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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 March 31, 2015

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 April 30, 2015

Common Stock, $0.01 par value per share

 

179,962,233 shares

 

 

 


TABLE OF CONTENTS

AMERICAN WATER WORKS COMPANY, INC.

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED March 31, 2015

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

19

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

32

ITEM 4. CONTROLS AND PROCEDURES

32

 

 

PART II. OTHER INFORMATION

33

 

 

ITEM 1. LEGAL PROCEEDINGS

33

ITEM 1A. RISK FACTORS

34

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

34

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

34

ITEM 4. MINE SAFETY DISCLOSURES

34

ITEM 5. OTHER INFORMATION

34

ITEM 6. EXHIBITS

35

 

 

SIGNATURES

36

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)

 

 

March 31,

 

 

December 31,

 

 

2015

 

 

2014

 

ASSETS

 

Property plant and equipment

 

 

 

 

 

 

 

Utility plant—at original cost, net of accumulated depreciation of $4,062,270 at

     March 31 and $3,991,680 at December 31

$

12,985,631

 

 

$

12,899,704

 

Nonutility property, net of accumulated depreciation of $239,246 at March 31

     and $248,341 at December 31

 

112,936

 

 

 

129,592

 

Total property, plant and equipment

 

13,098,567

 

 

 

13,029,296

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

24,294

 

 

 

23,080

 

Restricted funds

 

21,027

 

 

 

13,859

 

Accounts receivable

 

267,204

 

 

 

267,053

 

Allowance for uncollectible accounts

 

(35,485

)

 

 

(34,941

)

Unbilled revenues

 

222,111

 

 

 

220,538

 

Income taxes receivable

 

8,014

 

 

 

2,575

 

Materials and supplies

 

38,622

 

 

 

37,190

 

Deferred income taxes

 

119,839

 

 

 

86,601

 

Other

 

63,393

 

 

 

45,414

 

Total current assets

 

729,019

 

 

 

661,369

 

Regulatory and other long-term assets

 

 

 

 

 

 

 

Regulatory assets

 

1,151,849

 

 

 

1,153,429

 

Restricted funds

 

8,796

 

 

 

8,958

 

Goodwill

 

1,208,043

 

 

 

1,208,043

 

Other

 

67,257

 

 

 

69,861

 

Total regulatory and other long-term assets

 

2,435,945

 

 

 

2,440,291

 

TOTAL ASSETS

$

16,263,531

 

 

$

16,130,956

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

March 31,

 

 

December 31,

 

 

2015

 

 

2014

 

CAPITALIZATION AND LIABILITIES

 

Capitalization

 

 

 

 

 

 

 

Common stock ($0.01 par value, 500,000 shares authorized, 179,921 shares

     outstanding at March 31 and 179,462 at December 31)

$

1,799

 

 

$

1,795

 

Paid-in-capital

 

6,313,242

 

 

 

6,301,729

 

Accumulated deficit

 

(1,224,008

)

 

 

(1,295,549

)

Accumulated other comprehensive loss

 

(81,503

)

 

 

(81,868

)

Treasury stock

 

(16,592

)

 

 

(10,516

)

Total common stockholders' equity

 

4,992,938

 

 

 

4,915,591

 

Long-term debt

 

5,428,901

 

 

 

5,432,744

 

Redeemable preferred stock at redemption value

 

14,296

 

 

 

15,501

 

Total capitalization

 

10,436,135

 

 

 

10,363,836

 

Current liabilities

 

 

 

 

 

 

 

Short-term debt

 

544,531

 

 

 

449,959

 

Current portion of long-term debt

 

61,149

 

 

 

61,132

 

Accounts payable

 

203,409

 

 

 

285,800

 

Taxes accrued

 

55,714

 

 

 

24,505

 

Interest accrued

 

94,934

 

 

 

56,523

 

Other

 

267,811

 

 

 

363,079

 

Total current liabilities

 

