Notes to Consolidated Financial Statements (Unaudited)
(Unless otherwise noted, in millions, except per share data)
Note 1: Basis of Presentation
The unaudited Consolidated Financial Statements provided in this report include the accounts of American Water Works Company, Inc. and all of its subsidiaries (collectively, “American Water” or the “Company”), in which a controlling interest is maintained after the elimination of intercompany accounts and transactions. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting, and with the rules and regulations for reporting on Quarterly Reports on Form 10-Q (“Form 10-Q”). Accordingly, they do not contain certain information and disclosures required by GAAP for comprehensive financial statements. In the opinion of management, all adjustments necessary for a fair statement of the financial position as of
March 31, 2018
, and results of operations and cash flows for all periods presented have been made. All adjustments are of a normal, recurring nature, except as otherwise disclosed.
The unaudited Consolidated Financial Statements and notes included in this report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017
(“Form 10-K”), which provides a more complete discussion of the Company’s accounting policies, financial position, operating results and other matters. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the year, primarily due to the seasonality of the Company’s operations.
Note 2: Significant Accounting Policies
New Accounting Standards
The Company adopted the following accounting standards as of January 1, 2018:
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Standard
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Description
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Date of
Adoption
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Application
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Effect on the Consolidated Financial Statements
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Revenue from Contracts with Customers
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|
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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Modified retrospective
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The adoption had no material impact on the Consolidated Financial Statements. The primary impact was the additional disclosures required in the Notes to Consolidated Financial Statements. See Note 3—Revenue Recognition for additional information.
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Clarifying the Definition of a Business
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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 adoption had no material impact on the Consolidated Financial Statements.
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Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-Retirement 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 the service cost component and the other components of net periodic benefit costs on the income statement; prospective for the limitation of capitalization to only the service cost component of net periodic benefit costs in total assets.
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The Company presented in the current period, and reclassified in the prior period, net periodic benefit costs, other than the service cost component, in Non-operating benefit costs, net on the Consolidated Statements of Operations.
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The following recently issued accounting standards have not yet been adopted by the Company as of
March 31, 2018
:
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Standard
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Description
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Date of
Adoption
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Application
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Estimated Effect on the Consolidated Financial Statements
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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 (the “TCJA”) 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 its 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 impact 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 its hedging activities 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.
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Cash, Cash Equivalents and Restricted Funds
The following table provides a reconciliation of the cash, cash equivalents and restricted funds as presented on the Consolidated Balance Sheets, to the sum of such amounts presented on the Consolidated Statements of Cash Flows for the periods ended
March 31
:
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2018
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2017
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Cash and cash equivalents
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$
|
55
|
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$
|
78
|
|
Restricted funds
|
26
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|
23
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Restricted funds included in other long-term assets
|
1
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|
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4
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Cash and cash equivalents and restricted funds as presented on the Consolidated Statements of Cash Flows
|
$
|
82
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$
|
105
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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: Revenue Recognition
On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606,
Revenue From Contracts With Customers,
and
all related amendments (collectively, “ASC 606” or the “standard”)
,
using the modified retrospective approach, applied to contracts which were not completed as of January 1, 2018. Under this approach, periods prior to the adoption date have not been restated and continue to be reported under the accounting standards in effect for those periods. The Company’s revenue associated with alternative revenue programs and lease contracts are outside the scope of ASC 606 and accounted for under other existing GAAP.
Under ASC 606, a performance obligation is a promise within a contract to transfer a distinct good or service, or a series of distinct goods and services, to a customer. Revenue is recognized when performance obligations are satisfied and the customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for goods or services. Under the standard, a contract’s transaction price is allocated to each distinct performance obligation. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identifies the contracts with a customer; (ii) identifies the performance obligations within the contract, including whether they are distinct and capable of being distinct in the context of the contract; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenue when, or as, the Company satisfies each performance obligation.
The Company’s revenues from contracts with customers are discussed below. Customer payments for contracts are generally due within 30 days of billing and none of the contracts with customers have payment terms that exceed one year; therefore, the Company elected to apply the significant financing component practical expedient and no amount of consideration has been allocated as a financing component. See
Note 14—Segment Information
for additional information regarding the Company’s operating segments.
