2 0 1 8 A N N U A L R E P O R T
PURPOSE DRIVEN.
PEOPLE POWERED.
CUSTOMER OBSESSED.
TRUSTED SOURCE
OF EVERYTHING WATER.
WE KEEP LIFE FLOWING®
T O O U R S H A R E H O L D E R S ,
American Water and its 7,100 employees continue to provide stability and produce value.
Through changing economic circumstances, uncertain political environments and the evolving
needs of our customers and the communities we serve, we continue to demonstrate consistent
and reliable performance and strength for all our stakeholders. In 2018, we continued that
tradition of excellence by focusing on our business fundamentals, leading in customer satisfaction
and setting a high bar for water quality.
American Water’s 2018 financial performance, detailed in this report, gives the Board of
Directors confidence that the company continues to be well-positioned to achieve our target of the
top half of 7 to 10 percent long-term diluted earnings per share (EPS) compound annual growth
rate. Additionally, in recognition of this financial performance, our Board increased the quarterly
dividend by 9.6 percent in the second quarter of 2018, from 41.5 cents to 45.5 cents per share.
This is consistent with our goal to have a target payout ratio of 50 to 60 percent of earnings.
As an owner of American Water, you received a total shareholder return (TSR) of 1.3 percent during
2018—above the TSR for the S&P 500 Index, which was just (4.4) percent for 2018. In addition,
our five-year TSR growth (2014-2018) remains positive at 140.1%.
These results are a product of our disciplined approach and successful execution of American
Water’s business strategy, which allowed the company to continue to provide safe, clean,
reliable, and affordable water and wastewater services. We continue to transform our company
into one that is Purpose Driven, People Powered, Customer Obsessed and the Trusted
Source of Everything Water. These attributes will allow us to pave the way for sustainable and
profitable growth.
The American Water Board of Directors would like to thank our shareholders, communities and
business partners for their continued trust and support. I enjoyed meeting many of you at Investor
Day on December 11, 2018, at our new headquarters in Camden, New Jersey, and hope to meet
more of you at our Annual Meeting of Shareholders on Friday, May 10, 2019.
We look forward to all that American Water will accomplish in 2019.
Sincerely,
Karl F. Kurz
Chairman of the Board
1
AMERICAN WATER 2018 ANNUAL REPORT D E A R F E L L O W S H A R E H O L D E R ,
American Water is pleased to provide you with another year of strong financial performance. We are
a company that appreciates our past, building on what we did well and learning what we could do
better. We are a company that performs in the present, challenging ourselves to raise our performance
to an even higher level. We are also a company that prepares for the future, anticipating what we have
to do next. It all starts with efficiently executing business fundamentals—and being Purpose Driven,
People Powered, Customer Obsessed and the Trusted Source of Everything Water.
PURPOSE DRIVEN. We are driven by a purpose to be the best for our customers, employees and
investors. We never forget that, at the end of every water pipe, there’s a family depending on us to
provide life’s most critical need. At every fire hydrant, lives could depend on us, and at every wastewater
treatment plant we serve as a shield against potential disease. We believe every community should
be stronger because we are there. This is our calling, and it is what motivates our people every day.
PEOPLE POWERED. A company is its people. We are committed to making sure our people have a
safe place to work, are trained and developed to reach their potential, and feel respected and valued.
In 2018, we finished with the fewest employee injuries in our recorded history. Safety is a value and
a strategy for us, and we will continue to strengthen our safety culture, because it is not acceptable
for anyone to get hurt on the job. Our target is zero injuries.
We also continue to build an environment where every employee feels included and knows how he
or she contributes toward the company’s strategies and goals. In 2018, we expanded our training
and development programs across our company, with almost every employee completing at least
20 hours of training. We continue to improve inclusion and diversity in our overall employee population,
ensuring that our workforce is reflective of the customers and communities we serve. We are also
implementing a strategic workforce plan to address the changing requirements of our business,
driven by our customers’ expectations as well as new technologies.
Our people are also an integral part of the communities we serve. Throughout the country, our employees
are constantly giving back to the community by participating in and supporting organizations such
as the United Way, Special Olympics and American Heart Association. American Water employees
volunteered more than 5,000 hours to community projects during 2018. We are truly People Powered,
from our hearts to our hands, leaving a lasting impact on the customers and communities we serve.
CUSTOMER OBSESSED. Our customers are at the center of everything we plan and do. We want to
be the best, and if our customers have a choice as to who serves them, we want them to choose us.
Last year, we expanded our customer experience initiative, making it easier for customers to
do business with us. We enhanced our quality of service through innovative technology, and we
continued to make needed infrastructure investments, while also implementing operational efficiency
improvements to keep customer bills affordable.
At the end of the day, we know that what we do is in the best interests of our customers and
communities, as well as our investors. Customer input, along with empathy for our customers’ ideas
and experiences, will drive how we change and improve our processes and systems.
2
AMERICAN WATER 2018 ANNUAL REPORTAMERICAN WATER 2018 ANNUAL REPORT By listening to customers, we aim to achieve customer satisfaction and service quality ratings in the
top quartile of service industries beyond the water and wastewater industry. We have a multiyear
plan to enhance technology and innovation in our customer experience by leveraging secure artificial
intelligence to better serve our customers, as well as by using online customer communities for
immediate input and mapping of our most frequent customer interactions. That way, we can give
customers the service they want, in the manner they choose.
