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Section 1: 10-Q (10-Q)

      

      

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_________________________

FORM 10-Q

_________________________

 

x

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

For the quarterly period ended September 30, 2013

OR

 

¨

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

For the transition period from                      to                        

Commission file: number 001-34028

_________________________

AMERICAN WATER WORKS COMPANY, INC.

(Exact name of registrant as specified in its charter)

_________________________

   

 

Delaware

   

51-0063696

(State or other jurisdiction of

incorporation or organization)

   

(I.R.S. Employer

Identification No.)

   

   

   

1025 Laurel Oak Road, Voorhees, NJ

   

08043

(Address of principal executive offices)

   

(Zip Code)

(856) 346-8200

(Registrant’s telephone number, including area code)

_________________________

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

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

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

   

 

Large accelerated filer

   

x

      

Accelerated filer

   

¨

   

   

   

   

   

   

   

Non-accelerated filer

   

¨

      

Smaller reporting company

   

¨

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

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

   

 

Class

   

Outstanding at October 31, 2013

Common Stock, $0.01 par value per share

   

178,274,197 shares

   

      

      


TABLE OF CONTENTS

AMERICAN WATER WORKS COMPANY, INC.

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED September 30, 2013

INDEX

   

 

PART I. FINANCIAL INFORMATION  

   

2

      

   

   

   

   

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS  

   

2-20

      

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  

   

21-37

      

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  

   

37

      

ITEM 4. CONTROLS AND PROCEDURES  

   

37-38

      

   

   

   

   

PART II. OTHER INFORMATION  

   

38

      

   

   

   

   

ITEM 1. LEGAL PROCEEDINGS  

   

38

      

ITEM 1A. RISK FACTORS  

   

38

      

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS  

   

38

      

ITEM 3. DEFAULTS UPON SENIOR SECURITIES  

   

38

      

ITEM 4. MINE SAFETY DISCLOSURES  

   

38

      

ITEM 5. OTHER INFORMATION  

   

38

      

ITEM 6. EXHIBITS  

   

39

      

   

   

   

   

SIGNATURES  

   

40

      

EXHIBITS INDEX  

   

   

   

   

   

   

   

EXHIBIT 10.1

   

   

   

EXHIBIT 31.1

   

   

   

EXHIBIT 31.2

   

   

   

EXHIBIT 32.1

   

   

   

EXHIBIT 32.2

   

   

   

EXHIBIT 101

   

   

   

   

   

   

   

 

i


PART I. FINANCIAL INFORMATION

 

ITEM  1.

CONSOLIDATED FINANCIAL STATEMENTS

Water Works Company, Inc. and Subsidiary Companies

Consolidated Balance Sheets (Unaudited)

(In thousands, except per share data)

   

 

   

September 30,
2013

   

      

December 31,
2012

   

ASSETS

   

   

   

      

   

   

   

Property, plant and equipment

   

   

   

   

   

   

   

Utility plant—at original cost, net of accumulated depreciation of $3,815,118 at September 30 and $3,657,221 at December 31

$

11,963,377

   

      

$

11,584,944

   

Nonutility property, net of accumulated depreciation of $223,953 at September 30 and $199,467 at December 31

   

149,190

   

      

   

154,420

   

Total property, plant and equipment

   

12,112,567

   

      

   

11,739,364

   

Current assets

   

   

   

      

   

   

   

Cash and cash equivalents

   

32,454

   

      

   

24,433

   

Restricted funds

   

25,429

   

      

   

29,756

   

Accounts receivable

   

288,788

   

      

   

221,655

   

Allowance for uncollectible accounts

   

(32,241

)

   

   

(26,874

)

Unbilled revenues

   

209,865

   

      

   

180,628

   

Income taxes receivable

   

15,107

   

      

   

9,594

   

Materials and supplies

   

35,053

   

      

   

29,772

   

Other

   

38,765

   

      

   

30,483

   

Total current assets

   

613,220

   

      

   

499,447

   

Regulatory and other long-term assets

   

   

   

      

   

   

   

Regulatory assets

   

1,232,447

   

      

   

1,199,114

   

Restricted funds

   

754

   

      

   

10,791

   

Goodwill

   

1,207,741

   

      

   

1,207,250

   

Other

   

