
|
1,458
|
|
|
1,343
|
|
|
1 to 156 Years
|
|
16 years
|
Waste treatment, pumping and disposal
|
557
|
|
|
457
|
|
|
3 to 106 Years
|
|
37 years
|
Waste collection
|
904
|
|
|
637
|
|
|
5 to 97 Years
|
|
55 years
|
Construction work in progress
|
585
|
|
|
419
|
|
|
|
|
|
Total utility plant
|
21,146
|
|
|
19,502
|
|
|
|
|
|
Nonutility property
|
570
|
|
|
452
|
|
|
3 to 50 years
|
|
6 years
|
Total property, plant and equipment
|
$
|
21,716
|
|
|
$
|
19,954
|
|
|
|
|
|
Property, plant and equipment depreciation expense amounted to
$460 million
,
$435 million
,
and
$405 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively and was included in depreciation and amortization expense in the accompanying Consolidated Statements of Operations. The provision for depreciation expressed as a percentage of the aggregate average depreciable asset balances was
3.07%
,
3.14%
and
3.13%
for years
December 31, 2017
,
2016
and
2015
, respectively.
Note 5: Allowance for Uncollectible Accounts
The following table summarizes the changes in the Company’s allowances for uncollectible accounts for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Balance as of January 1
|
$
|
(40
|
)
|
|
$
|
(39
|
)
|
|
$
|
(35
|
)
|
Amounts charged to expense
|
(29
|
)
|
|
(27
|
)
|
|
(32
|
)
|
Amounts written off
|
30
|
|
|
29
|
|
|
31
|
|
Recoveries of amounts written off
|
(3
|
)
|
|
(3
|
)
|
|
(3
|
)
|
Balance as of December 31
|
$
|
(42
|
)
|
|
$
|
(40
|
)
|
|
$
|
(39
|
)
|
Note 6: Regulatory Assets and Liabilities
Regulatory Assets
Regulatory assets represent costs that are probable of recovery from customers in future rates. The majority of the regulatory assets earn a return. The following table summarizes the composition of regulatory assets as of
December 31
:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Deferred pension expense
|
$
|
285
|
|
|
$
|
310
|
|
Income taxes recoverable through rates
|
—
|
|
|
241
|
|
Removal costs recoverable through rates
|
269
|
|
|
251
|
|
San Clemente Dam project costs
|
89
|
|
|
91
|
|
Regulatory balancing accounts
|
113
|
|
|
110
|
|
Debt expense
|
67
|
|
|
66
|
|
Make-whole premium on early extinguishment of debt
|
27
|
|
|
—
|
|
Purchase premium recoverable through rates
|
57
|
|
|
58
|
|
Deferred tank painting costs
|
42
|
|
|
39
|
|
Other
|
112
|
|
|
123
|
|
Total Regulatory Assets
|
$
|
1,061
|
|
|
$
|
1,289
|
|
The Company’s deferred pension expense includes a portion of the underfunded status that is probable of recovery through rates in future periods of
$270 million
and
$300 million
as of
December 31, 2017
and
2016
, respectively. The remaining portion is the pension expense in excess of the amount contributed to the pension plans which is deferred by certain subsidiaries and will be recovered in future service rates as contributions are made to the pension plan.
The Company has recorded a regulatory asset for the additional revenues expected to be realized when the tax effects of temporary differences previously flowed through to customers, reverse. These temporary differences are primarily related to the difference between book and tax depreciation on property placed in service before the adoption by the regulatory authorities of full normalization for rate making purposes. Full normalization requires no flow through of tax benefits to customers. The regulatory asset for income taxes recoverable through rates is net of the reduction expected in future revenues as deferred taxes previously provided, attributable to the difference between the state and federal income tax rates under prior law and the current statutory rates, reverse over the average remaining service lives of the related assets.
Removal costs recoverable through rates represent costs incurred for removal of property, plant and equipment or other retirement costs.
San Clemente Dam project costs represent costs incurred and deferred by the Company’s California subsidiary pursuant to its efforts to investigate alternatives to strengthen or remove the dam due to potential earthquake and flood safety concerns. In June 2012, the California Public Utilities Commission (“CPUC”) issued a decision authorizing implementation of a project to reroute the Carmel River and remove the San Clemente Dam. The project includes the Company’s California subsidiary, the California State Conservancy and the National Marine Fisheries Services. Under the order’s terms, the CPUC has authorized recovery for pre-construction costs, interim dam safety measures and environmental costs and construction costs. The authorized costs are to be recovered via a surcharge over a
twenty
-year period which began in October 2012. The unrecovered balance of project costs incurred, including cost of capital, net of surcharges totaled
$89 million
and
$91 million
as of
December 31, 2017
and
2016
, respectively. Surcharges collected were
$7 million
and
$4 million
for the years ended
December 31, 2017
and
2016
, respectively. In the current general rate case in California, there is a pending request to reset the twenty-year recovery period to begin on January 1, 2018 and to set the annual recovery amount.
Regulatory balancing accounts accumulate differences between revenues recognized and authorized revenue requirements until they are collected from customers or are refunded. Regulatory balancing accounts include low income programs and purchased power and water accounts.
Debt expense is amortized over the lives of the respective issues. Call premiums on the redemption of long-term debt, as well as unamortized debt expense, are deferred and amortized to the extent they will be recovered through future service rates.
As a result of American Water Capital Corp.’s prepayment of the
5.62%
Series C Senior Notes due December 21, 2018 (“Series C Senior Notes”) and
5.77%
Series D Senior Notes due December 21, 2021 (“Series D Senior Notes”) and payment of a make-whole premium amount to the holders thereof of
$34 million
, the Company recorded a
$6 million
charge resulting from the early extinguishment of debt at the parent company. Substantially all of the early debt extinguishment costs allocable to the Company’s utility subsidiaries were recorded as regulatory assets that the Company believes are probable of recovery in future rates. Approximately
$1 million
of the early debt extinguishment costs allocable to the Company’s utility subsidiaries was amortized in 2017.
Purchase premium recoverable through rates is primarily the recovery of the acquisition premiums related to an asset acquisition by the Company’s California Utility subsidiary during 2002, and acquisitions in 2007 by the Company’s New Jersey Utility subsidiary. As authorized for recovery by the California and New Jersey PUCs, these costs are being amortized to depreciation and amortization in the Consolidated Statements of Operations through November 2048.
Tank painting costs are generally deferred and amortized to operations and maintenance expense in the Consolidated Statements of Operations on a straight-line basis over periods ranging from
two
to
fifteen
years, as authorized by the regulatory authorities in their determination of rates charged for service.
Other regulatory assets include certain construction costs for treatment facilities, property tax stabilization, employee-related costs, deferred other postretirement benefit expense, business services project expenses, coastal water project costs, rate case expenditures and environmental remediation costs among others. These costs are deferred because the amounts are being recovered in rates or are probable of recovery through rates in future periods.
Regulatory Liabilities
Regulatory liabilities generally represent amounts that are probable of being credited or refunded to customers through the rate-making process. Also, if costs expected to be incurred in the future are currently being recovered through rates, the Company records those expected future costs as regulatory liabilities. The following table summarizes the composition of regulatory liabilities as of
December 31
:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Income taxes recovered through rates
|
$
|
1,242
|
|
|
$
|
—
|
|
Removal costs recovered through rates
|
315
|
|
|
316
|
|
Pension and other postretirement benefit balancing accounts
|
48
|
|
|
55
|
|
Other
|
59
|
|
|
32
|
|
Total Regulatory Liabilities
|
$
|
1,664
|
|
|
$
|
403
|
|
Income taxes recovered through rates relate to deferred taxes that will likely be refunded to the Company’s customers. On
December 22, 2017
, the TCJA was signed into law, which, among other things, enacted significant and complex changes to the Internal Revenue Code of 1986, including a reduction in the maximum U.S. federal corporate income tax rate from
35%
to
21%
as of January 1, 2018. The TCJA created significant excess deferred income taxes that the Company and its regulatory jurisdictions believe should be refunded to customers. Since these are significant refundable amounts, the Company believes it is probable these amounts will be refunded to customers through future rates, and as such the amounts are recorded to a regulatory liability.
Removal costs recovered through rates are estimated costs to retire assets at the end of their expected useful life that are recovered through customer rates over the life of the associated assets. In December 2008, the Company’s utility subsidiary in New Jersey, at the direction of the New Jersey Board of Public Utilities, began to depreciate
$48 million
of the total balance into depreciation and amortization expense in the Consolidated Statements of Operations via straight line amortization through November 2048.
Pension and other postretirement benefit balancing accounts represent the difference between costs incurred and costs authorized by the PUCs that are expected to be refunded to customers.
Other regulatory liabilities include legal settlement proceeds, deferred gains and various regulatory balancing accounts.
Note 7: Goodwill and Other Intangible Assets
Goodwill
The following table summarizes changes in the carrying amount of goodwill for the years ended
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated Businesses
|
|
Market-Based Businesses
|
|
Consolidated
|
|
Cost
|
|
Accumulated Impairment
|
|
Cost
|
|
Accumulated Impairment
|
|
Cost
|
|
Accumulated Impairment
|
|
Total Net
|
Balance as of January 1, 2016
|
$
|
3,415
|
|
|
$
|
(2,332
|
)
|
|
$
|
327
|
|
|
$
|
(108
|
)
|
|
$
|
3,742
|
|
|
$
|
(2,440
|
)
|
|
$
|
1,302
|
|
Goodwill from acquisitions
|
43
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
43
|
|
|
—
|
|
|
43
|
|
Balance as of December 31, 2016
|
$
|
3,458
|
|
|
$
|
(2,332
|
)
|
|
$
|
327
|
|
|
$
|
(108
|
)
|
|
$
|
3,785
|
|
|
$
|
(2,440
|
)
|
|
$
|
1,345
|
|
Goodwill from acquisitions
|
29
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
29
|
|
|
—
|
|
|
29
|
|
Measurement period adjustments
|
5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
5
|
|
Balance as of December 31, 2017
|
$
|
3,492
|
|
|
$
|
(2,332
|
)
|
|
$
|
327
|
|
|
$
|
(108
|
)
|
|
$
|
3,819
|
|
|
$
|
(2,440
|
)
|
|
$
|
1,379
|
|
In
2017
, the Company acquired aggregate goodwill of
$29 million
associated with
four
of its acquisitions in the
Regulated Businesses
segment. Additionally, during
2017
the Company recorded a measurement period adjustment of
$5 million
, increasing the goodwill recognized from the Scranton acquisition completed in December 2016.
In
2016
, the Company acquired aggregate goodwill of
$43 million
associated with
five
of its acquisitions in the
Regulated Businesses
segment.
The Company completed its annual impairment assessment of goodwill as of
November 30
,
2017
and
2016
. It elected to apply the qualitative assessment of factors for goodwill in our
Regulated Businesses
and in Military Services Group and Contract Operations Group reporting units within the
Market-Based Businesses
for both
November 30
,
2017
and
2016
. The Company also elected to apply the qualitative assessment of factors for annual impairment assessment of goodwill as of
November 30
,
2016
to its Homeowners Services Group. Based on the work performed, the Company determined that no qualitative factors were present that would indicate the estimated fair values of the above stated reporting units were less than the respective carrying values.
At
November 30
,
2017
, the Company completed step one of the two-step test for its Homeowner Services Group and Keystone reporting units. The Company also completed a step one test for the Keystone reporting unit at
November 30
,
2016
. Based on those valuations, the Company concluded that there were no impairments to its goodwill. The Company used an income approach valuation technique which estimates the discounted future cash flows of operations. The discounted cash flow analysis relies on a single scenario reflecting the best estimate of projected cash flows. Significant assumptions were used in estimating the fair values, including the discount rate, growth rate and terminal value. At
November 30
,
2017
, the estimated fair value of the Homeowner Services Group reporting unit exceeded its carrying value by more than
156%
, and the estimated fair value of the Keystone reporting unit exceeded its carrying value by approximately
11%
. If further decline in the fair value were to occur, the Keystone reporting unit would be at risk of failing step one of the goodwill impairment test.
There can be no assurances that the Company will not be required to recognize an impairment of goodwill in the future due to market conditions or other factors related to the performance of the Company’s reporting units. These market events could include a decline over a period of time of the Company’s stock price, a decline over a period of time in valuation multiples of comparable water utilities and reporting unit companies, the lack of an increase in the Company’s market price consistent with its peer companies, decreases in control premiums or continued downward pressure on commodity prices. A decline in the forecasted results in our business plan, such as changes in rate case results or capital investment budgets or changes in our interest rates, could also result in an impairment charge. In regards to the Keystone goodwill, adverse developments in market conditions, including prolonged depression of natural gas or oil prices or other factors that negatively impact our forecast operating results, cash flows or key assumptions in the future could result in an impairment charge of a portion or all of the goodwill balance.
