# American Water Works Company, Inc.: Form 10-Q for the period ended Jun 30, 2015

- Company: [American Water Works Company, Inc.](/companies/awk.md) (CIK 1410636)
- Form: 10-Q
- Filed: 2015-08-05
- Accepted by EDGAR: Aug 5, 2015, 16:32 ET
- Period: 2015-06-30
- Accession: 0001564590-15-006249
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1410636/000156459015006249/awk-10q_20150630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1410636/000156459015006249/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2015-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2015-04-01 to 2015-06-30 | $782.1m | us-gaap:Revenues |
| Revenue | 6 months, 2015-01-01 to 2015-06-30 | $1.48bn | us-gaap:Revenues |
| Operating income | 3 months, 2015-04-01 to 2015-06-30 | $277.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2015-01-01 to 2015-06-30 | $481.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2015-04-01 to 2015-06-30 | $75.4m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2015-01-01 to 2015-06-30 | $151.1m | us-gaap:InterestExpense |
| Income tax | 3 months, 2015-04-01 to 2015-06-30 | $80.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2015-01-01 to 2015-06-30 | $134.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2015-04-01 to 2015-06-30 | $123.1m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2015-01-01 to 2015-06-30 | $203.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2015-04-01 to 2015-06-30 | $0.68 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2015-01-01 to 2015-06-30 | $1.13 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2015-04-01 to 2015-06-30 | $0.69 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2015-01-01 to 2015-06-30 | $1.13 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2015-04-01 to 2015-06-30 | 180,371,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2015-01-01 to 2015-06-30 | 180,348,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2015-01-01 to 2015-06-30 | $418.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 6 months, 2015-01-01 to 2015-06-30 | $116.6m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 3 months, 2015-04-01 to 2015-06-30 | $13.2m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Share repurchases | 6 months, 2015-01-01 to 2015-06-30 | $13.2m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2015-06-30 | $144.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2015-06-30 | $890.1m | us-gaap:AssetsCurrent |
| Total assets | at 2015-06-30 | $16.73bn | us-gaap:Assets |
| Current liabilities | at 2015-06-30 | $1.51bn | us-gaap:LiabilitiesCurrent |
| Short-term borrowings | at 2015-06-30 | $821.0m | us-gaap:ShortTermBorrowings |

## Management's discussion and analysis

As filed, 61,178 characters.

### 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 (the “Exchange Act”). 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. (“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. These utilities are generally subject to economic regulation by state regulatory agencies in the states in which they operate. We report the financial results of these utilities in our Regulated Businesses segment. We also provide other services through businesses 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 Part I, Item 1, “Business,” in our Form 10-K.

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.

### Overview

### Financial Results

Highlights of our operating results per diluted share for the three and six months ended June 30, 2015 compared to same periods during 2014 are as follows:

|  | Three Months Ended June 30, 2015 | 2014 | Six Months Ended June 30, 2015 | 2014 |
| --- | ---: | ---: | ---: | ---: |
| Income from continuing operations | $0.68 | $0.61 | $1.13 | $1.00 |
| Loss from discontinued operations, net of tax | $0.00 | $0.00 | $0.00 | $(0.01) |
| Diluted earnings per share | $0.68 | $0.61 | $1.13 | $0.99 |

### Continuing Operations

Income from continuing operations increased 7 cents and 13 cents per diluted share for the quarter and year-to-date, respectively. Excluding the costs related to the Freedom Industries chemical spill in West Virginia of 2 cents and 4 cents per diluted share for the three and six months ended June 30, 2014, earnings for the three and six months ended June 30, 2015, increased 5 cents and 9 cents per diluted share, respectively, mainly due to continued revenue growth in our Regulated Businesses and Market-Based Operations segments and lower operating and maintenance expenses in our Regulated Businesses segment. Also, adding to the increase for the six months ended June 30, 2015 was 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 for both the three and six months ended June 30, 2014 includes the operating results of the entity prior to the sale.

### Regulatory Matters

The table below provides details by state and effective date in 2015 of annualized revenues awarded assuming a constant volume, resulting from rate authorizations:

*(In millions)*

| State General Rate Cases: | For the Three Months Ended June 30, 2015 | For the Six Months Ended June 30, 2015 |
| --- | ---: | ---: |
| Maryland (June 19) | $0.5 | $0.5 |
| Indiana (January 29) | — | 5.1 |
| California (January 1) | — | 5.2 |
| Total General Rate cases | $0.5 | $10.8 |
| Infrastructure charges: |  |  |
| Pennsylvania (April 1) | $1.6 | $1.6 |
| Tennessee (June 30) | 2.2 | 2.2 |
| Missouri (June 27) (a) | 1.9 | 1.9 |
| New Jersey (January 1) | — | 9.4 |
| Illinois (b) | — | 5.9 |
| New York (June 1) | 0.1 | 0.1 |
| Total Infrastructure charges | $5.8 | $21.1 |

(a) The Office of the Public Counsel filed an appeal notice claiming St. Louis County no longer meets the required population requirement for an infrastructure charge.

(b) Rates of $4.9 million and $1.0 million became effective January 1, 2015 and February 1, 2015, respectively.

On April 9, 2015, our California general rate case settlement was approved by the California Public Utilities Commission (the “CPUC”), with rates retroactive to January 1, 2015. The settlement, which also allowed for recovery of prior expenditures incurred related to our business transformation project and authorized a sharing mechanism for prior contamination proceeds that were previously deferred, was reflected in 2015 first quarter results.