Showing customers and communities that you care matters. It is why people trust us to provide a life-
sustaining service. As a result, our customer base continues to grow. In 2018, we added 11,000 new
customers in the regulated business through closed acquisitions and organic growth. As of January
2019, we have entered into agreements for 61,000 additional customers. We also welcomed our
14th military base—Fort Leonard Wood in Missouri—and Pivotal Home Solutions to our Homeowner
Services family.
TRUSTED SOURCE OF EVERYTHING WATER. Our customers and all our stakeholders trust in our
business fundamentals and operations. We don’t take that trust for granted. We will continue to work
to be the leaders in bringing together all players in the space to ensure that we have safe, reliable and
affordable water. We have a long and rich history of serving customers and providing solutions for the
communities that we serve, and we are in this business for the long term.
DOING WELL BY DOING GOOD. Finally, it is our firm belief that companies do well by doing good.
We believe that the “how” is just as important as the “what” for long-term financial stability. More
and more, investors are seeking opportunities with companies that are actively committed to the
betterment of society—those that make a positive impact on communities, are fully transparent
and offer opportunities to get involved and give back. Investors are actively searching for companies
with responsible policies, as well as an inclusive and diverse corporate culture that has a positive
impact on and cares for the environment and the communities they serve. When you do these things
responsibly, long-term financial sustainability follows.
All of the above efforts and initiatives drive our financial performance. Our adjusted earnings per
share from 2017 to 2018 increased 8.9 percent. Our total shareholder return was 1.3 percent in
2018, compared to the S&P 500 Index of (4.4) percent. In addition, our Board of Directors approved
a quarterly dividend increase of 9.6 percent during 2018, marking the sixth year in a row of dividend
increases of about 10 percent.
On behalf of the company and our 7,100 employees, I want to thank you for your continued support.
We are proud of all that our people were able to achieve in 2018—and are even more excited about
our bright future. We hope that you are too, and that you’ll continue to support us through our journey
and continued success.
Sincerely,
Susan Story
President and Chief Executive Officer
3
AMERICAN WATER 2018 ANNUAL REPORTAMERICAN WATER 2018 ANNUAL REPORT OUR PURPOSE
IS OUR PASSION.
Like any company, we are driven to succeed. But we measure success by a higher standard.
The service we provide does not simply make life more comfortable or more enjoyable; it makes
life possible and sustainable.
Without water, we could not survive. With it, we can make our lives better in a multitude of ways.
Water helps to nourish and refresh us. It helps us grow our food. It keeps us clean and healthy. It
protects our homes from fire. The one thing we cannot do is take water for granted.
AN ABUNDANT YET SCARCE RESOURCE.
We are taught in school that the surface of the
earth is 70 percent water. But what’s often less
understood is how little of that water is available
for human use. When the saltwater in the oceans
and the frozen water locked in glaciers and ice
caps are subtracted, what’s left for us to use
is a tiny fraction; in fact, less than 1 percent of
the planet’s most critical resource is suitable for
human consumption.
<1%
IS SUITABLE
FOR HUMAN
CONSUMPTION
70%
OF EARTH'S SURFACE
IS WATER
4
AMERICAN WATER 2018 ANNUAL REPORTAMERICAN WATER 2018 ANNUAL REPORT OUR PURPOSE
IS OUR PASSION.
A HIGHER CALLING.
As the nation’s largest and most geographically diverse water supplier, American Water has a
unique responsibility to not only identify threats to our water supply, but also advance the industry
in combatting those threats. We must be both a vigilant steward of water and an effective advocate
for its preservation. For the 14 million people who depend on us every day, we can do no less.
A FOCUS ON THE FUTURE.
Today, when we lay pipe in the ground, build water treatment facilities, expand our research
capabilities or invest in the training and well-being of our employees, we are not thinking merely in
quarters or years. We are thinking in decades, preparing for the challenges that lie ahead. It is not
enough for us to be the Trusted Source of Everything Water for our current customers. We expect to
be there for their children and grandchildren as well.
5
AMERICAN WATER 2018 ANNUAL REPORTAMERICAN WATER 2018 ANNUAL REPORT In an age of rapid global change, American Water remains resolute in its commitment to
operate in a very local and highly personal way with our customers. We are also dedicated to
making a difference, with engaged people who have a shared purpose and a heart to make the
world a better place. We are People Powered, and our employees live in and give back to the
communities in which we are privileged to serve. Every day, our 7,100 employees take pride
in delivering the critical services of water, sanitation and fire protection to about 14 million
Americans in over 1,600 communities across the country.
It is a field service representative repairing a main break on a frigid winter day. A scientist
monitoring water treatment to ensure that every drop meets our stringent standards of quality
and safety. A customer service representative anticipating a customer’s needs. A backhoe
operator volunteering to organize a neighborhood food drive. A microbiologist working in the
industry’s most sophisticated water research laboratory.
We are the sum of our people—their energies and efforts, their dedication and loyalty. As a
company, we are dedicated to their safety and well-being, and to helping them make the most
of their skills and talents.
POWERED BY PEOPLE.
FOR PEOPLE.
6
AMERICAN WATER 2018 ANNUAL REPORTAMERICAN WATER 2018 ANNUAL REPORT
POWERED BY PEOPLE.
FOR PEOPLE.
SAFETY ISN’T EVERYTHING. IT’S THE ONLY THING.
Safety is in everything we do. Every day, our employees should return home as healthy as they were
when they left. This commitment to safety extends to our customers and the communities we serve.
In pursuit of these goals, we invested nearly 80,000 hours in employee safety
training in 2018. We constantly and rigorously inspect work sites. Through frequent
labor-management meetings across the company, we encourage open exchanges
to explore new ways to further enhance safety on the job. If it takes longer to do
a task safely, then employees are empowered to take the time they need.