61,717

   

      

   

63,010

   

Total regulatory and other long-term assets

   

2,502,659

   

      

   

2,480,165

   

TOTAL ASSETS

$

15,228,446

   

      

$

14,718,976

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

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

   

   

   

 

 

 2 

   


American Water Works Company, Inc. and Subsidiary Companies

Consolidated Balance Sheets (Unaudited)

(In thousands, except per share data)

   

 

   

September 30,
2013

   

      

December 31,
2012

   

CAPITALIZATION AND LIABILITIES

   

   

   

      

   

   

   

Capitalization

   

   

   

      

   

   

   

Common stock ($.01 par value, 500,000 shares authorized, 178,121 and 176,988 shares outstanding at September 30 and December 31, respectively)

$

1,781

   

      

$

1,770

   

Paid-in-capital

   

6,251,286

   

      

   

6,222,644

   

Accumulated deficit

   

(1,505,191

)

      

   

(1,664,955

)

Accumulated other comprehensive loss

   

(109,901

)

      

   

(116,191

)

Treasury stock

   

(5,043

)

      

   

0

   

Common stockholders’ equity

   

4,632,932

   

      

   

4,443,268

   

Preferred stock without mandatory redemption requirements

   

0

   

      

   

1,720

   

Total stockholders’ equity

   

4,632,932

   

      

   

4,444,988

   

Long-term debt

   

   

   

      

   

   

   

Long-term debt

   

5,174,077

   

      

   

5,190,509

   

Redeemable preferred stock at redemption value

   

17,635

   

      

   

18,861

   

Total capitalization

   

9,824,644

   

      

   

9,654,358

   

Current liabilities

   

   

   

      

   

   

   

Short-term debt

   

389,435

   

      

   

269,985

   

Current portion of long-term debt

   

113,661

   

      

   

115,919

   

Accounts payable

   

209,768

   

      

   

279,613

   

Taxes accrued

   

46,268

   

      

   

35,555

   

Interest accrued

   

101,291

   

      

   

53,810

   

Other

   

281,050

   

      

   

239,950

   

Total current liabilities

   

1,141,473

   

      

   

994,832

   

Regulatory and other long-term liabilities

   

   

   

      

   

   

   

Advances for construction

   

372,484

   

      

   

379,737

   

Deferred income taxes

   

1,744,330

   

      

   

1,545,513

   

Deferred investment tax credits

   

26,783

   

      

   

27,909

   

Regulatory liabilities

   

380,757

   

      

   

364,181

   

Accrued pension expense

   

434,031

   

      

   

461,647

   

Accrued postretirement benefit expense

   

251,637

   

      

   

254,147

   

Other

   

36,475

   

      

   

40,516

   

Total regulatory and other long-term liabilities

   

3,246,497

   

      

   

3,073,650

   

Contributions in aid of construction

   

1,015,832

   

      

   

996,136

   

Commitments and contingencies (See Note 10)

   

—  

   

      

   

—  

   

TOTAL CAPITALIZATION AND LIABILITIES

$

15,228,446

   

      

$

14,718,976

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

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

   

   

 

 

 3 

   


American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Operations and Comprehensive Income (Unaudited)

(In thousands, except per share data)

   

 

   

Three Months Ended
September 30,

   

   

Nine Months Ended
September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Operating revenues

$

829,196

   

   

$

831,815

   

   

$

2,189,598

   

   

$

2,195,976

   

Operating expenses

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Operation and maintenance

   

343,610

   

   

   

355,126

   

   

   

979,133

   

   

   

992,707

   

Depreciation and amortization

   

102,734

   

   

   

96,219

   

   

   

303,749

   

   

   

280,652

   

General taxes

   

58,209

   

   

   

52,861

   

   

   

176,161

   

   

   

165,264

   

(Gain) loss on asset dispositions and purchases

   

768

   

   

   

(31

)

   

   

560

   

   

   

(657

)

Total operating expenses, net

   

505,321

   

   

   

504,175

   

   

   

1,459,603

   

   

   

1,437,966

   

Operating income

   

323,875

   

   

   

327,640

   

   

   

729,995

   

   

   

758,010

   

Other income (expenses)

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Interest, net

   

(77,389

)

   

   

(76,616

)