Regulated Businesses
Revenue
Revenue from the Company’s
Regulated Businesses
is generated primarily from water and wastewater services delivered to customers. These contracts contain a single performance obligation, the delivery of water and wastewater services, as the promise to transfer the individual good or service is not separately identifiable from other promises within the contract and, therefore, is not distinct. Revenues are recognized over time, as services are provided. There are generally no significant financing components or variable consideration. Revenues include amounts billed to customers on a cycle basis, and unbilled amounts calculated 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 amounts that the Company has a right to invoice are determined by each customer’s actual usage, an indicator that the invoice amount corresponds directly to the value transferred to the customer. The Company elected to use the right to invoice and the disclosure of remaining performance obligations practical expedients for these revenues.
Market-Based Businesses
Revenue
Through various protection programs, the Company provides fixed fee services to domestic homeowners and smaller commercial customers to protect against repair costs for interior and external water and sewer lines, interior electric lines, heating and cooling systems and water heaters, as well as power surge protection and other related services. All contracts have a one-year term and each service is a separate performance obligation, satisfied over time, as the customers simultaneously receive and consume the benefits provided from the service. Customers are obligated to pay for the protection programs ratably over 12 months or via a one-time, annual fee, with revenues recognized ratably over time for these services. Advances from customers are deferred until the performance obligation is satisfied. The Company elected to use the disclosure of remaining performance obligations practical expedients for these revenues.
The Company’s
Market-Based Businesses
also have long-term, fixed fee contracts to operate and maintain water and wastewater facilities with the U.S. government on various military bases and facilities owned by municipal and industrial customers, as well as shorter-term contracts that provide water management solutions for shale natural gas companies and customers in the water services market. Billing and revenue recognition for the fixed fee revenues occurs ratably over the term of the contract, as customers simultaneously receive and consume the benefits provided by the Company. Additionally, these contracts allow the Company to make capital improvements to underlying infrastructure, which are initiated through separate modifications or amendments to the original contract, whereby stand-alone, fixed pricing is separately stated for each improvement. The Company has determined that these capital improvements are separate performance obligations, with revenue recognized over time based on performance completed at the end of each reporting period. The Company elected to use the significant financing component practical expedient for these contract revenues. 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 revenues, with billings in excess of revenues 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.
Disaggregated Revenues
The following table is a summary of the Company’s operating revenues disaggregated for the three months ended
March 31, 2018
:
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(In millions)
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Revenues from Contracts with Customers
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Other Revenues not from Contracts with Customers (a)
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Total Operating Revenues
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Regulated Businesses:
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Water services:
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Residential
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$
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368
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$
|
—
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$
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368
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Commercial
|
133
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|
|
—
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|
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133
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Industrial
|
31
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|
|
—
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|
|
31
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|
Public and other
|
80
|
|
|
—
|
|
|
80
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Total water services
|
612
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|
|
—
|
|
|
612
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Wastewater services:
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Residential
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27
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—
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27
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Commercial
|
7
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—
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7
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Industrial
|
1
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|
|
—
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|
1
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|
Public and other
|
3
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|
|
—
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|
3
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|
Total wastewater services
|
38
|
|
|
—
|
|
|
38
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|
Miscellaneous utility charges
|
11
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|
|
—
|
|
|
11
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|
Alternative revenue programs revenue
|
—
|
|
|
3
|
|
|
3
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|
Lease revenue
|
—
|
|
|
2
|
|
|
2
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|
Total Regulated Businesses
|
661
|
|
|
5
|
|
|
666
|
|
Market-Based Businesses
|
100
|
|
|
—
|
|
|
100
|
|
Other
|
(5
|
)
|
|
—
|
|
|
(5
|
)
|
Total operating revenues
|
$
|
756
|
|
|
$
|
5
|
|
|
$
|
761
|
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(a)
|
Includes revenues associated with alternative revenue programs and lease contracts which are outside the scope of ASC 606 and accounted for under other existing GAAP.
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Contract Balances
Contract assets and contract liabilities are the result of timing differences between revenue recognition, billings and cash collections. In the Company’s
Market-Based Businesses
, certain contracts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Contract assets are recorded when billing occurs subsequent to revenue recognition, and are reclassified to accounts receivable when billed and the right to consideration becomes unconditional. Contract liabilities are recorded when the Company receives advances from customers prior to satisfying contractual performance obligations, particularly for construction contracts and protection program contracts, and are recognized as revenue when the associated performance obligations are satisfied. Contract assets are included in unbilled revenues and contract liabilities are in included in other (current liabilities) on the Consolidated Balance Sheets as of
March 31, 2018
.