As a result, we have cut workplace injuries in half over the past five years, and
our 2018 safety performance was the best in our recorded history. However, our
target is—and must be—zero injuries.
MANY VOICES, BUILDING GREATER VALUE.
At American Water, we also believe in listening to people—our employees, customers and
stakeholders. We respect what they have to say and leverage their knowledge, experience and
expertise gained on the job to make us more efficient and productive.
For example, when we introduced a new back-office software system, many of our frontline employees
found it hard to work with. So we brought our technology developers and field service representatives
together to create an integrated system more aligned with their needs. Within two months, a new
prototype was designed. Six months later, it was in use throughout our regulated footprint.
We encourage the free exchange of ideas in many other ways as well—from conducting regular
surveys with employee teams to bringing frontline workers and Board members together for informal
breakfasts and lunches every year.
PUTTING IDEAS INTO ACTION.
Our emphasis on inclusion and diversity doesn’t just make us different. It
makes us stronger—giving American Water both a source of fresh thinking and
a welcoming, safe environment for advancing it. Last year, over 50 percent of
our transfers and promotions were filled by minority, female, veteran or disabled
candidates. In addition, half of our Board seats are occupied by women. These
are just a few examples of how our workforce reflects the rich diversity of the
customers we serve throughout the country.
7
AMERICAN WATER 2018 ANNUAL REPORTAMERICAN WATER 2018 ANNUAL REPORT
We are only as good as our customers think we are. They are our reason for holding ourselves to
a higher standard—a standard that is continually growing more personalized. In today’s world of
swift and increasingly personal service, where fulfillment is usually no more than a click away, the
job of meeting—and surpassing—customer expectations has never been more challenging. We are
determined to rise to every challenge, to meet and surpass every expectation.
Although more than 90 percent of our business is in regulated operations, in which we are the only
supplier of water, we approach every customer encounter with a relentlessly competitive mindset.
Our aim is not to be the water company they have to choose, but the one they want to choose.
GUIDED BY THEIR EXPERIENCE.
In a series of focus groups designed to help us achieve higher levels of service, we asked
customers to tell us how we are doing and how we can be better, as well as what their concerns
are. We found that customers don’t want to have to think about their water service—they want to
be able to take quality and reliability for granted.
In reality, most people don’t call us unless they have a question or a problem.
We’re using that point of contact as an opportunity to create a positive
experience—by reducing the number of touchpoints that customers need to
reach a representative, by empathetically listening to them and by resolving
their concerns to their complete satisfaction as quickly as possible.
PUTTING TECHNOLOGY INTO SERVICE.
Tools such as artificial intelligence and machine learning aren’t just helping us
refine our person-to-person customer encounters. They’re also enabling us to
be proactive in solving problems before they occur. For example, we can now
use secure AI models to monitor a customer’s water meter, tracking not only
usage but also factors like damage and exposure to weather that can affect
performance, overall service and ultimately the customer’s bill.
While we are using the data we gather to better understand and serve our
customers, we do not—and will not—sell or share it with any third party. We
hold our customers’ privacy paramount.
8
AMERICAN WATER 2018 ANNUAL REPORTAMERICAN WATER 2018 ANNUAL REPORT SETTING OUR SIGHTS HIGHER.
Through innovative efforts like these, we are generating tangible results.
We are in the top quartile for customer satisfaction among our industry
peers. For some, this would be cause for celebration. For American Water,
it is a reason to reset the bar and redouble our efforts until we are the
unchallenged leader in customer service—not just among utilities, but
companies of any kind.
IT BEGINS AND ENDS
WITH OUR CUSTOMERS.
9
AMERICAN WATER 2018 ANNUAL REPORTAMERICAN WATER 2018 ANNUAL REPORT OUR MOST
IRREPLACEABLE
ASSET: TRUST.
You won’t find it on a balance sheet. Or at our offices. Or in any of the hundreds of water and
wastewater systems we operate. You can’t see it, touch it or feel it. But if it’s lost, it’s almost
impossible to find again.
IT’S TRUST.
Our customers must be absolutely confident that the water that flows into their homes and
businesses is tested, clean and safe. Nothing else matters. We must be the Trusted Source of
Everything Water.
Trust is an asset that is not quickly or easily gained. It’s the product of
decades of untiring attention to every facet of water supply, from its source
to its ultimate destination. This vigilance and unwavering attention to water
quality—which includes performing more than 1 million water quality tests a
year—has made American Water a pacesetter in the utility industry. This is
reflected in the numerous Environmental Protection Agency awards we have
received for providing high-quality drinking water.
But the future will demand even more of us.
10
AMERICAN WATER 2018 ANNUAL REPORTAMERICAN WATER 2018 ANNUAL REPORT A UNIQUE RESPONSIBILITY TO PRESERVE AND PROTECT.
From extreme weather to emerging contaminants to the resiliency of our assets, the safety and
security of our water supply is paramount. Because of our scale and size, we have a special
responsibility to lead.
With a team of scientists recognized as cutting-edge innovators in their fields, our water quality
and testing laboratory in Belleville, Illinois, is one of the most advanced in the country. Here, we’re
combining the deep expertise of our researchers with some of today’s most sophisticated technology
to continue to protect water quality. In addition, many of the advances we make in our labs and
research facilities are shared with the industry as a whole.
NEW CHALLENGES, NEW TECHNOLOGIES.
As new challenges arise, we develop new tools to address them. For example, to more quickly and
accurately detect pathogens like giardia and cryptosporidium, our water intelligence team employs
image-recognition technology to identify the presence of these microscopic organisms. We’re
using equally advanced techniques to help identify emerging contaminants that can result from the
breakdown of millions of chemicals that are continually being released into the environment.