On April 30, 2015, our West Virginia subsidiary filed a general rate case requesting additional annualized water and wastewater revenue of approximately $35.6 million.

Following the close of the second quarter, additional annualized revenue of $4.6 million resulting from infrastructure charges in our Pennsylvania subsidiary became effective on July 1, 2015. Also, additional annualized revenue of $0.2 million resulting from the approval of our general wastewater rate case in Kentucky became effective on July 2, 2015.

In July 2015, our California subsidiary filed an application with the CPUC to request changes to the present rate design and the emergency conservation and rationing plan for water customers in certain areas within its Monterey County service district. If approved, the proposed changes would allow (i) recovery in authorized cost of service of existing under-collections of the net water revenue adjustment mechanism/ modified cost balancing account (“WRAM/MCBA”) balance, currently amounting to approximately $45 million, over 20 years earning a pretax rate of 8.41%; (ii) an annual consumption true-up mechanism and rate design that provide for more timely collection of the cost of service; and (iii) modification of existing conservation and rationing plans. We expect a CPUC decision in mid to late 2016.

On July 31, 2015, our Missouri subsidiary filed a general rate case requesting additional annualized revenue of approximately $25.2 million.

As of July 31, 2015, we are awaiting final general rate case orders in three states, requesting additional annualized revenue of $127.0 million. 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 leverages our people resources, processes and technology innovation to make our business more effective and efficient. The progress that we have made in the first six months of 2015 with respect to growth and improvement in our operational efficiency ratio is described below.

### Growth - Infrastructure improvements, acquisitions and strategic investments

During the first half of 2015, we made capital investments of approximately $514.9 million, consisting of approximately $473.6 million to improve infrastructure in our Regulated Businesses and the remaining $41.3 million for acquisitions of regulated operations. For the full-year of 2015, our total capital investment is expected to be in the range of $1.2 to $1.3 billion, most of which will be allocated to improving infrastructure in our Regulated Businesses with an additional $200 million allocated for acquisitions and strategic investments.

On April 30, 2015, we announced the signing of 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.

On May 21, 2015, upon the approval of the New Jersey Board of Public Utilities, we completed our acquisition of the Borough of Haddonfield’s water and wastewater system and on May 22, 2015, we completed the acquisition of the City of Arnold, Missouri’s wastewater system. These acquisitions added approximately 4,500 water and 13,800 wastewater customers to our regulated operations.

On July 9, 2015, we made a strategic acquisition in Water Solutions Holdings, LLC, including its wholly owned subsidiary, Keystone Clearwater Solutions (“Keystone”), by acquiring a ninety-five percent interest in the entity with a purchase price of approximately $130 million. Keystone is a water service provider that offers a range of water-related services to the oil and gas industry primarily in the Appalachian region of Pennsylvania, Ohio and West Virginia.

### 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 (a non-GAAP measure). Our O&M efficiency ratio for the twelve months ended June 30, 2015 was 35.9%, compared to 37.7% for the twelve months ended June 30, 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.

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.

Our O&M efficiency ratio 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 exclude these items from the calculation as we believe such items are not reflective of management’s ability to increase efficiency of the Company’s regulated operations.

The following table provides the calculation and 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 June 30, 2015 as compared to the same period in 2014.

Calculation and Reconciliation of Regulated O&M Efficiency Ratio (a Non-GAAP Measure):

*(In thousands)*

|  | For the Twelve Months Ended June 30, 2015 | 2014 |
| --- | ---: | ---: |
| Total Operation and Maintenance Expense | $1,347,291 | $1,326,931 |
| Less: |  |  |
| Operation and maintenance expense—Market-Based Operations | 316,456 | 254,668 |
| Operation and maintenance expense—Other | (55,333) | (53,896) |
| Total Regulated Operation and Maintenance Expense | 1,086,168 | 1,126,159 |
| Less: |  |  |
| Regulated purchased water expense | 118,708 | 119,974 |
| Allocation of non-operation and maintenance expense | 39,165 | 36,027 |
| Impact of West Virginia Freedom Industries chemical spill | 618 | 9,820 |
| Estimated impact of weather (mid-point of range) | (1,762) | (893) |
| Adjusted Regulated Operation and Maintenance Expense (a) | $929,439 | $961,231 |
| Total Operating Revenues | $3,057,746 | $2,962,213 |
| Less: |  |  |
| Operating revenues—Market-Based Operations | 385,250 | 321,226 |
| Operating revenues—Other | (18,309) | (17,541) |
| Total Regulated Operating Revenues | 2,690,805 | 2,658,528 |
| Less: |  |  |
| Regulated purchased water expense\* | 118,708 | 119,974 |
| Plus: |  |  |
| Impact of West Virginia Freedom Industries chemical spill | — | 1,012 |
| Estimated impact of weather (mid-point of range) | 16,785 | 9,918 |
| Adjusted Regulated Operating Revenues (b) | $2,588,882 | $2,549,484 |
| Adjusted Regulated Operation and Maintenance Efficiency Ratio (a)/(b) | 35.9% | 37.7% |

\* Calculation assumes purchased water revenues approximate purchased water expenses.

