Business Context and Reporting Period
Company: American Water Works Company, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: October 31, 2016
Subject: Entry into a Material Definitive Agreement regarding the settlement of claims arising from the January 9, 2014, Freedom Industries, Inc. chemical spill into the Elk River in West Virginia.
Key Financial Metrics
This filing details a specific contingent liability and settlement agreement rather than providing comprehensive periodic financial statements (e.g., total revenue or operating cash flow). The key financial figures disclosed are:
- Proposed Aggregate Settlement Amount: $126 million (pre-tax).
- Company Contribution (WVAWC): $65 million.
- Insurance Carrier Contribution: $61 million (remainder of the $126 million).
- Recorded Charge to Earnings: $65 million pre-tax ($39 million after-tax) to be recorded in the third quarter of 2016, net of insurance receivables.
- Settlement Fund Structure: A guaranteed fund of $76 million and a claims-based payment fund of $50 million.
- Rate Recovery Waiver: WVAWC will not seek rate recovery for approximately $4 million in direct response costs expensed in 2014 or amounts paid under the Settlement.
Material Changes and Contingencies
The filing reports a material development in ongoing litigation involving 73 pending cases against West Virginia-American Water Company (WVAWC). Key changes and contingencies include:
- Insurance Dispute: Two insurance carriers providing $50 million in coverage have not agreed to participate in the Settlement. WVAWC has filed a lawsuit against one carrier for breach of contract and is considering similar action against the other.
- Reimbursement Risk: The Company may not ultimately obtain full reimbursement from non-participating carriers for the $65 million contribution.
- Legal Status: The U.S. District Court approved preliminary principles of the settlement. A trial on issues of fault, originally scheduled for October 25, 2016, was delayed pending settlement finalization.
- Liability Admission: The American Water Defendants have not admitted, and will not admit, any fault or liability as part of the settlement terms.
Guidance, Outlook, and Risks
Outlook and Funding: The Company intends to fund WVAWC's contributions through existing sources of liquidity. No contribution is required until the Settlement is finally approved by the court.
Timeline: The court has granted 30 days to finalize terms and obtain preliminary approval. If approved, a fairness hearing will follow. The trial date has been continued to December 5, 2016.
Risks and Uncertainties:
- There is no assurance the court will provide preliminary or final approval of the Settlement.
- The number of claimants electing to opt out of the Settlement is unknown.
- Forward-looking statements regarding the ability to obtain insurance reimbursement and the ultimate impact on consolidated financial statements are subject to significant risks and uncertainties.
Important Facts for Investor Verification
- Verify the final court approval status of the $126 million settlement agreement.
- Monitor the outcome of the lawsuit filed against the non-participating insurance carrier regarding the $50 million coverage dispute.
- Confirm the final number of claimants opting out of the settlement, which could alter the total payout requirements.
- Review the Company's liquidity position to ensure it can fund the $65 million contribution if insurance reimbursement is denied.
- Check for any updates on the December 5, 2016, trial date if the settlement is not finalized.