2018 was an exciting year. Our focus on new technology for our laboratories to develop and expand
different methods to identify and focus on emerging contaminants has grown. We recognize that
conducting research, being proactive in meeting regulations and understanding water contaminants
is very important to us—and is good business.
BUILDING FOR TOMORROW.
One of the most pressing problems affecting America’s water supply is anything
but new: our nation’s aging infrastructure. We are doing our part by replacing old
pipes every year and committing $1.5 billion annually to upgrade and renew water
and wastewater treatment plants, pipes, pumping stations and other essential
facilities. Over the next five years, we will invest between $8.0-8.6 billion in total
capital infrastructure.
11
AMERICAN WATER 2018 ANNUAL REPORTAMERICAN WATER 2018 ANNUAL REPORT SUSTAINING
OUR VALUES.
More and more today, companies are being measured by how well they adhere to environmental,
social and governance (ESG) principles. This makes good business sense as well, as we believe
that investment in sustainable companies generates higher return and longer term growth than it
does in less sustainable ones.
For some, ESG is a recent development. For American Water, it is an affirmation of the values we
have upheld for decades.
We also hold ourselves to a high standard through our governance practices. Our Board of
Directors has an independent chairman, a rarity in the utility industry. We have also added a Safety,
Environmental, Technology and Operations Committee. Twice a year, we take our Board out into the
field to meet informally with our frontline employees, allowing them to engage one-on-one and gain
firsthand knowledge of our operations.
CREATING A HEALTHIER ENVIRONMENT.
The more we can do for the health of the environment, the more we can contribute to the health of
the people and communities we serve. It begins with providing safe, clean water, but it extends into
every facet of our operations.
We set a goal of cutting our greenhouse gas emissions by 40 percent, with a
target date of 2025. With six years to go, we have already achieved a reduction
of more than 30 percent. In an increasingly drought-stricken California, we
are building our Monterey Peninsula Water Supply Project to desalinate
6.4 million gallons of water a day and convert seawater into drinking water.
Our headquarters in Camden, New Jersey, is a Platinum LEED-certified
building with roof terraces that capture rainwater that can be recycled for
flushing and irrigation, serving as a model for water conservation.
GIVING BACK WHERE WE LIVE AND WORK.
We serve more than 1,600 communities across the nation, and we have strong roots in every one—
not just as American Water employees, but as neighbors, families and friends. As individuals, and
as a company, we believe in making a difference everywhere we are.
12
AMERICAN WATER 2018 ANNUAL REPORTAMERICAN WATER 2018 ANNUAL REPORT Every year, our AmeriCANs in Action! Month of Service encourages employees to volunteer in their
communities. In 2018, our employees donated over 5,000 hours of their time and energy volunteering
for local projects across the country.
In 2012, to support employees in their own charitable efforts, we created the American Water
Charitable Foundation. Since then, the Foundation has donated over $3 million toward programs that
promote conservation, community sustainability and disaster relief, as well as many other initiatives.
Through our Building Better Communities program, we have awarded more than $2.5 million in grants
to help communities develop recreational spaces that advance awareness of water stewardship and
the importance of protecting natural resources.
American Water has always believed in making our world a better place—everywhere we are. These
are just a few of the ways we are putting our ideas into action.
DOING WELL BY DOING GOOD.
What’s good for our environment, our customers, our employees and our communities has also proven
to be good for our shareholders as well as our financial sustainability as a company.
Over the past five years, American Water’s operating revenues have risen from $3.01 billion to $3.44
billion; annual dividends went from $1.21 to $1.78 per share; our diluted earnings from continuing
operations (GAAP) went from $2.39 to $3.15 per share, and adjusted earnings from continuing
operations (non-GAAP) went from $2.43 to $3.30 per share. Please find a reconciliation table for
2014 and 2018 consolidated adjusted earnings per share on page 16 of this annual report.
Our ultimate measure of success, however, is broader than just dollars and cents. It is not
merely in “what” we do but also in “how” we do it. It is driven by a single, overriding purpose:
to KEEP LIFE FLOWING for more than 14 million people every day.
13
AMERICAN WATER 2018 ANNUAL REPORTAMERICAN WATER 2018 ANNUAL REPORT SHAREHOLDERS
CORPORATE INFORMATION
BOARD OF DIRECTORS
Independent Registered
Public Accounting Firm
PricewaterhouseCoopers LLP
Two Commerce Square, Suite 1800
2001 Market Street
Philadelphia, PA 19103-7042
Stock Transfer Agent
American Stock Transfer
& Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
Phone: 1-800-937-5449
Susan N. Story
President and Chief Executive Officer,
American Water Works Company, Inc.
Karl F. Kurz
Non-Executive Chairman of the Board
Former Chief Operating Officer,
Anadarko Petroleum Corporation
Jeffrey N. Edwards
Director
Chief Operating Officer,
New Vernon Capital
Martha Clark Goss
Director
Former Chief Operating Officer
and Chief Financial Officer, Amwell
Holdings/Hopewell Holdings, LLC
Veronica M. Hagen
Director
Former Chief Executive Officer, Polymer
Group, Inc. (now known as AVINTIV
Specialty Materials Inc.)