### Consolidated Results of Operations and Changes from Prior Periods

*(In thousands, except per share amounts)*

|  | For the Three Months Ended June 30, 2015 | 2014 | Favorable (Unfavorable) Change | For the Six Months Ended June 30, 2015 | 2014 | Favorable (Unfavorable) Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Operating revenues | $782,121 | $754,778 | $27,343 | $1,480,199 | $1,433,781 | $46,418 |
| Operating expenses |  |  |  |  |  |  |
| Operation and maintenance | 336,624 | 337,849 | 1,225 | 660,456 | 663,029 | 2,573 |
| Depreciation and amortization | 108,923 | 105,685 | (3,238) | 216,300 | 211,609 | (4,691) |
| General taxes | 60,222 | 56,802 | (3,420) | 123,918 | 117,469 | (6,449) |
| Gain on asset dispositions and purchases | (1,209) | (345) | 864 | (2,337) | (555) | 1,782 |
| Total operating expenses, net | 504,560 | 499,991 | (4,569) | 998,337 | 991,552 | (6,785) |
| Operating income | 277,561 | 254,787 | 22,774 | 481,862 | 442,229 | 39,633 |
| Other income (expenses) |  |  |  |  |  |  |
| Interest, net | (75,421) | (73,668) | (1,753) | (151,094) | (147,228) | (3,866) |
| Allowance for other funds used during construction | 2,835 | 2,058 | 777 | 5,195 | 4,259 | 936 |
| Allowance for borrowed funds used during construction | 1,542 | 1,271 | 271 | 4,064 | 2,754 | 1,310 |
| Amortization of debt expense | (1,878) | (1,629) | (249) | (3,642) | (3,302) | (340) |
| Other, net | (1,012) | (316) | (696) | 744 | (1,857) | 2,601 |
| Total other income (expenses) | (73,934) | (72,284) | (1,650) | (144,733) | (145,374) | 641 |
| Income from continuing operations before income taxes | 203,627 | 182,503 | 21,124 | 337,129 | 296,855 | 40,274 |
| Provision for income taxes | 80,552 | 72,329 | (8,223) | 134,011 | 117,568 | (16,443) |
| Income from continuing operations | 123,075 | 110,174 | 12,901 | 203,118 | 179,287 | 23,831 |
| Loss from discontinued operations, net of tax | — | (875) | 875 | — | (1,865) | 1,865 |
| Net income | $123,075 | $109,299 | $13,776 | $203,118 | $177,422 | $25,696 |
| Basic earnings per share: (a) |  |  |  |  |  |  |
| Income from continuing operations | $0.69 | $0.62 |  | $1.13 | $1.00 |  |
| Loss from discontinued operations, net of tax | $0.00 | $(0.00) |  | $0.00 | $(0.01) |  |
| Net income | $0.69 | $0.61 |  | $1.13 | $0.99 |  |
| Diluted earnings per share: (a) |  |  |  |  |  |  |
| Income from continuing operations | $0.68 | $0.61 |  | $1.13 | $1.00 |  |
| Loss from discontinued operations, net of tax | $0.00 | $(0.00) |  | $0.00 | $(0.01) |  |
| Net income | $0.68 | $0.61 |  | $1.13 | $0.99 |  |
| Average common shares outstanding during the period: |  |  |  |  |  |  |
| Basic | 179,564 | 178,863 |  | 179,511 | 178,702 |  |
| Diluted | 180,371 | 179,693 |  | 180,348 | 179,512 |  |
| (a) Amounts may not sum due to rounding |  |  |  |  |  |  |

The following is a discussion of the consolidated results of operations for the three and six months ended June 30, 2015 compared to the same periods in 2014:

#### Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

***Operating revenues.*** Consolidated operating revenues for the quarter ended June 30, 2015 increased $27.3 million, or 3.6%, compared to the same quarter last year. Revenues in our Market-Based Operations segment rose $19.0 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 $8.7 million mainly attributable to rate increases, infrastructure charges and increased demand, partially offset by decreased surcharges and balancing accounts in 2015. For further information, see the respective “Operating Revenues” discussions within the “Segment Results.”

***Operation and maintenance.*** Consolidated O&M decreased by $1.2 million, or 0.4%, compared to the same period in 2014. This decrease resulted from continued cost management; lower costs associated with the Freedom Industries chemical spill; a reduction in uncollectible expense; and reduced employee-related, condemnation and production costs. These decreases were partially offset by an increase of $15.3 million in O&M costs associated with our Market-Based Operations segment, principally due to increased activity under our military contracts, as noted in the operating revenue discussion above. For further information 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” section below.

***Depreciation and amortization.*** Depreciation and amortization expense increased by $3.2 million, or 3.1%, primarily as a result of additional utility plant placed in service.

***General Taxes.*** General taxes increased $3.4 million, or 6.0%, primarily due higher property tax assessments for various subsidiaries in our Regulated Businesses segment.

***Other income (expenses).*** Other expenses increased by $1.7 million, or 2.3%, compared to the same period in 2014. The increase is primarily due to an increase in interest expense, mainly as a result of a $500 million debt issuance in the third quarter of 2014.

***Provision for income taxes.*** Our consolidated provision for income taxes increased $8.2 million, or 11.4%, to $80.6 million for the three months ended June 30, 2015, due to the increase in pre-tax income. The effective tax rate for both the three months ended June 30, 2015 and 2014 was 39.6%.

***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 June 30, 2014, the loss from discontinued operations, net of tax, represents the operating results of Terratec for the period.

#### Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

***Operating revenues.*** Consolidated operating revenues for the six months ended June 30, 2015 increased $46.4 million, or 3.2%, compared to the same period last year. Revenues in our Market-Based Operations segment rose $30.6 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 HOS. Revenues in our Regulated Businesses segment rose $16.5 million mainly attributable to rate increases, infrastructure charges and increased demand, partially offset by decreased surcharges and balancing accounts in 2015. For further information, see the respective “Operating Revenues” discussions within the “Segment Results” section below.