   

   

(233,260

)

   

   

(236,000

)

Allowance for other funds used during construction

   

2,800

   

   

   

3,735

   

   

   

9,895

   

   

   

13,173

   

Allowance for borrowed funds used during construction

   

1,679

   

   

   

1,548

   

   

   

5,102

   

   

   

5,942

   

Amortization of debt expense

   

(1,524

)

   

   

(1,322

)

   

   

(4,729

)

   

   

(3,949

)

Other, net

   

(449

)

   

   

39

   

   

   

(1,481

)

   

   

(242

)

Total other income (expenses)

   

(74,883

)

   

   

(72,616

)

   

   

(224,473

)

   

   

(221,076

)

Income from continuing operations before income taxes

   

248,992

   

   

   

255,024

   

   

   

505,522

   

   

   

536,934

   

Provision for income taxes

   

98,327

   

   

   

100,913

   

   

   

195,951

   

   

   

216,908

   

Income from continuing operations

   

150,665

   

   

   

154,111

   

   

   

309,571

   

   

   

320,026

   

Loss from discontinued operations, net of tax

   

0

   

   

   

(299

)

   

   

0

   

   

   

(17,434

)

Net income

$

150,665

   

   

$

153,812

   

   

$

309,571

   

   

$

302,592

   

Other comprehensive income, net of tax:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Pension plan amortized to periodic benefit cost:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Prior service cost, net of tax of $28 and $28 for the three months and $83 and $84 for the nine months ended, respectively

$

43

   

   

$

44

   

   

$

130

   

   

$

132

   

Actuarial loss, net of tax of $1,424 and $1,167 for the three months and $4,273 and $3,501 for the nine months ended, respectively

   

2,228

   

   

   

1,825

   

   

   

6,683

   

   

   

5,476

   

Foreign currency translation adjustment

   

296

   

   

   

514

   

   

   

(523

)

   

   

562

   

Other comprehensive income

   

2,567

   

   

   

2,383

   

   

   

6,290

   

   

   

6,170

   

Comprehensive income

$

153,232

   

   

$

156,195

   

   

$

315,861

   

   

$

308,762

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Basic earnings per common share:(a)

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Income from continuing operations

$

0.85

   

   

$

0.87

   

   

$

1.74

   

   

$

1.81

   

Loss from discontinued operations, net of tax

$

0.00

   

   

$

(0.00

)

   

$

0.00

   

   

$

(0.10

)

Net income

$

0.85

   

   

$

0.87

   

   

$

1.74

   

   

$

1.72

   

Diluted earnings per common share:(a)

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Income from continuing operations

$

0.84

   

   

$

0.87

   

   

$

1.73

   

   

$

1.80

   

Loss from discontinued operations, net of tax

$

0.00

   

   

$

(0.00

)

   

$

0.00

   

   

$

(0.10

)

Net income

$

0.84

   

   

$

0.86

   

   

$

1.73

   

   

$

1.70

   

Average common shares outstanding during the period:

   

   

   

   

   

   

   

   

   

   

   

   

   

   

   

Basic

   

177,965

   

   

   

176,621

   

   

   

177,671

   

   

   

176,290

   

Diluted

   

179,154

   

   

   

177,841

   

   

   

178,906

   

   

   

177,486

   

Dividends per common share

$

0.28

   

   

$

0.25

   

   

$

0.56

   

   

$

0.73

   

 

(a)

Amounts may not sum due to rounding.

   

   

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

 

 

 4 

   


American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Cash Flows (Unaudited)

(In thousands, except per share data)

 

      

Nine Months Ended
September 30,

   

   

2013

   

   

2012

   

CASH FLOWS FROM OPERATING ACTIVITIES

   

   

   

   

   

   

   

Net income

$

309,571

   

   

$

302,592

   

Adjustments

   

   

   

   

   

   

   

Depreciation and amortization

   

303,749

   

   

   

280,652

   

Provision for deferred income taxes

   

195,240

   

   

   

197,001

   

Amortization of deferred investment tax credits

   

(1,126

)

   

   

(1,139

)

Provision for losses on accounts receivable

   

18,369

   

   

   

15,946

   

Allowance for other funds used during construction

   

(9,895

)

   

   

(13,173

)