1,227,548

 

 

 

1,240,998

 

Regulatory and other long-term liabilities

 

 

 

 

 

 

 

Advances for construction

 

362,722

 

 

 

367,693

 

Deferred income taxes

 

2,199,681

 

 

 

2,120,739

 

Deferred investment tax credits

 

24,676

 

 

 

25,014

 

Regulatory liabilities

 

386,317

 

 

 

391,782

 

Accrued pension expense

 

317,444

 

 

 

316,368

 

Accrued postretirement benefit expense

 

191,689

 

 

 

192,502

 

Other

 

36,059

 

 

 

37,152

 

Total regulatory and other long-term liabilities

 

3,518,588

 

 

 

3,451,250

 

Contributions in aid of construction

 

1,081,260

 

 

 

1,074,872

 

Commitments and contingencies (See Note 9)

 

 

 

TOTAL CAPITALIZATION AND LIABILITIES

$

16,263,531

 

 

$

16,130,956

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

For the Three Months Ended March 31,

 

 

2015

 

 

2014

 

Operating revenues

$

698,078

 

 

$

679,003

 

Operating expenses

 

 

 

 

 

 

 

Operation and maintenance

 

323,832

 

 

 

325,180

 

Depreciation and amortization

 

107,377

 

 

 

105,924

 

General taxes

 

63,696

 

 

 

60,667

 

Gain on asset dispositions and purchases

 

(1,128

)

 

 

(210

)

Total operating expenses, net

 

493,777

 

 

 

491,561

 

Operating income

 

204,301

 

 

 

187,442

 

Other income (expenses)

 

 

 

 

 

 

 

Interest, net

 

(75,673

)

 

 

(73,560

)

Allowance for other funds used during construction

 

2,360

 

 

 

2,201

 

Allowance for borrowed funds used during construction

 

2,522

 

 

 

1,483

 

Amortization of debt expense

 

(1,764

)

 

 

(1,673

)

Other, net

 

1,756

 

 

 

(1,541

)

Total other income (expenses)

 

(70,799

)

 

 

(73,090

)

Income from continuing operations before income taxes

 

133,502

 

 

 

114,352

 

Provision for income taxes

 

53,459

 

 

 

45,239

 

Income from continuing operations

 

80,043

 

 

 

69,113

 

Loss from discontinued operations, net of tax

 

 

 

 

(990

)

Net income

$

80,043

 

 

$

68,123

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

Pension amortized to periodic benefit cost:

 

 

 

 

 

 

 

Prior service cost, net of tax of $25 and $27, respectively

$

39

 

 

$

41

 

Actuarial (gain) loss, net of tax of $832 and $(5), respectively

 

1,302

 

 

 

(7

)

Foreign currency translation adjustment

 

(996

)

 

 

(550

)

Unrealized loss on cash flow hedge, net of tax of $10

 

20

 

 

 

 

Other comprehensive income (loss)

 

365

 

 

 

(516

)

Comprehensive income

$

80,408

 

 

$

67,607

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

Income from continuing operations

$

0.45

 

 

$

0.39

 

Loss from discontinued operations, net of tax

$

0.00

 

 

$

(0.01

)

Net income

$

0.45

 

 

$

0.38

 

Diluted earnings per share:

 

 

 

 

 

 

 

Income from continuing operations

$

0.44

 

 

$

0.39

 

Loss from discontinued operations, net of tax

$

0.00

 

 

$

(0.01

)

Net income

$

0.44

 

 

$

0.38

 

Average common shares outstanding during the period

 

 

 

 

 

 

 

Basic

 

179,458

 

 

 

178,539

 

Diluted

 

180,295

 

 

 

179,457

 

Dividends declared per common share

$

 

 

$

 

 

 

 

 

 

 

  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)

 

 

Three Months Ended

March 31,

 

 

2015

 

 

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net income

$

80,043

 

 

$

68,123

 

Adjustments

 

