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Section 1: 10-Q (10-Q)

awk-10q_20160930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended September 30, 2016

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.      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).      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

 

  

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      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 as of October 27, 2016

Common Stock, $0.01 par value per share

 

178,003,367 shares

(excludes 3,721,496 treasury shares as of October 27, 2016)

 

 

 

 

 


 

TABLE OF CONTENTS

AMERICAN WATER WORKS COMPANY, INC.

Quarterly REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2016

INDEX

 

FORWARD LOOKING STATEMENTS

1

 

 

PART I. FINANCIAL INFORMATION

3

 

 

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

3

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

24

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

41

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

42

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

42

ITEM 4. MINE SAFETY DISCLOSURES

42

ITEM 5. OTHER INFORMATION

42

ITEM 6. EXHIBITS

43

 

 

SIGNATURES

44

EXHIBIT INDEX

45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

i


 

FORWARD-LOOKING STATEMENTS

We have made statements in Part I, Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations and in other sections of this Quarterly Report on Form 10-Q (“Form 10-Q”), that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. In some cases, these forward-looking statements can be identified by words with prospective meanings such as “intend,” “plan,” “estimate,” “believe,” “anticipate,” “expect,” “predict,” “project,” “assume,” “forecast,” “outlook,” “future,” “pending,” “goal,” “objective,” “potential,” “continue,” “seek to,” “may,” “can,” “should,” “will” and “could” or the negative of such terms or other variations or similar expressions. Forward-looking statements may relate to, among other things, our future financial performance, including our adjusted operation and maintenance (“O&M”) efficiency ratio, cash flows, our growth and portfolio optimization strategies, our projected capital expenditures and related funding requirements, our ability to repay debt, our projected strategy to finance current operations and growth initiatives, the impact of legal proceedings and potential fines and penalties, business process and technology improvement initiatives, trends in our industry, regulatory or legal developments or rate adjustments, including rate case filings, filings for infrastructure surcharges and filings to address regulatory lag.

Forward-looking statements are predictions based on our current expectations and assumptions regarding future events. They are not guarantees or assurances of any outcomes, financial results or levels of activity, performance or achievements, and you are cautioned not to place undue reliance upon them. These forward-looking statements are subject to a number of estimates and assumptions, and known and unknown risks, uncertainties and other factors. Our actual results may vary materially from those discussed in the forward-looking statements included herein as a result of the following important factors:

 

the decisions of governmental and regulatory bodies, including decisions to raise or lower rates;

 

the timeliness of regulatory commissions’ actions concerning rates, permitting and other decisions;

 

changes in customer demand for, and patterns of use of, water, such as may result from conservation efforts;

 

changes in laws, governmental regulations and policies, including environmental, health and safety, water quality and public utility regulations and policies;

 

weather conditions, patterns, events or natural disasters, including drought or abnormally high rainfall, strong winds, coastal and intercoastal flooding, earthquakes, landslides, hurricanes and tornados;

 

the outcome of litigation and government action related to the Freedom Industries chemical spill in West Virginia, including matters pertaining to the recently announced binding global agreement in principle to settle claims related to this chemical spill;

 

our ability to appropriately maintain current infrastructure, including our technology systems, and manage expansion of our business;

 

our ability to obtain permits and other approvals for projects;

 

changes in our capital requirements;

 

our ability to control operating expenses and to achieve efficiencies in our operations;

 

the intentional or unintentional actions of a third party, including contamination of our water supplies or water provided to our customers, and attacks on, or infiltration of or other disruptions to, our computer systems or other critical infrastructure;

 

our ability to obtain adequate and cost-effective supplies of chemicals, electricity, fuel, water and other raw materials that are needed for our operations;

 

our ability to successfully meet growth projections for our business and capitalize on growth opportunities, including our ability to, among other things, acquire and integrate water and wastewater systems into our regulated operations, and enter into contracts and other agreements with, or otherwise obtain, new customers in our market-based businesses;

 

cost overruns relating to improvements in or the expansion of our operations;

 

our ability to maintain safe work sites;

 

our exposure to liabilities related to environmental laws and similar matters resulting from, among other things, the provision of water services to customers in the natural gas exploration and production market;

 

changes in general economic, business and financial market conditions;

1


 

 

access to sufficient capital on satisfactory terms and when and as needed to support operations and capital expenditures;

 

fluctuations in interest rates;

