American Water Works Company, Inc.: Form 10-Q for the period ended Mar 31, 2015

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements included in this Form 10-Q, other than statements of historical fact, may constitute forward-looking statements. Forward-looking statements can be identified by the use of words such as “may,” “should,” “will,” “could,” “estimates,” “predicts,” “potential,” “continue,” “anticipates,” “believes,” “plans,” “expects,” “future” and “intends” and similar expressions. Forward-looking statements may involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance to differ from those projected in the forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Factors that could cause or contribute to differences in results and outcomes from those in our forward-looking statements include, without limitation, those items discussed in the “Risk Factors” section or other sections in the Company’s annual report on Form 10-K (“Form 10-K”) for the year ended December 31, 2014 filed with the Securities and Exchange Commission (“SEC”). We undertake no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

General

American Water Works Company, Inc. (herein referred to as “American Water” or the “Company”) is the largest investor-owned United States water and wastewater utility company, as measured both by operating revenue and population served. Our primary business involves the ownership of water and wastewater utilities that provide water and wastewater services to residential, commercial, industrial and other customers. Our Regulated Businesses that provide these services are generally subject to economic regulation by state regulatory agencies in the states in which they operate. We report the results of these businesses in our Regulated Businesses segment. We also provide services that are not subject to economic regulation by state regulatory agencies. We report the results of these businesses in our Market-Based Operations segment. For further description of our businesses see Item 1, “Business,” in our Form 10-K for the year ended December 31, 2014.

You should read the following discussion in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and in our Form 10-K for the year ended December 31, 2014.

Overview

Financial Results

Highlights of our operating results for the three months ended March 31, 2015 compared to same period during 2014 include:

Continuing Operations

Income from continuing operations increased 5 cents per diluted share for the quarter. Contributing to this increase were costs of 2 cents per diluted share last year resulting from the Freedom Industries chemical spill in West Virginia. The remainder of the increase is mainly from favorable operating results for our Regulated Businesses segment due to higher revenues, lower operating expenses and the finalization of our California general rate case.

Discontinued operations

In the fourth quarter of 2014, we sold our Terratec line of business, which was part of our Market-Based Operations segment. The after-tax loss from discontinued operations includes the operating results of the entity prior to the sale for the three months ended March 31, 2014.

Regulatory Matters

The table below provides details of annualized revenues awarded assuming a constant volume, resulting from rate authorizations that were effective in the first quarter of 2015:

(In millions)

(1) Rates became effective January 29, 2015.

(2) Rates retroactive to January 1, 2015.

(3) Rates became effective January 1, 2015.

(4) Rates of $5.4 million and $1.0 million became effective January 1, 2015 and February 1, 2015, respectively.

On April 9, 2015, our California settlement was approved by the California Public Utility Commission. Rates were retroactive to January 1, 2015. The settlement also allowed recovery of prior expenditures incurred related to our business transformation project and authorized a sharing mechanism for prior contamination proceeds that were previously deferred, which has also been reflected in 2015 first quarter results.

On January 9, 2015, our New Jersey subsidiary filed a general rate case requesting additional annualized revenue of approximately $66.2 million. Also in the first in the first quarter of 2015, we filed for additional annualized revenues from infrastructure charges for our Missouri and New York subsidiaries of $1.9 million and $0.1 million, respectively.

Following the close of the quarter, additional annualized revenue of $1.6 million resulting from infrastructure charges in our Pennsylvania subsidiary became effective on April 1, 2015 and on April 30, 2015 our West Virginia subsidiary requested additional annual water and wastewater revenue of approximately $35.6 million as part of a general rate case filing.

As of May 6, 2015, we are awaiting final orders in four states, including New Jersey and West Virginia, requesting additional annualized revenue of $102.4 million and $4.4 million in additional annualized revenues for infrastructure charges in three states. There is no assurance that all or any portion of these requests will be granted.