Other Intangible Assets
Included in other long-term assets at
December 31, 2017
and
2016
, is a
$8 million
and
$10 million
, respectively, customer relationship intangible resulting from the Keystone acquisition. This intangible is being amortized on a straight-line basis over a period of
eight
years.
Note 8: Stockholders’ Equity
Common Stock
Under the dividend reinvestment and direct stock purchase plan (the “DRIP”), stockholders may reinvest cash dividends and purchase additional Company common stock, up to certain limits, through the plan administrator without commission fees. Shares purchased by participants through the DRIP may be newly-issued shares, treasury shares, or at the Company’s election, shares purchased by the plan administrator in the open market or in privately negotiated transactions. Purchases generally will be made and credited to DRIP accounts once each week. As of
December 31, 2017
, there were approximately
4.3 million
shares available for future issuance under the DRIP.
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 million
shares of its outstanding common stock over an unrestricted period of time. The Company repurchased
0.7 million
shares and
1.0 million
shares of common stock in the open market at an aggregate cost of
$54 million
and
$65 million
under this program for the years ended
December 31, 2017
and
2016
, respectively. As of
December 31, 2017
, there were
6.1 million
shares of common stock available for purchase under the program.
Accumulated Other Comprehensive Loss
The following table presents changes in accumulated other comprehensive loss by component, net of tax, for the years ended
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Plans
|
|
Foreign
Currency
Translation
|
|
Gain (Loss)
on Cash
Flow Hedge
|
|
Accumulated Other
Comprehensive
Loss
|
|
Employee
Benefit Plan
Funded Status
|
|
Amortization
of Prior
Service Cost
|
|
Amortization
of Actuarial
Loss
|
|
|
|
Beginning balance as of January 1, 2016
|
$
|
(126
|
)
|
|
$
|
1
|
|
|
$
|
36
|
|
|
$
|
2
|
|
|
$
|
(1
|
)
|
|
$
|
(88
|
)
|
Other comprehensive gain (loss) before reclassification
|
(21
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17
|
|
|
(4
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
6
|
|
Net other comprehensive income (loss)
|
(21
|
)
|
|
—
|
|
|
6
|
|
|
—
|
|
|
17
|
|
|
2
|
|
Ending balance as of December 31, 2016
|
$
|
(147
|
)
|
|
$
|
1
|
|
|
$
|
42
|
|
|
$
|
2
|
|
|
$
|
16
|
|
|
$
|
(86
|
)
|
Other comprehensive gain (loss) before reclassification
|
7
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(6
|
)
|
|
—
|
|
Amounts reclassified from accumulated other comprehensive income
|
—
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
7
|
|
Net other comprehensive income (loss)
|
7
|
|
|
—
|
|
|
7
|
|
|
(1
|
)
|
|
(6
|
)
|
|
7
|
|
Ending balance as of December 31, 2017
|
$
|
(140
|
)
|
|
$
|
1
|
|
|
$
|
49
|
|
|
$
|
1
|
|
|
$
|
10
|
|
|
$
|
(79
|
)
|
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 loss components are included in the computation of net periodic pension cost. See
Note 14—Employee Benefits
.
The amortization of the loss on cash flow hedge is reclassified to net income during the period incurred and is included in interest, net in the accompanying Consolidated Statements of Operations.
Note 9: Stock Based Compensation
The Company has granted stock options and restricted stock unit (“RSU”) awards to non-employee directors, officers and other key employees of the Company pursuant to the terms of its 2007 Omnibus Equity Compensation Plan (the “2007 Plan”). The total aggregate number of shares of common stock that may be issued under the 2007 Plan is
15.5 million
. As of
December 31, 2017
,
7.7 million
shares were available for grant under the 2007 Plan.
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. As of
December 31, 2017
,
7.2 million
shares were available for grant 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. Following the approval of the 2017 Omnibus Plan, no additional awards are to be granted under the 2007 Plan. However, shares will still be issued under the 2007 Plan pursuant to the terms of awards previously issued under that plan prior to May 12, 2017.
The cost of services received from employees in exchange for the issuance of stock options and restricted stock awards is measured based on the grant date fair value of the awards issued. The value of stock options and RSUs awards at the date of the grant is amortized through expense over the three-year service period. All awards granted in
2017
,
2016
and
2015
are classified as equity. The Company recognizes compensation expense for stock awards over the vesting period of the award. The Company stratified its grant populations and used historic employee turnover rates to estimate employee forfeitures. The estimated rate is compared to the actual forfeitures at the end of the reporting period and adjusted as necessary. The following table presents stock-based compensation expense recorded in operation and maintenance expense in the accompanying Consolidated Statements of Operations for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Stock options
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
2
|
|
RSUs
|
9
|
|
|
8
|
|
|
8
|
|
Nonqualified employee stock purchase plan
|
1
|
|
|
1
|
|
|
1
|
|
Stock-based compensation
|
11
|
|
|
11
|
|
|
11
|
|
Income tax benefit
|
(4
|
)
|
|
(4
|
)
|
|
(4
|
)
|
Stock-based compensation expense, net of tax
|
$
|
7
|
|
|
$
|
7
|
|
|
$
|
7
|
|
There were
no
significant stock-based compensation costs capitalized during the years ended
December 31, 2017
,
2016
and
2015
.
The Company receives a tax deduction based on the intrinsic value of the award at the exercise date for stock options and the distribution date for RSUs. For each award, throughout the requisite service period, the Company recognizes the tax benefits, which have been included in deferred income tax assets, related to compensation costs. The tax deductions in excess of the benefits recorded throughout the requisite service period are recorded to the Consolidated Statements of Operations and are presented in the financing section of the Consolidated Statements of Cash Flows.
Stock Options
There were
no
grants of stock options to employees in
2017
. In
2016
and
2015
, the Company granted non-qualified stock options to certain employees under the 2007 Plan. The stock options vest ratably over the
three
-year service period beginning on January 1 of the year of the grant and have no performance vesting conditions. Expense is recognized using the straight-line method and is amortized over the requisite service period.
The following table summarizes the weighted-average assumptions used in the Black-Scholes option-pricing model for grants and the resulting weighted-average grant date fair value per share of stock options granted for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Dividend yield
|
—
|
%
|
|
2.09
|
%
|
|
2.35
|
%
|
Expected volatility
|
—
|
%
|
|
15.89
|
%
|
|
17.64
|
%
|
Risk-free interest rate
|
—
|
%
|
|
1.15
|
%
|
|
1.48
|
%
|
Expected life (years)
|
0
|
|
|
4.0
|
|
|
4.4
|
|
Exercise price
|
$
|
—
|
|
|
$
|
65.25
|
|
|
$
|
52.75
|
|
Grant date fair value per share
|
$
|
—
|
|
|
$
|
6.61
|
|
|
$
|
6.21
|
|
The Company used the actual historical experience of exercises or expirations of the 2009 grant to determine the expected stock option life. The Company began granting stock options at the time of its initial public offering in April 2008. Expected volatility is based on a weighted average of historic volatilities of traded common stock of peer companies (regulated water companies) over the expected term of the stock options and historic volatilities of the Company’s common stock during the period it has been publicly traded. The dividend yield is based on the Company’s expected dividend payments and the stock price on the date of grant. The risk-free interest rate is the market yield on U.S. Treasury strips with maturities similar to the expected term of the stock options. The exercise price of the stock options is equal to the fair market value of the underlying stock on the date of option grant. Stock options vest over periods ranging from
one
to
three
years and have a maximum term of
seven
years from the effective date of the grant.
The table below summarizes stock option activity for the year ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
(In thousands)
|
|
Weighted-
Average
Exercise
Price (Per share)
|
|
Weighted-
Average
Remaining Life
(Years)
|
|
Aggregate
Intrinsic Value
|
Options outstanding as of December 31, 2016
|
987
|
|
|
$
|
50.65
|
|
|
4.3
|
|
$
|
21
|
|
Granted
|
—
|
|
|
—
|
|
|
|
|
|
Forfeited or expired
|
(14
|
)
|
|
62.10
|
|
|
|
|
|
Exercised
|
(262
|
)
|
|
42.29
|
|
|
|
|
|
Options outstanding as of December 31, 2017
|
711
|
|
|
$
|
53.51
|
|
|
3.67
|
|
$
|
29
|
|
Exercisable as of December 31, 2017
|
452
|
|
|
$
|
48.83
|
|
|
3.15
|
|
$
|
21
|
|
As of
December 31, 2017
,
$1 million
of total unrecognized compensation cost related to nonvested stock options is expected to be recognized over the remaining weighted-average period of
1.0
years. The total fair value of stock options vested was
$2 million
,
$1 million
and
$3 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
The following table summarizes additional information regarding stock options exercised during the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Intrinsic value
|
$
|
10
|
|
|
$
|
18
|
|
|
$
|
22
|
|
Exercise proceeds
|
11
|
|
|
15
|
|
|
30
|
|
Income tax benefit realized
|
3
|
|
|
6
|
|
|
7
|
|
RSUs
During
2017
,
2016
and
2015
, the Company granted RSUs, both with and without performance conditions, to certain employees under the 2007 Plan. RSUs generally vest over periods ranging from
one
to
three
years.
During
2017
, the Company granted RSUs to non-employee directors under the 2017 Omnibus Plan, and during
2016
and
2015
, these awards were granted under the 2007 Plan. The RSUs vested on the date of grant; however, distribution of the shares will be made within 30 days of the earlier of: (i) 15 months after grant date, subject to any deferral election by the director; or (ii) the participant’s separation from service. Because these RSUs vested on the grant date, the total grant date fair value was recorded in operation and maintenance expense on the grant date.
The RSUs without performance conditions are valued at the market value of the closing price of the Company’s common stock on the date of the grant and vest ratably over the
three
-year service period beginning January 1 of the year of the grant. These RSUs are amortized through expense over the requisite service period using the straight-line method.
The table below summarizes activity of RSUs without performance conditions for the year ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
Shares
(In thousands)
|
|
Weighted
Average Grant
Date Fair Value
(Per share)
|
Non-vested total as of December 31, 2016
|
74
|
|
|
$
|
56.43
|
|
Granted
|
61
|
|
|
73.43
|
|
Vested
|
(42
|
)
|
|
56.52
|
|
Forfeited
|
(4
|
)
|
|
69.09
|
|
Non-vested total as of December 31, 2017
|
89
|
|
|
$
|
67.48
|
|
RSUs
with performance conditions vest ratably over the three-year performance period beginning January 1 of the year of the 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.
RSUs granted with internal performance measures are valued at the market value of the closing price of the Company’s common stock on the date of grant. RSUs granted with market conditions are valued using a Monte Carlo model. Expected volatility is based on historical volatilities of traded common stock of the Company and comparative companies using daily stock prices over the past three years. The expected term is
three
years and the risk-free interest rate is based on the three-year U.S. Treasury rate in effect as of the measurement date. The following table presents the weighted-average assumptions used in the Monte Carlo simulation and the weighted-average grant date fair values of RSUs granted for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Expected volatility
|
17.40
|
%
|
|
15.90
|
%
|
|
14.93
|
%
|
Risk-free interest rate
|
1.53
|
%
|
|
0.91
|
%
|
|
1.07
|
%
|
Expected life (years)
|
3.0
|
|
|
3.0
|
|
|
3.0
|
|
Grant date fair value per share
|
$
|
72.81
|
|
|
$
|
77.16
|
|
|
$
|
62.10
|
|
The grant date fair value of restricted stock awards that vest ratably and have market and/or performance conditions are amortized through expense over the requisite service period using the graded-vesting method.
The table below summarizes activity of RSUs with performance conditions for the year ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
Shares
(In thousands)
|
|
Weighted
Average Grant
Date Fair Value
(Per share)
|
Non-vested total as of December 31, 2016
|
309
|
|
|
$
|
55.94
|
|
Granted
|
186
|
|
|
63.10
|
|
Vested
|
(204
|
)
|
|
46.10
|
|
Forfeited
|
(10
|
)
|
|
70.50
|
|
Non-vested total as of December 31, 2017
|
281
|
|
|
$
|
67.33
|
|
As of
December 31, 2017
,
$6 million
of total unrecognized compensation cost related to the nonvested RSUs, with and without performance conditions, is expected to be recognized over the weighted-average remaining life of
1.5
years. The total fair value of RSUs, with and without performance conditions, vested was
$16 million
,
$14 million
and
$12 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
If dividends are paid with respect to shares of the Company’s common stock before the RSUs are distributed, the Company credits a liability for the value of the dividends that would have been paid if the RSUs were shares of Company common stock. When the RSUs are distributed, the Company pays the participant a lump sum cash payment equal to the value of the dividend equivalents accrued. The Company accrued dividend equivalents totaling
less than $1 million
,
$1 million
and
$1 million
to accumulated deficit in the accompanying Consolidated Statements of Changes in Stockholders’ Equity for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Employee Stock Purchase Plan
The Company maintains a nonqualified employee stock purchase plan (the “ESPP”) through which employee participants may use payroll deductions to acquire Company common stock at the lesser of
90%
of the fair market value of the common stock at either the beginning or the end of a three-month purchase period. On February 15, 2017, the Board adopted the American Water Works Company, Inc. and its Designated Subsidiaries 2017 Nonqualified Employee Stock Purchase Plan, which was approved by stockholders on May 12, 2017 and took effect on August 5, 2017. The prior plan was terminated as to new purchases of Company stock effective August 31, 2017. As of
December 31, 2017
, there were
2.0 million
shares of common stock reserved for issuance under the ESPP. The ESPP is considered compensatory. During the years ended
December 31, 2017
,
2016
and
2015
, the Company issued
93 thousand
,
93 thousand
and
98 thousand
shares, respectively, under the ESPP.
