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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 June 30, 2014

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 July 31, 2014

Common Stock, $0.01 par value per share

 

179,148,915      shares

 

 

 


TABLE OF CONTENTS

AMERICAN WATER WORKS COMPANY, INC.

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED June 30, 2014

INDEX

 

PART I. FINANCIAL INFORMATION

2

 

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

2

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

21

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

36

ITEM 4. CONTROLS AND PROCEDURES

36

 

 

PART II. OTHER INFORMATION

37

 

 

ITEM 1. LEGAL PROCEEDINGS

37

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

39

ITEM 5. OTHER INFORMATION

39

ITEM 6. EXHIBITS

40

 

 

SIGNATURES

41

EXHIBITS INDEX

 

 

 

EXHIBIT 10.1

 

EXHIBIT 10.2

 

EXHIBIT 10.3

 

EXHIBIT 10.4

 

EXHIBIT 10.5

 

EXHIBIT 31.1

 

EXHIBIT 31.2

 

EXHIBIT 32.1

 

EXHIBIT 32.2

 

EXHIBIT 101

 

 

 

i


PART I. FINANCIAL INFORMATION

ITEM  1.

CONSOLIDATED FINANCIAL STATEMENTS

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Balance Sheets (Unaudited)

(In thousands, except per share data)

 

 

June 30,

 

 

December 31,

 

 

2014

 

 

2013

 

ASSETS

 

Property plant and equipment

 

 

 

 

 

 

 

Utility plant—at original cost, net of accumulated depreciation of $3,965,888 at June 30 and $3,894,326 at December 31

$

12,445,097

 

 

$

12,244,359

 

Nonutility property, net of accumulated depreciation of $243,330 at June 30 and $228,465 at December 31

 

137,414

 

 

 

146,803

 

Total property, plant and equipment

 

12,582,511

 

 

 

12,391,162

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

32,133

 

 

 

26,964

 

Restricted funds

 

21,537

 

 

 

28,505

 

Accounts receivable

 

277,780

 

 

 

244,568

 

Allowance for uncollectible accounts

 

(37,868

)

 

 

(33,953

)

Unbilled revenues

 

224,581

 

 

 

217,147

 

Income taxes receivable

 

6,290

 

 

 

5,778

 

Materials and supplies

 

36,845

 

 

 

32,973

 

Deferred income taxes

 

119,144

 

 

 

18,609

 

Other

 

27,193

 

 

 

28,408

 

Total current assets

 

707,635

 

 

 

568,999

 

Regulatory and other long-term assets

 

 

 

 

 

 

 

Regulatory assets

 

848,352

 

 

 

858,465

 

Restricted funds

 

19,647

 

 

 

754

 

Goodwill

 

1,208,065

 

 

 

1,207,764

 

Other

 

60,237

 

 

 

60,998

 

Total regulatory and other long-term assets

 

2,136,301

 

 

 

2,127,981

 

TOTAL ASSETS

$

15,426,447

 

 

$

15,088,142

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

June 30,

 

 

December 31,

 

 

2014

 

 

2013

 

CAPITALIZATION AND LIABILITIES

 

Capitalization

 

 

 

 

 

 

 

Common stock ($0.01 par value, 500,000 shares authorized, 179,141 shares outstanding at June 30 and 178,379 at December 31)

$

1,791

 

 

$

1,784

 

Paid-in-capital

 

6,290,402

 

 

 

6,261,396

 

Accumulated deficit

 

(1,374,174

)

 

 

(1,495,698

)

Accumulated other comprehensive loss

 

(34,671

)

 

 

(34,635

)

Treasury stock

 

(10,222

)

 

 

(5,043

)

Total common stockholders' equity

 

4,873,126

 

 

 

4,727,804

 

Long-term debt

 

 

 

 

 

 

 

Long-term debt

 

5,217,544

 

 

 

5,212,881

 

Redeemable preferred stock at redemption value

 

15,964

 

 

 

17,177

 

Total capitalization

 

10,106,634

 

 

 

9,957,862

 

Current liabilities

 

 

 

 

 

 

 

Short-term debt

 

702,438

 

 

 