Focusing on Central Themes

For 2015, our focus is anchored on five central themes: 1) Customers, 2) Safety, 3) People, 4) Growth and 5) Operational Efficiency. We will continue our focus on operating our business responsibly and managing our operating and capital costs in a manner that benefits our customers and produces value for our shareholders. Additionally, we will continue our ongoing strategy that ensures a safe workplace for our employees, emphasizes public safety for our customers, and that leverages our people resources, processes and technology innovation to make ourselves more effective and efficient. The progress that we have made in the first three months of 2015 with respect to growth and continuing to improve our operational efficiency ratio is described below.

Growth - Infrastructure improvements, acquisitions and strategic investments

During the first three months of 2015, we made capital investments of approximately $167.3 million to improve infrastructure in our Regulated Businesses. For the full-year of 2015, our total capital plan is $1.2 billion, most of which will be allocated to improving infrastructure in our Regulated Businesses with an additional $0.1 billion allocated for acquisitions and strategic investments.

On April 30, 2015, we announced that we had signed an agreement to acquire Environmental Disposal Corporation (“EDC”), which provides wastewater services to more than 5,300 customer accounts located in New Jersey. The acquisition is pending approval by the New Jersey Board of Public Utilities.

Technology and Operational Efficiency - Continuing Improvement in O&M Efficiency Ratio for our Regulated Businesses

We continued to improve on our operation and maintenance (“O&M”) efficiency ratio. Our O&M efficiency ratio for the twelve months ended March 31, 2015 was 36.3%, compared to 38.0% for the twelve months ended March 31, 2014. The improvement in the 2015 O&M efficiency ratio over this period was principally attributable to an increase in Regulated Businesses’ revenue and a decrease in the O&M expenses.

Our O&M efficiency ratio (a non-GAAP measure) is defined as our regulated operation and maintenance expense divided by regulated operating revenues, where both O&M expense and operating revenues are adjusted to eliminate purchased water expense. We also excluded from operating revenues and O&M expenses the estimated impact from changes in consumption as a result of weather and the West Virginia Freedom Industries chemical spill. Additionally, from the O&M expenses, we exclude the allocable portion of non-O&M support services cost, mainly depreciation and general taxes that are reflected in the Regulated Businesses segment as O&M costs but for consolidated financial reporting purposes are categorized within other line items in the Statement of Operations.

We evaluate our operating performance using this measure because management believes it is a direct measure of the efficiency of our Regulated Businesses’ operations. This information is intended to enhance an investor’s overall understanding of our operating performance. The O&M efficiency ratio is not a measure defined under GAAP and may not be comparable to other companies’ operating measures and should not be used in place of the GAAP information provided elsewhere in this report. The following table provides a reconciliation that compares O&M and operating revenues, as determined in accordance with GAAP, to those amounts utilized in the calculation of our O&M efficiency ratio for the twelve months ended March 31, 2015 as compared to the same period in 2014.

Regulated O&M Efficiency Ratio (a Non-GAAP Measure):

(In thousands)

* Calculation assumes purchased water revenues approximate purchased water expenses.

Consolidated Results of Operations and Changes from Prior Periods

(In thousands, except per share amounts)

The following is a discussion of the consolidated results of operations for the three months ended March 31, 2015 compared to the three ended March 31, 2014:

Three Months Ended March 31, 2015 Compared to Three Months Ended March 31, 2014

Operating revenues. Consolidated operating revenues for the quarter ended March 31, 2015 increased $19.1 million, or 2.8%, compared to the same quarter last year. Revenues in our Market-Based Operations segment rose $11.6 million, largely driven by incremental revenue from our military contracts due to increased construction type projects and the addition of two military bases in the second half of 2014 coupled with contract growth in our Homeowner Services Group (“HOS”). Revenues in our Regulated Businesses segment rose $7.8 million mainly attributable to rate increases, partially offset by reduced consumption in 2015. For further information, see the respective “Operating Revenues” discussions within the “Segment Results.”