Note 10: Long-Term Debt
The Company obtains long-term debt primarily to fund capital expenditures of the
Regulated Businesses
and to refinance debt of the parent company. The following table summarizes the components of long-term debt as of
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate
|
|
Weighted
Average Rate
|
|
Maturity
|
|
2017
|
|
2016
|
Long-term debt of American Water Capital Corp.
(a)
|
|
|
|
|
|
|
|
|
|
|
Senior notes—fixed rate
|
|
2.95%-8.27%
|
|
4.47%
|
|
2018-2047
|
|
$
|
5,292
|
|
|
$
|
4,786
|
|
Private activity bonds and government funded debt—fixed rate
|
|
1.79%-6.25%
|
|
5.44%
|
|
2021-2040
|
|
193
|
|
|
194
|
|
Long-term debt of other American Water subsidiaries
|
|
|
|
|
|
|
|
|
|
|
Private activity bonds and government funded debt—fixed rate
(b)
|
|
0.00%-6.20%
|
|
4.59%
|
|
2018-2041
|
|
712
|
|
|
695
|
|
Mortgage bonds—fixed rate
|
|
3.92%-9.71%
|
|
7.41%
|
|
2019-2039
|
|
607
|
|
|
636
|
|
Mandatorily redeemable preferred stock
|
|
8.47%-9.75%
|
|
8.60%
|
|
2019-2036
|
|
10
|
|
|
12
|
|
Capital lease obligations
|
|
12.66%
|
|
12.66%
|
|
2026
|
|
1
|
|
|
1
|
|
Term loan
|
|
4.81%-5.31%
|
|
5.15%
|
|
2021
|
|
9
|
|
|
—
|
|
Long-term debt
|
|
|
|
|
|
|
|
6,824
|
|
|
6,324
|
|
Unamortized debt premium, net
(c)
|
|
|
|
|
|
|
|
9
|
|
|
17
|
|
Unamortized debt issuance costs
|
|
|
|
|
|
|
|
(13
|
)
|
|
(9
|
)
|
Interest rate swap fair value adjustment
|
|
|
|
|
|
|
|
—
|
|
|
1
|
|
Less current portion of long-term debt
|
|
|
|
|
|
|
|
(322
|
)
|
|
(574
|
)
|
Total long-term debt
|
|
|
|
|
|
|
|
$
|
6,498
|
|
|
$
|
5,759
|
|
|
|
(a)
|
This indebtedness is considered “debt” for purposes of a support agreement between American Water and American Water Capital Corp. (“AWCC”), the Company’s wholly owned finance subsidiary, which serves as a functional equivalent of a guarantee by American Water of AWCC’s payment obligations under such indebtedness.
|
|
|
(b)
|
Includes
$5 million
and
$6 million
of variable rate debt as of
December 31, 2017
and
2016
, respectively, with variable-to-fixed interest rate swaps ranging between
3.93%
and
4.72%
. This debt was assumed via an acquisition in 2013.
|
|
|
(c)
|
Primarily fair value adjustments previously recognized in acquisition purchase accounting.
|
All mortgage bonds, term loans and
$709 million
of the private activity bonds and government funded debt held by the Company’s subsidiaries were collateralized as of
December 31, 2017
.
Long-term debt indentures contain a number of covenants that, among other things, limit, subject to certain exceptions, the Company from issuing debt secured by the Company’s assets. Certain long term notes require the Company to maintain a ratio of consolidated total indebtedness to consolidated total capitalization of not more than
0.70
to
1.00
. The ratio as of
December 31, 2017
was
0.59
to
1.00
. In addition, the Company has
$922 million
of notes which include the right to redeem the notes at par value, in whole or in part, from time to time, subject to certain restrictions.
The following table presents future sinking fund payments and debt maturities:
|
|
|
|
|
|
Year
|
|
Amount
|
2018
|
|
$
|
322
|
|
2019
|
|
170
|
|
2020
|
|
51
|
|
2021
|
|
299
|
|
2022
|
|
123
|
|
Thereafter
|
|
5,859
|
|
The following table details the issuances of long-term debt in
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Type
|
|
Rate
|
|
Maturity
|
|
Amount
|
AWCC
|
|
Senior notes—fixed rate
|
|
2.95%-3.75%
|
|
2027-2047
|
|
$
|
1,350
|
|
Other American Water subsidiaries
|
|
Private activity bonds and government funded debt—fixed rate
|
|
0.00%-1.44%
|
|
2020-2037
|
|
31
|
|
Other American Water subsidiaries
|
|
Mortgage bonds—fixed rate
|
|
3.92%
|
|
2020
|
|
3
|
|
Other American Water subsidiaries
|
|
Term loan
|
|
4.62%-5.12%
|
|
2021
|
|
11
|
|
Total issuances
|
|
|
|
|
|
|
|
$
|
1,395
|
|
The Company also assumed debt of
$7 million
as a result of acquisitions during
2017
, of which
$1 million
was paid subsequent to an acquisition closing during 2017. The remaining
$6 million
of assumed debt has fixed interest rates of
0.00%
and
3.92%
, maturing in
2024
and
2020
, respectively. The Company incurred debt issuance costs of
$17 million
related to the above issuances.
The following table details the long-term debt that was retired through sinking fund provisions, optional redemption or payment at maturity during
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Type
|
|
Rate
|
|
Maturity
|
|
Amount
|
AWCC
|
|
Senior notes—fixed rate
|
|
5.62%-6.09%
|
|
2017-2021
|
|
$
|
844
|
|
AWCC
|
|
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
|
|
15
|
|
Other American Water subsidiaries
|
|
Mortgage bonds—fixed rate
|
|
7.08%
|
|
2017
|
|
33
|
|
Other American Water subsidiaries
|
|
Mandatorily redeemable preferred stock
|
|
8.49%-9.18%
|
|
2031-2036
|
|
2
|
|
Other American Water subsidiaries
|
|
Term loan
|
|
4.31%-5.31%
|
|
2021
|
|
1
|
|
Total retirements and redemptions
|
|
|
|
|
|
|
|
$
|
896
|
|
On
August 10, 2017
, AWCC completed a
$1.35 billion
debt offering which included the sale of
$600 million
aggregate principal amount of its
2.95%
Senior Notes due 2027, and
$750 million
aggregate principal amount of its
3.75%
Senior Notes due in 2047. At the closing of the offering, AWCC received, after deduction of underwriting discounts and debt issuance costs,
$1.33 billion
. On September 13, 2017, AWCC used proceeds from the offering to prepay
$138 million
of its outstanding
5.62%
Series C Senior Notes due December 21, 2018 (“Series C Senior Notes”) and
$181 million
of it’s outstanding
5.77%
Series D Senior Notes due December 21, 2021 (“Series D Senior Notes”). AWCC also used the proceeds of this offering to repay commercial paper obligations and for general corporate purposes, and subsequently, on October 15, 2017, to repay at maturity,
$524 million
of its
6.085%
Senior Notes.
As a result of AWCC’s prepayment of the Series C Senior Notes and Series D Senior Notes, and payment of a make-whole premium amount to the holders thereof of
$34 million
, the Company recorded a
$6 million
charge resulting from the early extinguishment of debt at the parent company. Substantially all of the early debt extinguishment costs allocable to the
Regulated Businesses
were recorded as regulatory assets for the Company believes they are probable of recovery in future rates. Approximately
$1 million
of the early debt extinguishment costs allocable to the
Regulated Businesses
were amortized in 2017.
Interest net, includes interest income of approximately
$14 million
,
$14 million
and
$13 million
in
2017
,
2016
and
2015
, respectively.
One of the principal market risks to which the Company is exposed is changes in interest rates. In order to manage the exposure, the Company follows risk management policies and procedures, including the use of derivative contracts such as swaps. The Company reduces exposure to interest rates by managing commercial paper and debt maturities. The Company also does not enter into derivative contracts for speculative purposes and does not use leveraged instruments. The derivative contracts entered into are for periods consistent with the related underlying exposures. The Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations and minimizes this risk by dealing only with leading, credit-worthy financial institutions having long-term credit ratings of “A” or better.
On
August 7, 2017
, coinciding with AWCC’s
$1.35 billion
debt offering, the Company terminated
four
existing forward starting swap agreements with an aggregate notional amount of
$300 million
, realizing a gain of
$19 million
to be amortized through interest, net, over
30
years. On February 8, 2017, and December 11, 2017, the Company entered into forward starting swap agreements, each with a notional amount of
$100 million
, to reduce interest rate exposure on debt expected to be issued in 2018. These forward starting swap agreements terminate in November 2018, and have an average fixed rate of
2.59%
. The Company has designated these forward starting swap agreements as cash flow hedges, with their fair values recorded 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 new debt.
In October 2017, the Company terminated its interest-rate swap to hedge
$100 million
of its
6.085%
Senior Notes maturing in the fourth quarter of 2017. The Company paid variable interest of six-month LIBOR plus
3.422%
, and had 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 was de minimis for the periods ended
December 31, 2017
and
2016
.
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
$5 million
. 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 years ended
2017
and
2016
.
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 as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
|
|
Derivative Designation
|
|
Balance Sheet Classification
|
|
2017
|
|
2016
|
Asset derivative:
|
|
|
|
|
|
|
|
|
Forward starting swaps
|
|
Cash flow hedge
|
|
Other current assets
|
|
$
|
—
|
|
|
$
|
27
|
|
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
|
|
Forward starting swaps
|
|
Cash flow hedge
|
|
Other current liabilities
|
|
3
|
|
|
—
|
|
Note 11: Short-Term Debt
Short-term debt consists of commercial paper and credit facility borrowings totaling
$905 million
and
$849 million
as of
December 31, 2017
and
2016
, respectively. As of
December 31, 2017
there were
no
borrowings outstanding with maturities greater than three months.
AWCC has a revolving credit facility with
$1.75 billion
in aggregate total commitments from a diversified group of financial institutions with a termination date of June 2020. On March 22, 2016, AWCC and its lenders agreed to increase total commitments under AWCC’s revolving credit facility to the
$1.75 billion
, from
$1.25 billion
. Other terms and conditions of the existing facility remained unchanged. The agreement also includes a
$150 million
sublimit for letters of credit and a
$100 million
sublimit for swing loans. On June 30, 2015, AWCC and its lenders extended the termination date of revolving credit facility from October 2018, to June 2020.
This amended and restated agreement also allowed AWCC to request to further extend the term of the credit facility for up to two one-year periods.
Issuance costs related to the increased lending commitments will be amortized over the remaining life of the credit facility and is included in interest, net in the accompanying Consolidated Statements of Operations. Interest on borrowings are based on a LIBOR-based rate, plus an applicable margin.
Also, the Company acquired a line of credit facility as part of the Keystone acquisition. This facility has a maximum availability of up to
$12 million
, dependent on a collateral base calculation. Based on the collateral assets at
December 31, 2017
,
$7 million
was available to borrow. At
December 31, 2017
, there were
no
outstanding borrowings on this line of credit facility. Borrowings under the facility are due upon demand with interest being paid monthly. Interest accrues each day at a rate per annum equal to
2.75%
above the greater of the
one month or one day LIBOR
.
The borrowing base under the facility allows for financing up to the greater of the note or 80% of eligible accounts receivable.
The following table summarizes the Company’s aggregate credit facility commitments, letter of credit sub-limit under our revolving credit facility and commercial paper limit, as well as the available capacity for each as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Facility Commitment
|
|
Available Credit Facility Capacity
|
|
Letter of Credit Sublimit (a)
|
|
Available Letter of Credit Capacity
|
|
Commercial Paper Limit
|
|
Available Commercial Paper Capacity
|
December 31, 2017
|
|
$
|
1,762
|
|
|
$
|
1,673
|
|
|
$
|
150
|
|
|
$
|
66
|
|
|
$
|
1,600
|
|
|
$
|
695
|
|
December 31, 2016
|
|
1,766
|
|
|
1,668
|
|
|
150
|
|
|
62
|
|
|
1,600
|
|
|
751
|
|
|
|
(a)
|
Letters of credit are non-debt instruments maintained to provide credit support for certain transactions as requested by third parties. The Company had
$84 million
and
$88 million
of outstanding letters of credit as of
December 31, 2017
and
2016
, respectively, all of which were issued under the revolving credit facility noted above.
|
The following table summarizes the short-term borrowing activity for AWCC for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Average borrowings
|
$
|
779
|
|
|
$
|
850
|
|
Maximum borrowings outstanding
|
1,135
|
|
|
1,016
|
|
Weighted average interest rates, computed on daily basis
|
1.24
|
%
|
|
0.78
|
%
|
Weighted average interest rates, as of December 31
|
1.61
|
%
|
|
0.98
|
%
|
The credit facility requires the Company to maintain a ratio of consolidated debt to consolidated capitalization of not more than
0.70
to
1.00
. The ratio as of
December 31, 2017
was
0.59
to
1.00
.
