# American Water Works Company, Inc.: Form 10-Q for the period ended Mar 31, 2017

- Company: [American Water Works Company, Inc.](/companies/awk.md) (CIK 1410636)
- Form: 10-Q
- Filed: 2017-05-03
- Accepted by EDGAR: May 3, 2017, 16:31 ET
- Period: 2017-03-31
- Accession: 0001564590-17-008399
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1410636/000156459017008399/awk-10q_20170331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1410636/000156459017008399/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Operating income | 3 months, 2017-01-01 to 2017-03-31 | $227.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2017-01-01 to 2017-03-31 | $52.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-01-01 to 2017-03-31 | $93.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2017-01-01 to 2017-03-31 | $0.52 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2017-01-01 to 2017-03-31 | $0.52 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2017-01-01 to 2017-03-31 | 179,000,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Capital expenditure | 3 months, 2017-01-01 to 2017-03-31 | $270.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2017-01-01 to 2017-03-31 | $67.0m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 3 months, 2017-01-01 to 2017-03-31 | $54.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2017-03-31 | $78.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-03-31 | $767.0m | us-gaap:AssetsCurrent |
| Total assets | at 2017-03-31 | $18.61bn | us-gaap:Assets |
| Current liabilities | at 2017-03-31 | $2.42bn | us-gaap:LiabilitiesCurrent |
| Short-term borrowings | at 2017-03-31 | $980.0m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2017-03-31 | $5.29bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,579 characters.

*The following discussion should be read together with the unaudited consolidated financial statements and the notes thereto included elsewhere in this Form 10-Q. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business, operations and financial performance. The cautionary statements made in this Form 10-Q should be read as applying to all related forward-looking statements whenever they appear in this Form 10-Q. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as result of a number of factors, including those we discuss under “Forward Looking Statements,” and elsewhere in this Form 10-Q.*

### General

Through its subsidiaries, American Water Works Company, Inc. (“American Water” or the “Company”) is the largest and most geographically diverse investor-owned publicly-traded water and wastewater utility company in the United States, as measured by both operating revenue and population served. Our primary business involves the ownership of utilities that provide water and wastewater services to residential, commercial, industrial and other customers, including sale for resale and public authority customers. Our utilities are generally subject to economic regulation by certain state utility commissions or other entities engaged in utility regulation. We report the results of our utilities in our Regulated Businesses segment. We also operate several businesses that provide a broad range of related and complementary water and wastewater services that are not subject to economic regulation by state utility commissions or other entities engaged in utility regulation. We present the results of these businesses as our “Market-Based Businesses”. 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 Form 10-Q and in our Form 10-K.

### Financial Results

Income attributable to common stockholders was $93 million, or $0.52 per diluted share for the first quarter of 2017, an increase of 13% over the same period in 2016. This increase was primarily due to continued growth in our Regulated Businesses segment, largely attributable to additional authorized revenue driven by investment growth, acquisitions and organic growth, and a tax benefit associated with the new accounting standard requirements for stock-based compensation.

See “Comparison of Consolidated Results of Operations” and “Segment Results of Operations” below for further discussion on the consolidated results of operations, as well as our business segments.

### Focusing on Central Themes

For 2017, our focus continues to be anchored on our five central themes: 1) Safety, 2) Customers, 3) People, 4) Growth and 5) Technology and Operational Efficiency. We continue our focus on operating our business responsibly and managing our operating and capital costs in a manner that benefits our customers and produces long-term value for our stockholders. Additionally, we continue to execute on our ongoing strategy that ensures a safe workplace for our employees, emphasizes public safety for our customers and communities, and leverages our human resources, processes and technology innovation to make our business more effective and efficient. The progress that we have made in the first three months of 2017 with respect to growth and improvement in our operational efficiency ratio is described below.

### Growth—Infrastructure improvements, acquisitions and strategic capital investments

During the first three months of 2017, we made capital investments of approximately $242 million, the majority of which was in our Regulated Businesses, primarily to improve infrastructure. For the full year of 2017, our total capital investment, including acquisitions, is expected to be approximately $1.5 billion, most of which is allocated to improving infrastructure in our Regulated Businesses.