 

 

 

 

 

 

Depreciation and amortization

 

107,377

 

 

 

106,078

 

Provision for deferred income taxes

 

34,368

 

 

 

44,919

 

Amortization of deferred investment tax credits

 

(338

)

 

 

(349

)

Provision for losses on accounts receivable

 

7,578

 

 

 

7,580

 

Allowance for other funds used during construction

 

(2,360

)

 

 

(2,201

)

Gain on asset dispositions and purchases

 

(1,128

)

 

 

(270

)

Pension and non-pension postretirement benefits

 

15,324

 

 

 

6,018

 

Stock-based compensation expense

 

2,418

 

 

 

2,711

 

Other, net

 

(13,844

)

 

 

9,624

 

Changes in assets and liabilities

 

 

 

 

 

 

 

Receivables and unbilled revenues

 

(8,758

)

 

 

3,307

 

Taxes receivable, including income taxes

 

(5,439

)

 

 

(4,322

)

Other current assets

 

(3,171

)

 

 

(9,654

)

Pension and non-pension postretirement benefit contributions

 

(12,732

)

 

 

(10,714

)

Accounts payable

 

(30,052

)

 

 

(59,140

)

Taxes accrued, including income taxes

 

31,209

 

 

 

21,729

 

Interest accrued

 

38,411

 

 

 

41,568

 

Change in book overdraft

 

(19,368

)

 

 

22,089

 

Other current liabilities

 

(20,919

)

 

 

(2,222

)

  Net cash provided by operating activities

 

198,619

 

 

 

244,874

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

Capital expenditures

 

(226,411

)

 

 

(192,466

)

Acquisitions

 

(48

)

 

 

(2,279

)

Proceeds from sale of assets

 

1,214

 

 

 

243

 

Removal costs from property, plant and equipment retirements, net

 

(14,265

)

 

 

(10,460

)

Net funds released

 

(7,006

)

 

 

(238

)

Net cash used in investing activities

 

(246,516

)

 

 

(205,200

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

Repayment of long-term debt

 

(3,091

)

 

 

(2,192

)

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

 

 

 

 

35,000

 

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

 

 

 

 

(221,000

)

Net short-term borrowings with maturities less than three months

 

94,572

 

 

 

193,920

 

Proceeds from issuances of employee stock plans and DRIP

 

6,191

 

 

 

8,199

 

Advances and contributions for construction, net of refunds of $4,146 and

      $5,277 at March 31, 2015 and  2014, respectively

 

5,346

 

 

 

1,358

 

Redemption of preferred stock

 

(1,200

)

 

 

(1,200

)

Dividends paid

 

(55,615

)

 

 

(49,968

)

Tax benefit realized from equity compensation

 

2,908

 

 

 

 

Net cash provided by (used in) financing activities

 

49,111

 

 

 

(35,883

)

Net increase in cash and cash equivalents

 

1,214

 

 

 

3,791

 

Cash and cash equivalents at beginning of period

 

23,080

 

 

 

26,964

 

Cash and cash equivalents at end of period

$

24,294

 

 

$

30,755

 

Non-cash investing activity:

 

 

 

 

 

 

 

Capital expenditures acquired on account but unpaid at end of period

$

133,799

 

 

$

109,464

 

Non-cash financing activity:

 

 

 

 

 

 

 

Advances and contributions

$

3,006

 

 

$

3,526

 

 

  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)

 

 

Common  Stock

 

 

 

 

 

 

 

Accumulated Other

 

Treasury Stock

 

Total

 

 

Shares

 

Par Value

 

Paid-in Capital

 

Accumulated Deficit

 

Comprehensive Loss

 

Shares

 

At Cost

 

Stockholders' Equity

 

Balance at December 31, 2014

 

179,462

 

$

1,795

 

$

6,301,729

 

$

(1,295,549

)

$

(81,868

)

 

(261

)

$

(10,516

)