None of the Company’s borrowings are subject to default or prepayment as a result of a downgrading of securities, although such a downgrading could increase fees and interest charges under the Company’s credit facility.
As part of the normal course of business, the Company routinely enters contracts for the purchase and sale of water, energy, fuels and other services. These contracts either contain express provisions or otherwise permit the Company and its counterparties to demand adequate assurance of future performance when there are reasonable grounds for doing so. In accordance with the contracts and applicable contract law, if the Company is downgraded by a credit rating agency, especially if such downgrade is to a level below investment grade, it is possible that a counterparty would attempt to rely on such a downgrade as a basis for making a demand for adequate assurance of future performance. Depending on the Company’s net position with the counterparty, the demand could be for the posting of collateral. In the absence of expressly agreed provisions that specify the collateral that must be provided, the obligation to supply the collateral requested will be a function of the facts and circumstances of the Company’s situation at the time of the demand. If the Company can reasonably claim that it is willing and financially able to perform its obligations, it may be possible that no collateral would need to be posted or that only an amount equal to two or three months of future payments should be sufficient. The Company does not expect to post any collateral which will have a material adverse impact on the Company’s results of operations, financial position or cash flows.
Note 12: General Taxes
The following table summarizes the components of general tax expense for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Gross receipts and franchise
|
$
|
110
|
|
|
$
|
106
|
|
|
$
|
99
|
|
Property and capital stock
|
105
|
|
|
106
|
|
|
98
|
|
Payroll
|
31
|
|
|
32
|
|
|
31
|
|
Other general
|
13
|
|
|
14
|
|
|
15
|
|
Total general taxes
|
$
|
259
|
|
|
$
|
258
|
|
|
$
|
243
|
|
Note 13: Income Taxes
The following table summarizes the components of income tax expense for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Current income taxes
|
|
|
|
|
|
State
|
$
|
25
|
|
|
$
|
20
|
|
|
$
|
10
|
|
Federal
|
(1
|
)
|
|
1
|
|
|
—
|
|
Total current income taxes
|
$
|
24
|
|
|
$
|
21
|
|
|
$
|
10
|
|
Deferred income taxes
|
|
|
|
|
|
State
|
$
|
50
|
|
|
$
|
24
|
|
|
$
|
32
|
|
Federal
|
413
|
|
|
258
|
|
|
265
|
|
Amortization of deferred investment tax credits
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
Total deferred income taxes
|
462
|
|
|
281
|
|
|
296
|
|
Provision for income taxes
|
$
|
486
|
|
|
$
|
302
|
|
|
$
|
306
|
|
The following is a reconciliation between the statutory federal income tax rate and the Company’s effective tax rate for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Income tax at statutory rate
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Increases (decreases) resulting from:
|
|
|
|
|
|
State taxes, net of federal taxes
|
5.4
|
%
|
|
3.8
|
%
|
|
3.6
|
%
|
Tax Cuts and Jobs Act
|
13.7
|
%
|
|
—
|
%
|
|
—
|
%
|
Other, net
|
(0.8
|
)%
|
|
0.4
|
%
|
|
0.5
|
%
|
Effective tax rate
|
53.3
|
%
|
|
39.2
|
%
|
|
39.1
|
%
|
On
December 22, 2017
, President Trump signed into law the TCJA. Substantially all of the provisions of the TCJA are effective for taxable years beginning after December 31, 2017. The TCJA includes significant changes to the Internal Revenue Code of 1986, as amended (the “Code”), including amendments which significantly change the taxation of individuals and business entities, and includes specific provisions related to regulated public utilities. The more significant changes that impact the Company included in the TCJA are reductions in the corporate federal income tax rate from
35%
to
21%
, and several technical provisions including, among others, limiting the utilization of net operating losses (“NOLs”) arising after December 31, 2017 to
80%
of taxable income with an indefinite carryforward. The specific provisions related to regulated public utilities in the TCJA generally allow for the continued deductibility of interest expense, the elimination of full expensing for tax purposes of certain property acquired after September 27, 2017 and continue certain rate normalization requirements for accelerated depreciation benefits. Non-regulated segments of the Company’s business will be able to take advantage of the full expensing provisions of the TCJA.
Changes in the Code from the TCJA had a material impact on our financial statements in 2017. Under GAAP, specifically Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, the tax effects of changes in tax laws must be recognized in the period in which the law is enacted. ASC 740 also requires deferred income tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. Thus, at the date of enactment, the Company’s deferred income taxes were re-measured based upon the new tax rate. For the Company’s regulated entities, substantially all of the change in deferred income taxes are recorded as either an offset to a regulatory asset or liability because changes are expected to be recovered by or refunded to customers. For the Company’s unregulated operations, the change in deferred income taxes is recorded as a non-cash re-measurement adjustment to earnings.
The staff of the U.S. Securities and Exchange Commission (the “SEC”) has recognized the complexity of reflecting the impacts of the TCJA, and on December 22, 2017 issued guidance in Staff Accounting Bulletin 118 (“SAB 118”) which clarifies accounting for income taxes under ASC 740 if information is not yet available or complete and provides for up to a one year period in which to complete the required analyses and accounting. SAB 118 describes three scenarios or buckets associated with a company’s status of accounting for income tax reform: (1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of tax reform and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply ASC 740, based on the provisions of the tax laws that were in effect immediately prior to the TCJA being enacted. The Company has made a reasonable estimate for the measurement and accounting of certain effects of the TCJA which have been reflected in the December 31, 2017 financial statements. The re-measurement of deferred income taxes at the new federal tax rate increased the 2017 deferred income tax provision by
$125 million
for the year ending December 31, 2017. Additionally, the accumulated deferred income tax liability decreased by
$1.39 billion
and regulatory liabilities increased by
$1.51 billion
, respectively, as of December 31, 2017.
As provided for under SAB 118, the Company has not recorded the impact for certain items under TCJA for which it has not yet been able to gather, prepare and analyze the necessary information in reasonable detail to complete the ASC 740 accounting. For these items, which include the impact of TCJA on state income taxes, the current and deferred income taxes were recognized and measured based on the provisions of the tax laws that were in effect immediately prior to the TCJA being enacted. The current and deferred state taxes are
$25 million
and
$50 million
as of December 31, 2017, respectively. The determination of the impact of the income tax effects of these items and the items reflected as provisional amounts will require additional analysis of historical records and further interpretation of the TCJA from yet to be issued U.S. Treasury regulations which will require more time, information and resources than currently available to the Company.
The following table provides the components of the net deferred tax liability as of
December 31
:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Deferred tax assets
|
|
|
|
Advances and contributions
|
$
|
395
|
|
|
$
|
540
|
|
Tax losses and credits
|
256
|
|
|
301
|
|
Regulatory income tax assets
|
327
|
|
|
—
|
|
Pension and other postretirement benefits
|
96
|
|
|
173
|
|
Other
|
49
|
|
|
90
|
|
Total deferred tax assets
|
1,123
|
|
|
1,104
|
|
Valuation allowance
|
(13
|
)
|
|
(6
|
)
|
Total deferred tax assets, net of allowance
|
$
|
1,110
|
|
|
$
|
1,098
|
|
Deferred tax liabilities
|
|
|
|
|
Property, plant and equipment
|
$
|
2,489
|
|
|
$
|
3,339
|
|
Deferred pension and other postretirement benefits
|
69
|
|
|
126
|
|
Other
|
103
|
|
|
229
|
|
Total deferred tax liabilities
|
2,661
|
|
|
3,694
|
|
Total deferred tax liabilities, net of deferred tax assets
|
$
|
(1,551
|
)
|
|
$
|
(2,596
|
)
|
As of
December 31, 2017
and
2016
, the Company recognized federal NOL carryforwards of
$1.05 billion
and
$1.23 billion
, respectively. The Company believes the federal NOL carryforwards are more likely than not to be recovered and require no valuation allowance. The Company’s federal NOL carryforwards will begin to expire in
2028
.
As of
December 31, 2017
and
2016
, the Company had state NOLs of
$322 million
and
$625 million
, respectively, a portion of which are offset by a valuation allowance because the Company does not believe these NOLs are more likely than not to be realized.
The state NOL carryforwards will begin to expire in 2018 through 2037
.
As of
December 31, 2017
and
2016
, the Company had an insignificant amount of Canadian NOL carryforwards and capital loss carryforwards for federal income tax purposes.
The Company files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local or non-U.S. income tax examinations by tax authorities for years on or before 2012. The Company has state income tax examinations in progress and does not expect material adjustments to result.
The following table summarizes the changes in the Company’s gross liability, excluding interest and penalties, for unrecognized tax benefits:
|
|
|
|
|
Balance as of January 1, 2016
|
$
|
233
|
|
Increases in current period tax positions
|
10
|
|
Decreases in prior period measurement of tax positions
|
(74
|
)
|
Balance as of December 31, 2016
|
$
|
169
|
|
Increases in current period tax positions
|
8
|
|
Decreases in prior period measurement of tax positions
|
(71
|
)
|
Balance as of December 31, 2017
|
$
|
106
|
|
The Company’s tax positions relate primarily to the deductions claimed for repair and maintenance costs on its utility plant. The gross liability was reduced primarily as a result of the Section 481(a) adjustment allocated for the current year when the Company filed the accounting method change with its 2015 tax return. The Company does not anticipate material changes to its unrecognized tax benefits within the next year. If the Company sustains all of its positions as of
December 31, 2017
, an unrecognized tax benefit of
$10 million
, excluding interest and penalties, would impact the Company’s effective tax rate. The Company had an insignificant amount of interest and penalties related to its tax positions as of
December 31, 2017
and
2016
.
The following table summarizes the changes in the Company’s valuation allowance:
|
|
|
|
|
Balance as of January 1, 2015
|
$
|
10
|
|
Decreases in current period tax positions
|
(2
|
)
|
Balance as of December 31, 2015
|
$
|
8
|
|
Decreases in current period tax positions
|
(2
|
)
|
Balance as of December 31, 2016
|
$
|
6
|
|
Increases in current period tax positions
|
7
|
|
Balance as of December 31, 2017
|
$
|
13
|
|
Note 14: Employee Benefits
Pension and Other Postretirement Benefits
The Company maintains noncontributory defined benefit pension plans covering eligible employees of its regulated utility and shared services operations. Benefits under the plans are based on the employee’s years of service and compensation. The pension plans have been closed for all new employees. The pension plans were closed for most employees hired on or after January 1, 2006. Union employees hired on or after January 1, 2001, except for specific eligible groups specified in the Plan, had their accrued benefit frozen and will be able to receive this benefit as a lump sum upon termination or retirement. Union employees hired on or after January 1, 2001 and non-union employees hired on or after January 1, 2006 are provided with a
5.25%
of base pay defined contribution plan. The Company does not participate in a multi-employer plan. The Company also has unfunded noncontributory supplemental non-qualified pension plans that provide additional retirement benefits to certain employees.
The Company’s pension funding practice is to contribute at least the greater of the minimum amount required by the Employee Retirement Income Security Act of 1974 or the normal cost. Further, the Company will consider additional contributions if needed to avoid “at risk” status and benefit restrictions under the Pension Protection Act of 2006 (“PPA”). The Company may also consider increased contributions, based on other financial requirements and the plans’ funded position. Pension expense in excess of the amount contributed to the pension plans is deferred by certain regulated subsidiaries pending future recovery in rates charged for utility services as contributions are made to the plans. See
Note 6—Regulatory Assets and Liabilities
. Pension plan assets are invested in a number of actively managed, commingled funds, and limited partnerships including equities, fixed income securities, guaranteed annuity contracts with insurance companies, real estate funds and real estate investment trusts (“REITs”).
The Company maintains other postretirement benefit plans providing varying levels of medical and life insurance to eligible retirees. The retiree welfare plans are closed for union employees hired on or after January 1, 2006. The plans had previously closed for non-union employees hired on or after January 1, 2002. The Company’s policy is to fund other postretirement benefit costs up to the amount recoverable through rates. Assets of the plans are invested in a number of actively managed and commingled funds including equities and fixed income securities.
The investment policy guidelines of the pension plan require that the fixed income portfolio has an overall weighted-average credit rating of A or better by Standard & Poor’s. None of the Company’s securities are included in pension or other postretirement benefit plan assets. The investment policies’ objectives are focused on reducing the volatility of the plans’ funded status over a long term horizon.
