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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, 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 October 30, 2014

Common Stock, $0.01 par value per share

 

179,309,045 shares

 

 

 


TABLE OF CONTENTS

AMERICAN WATER WORKS COMPANY, INC.

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED September 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

22

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

37

ITEM 4. CONTROLS AND PROCEDURES

37

 

 

PART II. OTHER INFORMATION

38

 

 

ITEM 1. LEGAL PROCEEDINGS

38

ITEM 1A. RISK FACTORS

40

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

40

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

40

ITEM 4. MINE SAFETY DISCLOSURES

40

ITEM 5. OTHER INFORMATION

41

ITEM 6. EXHIBITS

42

 

 

SIGNATURES

43

EXHIBITS INDEX

 

 

 

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)

 

 

September 30,

 

 

December 31,

 

 

2014

 

 

2013

 

ASSETS

 

Property plant and equipment

 

 

 

 

 

 

 

Utility plant—at original cost, net of accumulated depreciation of $4,010,604 at September 30 and $3,894,326 at December 31

$

12,668,123

 

 

$

12,244,359

 

Nonutility property, net of accumulated depreciation of $239,780 at September 30 and $215,083 at December 31

 

131,235

 

 

 

143,995

 

Total property, plant and equipment

 

12,799,358

 

 

 

12,388,354

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

74,128

 

 

 

26,964

 

Restricted funds

 

20,040

 

 

 

28,505

 

Accounts receivable

 

284,273

 

 

 

241,926

 

Allowance for uncollectible accounts

 

(34,579

)

 

 

(33,823

)

Unbilled revenues

 

227,037

 

 

 

215,725

 

Income taxes receivable

 

9,608

 

 

 

5,778

 

Materials and supplies

 

37,203

 

 

 

32,973

 

Deferred income taxes

 

104,251

 

 

 

18,609

 

Assets of discontinued operations

 

6,256

 

 

 

7,761

 

Other

 

28,744

 

 

 

28,276

 

Total current assets

 

756,961

 

 

 

572,694

 

Regulatory and other long-term assets

 

 

 

 

 

 

 

Regulatory assets

 

874,828

 

 

 

858,465

 

Restricted funds

 

17,243

 

 

 

754

 

Goodwill

 

1,208,065

 

 

 

1,207,764

 

Other

 

59,192

 

 

 

60,998

 

Total regulatory and other long-term assets

 

2,159,328

 

 

 

2,127,981

 

TOTAL ASSETS

$

15,715,647

 

 

$

15,089,029

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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,

 

 

December 31,

 

 

2014

 

 

2013

 

CAPITALIZATION AND LIABILITIES

 

Capitalization

 

 

 

 

 

 

 

Common stock ($0.01 par value, 500,000 shares authorized, 179,265 shares outstanding at September 30 and 178,379 at December 31)

$

1,793

 

 

$

1,784

 

Paid-in-capital

 

6,297,187

 

 

 

6,261,396

 

Accumulated deficit

 

(1,333,164

)

 

 

(1,495,698

)

Accumulated other comprehensive loss

 

(35,942

)

 

 

(34,635

)

Treasury stock

 

(10,222

)

 

 

(5,043

)

Total common stockholders' equity

 

4,919,652

 

 

 

4,727,804

 

Long-term debt

 

 

 

 

 

 

 

Long-term debt

 

5,540,648

 

 

 

5,212,881

 

Redeemable preferred stock at redemption value

 

15,958

 

 

 

17,177

 

Total capitalization

 

10,476,258

 

 

 

9,957,862

 

Current liabilities

 

 

 

 

 

 

 

Short-term debt

 

313,979

 

 

 

630,307

 

Current portion of long-term debt

 

55,581

 

 

 

14,174

 

Accounts payable

 

260,713

 

 

 

264,115

 

Taxes accrued

 

46,945

 

 

 

32,166

 

Interest accrued

 

97,062

 

 

 

52,087

 

Liabilities of discontinued operations

 

1,667

 

 

 

3,824

 

Other

 

282,988

 

 

 

238,860

 

Total current liabilities

 

1,058,935

 

 

 

1,235,533

 

Regulatory and other long-term liabilities

 

 

 

 

 

 

 

Advances for construction

 

368,827

 

 

 

375,729

 

Deferred income taxes

 

2,118,499

 

 

 

1,841,584

 

Deferred investment tax credits

 

25,362

 

 

 

26,408

 

Regulatory liabilities

 

385,288

 

 

 

373,319

 

Accrued pension expense

 

90,026

 

 

 

108,542

 