***Operation and maintenance.*** Consolidated O&M decreased by $2.6 million, or 0.4%, compared to the same period in 2014. This decrease was attributable to lower O&M costs in our Regulated Businesses segment of $25.3 million from continued cost management, lower production and condemnation costs, and authorized recovery of costs as a result of the finalization of our California general rate case in the first quarter of 2015. Also, contributing to lower costs in our Regulated Businesses was the inclusion in 2014 of costs associated with the Freedom Industries chemical spill of $9.8 million. These decreases were partially offset by an increase of $27.1 million in O&M costs in our Market-Based Operations segment, principally due to increased activity under our military contracts, as noted in the operating revenue discussion above. For further information 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” section below.

***Depreciation and amortization.*** Depreciation and amortization expense increased by $4.7 million, or 2.2%, primarily as a result of additional utility plant placed in service.

***General Taxes.*** General taxes increased $6.4 million, or 5.5%, primarily due to a true-up of business and occupation taxes and higher property tax assessments for various subsidiaries in our Regulated Businesses segment.

***Other income (expenses).*** Other expenses decreased by $0.6 million, or 0.4%, 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 prior chemical contamination settlement proceeds of $4.1 million that were previously deferred and the recovery of the allowance for borrowed funds used during construction on the authorized business transformation costs. These decreases were offset by incremental interest expense principally due to the $500 million debt issuance in the third quarter of 2014.

***Provision for income taxes.*** Our consolidated provision for income taxes increased $16.4 million, or 14.0%, to $134.0 million for the six months ended June 30, 2015, due to the increase in pre-tax income. The effective tax rates for the six months ended June 30, 2015 and 2014 were 39.8% 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 six months ended June 30, 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)*

|  | For the Three Months Ended June 30, 2015 | 2014 | Increase (Decrease) | For the Six Months Ended June 30, 2015 | 2014 | Increase (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Operating revenues | $686,811 | $678,101 | $8,710 | $1,302,221 | $1,285,745 | $16,476 |
| Operation and maintenance expense | 270,279 | 284,121 | (13,842) | 536,609 | 561,948 | (25,339) |
| Operating expenses, net | 428,176 | 435,429 | (7,253) | 852,587 | 867,386 | (14,799) |
| Income from continuing operations before income taxes | 198,756 | 182,418 | 16,338 | 332,898 | 297,446 | 35,452 |

***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.

Operating revenues increased by $8.7 million, or 1.3%, for the three months ended June 30, 2015, as compared to the same period in 2014. This increase is principally due to incremental revenues of approximately $8.6 million, attributable to rate increases, including infrastructure charges, obtained through rate authorizations for a number of our operating companies. Additionally, operating revenues increased by $2.7 million, due to higher demand for the quarter ended June 30, 2015 compared to 2014. Partially offsetting these increases was a $3.6 million decrease in 2015 revenues attributable to the amortization of balancing accounts.

Operating revenues increased by $16.5 million, or 1.3%, for the six months ended June 30, 2015, as compared to the same period in 2014, primarily due to incremental revenues of approximately $17.5 million resulting from rate increases, including the infrastructure charges for a number of our operating companies. Partially offsetting these increases was a reduction in revenues from the amortization of balancing accounts in 2015 compared to 2014 of approximately $4.1 million.

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

| Customer Class Water service | For the Three Months Ended June 30, 2015 2014 Increase (Decrease) Percentage Operating Revenues (Dollars in thousands) | 2015 2014 Increase (Decrease) Percentage Billed Water Sales Volume (Gallons in millions) |
| --- | ---: | ---: |
| Residential | $373,166 $364,906 $8,260 2.3% | 41,725 41,705 20 0.0% |
| Commercial | 135,631 130,617 5,014 3.8% | 19,727 19,092 635 3.3% |
| Industrial | 32,021 31,419 602 1.9% | 9,573 9,591 (18) (0.2%) |
| Public and other | 83,021 81,293 1,728 2.1% | 12,889 12,510 379 3.0% |
| Other water revenues | 8,710 7,822 888 11.4% | — — — — |
| Billed water services | 632,549 616,057 16,492 2.7% | 83,914 82,898 1,016 1.2% |
| Unbilled water services | 15,961 23,246 (7,285) (31.3%) |  |
| Total water service revenues | 648,510 639,303 9,207 1.4% |  |
| Wastewater service revenues | 25,170 24,254 916 3.8% |  |
| Other revenues | 13,131 14,544 (1,413) (9.7%) |  |
|  | $686,811 $678,101 $8,710 1.3% |  |
|  | **For the Six Months Ended June 30,** |  |
|  | **2015** **2014** **Increase (Decrease)** **Percentage** | **2015** **2014** **Increase (Decrease)** **Percentage** |
|  | **Operating Revenues (Dollars in thousands)** | **Billed Water Sales Volume (Gallons in millions)** |
| **Customer Class** |  |  |
| Water service |  |  |
| Residential | $720,307 $718,430 $1,877 0.3% | 79,379 81,642 (2,263) (2.8%) |
| Commercial | 258,229 260,436 (2,207) (0.8%) | 37,017 38,081 (1,064) (2.8%) |
| Industrial | 62,990 64,988 (1,998) (3.1%) | 18,570 19,406 (836) (4.3%) |
| Public and other | 159,150 165,259 (6,109) (3.7%) | 24,726 25,919 (1,193) (4.6%) |
| Other water revenues | 16,190 8,599 7,591 88.3% | — — — — |
| Billed water services | 1,216,866 1,217,712 (846) (0.1%) | 159,692 165,048 (5,356) (3.2%) |
| Unbilled water services | 12,155 (2,961) 15,116 510.5% |  |
| Total water service revenues | 1,229,021 1,214,751 14,270 1.2% |  |
| Wastewater service revenues | 47,988 46,662 1,326 2.8% |  |
| Other revenues | 25,212 24,332 880 3.6% |  |
|  | $1,302,221 $1,285,745 $16,476 1.3% |  |