Julia L. Johnson
Director
President, Net Communications, LLC
George MacKenzie
Former Vice Chairman and Chief
Financial Officer, Hercules Incorporated
Admiral James G. Stavridis
Director
Operating Executive, The Carlyle Group
14
AMERICAN WATER 2018 ANNUAL REPORTAMERICAN WATER 2018 ANNUAL REPORT Investor Inquiries
Shareholders with questions, or those who
wish to obtain a copy of the company’s
reports filed with the Securities and
Exchange Commission without charge,
should visit American Water’s Investor
Relations page at https://amwater.com.
Investor Relations
1 Water Street
Camden, NJ 08102-1658
Investor Relations Line: 856-566-4005
Investor Relations Fax: 856-782-2782
Email: aw.investorrelations@amwater.com
Executive Certifications
American Water has included as exhibits
to its 2018 Annual Report on Form 10-K
filed with the Securities and Exchange
Commission certifications of the chief
executive officer and chief financial officer
of the company regarding the company’s
public disclosures contained therein. The
company also provides annually to the
NYSE a certificate of the CEO certifying
that, among other things, it is not aware
of any violation by the company of NYSE
corporate listing standards.
Dividends
Dividends paid on the company’s common
stock in 2018 were:
March 1, 2018 ......................... $0.415
June 1, 2018 ........................... $0.455
September 4, 2018 .................. $0.455
December 4, 2018 ................... $0.455
Stock Performance Graph
The graph below compares the cumulative
total return on American Water’s common
stock with the cumulative total return of
the Standards & Poor’s 500 Index and the
PHLX Utility Sector Index from December
31, 2013, through December 31, 2018.
The comparison assumes $100 was
invested on December 31, 2013, and that
dividends were reinvested.
Corporate Headquarters
1 Water Street
Camden, NJ 08102-1658
Phone: 856-955-4001
amwater.com
Stock Market
Common stock of American Water
Works Company, Inc. is traded on the
New York Stock Exchange (NYSE) under
the symbol AWK.
Annual Meeting
The annual meeting of shareholders is
scheduled for 10:00 a.m. ET on Friday,
May 10, 2019, to be held at the Camden
Adventure Aquarium, 1 Riverside Drive,
Camden, NJ 08103. All holders of our
outstanding common stock at the close of
business on March 15, 2019, are entitled
to notice of, and to vote at, the meeting.
Notice of the meeting and proxy materials
will be distributed to shareholders and
accessible to the public on our Investor
Relations page at https://amwater.com.
Management encourages all investors
to have their votes counted at the
annual meeting.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among American Water Works Company, the S&P 500 Index,
and the PHLX Utility Sector Index
$300
$250
$200
$150
$100
$50
$0
12/13
12/14
12/15
12/16
12/17
12/18
*$100 invested on 12/31/13 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
12/31/13 12/31/14 12/31/15 12/30/16 12/29/17 12/31/18
American Water
Works Company, Inc.
$100.00
$129.42
$148.64
$183.70
$237.01
$240.12
PHLX Utility Sector
$100.00
$128.94
$120.87
$141.90
$160.09
$165.72
S&P 500
$100.00
$113.68
$115.24
$129.02
$157.17
$150.27
Copyright© 2019 Standard & Poor's, a division of S&P Global. All rights reserved.
Copyright© 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.
15
AMERICAN WATER 2018 ANNUAL REPORTAMERICAN WATER 2018 ANNUAL REPORTAmerican Water Works CompanySource of data: Bloomberg.S&P 500PHLX Utility Sector
NON-GAAP FINANCIAL INFORMATION
Consolidated Adjusted EPS
Diluted earnings per share (GAAP):
For the Twelve Months
Ended December 31,
2018
2014
2018 vs. 2014
Net income attributable to common stockholders
$ 3.15
$ 2.39
$ 0.76
Non-GAAP adjustments:
Contract Services Gain on Sale
Income tax impact
Net non-GAAP adjustment
Keystone Impairment
Income tax impact
Net loss attributable to noncontrolling interest
Net non-GAAP adjustment
Freedom Industries Insurance Settlement
Income tax impact
Net non-GAAP adjustment
Freedom Industries chemical spill in West Virginia
Income tax impact
Net non-GAAP adjustment
Re-measurement from Tax Reform
(0.08)
0.02
(0.06)
0.31
(0.08)
(0.01)
0.22
(0.11)
0.03
(0.08)
-
-
-
0.07
-
-
-
-
-
-
-
-
-
-
0.06
(0.02)
0.04
(0.08)
0.02
(0.06)
0.31
(0.08)
(0.01)
0.22
(0.11)
0.03
(0.08)
(0.06)
0.02
(0.04)
0.07
Total net non-GAAP adjustments
0.15
0.04
0.11
Adjusted diluted earnings per share attributable to common stockholders
(non-GAAP)
$ 3.30
$ 2.43
$ 0.87
16
AMERICAN WATER 2018 ANNUAL REPORT UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from
to
Commission file number: 001-34028
AMERICAN WATER WORKS COMPANY, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
1 Water Street, Camden, NJ
(Address of principal executive offices)
51-0063696
(I.R.S. Employer
Identification No.)
08102-1658
(Zip Code)
(856) 955-4001
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common stock, par value $0.01 per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes È No ‘
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ‘ No È
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes È No ‘
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit such files). Yes È No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ‘
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer È
Non-accelerated filer ‘
‘
Accelerated filer
Smaller reporting company ‘
Emerging growth company ‘
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ‘
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘ No È
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s
most recently completed second fiscal quarter.
Common Stock, $0.01 par value—$13,802,100,000 as of June 29, 2018 (solely for purposes of calculating this aggregate market value,
American Water has defined its affiliates to include (i) those persons who were, as of June 29, 2018, its executive officers, directors or known
beneficial owners of more than 10% of its common stock, and (ii) such other persons who were deemed, as of June 29, 2018, to be controlled by, or
under common control with, American Water or any of the persons described in clause (i) above).