 

restrictive covenants in or changes to the credit ratings on our current or future debt that could increase our financing costs or affect our ability to borrow, make payments on debt or pay dividends;

 

fluctuations in the value of benefit plan assets and liabilities that could increase our cost and funding requirements;

 

changes in federal or state income tax laws, including tax reform, the availability of tax credits and tax abatement programs, and our ability to utilize our U.S. and state net operating loss carryforwards;

 

migration of customers into or out of our service territories;

 

the use by municipalities of the power of eminent domain or other authority to condemn our systems;

 

difficulty in obtaining, or the inability to obtain, insurance at acceptable rates and on acceptable terms and conditions;

 

the incurrence of impairment charges related to our goodwill or other assets;

 

labor actions, including work stoppages and strikes;

 

ability to retain and attract qualified employees; and

 

civil disturbances or terrorist threats or acts, or public apprehension about future disturbances or terrorist threats or acts.

These forward-looking statements are qualified by, and should be read together with, the risk factors and other statements contained in our Annual Report on Form 10-K for the year ended December 31, 2015 (“Form 10-K”), and in this Form 10-Q, and investors should refer to such risk factors and other statements in evaluating such forward-looking statements. Any forward-looking statements we make speak only as of the date this Form 10-Q was filed with the United States Securities and Exchange Commission. Except as required by the federal securities laws, we do not have any obligation, and we specifically disclaim any undertaking or intention, to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or otherwise. New factors emerge from time to time, and it is not possible for us to predict all such factors. Furthermore, it may not be possible to assess the impact of any such factor on our businesses, either viewed independently or together, or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. The foregoing factors should not be construed as exhaustive.

 

 

2


 

PART I. FINANCIAL INFORMATION

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

 

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Balance Sheets (Unaudited)

(In millions, except share and per share data)

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

December 31, 2015

 

ASSETS

 

Property, plant and equipment

$

19,376

 

 

$

18,504

 

Accumulated depreciation

 

(4,817

)

 

 

(4,571

)

Property, plant and equipment, net

 

14,559

 

 

 

13,933

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

46

 

 

 

45

 

Restricted funds

 

23

 

 

 

21

 

Accounts receivable, net

 

302

 

 

 

255

 

Unbilled revenues

 

285

 

 

 

267

 

Materials and supplies

 

40

 

 

 

38

 

Other

 

105

 

 

 

31

 

Total current assets

 

801

 

 

 

657

 

Regulatory and other long-term assets:

 

 

 

 

 

 

 

Regulatory assets

 

1,223

 

 

 

1,271

 

Goodwill

 

1,313

 

 

 

1,302

 

Other

 

75

 

 

 

78

 

Total regulatory and other long-term assets

 

2,611

 

 

 

2,651

 

TOTAL ASSETS

$

17,971

 

 

$

17,241

 

 

 

 

 

 

 

 

 

 

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

 

3


 

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Balance Sheets (Unaudited)

(In millions, except share and per share data)

 

 

 

 

 

 

 

 

 

 

September 30, 2016

 

 

December 31, 2015

 

CAPITALIZATION AND LIABILITIES

 

Capitalization:

 

 

 

 

 

 

 

Common stock ($0.01 par value, 500,000,000 shares authorized, 181,720,136

   and 180,907,483 shares issued, respectively)

$

2

 

 

$

2

 

Paid-in-capital

 

6,388

 

 

 

6,351

 

Accumulated deficit

 

(839

)

 

 

(1,073

)

Accumulated other comprehensive loss

 

(99

)

 

 

(88

)

Treasury stock, at cost (3,721,496 and 2,625,112 shares, respectively)

 

(214

)

 

 

(143

)

Total common stockholders' equity

 

5,238

 

 

 

5,049

 

Long-term debt

 

5,842

 

 

 

5,862

 

Redeemable preferred stock at redemption value

 

11

 

 

 

12

 

Total long-term debt

 

5,853

 

 

 

5,874

 

Total capitalization

 

11,091

 

 

 

10,923

 

Current liabilities:

 

 

 

 

 

 

 

Short-term debt

 

951

 

 

 

628

 

Current portion of long-term debt

 

53

 

 

 

54

 

Accounts payable

 

135

 

 

 

126

 

Accrued liabilities

 

530

 

 

 

493

 

Taxes accrued

 

45

 

 

 

26

 

Interest accrued

 

96

 

 

 

62

 

Other

 

118

 

 

 

144

 