$

4,915,591

 

Cumulative effect of change in

      accounting principle

 

 

 

 

 

 

 

(8,395

)

 

 

 

 

 

 

 

(8,395

)

Net income

 

 

 

 

 

 

 

80,043

 

 

 

 

 

 

 

 

80,043

 

Direct stock reinvestment

      and purchase plan, net of

      expense of $11

 

11

 

 

 

 

566

 

 

 

 

 

 

 

 

 

 

566

 

Employee stock purchase

      plan

 

21

 

 

 

 

1,170

 

 

 

 

 

 

 

 

 

 

1,170

 

Stock-based compensation

      activity

 

427

 

 

4

 

 

9,777

 

 

(45

)

 

 

 

(109

)

 

(6,076

)

 

3,660

 

Other comprehensive

      income, net of tax of $867

 

 

 

 

 

 

 

 

 

365

 

 

 

 

 

 

365

 

Dividends

 

 

 

 

 

 

 

(62

)

 

 

 

 

 

 

 

(62

)

Balance at March 31, 2015

 

179,921

 

$

1,799

 

$

6,313,242

 

$

(1,224,008

)

$

(81,503

)

 

(370

)

$

(16,592

)

$

4,992,938

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common  Stock

 

 

 

 

 

 

 

Accumulated Other

 

Treasury Stock

 

Total

 

 

Shares

 

Par Value

 

Paid-in Capital

 

Accumulated Deficit

 

Comprehensive Loss

 

Shares

 

At Cost

 

Stockholders' Equity

 

Balance at December 31, 2013

 

178,379

 

$

1,784

 

$

6,261,396

 

$

(1,495,698

)

$

(34,635

)

 

(132

)

$

(5,043

)

$

4,727,804

 

Net income

 

 

 

 

 

 

 

68,123

 

 

 

 

 

 

 

 

68,123

 

Direct stock reinvestment

      and purchase plan, net of

      expense of $8

 

10

 

 

 

 

430

 

 

 

 

 

 

 

 

 

 

430

 

Employee stock purchase

      plan

 

25

 

 

 

 

1,076

 

 

 

 

 

 

 

 

 

 

1,076

 

Stock-based compensation

      activity

 

562

 

 

6

 

 

9,375

 

 

(175

)

 

 

 

(118

)

 

(4,977

)

 

4,229

 

Other comprehensive

      loss, net of tax of $22

 

 

 

 

 

 

 

 

 

(516

)

 

 

 

 

 

(516

)

Dividends

 

 

 

 

 

 

 

(59

)

 

 

 

 

 

 

 

(59

)

Balance at March 31, 2014

 

178,976

 

$

1,790

 

$

6,272,277

 

$

(1,427,809

)

$

(35,151

)

 

(250

)

$

(10,020

)

$

4,801,087

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 unaudited consolidated financial statements provided in this report include the accounts of American Water Works, Company, Inc. and its subsidiaries (collectively, the “Company”) after the elimination of intercompany accounts and transactions. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not contain certain information and disclosures required by GAAP for comprehensive financial statements. In the opinion of management, all adjustments necessary for a fair presentation of the financial position at March 31, 2015 and results of operations and cash flows for all periods presented have been made. All adjustments are of a normal, recurring nature, except as otherwise disclosed.

The Consolidated Balance Sheet as of December 31, 2014 is derived from the Company's audited consolidated financial statements at December 31, 2014. These unaudited financial statements and notes should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2014 which provides a more complete understanding of our accounting policies, financial position, operating results and other matters. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the year, 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.

The Company reclassified previously reported 2014 data to conform to the current presentation for discontinued operations. See Note 3 for additional details on the Company’s discontinued operations.

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:

Service Concession Arrangements

In January 2014, the Financial Accounting Standards Board (“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. The update required application on a modified retrospective basis to service concession arrangements that existed at January 1, 2015. The Company reduced nonutility property and other long-term assets for infrastructure related to service concession arrangements and recognized a cumulative effect adjustment of $8,395, net of tax, to the opening balance of accumulated deficit at January 1, 2015.