The Company uses fair value for all classes of assets in the calculation of market-related value of plan assets. As of 2017, the fair values and asset allocations of the pension plan assets include the American Water Pension Plan, the New York Water Service Corporation Pension Plan, and the Shorelands Water Company, Inc. Pension Plan.
The fair values and asset allocations of pension plan assets as of
December 31, 2017
and
2016
, respectively, by asset category were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Percentage
of Plan Assets
as of
|
|
|
2018
|
|
|
|
|
|
|
Asset Category
|
|
Target
Allocation
|
|
Total
|
|
|
|
|
December 31, 2017
|
Cash
|
|
|
|
$
|
7
|
|
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
Equity securities:
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
|
344
|
|
|
344
|
|
|
—
|
|
|
—
|
|
|
21
|
%
|
U.S. small cap
|
|
|
|
84
|
|
|
79
|
|
|
5
|
|
|
—
|
|
|
5
|
%
|
International
|
|
|
|
295
|
|
|
2
|
|
|
149
|
|
|
144
|
|
|
18
|
%
|
Real estate fund
|
|
|
|
86
|
|
|
—
|
|
|
—
|
|
|
86
|
|
|
5
|
%
|
REITs
|
|
|
|
26
|
|
|
—
|
|
|
26
|
|
|
—
|
|
|
2
|
%
|
Fixed income securities:
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and government bonds
|
|
|
|
200
|
|
|
180
|
|
|
20
|
|
|
—
|
|
|
12
|
%
|
Corporate bonds
|
|
|
|
519
|
|
|
—
|
|
|
519
|
|
|
—
|
|
|
31
|
%
|
Mortgage-backed securities
|
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
Municipal bonds
|
|
|
|
31
|
|
|
—
|
|
|
31
|
|
|
—
|
|
|
2
|
%
|
Long duration bond fund
|
|
|
|
8
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
1
|
%
|
Guarantee annuity contracts
|
|
|
|
48
|
|
|
—
|
|
|
—
|
|
|
48
|
|
|
3
|
%
|
Total
|
|
100
|
%
|
|
$
|
1,649
|
|
|
$
|
620
|
|
|
$
|
751
|
|
|
$
|
278
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Percentage
of Plan Assets
as of
|
|
|
2017
|
|
|
|
|
|
|
Asset Category
|
|
Target
Allocation
|
|
Total
|
|
|
|
|
December 31, 2016
|
Cash
|
|
|
|
$
|
10
|
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
Equity Securities:
|
|
60
|
%
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
|
316
|
|
|
316
|
|
|
—
|
|
|
—
|
|
|
22
|
%
|
U.S. small cap
|
|
|
|
134
|
|
|
134
|
|
|
—
|
|
|
—
|
|
|
9
|
%
|
International
|
|
|
|
259
|
|
|
—
|
|
|
259
|
|
|
—
|
|
|
18
|
%
|
Real estate fund
|
|
|
|
101
|
|
|
—
|
|
|
—
|
|
|
101
|
|
|
7
|
%
|
REITs
|
|
|
|
24
|
|
|
—
|
|
|
24
|
|
|
—
|
|
|
2
|
%
|
Fixed income securities:
|
|
40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and government bonds
|
|
|
|
150
|
|
|
114
|
|
|
36
|
|
|
—
|
|
|
11
|
%
|
Corporate bonds
|
|
|
|
391
|
|
|
—
|
|
|
391
|
|
|
—
|
|
|
27
|
%
|
Mortgage-backed securities
|
|
|
|
3
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
Long duration bond fund
|
|
|
|
7
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
1
|
%
|
Guarantee annuity contracts
|
|
|
|
48
|
|
|
—
|
|
|
9
|
|
|
39
|
|
|
3
|
%
|
Total
|
|
100
|
%
|
|
$
|
1,443
|
|
|
$
|
581
|
|
|
$
|
722
|
|
|
$
|
140
|
|
|
100
|
%
|
The following tables present a reconciliation of the beginning and ending balances of the fair value measurements using significant unobservable inputs (Level 3) for
2017
and
2016
, respectively:
|
|
|
|
|
|
Level 3
|
Balance as of January 1, 2017
|
$
|
140
|
|
Actual return on assets
|
2
|
|
Purchases, issuances and settlements, net
|
136
|
|
Balance as of December 31, 2017
|
$
|
278
|
|
|
|
|
|
|
|
Level 3
|
Balance as of January 1, 2016
|
$
|
136
|
|
Actual return on assets
|
8
|
|
Purchases, issuances and settlements, net
|
(4
|
)
|
Balance as of December 31, 2016
|
$
|
140
|
|
The Company’s postretirement benefit plans have different levels of funded status and the assets are held under various trusts. The investments and risk mitigation strategies for the plans are tailored specifically for each trust. In setting new strategic asset mixes, consideration is given to the likelihood that the selected asset allocation will effectively fund the projected plan liabilities and meet the risk tolerance criteria of the Company. The Company periodically updates the long-term, strategic asset allocations for these plans through asset liability studies and uses various analytics to determine the optimal asset allocation. Considerations include plan liability characteristics, liquidity needs, funding requirements, expected rates of return and the distribution of returns. Strategies to address the goal of ensuring sufficient assets to pay benefits include target allocations to a broad array of asset classes and, within asset classes, strategies are employed to provide adequate returns, diversification and liquidity.
In 2012, the Company implemented a de-risking strategy for the American Water Pension Plan after conducting an asset-liability study to reduce the volatility of the funded status of the plan. As part of the de-risking strategy, the Company revised the asset allocations to increase the matching characteristics of fixed-income assets relative to liabilities. The fixed income portion of the portfolio was designed to match the bond-like and long-dated nature of the postretirement liabilities. In 2017, the Company further increased its exposure to liability-driven investing and increased its fixed-income allocation to
50%
, up from 40%, in an effort to further decrease the funded status volatility of the plan and hedge the portfolio from movements in interest rates.
In 2012, the Company also implemented a de-risking strategy for the medical bargaining trust within the plan to minimize volatility. In 2017, the Company conducted a new asset-liability study that indicated medical trend inflation that outpaced the Consumer Price Index by more than 2% for the last 20 years. Given continuously rising medical costs, the Company decided to increase the equity exposure of the portfolio to
30%
, up from 20%, while reducing the fixed-income portion of the portfolio from
80%
to 70%. The Company also conducted an asset-liability study for the Post-Retirement Non-Bargaining Medical Plan. Its allocation was adjusted to make it more conservative, reducing the equity allocation from 70% to
60%
and increasing the fixed-income allocation from 30% to
40%
. The Post-Retirement Medical Non-Bargaining plan’s equity allocation was reduced due to the cap on benefits for some non-union participants and resultant reduction in the plan’s liabilities. These changes will take place in 2018.
The Company engages third party investment managers for all invested assets. Managers are not permitted to invest outside of the asset class (e.g. fixed income, equity, alternatives) or strategy for which they have been appointed. Investment management agreements and recurring performance and attribution analysis are used as tools to ensure investment managers invest solely within the investment strategy they have been provided. Futures and options may be used to adjust portfolio duration to align with a plan’s targeted investment policy.
In order to minimize asset volatility relative to the liabilities, a portion of plan assets is allocated to fixed income investments that are exposed to interest rate risk. Increases in interest rates generally will result in a decline in the value of fixed income assets while reducing the present value of the liabilities. Conversely, rate decreases will increase fixed income assets, partially offsetting the related increase in the liabilities. Within equities, risk is mitigated by constructing a portfolio that is broadly diversified by geography, market capitalization, manager mandate size, investment style and process.
Actual allocations to each asset class vary from target allocations due to periodic investment strategy updates, market value fluctuations, the length of time it takes to fully implement investment allocations, and the timing of benefit payments and contributions. The asset allocation is rebalanced on a quarterly basis, if necessary. Voluntary Employees’ Beneficiary Association (“VEBA”) Trust assets include the American Water Post-Retirement Medical Benefits Bargaining Plan, the New York Water Service Corporation Post-Retirement Medical Benefits Bargaining Plan, the American Water Post-Retirement Medical Benefits Non-Bargaining Plan, and the American Water Life Insurance Trust.
The fair values and asset allocations of postretirement benefit plan assets as of
December 31, 2017
and
2016
, respectively, by asset category, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Percentage
of Plan Assets
as of
|
|
|
2018
|
|
|
|
|
|
|
Asset Category
|
|
Target Allocation
|
|
Total
|
|
|
|
|
December 31, 2017
|
Bargain VEBA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
$
|
18
|
|
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
Equity securities:
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
|
44
|
|
|
44
|
|
|
—
|
|
|
—
|
|
|
10
|
%
|
International
|
|
|
|
51
|
|
|
51
|
|
|
—
|
|
|
—
|
|
|
12
|
%
|
Fixed income securities:
|
|
70
|
%
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and government bonds
|
|
|
|
48
|
|
|
21
|
|
|
27
|
|
|
—
|
|
|
11
|
%
|
Corporate bonds
|
|
|
|
233
|
|
|
—
|
|
|
233
|
|
|
—
|
|
|
55
|
%
|
Municipal bonds
|
|
|
|
26
|
|
|
—
|
|
|
26
|
|
|
—
|
|
|
6
|
%
|
Long duration bond fund
|
|
|
|
4
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
1
|
%
|
Future and option contracts
(a)
|
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
5
|
%
|
Total bargain VEBA
|
|
100
|
%
|
|
$
|
426
|
|
|
$
|
140
|
|
|
$
|
286
|
|
|
$
|
—
|
|
|
100
|
%
|
Non-bargain VEBA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
Equity securities:
|
|
60
|
%
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
|
53
|
|
|
53
|
|
|
—
|
|
|
—
|
|
|
37
|
%
|
U.S. small cap
|
|
|
|
5
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
4
|
%
|
International
|
|
|
|
47
|
|
|
47
|
|
|
—
|
|
|
—
|
|
|
33
|
%
|
Fixed income securities:
|
|
40
|
%
|
|
|
|
|
|
|
|
|
|
|
Core fixed income bond fund
(a)
|
|
|
|
36
|
|
|
36
|
|
|
—
|
|
|
—
|
|
|
26
|
%
|
Total non-bargain VEBA
|
|
100
|
%
|
|
$
|
142
|
|
|
$
|
142
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
100
|
%
|
Life VEBA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
Equity securities:
|
|
70
|
%
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
|
3
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
38
|
%
|
Fixed income securities:
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
Core fixed income bond fund
(a)
|
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
62
|
%
|
Total life VEBA
|
|
100
|
%
|
|
$
|
8
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
100
|
%
|
Total
|
|
100
|
%
|
|
$
|
576
|
|
|
$
|
290
|
|
|
$
|
286
|
|
|
$
|
—
|
|
|
100
|
%
|
|
|
(a)
|
Includes cash for margin requirements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Percentage
of Plan Assets
as of
|
|
|
2017
|
|
|
|
|
|
|
Asset Category
|
|
Target Allocation
|
|
Total
|
|
|
|
|
December 31, 2016
|
Bargain VEBA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
|
$
|
35
|
|
|
$
|
35
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
9
|
%
|
International
|
|
|
|
40
|
|
|
40
|
|
|
—
|
|
|
—
|
|
|
10
|
%
|
Fixed income securities:
|
|
80
|
%
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and government bonds
|
|
|
|
84
|
|
|
84
|
|
|
—
|
|
|
—
|
|
|
22
|
%
|
Corporate bonds
|
|
|
|
223
|
|
|
—
|
|
|
223
|
|
|
—
|
|
|
58
|
%
|
Long duration bond fund
|
|
|
|
3
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
1
|
%
|
Future and option contracts
(a)
|
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total bargain VEBA
|
|
100
|
%
|
|
$
|
386
|
|
|
$
|
163
|
|
|
$
|
223
|
|
|
$
|
—
|
|
|
100
|
%
|
Non-bargain VEBA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
Equity securities:
|
|
70
|
%
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
|
29
|
|
|
29
|
|
|
—
|
|
|
—
|
|
|
22
|
%
|
U.S. small cap
|
|
|
|
30
|
|
|
30
|
|
|
—
|
|
|
—
|
|
|
22
|
%
|
International
|
|
|
|
37
|
|
|
37
|
|
|
—
|
|
|
—
|
|
|
28
|
%
|
Fixed income securities:
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
Core fixed income bond fund
|
|
|
|
36
|
|
|
36
|
|
|
—
|
|
|
—
|
|
|
28
|
%
|
Total non-bargain VEBA
|
|
100
|
%
|
|
$
|
134
|
|
|
$
|
134
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
100
|
%
|
Life VEBA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
70
|
%
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
60
|
%
|
Fixed income securities:
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
Core fixed income bond fund
|
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
40
|
%
|
Total life VEBA
|
|
100
|
%
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
100
|
%
|
Total
|
|
100
|
%
|
|
$
|
525
|
|
|
$
|
302
|
|
|
$
|
223
|
|
|
$
|
—
|
|
|
100
|
%
|
|
|
(a)
|
Includes cash for margin requirements.
|
Valuation Techniques Used to Determine Fair Value
Cash—Cash and investments with maturities of three months or less when purchased, including certain short-term fixed-income securities, are considered cash and are included in the recurring fair value measurements hierarchy as Level 1.