Total current liabilities

 

1,928

 

 

 

1,533

 

Regulatory and other long-term liabilities:

 

 

 

 

 

 

 

Advances for construction

 

300

 

 

 

349

 

Deferred income taxes, net

 

2,524

 

 

 

2,310

 

Deferred investment tax credits

 

23

 

 

 

24

 

Regulatory liabilities

 

403

 

 

 

402

 

Accrued pension expense

 

342

 

 

 

342

 

Accrued postretirement benefit expense

 

72

 

 

 

169

 

Other

 

90

 

 

 

68

 

Total regulatory and other long-term liabilities

 

3,754

 

 

 

3,664

 

Contributions in aid of construction

 

1,198

 

 

 

1,121

 

Commitments and contingencies (see Note 9)

 

 

 

 

 

 

 

TOTAL CAPITALIZATION AND LIABILITIES

$

17,971

 

 

$

17,241

 

 

 

 

 

 

 

 

 

 

 

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

 

 

4


 

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Operations (Unaudited)

(In millions, except per share data)

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Operating revenues

$

930

 

 

$

896

 

 

$

2,500

 

 

$

2,376

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operation and maintenance

 

432

 

 

 

364

 

 

 

1,131

 

 

 

1,024

 

Depreciation and amortization

 

119

 

 

 

111

 

 

 

350

 

 

 

327

 

General taxes

 

65

 

 

 

60

 

 

 

195

 

 

 

184

 

Gain on asset dispositions and purchases

 

(5

)

 

 

 

 

 

(8

)

 

 

(2

)

Total operating expenses, net

 

611

 

 

 

535

 

 

 

1,668

 

 

 

1,533

 

Operating income

 

319

 

 

 

361

 

 

 

832

 

 

 

843

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

(81

)

 

 

(77

)

 

 

(242

)

 

 

(228

)

Other, net

 

5

 

 

 

3

 

 

 

14

 

 

 

9

 

Total other income (expense)

 

(76

)

 

 

(74

)

 

 

(228

)

 

 

(219

)

Income from continuing operations before income taxes

 

243

 

 

 

287

 

 

 

604

 

 

 

624

 

Provision for income taxes

 

95

 

 

 

113

 

 

 

237

 

 

 

247

 

Net income attributable to common stockholders

$

148

 

 

$

174

 

 

$

367

 

 

$

377

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

$

0.83

 

 

$

0.97

 

 

$

2.06

 

 

$

2.10

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to common stockholders

$

0.83

 

 

$

0.96

 

 

$

2.05

 

 

$

2.09

 

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

178

 

 

 

179

 

 

 

178

 

 

 

179

 

Diluted

 

178

 

 

 

180

 

 

 

179

 

 

 

180

 

Dividends declared per common share

$

0.375

 

 

$

0.34

 

 

$

0.75

 

 

$

0.68

 

 

 

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

 

 

5


 

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Comprehensive Income (Unaudited)

(In millions)

 

 

For the Three Months Ended September 30,

 

 

For the Nine Months Ended September 30,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Net income attributable to common stockholders

$

148

 

 

$

174

 

 

$

367

 

 

$

377

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pension amortized to periodic benefit cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Actuarial loss, net of tax of $1 for the three months and

   $3 for the nine months

 

1

 

 

 

1

 

 

 

4

 

 

 

4

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

(1

)

Unrealized loss on cash flow hedges, net of tax of $(3) and

   $0 for the three months and $(10) and $0 for the nine

   months

 

(4

)

 

 

 

 

 

(15

)

 

 

 

Net other comprehensive income (loss)

 

(3

)

 

 

1

 

 

 

(11

)

 

 

3

 

Comprehensive income attributable to common stockholders

$

145

 

 

$

175

 

 

$

356

 

 

$

380

 

 

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

 

 

6


 

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Cash Flows (Unaudited)

(In millions)

 

 

For the Nine Months Ended September 30,

 

 

2016

 

 

2015

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net income

$

367

 

 

$

377

 

Adjustments to reconcile to net cash flows provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

350

 

 

 

327

 

Deferred income taxes and amortization of investment tax credits

 

223

 

 

 

236

 

Provision for losses on accounts receivable

 

18

 

 

 

22

 

Gain on asset dispositions and purchases

 

(8

)

 

 

(2

)

Pension and non-pension postretirement benefits

 

43

 

 

 

46

 

Other non-cash, net

 