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date: Common Stock,
$0.01 par value per share—180,751,697 shares as of February 14, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the American Water Works Company, Inc. definitive proxy statement for the 2019 Annual Meeting of Shareholders to be filed
with the Securities and Exchange Commission within 120 days after December 31, 2018 are incorporated by reference into Part III of this report.
TABLE OF CONTENTS
Forward-Looking Statements
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part I
Item 1.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2.
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3.
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part II
Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6.
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8.
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part III
Item 10. Directors, Executive Officers of the Registrant and Corporate Governance . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions and Director Independence . . . . . . . . . . . . .
Item 14.
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part IV
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 16.
Form 10-K Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
1
4
24
44
44
45
50
51
52
53
94
96
160
160
161
162
162
162
162
162
163
163
164
172
FORWARD-LOOKING STATEMENTS
We have made statements in Item 1—Business, Item 1A—Risk Factors, and Item 7—Management’s
Discussion and Analysis of Financial Condition and Results of Operations, and in other sections of this Form
10-K, or incorporated certain statements by reference into this Form 10-K, that are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of
1995. In some cases, these forward-looking statements can be identified by words with prospective meanings
such as “intend,” “plan,” “estimate,” “believe,” “anticipate,” “expect,” “predict,” “project,” “propose,” “assume,”
“forecast,” “likely,” “uncertain,” “outlook,” “future,” “pending,” “goal,” “objective,” “potential,” “continue,”
“seek to,” “may,” “can,” “should,” “will” and “could” or the negative of such terms or other variations or similar
expressions. Forward-looking statements may relate to, among other things: our future financial performance,
including our operation and maintenance (“O&M”) efficiency ratio; our liquidity and future cash flows; our
growth and portfolio optimization strategies; our projected capital expenditures and related funding requirements;
our ability to repay debt; our projected strategy to finance current operations and growth initiatives; the impact of
legal proceedings and potential fines and penalties; business process, technology improvement and other strategic
initiatives; trends in our industry; regulatory, legislative, tax policy or legal developments; rate adjustments,
including through general rate case filings, filings for infrastructure surcharges and filings to address regulatory
lag; and impacts that the Tax Cuts and Jobs Act (the “TCJA”) may have on us and on our business, results of
operations, cash flows and liquidity.
Forward-looking statements are predictions based on our current expectations and assumptions regarding
future events. They are not guarantees or assurances of any outcomes, financial results or levels of activity,
performance or achievements, and you are cautioned not to place undue reliance upon them. These forward-
looking statements are subject to a number of estimates and assumptions, and known and unknown risks,
uncertainties and other factors. Our actual results may vary materially from those discussed in the forward-
looking statements included herein as a result of the factors discussed under Item 1A—Risk Factors, and the
following important factors:
•
•
•
•
•
the decisions of governmental and regulatory bodies, including decisions to raise or lower customer
rates;
the timeliness and outcome of regulatory commissions’ actions concerning rates, capital structure,
authorized return on equity, capital investment, system acquisitions, taxes, permitting and other
decisions;
changes in customer demand for, and patterns of use of, water, such as may result from conservation
efforts;
limitations on the availability of our water supplies or sources of water, or restrictions on our use
thereof, resulting from allocation rights, governmental or regulatory requirements and restrictions,
drought, overuse or other factors;
changes in laws, governmental regulations and policies, including with respect to environmental, health
and safety, water quality and emerging contaminants, public utility and tax regulations and policies,
and impacts resulting from U.S., state and local elections;
• weather conditions and events, climate variability patterns, and natural disasters, including drought or
abnormally high rainfall, prolonged and abnormal ice or freezing conditions, strong winds, coastal and
intercoastal flooding, earthquakes, landslides, hurricanes, tornadoes, wildfires, electrical storms and
solar flares;
•
•
the outcome of litigation and similar governmental and regulatory proceedings, investigations or
actions;
our ability to appropriately maintain current infrastructure, including our operational and technology
systems, and manage the expansion of our business;
1
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
exposure or infiltration of our critical infrastructure and our technology systems, including the
disclosure of sensitive, personal or confidential information contained therein, through physical or
cyber attacks or other means;
our ability to obtain permits and other approvals for projects;
changes in our capital requirements;
our ability to control operating expenses and to achieve efficiencies in our operations;
the intentional or unintentional actions of a third party, including contamination of our water supplies
or water provided to our customers;
our ability to obtain adequate and cost-effective supplies of chemicals, electricity, fuel, water and other
raw materials that are needed for our operations;
our ability to successfully meet growth projections for our regulated and market-based businesses,
either individually or in the aggregate, and capitalize on growth opportunities, including our ability to,
among other things:
•
•
•
acquire, close and successfully integrate regulated operations and market-based businesses;
enter into contracts and other agreements with, or otherwise obtain, new customers in our market-
based businesses; and
realize anticipated benefits and synergies from new acquisitions;
risks and uncertainties associated with contracting with the U.S. government, including ongoing
compliance with applicable government procurement and security regulations;
cost overruns relating to improvements in or the expansion of our operations;
our ability to maintain safe work sites;
our exposure to liabilities related to environmental laws and similar matters resulting from, among
other things, water and wastewater service provided to customers, including, for example, our water
transfer business focused on customers in the shale natural gas exploration and production market;
changes in general economic, political, business and financial market conditions;
access to sufficient capital on satisfactory terms and when and as needed to support operations and
capital expenditures;
fluctuations in interest rates;
restrictive covenants in or changes to the credit ratings on us or our current or future debt that could
increase our financing costs or funding requirements or affect our ability to borrow, make payments on
debt or pay dividends;
fluctuations in the value of benefit plan assets and liabilities that could increase our cost and funding
requirements;
changes in federal or state general, income and other tax laws, including any further rules, regulations,
interpretations and guidance by the U.S. Department of the Treasury and state or local taxing
authorities (collectively, the “Related Interpretations”) related to the enactment of the TCJA, the
availability of tax credits and tax abatement programs, and our ability to utilize our U.S. federal and
state income tax net operating loss (“NOL”) carryforwards;
• migration of customers into or out of our service territories;
•
the use by municipalities of the power of eminent domain or other authority to condemn our systems,
or the assertion by private landowners of similar rights against us;
2
•
•
•
•
•
•
our difficulty or inability to obtain insurance, our inability to obtain insurance at acceptable rates and
on acceptable terms and conditions, or our inability to obtain reimbursement under existing insurance
programs for any losses sustained;
the incurrence of impairment charges related to our goodwill or other assets;
labor actions, including work stoppages and strikes;
our ability to retain and attract qualified employees;
civil disturbances or terrorist threats or acts, or public apprehension about future disturbances or
terrorist threats or acts; and
the impact of new, and changes to existing, accounting standards.