The following table summarizes the changes in contract assets and liabilities for the
three
months ended
March 31, 2018
:
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(In millions)
|
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Contract assets:
|
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Balance at January 1, 2018
|
$
|
35
|
|
Additions
|
7
|
|
Transfers to accounts receivable, net
|
(23
|
)
|
Balance at March 31, 2018
|
$
|
19
|
|
|
|
Contract liabilities:
|
|
Balance at January 1, 2018
|
$
|
25
|
|
Additions
|
26
|
|
Transfers to operating revenues
|
(22
|
)
|
Balance at March 31, 2018
|
$
|
29
|
|
Remaining Performance Obligations
Remaining performance obligations (“RPOs”) represent revenues the Company expects to recognize in the future from contracts that are in progress. As of
March 31, 2018
, the Company’s operation and maintenance and capital improvement contracts in the
Market-Based Businesses
have RPOs. Contracts with the U.S. government for work on various military bases expire between
2051
and
2068
and have RPOs of
$3.8 billion
as of
March 31, 2018
, as measured by estimated remaining contract revenue. Such contracts are subject to customary termination provisions held by the U.S. government, prior to the agreed-upon contract expiration. Contracts with municipalities and commercial customers expire between
2018
and
2038
and have RPOs of
$690 million
as of
March 31, 2018
, as measured by estimated remaining contract revenue.
Note 4: Acquisitions
During the
three
months ended
March 31, 2018
, the Company closed on
three
acquisitions of various regulated water and wastewater systems for a total aggregate purchase price of
$8 million
. Assets acquired in the aforementioned acquisitions, principally utility plant, totaled
$9 million
. Liabilities assumed totaled
$1 million
, including
$1 million
of contributions in aid of construction. See
Note 15—Subsequent Events
for discussion relating to the pending acquisitions of Pivotal Home Solutions (“Pivotal”) and the City of Alton, Illinois’ regional wastewater system.
Note 5: Regulatory Liabilities
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 federal corporate income tax rate from
35%
to
21%
as of
January 1, 2018
.
Fourteen
of the Company’s regulatory jurisdictions have either opened separate proceedings to address the TCJA, or are planning to incorporate the impacts of the TCJA in existing proceedings. The Company expects its regulated customers to benefit from the tax savings resulting from the TCJA and, as a result, recorded a
$32 million
reserve on revenue earned during the first quarter of 2018, for the estimated tax savings resulting from the TCJA; and a corresponding regulatory liability, of which, the current portion is
$23 million
and is recorded in other (current liabilities), and the long-term portion is
$9 million
and is recorded in regulatory liabilities on the Consolidated Balance Sheet as of
March 31, 2018
.
Note 6: Stockholders' Equity
Accumulated Other Comprehensive Loss
The following table presents changes in accumulated other comprehensive loss by component, net of tax, for the
three
months ended
March 31, 2018
and
2017
, respectively:
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|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Defined Benefit Plans
|
|
Foreign Currency Translation
|
|
Gain on Cash Flow Hedges
|
|
Accumulated Other Comprehensive Loss
|
|
Employee
Benefit Plan
Funded Status
|
|
Amortization
of Prior
Service Cost
|
|
Amortization
of Actuarial
(Gain) Loss
|
|
|
|
Beginning balance as of December 31, 2017
|
$
|
(140
|
)
|
|
$
|
1
|
|
|
$
|
49
|
|
|
$
|
1
|
|
|
$
|
10
|
|
|
$
|
(79
|
)
|
Other comprehensive income before reclassifications
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
6
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
Net other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
6
|
|
|
4
|
|
Ending balance as of March 31, 2018
|
$
|
(140
|
)
|
|
$
|
1
|
|
|
$
|
47
|
|
|
$
|
1
|
|
|
$
|
16
|
|
|
$
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance as of December 31, 2016
|
$
|
(147
|
)
|
|
$
|
1
|
|
|
$
|
42
|
|
|
$
|
2
|
|
|
$
|
16
|
|
|
$
|
(86
|
)
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
3
|
|
|
2
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Net other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
2
|
|
|
(1
|
)
|
|
3
|
|
|
4
|
|
Ending balance as of March 31, 2017
|
$
|
(147
|
)
|
|
$
|
1
|
|
|
$
|
44
|
|
|
$
|
1
|
|
|
$
|
19
|
|
|
$
|
(82
|
)
|
The Company does not reclassify the amortization of defined benefit pension cost components from accumulated other comprehensive loss directly to net income in its entirety, as a portion of these costs have been capitalized as a regulatory asset. These accumulated other comprehensive income loss components are included in the computation of net periodic pension cost. See
Note 10—Pension and Other Post-Retirement Benefits
.