*Water Services –* Consistent with the above discussion, water service operating revenues for the three months ended June 30, 2015 totaled $648.5 million, a $9.2 million increase, or 1.4%, over the same period of 2014. For the six months ended June 30, 2015, these revenues increased $14.3 million, or 1.2%, compared to the six months ended June 30, 2014. As described above, the increases for both the three and six months are primarily due to rate increases and infrastructure charges partially offset by a reduction in revenues attributable to the amortization of balancing accounts. Also, contributing to the incremental revenue for the three months ended June 30, 2015 compared to the same period last year was higher demand. Also, it should be noted that the mix between billed and unbilled water revenue for the six-month period ended June 30, 2015, compared to the same period in 2014 has changed. This change is principally the result of addressing the majority of delayed customer 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.

*Wastewater services –* Our subsidiaries provide wastewater services in eleven states. Revenues from these services increased $0.9 million, or 3.8%, and $1.3 million, or 2.8%, for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014 as the result of adding additional systems through acquisitions.

*Other revenues –* Other revenues, which include reconnection charges, initial application service fees, certain rental revenues, revenue collection services for others and other similar items, decreased $1.4 million, or 9.7%, for the three months ended June 30, 2015. This decrease is principally due to 2014 including $2.4 million in insurance proceeds for business interruption as a result of Hurricane Sandy. The six months ended June 30, 2015 increased $0.9 million, or 3.6%, due to incremental revenues for late payment fees and reconnection fees offset by the insurance proceeds mentioned above.

***Operation and maintenance expense.*** Operation and maintenance expense decreased $13.8 million, or 4.9%, and $25.3 million, or 4.5%, for the three and six months ended June 30, 2015, respectively, compared to the same period in 2014.

The following table provides information regarding operation and maintenance expense for the three and six months ended June 30, 2015 and 2014, by major expense category:

*(Dollars in thousands)*

|  | For the Three Months Ended June 30, 2015 | 2014 | Increase (Decrease) | Percentage | For the Six Months Ended June 30, 2015 | 2014 | Increase (Decrease) | Percentage |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Production costs | $72,219 | $74,141 | $(1,922) | (2.6%) | $136,004 | $143,400 | $(7,396) | (5.2%) |
| Employee-related costs | 106,277 | 107,599 | (1,322) | (1.2%) | 215,406 | 214,780 | 626 | 0.3% |
| Operating supplies and services | 48,907 | 53,991 | (5,084) | (9.4%) | 95,180 | 110,256 | (15,076) | (13.7%) |
| Maintenance materials and supplies | 16,619 | 17,713 | (1,094) | (6.2%) | 36,050 | 38,160 | (2,110) | (5.5%) |
| Customer billing and accounting | 13,588 | 16,082 | (2,494) | (15.5%) | 28,715 | 29,287 | (572) | (2.0%) |
| Other | 12,669 | 14,595 | (1,926) | (13.2%) | 25,254 | 26,065 | (811) | (3.1%) |
| Total | $270,279 | $284,121 | $(13,842) | (4.9%) | $536,609 | $561,948 | $(25,339) | (4.5%) |

Production costs by major expense type were as follows:

*(Dollars in thousands)*

|  | For the Three Months Ended June 30, 2015 | 2014 | Increase (Decrease) | Percentage | For the Six Months Ended June 30, 2015 | 2014 | Increase (Decrease) | Percentage |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Purchased Water | $30,694 | $32,576 | $(1,882) | (5.8%) | $57,065 | $59,658 | $(2,593) | (4.3%) |
| Fuel and Power | 21,518 | 21,217 | 301 | 1.4% | 42,712 | 45,135 | (2,423) | (5.4%) |
| Chemicals | 12,359 | 12,127 | 232 | 1.9% | 21,956 | 22,795 | (839) | (3.7%) |
| Waste Disposal | 7,648 | 8,221 | (573) | (7.0%) | 14,271 | 15,812 | (1,541) | (9.7%) |
| Total | $72,219 | $74,141 | $(1,922) | (2.6%) | $136,004 | $143,400 | $(7,396) | (5.2%) |

Production costs decreased by $1.9 million, or 2.6%, and $7.4 million, or 5.2%, for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year. The decrease for the second quarter was primarily due to a reduction in purchased water costs principally from lower usage in our California subsidiary. Purchased water and fuel and power costs in California are recorded in a balancing account and therefore do not impact earnings. The decrease for the six months ended June 30, 2015 was primarily due to decreases in purchased water as discussed above and fuel and power expenses principally attributable to incremental costs in 2014 due to harsher weather conditions in certain states and lower fuel and natural gas prices in 2015.