Equity securities—For equity securities, the trustees obtain prices from pricing services, whose prices are obtained from direct feeds from market exchanges, that the Company is able to independently corroborate. Equity securities are valued based on quoted prices in active markets and categorized as Level 1. Certain equities, such as international securities held in the pension plan are invested in commingled funds and/or limited partnerships. These funds are valued to reflect the plan fund’s interest in the fund based on the reported year-end net asset value. Since net asset value is not directly observable or not available on a nationally recognized securities exchange for the commingled funds, they are categorized as Level 2. For limited partnerships, the assets as a whole are categorized as level 3 due to the fact that the partnership provides the pricing and the pricing inputs are less readily observable. In addition, the limited partnership vehicle cannot be readily traded.
Fixed-income securities—The majority of U.S. Treasury securities and government bonds have been categorized as Level 1 because they trade in highly-liquid and transparent markets and their prices can be corroborated. The fair values of corporate bonds, mortgage backed securities, and certain government bonds are based on prices that reflect observable market information, such as actual trade information of similar securities. They are categorized as Level 2 because the valuations are calculated using models which utilize actively traded market data that the Company can corroborate.
Guaranteed annuity contracts are categorized as Level 3 because the investments are not publicly quoted. Since these market values are determined by the provider, they are not highly observable and have been categorized as Level 3. Exchange-traded future and option positions are reported in accordance with changes in variation margins that are settled daily. Exchange-traded options and futures, for which market quotations are readily available, are valued at the last reported sale price or official closing price on the primary market or exchange on which they are traded and are classified as Level 1.
Real estate fund—Real estate fund is categorized as Level 3 as the fund uses significant unobservable inputs for fair value measurement and the vehicle is in the form of a limited partnership.
REITs—REITs are invested in commingled funds. Commingled funds are valued to reflect the plan fund’s interest in the fund based on the reported year-end net asset value. Since the net asset value is not directly observable for the commingled funds, they are categorized as Level 2.
The following table provides a rollforward of the changes in the benefit obligation and plan assets for the most recent two years for all plans combined:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
Benefit obligation as of January 1,
|
$
|
1,864
|
|
|
$
|
1,720
|
|
|
$
|
610
|
|
|
$
|
667
|
|
Service cost
|
33
|
|
|
32
|
|
|
10
|
|
|
12
|
|
Interest cost
|
80
|
|
|
80
|
|
|
26
|
|
|
28
|
|
Plan participants' contributions
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
Plan amendments
|
—
|
|
|
—
|
|
|
—
|
|
|
(156
|
)
|
Actuarial (gain) loss
|
118
|
|
|
100
|
|
|
(9
|
)
|
|
82
|
|
Acquisitions
|
9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlements
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
Gross benefits paid
|
(70
|
)
|
|
(65
|
)
|
|
(26
|
)
|
|
(26
|
)
|
Federal subsidy
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Benefit obligation as of December 31,
|
$
|
2,034
|
|
|
$
|
1,864
|
|
|
$
|
614
|
|
|
$
|
610
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
Fair value of plan assets as of January 1,
|
$
|
1,443
|
|
|
$
|
1,376
|
|
|
$
|
525
|
|
|
$
|
500
|
|
Actual return on plan assets
|
227
|
|
|
99
|
|
|
69
|
|
|
32
|
|
Employer contributions
|
42
|
|
|
36
|
|
|
6
|
|
|
17
|
|
Plan participants' contributions
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
Settlements
|
—
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
Acquisitions
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Benefits paid
|
(70
|
)
|
|
(65
|
)
|
|
(26
|
)
|
|
(26
|
)
|
Fair value of plan assets as of December 31,
|
$
|
1,649
|
|
|
$
|
1,443
|
|
|
$
|
576
|
|
|
$
|
525
|
|
Funded value as of December 31,
|
$
|
(385
|
)
|
|
$
|
(421
|
)
|
|
$
|
(38
|
)
|
|
$
|
(85
|
)
|
Amounts recognized in the balance sheet consist of:
|
|
|
|
|
|
|
|
Noncurrent asset
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Current liability
|
(2
|
)
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
Noncurrent liability
|
(383
|
)
|
|
(419
|
)
|
|
(40
|
)
|
|
(87
|
)
|
Net amount recognized
|
$
|
(385
|
)
|
|
$
|
(421
|
)
|
|
$
|
(38
|
)
|
|
$
|
(85
|
)
|
On July 31, 2016, the other postretirement benefit plan was re-measured to reflect a plan amendment, which capped benefits for certain non-union plan participants. The re-measurement included an
$156 million
reduction in future benefits payable to plan participants, and resulted in an
$89 million
reduction to the net accrued postretirement benefit obligation. The plan amendment will be amortized over
10.2
years, the average future working lifetime to full eligibility age for all plan participants.
The following table provides the components of the Company’s accumulated other comprehensive income and regulatory assets that have not been recognized as components of periodic benefit costs as of
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Net actuarial loss
|
$
|
416
|
|
|
$
|
466
|
|
|
$
|
108
|
|
|
$
|
170
|
|
Prior service cost (credit)
|
2
|
|
|
2
|
|
|
(140
|
)
|
|
(158
|
)
|
Net amount recognized
|
$
|
418
|
|
|
$
|
468
|
|
|
$
|
(32
|
)
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
Regulatory assets (liabilities)
|
$
|
270
|
|
|
$
|
300
|
|
|
$
|
(32
|
)
|
|
$
|
12
|
|
Accumulated other comprehensive income
|
148
|
|
|
168
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
418
|
|
|
$
|
468
|
|
|
$
|
(32
|
)
|
|
$
|
12
|
|
As of
December 31, 2017
and
2016
, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with a projected obligation in excess of plan assets were as follows:
|
|
|
|
|
|
|
|
|
|
Projected Benefit Obligation Exceeds the Fair Value of Plans' Assets
|
|
2017
|
|
2016
|
Projected benefit obligation
|
$
|
2,034
|
|
|
$
|
1,864
|
|
Fair value of plan assets
|
1,649
|
|
|
1,443
|
|
|
|
|
|
|
Accumulated Benefit Obligation Exceeds the Fair Value of Plans' Assets
|
|
2017
|
|
2016
|
Accumulated benefit obligation
|
$
|
1,888
|
|
|
$
|
1,722
|
|
Fair value of plan assets
|
1,649
|
|
|
1,443
|
|
The accumulated postretirement benefit obligation exceeds plan assets for all of the Company’s other postretirement benefit plans, except for the New York Water Medical Benefits Bargaining Trust.
In August 2006, the PPA was signed into law in the U.S. The PPA replaces the funding requirements for defined benefit pension plans by requiring that defined benefit plans contribute to 100% of the current liability funding target over seven years. Defined benefit plans with a funding status of less than 80% of the current liability are defined as being “at risk” and additional funding requirements and benefit restrictions may apply. The PPA was effective for the 2008 plan year with short-term phase-in provisions for both the funding target and at-risk determination. The Company’s qualified defined benefit plan is currently funded above the at-risk threshold, and therefore the Company expects that the plans will not be subject to the “at risk” funding requirements of the PPA. The Company is proactively monitoring the plan’s funded status and projected contributions under the law to appropriately manage the potential impact on cash requirements.
Minimum funding requirements for the qualified defined benefit pension plan are determined by government regulations and not by accounting pronouncements. The Company plans to contribute amounts at least equal to the greater of the minimum required contributions or the normal cost in
2018
to the qualified pension plans. The Company plans to contribute to its
2018
other postretirement benefit cost for rate-making purposes.
Information about the expected cash flows for the pension and postretirement benefit plans is as follows:
|
|
|
|
|
|
|
|
|
|
Pension
Benefits
|
|
Other
Benefits
|
2018 expected employer contributions:
|
|
|
|
To plan trusts
|
$
|
39
|
|
|
$
|
—
|
|
To plan participants
|
2
|
|
|
—
|
|
The following table reflects the net benefits expected to be paid from the plan assets or the Company’s assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Expected Benefit
Payments
|
|
Expected Benefit
Payments
|
|
Expected Federal
Subsidy Payments
|
2018
|
$
|
77
|
|
|
$
|
29
|
|
|
$
|
2
|
|
2019
|
83
|
|
|
31
|
|
|
2
|
|
2020
|
89
|
|
|
32
|
|
|
2
|
|
2021
|
94
|
|
|
34
|
|
|
2
|
|
2022
|
99
|
|
|
35
|
|
|
2
|
|
2022-2026
|
577
|
|
|
192
|
|
|
12
|
|
Because the above amounts are net benefits, plan participants’ contributions have been excluded from the expected benefits.
Accounting for pensions and other postretirement benefits requires an extensive use of assumptions about the discount rate, expected return on plan assets, the rate of future compensation increases received by the Company’s employees, mortality, turnover and medical costs. Each assumption is reviewed annually. The assumptions are selected to represent the average expected experience over time and may differ in any one year from actual experience due to changes in capital markets and the overall economy. These differences will impact the amount of pension and other postretirement benefit expense that the Company recognizes.
The significant assumptions related to the Company’s pension and other postretirement benefit plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
Weighted-average assumptions used to determine December 31 benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
3.75%
|
|
4.28%
|
|
4.66%
|
|
3.73%
|
|
4.26%
|
|
4.67%
|
Rate of compensation increase
|
3.02%
|
|
3.07%
|
|
3.10%
|
|
N/A
|
|
N/A
|
|
N/A
|
Medical trend
|
N/A
|
|
N/A
|
|
N/A
|
|
graded from
|
|
graded from
|
|
graded from
|
|
|
|
|
|
|
|
7.00% in 2018
|
|
7.00% in 2017
|
|
6.50% in 2016
|
|
|
|
|
|
|
|
to 4.50% in 2026+
|
|
to 5.00% in 2021+
|
|
to 5.00% in 2021+
|
Weighted-average assumptions used to determine net periodic cost:
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
4.28%
|
|
4.66%
|
|
4.24%
|
|
4.26%
|
|
3.66%
|
|
4.24%
|
Expected return on plan assets
|
6.49%
|
|
7.02%
|
|
6.91%
|
|
5.09%
|
|
5.37%
|
|
4.92%
|
Rate of compensation increase
|
3.07%
|
|
3.10%
|
|
3.12%
|
|
N/A
|
|
N/A
|
|
N/A
|
Medical trend
|
N/A
|
|
N/A
|
|
N/A
|
|
graded from
|
|
graded from
|
|
graded from
|
|
|
|
|
|
|
|
7.00% in 2017
|
|
6.50% in 2016
|
|
6.75% in 2015
|
|
|
|
|
|
|
|
to 5% in 2021+
|
|
to 5.00% in 2021+
|
|
to 5.00% in 2021+
|
Note: N/A - Assumption is not applicable.
The discount rate assumption was determined for the pension and postretirement benefit plans independently. At year-end 2011, the Company began using an approach that approximates the process of settlement of obligations tailored to the plans’ expected cash flows by matching the plans’ cash flows to the coupons and expected maturity values of individually selected bonds. The yield curve was developed for a universe containing the majority of U.S.-issued AA-graded corporate bonds, all of which were non-callable (or callable with make-whole provisions). Historically, for each plan, the discount rate was developed at the level equivalent rate that would produce the same present value as that using spot rates aligned with the projected benefit payments.
The expected long-term rate of return on plan assets is based on historical and projected rates of return, prior to administrative and investment management fees, for current and planned asset classes in the plans’ investment portfolios. Assumed projected rates of return for each of the plans’ projected asset classes were selected after analyzing historical experience and future expectations of the returns and volatility of the various asset classes. Based on the target asset allocation for each asset class, the overall expected rate of return for the portfolio was developed, adjusted for historical and expected experience of active portfolio management results compared to the benchmark returns and for the effect of expenses paid from plan assets. The Company’s pension expense increases as the expected return on assets decreases. The Company used an expected return on plan assets of
6.49%
to estimate its 2017 pension benefit costs, and an expected blended return based on weighted assets of
5.09%
to estimate its 2017 other postretirement benefit costs.
In the determination of year end 2014 projected benefit plan obligations, the Company adopted a new table based on the Society of Actuaries RP 2014 mortality table including a generational BB-2D projection scale. The adoption resulted in a significant increase to pension and other postretirement benefit plans’ projected benefit obligations. In 2015 a new MP 2015 Projection Scale was issued, but not adopted by the Company since all of the experience upon which the MP 2015 Projection Scale is based was considered by the Company in selecting its 2014 assumptions. For year-end 2017, the Company retained the Society of Actuaries RP-2014 mortality table as its base mortality table but adopted the new MP-2017 generational projection scale to project mortality improvements after 2006.