(Gain) loss on asset dispositions and purchases

   

560

   

   

   

(657

)

Pension and non-pension postretirement benefits

   

58,552

   

   

   

60,426

   

Stock-based compensation expense

   

8,916

   

   

   

8,549

   

Other, net

   

(12,100

)

   

   

(15,289

)

Changes in assets and liabilities

   

   

   

   

   

   

   

Receivables and unbilled revenues

   

(109,372

)

   

   

(106,911

)

Taxes receivable, including income taxes

   

(5,513

)

   

   

(143

)

Other current assets

   

(13,410

)

   

   

(15,671

)

Pension and non-pension postretirement benefit contributions

   

(77,664

)

   

   

(96,036

)

Accounts payable

   

(28,061

)

   

   

(47,121

)

Taxes accrued, including income taxes

   

9,934

   

   

   

33,721

   

Interest accrued

   

47,481

   

   

   

46,617

   

Change in book overdraft

   

(7,993

)

   

   

36,206

   

Other current liabilities

   

1,438

   

   

   

49,444

   

Net cash provided by operating activities

   

688,676

   

   

   

735,014

   

CASH FLOWS FROM INVESTING ACTIVITIES

   

   

   

   

   

   

   

Capital expenditures

   

(665,262

)

   

   

(680,357

)

Acquisitions

   

(16,554

)

   

   

(44,333

)

Proceeds from sale of assets and securities

   

749

   

   

   

560,095

   

Removal costs from property, plant and equipment retirements, net

   

(49,639

)

   

   

(38,606

)

Net funds (restricted) released

   

11,339

   

   

   

17,845

   

Net cash used in investing activities

   

(719,367

)

   

   

(185,356

)

CASH FLOWS FROM FINANCING ACTIVITIES

   

   

   

   

   

   

   

Proceeds from long-term debt

   

2,737

   

   

   

14,730

   

Repayment of long-term debt

   

(13,149

)

   

   

(261,309

)

Proceeds from short-term borrowings with maturities greater than three months

   

20,000

   

   

   

0

   

Net borrowings (repayments) under short-term debt agreements with maturities three months or less

   

99,450

   

   

   

(183,190

)

Proceeds from issuances of employee stock plans and DRIP

   

19,788

   

   

   

22,062

   

Advances and contributions for construction, net of refunds of $16,671 and $10,748 at September 30, 2013 and 2012, respectively

   

13,486

   

   

   

22,182

   

Change in bank overdraft position

   

0

   

   

   

(34,812

)

Debt issuance costs

   

(1,126

)

   

   

0

   

Redemption of preferred stocks

   

(2,920

)

   

   

(3,927

)

Dividends paid

   

(99,554

)

   

   

(125,023

)

Other

   

0

   

   

   

3,953

   

Net cash provided by (used in) financing activities

   

38,712

   

   

   

(545,334

)

Net increase in cash and cash equivalents

   

8,021

   

   

   

4,324

   

Cash and cash equivalents at beginning of period

   

24,433

   

   

   

14,207

   

Cash and cash equivalents at end of period

$

32,454

   

   

$

18,531

   

Non-cash investing activity:

   

   

   

   

   

   

   

Capital expenditures acquired on account but unpaid at quarter-end

$

119,807

   

   

$

118,215

   

Non-cash financing activity:

   

   

   

   

   

   

   

Advances and contributions

$

9,379

   

   

$

9,185

   

Dividends accrued

$

49,837

   

   

$

44,187

   

Long-term debt

$

0

   

   

$

68,746

   

   

   

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

   

   

 

 

 5 

   


American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)

(In thousands, except per share data)

   

 

   

Common Stock

   

   

Paid-in
Capital

   

   

Accumulated
Deficit

   

   

Accumulated
Other
Comprehensive
Loss

   

   

Treasury Stock

   

   

Preferred
Stock
of
Subsidiary
Companies
Without
Mandatory
Redemption
Requirements

   

   

Total
Stockholders’
Equity

   

   

Shares

   

   

Par
Value

   

   

   

   

   

   

   

   

Shares

   

   

At Cost

   

   

   

   

   

Balance at December 31, 2012

   

176,988

   

   

$

1,770

   

   

$

6,222,644

   

   

$

(1,664,955

)