These forward-looking statements are qualified by, and should be read together with, the risks and
uncertainties set forth above and the risk factors included in Item 1A—Risk Factors and other statements
contained in this Form 10-K, and you should refer to such risks, uncertainties and risk factors in evaluating such
forward-looking statements. Any forward-looking statements we make speak only as of the date this Form 10-K
was filed with the U.S. Securities and Exchange Commission (“SEC”). Except as required by the federal
securities laws, we do not have any obligation, and we specifically disclaim any undertaking or intention, to
publicly update or revise any forward-looking statements, whether as a result of new information, future events,
changed circumstances or otherwise. New factors emerge from time to time, and it is not possible for us to
predict all such factors. Furthermore, it may not be possible to assess the impact of any such factor on our
businesses, either viewed independently or together, or the extent to which any factor, or combination of factors,
may cause results to differ materially from those contained in any forward-looking statement. The foregoing
factors should not be construed as exhaustive.
3
ITEM 1. BUSINESS
Our Company
PART I
With a history dating back to 1886, American Water is the largest and most geographically diverse,
publicly-traded water and wastewater utility company in the United States, as measured by both operating
revenues and population served. A holding company originally incorporated in Delaware in 1936, we employ
approximately 7,100 professionals who provide drinking water, wastewater and other related services to more
than 14 million people in 46 states and Ontario, Canada. We conduct the majority of our business through
regulated utilities that provide water and wastewater services, collectively presented as our “Regulated
Businesses.” We also operate market-based businesses that provide a broad range of related and complementary
water, wastewater and other services. Individually, these businesses do not meet the criteria of a reportable
segment in accordance with generally accepted accounting principles in the United States (“GAAP”), and are
collectively presented as our Market-Based Businesses, which is consistent with how management assesses the
results of these businesses.
Throughout this Form 10-K, unless the context otherwise requires, references to “we,” “us,” “our,” the
“Company,” and “American Water” mean American Water Works Company, Inc. and its subsidiaries, taken
together as a whole. References to “parent company” mean American Water Works Company, Inc., without its
subsidiaries.
Regulated Businesses
Our primary business involves the ownership of utilities that provide water and wastewater services to
residential, commercial, industrial, public authority, fire service and sale for resale customers. Our utilities
operate in approximately 1,600 communities in 16 states in the United States, with approximately 3.4 million
active customers to our water and wastewater networks. Services provided by our utilities are generally subject to
economic regulation by certain state utility commissions or other entities engaged in utility regulation,
collectively referred to as Public Utility Commissions (“PUCs” or “Regulators”). Certain federal, state and local
governments also regulate environmental, health and safety, and water quality matters. We report the results of
the services provided by our utilities in our Regulated Businesses segment. Operating revenues for our Regulated
Businesses were $2,984 million for 2018, $2,958 million for 2017 and $2,871 million for 2016, accounting for
87%, 88% and 87%, respectively, of the Company’s total operating revenues for the same periods.
The following table provides a geographic summary of our Regulated Businesses’ operating revenues and
the number of customers we serve, by type of service, for and as of the year ended December 31, 2018:
Operating Revenues (in millions)
Number of Customers (in thousands)
New Jersey . . . . . . . . . . . . . . . . . . . . . $ 682 $
Pennsylvania . . . . . . . . . . . . . . . . . . .
Missouri . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . .
California . . . . . . . . . . . . . . . . . . . . . .
Indiana . . . . . . . . . . . . . . . . . . . . . . . .
West Virginia . . . . . . . . . . . . . . . . . . .
Total—Top Seven States (b) . . . . . . . .
Other states (c)
. . . . . . . . . . . . . . . . . .
Total Regulated Businesses . . . . . . . . $2,823 $
Water (a) Wastewater Total % of Total Water Wastewater Total % of Total
20.6%
21.4%
14.3%
9.5%
5.3%
9.1%
4.9%
85.1%
14.9%
100.0%
648
660
469
286
176
305
166
87.5% 2,710
472
12.5%
100.0% 3,182
41 $ 723
689
62
319
10
297
20
3
221
— 219
144
137 2,612
24
372
161 $2,984
697
725
483
321
179
307
167
169 2,879
503
200 3,382
627
309
277
218
219
143
2,475
348
24.2%
23.1%
10.7%
10.0%
7.4%
7.3%
4.8%
49
65
14
35
3
2
1
31
1
(a)
(b)
(c)
Includes other operating revenues consisting primarily of miscellaneous utility charges, fees and rents.