Accrued postretirement benefit expense

 

88,338

 

 

 

88,419

 

Other

 

36,893

 

 

 

38,929

 

Total regulatory and other long-term liabilities

 

3,113,233

 

 

 

2,852,930

 

Contributions in aid of construction

 

1,067,221

 

 

 

1,042,704

 

Commitments and contingencies (See Note 10)

 

 

 

TOTAL CAPITALIZATION AND LIABILITIES

$

15,715,647

 

 

$

15,089,029

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

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,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Operating revenues

$

846,169

 

 

$

822,190

 

 

$

2,279,950

 

 

$

2,172,694

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operation and maintenance

 

341,348

 

 

 

337,674

 

 

 

1,004,377

 

 

 

962,853

 

Depreciation and amortization

 

106,789

 

 

 

102,495

 

 

 

318,398

 

 

 

303,002

 

General taxes

 

60,807

 

 

 

58,087

 

 

 

178,276

 

 

 

175,789

 

(Gain) loss on asset dispositions and purchases

 

(60

)

 

 

768

 

 

 

(616

)

 

 

529

 

Total operating expenses, net

 

508,884

 

 

 

499,024

 

 

 

1,500,435

 

 

 

1,442,173

 

Operating income

 

337,285

 

 

 

323,166

 

 

 

779,515

 

 

 

730,521

 

Other income (expenses)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

(75,445

)

 

 

(77,389

)

 

 

(222,673

)

 

 

(233,260

)

Allowance for other funds used during construction

 

2,805

 

 

 

2,800

 

 

 

7,064

 

 

 

9,895

 

Allowance for borrowed funds used during construction

 

1,570

 

 

 

1,679

 

 

 

4,324

 

 

 

5,102

 

Amortization of debt expense

 

(1,669

)

 

 

(1,524

)

 

 

(4,971

)

 

 

(4,729

)

Other, net

 

(733

)

 

 

(449

)

 

 

(2,591

)

 

 

(1,481

)

Total other income (expenses)

 

(73,472

)

 

 

(74,883

)

 

 

(218,847

)

 

 

(224,473

)

Income from continuing operations before income taxes

 

263,813

 

 

 

248,283

 

 

 

560,668

 

 

 

506,048

 

Provision for income taxes

 

107,205

 

 

 

98,374

 

 

 

224,773

 

 

 

196,325

 

Income from continuing operations

 

156,608

 

 

 

149,909

 

 

 

335,895

 

 

 

309,723

 

Income (loss) from discontinued operations, net of tax

 

(4,423

)

 

 

756

 

 

 

(6,288

)

 

 

(152

)

Net income

$

152,185

 

 

$

150,665

 

 

$

329,607

 

 

$

309,571

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension plan amortized to periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior service cost, net of tax of $26 and $28 for the three

     months and $79 and $83 for the nine months, respectively

 

41

 

 

 

43

 

 

 

124

 

 

 

130

 

Actuarial loss, net of tax of $(4) and $1,424 for the three

     months and $(14) and $4,273 for the nine months,

     respectively

 

(7

)

 

 

2,228

 

 

 

(22

)

 

 

6,683

 

Foreign currency translation adjustment

 

(490

)

 

 

296

 

 

 

(594

)

 

 

(523

)

Unrealized loss on cash flow hedge, net of tax of $(439) for the

     three and nine months

 

(815

)

 

 

0

 

 

 

(815

)

 

 

0

 

Other comprehensive income (loss)

 

(1,271

)

 

 

2,567

 

 

 

(1,307

)

 

 

6,290

 

Comprehensive income

$

150,914

 

 

$

153,232

 

 

$

328,300

 

 

$

315,861

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share: (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

$

0.87

 

 

$

0.84

 

 

$

1.88

 

 

$

1.74

 

Income (loss) from discontinued operations, net of tax

$

(0.02

)

 

$

0.00

 

 

$

(0.04

)

 

$

(0.00

)

Basic earnings per share

$

0.85

 

 

$

0.85

 

 

$

1.84

 

 

$

1.74

 

Diluted earnings per share: (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

$

0.87

 

 

$

0.84

 

 

$

1.87

 

 

$

1.73

 

Income (loss) from discontinued operations, net of tax

$

(0.02

)

 

$

0.00

 

 

$

(0.03

)

 

$

(0.00

)

Diluted earnings per share

$

0.85

 

 

$

0.84

 

 

$

1.83

 

 

$

1.73

 

Average common shares outstanding during the period

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

178,992

 

 

 

177,965

 

 

 

178,800

 

 

 

177,671

 

Diluted

 