The amortization of the gain on cash flow hedges is reclassified to net income during the period incurred and is included in interest, net in the accompanying Consolidated Statements of Operations.
Anti-dilutive Stock Repurchase Program
During the
three
months ended
March 31, 2018
, the Company repurchased
0.6 million
shares of common stock in the open market at an aggregate cost of
$45 million
under the anti-dilutive stock repurchase program authorized by the Company’s Board of Directors in 2015. As of
March 31, 2018
, there were
5.5 million
shares of common stock available for repurchase under the program.
Forward Sale Agreements
See
Note 15—Subsequent Events
for discussion relating to the forward sale agreements entered into by the Company on
April 11, 2018
and the related potential impacts on the Company’s stockholders’ equity.
Note 7: Long-Term Debt
The following long-term debt was issued during the
three
months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Type
|
|
Rate
|
|
Maturity
|
|
Amount
|
Other American Water subsidiaries
|
|
Private activity bonds and government funded debt—fixed rate
(a)
|
|
0.00%
|
|
2020-2021
|
|
$
|
10
|
|
Total issuances
|
|
|
|
|
|
|
|
$
|
10
|
|
|
|
(a)
|
This long-term debt relates to the New Jersey Environmental Infrastructure Financing Program.
|
The following long-term debt was retired through sinking fund provisions, optional redemptions or payment at maturity during the
three
months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Type
|
|
Rate
|
|
Maturity
|
|
Amount
|
American Water Capital Corp.
|
|
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%-5.40%
|
|
2018-2041
|
|
3
|
|
Other American Water subsidiaries
|
|
Term Loan
|
|
4.83%-5.38%
|
|
2021
|
|
1
|
|
Other American Water subsidiaries
|
|
Mandatorily redeemable preferred stock
|
|
8.49%
|
|
2036
|
|
1
|
|
Total retirements and redemptions
|
|
|
|
|
|
|
|
$
|
6
|
|
The Company has
two
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 value 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.
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 interest rate swaps as economic hedges accounted for at fair value with gains or losses deferred as a regulatory asset or regulatory liability. The net gain recognized by the Company for the
three
months ended
March 31, 2018
and
2017
was de minimis.
No
ineffectiveness was recognized on hedging instruments for the
three
months ended
March 31, 2018
and
2017
.
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 on the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
|
|
Derivative Designation
|
|
Balance Sheet Classification
|
|
March 31, 2018
|
|
December 31, 2017
|
Asset derivative:
|
|
|
|
|
|
|
|
|
|
|
Forward starting swaps
|
|
Cash flow hedge
|
|
Other current assets
|
|
$
|
6
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Liability derivative:
|
|
|
|
|
|
|
|
|
|
|
Forward starting swaps
|
|
Cash flow hedge
|
|
Other current liabilities
|
|
—
|
|
|
3
|
|
Note 8: Short-Term Debt
On
March 21, 2018
, AWCC and its lenders amended and restated the credit agreement with respect to AWCC’s revolving credit facility to increase the maximum commitments under the facility to
$2.25 billion
from
$1.75 billion
and to extend the expiration date of the facility to March 2023 from June 2020. The facility is used principally to support AWCC’s commercial paper program and to provide a sub-limit of up to
$150 million
for letters of credit. As of
March 31, 2018
,
no
amounts were borrowed by AWCC under the credit agreement, except with respect to the letters of credit issued under the
$150 million
letter of credit sub-limit. Subject to satisfying certain conditions, the credit agreement also permits AWCC to increase the maximum commitment under the facility by up to an aggregate of
$500 million
and to request extensions of its expiration date for up to two one-year periods. The financial covenants with respect to the facility remained unchanged from the credit agreement in effect on
December 31, 2017
.
On
March 21, 2018
, AWCC increased the maximum aggregate principal amount of borrowings authorized under its commercial paper program from
$1.60 billion
to
$2.10 billion
. As of
March 31, 2018
, AWCC had
$1.18 billion
in commercial paper outstanding.