   

$

(116,191

)

   

   

0

   

   

$

0

   

   

$

1,720

   

   

$

4,444,988

   

Net income

   

0

   

   

   

0

   

   

   

0

   

   

   

309,571

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

309,571

   

Direct stock reinvestment and purchase plan, net of expense of $41

   

35

   

   

   

0

   

   

   

1,399

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

1,399

   

Employee stock purchase plan

   

81

   

   

   

1

   

   

   

3,270

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

3,271

   

Stock-based compensation activity, net of expense of $11

   

1,017

   

   

   

10

   

   

   

23,973

   

   

   

(416

)

   

   

0

   

   

   

(132

)

   

   

(5,043

)

   

   

0

   

   

   

18,524

   

Subsidiary preferred stock redemption

   

0

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

(1,720

)

   

   

(1,720

)

Other comprehensive income, net of tax of $4,356

   

0

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

6,290

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

6,290

   

Dividends

   

0

   

   

   

0

   

   

   

0

   

   

   

(149,391

)

   

   

0

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

(149,391

)

Balance at September 30, 2013

   

178,121

   

   

$

1,781

   

   

$

6,251,286

   

   

$

(1,505,191

)

   

$

(109,901

)

   

   

(132

)

   

$

(5,043

)

   

$

0

   

   

$

4,632,932

   

   

Common Stock

   

   

Paid-in
Capital

   

   

Accumulated
Deficit

   

   

Accumulated
Other
Comprehensive
Loss

   

   

Treasury Stock

   

   

Preferred
Stock
of
Subsidiary
Companies
Without
Mandatory

Redemption
Requirements

   

   

Total
Stockholders’
Equity

   

   

Shares

   

   

Par
Value

   

   

   

   

   

   

   

   

Shares

   

   

At Cost

   

   

   

   

   

Balance at December 31, 2011

   

175,664

   

   

$

1,757

   

   

$

6,180,558

   

   

$

(1,848,801

)

   

$

(97,677

)

   

   

0

   

   

$

0

   

   

$

4,547

   

   

$

4,240,384

   

Net income

   

0

   

   

   

0

   

   

   

0

   

   

   

302,592

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

302,592

   

Direct stock reinvestment and purchase plan, net of expense of $14

   

42

   

   

   

0

   

   

   

1,445

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

1,445

   

Employee stock purchase plan

   

57

   

   

   

0

   

   

   

2,161

   

   

   

0

   

   

   

0

   

   

   

31

   

   

   

1,046

   

   

   

0

   

   

   

3,207

   

Stock-based compensation activity

   

985

   

   

   

10

   

   

   

28,874

   

   

   

(662

)

   

   

0

   

   

   

(31

)

   

   

(1,046

)

   

   

0

   

   

   

27,176

   

Subsidiary preferred stock redemption

   

0

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

(2,827

)

   

   

(2,827

)

Other comprehensive income, net of tax of $3,585

   

0

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

6,170

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

6,170

   

Dividends

   

0

   

   

   

0

   

   

   

0

   

   

   

(128,807

)

   

   

0

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

(128,807

)

Balance at September 30, 2012

   

176,748

   

   

$

1,767

   

   

$

6,213,038

   

   

$

(1,675,678

)

   

$

(91,507

)

   

   

0

   

   

$

0

   

   

$

1,720

   

   

$

4,449,340

   

   

   

   

   

   

   

   

   

   

   

   

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

   

   

 

 

 6 

   


American Water Works Company, Inc. and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)

(In thousands, except per share data)

   

Note 1: Basis of Presentation

The accompanying Consolidated Balance Sheet of American Water Works Company, Inc. and Subsidiary Companies (the “Company”) at September 30, 2013, the Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2013 and 2012, the Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012, and the Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2013 and 2012, are unaudited, but reflect all adjustments, which are, in the opinion of management, necessary to present fairly the consolidated financial position, the consolidated changes in stockholders’ equity, the consolidated results of operations and comprehensive income, and the consolidated cash flows for the periods presented. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Because they cover interim periods, the unaudited consolidated financial statements and related notes to the consolidated financial statements do not include all disclosures and notes normally provided in annual financial statements and, therefore, should be read in conjunction with the Company’s Consolidated Financial Statements and related Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the year, due primarily to the seasonality of the Company’s operations.