Operation and maintenance. Consolidated O&M decreased by $1.3 million, or 0.4%, compared to the same period in 2014. O&M in our Regulated Businesses segment decreased $11.5 million primarily due to lower production costs of $5.5 million driven by lower supplier prices related to fuel and power costs, 2014 costs associated with Freedom Industries chemical spill of $4.6 million and authorized recovery of $3.1 million in costs as a result of the finalization of our California general rate case. These decreases were partially offset by higher O&M costs in our Market-Based Operations segment of $11.8 million, principally due to increased activity under our military contracts, corresponding with the increased revenue. For further discussions on the changes in our Regulated Businesses and Market-Based Operations segments’ O&M, see the respective “Operation and Maintenance” discussions within the “Segment Results.”

Depreciation and amortization. Depreciation and amortization expense increased by $1.5 million, or 1.4%, primarily as a result of additional utility plant placed in service.

General Taxes. General taxes increased $3.0 million, or 5.0%, primarily due to a true-up of business and opportunity taxes and higher property tax assessments for various subsidiaries in our Regulated Businesses segment.

Other income (expenses). Other expenses decreased by $2.3 million, or 3.1%, compared to the same period in 2014. The decrease is primarily due to authorization through the California rate case of a sharing mechanism between shareholders and customers for proceeds from a $4.1 million chemical settlement and the recovery of the allowance for borrowed funds used during construction on the authorized business transformation costs.

Provision for income taxes. Our consolidated provision for income taxes increased $8.2 million, or 18.2%, to $53.5 million for the three months ended March 31, 2015, due to the increase in pre-tax income. The effective tax rates for the three months ended March 31, 2015 and 2014 were 40.0% and 39.6%, respectively.

Loss from discontinued operations, net of tax. As previously noted, the financial results of our Terratec line of business previously reported in our Market-Based Operations segment were classified as discontinued operations for all periods presented. The disposition of Terratec was finalized in the fourth quarter of 2014. For the three months ended March 31, 2014, the loss from discontinued operations, net of tax, represents the operating results of Terratec for the period.

Segment Results

We have two reportable segments: the Regulated Businesses and the Market-Based Operations Segments. We evaluate the performance of our segments and allocate resources based on several factors, with the primary measure being income before income taxes.

Regulated Businesses Segment

The following table summarizes certain financial information for our Regulated Businesses Segment for the periods indicated:

(In thousands)

Operating revenues. Our primary business involves the ownership of water and wastewater utilities that provide services to residential, commercial, industrial and other customers. This business generally is subject to state economic regulation and our results of operations are impacted significantly by rates authorized by the state regulatory commissions in the states in which we operate.

Comparison of Results of Operations for the Three Months Ended March 31, 2015 and 2014

Operating revenues increased by $7.8 million, or 1.3%, for the quarter primarily due to incremental revenues of approximately $9.0 million resulting from rate increases and infrastructure surcharges for a number of our operating companies. Partially offsetting this increase was a decrease in revenues of approximately $3.3 million as a result of lower demand compared to the same period in last year.

The following table sets forth information regarding the Regulated Businesses’ revenues and billed water sales volume by customer class for the periods indicated:

Water Services – Water service operating revenues for the three months ended March 31, 2015 totaled $580.5 million, a $5.1 million increase, or 0.9%, over the same period of 2014. As described above, the increase is primarily due to rate increases and infrastructure surcharges. Also, the mix between billed and unbilled water revenue for the three-month period ended March 31, 2015, compared to the same periods in 2014 has changed. This change is principally the result of addressing the majority of delayed billings that existed at December 31, 2013, by billing those customers in the first quarter of 2014. The delayed billings resulted from the implementation of our Customer Information System (“CIS”) in 2013. Additionally, included in the first quarter 2014 was a credit of $1.0 million issued to the customers of West Virginia in connection with the Freedom Industries chemical spill.

Wastewater services – Our subsidiaries provide wastewater services in eleven states. Revenues from these services increased $0.4 million, or 1.8%, for the three months ended March 31, 2015 compared to the same period in 2014.

Other revenues – Other revenues, which include such items as reconnection charges, initial application service fees, certain rental revenues, revenue collection services for others and similar items, increased $2.3 million, or 23.4%, for the three months ended March 31, 2015. The increase is principally due to incremental revenues for late payment fees and reconnection fees.