Regulated acquisition growth included:

- Closed acquisitions of $38 million, adding approximately 13,000 customers through May 3, 2017. This includes the acquisition on April 3, 2017, of all of the outstanding capital stock of Shorelands Water Company, Inc. (“Shorelands”), for total consideration of $33 million in the form of 438,211 shares of our common stock. Shorelands provides water service to approximately 11,000 customers in Monmouth County, New Jersey. The assets acquired are owned by New Jersey-American Water Company, Inc.
- Pending acquisitions representing the addition of approximately 33,000 customers, including the September 9, 2016, asset purchase agreement signed by Pennsylvania-American Water Company to acquire substantially all of the wastewater collection and treatment system assets of the Municipal Authority of the City of McKeesport, Pennsylvania for approximately $156 million, subject to certain adjustments provided in the agreement. In connection with the execution of this agreement, a $7 million non-escrowed deposit has been made to the seller. The closing of this acquisition is subject to the satisfaction of various conditions and covenants, including obtaining the approval of the Pennsylvania Public Utility Commission. The system currently represents approximately 22,000 wastewater customers. We are expecting to close this acquisition in the fourth quarter of 2017.

### Technology & Operational Efficiency—Continuing Improvement in Adjusted Operation and Maintenance (“O&M”) Efficiency Ratio for our Regulated Businesses

We continued to improve on our adjusted O&M efficiency ratio (a non-GAAP measure). Our adjusted O&M efficiency ratio for the twelve months ended March 31, 2017 was 34.6%, compared to 35.6% for the twelve months ended March 31, 2016. The improvement in the 2017 O&M efficiency ratio over this period was attributable to an increase in revenue.

Our adjusted O&M efficiency ratio is defined as our regulated O&M expenses divided by regulated operating revenues, where both O&M expenses and operating revenues were adjusted to eliminate purchased water expense. Additionally, from the O&M expenses, we excluded 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 expenses but for consolidated financial reporting purposes are categorized within other line items in the accompanying Consolidated Statements of Operations. In addition to the standard adjustments to the O&M efficiency ratio for the twelve months ended March 31, 2017, we have also excluded from O&M expenses, the impact from the binding global agreement in principle related to the Freedom Industries chemical spill in West Virginia. We excluded all the above 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.

We evaluate our operating performance using this measure because we believe it is a direct measure of the improvement to the efficiency of our regulated operations. This information is intended to enhance an investor’s overall understanding of our operating performance. The O&M efficiency ratio is not a GAAP financial measure 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 the calculation and reconciliation that compares O&M expenses and operating revenues, as determined in accordance with GAAP, to those amounts utilized in the calculation of our adjusted O&M efficiency ratio for the twelve months ended March 31, 2017, as compared to the same period in 2016:

*(In millions)*

|  | For the Twelve Months Ended March 31, 2017 | 2016 |
| --- | ---: | ---: |
| Total operation and maintenance expenses | $1,493 | $1,428 |
| Less: |  |  |
| Operation and maintenance expenses—Market-Based Businesses | 361 | 383 |
| Operation and maintenance expenses—Other | (44) | (46) |
| Total operation and maintenance expenses—Regulated Businesses | 1,176 | 1,091 |
| Less: |  |  |
| Regulated purchased water expenses | 122 | 116 |
| Allocation of non-operation and maintenance expenses | 28 | 33 |
| Impact of binding global agreement in principle | 65 | — |
| Adjusted operation and maintenance expenses—Regulated Businesses (a) | $961 | $942 |
| Total operating revenues | $3,315 | $3,204 |
| Less: |  |  |
| Operating revenues—Market-Based Businesses | 440 | 461 |
| Operating revenues—Other | (21) | (19) |
| Total regulated operating revenues—Regulated Businesses | 2,896 | 2,762 |
| Less: |  |  |
| Regulated purchased water revenues\* | 122 | 116 |
| Adjusted operating revenues—Regulated Businesses (b) | $2,774 | $2,646 |
| Adjusted operation and maintenance efficiency ratio—Regulated Businesses (a)/(b) | 34.6% | 35.6% |

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

### Regulatory Matters

The table below provides rate authorizations which became effective during the three months ended March 31, 2017. The table depicts annualized incremental revenues, assuming a constant water sales volume, resulting from general rate cases and, infrastructure surcharge mechanisms that became effective during the period:

*(In millions)*

| General rate cases by state: | For the Three Months Ended March 31, 2017 |
| --- | ---: |
| Illinois (January 1) | $25 |
| California (January 13) | 5 |
| Iowa (March 27) | 4 |
| **Total general rate cases** | $34 |
| **Infrastructure surcharges by state:** |  |
| West Virginia (January 1) | $2 |
| Pennsylvania (January 1) | 1 |
| Tennessee (March 14) | 2 |
| Indiana (March 22) | 8 |
| **Total infrastructure surcharges** | $13 |

#### Pending and Filed Rate Cases

On April 3, 2017, our California subsidiary filed a cost of capital application requesting a return on equity of 10.8%. The results of this proceeding will not become effective until January 2018.

On April 13, 2017, our New Jersey subsidiary filed for an infrastructure surcharge requesting additional revenues of $10 million.

On April 28, 2017, our Pennsylvania subsidiary filed a general rate case requesting $108 million in additional annualized water and wastewater revenues.

In addition to the filings discussed above, we are awaiting final general rate case orders in three states requesting additional annualized revenue of $52 million. One of these states authorized interim rates under bond, subject to refund, which were put into effect in 2016. We are also awaiting approval in one state for a step rate and attrition rate increase of $8 million in both 2019 and 2020. There is no assurance that all or any portion of these requests will be granted.

#### Other Regulatory Matters

On April 5, 2017, Senate Bill 1492 impacting our Virginia subsidiary was approved and will become law later in 2017. The new law directs the Virginia State Corporation Commission to require water and wastewater utilities in any proceeding after July 1, 2017, to consolidate tariffs for each service statewide.

### Other Tax Matters

On April 11, 2017, the State of New York enacted legislation that would increase the state income tax rate on our taxable income attributable to New York. Manufacturers in New York are taxed at a lower income tax rate, and this legislation eliminated the production of water as a qualified manufacturing activity. The effective date of the legislation is January 1, 2018 and this future increase in the New York tax rate will cause us to book a one-time adjustment during the second quarter of 2017, increasing our state accumulated deferred income tax liability. An offsetting adjustment will be recorded to regulatory assets for the amount recoverable in future customer rates, with the remaining balance, preliminarily estimated to be between $5 million and $7 million, recorded to income tax expense.

### Consolidated Results of Operations

*(In millions)%*

|  | For the Three Months Ended March 31, 2017 | 2016 | Increase (Decrease) |  |
| --- | ---: | ---: | ---: | ---: |
| Operating revenues | $756 | $743 | $13 | 1.7 |
| Operating expenses: |  |  |  |  |
| Operation and maintenance | 337 | 348 | (11) | (3.2) |
| Depreciation and amortization | 124 | 116 | 8 | 6.9 |
| General taxes | 68 | 66 | 2 | 3.0 |
| Gain on asset dispositions and purchases | — | (1) | 1 | (100.0) |
| Total operating expenses, net | 529 | 529 | — | — |
| Operating income | 227 | 214 | 13 | 6.1 |
| Other income (expenses): |  |  |  |  |
| Interest, net | (85) | (80) | (5) | 6.3 |
| Other, net | 3 | 2 | 1 | 50.0 |
| Total other income (expenses) | (82) | (78) | (4) | 5.1 |
| Income from continuing operations before income taxes | 145 | 136 | 9 | 6.6 |
| Provision for income taxes | 52 | 54 | (2) | (3.7) |
| Net income attributable to common stockholders | $93 | $82 | $11 | 13.4 |

### Comparison of Consolidated Results of Operations

*Operating revenues.* For the three months ended March 31, 2017, operating revenues increased primarily due to a:

- $25 million increase in our Regulated Businesses segment principally due to authorized rate increases to fund infrastructure investment growth, acquisitions and organic growth, partially offset by lower demand and consumption when compared to the same period in 2016; and
- $11 million decrease in our Market-Based Businesses primarily due to lower revenue from capital upgrades in our Military Services Group as a result of the completion of a large project in mid-2016 at Fort Polk and reduced military base budgets. Partially offsetting this decrease were incremental revenues from our Homeowner Services Group from customer additions and price increases.