Certain reclassifications have been made to previously reported data to conform to the current presentation.

   

Note 2: New Accounting Pronouncements

The following recently issued accounting standards have been adopted by the Company and have been included in the consolidated results of operations, financial position or footnotes of the accompanying Consolidated Financial Statements:

Balance Sheet Offsetting

In December 2011, the Financial Accounting Standards Board (“FASB”) issued accounting guidance to amend the existing disclosure requirements for offsetting financial assets and liabilities to enhance current disclosures, as well as to improve comparability of balance sheets prepared under U.S. Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards (“IFRS”). In January 2013, the FASB issued additional guidance on the scope of these disclosures. The revised disclosure guidance applies to derivative instruments and securities borrowing and lending transactions that are either offset in the financial statements or subject to an enforceable master netting arrangement or similar agreement. The revised disclosure guidance is effective on a retrospective basis for interim and annual periods beginning January 1, 2013. As this guidance provides for additional disclosure requirements only, the adoption of this guidance did not have an impact on the Company’s results of operations, financial position or cash flows.

Testing Indefinite-Lived Intangible Assets for Impairment

In July 2012, the FASB updated the accounting guidance related to testing indefinite-lived intangible assets for impairment. This update permits an entity to perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test under current guidance. This update is effective for annual and interim impairment tests performed by the Company beginning on January 1, 2013. The adoption of this guidance did not have an impact on the Company’s results of operations, financial position or cash flows.

Amounts Reclassified Out of Accumulated Other Comprehensive Income (“AOCI”)

In February 2013, the FASB updated accounting guidance to add new disclosure requirements for items reclassified out of AOCI. The update does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, the amendments require an entity to provide information about the amounts reclassified out of AOCI by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. The amendments are required to be applied prospectively for interim and annual reporting periods beginning January 1, 2013. As this guidance provides for additional disclosure requirements only, the adoption of this guidance did not have an impact on the Company’s results of operations, financial position or cash flows.

 

 

 7 

   


Presentation of an Unrecognized Tax Benefit When a Net Operating Loss (“NOL”) or Tax Credit Carryforward Exists

In July 2013, the FASB updated the income tax accounting guidance to resolve diversity in presentation by addressing when an entity should present unrecognized tax benefits on a net basis if there are available NOL or tax credit carryforwards. The update requires an entity to net unrecognized tax benefits against the deferred tax assets for same-jurisdiction NOL or similar tax loss carryforwards or tax credit carryforwards. Gross presentation will be required only if such carryforwards are not available or would not be used by the entity to settle any additional income taxes resulting from disallowance of the uncertain tax position. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The amendments are required to be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application and early adoption are permitted. The Company adopted this guidance effective June 30, 2013. (See Note 8)

Inclusion of the Fed Funds Effective Swap Rate as a Benchmark Interest Rate for Hedge Accounting Purposes

In July 2013, the FASB updated the derivatives and hedging accounting guidance to provide for the inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate (“OIS”)) as a US benchmark interest rate for hedge accounting purposes, in addition to interest rates on direct Treasury obligations of the US government (“UST”) and the London Interbank Offered Rate ("LIBOR"). The amendment also removes the restriction on using different benchmark rates for similar hedges. The update is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. As the Company has not entered into new or redesignated hedging relationships, the adoption of this guidance did not have an impact on the Company’s results of operations, financial position or cash flows.

The following recently announced accounting standards are not yet required to be adopted by the Company or included in the consolidated results of operations, financial position or footnotes of the Company:

Obligations Resulting from Joint and Several Liability Arrangements

In February 2013, the FASB issued guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. Examples of obligations within the scope of the updated guidance include debt arrangements, other contractual obligations and settled litigation and judicial rulings. The update requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date as the sum of the following: (a) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and (b) any additional amount the reporting entity expects to pay on behalf of its co-obligors. The updated guidance also includes additional disclosures regarding the nature and amount of the obligation, as well as other information about those obligations. The update is effective on a retrospective basis for interim and annual periods beginning January 1, 2014. Early adoption is permitted. The Company is evaluating the specific provisions of the updated guidance, but does not expect the adoption of this guidance to have a significant impact on the Company’s results of operations, financial position or cash flows.