(48

)

 

 

(40

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

Receivables and unbilled revenues

 

(83

)

 

 

(147

)

Pension and non-pension postretirement benefit contributions

 

(42

)

 

 

(40

)

Accounts payable and accrued liabilities

 

184

 

 

 

69

 

Other assets and liabilities, net

 

(79

)

 

 

8

 

Net cash provided by operating activities

 

925

 

 

 

856

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

Capital expenditures

 

(928

)

 

 

(791

)

Acquisitions

 

(29

)

 

 

(176

)

Proceeds from sale of assets and securities

 

5

 

 

 

5

 

Removal costs from property, plant and equipment retirements, net

 

(62

)

 

 

(74

)

Net funds restricted

 

 

 

 

(9

)

Net cash used in investing activities

 

(1,014

)

 

 

(1,045

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

Proceeds from long-term debt

 

2

 

 

 

564

 

Repayments of long-term debt

 

(20

)

 

 

(88

)

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

 

 

 

60

 

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

 

 

 

(60

)

Net short-term borrowings with maturities less than three months

 

322

 

 

 

(70

)

Proceeds from issuances of employee stock plans and DRIP

 

22

 

 

 

32

 

Advances and contributions for construction, net of refunds of $17 and

   $17, respectively

 

16

 

 

 

20

 

Debt issuance costs

 

(1

)

 

 

(7

)

Dividends paid

 

(194

)

 

 

(178

)

Anti-dilutive stock repurchase

 

(65

)

 

 

(39

)

Tax benefit realized from equity compensation

 

8

 

 

 

7

 

Net cash provided by financing activities

 

90

 

 

 

241

 

Net increase in cash and cash equivalents

 

1

 

 

 

52

 

Cash and cash equivalents as of beginning of period

 

45

 

 

 

23

 

Cash and cash equivalents as of end of period

$

46

 

 

$

75

 

Non-cash investing activity:

 

 

 

 

 

 

 

Capital expenditures acquired on account but unpaid as of end of period

$

182

 

 

$

195

 

 

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

 

 

7


 

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

(In millions)

 

 

Common Stock

 

 

 

 

Accumulated

 

Accumulated Other Comprehensive

 

Treasury Stock

 

Total

Stockholders'

 

 

Shares

 

Par Value

 

Paid-in-Capital

 

Deficit

 

Loss

 

Shares

 

At Cost

 

Equity

 

Balance as of December 31, 2015

 

180.9

 

$

2

 

$

6,351

 

$

(1,073

)

$

(88

)

 

(2.6

)

$

(143

)

$

5,049

 

Net income attributable to common

   stockholders

 

 

 

 

 

 

 

367

 

 

 

 

 

 

 

 

367

 

Direct stock reinvestment and

   purchase plan

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

 

4

 

Employee stock purchase plan

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

5

 

Stock-based compensation activity

 

0.8

 

 

 

 

28

 

 

 

 

 

 

(0.1

)

 

(6

)

 

22

 

Repurchases of common stock

 

 

 

 

 

 

 

 

 

 

 

(1.0

)

 

(65

)

 

(65

)

Net other comprehensive income

   (loss)

 

 

 

 

 

 

 

 

 

(11

)

 

 

 

 

 

(11

)

Dividends

 

 

 

 

 

 

 

(133

)

 

 

 

 

 

 

 

(133

)

Balance as of September 30, 2016

 

181.7

 

$

2

 

$

6,388

 

$

(839

)

$

(99

)

 

(3.7

)

$

(214

)

$

5,238

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

 

 

Accumulated

 

Accumulated Other Comprehensive

 

Treasury Stock

 

Total

Stockholders'

 

 

Shares

 

Par Value

 

Paid-in-Capital

 

Deficit

 

Loss

 

Shares

 

At Cost

 

Equity

 

Balance as of December 31, 2014

 

179.5

 

$

2

 

$

6,302

 

$

(1,296

)

$

(82

)

 

(0.2

)

$

(11

)

$

4,915

 

Cumulative effect of change in

   accounting principle

 

 

 

 

(8

)

 

 

 

 

(8

)

Net income attributable to common

   stockholders

 

 

 

 

 

 

 

377

 

 

 

 

 

 

 

 

377

 

Direct stock reinvestment and

   purchase plan

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

3

 

Employee stock purchase plan

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

 

4

 

Stock-based compensation activity

 

1.1

 

 

 

 