Note 9: Income Taxes
The Company’s effective income tax rate was
24.3%
and
35.9%
for the three months ended
March 31, 2018
and
2017
, respectively. The decrease of the Company’s effective income tax rate primarily resulted from the reduction in the federal corporate income tax rate from
35%
to
21%
as of
January 1, 2018
from the enactment of the TCJA. There were no significant adjustments recorded during the first quarter of 2018 pursuant to Staff Accounting Bulletin 118.
Note 10: Pension and Other Post-Retirement Benefits
The following table provides the components of net periodic benefit (credit) costs:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
2018
|
|
2017
|
Components of net periodic pension benefit cost:
|
|
|
|
Service cost
|
$
|
9
|
|
|
$
|
9
|
|
Interest cost
|
19
|
|
|
20
|
|
Expected return on plan assets
|
(25
|
)
|
|
(24
|
)
|
Amortization of actuarial loss
|
7
|
|
|
9
|
|
Net periodic pension benefit cost
|
$
|
10
|
|
|
$
|
14
|
|
|
|
|
|
Components of net periodic other post-retirement benefit (credit) cost:
|
|
|
|
Service cost
|
$
|
3
|
|
|
$
|
3
|
|
Interest cost
|
6
|
|
|
7
|
|
Expected return on plan assets
|
(7
|
)
|
|
(7
|
)
|
Amortization of prior service credit
|
(5
|
)
|
|
(5
|
)
|
Amortization of actuarial loss
|
1
|
|
|
3
|
|
Net periodic other post-retirement benefit (credit) cost
|
$
|
(2
|
)
|
|
$
|
1
|
|
The Company made
no
contributions for the funding of its defined benefit pension plans for the three months ended
March 31, 2018
and
$10 million
for the three months ended
March 31, 2017
, respectively. In addition, the Company made
no
contributions for the funding of its other post-retirement plans for the three months ended
March 31, 2018
and
$1 million
for the three months ended
March 31, 2017
, respectively. The Company expects to make pension and post-retirement contributions to the plan trusts of up to
$45 million
during the remainder of
2018
.
Note 11: Commitments and Contingencies
Contingencies
The Company is routinely involved in legal actions incident to the normal conduct of its business. As of
March 31, 2018
, 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
$25 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 11—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 July 27, 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
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. Less than
100
of the
225,000
estimated putative Plaintiffs have submitted opt-out notices. The deadline to file a claim in the Settlement expired on 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 insurance carriers, which provide an aggregate of
$50 million
in insurance coverage to the Company under the Company’s general liability insurance program, 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.
The settlement amount of
$126 million
is reflected in Accrued Liabilities and the offsetting insurance receivables are reflected in Other Current Assets on the Consolidated Balance Sheet as of
March 31, 2018
. 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 insurance carrier that was requested, but presently has not agreed, to participate in the Settlement ranks lower in the general liability insurance structure than the insurance carriers that have agreed to contribute
$36 million
to the individual review claim fund, as noted above. As such, the non-participating carrier would have ordinarily be required to respond to pay a claim prior to the participating carriers. Any recovery by WVAWC or the Company from the remaining non-participating carrier would reimburse WVAWC for its contributions to the guaranteed fund.
Following completion of the required class member 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. On March 5, 2018, based on information the Company provided to the CSB, the CSB closed its investigation with a status of “acceptable action,” which refers to the Company’s actions on all three parts of the CSB’s recommendation.
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. On March 5, 2018, this motion was denied. 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
On April 9, 2018, the California Public Utilities Commission (the “CPUC”) issued a presiding officer’s decision (“POD”) granting the motion for adoption of the Joint Settlement Agreement (described below) to resolve the CPUC’s residential tariff administration proceeding. The POD provides for a waiver by California-American Water Company, a wholly owned subsidiary of the Company (“Cal Am”), of
$0.5 million
of cost recovery for residential customers through the water revenue adjustment mechanism/modified cost balancing account (“WRAM/MCBA”), in lieu of a penalty. Any party or any CPUC commissioner may file an appeal of the POD by May 9, 2018. If no appeal is filed, the decision will become final.
The POD relates initially to a final CPUC decision issued in December 2016 in a proceeding involving 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 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. 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. This 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 ultimately clarified by the administrative law judge to be from
$3 million
to
$179 million
. However, in the April 9, 2018 POD, the administrative law judge found that Cal Am’s administration of the residential tariff did not in fact violate the California Public Utilities Code or a CPUC decision, which was a significant departure from the judge’s March 28, 2017 ruling. The POD essentially reverses the CPUC’s position expressed in the earlier ruling.