*Operation and maintenance.* For the three months ended March 31, 2017, operation and maintenance expense decreased principally due to a:

- $11 million decrease in our Market-Based Businesses attributable to lower capital upgrades in our Military Services Group corresponding with the decrease in operating revenues discussed above, partially offset by higher expenses in our Homeowner Services Group due to higher claims expense.

*Depreciation and amortization.* For the three months ended March 31, 2017, depreciation and amortization expense increased largely due to additional utility plant placed in service.

*Other income (expenses).* For the three months ended March 31, 2017, other expenses increased primarily due to an increase in long-term interest expense from the issuance of incremental long-term debt in the fourth quarter of 2016, as well as an increase in short-term interest expense resulting from higher levels of short-term borrowings, coupled with an increase in the average short-term borrowing rates.

*Provision for income taxes.* For the three months ended March 31, 2017, our provision for income taxes decreased principally due to the tax benefit recorded as a result of the new accounting standard for stock-based compensation.

### Segment Results of Operations

Our segments are determined based on how we assess performance and allocate our resources. We evaluate the performance of our segments and allocate resources based on several factors, with the primary measure being income from continuing operations.

We conduct our business primarily through one reportable segment, our Regulated Businesses segment. We also operate businesses that provide a broad range of related and complementary water and wastewater services, which includes four operating segments that individually do not meet the criteria of a reportable segment. These four non-reportable segments have been combined and are presented as our “Market-Based Businesses”, which is consistent with how management assesses the results of our businesses.

### Regulated Businesses Segment

The following table summarizes certain financial information for our Regulated Businesses segment:

*(In millions)%*

|  | For the Three Months Ended March 31, 2017 | 2016 | Increase (Decrease) |  |
| --- | ---: | ---: | ---: | ---: |
| Operating revenues | $659 | $634 | $25 | 3.9 |
| Operation and maintenance | 262 | 262 | — | — |
| Total operating expenses, net | 441 | 430 | 11 | 2.6 |
| Net income attributable to common stockholders | 94 | 87 | 7 | 8.0 |

*Operating revenues.* The following tables and discussions provide explanation of the variances related to the three components of operating revenues—water services revenues, wastewater services revenues and other revenues:

*(In millions)%*

| Billed water services: | For the Three Months Ended March 31, 2017 | 2016 | Increase (Decrease) |  |
| --- | ---: | ---: | ---: | ---: |
| Residential | $364 | $348 | $16 | 4.6 |
| Commercial | 129 | 125 | 4 | 3.2 |
| Industrial | 32 | 30 | 2 | 6.7 |
| Public and other | 81 | 76 | 5 | 6.6 |
| Other water revenues | 15 | 11 | 4 | 36.4 |
| Billed water services | 621 | 590 | 31 | 5.3 |
| Unbilled water services | (7) | 5 | (12) | (240.0) |
| Total water services revenues | 614 | 595 | 19 | 3.2 |
| Wastewater services revenues | 34 | 27 | 7 | 25.9 |
| Other revenues | 11 | 12 | (1) | (8.3) |
| Total operating revenues | $659 | $634 | $25 | 3.9 |

*(In millions)%*

| Billed water services volumes: | For the Three Months Ended March 31, 2017 | 2016 | Increase (Decrease) |  |
| --- | ---: | ---: | ---: | ---: |
| Residential | 35,985 | 36,409 | (424) | (1.2) |
| Commercial | 17,063 | 17,416 | (353) | (2.0) |
| Industrial | 8,878 | 8,640 | 238 | 2.8 |
| Public and other | 11,493 | 10,968 | 525 | 4.8 |
| Billed water services volumes | 73,419 | 73,433 | (14) | (0.0) |

For the three months ended March 31, 2017, operating revenues increased primarily due to a:

- $25 million increase from authorized rate increases, including infrastructure surcharges, to fund infrastructure investment growth in various states;
- $8 million increase resulting from water and wastewater acquisitions as well as organic growth in existing systems; and
- $7 million decrease in demand and consumption when compared to the same period in 2016.