179,948

 

 

 

179,154

 

 

 

179,723

 

 

 

178,906

 

Dividends declared per common share

$

0.62

 

 

$

0.56

 

 

$

0.93

 

 

$

0.84

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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,

 

 

2014

 

 

2013

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net income

$

329,607

 

 

$

309,571

 

Adjustments

 

 

 

 

 

 

 

Depreciation and amortization

 

318,398

 

 

 

303,002

 

Provision for deferred income taxes

 

213,125

 

 

 

195,240

 

Amortization of deferred investment tax credits

 

(1,046

)

 

 

(1,126

)

Provision for losses on accounts receivable

 

26,087

 

 

 

18,331

 

Allowance for other funds used during construction

 

(7,064

)

 

 

(9,895

)

(Gain) loss on asset dispositions and purchases

 

(616

)

 

 

529

 

Pension and non-pension postretirement benefits

 

18,056

 

 

 

58,552

 

Stock-based compensation expense

 

9,670

 

 

 

8,916

 

Other, net

 

(229

)

 

 

(12,264

)

Changes in assets and liabilities

 

 

 

 

 

 

 

Receivables and unbilled revenues

 

(77,323

)

 

 

(108,062

)

Taxes receivable, including income taxes

 

(3,830

)

 

 

(5,513

)

Other current assets

 

(15,292

)

 

 

(13,188

)

Pension and non-pension postretirement benefit contributions

 

(35,783

)

 

 

(77,664

)

Accounts payable

 

(30,141

)

 

 

(28,577

)

Taxes accrued, including income taxes

 

14,779

 

 

 

10,064

 

Interest accrued

 

44,975

 

 

 

47,481

 

Change in book overdraft

 

(2,052

)

 

 

(7,993

)

Other current liabilities

 

39,581

 

 

 

1,145

 

Operating cash flows provided by continuing operations

 

840,902

 

 

 

688,549

 

Operating cash flows provided by (used in) discontinued operations, net

 

(640

)

 

 

127

 

  Net cash provided by operating activities

 

840,262

 

 

 

688,676

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

Capital expenditures

 

(664,859

)

 

 

(664,975

)

Acquisitions

 

(6,053

)

 

 

(16,554

)

Proceeds from sale of assets

 

804

 

 

 

749

 

Removal costs from property, plant and equipment retirements, net

 

(51,959

)

 

 

(49,639

)

Net funds released

 

738

 

 

 

11,339

 

Investing cash flows used in continuing operations

 

(721,329

)

 

 

(719,080

)

Investing cash flows used in discontinued operations

 

(12

)

 

 

(287

)

Net cash used in investing activities

 

(721,341

)

 

 

(719,367

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

Proceeds from long-term debt

 

500,497

 

 

 

2,737

 

Repayment of long-term debt

 

(136,739

)

 

 

(13,149

)

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

 

35,000

 

 

 

20,000

 

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

 

(256,000

)

 

 

0

 

Net short-term borrowings (repayments) with maturities less than three months

 

(95,328

)

 

 

99,450

 

Proceeds from issuances of employee stock plans and DRIP

 

15,446

 

 

 

19,788

 

Advances and contributions for construction, net of refunds of $16,305 and

      $16,671 at September 30, 2014 and  2013, respectively

 

21,293

 

 

 

13,486

 

Debt issuance costs

 

(4,593

)

 

 

(1,126

)

Redemption of preferred stock

 

(1,200

)

 

 

(2,920

)

Dividends paid

 

(160,848

)

 

 

(99,554

)

Tax benefit realized from equity compensation

 

10,715

 

 

 

0

 

Net cash (used in) provided by financing activities

 

(71,757

)

 

 

38,712

 

Net increase in cash and cash equivalents

 

47,164

 

 

 

8,021

 

Cash and cash equivalents at beginning of period

 

26,964

 

 

 

24,433

 

Cash and cash equivalents at end of period

$

74,128

 

 

$

32,454

 

Non-cash investing activity:

 

 

 

 

 

 

 

Capital expenditures acquired on account but unpaid at end of period

$

163,053

 

 

$

119,807

 

Non-cash financing activity:

 

 

 

 

 

 

 

Advances and contributions

$

8,876

 

 

$

9,379

 

Dividends accrued

$

55,494

 

 

$

49,837

 

Long-term debt issued

$

9,977

 

 

$

0

 

Long-term debt retired

$

(1,215

)

 

$

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

 

 

329,607

 

 

0

 

 

0

 

 

0

 

 

0

 

 

329,607

 

Direct stock reinvestment

      and purchase plan, net of

      expense of $22

 