Reporting Discontinued Operations

In April 2014, the FASB issued guidance that changed 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 December 15, 2014, which for the Company is January 1, 2015.

7


The following recently issued accounting standards are not yet required to be adopted by the Company:

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 December 15, 2016, which for the Company is January 1, 2017. 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 FASB voted on April 1, 2015 to propose to defer the effective date of the new revenue recognition standard by one year. Based on the proposed FASB decision, public organizations would apply the new revenue standard to annual reporting periods beginning after December 15, 2017, which is January 1, 2018 for the Company. Additionally in its proposal, the FASB decided to permit early adoption but not before the original public organization effective date (that is, annual periods beginning after December 15, 2016 or January 1, 2017 for the Company). The FASB plans to expose its decisions for a thirty-day public comment period in a proposed Accounting Standards Update, which is expected to be issued sometime during the second quarter of 2015. The Company is evaluating the new guidance, the best transition method and the impact the new standard will have on 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 updated guidance may be applied either: (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, which for the Company is January 1, 2016. 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.

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, which for the Company is January 1, 2017. Early adoption is permitted. The adoption of this updated guidance is not expected to have a material impact on its results of operations, financial position or cash flows.

Hybrid Financial Instruments Issued in the Form of a Share

In November 2014, the FASB updated the derivatives and hedging guidance requiring issuers of, or investors in, hybrid financial instruments to determine whether the nature of the host contract is more akin to a debt instrument or an equity instrument by considering the economic characteristics and risks of the entire hybrid financial instrument, including the embedded derivative feature that is being evaluated for separate accounting from the host contract. This update should be applied on a modified retrospective basis to hybrid financial instruments issued in the form of a share that exist at the beginning of an entity’s fiscal year of adoption. The updated guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, which for the Company is January 1, 2016. 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.

Extraordinary and Unusual Items

In January 2015, the FASB issued guidance that eliminates the concept of an extraordinary item. As a result, an entity will no longer segregate an extraordinary item and present it separately from the results of ordinary operations or separately disclose income taxes or earnings per share information applicable to an extraordinary item. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently has been retained and expanded to include items that are both unusual in nature and infrequently occurring. The updated guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, which for the Company is January 1, 2016. Early adoption is permitted. The updated guidance may be applied prospectively or retrospectively to all periods presented in the financial statements. The adoption of this updated guidance is not expected to have a material impact on results of operations, financial position or cash flows.

8


Amendments to the Consolidation Analysis

In February 2015, the FASB issued guidance that amends the consolidation analysis for variable interest entities (“VIEs”) as well as voting interest entities. The amended guidance (1) modifies the assessment of limited partnerships as VIEs, (2) amends the effect that fees paid to a decision maker or service provider have on the VIE analysis, (3) amends how variable interests held by a reporting entity’s related parties and de facto agents impact its consolidation conclusion, (4) clarifies how to determine whether equity holders have power over an entity and (5) provides a scope exception for registered and similar unregistered money market funds. The guidance is effective for the first interim period within annual reporting periods beginning after December 15, 2015, which for the Company is January 1, 2016. Early adoption is permitted as of the beginning of the annual period containing the adoption date. The guidance may be applied retrospectively to each prior reporting period presented or retrospectively with a cumulative effect adjustment to retained earnings for initial application of the guidance at the date of adoption (modified retrospective method). The Company is evaluating the impact the updated guidance will have on its results of operations, financial position or cash flows.