630,307

 

Current portion of long-term debt

 

15,030

 

 

 

14,174

 

Accounts payable

 

192,441

 

 

 

264,589

 

Taxes accrued

 

37,579

 

 

 

32,400

 

Interest accrued

 

55,545

 

 

 

52,087

 

Other

 

231,878

 

 

 

241,976

 

Total current liabilities

 

1,234,911

 

 

 

1,235,533

 

Regulatory and other long-term liabilities

 

 

 

 

 

 

 

Advances for construction

 

370,123

 

 

 

375,729

 

Deferred income taxes

 

2,027,483

 

 

 

1,840,697

 

Deferred investment tax credits

 

25,711

 

 

 

26,408

 

Regulatory liabilities

 

382,511

 

 

 

373,319

 

Accrued pension expense

 

98,672

 

 

 

108,542

 

Accrued postretirement benefit expense

 

88,362

 

 

 

88,419

 

Other

 

37,712

 

 

 

38,929

 

Total regulatory and other long-term liabilities

 

3,030,574

 

 

 

2,852,043

 

Contributions in aid of construction

 

1,054,328

 

 

 

1,042,704

 

Commitments and contingencies (See Note 10)

 

 

 

TOTAL CAPITALIZATION AND LIABILITIES

$

15,426,447

 

 

$

15,088,142

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

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

June 30,

 

 

Six Months Ended

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Operating revenues

$

759,159

 

 

$

724,265

 

 

$

1,441,105

 

 

$

1,360,402

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operation and maintenance

 

342,974

 

 

 

323,320

 

 

 

672,249

 

 

 

635,523

 

Depreciation and amortization

 

105,862

 

 

 

101,366

 

 

 

211,940

 

 

 

201,015

 

General taxes

 

56,894

 

 

 

57,806

 

 

 

117,661

 

 

 

117,952

 

(Gain) loss on asset dispositions and purchases

 

(345

)

 

 

(114

)

 

 

(615

)

 

 

(208

)

Total operating expenses, net

 

505,385

 

 

 

482,378

 

 

 

1,001,235

 

 

 

954,282

 

Operating income

 

253,774

 

 

 

241,887

 

 

 

439,870

 

 

 

406,120

 

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

(73,668

)

 

 

(77,757

)

 

 

(147,228

)

 

 

(155,871

)

Allowance for other funds used during construction

 

2,058

 

 

 

3,699

 

 

 

4,259

 

 

 

7,095

 

Allowance for borrowed funds used during construction

 

1,271

 

 

 

1,770

 

 

 

2,754

 

 

 

3,423

 

Amortization of debt expense

 

(1,629

)

 

 

(1,624

)

 

 

(3,302

)

 

 

(3,205

)

Other, net

 

(317

)

 

 

(256

)

 

 

(1,858

)

 

 

(1,032

)

Total other income (expenses)

 

(72,285

)

 

 

(74,168

)

 

 

(145,375

)

 

 

(149,590

)

Income before income taxes

 

181,489

 

 

 

167,719

 

 

 

294,495

 

 

 

256,530

 

Provision for income taxes

 

72,190

 

 

 

66,456

 

 

 

117,073

 

 

 

97,624

 

Net income

$

109,299

 

 

$

101,263

 

 

$

177,422

 

 

$

158,906

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension plan amortized to periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service cost, net of tax of $26 and $27 for the three months and $53 and $55 for the six months, respectively

 

42

 

 

 

44

 

 

 

83

 

 

 

87

 

Actuarial loss, net of tax of $(5) and $1,425 for the three months and $(10) and $2,849 for the six months, respectively

 

(8

)

 

 

2,227

 

 

 

(15

)

 

 

4,455

 

Foreign currency translation adjustment

 

446

 

 

 

(453

)

 

 

(104

)

 

 

(819

)

Other comprehensive income (loss)

 

480

 

 

 

1,818

 

 

 

(36

)

 

 

3,723

 

Comprehensive income

$

109,779

 

 

$

103,081

 

 

$

177,386

 

 

$

162,629

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

$

0.61

 

 

$

0.57

 

 

$

0.99

 