Operation and maintenance expense. Operation and maintenance expense decreased $11.5 million, or 4.1%, the three months ended March 31, 2015 compared to the same period in 2014.

The following table provides information regarding operation and maintenance expense for the three months ended March 31, 2015 and 2014, by major expense category:

(Dollars in thousands)

25

Production costs by major expense type were as follows:

(Dollars in thousands)

Production costs decreased by $5.5 million, or 7.9%, for the three months ended March 31, 2015. The decrease was primarily due to decreases in fuel, power and chemicals costs. The fuel and power decrease was primarily a result of lower fuel and natural prices and a rebate received at one of our subsidiaries in 2015 and as well as higher costs in the prior-year period resulting from the harsh winter weather conditions in 2014 principally in our mid-western states. The decrease in chemical costs is principally due to a sharing mechanism authorized in our Indiana general rate case which allowed for the recognition of prior contamination proceeds that were previously deferred. Also, contributing to the chemical expense reduction is lower chemical usage attributable to a new process for one of our districts in Illinois.

The following table provides information with respect to components of employee-related costs for the three months ended March 31, 2015 and 2014:

(Dollars in thousands)

The overall increase in employee-related costs for the three months ended March 31, 2015 compared to the same period in 2014 was primarily due to an increase in pension and postretirement benefit costs (which is included in group insurance expenses). These increases are principally due to the adoption of new mortality assumptions based on the Society of Actuaries RP 2014 mortality table and a decrease in the discount rate assumptions, which resulted in increased plan obligations. These increases were partially offset by decreases as a result of the finalization of our California rate case.

Operating supplies and services include expenses for office operation, legal and professional services, including transportation expenses, and information systems and other office equipment rental charges. Overall these costs decreased $10.0 million, or 17.8%, for the three months ended March 31, 2015 compared to the same period in 2014. The decrease was primarily the result of higher incremental costs in 2014 of $3.6 million attributable to the January 2014 Freedom Industries chemical spill in West Virginia, an adjustment of $3.2 million attributable to the recovery of previously expensed business transformation costs as a result of the finalization of rate case in California and decreased transportation costs, principally due to a reduction in costs associated with leased vehicles.

Maintenance materials and supplies, which include preventive maintenance and emergency repair costs, decreased $1.0 million, or 5.0%, for the three months ended March 31, 2015 compared to the same period in 2014. The decrease is primarily due to decreases in paving, backfilling and other repair costs, which were higher in the first quarter of 2014 due to higher than normal main breaks as a result of the abnormally harsh winter weather conditions experienced throughout our operating areas in 2014.

Customer billing and accounting expenses, which include uncollectible accounts expense, postage and other customer related expenses, increased by $1.9 million, or 14.6%, for the three months ended March 31, 2015 and is attributable to incremental uncollectible expense mainly associated with an increase in installment plans at one of our subsidiaries and an increase in customer accounts receivable attributable to the overall aging of receivables.

Other operation and maintenance expense includes casualty and liability insurance premiums and regulatory costs. The increase in these costs for the three months ended March 31, 2015 compared to the prior year period was primarily driven by increased casualty insurance costs, as a result an increase in historical claims experience resulting in premium adjustments. The premium adjustments are based upon current facts and circumstances with respect to outstanding claims and are subject to change as the claims mature.

Operating expenses. The decrease in operating expenses for the three months ended March 31, 2015 is principally due to the decrease in operation and maintenance expense explained above offset by higher incremental general taxes of $3.1 million, including increased business and occupation taxes in one of our subsidiaries, and higher depreciation and amortization expense.

Market-Based Operations

The following table provides financial information for our Market-Based Operations segment for the periods indicated:

(In thousands)

Operating revenues. Revenues for the three months ended March 31, 2015 increased $11.6 million, compared to the same period in 2014, as a result of incremental revenues in our Military Services Group (“Military”) of $8.7 million and HOS of $3.8 million partially offset by lower Contract Operations Group (“ConOps”) revenues. The increase in Military is primarily related to additional revenues from construction project activities associated with our military contracts and the addition of Hill Air Force Base and Picatinny Arsenal in the second half of 2014. The incremental revenues in HOS are primarily the result of contract growth, mainly through our New York City contracts, as well as expansion into other geographic areas. The decrease in Contract Operations group revenue is attributable to a reduction in project activity for one of our projects, which is nearing completion, and a decrease in reimbursable revenues related to lower natural gas prices.