Assumed health care cost trend rates have a significant effect on the amounts reported for the other postretirement benefit plans. The health care cost trend rate is based on historical rates and expected market conditions. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
|
One-Percentage-Point
Increase
|
|
One-Percentage-Point
Decrease
|
Effect on total of service and interest cost components
|
$
|
5
|
|
|
$
|
(4
|
)
|
Effect on other postretirement benefit obligation
|
73
|
|
|
(60
|
)
|
The following table provides the components of net periodic benefit costs for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Components of net periodic pension benefit cost:
|
|
|
|
|
|
Service cost
|
$
|
33
|
|
|
$
|
32
|
|
|
$
|
37
|
|
Interest cost
|
80
|
|
|
80
|
|
|
74
|
|
Expected return on plan assets
|
(93
|
)
|
|
(95
|
)
|
|
(97
|
)
|
Amortization of:
|
|
|
|
|
|
Prior service cost (credit)
|
1
|
|
|
1
|
|
|
1
|
|
Actuarial (gain) loss
|
34
|
|
|
27
|
|
|
25
|
|
Net periodic pension benefit cost
|
$
|
55
|
|
|
$
|
45
|
|
|
$
|
40
|
|
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
|
|
|
|
|
|
Amortization of prior service credit (cost)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Current year actuarial (gain) loss
|
(7
|
)
|
|
21
|
|
|
10
|
|
Amortization of actuarial gain (loss)
|
(7
|
)
|
|
(6
|
)
|
|
(5
|
)
|
Total recognized in other comprehensive income
|
$
|
(14
|
)
|
|
$
|
15
|
|
|
$
|
5
|
|
Total recognized in net periodic benefit cost and comprehensive income
|
$
|
41
|
|
|
$
|
60
|
|
|
$
|
45
|
|
Components of net periodic other postretirement benefit cost:
|
|
|
|
|
|
Service cost
|
$
|
10
|
|
|
$
|
12
|
|
|
$
|
14
|
|
Interest cost
|
26
|
|
|
28
|
|
|
30
|
|
Expected return on plan assets
|
(26
|
)
|
|
(27
|
)
|
|
(26
|
)
|
Amortization of:
|
|
|
|
|
|
Prior service cost (credit)
|
(18
|
)
|
|
(9
|
)
|
|
(2
|
)
|
Actuarial (gain) loss
|
10
|
|
|
5
|
|
|
5
|
|
Net periodic other postretirement benefit cost
|
$
|
2
|
|
|
$
|
9
|
|
|
$
|
21
|
|
The Company’s policy is to recognize curtailments when the total expected future service of plan participants is reduced by greater than
10%
due to an event that results in terminations and/or retirements.
Cumulative gains and losses that are in excess of
10%
of the greater of either the projected benefit obligation or the fair value of plan assets are amortized over the expected average remaining future service of the current active membership for the plans.
The estimated amounts that will be amortized from accumulated other comprehensive income and regulatory assets into net periodic benefit cost in
2018
are as follows:
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
Actuarial (gain) loss
|
$
|
27
|
|
|
$
|
4
|
|
Prior service cost (credit)
|
1
|
|
|
(18
|
)
|
Total
|
$
|
28
|
|
|
$
|
(14
|
)
|
Savings Plans for Employees
The Company maintains 401(k) savings plans that allow employees to save for retirement on a tax-deferred basis. Employees can make contributions that are invested at their direction in one or more funds. The Company makes matching contributions based on a percentage of an employee’s contribution, subject to certain limitations. Due to the Company’s discontinuing new entrants into the defined benefit pension plan, on January 1, 2006 the Company began providing an additional
5.25%
of base pay defined contribution benefit for union employees hired on or after January 1, 2001 and non-union employees hired on or after January 1, 2006. Plan expenses totaled
$13 million
,
$9 million
and
$9 million
for
2017
,
2016
and
2015
, respectively. All of the Company’s contributions are invested in one or more funds at the direction of the employees.
Note 15: Commitments and Contingencies
Commitments have been made in connection with certain construction programs. The estimated capital expenditures required under legal and binding contractual obligations amounted to
$475 million
as of
December 31, 2017
.
The Company’s regulated subsidiaries maintain agreements with other water purveyors for the purchase of water to supplement their water supply. The future annual commitments related to minimum quantities of purchased water having non-cancelable terms are as follows:
|
|
|
|
|
Year
|
Amount
|
2018
|
$
|
59
|
|
2019
|
65
|
|
2020
|
65
|
|
2021
|
65
|
|
2022
|
64
|
|
Thereafter
|
661
|
|
The Company enters into agreements for the provision of services to water and wastewater facilities for the United States military, municipalities and other customers. The Company’s military agreements expire between
2051
and
2068
and have remaining performance commitments as measured by estimated remaining contract revenue of
$3.6 billion
as of
December 31, 2017
. The military agreements are subject to customary termination provisions held by the U.S. government prior to the agreed upon contract expiration. The Company’s O&M agreements with municipalities and other customers expire between
2018
and
2038
and have remaining performance commitments as measured by estimated remaining contract revenue of
$711 million
as of
December 31, 2017
. Some of the Company’s long-term contracts to operate and maintain a municipality’s, federal government’s or other party’s water or wastewater treatment and delivery facilities include responsibility for certain maintenance for some of those facilities, in exchange for an annual fee. Unless specifically required to perform certain maintenance activities, the maintenance costs are recognized when the maintenance is performed.
Contingencies
The Company is routinely involved in legal actions incident to the normal conduct of its business. As of
December 31, 2017
, the Company has accrued approximately
$135 million
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
$27 million
. 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 15—Commitments and Contingencies
, 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 (“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. By January 18, 2014, none of WVAWC’s customers were subject to the Do Not Use order.
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 this 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, more than
70
cases remain pending.
Four
of the cases pending before the U.S. district court were consolidated 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. In January 2016, all of the then-filed state court cases were referred to West Virginia’s Mass Litigation Panel for further proceedings, which have been stayed until April 22, 2018 pending the approval by the court in the Federal action of a global agreement to settle all of such cases, as described below. The court in the Federal action has continued the start of the trial indefinitely pending ongoing settlement approval activities.
Proposed Global Class Action Settlement
In October 2016, the court in the Federal action approved the preliminary principles, terms and conditions of a binding global agreement in principle to settle claims among the American Water Defendants, and all class members, putative class members, claimants and potential claimants, arising out of the Freedom Industries chemical spill. 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 of these matters and requesting that the court in the Federal action grant preliminary approval of such settlement. 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. On August 25, 2017, the parties filed a proposed amended settlement agreement and related materials addressing the matters set forth in the July 6, 2017 order.
On September 21, 2017, the court in the Federal action issued an order granting preliminary approval of a settlement class and proposed class action settlement (the “Settlement”) with respect to claims against the American Water Defendants by all putative class members (collectively, the “Plaintiffs”) for all claims and potential claims arising out of the Freedom Industries chemical spill. The Settlement proposes a global resolution of all federal and state litigation and potential claims against the American Water Defendants and their insurers. Under the terms and conditions of the Settlement and the proposed amended 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. Under federal class action rules, claimants had the right, until December 8, 2017, to elect to opt out of the final Settlement, in which case such claimant would not receive any benefit from or be bound by the terms of the Settlement. As of January 31, 2018, less than
100
of the
225,000
estimated putative Plaintiffs have submitted opt-out notices. The deadline to file a claim in the Settlement is February 21, 2018.
The proposed aggregate pre-tax amount of the Settlement with respect to the Company is
$126 million
. The aggregate portion of the Settlement to be contributed by WVAWC, net of insurance recoveries, is
$43 million
(approximately
$26 million
after-tax), taking into account the September 2017 settlement with one of the Company’s general liability insurance carriers discussed below. Another defendant to the Settlement is to contribute up to
$25 million
to the Settlement. Two of the Company’s general liability insurance carriers, which provide an aggregate of
$50 million
in insurance coverage to the Company under these policies, had been originally requested to participate in the Settlement at the time of the initial filing of the binding agreement in principle with the court in the Federal action, but did not agree to do so at that time. WVAWC filed a lawsuit against one of these carriers alleging that the carrier’s failure to agree to participate in the Settlement constituted a breach of contract. On September 19, 2017, the Company and the insurance carrier settled this lawsuit for
$22 million
, out of a maximum of
$25 million
in potential coverage under the terms of the relevant policy, in exchange for a full release by the Company and WVAWC of all claims against the insurance carrier related to the Freedom Industries chemical spill. WVAWC and the settling insurer have agreed to stay this litigation pending final approval of the Settlement. The Company and WVAWC continue to pursue vigorously their rights to insurance coverage for contributions by WVAWC to the Settlement in mandatory arbitration with the remaining non-participating carrier. This arbitration proceeding remains pending.
The proposed Settlement would 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 million
, of which
$29 million
will be contributed by WVAWC, including insurance deductibles, and
$47 million
would be contributed by two of the Company’s general liability insurance carriers, and (ii) an individual review claim fund of up to
$50 million
, of which up to
$14 million
would be contributed by WVAWC and up to
$36 million
would be contributed by a number of the Company’s general liability insurance carriers. Separately, up to
$25 million
would be contributed to the guaranteed fund by another defendant to the Settlement. If any final approval order by the court in the Federal action with respect to the Settlement is appealed and such appeal would delay potential payment to claimants under the Settlement, WVAWC and the other defendant to the Settlement will contribute up to
$50 million
and
$25 million
, respectively, to the Settlement (not including, in the case of WVAWC, any contributions by the Company’s general liability insurance carriers which would not be made until such time as a final, non-appealable order is issued) into an escrow account during the pendency of such appeals. For certain claims, WVAWC and the other defendant to the Settlement may, in lieu of these escrowed contributions, make advance payments of such claims if agreed to by the parties. All administrative expenses of the Settlement and attorneys’ fees of class counsel related thereto would be paid from the funds designated to pay claims covered by the Settlement.
As a result of these events, in the third quarter of 2016, the Company recorded a charge to earnings, net of insurance receivables, of
$65 million
(
$39 million
after-tax). Additionally, in the third quarter of 2017, the Company recorded a benefit of
$22 million
(
$13 million
after-tax) as an additional insurance receivable reflecting the settlement with the insurance carrier described above. The settlement amount of
$126 million
is reflected in Accrued Liabilities and the offsetting insurance receivables are reflected in Other Current Assets in the Consolidated Balance Sheet as of
December 31, 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 (the “PSC”) for approximately
$4 million
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 million
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 insurance carrier that was requested, but presently has not agreed, to participate in the Settlement. Any recovery by WVAWC or the Company from the remaining non-participating carrier would reimburse WVAWC for its contributions to the guaranteed fund.
Notice of the terms of the Settlement to members of the settlement class commenced on October 11, 2017. Following the notice period, on January 9, 2018, the court in the Federal action held a fairness hearing to consider final approval of the Settlement, which was continued on February 1, 2018 to address certain open matters. At this hearing, the court in the Federal action indicated that it intended to enter an order approving the Settlement, and the parties submitted a proposed order to the court on February 2, 2018.
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 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. Moreover, the PSC issued an order on June 15, 2017 concluding its investigation without requiring WVAWC to take any further action with respect to the matters covered by 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. In September 2016, the CSB issued and adopted its investigation report in which it recommended that the Company conduct additional source water protection activities. 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. The Company has submitted an updated report on contingency planning and is awaiting CSB’s further review.
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. The complaint seeks an injunction against WVAWC that would require the creation of various databases and public repositories of documents related to the Freedom Industries chemical spill, as well as further study and risk assessments regarding the alleged exposure of Lincoln County residents to the released chemicals. 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 LCC has elected to opt out of the Settlement. On January 26, 2018, the LCC filed a motion seeking to lift the stay imposed by the Mass Litigation Panel. This motion is pending. WVAWC believes that this lawsuit is without merit and intends to vigorously contest the claims and allegations raised in the complaint.
California Public Utilities Commission Residential Rate Design Proceeding
In December 2016, the CPUC issued a final decision in a proceeding involving California-American Water Company, a wholly owned subsidiary of the Company (“Cal Am”), adopting a new residential rate design for Cal Am’s Monterey District. The decision allowed for recovery by Cal Am of
$32 million
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 million
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 million
to
$179 million
(calculated as a continuing violation dating back to 2000 and applying penalties of up to
$20,000
per day until January 1, 2012 and penalties of up to
$50,000
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. Hearings before the administrative law judge in this matter were held in August, September and November 2017. Cal Am also submitted additional testimony on the issue of whether Cal Am should be penalized, and if so, the reasonable amount of any such penalty. This proceeding remains pending, and the CPUC has set a statutory deadline of September 30, 2018 for the completion of the proceeding.