 

$

0.89

 

Diluted earnings per share

$

0.61

 

 

$

0.57

 

 

$

0.99

 

 

$

0.89

 

Average common shares outstanding during the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

178,863

 

 

 

177,716

 

 

 

178,702

 

 

 

177,522

 

Diluted

 

179,693

 

 

 

178,910

 

 

 

179,512

 

 

 

178,716

 

Dividends declared per common share

$

0.31

 

 

$

0.28

 

 

$

0.31

 

 

$

0.28

 

  

 

 

 

 

 

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)

 

 

Six Months Ended

June 30,

 

 

2014

 

 

2013

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net income

$

177,422

 

 

$

158,906

 

Adjustments

 

 

 

 

 

 

 

Depreciation and amortization

 

211,940

 

 

 

201,015

 

Provision for deferred income taxes

 

108,991

 

 

 

91,930

 

Amortization of deferred investment tax credits

 

(697

)

 

 

(751

)

Provision for losses on accounts receivable

 

17,014

 

 

 

9,056

 

Allowance for other funds used during construction

 

(4,259

)

 

 

(7,095

)

Gain on asset dispositions and purchases

 

(615

)

 

 

(208

)

Pension and non-pension postretirement benefits

 

12,038

 

 

 

39,036

 

Stock-based compensation expense

 

6,882

 

 

 

6,462

 

Other, net

 

19,751

 

 

 

(9,853

)

Changes in assets and liabilities

 

 

 

 

 

 

 

Receivables and unbilled revenues

 

(53,745

)

 

 

(64,675

)

Taxes receivable, including income taxes

 

(512

)

 

 

(228

)

Other current assets

 

(13,969

)

 

 

(5,299

)

Pension and non-pension postretirement benefit contributions

 

(21,433

)

 

 

(59,493

)

Accounts payable

 

(55,626

)

 

 

(32,243

)

Taxes accrued, including income taxes

 

5,179

 

 

 

1,876

 

Interest accrued

 

3,458

 

 

 

721

 

Change in book overdraft

 

36,521

 

 

 

(12,870

)

Other current liabilities

 

2,275

 

 

 

(26,090

)

  Net cash provided by operating activities

 

450,615

 

 

 

290,197

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

Capital expenditures

 

(401,781

)

 

 

(429,830

)

Acquisitions

 

(2,869

)

 

 

(4,602

)

Proceeds from sale of assets

 

665

 

 

 

580

 

Removal costs from property, plant and equipment retirements, net

 

(31,366

)

 

 

(30,426

)

Net funds (restricted) released

 

(2,823

)

 

 

4,891

 

Net cash used in investing activities

 

(438,174

)

 

 

(459,387

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

Proceeds from long-term debt

 

0

 

 

 

1,378

 

Repayment of long-term debt

 

(3,365

)

 

 

(5,709

)

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

 

35,000

 

 

 

0

 

Repayment of short-term borrowings with maturities greater than three months

 

(256,000

)

 

 

0

 

Net short-term borrowings with maturities less than three months

 

293,131

 

 

 

196,477

 

Proceeds from issuances of employee stock plans and DRIP

 

12,169

 

 

 

14,780

 

Advances and contributions for construction, net of refunds of $10,459 and

      $9,136 at June 30, 2014 and  2013, respectively

 

8,401

 

 

 

10,861

 

Redemption of preferred stock

 

(1,200

)

 

 

(2,920

)

Dividends paid

 

(105,390

)

 

 

(49,744

)

Other

 

9,982

 

 

 

0

 

Net cash (used in) provided by financing activities

 

(7,272

)

 

 

165,123

 

Net increase (decrease) in cash and cash equivalents

 

5,169

 

 

 

(4,067

)

Cash and cash equivalents at beginning of period

 

26,964

 

 

 

24,433

 

Cash and cash equivalents at end of period

$

32,133

 

 

$

20,366

 

Non-cash investing activity:

 

 

 

 

 

 

 

Capital expenditures acquired on account but unpaid at end of period

$

115,127

 

 

$

94,889

 

Non-cash financing activity:

 

 

 

 

 

 

 