Operation and maintenance. Operation and maintenance expense increased $11.8 million, or 19.1%, for the three months ended March 31, 2015.

The following table provides information regarding categories of operation and maintenance expense for the periods indicated:

(Dollars in thousands)

As noted in the table above, the primary factor contributing to the overall increase was operating supplies and services. This increase corresponds with the incremental revenues and is mainly attributable to growth in construction project activities under our military contracts, as well as the addition of the two new military contracts discussed above. In addition, the increase in maintenance materials and supplies was primarily due to higher HOS repair costs, which is associated with new contracts as well as an increase in the frequency and severity of the claims.

Liquidity and Capital Resources

For a general overview of our sources and uses of capital resources, see the introductory discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources,” contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2014.

We rely on our revolving credit facility, the capital markets and our cash flows from operations to fulfill our short-term liquidity needs, to issue letters of credit and to support our commercial paper program. We fund liquidity needs for capital investment, working capital and other financial commitments through cash flows from operations, public and private debt offerings, commercial paper markets and, to the extent necessary, our revolving credit facility. We regularly evaluate the capital markets and closely monitor the financial condition of the financial institutions with contractual commitments in the revolving credit facility.

In order to meet our short-term liquidity needs, we, through AWCC, our financing subsidiary, issue commercial paper, which is supported by the revolving credit facility. The revolving credit facility is also used, to a limited extent, to support our issuance of letters of credit and, from time to time, for direct borrowings. As of March 31, 2015, AWCC had no outstanding borrowings and $37.6 million of outstanding letters of credit under the revolving credit facility. As of March 31, 2015, AWCC had $1.2 billion available under the credit facility that we can use to fulfill our short-term liquidity needs, to issue letters of credit and support our $544.5 million outstanding commercial paper. We can provide no assurances that our lenders will meet their existing commitments or that we will be able to access the commercial paper or loan markets in the future on terms acceptable to us or at all.

As noted in our Form 10-K, in February 2015, our Board of Directors authorized a common stock repurchase program for the specific purpose of providing a vehicle to minimize share dilution that occurs through our dividend reinvestment, employee stock purchase and executive compensation programs. We commenced the program in April 2015 and through May 4, 2015 have repurchased 84.4 thousand shares.

Cash Flows from Operating Activities

Cash flows from operating activities primarily result from the sale of water and wastewater services and, due to the seasonality of demand, are generally greater during the third quarter of each fiscal year. Cash flows from continuing operating activities for the three months ended March 31, 2015 were $198.6 million compared to $244.9 million for the three months ended March 31, 2014.

The following table provides a summary of the major items affecting our cash flows from operating activities for the three months ended March 31, 2015 and 2014:

(In thousands)

(1) Includes depreciation and amortization, provision for deferred income taxes, amortization of deferred investment tax credits, provision for losses on accounts receivable, allowance for other funds used during construction, (gain) loss on asset dispositions and purchases, pension and non-pension postretirement benefits expense, stock-based compensation expense and other non-cash items. Details of each component can be found in the Consolidated Statements of Cash Flows.

(2) Changes in working capital include changes to receivables and unbilled revenues, taxes receivable (including income taxes), other current assets, accounts payable, taxes accrued (including income taxes), interest accrued, change in book overdraft and other current liabilities.

The decrease in cash flows from operating activities during the three months ended March 31, 2015 as compared to the same period in 2014 reflects changes in working capital and an increase in pension and postretirement benefit contributions of $2.0 million. The decrease in working capital for the three months ended March 31, 2015 compared to the same period in the prior year is principally the result of higher cash collections for our Regulated Businesses in the first quarter of 2014, as we delayed some 2013 billings to the first quarter of 2014 when we implemented our new customer information system in 2013. Also, contributing to the changes in working capital was the timing of accounts payable and an increase in accrued dividends and accrued insurance.