*Operation and maintenance.* The following table summarizes information regarding the components of operation and maintenance expense:

*(In millions)%*

|  | For the Three Months Ended March 31, 2017 | 2016 | Increase (Decrease) |  |
| --- | ---: | ---: | ---: | ---: |
| Production costs | $63 | $63 | $— | — |
| Employee-related costs | 111 | 109 | 2 | 1.8 |
| Operating supplies and services | 48 | 50 | (2) | (4.0) |
| Maintenance materials and supplies | 18 | 15 | 3 | 20.0 |
| Customer billing and accounting | 10 | 14 | (4) | (28.6) |
| Other | 12 | 11 | 1 | 9.1 |
| Total | $262 | $262 | $— | — |

For the three months ended March 31, 2017, operation and maintenance expense was flat when compared to the same period in 2016. Variances related to individual components of operation and maintenance expense include a:

- $4 million decrease in customer billing and accounting due to a reduction in uncollectible expense primarily attributable to focused collection efforts; and
- $3 million increase in maintenance materials and supplies primarily due to increased tank painting costs, as well as the timing of specific maintenance activity in 2017 as compared to the same period in 2016;

*Operating expenses, net.* For the three months ended March 31, 2017, operating expenses, net increased primarily due to higher depreciation and amortization expense and general taxes expense of $9 million and $3 million, respectively. The increase in depreciation and amortization expense was driven by additional utility plant placed in service. The increase in general taxes is primarily due to higher gross receipts tax in New Jersey and higher property taxes in 2017 driven by investment growth.

### Market-Based Businesses

The following table summarizes certain financial information for our Market-Based Businesses:

*(In millions)%*

|  | For the Three Months Ended March 31, 2017 | 2016 | Increase (Decrease) |  |
| --- | ---: | ---: | ---: | ---: |
| Operating revenues | $103 | $114 | $(11) | (9.6) |
| Operation and maintenance | 88 | 99 | (11) | (11.1) |
| Total operating expenses, net | 94 | 104 | (10) | (9.6) |
| Net income attributable to common stockholders | 7 | 6 | 1 | 16.7 |

*Operating revenues.* For the three months ended March 31, 2017, operating revenues decreased primarily due to a:

- $18 million decrease in our Military Services Group resulting from lower capital upgrades in 2017 compared to 2016 primarily attributable to reduced military base infrastructure budgets and the completion of a large project at Fort Polk in mid-2016; partially offset by a
- $5 million increase in our Homeowner Services Group primarily due to customer additions and price increases for certain existing customers.

*Operation and maintenance.* The following table summarizes information regarding the components of operation and maintenance expense:

*(In millions)%*

|  | For the Three Months Ended March 31, 2017 | 2016 | Increase (Decrease) |  |
| --- | ---: | ---: | ---: | ---: |
| Production costs | $10 | $9 | $1 | 11.1 |
| Employee-related costs | 24 | 24 | - | - |
| Operating supplies and services | 30 | 47 | (17) | (36.2) |
| Maintenance materials and supplies | 21 | 16 | 5 | 31.3 |
| Other | 3 | 3 | — | — |
| Total | $88 | $99 | $(11) | (11.1) |

For the three months ended March 31, 2017, operation and maintenance expense decreased primarily due to a:

- $16 million decrease in operating supplies and services resulting from lower capital upgrades in our Military Services Group, as discussed above, and focused cost management in Keystone; partially offset by a
- $5 million increase in maintenance services and supplies due principally to contract growth and incremental claims activity in our Homeowner Services Group.

### Liquidity and Capital Resources

For a general overview of our sources and uses of capital resources, see the introductory discussion in Part II, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources contained in our Form 10-K.

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, if and to the extent necessary, borrowing under the American Water Capital Corp. (“AWCC”) revolving credit facility. The revolving credit facility provides $1.75 billion in aggregate total commitments from a diversified group of financial institutions with an expiration date of June 2020 (subject to extension by us for up to two one-year periods). We regularly evaluate the capital markets and closely monitor the financial condition of the financial institutions with contractual commitments in our 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 our revolving credit facility. As of March 31, 2017, AWCC had no outstanding borrowings and $86 million of outstanding letters of credit under the revolving credit facility, with $1.66 billion available to fulfill our short-term liquidity needs and to issue letters of credit. As of March 31, 2017, the revolving credit facility supported $980 million in outstanding commercial paper. We believe that our ability to access the capital markets, our revolving credit facility and our cash flows from operations will generate sufficient cash to fund our short-term requirements. However, 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.