Advances and contributions

$

6,060

 

 

$

6,681

 

Long-term debt issued

$

9,977

 

 

$

0

 

Long-term debt retired

$

(875

)

 

$

0

 

  

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

 

 

 

5


American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

(In thousands, except per share data)

 

 

Common  Stock

 

 

 

 

 

 

 

 

 

 

Accumulated Other

 

 

Treasury Stock

 

 

Preferred Stock of Subsidiary Companies Without Mandatory

 

 

Total

 

 

Shares

 

 

Par Value

 

 

Paid-in Capital

 

 

Accumulated Deficit

 

 

Comprehensive Loss

 

 

Shares

 

 

At Cost

 

 

Redemption Requirements

 

 

Stockholders' Equity

 

Balance at December 31, 2013

 

178,379

 

 

$

1,784

 

 

$

6,261,396

 

 

$

(1,495,698

)

 

$

(34,635

)

 

 

(132

)

 

$

(5,043

)

 

$

0

 

 

$

4,727,804

 

Net income

 

0

 

 

 

0

 

 

 

0

 

 

 

177,422

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

177,422

 

Direct stock reinvestment

      and purchase plan, net of

      expense of $14

 

23

 

 

 

0

 

 

 

1,017

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

1,017

 

Employee stock purchase

      plan

 

53

 

 

 

0

 

 

 

2,347

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

2,347

 

Stock-based compensation

      activity

 

686

 

 

 

7

 

 

 

25,642

 

 

 

(417

)

 

 

0

 

 

 

(122

)

 

 

(5,179

)

 

 

0

 

 

 

20,053

 

Other comprehensive

      loss, net of tax of $43

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(36

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(36

)

Dividends

 

0

 

 

 

0

 

 

 

0

 

 

 

(55,481

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(55,481

)

Balance at June 30, 2014

 

179,141

 

 

$

1,791

 

 

$

6,290,402

 

 

$

(1,374,174

)

 

$

(34,671

)

 

 

(254

)

 

$

(10,222

)

 

$

0

 

 

$

4,873,126

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common  Stock

 

 

 

 

 

 

 

 

 

 

Accumulated Other

 

 

Treasury Stock

 

 

Preferred Stock of Subsidiary Companies Without Mandatory

 

 

Total

 

 

Shares

 

 

Par Value

 

 

Paid-in Capital

 

 

Accumulated Deficit

 

 

Comprehensive Loss

 

 

Shares

 

 

At Cost

 

 

Redemption Requirements

 

 

Stockholders' Equity

 

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

 

 

 

158,906

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

158,906

 

Direct stock reinvestment

      and purchase plan, net of

      expense of $22

 

23

 

 

 

0

 

 

 

892

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

892

 

Employee stock purchase

      plan

 

55

 

 

 

1

 

 

 

2,185

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

2,186

 

Stock-based compensation

      activity

 

877

 

 

 

8

 

 

 

18,130

 

 

 

(200

)

 

 

0

 

 

 

(132

)

 

 

(5,043

)

 

 

0

 

 

 

12,895

 

Subsidiary preferred stock

      redemption

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(1,720

)

 

 

(1,720

)

Other comprehensive

      income, net of tax

      of $2,904

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

3,723

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

3,723

 

Dividends

 

0

 

 

 

0

 

 

 

0

 

 

 

(49,744

)

 

 

0

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(49,744

)

Balance at June 30, 2013

 

177,943

 

 

$

1,779

 

 

$

6,243,851

 

 

$

(1,555,993

)

 

$

(112,468

)

 

 

(132

)

 

$

(5,043

)

 

$

0

 

 

$

4,572,126

 

  

 

 

 

 

 

 

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 June 30, 2014, the Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2014 and 2013, the Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013, and the Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2014 and 2013, 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, 2013. 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.   In 2014 the Company revised the 2013 balance sheet to classify $18,609 of deferred income taxes as current rather than non-current.  The change in classification was not material to the previously issued financial statements.