Presentation of Debt Issuance Costs

In April 2015, the FASB issued updated guidance on imputation of interest and simplifying the presentation of debt issuance costs. The updated guidance requires debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related liability. Such treatment is consistent with the current presentation of debt discounts or premiums. As it stood prior to amendment, debt issuance costs were reported in the balance sheet as an asset (i.e., a deferred charge), whereas debt discounts and premiums were, and remain, reported as deductions from or additions to the debt itself. Recognition and measurement guidance for debt issuance costs is not affected by the amendments. The effective date is for financial statements covering fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016. Early adoption is permitted for financial statements that have not been previously issued. The amended guidance must be applied on a retrospective basis. Thus, balance sheets for each period presented should be adjusted to reflect the period-specific effects of applying the new guidance. The Company is evaluating the new guidance and does not expect this new guidance to have a material impact on its results of operations, financial position or cash flows.

Accounting for Fees Paid in a Cloud Computing Arrangement

In April 2015, the FASB issued guidance clarifying how customers should account for fees paid in a cloud computing arrangement. Examples of cloud computing arrangements include software as a service, platform as a service, infrastructure as a service and other similar hosting arrangements. Under the new guidance, if a cloud computing arrangement contains a software license, the customer would account for the fees related to the software license element in a manner consistent with the acquisition of other software licenses. If the arrangement does not contain a software license, the customer would account for the arrangement as a service contract. The guidance may be applied retrospectively or prospectively to arrangements entered into, or materially modified after the effective date. The guidance is effective for annual periods, and interim periods therein, beginning after December 15, 2015, which for the Company is January 1, 2016. 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.  

 

Note 3: Divestitures

In November 2014, the Company completed the sale of Terratec Environmental Ltd (“Terratec”) previously included in the Market-Based Operations segment. A summary of discontinued operations presented in the Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2014 is as follows:

 

Operating revenues

$

2,943

 

 

Total operating expenses, net

 

4,289

 

 

Loss from discontinued operations before

     income taxes

 

(1,346

)

 

Benefit from income taxes

 

(356

)

 

Loss from discontinued operations

$

(990

)

 

 

 

9


Note 4: Stockholders’ Equity

Accumulated Other Comprehensive Loss

The following table presents changes in accumulated other comprehensive loss by component, net of tax, for the three months ended March 31, 2015 and 2014, respectively:

 

 

Defined Benefit Plans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee Benefit Plan Funded Status

 

 

Amortization of Prior Service Cost

 

 

Amortization of Actuarial (Gain) Loss

 

 

Foreign Currency Translation

 

 

Loss on Cash Flow Hedge

 

 

Total Accumulated Other Comprehensive Loss

 

Beginning balance at January 1, 2015

$

(115,830

)

 

$

879

 

 

$

31,119

 

 

$

2,755

 

 

$

(791

)

 

$

(81,868

)

Other comprehensive income (loss) before

        reclassifications

 

 

 

 

 

 

 

 

 

 

(996

)

 

 

 

 

 

(996

)

Amounts reclassified from accumulated

        other comprehensive income (loss)

 

 

 

 

39

 

 

 

1,302

 

 

 

 

 

 

20

 

 

 

1,361

 

Net comprehensive income (loss) for the

        period

 

 

 

 

39

 

 

 

1,302

 

 

 

(996

)

 

 

20

 

 

 

365

 

Ending balance at March 31, 2015

$

(115,830

)

 

$

918

 

 

$

32,421

 

 

$

1,759

 

 

$

(771

)

 

$

(81,503

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance at January 1, 2014

$

(69,711

)

 

$

713

 

 

$

31,150

 

 

$

3,213

 

 

$

 

 

$

(34,635

)

Other comprehensive income (loss) before

        reclassifications

 

 

 

 

 

 

 

 

 

 

(550

)

 

 

 

 

 

(550

)

Amounts reclassified from accumulated

        other comprehensive income (loss)

 

 

 

 

41

 

 

 

(7

)

 

 

 

 

 

 

 

 

34

 

Net comprehensive income (loss) for the

        period

 

 

 

 

41

 

 

 

(7

)

 

 

(550

)

 

 

 

 

 

(516

)

Ending balance at March 31, 2014

$

(69,711

)

 

$

754

 

 

$

31,143

 

 

$

2,663

 

 

$

 

 

$

(35,151

)

 

The Company does not reclassify the amortization of defined benefit pension cost components from accumulated other comprehensive loss directly to net income in its entirety. These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension cost. (See Note 8)

The amortization of the loss on cash flow hedge is included in interest, net in the accompanying Consolidated Statements of Operations and Comprehensive Income.