As of
March 31, 2018
, 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 11—Commitments and Contingencies
.
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 by 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 12: Earnings per Common Share
The following table is a reconciliation of the numerator and denominator for basic and diluted earnings per share calculations:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31,
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
Net income attributable to common stockholders
|
$
|
106
|
|
|
$
|
93
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Weighted-average common shares outstanding—Basic
|
178
|
|
|
178
|
|
Effect of dilutive common stock equivalents
|
1
|
|
|
1
|
|
Weighted-average common shares outstanding—Diluted
|
179
|
|
|
179
|
|
The effect of dilutive common stock equivalents is related to outstanding stock options, restricted stock units and performance stock units granted under the 2007 and the 2017 Omnibus Equity Compensation Plans, as well as shares purchased under the American Water Works Company, Inc. and its Designated Subsidiaries 2017 Nonqualified Employee Stock Purchase Plan. Less than
one million
share-based awards were excluded from the computation of diluted EPS for the three months ended
March 31, 2018
and
2017
because their effect would have been anti-dilutive under the treasury stock method.
Forward Sale Agreements
See
Note 15—Subsequent Events
for discussion relating to the forward sale agreements entered into by the Company on
April 11, 2018
and the related potential impacts on the Company’s diluted earnings per common share.
Note 13: Fair Value of Financial Assets and Liabilities
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 on 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 Level 3 are determined by a valuation model that is based on a conventional discounted cash flow methodology and utilizes assumptions of current market rates. As a majority of the Company’s debt is not traded 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
|
|
At Fair Value as of March 31, 2018
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Preferred stock with mandatory redemption requirements
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
12
|
|
Long-term debt (excluding capital lease obligations)
|
6,814
|
|
|
4,630
|
|
|
959
|
|
|
1,782
|
|
|
7,371
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
At Fair Value as of December 31, 2017
|
|
|
Level 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
|
|
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
March 31, 2018
and
December 31, 2017
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At Fair Value as of March 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Restricted funds
|
$
|
28
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
28
|
|
Rabbi trust investments
|
15
|
|
|
—
|
|
|
—
|
|
|
15
|
|
Deposits
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Mark-to-market derivative asset
|
—
|
|
|
6
|
|
|
—
|
|
|
6
|
|
Other investments
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
Total assets
|
52
|
|
|
6
|
|
|
—
|
|
|
58
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred compensation obligations
|
17
|
|
|
—
|
|
|
—
|
|
|
17
|
|
Total liabilities
|
17
|
|
|
—
|
|
|
—
|
|
|
17
|
|
Total net assets (liabilities)
|
$
|
35
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At Fair Value as of 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 obligations
|
17
|
|
|
—
|
|
|
—
|
|
|
17
|
|
Mark-to-market derivative liabilities
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
Total liabilities
|
17
|
|
|
3
|
|
|
—
|
|
|
20
|
|
Total net assets (liabilities)
|
$
|
33
|
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
|
$
|
30
|
|
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, maintenance and repair projects. Long-term restricted funds of
$1 million
were included in other long-term assets as of
March 31, 2018
and
December 31, 2017
, 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 liabilities—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 14: Segment Information
The Company operates its businesses primarily through
one
reportable segment, the
Regulated Businesses
segment. The Company also operates businesses that provide a broad range of related and complementary water and wastewater services in non-regulated markets, which includes
four
operating segments that individually do not meet the criteria of a reportable segment. These four non-reportable operating segments are collectively presented as the “
Market-Based Businesses