 

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:

Obligations Resulting from Joint and Several Liability Arrangements

In February 2013, the Financial Accounting Standards Board (“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. The adoption of this guidance did not have an 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. 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:

Service Concession Arrangements

In January 2014, the FASB issued guidance for an operating entity that enters into a service concession arrangement with a public sector grantor who controls or has the ability to modify or approve the services that the operating entity must provide with the infrastructure, to whom it must provide the services and at what price. The grantor also controls, through ownership or otherwise, any residual interest in the infrastructure at the end of the term of the arrangement. The guidance specifies that an operating entity should not account for the service concession arrangement as a lease. The operating entity should refer instead to other accounting guidance to account for the various aspects of the arrangement. The guidance also specifies that the infrastructure used in the arrangement should not be recognized as property, plant and equipment of the operating entity. This update should be applied on a modified retrospective basis to service concession arrangements that exist at the beginning of an entity’s fiscal year of adoption. This requires

7


the cumulative effect of applying the update to be recognized as an adjustment to the opening retained earnings balance for the annual period of adoption. The update is effective for interim and annual periods beginning January 1, 2015. Early adoption is permitted. The Company is evaluating the impact the updated guidance will have on its results of operations, financial position or cash flows.

Reporting Discontinued Operations

In April 2014, the FASB issued guidance that changes the criteria for determining which disposals can be presented as discontinued operations and modifies related disclosure requirements. Under the updated guidance, a discontinued operation is defined as a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results. A strategic shift could include a disposal of a major geographical area of operations, a major line of business, a major equity method investment or other major part of the entity. A component comprises operations and cash flows that can be clearly distinguished, operationally and for financial reporting purposes, from the rest of the entity including a reportable segment, an operating segment, a reporting unit, a subsidiary or an asset group. The update no longer precludes presentation as a discontinued operation if there are operations and cash flows of the component that have not been eliminated from the reporting entity’s ongoing operations or if there is significant continuing involvement with a component after its disposal. The guidance is effective for new disposals after January 1, 2015 and early adoption is permitted for new disposals that have not yet been reported in financial statements. The Company is evaluating the impact the updated guidance will have on its results of operations, financial position or cash flows.

Revenue from Contracts with Customers

In May 2014, the FASB issued a comprehensive new revenue recognition standard that supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the new guidance is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The guidance is effective for annual and interim periods beginning January 1, 2017 and early adoption is not permitted. The new guidance allows for either full retrospective adoption, meaning the guidance is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements. The Company is evaluating the new guidance, the best transition method and the impact the new standard will have on its results of operations, financial position or cash flows.

Accounting for Stock-based Compensation with Performance Targets

In June 2014, the FASB issued guidance for the accounting for stock-based compensation tied to performance targets. The amendments clarify that a performance target that affects vesting of a share-based payment and that could be achieved after the requisite service period is a performance condition. As a result, the target is not reflected in the estimation of the award’s grant date fair value and compensation cost would be recognized over the required service period, if it is probable that the performance condition will be achieved. The guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The Company is evaluating the impact the updated guidance will have on its results of operations, financial position or cash flows.

 

Note 3: Acquisitions

Acquisitions

During the six-month period ended June 30, 2014, the Company closed on five acquisitions: four regulated water systems and one regulated water and wastewater system. The aggregate purchase price of these acquisitions totaled $2,869. Assets acquired, principally plant, totaled $5,985. Liabilities assumed totaled $3,117, including contributions in aid of construction of $1,425 and debt of $1,683.

 

 

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 six months ended June 30, 2014.

8


The change in the Company’s goodwill assets, as allocated between the reporting units is as follows:

 

Regulated Unit

 

 

Market-Based Operations

 

 

Consolidated

 

 

Cost

 

 

Accumulated Impairment

 

 

Cost

 

 

Accumulated Impairment

 

 

Cost

 

 

Accumulated Impairment

 

 

Total Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2014

$

3,412,063

 

 

$

(2,332,670

)

 

$

235,990

 

 

$

(107,619

)

 

$

3,648,053

 

 

$

(2,440,289

)

 

$

1,207,764

 

Goodwill from acquisitions

 

301

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

301

 

 

 

0

 

 

 

301

 

Balance at June 30, 2014

$

3,412,364

 

 

$

(2,332,670

)

 