Stock Options

In the first three months of 2015, 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, 2015. 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 March 31, 2015:

 

Dividend yield

 

2.35

%

Expected volatility

 

17.64

%

Risk-free interest rate

 

1.48

%

Expected life (years)

 

4.4

 

Exercise price

$

52.75

 

Grant date fair value per share

$

6.21

 

 

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 March 31, 2015, $2,565 of total unrecognized compensation cost related to the non-vested stock options is expected to be recognized over the weighted-average period of 2.2 years.

 

10


The table below summarizes stock option activity for the three months ended March 31, 2015:

 

 

Shares

 

 

Weighted-Average Exercise Price (per share)

 

 

Weighted-Average Remaining Life (years)

 

 

Aggregate Intrinsic Value

 

Options outstanding at January 1, 2015

 

1,910

 

 

$

33.47

 

 

 

 

 

 

 

 

 

Granted

 

301

 

 

 

52.75

 

 

 

 

 

 

 

 

 

Forfeited or expired

 

(28

)

 

 

42.73

 

 

 

 

 

 

 

 

 

Exercised

 

(152

)

 

 

30.24

 

 

 

 

 

 

 

 

 

Options outstanding at March 31, 2015

 

2,031

 

 

$

36.44

 

 

 

3.6

 

 

$

36,087

 

Exercisable at March 31, 2015

 

1,468

 

 

$

31.89

 

 

 

2.6

 

 

$

32,765

 

 

The following table summarizes additional information regarding stock options exercised during the three months ended March 31, 2015 and 2014:

 

 

2015

 

 

2014

 

Intrinsic value

$

3,575

 

 

$

4,206

 

Exercise proceeds

 

4,605

 

 

 

6,822

 

Income tax benefit

 

1,084

 

 

 

1,151

 

Restricted Stock Units

During 2012, the Company granted selected employees 158 restricted stock units with internal performance measures and, separately, certain market thresholds. These awards vested in January 2015. The terms of the grants specified that if certain performance on internal measures and market thresholds was achieved, the restricted stock units would vest; if performance was surpassed, up to 175% of the target awards would be distributed; and if performance thresholds were not met, awards would be cancelled. In January 2015, an additional 93 restricted stock units were granted and distributed because performance thresholds were exceeded.  

In the first three months of 2015, the Company granted restricted stock units, both with and without performance conditions, to certain employees and non-employee directors under the Plan. The restricted stock units without performance conditions vest ratably over the three-year service period beginning January 1, 2015 and the restricted stock units with performance conditions vest ratably over the three-year performance period beginning January 1, 2015 (the “Performance Period”). Distribution of the performance shares is contingent upon the achievement of internal performance measures and, separately, certain market thresholds over the Performance Period. The restricted stock units granted with service-only conditions and those with internal performance measures are valued at the market value of the Company’s common stock on the date of grant. The restricted stock units granted with market conditions are valued using a Monte Carlo model.

The following table presents the weighted-average assumptions used in the Monte Carlo simulation and the weighted-average grant date fair value of restricted stock units granted through March 31, 2015:

 

Expected volatility

 

14.90

%

Risk-free interest rate

 

1.10

%

Expected life (years)

 

3

 

Grant date fair value per share

$

55.28

 

 

The grant date fair value of the restricted stock unit awards that vest ratably and have market and/or performance and service conditions is amortized through expense over the requisite service period using the graded-vesting method. Restricted stock units that have no performance conditions are amortized through expense over the requisite service period using the straight-line method. As of March 31, 2015, $7,391 of total unrecognized compensation cost related to the non-vested restricted stock units is expected to be recognized over the weighted-average remaining life of 1.6 years.