.” “Other” includes corporate costs that are not allocated to the Company’s operating segments, eliminations of inter-segment transactions, fair value adjustments and associated income and deductions related to the acquisitions that have not been allocated to the operating segments for evaluation of performance and allocation of resource purposes. The following tables include the Company’s summarized segment information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the Three Months Ended March 31, 2018
|
|
Regulated
Businesses
|
|
Market-Based
Businesses
|
|
Other
|
|
Consolidated
|
Operating revenues
|
$
|
666
|
|
|
$
|
100
|
|
|
$
|
(5
|
)
|
|
$
|
761
|
|
Depreciation and amortization
|
122
|
|
|
4
|
|
|
3
|
|
|
129
|
|
Total operating expenses, net
|
462
|
|
|
86
|
|
|
(4
|
)
|
|
544
|
|
Interest, net
|
(69
|
)
|
|
1
|
|
|
(16
|
)
|
|
(84
|
)
|
Income before income taxes
|
142
|
|
|
16
|
|
|
(18
|
)
|
|
140
|
|
Provision for income taxes
|
38
|
|
|
4
|
|
|
(8
|
)
|
|
34
|
|
Net income attributable to common stockholders
|
104
|
|
|
12
|
|
|
(10
|
)
|
|
106
|
|
Total assets
|
17,817
|
|
|
604
|
|
|
1,307
|
|
|
19,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the Three Months Ended March 31, 2017
|
|
Regulated
Businesses
|
|
Market-Based
Businesses
|
|
Other
|
|
Consolidated
|
Operating revenues
|
$
|
659
|
|
|
$
|
103
|
|
|
$
|
(6
|
)
|
|
$
|
756
|
|
Depreciation and amortization
|
117
|
|
|
4
|
|
|
3
|
|
|
124
|
|
Total operating expenses, net
|
438
|
|
|
94
|
|
|
(6
|
)
|
|
526
|
|
Interest, net
|
(66
|
)
|
|
—
|
|
|
(19
|
)
|
|
(85
|
)
|
Income before income taxes
|
154
|
|
|
10
|
|
|
(19
|
)
|
|
145
|
|
Provision for income taxes
|
60
|
|
|
3
|
|
|
(11
|
)
|
|
52
|
|
Net income attributable to common stockholders
|
94
|
|
|
7
|
|
|
(8
|
)
|
|
93
|
|
Total assets
|
16,632
|
|
|
555
|
|
|
1,423
|
|
|
18,610
|
|
Note 15: Subsequent Events
Pivotal Home Solutions Acquisition Agreement
On
April 11, 2018
the Company, through its subsidiary American Water Enterprises, LLC (“AWE”), entered into a stock purchase agreement to acquire (the “Acquisition”) all of the capital stock of Nicor Energy Services Company, doing business as Pivotal Home Solutions (“Pivotal”), from Nicor Energy Ventures Company Gas (“Nicor”), a subsidiary of Southern Company Gas. Pivotal is headquartered in Naperville, Illinois and is a provider of home warranty protection products and services, operating in
18
states with approximately
1.2 million
customer contracts. Under the terms of the stock purchase agreement, AWE will purchase from Nicor all of Pivotal’s capital stock for an aggregate purchase price of approximately
$365 million
in cash, including an estimated
$7 million
of Pivotal’s working capital at closing, subject to adjustment based on the post-closing determination of Pivotal’s working capital as set forth in the stock purchase agreement. The Acquisition is expected to close in the second quarter of 2018.
Equity Forward Transaction
On
April 11, 2018
, the Company effected an equity forward transaction by entering into a forward sale agreement with each of
two
forward purchasers in connection with a public offering of
2,320,000
shares of the Company’s common stock. In the equity forward transaction, the forward purchasers or an affiliate borrowed an aggregate of
2,320,000
shares of the Company’s common stock from third parties and sold them to the underwriters in the public offering. Except under limited circumstances, the Company has the right under the forward sale agreements to elect physical, net share or cash settlement in whole or in part. If the Company decides to physically settle a forward sale agreement, the Company will issue shares of its common stock to the forward purchaser at the then-applicable forward sale price. The forward sale price is initially
$79.36
per share, and is subject to adjustment as specified in each forward sale agreement. The Company must settle the forward sale agreements in full on or before
April 11, 2019
.
The Company did not receive any proceeds from the sale of its common stock by the underwriters. The Company currently intends to elect full physical settlement of the forward sale agreements by delivering
2,320,000
shares of its Common Stock if the Company successfully completes the Acquisition. The net proceeds of the equity forward transaction are intended to be used to finance a portion of the purchase price of the Acquisition.
Alton, Illinois Wastewater Acquisition
On
April 13, 2018
, the Company’s Illinois subsidiary entered into an agreement to acquire the City of Alton, Illinois’ regional wastewater system for approximately
$54 million
. This system currently serves approximately
23,000
customers, including customers in the nearby communities of Bethalto and Godfrey. The closing of this acquisition is subject to approval by the Illinois Public Utility Commission. The Company is expecting this acquisition to close in the first quarter of 2019.