The following table provides information with respect to components of employee-related costs for the three and six months ended June 30, 2015 and 2014:

*(Dollars in thousands)*

|  | For the Three Months Ended June 30, 2015 | 2014 | Increase (Decrease) | Percentage | For the Six Months Ended June 30, 2015 | 2014 | Increase (Decrease) | Percentage |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Salaries and wages | $78,990 | $82,568 | $(3,578) | (4.3%) | $159,480 | $163,651 | $(4,171) | (2.5%) |
| Pensions | 7,351 | 6,800 | 551 | 8.1% | 15,066 | 13,620 | 1,446 | 10.6% |
| Group insurance | 15,064 | 13,765 | 1,299 | 9.4% | 30,805 | 28,130 | 2,675 | 9.5% |
| Other benefits | 4,872 | 4,466 | 406 | 9.1% | 10,055 | 9,379 | 676 | 7.2% |
| Total | $106,277 | $107,599 | $(1,322) | (1.2%) | $215,406 | $214,780 | $626 | 0.3% |

For the three and six months ended June 30, 2015 compared to the same periods in 2014 salaries and wages decreased as a result of the reduction in headcount and severance costs associated with the restructuring of certain organizational functions in 2014 as well as higher capitalization rates in 2015. Pension and postretirement benefit costs (which is included in group insurance expenses) increased 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.

Operating supplies and services include expenses for office operation, legal and professional services, transportation expenses, and information systems and other office equipment rental charges. Overall these costs decreased $5.1 million, or 9.4%, and $15.1 million, or 13.7%, for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014. The decrease was primarily due to incremental costs in 2014 associated with the Freedom Industries chemical spill in West Virginia and increased condemnation-related costs. Also, contributing to the decrease were lower fuel prices and leased vehicle costs for both the three and six months ended June 30, 2015. The decrease for the six months ended June 30, 2015 also included a $3.2 million adjustment in the first quarter of 2015 attributable to the recovery of previously expensed business transformation costs as a result of the finalization of our California rate case.

Maintenance materials and supplies, which include preventive maintenance and emergency repair costs, decreased $1.1 million, or 6.2%, and $2.1 million, or 5.5%, for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014. The decrease for both the three and six months is primarily due to decreases in paving, backfilling and other repair costs. These costs were higher in the first quarter of 2014 as compared to the same period in 2015 due to higher than normal main breaks as a result of the abnormally severe winter weather conditions experienced in certain states.

Customer billing and accounting expenses, which include uncollectible accounts expense, postage and other customer related expenses, decreased by $2.5 million, or 15.5%, and $0.6 million, or 2.0%, for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014, and is principally attributable to improvements in our uncollectible expense.

Other operation and maintenance expense includes casualty and liability insurance premiums and regulatory costs. The decrease in these costs for both the three and six months ended June 30, 2015 compared to the prior year periods was primarily driven by 2014 claims costs associated with the Freedom Industries chemical spill in West Virginia. 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 and six months ended June 30, 2015 is principally due to the decrease in operation and maintenance expense explained above offset by higher depreciation and amortization expense from additional utility plant placed in service and incremental general taxes mainly due to increased property and gross receipt taxes for certain of our operating companies.

### Market-Based Operations

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

*(In thousands)*

|  | For the Three Months Ended June 30, 2015 | 2014 | Increase (Decrease) | For the Six Months Ended June 30, 2015 | 2014 | Increase (Decrease) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Operating revenues | $99,976 | $81,022 | $18,954 | $187,449 | $156,877 | $30,572 |
| Operation and maintenance expense | 80,587 | 65,314 | 15,273 | 154,120 | 127,059 | 27,061 |
| Operating expenses, net | 82,844 | 67,639 | 15,205 | 158,876 | 132,162 | 26,714 |
| Income from continuing operations before income taxes | 17,737 | 13,982 | 3,755 | 29,794 | 25,959 | 3,835 |

***Operating revenues.*** Revenues for the three and six months ended June 30, 2015 increased $19.0 million and $30.6 million, respectively, compared to the same periods in 2014, as a result of incremental revenues in our Military Services Group (“Military”) and HOS lines of business partially offset by lower Contract Operations Group (“Contract Operations”) revenues. For the three and six months ended June 30, 2015, Military revenue increased $15.8 million and $24.5 million, respectively. These increases are 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. HOS revenues increased $3.3 million and $7.1 million for the three and six months ended June 30, 2015, respectively. 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.

***Operation and maintenance.*** Operation and maintenance expense increased $15.3 million, or 23.4%, and $27.1 million, or 21.3%, for the three and six months ended June 30, 2015, respectively.

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

*(Dollars in thousands)*

|  | For the Three Months Ended June 30, 2015 | 2014 | Increase (Decrease) | Percentage | For the Six Months Ended June 30, 2015 | 2014 | Increase (Decrease) | Percentage |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Production costs | $8,829 | $8,593 | $236 | 2.7% | $17,916 | $17,861 | $55 | 0.3% |
| Employee-related costs | 17,162 | 15,356 | 1,806 | 11.8% | 32,835 | 29,076 | 3,759 | 12.9% |
| Operating supplies and services | 39,952 | 29,248 | 10,704 | 36.6% | 72,977 | 54,682 | 18,295 | 33.5% |
| Maintenance materials and supplies | 13,150 | 10,953 | 2,197 | 20.1% | 27,437 | 22,310 | 5,127 | 23.0% |
| Other | 1,494 | 1,164 | 330 | 28.4% | 2,955 | 3,130 | (175) | (5.6%) |
| Total | $80,587 | $65,314 | $15,273 | 23.4% | $154,120 | $127,059 | $27,061 | 21.3% |

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 recognized in the Market-Based Operations segment 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 claim costs, which are 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 Form 10-K.