40

 

 

(1

)

 

 

 

(0.1

)

 

(7

)

 

32

 

Repurchases of common stock

 

 

 

 

 

 

 

 

 

 

 

(0.8

)

 

(39

)

 

(39

)

Net other comprehensive income

   (loss)

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

3

 

Dividends

 

 

 

 

 

 

 

(122

)

 

 

 

 

 

 

 

(122

)

Balance as of September 30, 2015

 

180.6

 

$

2

 

$

6,349

 

$

(1,050

)

$

(79

)

 

(1.1

)

$

(57

)

$

5,165

 

 

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

 

 

8


 

American Water Works Company, Inc. and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)

(Unless otherwise noted, in millions, except per share data)

 

Note 1: Basis of Presentation

The unaudited consolidated financial statements provided in this report include the accounts of American Water Works Company, Inc. and all of its subsidiaries (collectively, “American Water” or the “Company”) in which a controlling interest is maintained after the elimination of intercompany accounts and transactions. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and with the rules and regulations for reporting on Form 10-Q. Accordingly, they do not contain certain information and disclosures required by GAAP for comprehensive financial statements. In the opinion of management, all adjustments necessary for a fair statement of the financial position as of September 30, 2016 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, 2015 is derived from the Company's audited consolidated financial statements as of December 31, 2015. The unaudited financial statements and notes included in this report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (“Form 10-K”) which provides a more complete discussion of the Company’s accounting policies, financial position, operating results and other matters. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the year, due primarily to the seasonality of the Company’s operations.

 

 

Note 2: New Accounting Pronouncements

The following accounting standard was adopted by the Company as of September 30, 2016:

 

Standard

 

Description

 

Date of Adoption

 

Application

 

Effect on the Consolidated Financial

Statements

(or Other Significant Matters)

Accounting for Fees Paid in a Cloud Computing Arrangement

 

Clarified accounting guidance for fees paid in a cloud computing arrangement. Software license elements in a cloud computing arrangement should be accounted for consistent with other software licenses. A cloud computing arrangement without a software license is accounted for as a service contract.

 

January 1,

2016

 

Prospective

 

Adoption of this standard did not impact the Company’s results of operations, financial position or cash flows.

 

9


 

The following recently issued accounting standards are not yet required to be adopted by the Company as of September 30, 2016:

 

Standard

 

Description

 

Date of Adoption

 

Application

 

Effect on the Consolidated Financial

Statements

(or Other Significant Matters)

Simplification of Employee Share-Based Payment Accounting

 

Simplified accounting and disclosure requirements for share-based payment awards. The updated guidance addresses: (i) the recognition of excess tax benefits and deficiencies; (ii) the classification of excess tax benefits and taxes paid on the Consolidated Statements of Cash Flows; (iii) election of an accounting policy for forfeitures; and (iv) the amount an employer can withhold to cover income taxes and still qualify for equity classification.

 

January 1, 2017; early adoption permitted

 

Alternative transition methods available

 

The cumulative effect to retained earnings prior to 2017 is expected to be an increase of approximately $23, with an offsetting decrease to deferred income taxes, net. The Company does not expect to early adopt.

Revenue from Contracts with Customers

 

Provided new accounting guidance for revenue recognition replacing most existing guidance, including industry-specific guidance. Upon adoption, a company will recognize revenue for the transfer of goods or services to customers equal to the amount it expects to be entitled to receive for those goods or services. The guidance also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments.

 

January 1, 2018; early adoption permitted

 

Alternative transition methods available

 

The Company is evaluating the effect on the financial statements, related disclosures and method of adoption. The Company does not expect to early adopt.

Classification of Certain Cash Receipts and Cash Payments on the Statement of Cash Flows

 

Provided guidance on the presentation and classification in the statement of cash flow for the following cash receipts and payments: (i) debt prepayment or debt extinguishment costs; (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (iii) contingent consideration payments made after a business combination; (iv) proceeds from the settlement of insurance claims; (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (vi) distributions received from equity method investees; (vii) beneficial interests in securitization transactions; and (viii) separately identifiable cash flows and application of the predominance principle.

 

January 1, 2018; early adoption permitted

 

Retrospective

 

The Company is evaluating the effect on the Statements of Cash Flows and the timing of adoption.

Accounting for Leases

 

Updated the accounting and disclosure guidance for leasing arrangements. Under this guidance, a lessee will be required to recognize the following for all leases, excluding short-term leases, at the commencement date: (i) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Under the guidance, lessor accounting is largely unchanged.