 

11


The table below summarizes restricted stock unit activity for the three months ended March 31, 2015:

 

 

Shares

 

 

Weighted-Average Grant Date Fair Value (per share)

 

Non-vested total at January 1, 2015

 

516

 

 

$

41.46

 

Granted

 

105

 

 

 

55.28

 

Performance share adjustment

 

93

 

 

 

38.11

 

Vested

 

(274

)

 

 

38.56

 

Forfeited

 

(14

)

 

 

43.22

 

Non-vested total at March 31, 2015

 

426

 

 

$

45.94

 

 

The following table summarizes additional information regarding restricted stock units distributed during the three months ended March 31, 2015 and 2014:

 

 

2015

 

 

2014

 

Intrinsic value

$

15,250

 

 

$

13,175

 

Income tax benefit

 

1,836

 

 

 

1,450

 

 

If dividends are paid with respect to shares of the Company’s common stock before the restricted stock units are distributed, the Company credits a liability for the value of the dividends that would have been paid if the restricted stock units were shares of Company common stock. When the restricted stock units are distributed, the Company pays the participant a lump sum cash payment equal to the value of the dividend equivalents accrued. The Company accrued dividend equivalents totaling $45 and $175 to retained earnings during the three months ended March 31, 2015 and 2014, respectively.

 

 

Note 5: Long-Term Debt

The following long-term debt was retired through sinking fund payments during the first three months of 2015:

 

  

Company

 

Type

 

Rate

 

 

Maturity

 

Amount

 

American Water Capital Corp. (“AWCC”) (a)

 

Private activity bonds and government

funded debt—fixed rate

 

1.79%-2.90%

 

 

2021-2031

 

$

807

 

Other subsidiaries

 

Private activity bonds and government

funded debtfixed rate

 

0.00%-5.30%

 

 

2015-2033

 

 

2,277

 

Other subsidiaries

 

Mandatorily redeemable preferred stock

 

 

8.49%

 

 

2036

 

 

1,200

 

Other subsidiaries

 

Capital lease payments

 

 

12.17%

 

 

2026

 

 

7

 

Total retirements and redemptions

 

 

 

 

 

 

 

 

 

$

4,291

 

 

(a)

AWCC, which is a wholly-owned subsidiary of the Company, has a strong support agreement with its parent that, under certain circumstances, is the functional equivalent of a guarantee.

 

The Company has an interest rate swap to hedge $100,000 of its 6.085% fixed-rate debt maturing 2017. The Company pays variable interest of six-month LIBOR plus 3.422%. The swap is accounted for as a fair-value hedge and matures with the fixed-rate debt in 2017.  

The following table provides a summary of the derivative fair value balance recorded by the Company and the line item in the Consolidated Balance Sheets in which such amount is recorded:

 

Balance sheet classification

 

March 31,

2015

 

 

December 31,

2014

 

Regulatory and other long-term assets

 

 

 

 

 

 

 

 

Other

 

$

3,874

 

 

$

3,636

 

Long-term debt

 

 

 

 

 

 

 

 

Long-term debt

 

 

3,794

 

 

 

3,570

 

 

12


For derivative instruments that are designated and qualify as fair-value hedges, the gain or loss on the hedge instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current net income. The Company includes the gain or loss on the derivative instrument and the offsetting loss or gain on the hedged item in interest expense as follows:

 

 

 

Three Months Ended

March 31,

 

Income statement classification

 

2015

 

 

2014

 

Interest, net

 

 

 

 

 

 

 

 

Gain (loss) on swap

 

$

238

 

 

$

(377

)

Gain (loss) on borrowing

 

 

(224

)

 

 

328

 

Hedge ineffectiveness

 

 

14