On February 8, 2017, we entered into a forward swap agreement with a notional amount of $100 million to reduce interest rate exposure for a portion of the expected refinancing of our 5.62% fixed-rate long-term debt maturing in December 2018. This forward starting swap agreement terminates in November 2018 and has a fixed rate of 2.67%. During the three months ended March 31, 2017, the fair value of our five forward starting swaps increased by $5 million due to higher forward interest rates. Changes in the fair value of the forward starting swaps will be recognized in accumulated other comprehensive loss until the agreements terminate. See Note 5—Long-Term Debt for further information.

### Cash Flows Provided by Operating Activities

Cash flows provided by 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. The following table provides a summary of the major items affecting cash flows provided by our operating activities:

*(In millions)*

|  | For the Three Months Ended March 31, 2017 | 2016 |
| --- | ---: | ---: |
| Net income | $93 | $82 |
| Add (less): |  |  |
| Non-cash activities (a) | 189 | 177 |
| Changes in working capital (b) | 6 | 15 |
| Pension and postretirement healthcare contributions | (11) | (14) |
| Net cash flows provided by operations | $277 | $260 |

(a) Includes depreciation and amortization, deferred income taxes and amortization of deferred investment tax credits, provision for losses on accounts receivable, gain on asset dispositions and purchases, pension and non-pension postretirement benefits expense and other non-cash, net. Details of each component can be found in the Consolidated Statements of Cash Flows.

(b) Changes in working capital include changes to receivables and unbilled revenues, accounts payable and accrued liabilities, and other current assets and liabilities, net.

For the three months ended March 31, 2017, the increase in cash flows from operating activities, as compared to the same period in 2016, is primarily due to an increase in net income after non-cash adjustments. The main factors contributing to net income increase are described in this section under “Comparison of Consolidated Results of Operations” and included higher operating revenue and lower operation and maintenance expense. The increase in non-cash activities was mainly the result of an increase in depreciation and amortization attributable to infrastructure investment projects placed into service. The change in working capital was primarily the result of the following: (1) timing of accounts payable and accrued liabilities; and (2) change in other current assets and liabilities.

### Cash Flows Used in Investing Activities

The following table provides information regarding cash flows used in our investing activities:

*(In millions)*

|  | For the Three Months Ended March 31, 2017 | 2016 |
| --- | ---: | ---: |
| Net capital expenditures | $(270) | $(284) |
| Acquisitions | (2) | (22) |
| Other investing activities, net (a) | (16) | (17) |
| Net cash flows used in investing activities | $(288) | $(323) |

(a) Includes removal costs from property, plant and equipment retirements, net, proceeds from sale of assets and net funds restricted.

For the three months ended March 31, 2017, cash used in investing activities decreased primarily due to the timing of payments for the capital expenditures and acquisitions. We continue to expect investments of approximately $1.5 billion in 2017 for capital expenditures and acquisitions. We have also begun the construction of our new corporate headquarters building in Camden, New Jersey. The cost of construction is currently estimated to be up to $165 million, exclusive of any tax incentives, with $77 million expected to be incurred in 2017.

### Cash Flows Provided by Financing Activities

The following table provides information regarding cash flows provided by our financing activities:

*(In millions)*

|  | For the Three Months Ended March 31, 2017 | 2016 |
| --- | ---: | ---: |
| Repayments of long-term debt | $(4) | $(11) |
| Net proceeds from short-term borrowings | 131 | 211 |
| Dividends paid | (67) | (61) |
| Anti-dilutive stock repurchases | (54) | (62) |
| Other financing activities, net (a) | 8 | 7 |
| Net cash flows provided by financing activities | $14 | $84 |

(a) 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 and debt issuance costs.

For the three months ended March 31, 2017, the decrease in cash flows provided by financing activities, as compared to the same period in 2016, is primarily due to incremental short-term borrowings in 2016 to fund a portion of the capital expenditures and acquisitions.