As of
December 31, 2017
, the portions of this loss contingency that are probable and/or reasonably possible have been determined to be immaterial to the Company and have been included in the aggregate maximum amounts described above in the paragraph under “Contingencies” in this Note 15.
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.
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 Virginia law regarding the sufficiency of WVAWC’s facilities and negligence by WVAWC in the design, maintenance and operation of the water system. The plaintiffs seek 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.
On October 12, 2017, WVAWC filed with the court a motion seeking to dismiss all of the plaintiffs’ counts alleging statutory and common law tort claims. Furthermore, WVAWC asserts that the PSC, and not the court, has primary jurisdiction over allegations involving violations of the applicable tariff, the public utility code and related rules. This motion remains pending.
The Company and WVAWC believe that WVAWC has valid, meritorious defenses to the claims raised in this class action complaint. WVAWC is vigorously defending 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.
Note 16: 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 years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Numerator:
|
|
|
|
|
|
Net income attributable to common stockholders
|
$
|
426
|
|
|
$
|
468
|
|
|
$
|
476
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding—Basic
|
178
|
|
|
178
|
|
|
179
|
|
Effect of dilutive common stock equivalents
|
1
|
|
|
1
|
|
|
1
|
|
Weighted average common shares outstanding—Diluted
|
179
|
|
|
179
|
|
|
180
|
|
The effect of dilutive common stock equivalents is related to RSUs and performance stock units granted under the 2007 and 2017 Omnibus Equity Compensation Plans, as well as shares purchased under the ESPP. Less than
one million
share-based awards were excluded from the computation of diluted EPS for the years ended
December 31, 2017
,
2016
and
2015
because their effect would have been anti-dilutive under the treasury stock method.
Note 17: Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Current assets and current liabilities—The carrying amounts reported in the 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 majority 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: an average of the Company’s own publicly-traded debt securities and 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.
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 Amount
|
|
December 31, 2017
|
|
|
L
e
vel 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Preferred stock with mandatory redemption requirements
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14
|
|
|
$
|
14
|
|
Long-term debt (excluding capital lease obligations)
|
6,809
|
|
|
4,846
|
|
|
976
|
|
|
1,821
|
|
|
7,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
December 31, 2016
|
|
|
L
e
vel 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
|
|
Fair Value Measurements
To increase consistency and comparability in fair value measurements, GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
|
|
•
|
Level 1—quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date. Financial assets and liabilities utilizing Level 1 inputs include active exchange-traded equity securities, exchange-based derivatives, mutual funds and money market funds.
|
|
|
•
|
Level 2—inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities, non-exchange-based derivatives, commingled investment funds not subject to purchase and sale restrictions and fair-value hedges.
|
|
|
•
|
Level 3—unobservable inputs, such as internally-developed pricing models for the asset or liability due to little or no market activity for the asset or liability. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded non-exchange-based derivatives and commingled investment funds subject to purchase and sale restrictions.
|
Recurring Fair Value Measurements
The following table presents assets and liabilities measured and recorded at fair value on a recurring basis and their level within the fair value hierarchy as of
December 31, 2017
and
2016
, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Restricted funds
|
$
|
28
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28
|
|
Rabbi trust investments
|
15
|
|
|
—
|
|
|
—
|
|
|
15
|
|
Deposits
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Other investments
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Total assets
|
50
|
|
|
—
|
|
|
—
|
|
|
50
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred compensation obligation
|
17
|
|
|
—
|
|
|
—
|
|
|
17
|
|
Mark-to-market derivative liability
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
Total liabilities
|
17
|
|
|
3
|
|
|
—
|
|
|
20
|
|
Total net assets (liabilities)
|
$
|
33
|
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 asset
|
—
|
|
|
28
|
|
|
—
|
|
|
28
|
|
Other investments
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Total assets
|
40
|
|
|
28
|
|
|
—
|
|
|
68
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred compensation obligation
|
13
|
|
|
—
|
|
|
—
|
|
|
13
|
|
Mark-to-market derivative liability
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
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. Long-term restricted funds of
$1 million
and
$4 million
were included in other long-term assets as of
December 31, 2017
and
2016
, respectively.
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-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 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.
Note 18: Leases
The Company has entered into operating leases involving certain facilities and equipment. Rental expenses under operating leases were
$29 million
,
$24 million
and
$21 million
for the years ended
December 31, 2017
,
2016
and
2015
, respectively. The operating leases for facilities will expire over the next
25
years and the operating leases for equipment will expire over the next
5
years. Certain operating leases have renewal options ranging from one to five years.
The minimum annual future rental commitment under operating leases that have initial or remaining non-cancelable lease terms over the next
5
years and thereafter are as follows:
|
|
|
|
|
|
Amount
|
2018
|
$
|
15
|
|
2019
|
14
|
|
2020
|
12
|
|
2021
|
9
|
|
2022
|
8
|
|
Thereafter
|
65
|
|
The Company has a series of agreements with various public entities (the “Partners”) to establish certain joint ventures, commonly referred to as “public-private partnerships.” Under the public-private partnerships, the Company constructed utility plant, financed by the Company and the Partners constructed utility plant (connected to the Company’s property), financed by the Partners. The Company agreed to transfer and convey some of its real and personal property to the Partners in exchange for an equal principal amount of Industrial Development Bonds (“IDBs”), issued by the Partners under a state Industrial Development Bond and Commercial Development Act. The Company leased back the total facilities, including portions funded by both the Company and the Partners, under leases for a period of
40
years.
The leases related to the portion of the facilities funded by the Company have required payments from the Company to the Partners that approximate the payments required by the terms of the IDBs from the Partners to the Company (as the holder of the IDBs). As the ownership of the portion of the facilities constructed by the Company will revert back to the Company at the end of the lease, the Company has recorded these as capital leases. The lease obligation and the receivable for the principal amount of the IDBs are presented by the Company on a net basis. The carrying value of the facilities funded by the Company recognized as a capital lease asset was
$150 million
and
$152 million
as of
December 31, 2017
and
2016
, respectively, which is presented in property, plant and equipment in the accompanying Consolidated Balance Sheets. The future payments under the lease obligations are equal to and offset by the payments receivable under the IDBs.
As of
December 31, 2017
, the minimum annual future rental commitment under the operating leases for the portion of the facilities funded by the Partners that have initial or remaining non-cancelable lease terms in excess of
one
year included in the preceding minimum annual rental commitments are
$4 million
in
2018
through
2022
, and
$63 million
thereafter.
Note 19: Segment Information
The Company’s operating segments are comprised of the revenue-generating components of its businesses for which separate financial information is internally produced and regularly used by management to make operating decisions and assess performance. 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
.”
The Regulated Businesses segment is the largest component of the Company’s business and includes
20
subsidiaries that provide water and wastewater services to customers in
16
states.
The
Market-Based Businesses
’
four
non-reportable operating segments are Military Services Group, Contract Operations Group, Homeowner Services Group and Keystone Operations. Military Services Group performs
50
-
year contracts with the U.S. government for the operation and maintenance of the water and wastewater systems on certain military bases. Homeowner Services Group provides services to domestic homeowners and smaller commercial establishments to protect against the cost of repairing damaged or blocked pipes inside and outside their accommodations, as well as interior electric lines. Contract Operations Group performs contracts with municipalities, the food and beverage industry and other customers to operate and maintain water and wastewater facilities. Keystone Operations provides customized water sourcing, transfer services, pipeline construction and water storage solutions, for natural gas exploration and production companies.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. See
Note 2—Significant Accounting Policies
. The
Regulated Businesses
segment and
Market-Based Businesses
include intercompany costs that are allocated by American Water Works Service Company, Inc. and intercompany interest that is charged by American Water Capital Corp., which are eliminated to reconcile to the Consolidated Statements of Operations. Inter-segment revenues, include the sale of water from a regulated subsidiary to market-based subsidiaries, leased office space, furniture and equipment provided by the Company’s market-based subsidiaries to its regulated subsidiaries. “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 the acquisitions that have not been allocated to the operating segments for evaluation of performance and allocation of resource purposes. The adjustments related to the acquisitions are reported in Other as they are excluded from segment performance measures evaluated by management.
The following tables include the Company’s summarized segment information as of and for the years ended
December 31
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Regulated
Businesses
|
|
Market-Based
Businesses
|
|
Other
|
|
Consolidated
|
Operating revenues
|
$
|
2,958
|
|
|
$
|
422
|
|
|
$
|
(23
|
)
|
|
$
|
3,357
|
|
Depreciation and amortization
|
462
|
|
|
18
|
|
|
12
|
|
|
492
|
|
Total operating expenses, net
|
1,781
|
|
|
360
|
|
|
(28
|
)
|
|
2,113
|
|
Interest, net
|
(268
|
)
|
|
3
|
|
|
(77
|
)
|
|
(342
|
)
|
Income before income taxes
|
925
|
|
|
66
|
|
|
(79
|
)
|
|
912
|
|
Provision for income taxes
|
366
|
|
|
28
|
|
|
92
|
|
|
486
|
|
Net income attributable to common stockholders
|
559
|
|
|
38
|
|
|
(171
|
)
|
|
426
|
|
Total assets
|
17,602
|
|
|
599
|
|
|
1,281
|
|
|
19,482
|
|
Capital expenditures
|
1,316
|
|
|
18
|
|
|
100
|
|
|
1,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
Regulated
Businesses
|
|
Market-Based
Businesses
|
|
Other
|
|
Consolidated
|
Operating revenues
|
$
|
2,871
|
|
|
$
|
451
|
|
|
$
|
(20
|
)
|
|
$
|
3,302
|
|
Depreciation and amortization
|
440
|
|
|
15
|
|
|
15
|
|
|
470
|
|
Total operating expenses, net
|
1,852
|
|
|
391
|
|
|
(21
|
)
|
|
2,222
|
|
Interest, net
|
(256
|
)
|
|
2
|
|
|
(71
|
)
|
|
(325
|
)
|
Income before income taxes
|
775
|
|
|
65
|
|
|
(70
|
)
|
|
770
|
|
Provision for income taxes
|
303
|
|
|
26
|
|
|
(27
|
)
|
|
302
|
|
Net income attributable to common stockholders
|
472
|
|
|
39
|
|
|
(43
|
)
|
|
468
|
|
Total assets
|
16,405
|
|
|
637
|
|
|
1,440
|
|
|
18,482
|
|
Capital expenditures
|
1,274
|
|
|
18
|
|
|
19
|
|
|
1,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
Regulated
Businesses
|
|
Market-Based
Businesses
|
|
Other
|
|
Consolidated
|
Operating revenues
|
$
|
2,743
|
|
|
$
|
434
|
|
|
$
|
(18
|
)
|
|
$
|
3,159
|
|
Depreciation and amortization
|
411
|
|
|
8
|
|
|
21
|
|
|
440
|
|
Total operating expenses, net
|
1,732
|
|
|
370
|
|
|
(18
|
)
|
|
2,084
|
|
Interest, net
|
(248
|
)
|
|
2
|
|
|
(62
|
)
|
|
(308
|
)
|
Income before income taxes
|
776
|
|
|
68
|
|
|
(62
|
)
|
|
782
|
|
Provision for income taxes
|
303
|
|
|
26
|
|
|
(23
|
)
|
|
306
|
|
Net income attributable to common stockholders
|
473
|
|
|
42
|
|
|
(39
|
)
|
|
476
|
|
Total assets
|
15,258
|
|
|
496
|
|
|
1,487
|
|
|
17,241
|
|
Capital expenditures
|
1,143
|
|
|
17
|
|
|
—
|
|
|
1,160
|
|
Note 20: Unaudited Quarterly Data
The following table summarizes certain supplemental unaudited consolidated quarterly financial data for each of the four quarters in the years ended
December 31, 2017
and
2016
, respectively. The operating results for any quarter are not indicative of results that may be expected for a full year or any future periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Operating revenues
|
$
|
756
|
|
|
$
|
844
|
|
|
$
|
936
|
|
|
$
|
821
|
|
Operating income
|
227
|
|
|
308
|
|
|
430
|
|
|
279
|
|
Net income attributable to common stockholders
|
93
|
|
|
131
|
|
|
203
|
|
|
(1
|
)
|
Basic earnings per share:
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
$
|
0.52
|
|
|
$
|
0.74
|
|
|
$
|
1.14
|
|
|
$
|
(0.01
|
)
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
0.52
|
|
|
0.73
|
|
|
1.13
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Operating revenues
|
$
|
743
|
|
|
$
|
827
|
|
|
$
|
930
|
|
|
$
|
802
|
|
Operating income
|
214
|
|
|
299
|
|
|
319
|
|
|
248
|
|
Net income attributable to common stockholders
|
82
|
|
|
137
|
|
|
148
|
|
|
101
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
$
|
0.46
|
|
|
$
|
0.77
|
|
|
$
|
0.83
|
|
|
$
|
0.57
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
Net income attributable to common stockholders
|
0.46
|
|
|
0.77
|
|
|
0.83
|
|
|
0.57
|
|