$

235,990

 

 

$

(107,619

)

 

$

3,648,354

 

 

$

(2,440,289

)

 

$

1,208,065

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2013

$

3,411,549

 

 

$

(2,332,670

)

 

$

235,990

 

 

$

(107,619

)

 

$

3,647,539

 

 

$

(2,440,289

)

 

$

1,207,250

 

Reclassifications and other

     activity

 

86

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

86

 

 

 

0

 

 

 

86

 

Balance at June 30, 2013

$

3,411,635

 

 

$

(2,332,670

)

 

$

235,990

 

 

$

(107,619

)

 

$

3,647,625

 

 

$

(2,440,289

)

 

$

1,207,336

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

 

 

Note 5: Stockholders’ Equity

Common Stock

Under American Water Stock Direct, a dividend reinvestment and direct stock purchase plan (the “DRIP”), stockholders may reinvest cash dividends and purchase additional Company common stock, up to certain limits, through the plan administrator without commission fees. The Company’s plan administrator may buy newly issued shares directly from the Company or shares held in the Company’s treasury. The plan administrator may also buy shares in the public markets or in privately negotiated transactions. Purchases generally will be made and credited to DRIP accounts once each week. As of June 30, 2014, there were 4,632 shares available for future issuance under the DRIP.

The following table summarizes information regarding issuances under the DRIP for the six months ended June 30, 2014 and 2013:

 

 

2014

 

 

2013

 

Shares of common stock issued

 

23

 

 

 

23

 

Cash proceeds received

$

1,031

 

 

$

914

 

  

Cash dividend payments made during the three-month periods ended March 31 and June 30 were as follows:

 

 

2014

 

 

2013

 

Dividends per share, three months ended:

 

 

 

 

 

 

 

March 31

$

0.28

 

 

$

0.00

 

June 30

$

0.31

 

 

$

0.28

 

 

 

 

 

 

 

 

 

Total dividends paid, three months ended:

 

 

 

 

 

 

 

March 31

$

49,968

 

 

$

0

 

June 30

$

55,422

 

 

$

49,744

 

  

The March 31, 2014 payment included $49,909 of dividends accrued as of December 31, 2013.

On July 30, 2014, the Company declared a quarterly cash dividend of $0.31 per share, payable on September 2, 2014 to shareholders of record as of August 11, 2014.

9


Accumulated Other Comprehensive Income (Loss)

The following table presents changes in accumulated other comprehensive income (loss) by component, net of tax, for the six months ended June 30, 2014 and 2013, respectively:

 

 

Defined Benefit Plans

 

 

 

 

 

 

 

 

 

 

Employee Benefit Plan Funded Status

 

 

Amortization of Prior Service Cost

 

 

Amortization of Actuarial Loss

 

 

Foreign Currency Translation

 

 

Total Accumulated Other Comprehensive Loss

 

Beginning balance at January 1, 2014

$

(69,711

)

 

$

713

 

 

$

31,150

 

 

$

3,213

 

 

$

(34,635

)

Other comprehensive income (loss) before

        reclassifications

 

0

 

 

 

0

 

 

 

0

 

 

 

(104

)

 

 

(104

)

Amounts reclassified from accumulated other

        comprehensive income (loss)

 

0

 

 

 

83

 

 

 

(15

)

 

 

0

 

 

 

68

 

Other comprehensive income (loss) for the

        period

 

0

 

 

 

83

 

 

 

(15

)

 

 

(104

)

 

 

(36

)

Ending balance at June 30, 2014

$

(69,711

)

 

$

796

 

 

$

31,135

 

 

$

3,109

 

 

$

(34,671

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance at January 1, 2013

$

(143,183

)

 

$

539

 

 

$

22,239

 

 

$

4,214

 

 

$

(116,191

)

Other comprehensive income (loss) before

        reclassifications

 

0

 

 

 

0

 

 

 

0

 

 

 

(819

)

 

 

(819

)

Amounts reclassified from accumulated other

        comprehensive income (loss)

 

0

 

 

 

87

 

 

 

4,455

 

 

 

0

 

 

 

4,542

 