 

January 1, 2019; early adoption permitted

 

Modified retrospective

 

The Company is evaluating the effect on the financial statements, related disclosures and the timing of adoption.

Measurement of Credit Losses

 

Updated the accounting guidance on reporting credit losses for financial assets held at amortized cost basis and available-for-sale debt securities. Under this guidance, expected credit losses are required to be measured based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount of financial assets. Also, this guidance requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a direct write-down.

 

January 1, 2020; early adoption permitted

 

Modified retrospective

 

The Company is evaluating the effect on the financial statements, related disclosures and the timing of adoption.

 

 

Note 3: Acquisitions

During the nine months ended September 30, 2016, the Company incurred $24 in acquisition costs for ten closed acquisitions of various regulated water and wastewater systems. Assets acquired, principally utility plant, totaled $30. Liabilities assumed totaled $17. The Company recorded additional goodwill of $11 associated with two of its acquisitions, which is reported in its Regulated Businesses segment and is expected to be fully deductible for tax purposes. The Company recognized a bargain purchase gain of $1 associated with two of its acquisitions, which was deferred as a regulatory liability. Also, our Regulated Businesses made a non-escrowed deposit of $5 related to the acquisition of the McKeesport, Pennsylvania’s wastewater system.

 

 

10


 

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 nine months ended September 30, 2016 and 2015, respectively:

 

 

Defined Benefit Plans

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

Employee

Benefit Plan

Funded Status

 

 

Amortization

of Prior

Service Cost

 

 

Amortization

of Actuarial

Loss

 

 

Foreign

Currency

Translation

 

 

Loss on

Cash Flow

Hedges

 

 

Other

Comprehensive

Loss

 

Beginning balance as of January 1, 2016

$

(126

)

 

$

1

 

 

$

36

 

 

$

2

 

 

$

(1

)

 

$

(88

)

Other comprehensive loss before

   reclassifications

 

 

 

 

 

 

 

 

 

 

 

 

 

(15

)

 

 

(15

)

Amounts reclassified from accumulated

   other comprehensive loss

 

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

4

 

Net other comprehensive income (loss)

 

 

 

 

 

 

 

4

 

 

 

 

 

 

(15

)

 

 

(11

)

Ending balance as of September 30, 2016

$

(126

)

 

$

1

 

 

$

40

 

 

$

2

 

 

$

(16

)

 

$

(99

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance as of January 1, 2015

$

(116

)

 

$

1

 

 

$

31

 

 

$

3

 

 

$

(1

)

 

$

(82

)

Other comprehensive loss before

   reclassifications

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

Amounts reclassified from accumulated

   other comprehensive loss

 

 

 

 

 

 

 

4

 

 

 

 

 

 

 

 

 

4

 

Net other comprehensive income (loss)

 

 

 

 

 

 

 

4

 

 

 

(1

)

 

 

 

 

 

3

 

Ending balance as of September 30, 2015

$

(116

)

 

$

1

 

 

$

35

 

 

$

2

 

 

$

(1

)

 

$

(79

)

 

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 hedges is reclassified to net income attributable to common stockholders during the period incurred and is included in interest, net in the accompanying Consolidated Statements of Operations. (See Note 6)

Anti-dilutive Stock Repurchase Program

In February 2015, the Company’s Board of Directors authorized an anti-dilutive stock repurchase program, which allowed the Company to purchase up to 10.0 shares of its outstanding common stock over an unrestricted period of time. During the nine months ended September 30, 2016, the Company repurchased 1.0 shares of common stock in the open market at an aggregate cost of $65 under the program. As of September 30, 2016, there were 6.8 shares of common stock available for repurchase under the program.

 

 

Note 5: Stock Based Compensation

Stock Options

During the nine months ended September 30, 2016, the Company granted non-qualified stock options to certain employees under the Company’s 2007 Omnibus Equity Compensation Plan (the “2007 Plan”). Stock options have a maximum term of seven years, are granted with exercise prices equal to the fair market value of the Company’s common stock on the date of grant, vest ratably over a three-year service period beginning January 1 of the year of the grant and generally are subject to the employee’s continued employment with the Company. Stock options granted are valued using the Black-Scholes option-pricing model.

11


 

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 during the nine months ended September 30, 2016:

 

Dividend yield

 

2.09