### Credit Facilities and Short-Term Debt

The following table summarizes information regarding our aggregate credit facility commitments, letter of credit sub-limits and available funds under those revolving credit facilities, as well as outstanding amounts of commercial paper and outstanding borrowings under the respective facilities as of March 31, 2017:

*(In millions)*

|  | Credit Facility Commitments (a) | Available Credit Facility Capacity (a) | Letter of Credit Sublimit | Available Letter of Credit Capacity | Commercial Paper Limit | Available Commercial Paper Capacity |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| March 31, 2017 | $1,766 | $1,673 | $150 | $64 | $1,600 | $620 |

(a) Includes amounts related to the revolving credit facility of Keystone Clearwater Solutions, LLC (“Keystone”), our water management solutions subsidiary. As of March 31, 2017, the total commitment under the Keystone revolving credit facility was $16 million, of which $9 million was available for borrowing, subject to compliance with a collateral base calculation.

The weighted-average interest rate on AWCC short-term borrowings for the three months ended March 31, 2017 and 2016 was approximately 1.02% and 0.74%, respectively.

### Capital Structure

The following table indicates the percentage of our capitalization represented by the components of our capital structure as of the dates set forth below:

|  | March 31, 2017 | December 31, 2016 |
| --- | ---: | ---: |
| Total common stockholders' equity | 42.0% | 42.1% |
| Long-term debt and redeemable preferred stock at redemption value | 45.7% | 46.4% |
| Short-term debt and current portion of long-term debt | 12.3% | 11.5% |
|  | 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, an event of default may occur under one or more debt agreements and we or our subsidiaries may be restricted in our ability to pay dividends, issue new debt or access our revolving credit facility. Our long-term debt indentures contain a number of covenants that, among other things, prohibit or restrict 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.

Covenants in 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. On March 31, 2017, our ratio was 0.58 to 1.00 and therefore we were in compliance with the covenants.

### 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.

Our long-term and short-term credit ratings as of March 31, 2017 are as follows:

| Securities | Moody's Investors Service | Standard & Poor's Ratings Service |
| --- | --- | --- |
| Senior unsecured debt | A3 | A |
| Commercial paper | P2 | A-1 |

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.

### Dividends

On March 1, 2017, we paid a cash dividend of $0.375 per share to our stockholders of record as of February 7, 2017.

On April 21, 2017, our Board of Directors declared a quarterly cash dividend payment of $0.415 per share payable on June 1, 2017 to stockholders of record as of May 5, 2017. Future dividends, when and as declared at the discretion of the Board of Directors, will be dependent upon future earnings and cash flows, compliance with various regulatory, financial and legal requirements, and other factors. See Part II, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Dividends in our Form 10-K for more information regarding restrictions on the payment of dividends on our common stock.

### 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 Part II, Item 7—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 Standards

See Note 2—New Accounting Standards to the Notes to Consolidated Financial Statements included in Part I, Item 1—Consolidated Financial Statements of this Quarterly Report on Form 10-Q for a description of new accounting standards recently adopted or pending adoption.

## Market risk

As filed, 887 characters.

We are subject to market risks in the normal course of business, including changes in interest rates and equity prices. 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. Except as described below, there have been no significant changes to our exposure to market risk since December 31, 2016.

On February 8, 2017, we entered into a forward starting swap agreement with a notional amount of $100 million to reduce interest rate exposure on debt expected to be issued in 2018. This forward starting swap agreement terminates in November 2018 and has an average fixed rate of 2.67%. A hypothetical one hundred basis point change in the forward starting swap rates would have resulted in a $19 million increase or decrease in fair value for the three months ended March 31, 2017.

## Controls and procedures

As filed, 1,681 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 March 31, 2017.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2017, our disclosure controls and procedures were effective at a reasonable level of assurance.

### Changes in Internal Control over Financial Reporting

We concluded that there have been no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2017, 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, 405 characters.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A—Risk Factors in our Form 10-K, and in 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 Part I, Item 1A—Risk Factors in our Form 10-K.

Filed May 3, 2017.
Source: SEC EDGAR, the filing index for accession 0001564590-17-008399. Last ingested by Listed: Nov 5, 2026, 19:06 ET. No prices; not investment advice.