Foreign Currency Matters

In June 2013, the FASB issued guidance for a parent’s accounting for the cumulative translation adjustment upon derecognition of certain subsidiaries or groups of assets within a foreign entity or of an investment in a foreign entity. The amendments resolve differing views in practice and apply to the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or a business within a foreign entity. The update is effective prospectively for interim and annual periods beginning January 1, 2014. Early adoption is permitted. The Company does not expect the adoption of the updated guidance to have a significant impact on its results of operations, financial position or cash flows.

   

Note 3: Acquisitions and Divestitures

Acquisitions

For the period ended September 30, 2013, the Company closed on 12 acquisitions of various regulated water and wastewater systems for a total aggregate purchase price of $16,554. Assets acquired, principally plant, totaled $23,048. Liabilities assumed, primarily contributions in aid of construction, totaled $6,494.  

Divestitures

As part of the Company’s strategic review of its business investments, it entered into agreements to sell its Arizona, New Mexico and Ohio subsidiaries. In January 2012, the Company completed the sale of its Arizona and New Mexico subsidiaries. Initial sales proceeds were $461,057, and the Company recorded no gain or loss at the time of the sale closing. In June 2012, as part of post-

 

 

 8 

   


closing adjustments to finalize the sale, the Company remitted $2,448 to the purchaser and recorded a pretax loss on sale for the same amount.

In May 2012, the Company completed the sale of its Ohio subsidiary. Sales proceeds at closing totaled $101,083. The Company recorded a pretax loss on sale of $5,166 in the second quarter of 2012, primarily due to pension settlement costs calculated at closing.

A summary of discontinued operations presented in the Consolidated Statements of Operations and Comprehensive Income follows:

   

 

   

Three Months Ended
September 30,

   

   

Nine Months Ended
September 30,

   

   

2013

   

   

2012

   

   

2013

   

   

2012

   

Operating revenues

$

0

   

   

$

0

   

   

$

0

   

   

$

19,377

   

Total operating expenses, net

   

0

   

   

   

493

   

   

   

0

   

   

   

28,411

   

Operating income (loss)

   

0

   

   

   

(493

)

   

   

0

   

   

   

(9,034

)

Other income (expenses), net

   

0

   

   

   

0

   

   

   

0

   

   

   

(167

)

Income (loss) from discontinued operations before income taxes

   

0

   

   

   

(493

)

   

   

0

   

   

   

(9,201

)

Provision (benefit) for income taxes

   

0

   

   

   

(194

)

   

   

0

   

   

   

8,233

   

Income (loss) from discontinued operations

$

0

   

   

$

(299

)

   

$

0

   

   

$

(17,434

)

Provision for income taxes includes the recognition of tax expense related to the difference between the tax basis and book basis of assets upon the sale of Arizona, New Mexico and Ohio that resulted in taxable gains, since an election was made under Section 338(h)(10) of the Internal Revenue Code to treat the sales as asset sales.

   

Note 4: Goodwill

The Company’s annual goodwill impairment test is conducted at November 30 of each calendar year. Interim reviews are performed when the Company determines that a triggering event that would more likely than not reduce the fair value of a reporting unit below its carrying value has occurred. The Company has determined no such triggering event had occurred during the nine months ended September 30, 2013.

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

   

 

   

Regulated Unit

   

   

Market-Based Units

   

   

Consolidated

   

   

Cost

   

   

Accumulated
Impairment

   

   

Cost

   

   

Accumulated
Impairment

   

   

Cost

   

   

Accumulated
Impairment

   

   

Total Net

   

Balance at January 1, 2013

$

3,411,549

   

   

$

(2,332,670

)

   

$

235,990

   

   

$

(107,619

)

   

$

3,647,539

   

   

$

(2,440,289

)

   

$

1,207,250

   

Goodwill from acquisitions

   

405

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

405

   

   

   

0

   

   

   

405

   

Reclassifications and other activity

   

86

   

   

   

0

   

   

   

0

   

   

   

0

   

   

   

86

   

   

   

0

   

   

   

86

   

Balance at September 30, 2013

$

3,412,040

   

   

$

(2,332,670

)

   

$

235,990

   

   

$

(107,619

)

   

$

3,648,030