Other comprehensive income (loss) for the

        period

 

0

 

 

 

87

 

 

 

4,455

 

 

 

(819

)

 

 

3,723

 

Ending balance at June 30, 2013

$

(143,183

)

 

$

626

 

 

$

26,694

 

 

$

3,395

 

 

$

(112,468

)

  

The Company does not reclassify the amortization of defined benefit pension cost components from accumulated other comprehensive income (loss) directly to net income in its entirety. These accumulated other comprehensive income components are included in the computation of net periodic pension cost. (See Note 9)

Stock-Based Compensation

The Company has granted stock option and restricted stock unit awards to non-employee directors, officers and other key employees of the Company pursuant to the terms of its 2007 Omnibus Equity Compensation Plan (the “Plan”). As of June 30, 2014, a total of 8,797 shares were available for grant under the Plan. Shares issued under the Plan may be authorized-but-unissued shares of Company stock or reacquired shares of Company stock, including shares purchased by the Company on the open market for purposes of the Plan.

The Company recognizes compensation expense for stock awards over the vesting period of the award. The following table presents stock-based compensation expense recorded in operation and maintenance expense in the accompanying Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2014 and 2013:

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Stock options

$

702

 

 

$

1,100

 

 

$

1,357

 

 

$

1,852

 

Restricted stock units

 

3,321

 

 

 

3,177

 

 

 

5,240

 

 

 

4,334

 

Employee stock purchase plan

 

148

 

 

 

143

 

 

 

285

 

 

 

276

 

Stock-based compensation in operation and

     maintenance expense

 

4,171

 

 

 

4,420

 

 

 

6,882

 

 

 

6,462

 

Income tax benefit

 

(1,627

)

 

 

(1,724

)

 

 

(2,684

)

 

 

(2,520

)

After-tax stock-based compensation expense

$

2,544

 

 

$

2,696

 

 

$

4,198

 

 

$

3,942

 

  

There were no significant stock-based compensation costs capitalized during the six months ended June 30, 2014 and 2013, respectively.

10


Stock Options

In the first six months of 2014, the Company granted non-qualified stock options to certain employees under the Plan. The stock options vest ratably over the three-year service period beginning January 1, 2014. These awards have no performance vesting conditions and the grant date fair value is amortized through expense over the requisite service period using the straight-line method.

The following table presents the weighted-average assumptions used in the Black-Scholes option-pricing model and the resulting weighted-average grant date fair value per share of stock options granted through June 30, 2014:

 

Dividend yield

 

2.55

%

Expected volatility

 

17.75

%

Risk-free interest rate

 

1.06

%

Expected life (years)

 

3.6

 

Exercise price

$

44.29

 

Grant date fair value per share

$

4.57

 

Stock options granted under the Plan have maximum terms of seven years, vest over periods ranging from one to three years, and are granted with exercise prices equal to the market value of the Company’s common stock on the date of grant. As of June 30, 2014, $2,971 of total unrecognized compensation cost related to the non-vested stock options is expected to be recognized over the weighted-average period of 1.5 years.

The table below summarizes stock option activity for the six months ended June 30, 2014:

 

 

Shares

 

 

Weighted-Average Exercise Price (per share)

 

 

Weighted-Average Remaining Life (years)

 

 

Aggregate Intrinsic Value

 

Options outstanding at January 1, 2014

 

2,055

 

 

$

28.80

 

 

 

 

 

 

 

 

 

Granted

 

491

 

 

 

44.29

 

 

 

 

 

 

 

 

 

Forfeited or expired

 

(11

)

 

 

37.32

 

 

 

 

 

 

 

 

 

Exercised

 

(350

)

 

 

25.95

 

 

 

 

 

 

 

 

 

Options outstanding at June 30, 2014

 

2,185

 

 

$

32.69

 

 

 

4.3

 

 

$

36,614

 

Exercisable at June 30, 2014

 

1,320

 

 

$

27.14

 

 

 

3.2

 

 

$

29,454

 

  

 

The following table summarizes additional information regarding stock options exercised during the six months ended June 30, 2014 and 2013:

 

 

2014

 

 

2013

 

Intrinsic value

$