Due to the continued severe drought in California, in April 2015, the Governor of California mandated a water usage restriction that would cut the state’s overall water usage by 25% compared with 2013 levels. As a result of our California subsidiary’s water revenue adjustment mechanism (“WRAM”), which has the effect of reducing the adverse impact of customers’ conservation efforts, such restrictions should not have a significant impact on our result of operations. However, cash flows from operations could be affected as the surcharges or surcredits we recognize on these accounts are collected or refunded to customers through surcharges or surcredits generally over periods ranging from twelve to thirty-six months.

Our working capital needs are primarily limited to funding the increase in our customer accounts receivable and unbilled revenues which is mainly associated with the revenue increase as a result of rate increases in our Regulated Businesses segment. We address this timing issue through the aforementioned liquidity funding mechanisms.

Cash Flows from Investing Activities

The following table provides information regarding cash flows used in investing activities for the three months ended March 31, 2015 and 2014:

(In thousands)

(1) Includes removal costs from property, plant and equipment retirements, net and net funds released.

The increase in capital expenditures is principally due to less harsh winter conditions in the first quarter of 2015 compared to the same period in 2014 in certain of our Regulated Businesses’ territories which allowed for an increase in capital improvements in 2015.

Cash Flows from Financing Activities

The following table provides information regarding cash flows provided by (used in) financing activities for the three months ended March 31, 2015 and 2014:

(In thousands)

(1) Includes proceeds from issuance of employee stock plans and DRIP and advances and contributions for construction, net of refunds.

Our financing activities, primarily focused on funding construction expenditures, include the issuance of long-term and short-term debt, primarily through AWCC. We intend to access the capital markets on a regular basis, subject to market conditions. In addition, new infrastructure may be financed with customer advances (net of refunds) and contributions in aid of construction (net of refunds).

As previously noted, AWCC is a wholly-owned finance subsidiary of American Water Works Company, Inc. (the “parent company”). Based on the needs of our regulated subsidiaries and the parent company, AWCC borrows in the capital markets and then, through intercompany loans, provides proceeds of those borrowings to the regulated subsidiaries and the parent company. The regulated subsidiaries and the parent company are obligated to pay to AWCC their respective portion of principal and interest in the amount required to enable AWCC to meet its debt service obligations. Because the parent company borrowings are not a source of capital for the Company’s regulated subsidiaries, the Company is not able to recover the interest charges on parent company debt through regulated water and wastewater rates.

We intend to utilize commercial paper for short-term liquidity, as commercial paper borrowings have historically been a more flexible and lower cost option. However, if necessary, we utilize our credit facility to complement our borrowings in the commercial paper market. In the event of disruptions in the money market sector of the debt capital markets, borrowings under our revolving credit facility may be more efficient and a lower cost alternative to commercial paper.

The Company did not issue long-term debt during the first three months of 2015.

The following long-term debt was retired through sinking fund provisions or payment at maturity during the first three months of 2015:

From time to time, and as market conditions warrant, we may engage in additional long-term debt retirements via tender offers, open market repurchases or other transactions.

Credit Facilities and Short-Term Debt

Short-term debt balance, consisting of commercial paper, net of discount, amounted to $544.5 million at March 31, 2015.

The following table provides information as of March 31, 2015 regarding letters of credit sub-limits under our revolving credit facility and available funds under the revolving credit facility, as well as outstanding amounts of commercial paper and borrowings under our revolving credit facility.

(In thousands)

The weighted-average interest rate on short-term borrowings for the three months ended March 31, 2015 and 2014 was approximately 0.47% and 0.32%, respectively.

Capital Structure

The following table provides information regarding our capital structure for the periods presented:

Debt Covenants

Our debt agreements contain financial and non-financial covenants. To the extent that we are not in compliance, we, or our subsidiaries, may be restricted in the ability to pay dividends, issue new debt or access our revolving credit facility. For two of our smaller operating companies, we have informed our counterparties that we will provide only unaudited financial information at the subsidiary level, which resulted in technical non-compliance with certain of their reporting requirements. We do not believe this change will materially impact us. Our failure to comply with restrictive covenants under our credit facility could accelerate repayment obligations. Our long-term debt indentures contain a number of covenants that, among other things, limit the Company from issuing debt secured by the Company’s assets, subject to certain exceptions.