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 wholly owned financing subsidiary, issue commercial paper, which is supported by an unsecured revolving credit facility. Indebtedness under the credit facility is considered “debt” for purposes of a support agreement between American Water and AWCC, which serves as a functional equivalent of a guarantee by American Water of AWCC’s payment obligations under the 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.

On June 30, 2015, we, AWCC and the lenders amended and restated our outstanding credit agreement, dated as of October 29, 2012, associated with the revolving credit facility, to extend the expiration date of the facility from October 2018 to June 2020 and to allow AWCC to request to extend further the term of the credit facility for up to two one-year periods. An extension request must satisfy certain conditions and receive approval of the lenders, as set forth in the agreement. The financial covenants with respect to the credit facility remained unchanged.

As of June 30, 2015, AWCC had no outstanding borrowings and $40.4 million of outstanding letters of credit under the revolving credit facility. As of June 30, 2015, AWCC had $1.2 billion available under the credit facility to fulfill our short-term liquidity needs, to issue letters of credit and support $821.0 million in outstanding commercial paper. We can provide no assurances that the lenders will meet their existing commitments to AWCC under the credit facility 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 an anti-dilutive common stock repurchase program for the specific purpose of providing a vehicle to mitigate the dilutive effect of shares issued through our dividend reinvestment, employee stock purchase and executive compensation programs. This program allows us to purchase up to 10 million shares of our common stock over an unrestricted period of time. We may effect repurchases in the open market or through privately negotiated transactions. We commenced making purchases under this program in April 2015, and through June 30, 2015, we have repurchased an aggregate of 250 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 six months ended June 30, 2015 were $418.0 million compared to $450.6 million for the six months ended June 30, 2014.

The following table provides a summary of the major items affecting our cash flows from operating activities for the six months ended June 30, 2015 and 2014:

*(In thousands)*

|  | For the Six Months Ended June 30, 2015 | 2014 |
| --- | ---: | ---: |
| Net income | $203,118 | $177,422 |
| Add (subtract): |  |  |
| Non-cash activities (1) | 368,586 | 371,045 |
| Changes in working capital (2) | (128,245) | (76,419) |
| Pension and postretirement healthcare contributions | (25,464) | (21,433) |
| Net cash flows provided by operations | $417,995 | $450,615 |

(1) Includes depreciation and amortization, deferred income taxes and amortization of deferred investment tax credits, provision for losses on accounts receivable, allowance for other funds used during construction, gain on asset dispositions and purchases, pension and non-pension postretirement benefits 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 accrued (including income taxes), accounts payable and accrued expenses and other current assets and liabilities, net.

The decrease in cash flows from operating activities during the six months ended June 30, 2015, as compared to the same period in 2014, reflects changes in working capital and an increase in pension and postretirement benefit contributions of $4.0 million. The decrease in working capital for the six months ended June 30, 2015 compared to the same period in the prior year is 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, the timing of accounts payable and an increase in accrued dividends and insurance.

Due to the continued severe drought in California, in April 2015, the Governor of California mandated water usage restrictions intended to reduce the state’s overall water usage by 25% compared with 2013 levels. As a result of our California subsidiary’s WRAM, which has the effect of reducing the adverse financial impact on us of our California 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 from or refunded to customers generally over periods ranging from twelve to thirty-six months. The impact of the WRAM on cash flows for the first six months of 2015 was approximately $10 million.

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.

### Cash Flows from Investing Activities

The following table provides information regarding cash flows used in investing activities for the six months ended June 30, 2015 and 2014:

*(In thousands)*

|  | For the Six Months Ended June 30, 2015 | 2014 |
| --- | ---: | ---: |
| Net capital expenditures | $(478,821) | $(401,781) |
| Proceeds from sale of assets | 4,780 | 665 |
| Acquisitions and related costs | (41,244) | (2,869) |
| Other investing activities, net (1) | (51,890) | (34,189) |
| Net cash flows used in investing activities | $(567,175) | $(438,174) |

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

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, which allowed us to increase our capital improvements during the six months ended June 30, 2015.

The increase in cash utilized for acquisitions during the first six months of 2015 compared to the same period in 2014 is principally due to the purchase of two regulated systems, the Borough of Haddonfield, New Jersey’s water and wastewater systems and the City of Arnold, Missouri’s wastewater system.

We are currently considering a plan to construct a new corporate headquarters to consolidate our support services and certain of our Market-Based Operations employees within a single location. We are considering several alternatives for the location of the new headquarters. The cost of construction, which would take several years to complete, is currently estimated to be up to $165 million, depending on the location selected and exclusive of any tax incentives that the Company may receive.

### Cash Flows from Financing Activities

The following table provides information regarding cash flows provided by (used in) financing activities for the six months ended June 30, 2015 and 2014:

*(In thousands)*

|  | For the Six Months Ended June 30, 2015 | 2014 |
| --- | ---: | ---: |
| Proceeds from long-term debt | $7,748 | $— |
| Repayments of long-term debt | (5,694) | (4,565) |
| Proceeds from short-term borrowings | 371,023 | 72,131 |
| Dividends paid | (116,649) | (105,390) |
| Other financing activities, net (1) | 14,424 | 30,552 |
| Net cash flows provided by (used in) financing activities | $270,852 | $(7,272) |

(1) Includes proceeds from issuance of common stock under various employee stock plans and our dividend reinvestment plan, advances and contributions for construction, net of refunds, debt issuance costs, share repurchase and tax benefits realized from equity compensation.