34

 

 

0

 

 

1,568

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

1,568

 

Employee stock purchase

      plan

 

75

 

 

1

 

 

3,458

 

 

0

 

 

0

 

 

0

 

 

0

 

 

0

 

 

3,459

 

Stock-based compensation

      activity

 

777

 

 

8

 

 

30,765

 

 

(640

)

 

0

 

 

(122

)

 

(5,179

)

 

0

 

 

24,954

 

Other comprehensive

      loss, net of tax of $(374)

 

0

 

 

0

 

 

0

 

 

0

 

 

(1,307

)

 

0

 

 

0

 

 

0

 

 

(1,307

)

Dividends

 

0

 

 

0

 

 

0

 

 

(166,433

)

 

0

 

 

0

 

 

0

 

 

0

 

 

(166,433

)

Balance at September 30, 2014

 

179,265

 

$

1,793

 

$

6,297,187

 

$

(1,333,164

)

$

(35,942

)

 

(254

)

$

(10,222

)

$

0

 

$

4,919,652

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

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

 

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

 

 

 

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, 2014, the Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2014 and 2013, the Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013, and the Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 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.

The accompanying Notes to the Consolidated Financial Statements relate to continuing operations only unless otherwise indicated. 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 was 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 was 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 issued 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

7


retrospective basis to service concession arrangements that exist at the beginning of an entity’s fiscal year of adoption. This requires 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 adoption of this updated guidance is not expected to have a material impact on 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 on a prospective basis for interim and annual periods beginning after January 1, 2015. In general, this guidance is likely to result in fewer disposals of assets qualifying as discontinued operations.  

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.

Disclosures of Uncertainties about an Entity’s Ability to Continue as a Going Concern

In August 2014, the FASB issued guidance that explicitly requires an entity’s management to assess the entity’s ability to continue as a going concern. The new guidance requires an entity to evaluate, at each interim and annual period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued (or are available to be issued) and to provide related disclosures, if applicable. The new guidance is effective for annual periods ending after December 15, 2016 and for interim and annual periods thereafter. Early adoption is permitted. The Company does not expect this new guidance to have a material impact on its results of operations, financial position or cash flows.

Note 3: Acquisitions and Divestitures

Acquisitions

During the nine-month period ended September 30, 2014, the Company closed on nine acquisitions: five regulated water systems, one regulated wastewater, and three regulated water and wastewater systems. The aggregate purchase price of these acquisitions totaled $6,134. Assets acquired, principally plant, totaled $13,119. Liabilities assumed totaled $6,985, including contributions in aid of construction of $4,231 and debt of $1,683.

Divestitures

In the third quarter of 2014, the Company approved a plan to exit the Class B biosolids management business by selling Terratec Environmental Ltd (“Terratec”), and as a result, has included the results as discontinued operations for all periods presented. Terratec, which was previously included in the Market-Based Operations segment, is based in Canada and provides environmentally sustainable

8


management and disposal of biosolids and wastewater by-products. The Company expects to complete the disposition during the fourth quarter of 2014.

Included in the loss on discontinued operations is an estimated loss on the disposal of Terratec in the amount of $3,470. The provision for income taxes for 2014 includes the utilization of $1,480 of tax attributes as a result of the expected sale. Charges recorded in connection with the discontinued operations include estimates that are subject to subsequent adjustment.

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,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Operating revenues

$

4,910

 

 

$

7,006

 

 

$

12,234

 

 

$

16,904

 

Total operating expenses, net

 

7,973

 

 

 

6,297

 

 

 

17,657

 

 

 

17,430

 

Income (loss) from discontinued operations before

     income taxes

 

(3,063

)

 

 

709

 

 

 

(5,423

)

 

 

(526

)

Provision (benefit) for income taxes

 

1,360

 

 

 

(47

)

 

 

865

 

 

 

(374

)

Income (loss) from discontinued operations

$

(4,423

)

 

$

756

 

 

$

(6,288

)

 

$

(152

)

 

Assets and liabilities of discontinued operations in the accompanying Consolidated Balance Sheets include the following:

 

September 30,

2014

 

 

December 31,

2013

 

ASSETS

 

 

 

 

 

 

 

Total property, plant and equipment

$

2,168

 

 

$

2,808

 

Current assets

 

4,088

 

 

 

4,953

 

Total assets of discontinued operations

$

6,256

 

 

$

7,761

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Current liabilities

$

1,667

 

 

$

3,824

 

Total liabilities of discontinued operations

$

1,667

 

 

$

3,824

 

 

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, 2014.

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