Certain long-term notes and the revolving credit facility require us to maintain a ratio of consolidated debt to consolidated capitalization (as defined in the relevant documents) of not more than 0.70 to 1.00. As of March 31, 2015, our ratio was 0.55 to 1.00 and therefore we were in compliance with the covenant.

Security Ratings

Our access to the capital markets, including the commercial paper market, and respective financing costs in those markets, is directly affected by securities ratings of the entity that is accessing the capital markets. We primarily access the capital markets, including the commercial paper market, through AWCC. However, we have also issued debt through our regulated subsidiaries, primarily in the form of tax exempt securities or borrowings under state revolving funds, to lower our overall cost of debt.

The following table shows the Company’s securities ratings as of March 31, 2015:

On April 22, 2015, Moody’s reaffirmed our Baa1 corporate credit rating for American Water and AWCC and AWCC’s “P2” commercial paper rating. At the same time, Moody’s revised its rating outlook for American Water and AWCC to positive from stable.

A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency, and each rating should be evaluated independently of any other rating. Security ratings are highly dependent upon our ability to generate cash flows in an amount sufficient to service our debt and meet our investment plans. We can provide no assurances that our ability to generate cash flows is sufficient to maintain our existing ratings. None of our borrowings are subject to default or prepayment if a downgrading of these security ratings, although such a downgrading could increase fees and interest charges under our credit facility.

As part of the normal course of business, we routinely enter into contracts for the purchase and sale of water, energy, fuels and other services. These contracts either contain express provisions or otherwise permit us and our counterparties to demand adequate assurance of future performance when there are reasonable grounds for doing so. In accordance with the contracts and applicable contract law, if our debt is downgraded by a credit rating agency, especially if such downgrade is to a level below investment grade, it is possible that a counterparty would attempt to reference such a downgrade as a basis for making a demand for adequate assurance of future performance, which could include a demand that we provide collateral to secure our obligations. We do not expect that our posting of collateral would have a material adverse impact on our results of operations, financial position or cash flows.

Dividends

On March 2, 2015, we made a cash dividend payment of $0.31 per share to shareholders of record as of February 9, 2015.

On April 28, 2015, our board of directors declared a quarterly cash dividend payment of $0.34 per share payable on June 1, 2015 to shareholders of record as of May 11, 2015. Future dividends, declared at the discretion of the Board of Directors, will be dependent upon future earnings, cash flows, financial and legal requirements and other factors.

Market Risk

There have been no significant changes to our market risk since December 31, 2014. For a discussion of our exposure to market risk, refer to Part II, Item 7A. “Quantitative and Qualitative Disclosures about Market Risk,” contained in our Form 10-K for the year ended December 31, 2014.

Application of Critical Accounting Policies and Estimates

Our financial condition, results of operations and cash flows are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates,” in our Form 10-K for the year ended December 31, 2014 for a discussion of our critical accounting policies.

Recent Accounting Pronouncements

See Part I, Item 1 – Financial Statements (Unaudited) – Note 2 – New Accounting Pronouncements in this Quarterly Report on Form 10-Q for a discussion of new accounting standards recently adopted or pending adoption.

We are subject to market risks in the normal course of business, including changes in interest rates and equity prices. For further discussion of market risks see “Market Risk” in Part I, Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Evaluation of Disclosure Controls and Procedures

American Water Works Company, Inc. maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed or submitted under the Securities Exchange Act of 1934 (“the Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Our management, including the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) of the Exchange Act) as of March 31, 2015 pursuant to 15d-15(e) under the Exchange Act.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2015, our disclosure controls and procedures were effective at a reasonable level of assurance. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2015, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in the “Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2014, and our other public filings, which could materially affect our business, financial condition or future results. There have been no material changes from risk factors previously disclosed in “Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2014.