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 and general economic conditions. In addition, new infrastructure may be financed with customer advances (net of refunds) and contributions in aid of construction.

Based on the liquidity and capital needs of American Water and our regulated subsidiaries, AWCC borrows funds on a short-term basis and through intercompany loans, provides the proceeds of those borrowings to the regulated subsidiaries and American Water. The regulated subsidiaries and American Water are obligated to pay to AWCC their respective portion of AWCC’s debt service obligations. Because American Water borrowings are not a source of capital for the Company’s regulated subsidiaries, the Company is not able to recover the interest charges on its debt through regulated water and wastewater rates.

On May 7, 2015, American Water and AWCC filed with the SEC a universal shelf registration statement that enables us to meet our capital needs through the offer and sale to the public from time to time of an unlimited amount of various types of securities, including American Water common stock, preferred stock and other equity securities and AWCC debt securities, all subject to market conditions and demand, general economic conditions, and as applicable, rating status. The shelf registration will expire in May 2018.

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, we are able to utilize our credit facility to the extent necessary to complement our borrowings in the commercial paper market. In the event of disruptions in the money market sector of the debt capital markets or in response to economic conditions generally, borrowings under our revolving credit facility may be more efficient and a lower cost alternative to commercial paper.

The following long-term debt was issued during the first six months of 2015:

| Company | Type | Rate | Maturity | Amount (In thousands) |
| --- | --- | ---: | --- | ---: |
| Other subsidiaries | Private activity bonds and government funded debt—fixed rate | 1.00% | 2022 | $7,748 |

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

| Company | Type | Rate | Maturity | Amount (In thousands) |
| --- | --- | ---: | --- | ---: |
| American Water Capital Corp. | Private activity bonds and government funded debt—fixed rate | 1.79%-2.90% | 2021-2031 | $807 |
| Other subsidiaries | Private activity bonds and government funded debt—fixed rate | 0.00%-5.30% | 2015-2041 | 3,671 |
| Other subsidiaries | Mandatorily redeemable preferred stock | 8.49% | 2036 | 1,200 |
| Other subsidiaries | Capital lease payments | 12.23% | 2026 | 16 |
| Total retirements and redemptions |  |  |  | $5,694 |

34

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, consisting of commercial paper, net of discount, amounted to $821.0 million at June 30, 2015.

The following table provides information as of June 30, 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)*

|  | Credit Facility Commitment | Available Credit Facility Capacity | Letter of Credit Sub-limit | Available Letter of Credit Capacity | Outstanding Commercial Paper (Net of Discount) | Credit Line Borrowings |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| June 30, 2015 | $1,250,000 | $1,209,615 | $150,000 | $109,615 | $820,982 | $— |

The weighted-average interest rate on short-term borrowings for the three months ended June 30, 2015 and 2014 was approximately 0.27% and 0.29%, respectively, and 0.51% and 0.31% for the six months ended June 30, 2015 and 2014, respectively.

### Capital Structure

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

|  | At June 30, 2015 | At December 31, 2014 |
| --- | ---: | ---: |
| Total common stockholders' equity | 44% | 45% |
| Long-term debt and redeemable preferred stock at redemption value | 48% | 50% |
| Short-term debt and current portion of long-term debt | 8% | 5% |
|  | 100% | 100% |

### Debt Covenants

Our debt agreements contain financial and non-financial covenants. To the extent that we are not in compliance with these covenants, such an event may create an event of default under the debt agreement and 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 under debt agreements. We do not believe this event will materially impact us. Our long-term debt indentures also 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. Our failure to comply with any of these covenants could accelerate repayment obligations.

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 June 30, 2015, our ratio was 0.56 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, may be directly affected by our securities ratings. We primarily access the debt 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 June 30, 2015:

| Securities | Moody’s Investors Service | Standard & Poor’s Ratings Service |
| --- | --- | --- |
| Senior unsecured debt | Baa1 | A |
| Commercial paper | P2 | A-1 |

On May 7, 2015, Standard & Poor’s (“S&P”) raised our corporate credit rating on AWCC and American Water from A- to A and our commercial paper rating from A-2 to A-1 on American Water and AWCC. S&P also confirmed its stable rating outlook.

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 as a result of 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 June 1, 2015, we made a cash dividend payment of $0.34 per share to shareholders of record as of May 11, 2015.

On July 24, 2015, our board of directors declared a quarterly cash dividend payment of $0.34 per share payable on September 1, 2015 to shareholders of record as of August 10, 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.

### 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 a discussion of our critical accounting policies.

### Recent Accounting Pronouncements

See Note 2: New Accounting Pronouncements to our consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of new accounting standards recently adopted or pending adoption.

## Market risk

As filed, 380 characters.

We are subject to market risks in the normal course of business, including changes in interest rates and equity prices. There have been no significant changes to our exposure to 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.

## Controls and procedures

As filed, 1,660 characters.

### Evaluation of Disclosure Controls and Procedures

American Water maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed or submitted under 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) and 15d-15(e) of the Exchange Act) as of June 30, 2015.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of June 30, 2015, our disclosure controls and procedures were effective at a reasonable level of assurance.

### 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 June 30, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act).

## Risk factors

As filed, 472 characters.

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.

Filed Aug 5, 2015.
Source: SEC EDGAR, the filing index for accession 0001564590-15-006249. Last ingested by Listed: Nov 6, 2026, 17:16 ET. No prices; not investment advice.