Our “Top Seven States” are determined based upon operating revenues.
Includes our utilities in the following states: Georgia, Hawaii, Iowa, Kentucky, Maryland, Michigan, New York, Tennessee and
Virginia.
4
See Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations and
Note 20—Segment Information in the Notes to Consolidated Financial Statements for additional information.
Customers
Our Regulated Businesses have a large and geographically diverse customer base. A customer is defined as
a person, business, municipality or any other entity that purchases our water or wastewater services as of the last
business day of a reporting period. One single customer may purchase our services for use by multiple
individuals or businesses, as is the case in many homes, apartment complexes, businesses and governmental
entities.
The vast majority of our regulated water customers are metered, which allows us to measure and bill for our
customers’ water usage, typically on a monthly basis. We employ a variety of methods of customer meter
reading to monitor consumption. These methods range from meters with mechanical registers where
consumption is manually recorded by meter readers, to meters with electronic registers capable of transmitting
consumption data to proximity devices or via radio frequency to mobile or fixed network data collectors. Our
wastewater customers are billed either a flat rate or based upon their water consumption.
Residential customers make up a substantial portion of our customer base in all of the states in which we
operate. We also serve (i) commercial customers, such as food and beverage providers, commercial property
developers and proprietors, and energy suppliers, (ii) fire service customers, where we supply water through our
distribution systems to public fire hydrants for firefighting purposes and to private fire customers for use in fire
suppression systems in office buildings and other facilities, (iii) industrial customers, such as large-scale
manufacturers, mining and production operations, (iv) public authorities, such as government buildings and other
public sector facilities, including schools and universities, and (v) other utilities and community water and
wastewater systems in the form of bulk contracts for the supply of water or the treatment of wastewater, for their
own customers.
The following chart depicts the allocation of our Regulated Businesses’ operating revenue by type,
including a breakout of the total water services revenues by class of customer, for the year ended December 31,
2018:
Regulated Businesses’ Operating Revenue by Type and Customer Class
Industrial water: 4%
Wastewater: 5%
Fire service water: 5%
Other operating (b): 2%
Public and other water (a): 7%
Commercial water: 21%
Residential water: 56%
(a)
(b)
Includes water revenues from public authorities and other utilities and community water systems under bulk contracts.
Includes other operating revenues consisting primarily of miscellaneous utility charges, fees and rents.
5
The following table provides the number of water and wastewater customers we served by class as of
December 31:
2018
2017
2016
(In thousands)
Water Wastewater Water Wastewater Water Wastewater
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential
Commercial
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Fire service . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Public and other (a) . . . . . . . . . . . . . . . . . . . . . .
2,892
222
48
4
16
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,182
188
11
—
—
1
200
2,872
221
47
4
16
3,160
182
11
—
—
—
193
2,846
220
45
4
16
3,131
171
10
—
—
—
181
(a)
Includes public authorities and other utilities and community water and wastewater systems under bulk contracts. Bulk contracts,
which are accounted for as a single customer in the table above, generally result in service to multiple customers.
Customer growth in our Regulated Businesses is primarily from (i) adding new customers to our customer
base through acquisitions of water and/or wastewater utility systems, (ii) organic population growth in our
authorized service areas, and (iii) sale of water to other water utilities and community water systems.
Capital Investment
The aging water and wastewater infrastructure in the United States is in need of replacement and
modernization. The American Society of Civil Engineers published its Report Card for America’s Infrastructure
in 2017 and gave the drinking water industry a grade of “D,” and the wastewater infrastructure a grade of “D+,”
primarily because much of the country’s infrastructure is nearing the end of its useful life. The report also stated
that, on an annual basis, approximately 2 trillion gallons of treated water are lost in the United States through
more than 240,000 main breaks, at an estimated cost of $2.6 billion. This represents approximately 20% of all
treated water in the country. In addition, approximately 900 billion gallons of untreated sewage is discharged into
the country’s rivers and streams every year. As documented in the American Water Works Association’s Buried
No Longer: Confronting America’s Water Infrastructure Challenge, restoring the country’s existing water
systems as they reach the end of their useful lives, and expanding them to serve a growing population, will cost at
least $1 trillion between 2011 and 2035, just to maintain the current levels of water service. In addition, increased
regulation related to water quality and the management of water and wastewater residual discharges, which
began with the passage of the Clean Water Act in 1972 and the Safe Drinking Water Act in 1974, is also a
primary driver for the need to modernize the country’s water and wastewater infrastructure.
To address the growing infrastructure needs in the areas we serve, we plan to invest $7.3 billion over the
next five years, including $1.6 billion in 2019, for capital improvements to our Regulated Businesses’ water and
wastewater infrastructure, largely for pipe replacement and upgrading aging water and wastewater treatment
facilities. We have proactively improved our pipe renewal rate from a 250-year replacement cycle to a 120-year
replacement cycle, which we anticipate will enable us to replace nearly 2,000 miles of mains and collection pipes
between 2019 and 2023. In addition, during this same five-year period, our capital investment in treatment plants,
storage tanks and other key, above-ground facilities has increased over 10%, further addressing infrastructure
renewal, resiliency, water quality, operational efficiency, technology and innovation, and emerging regulatory
compliance needs. Additionally, we are investing significantly in resiliency projects to address the impacts of
climate and weather variability by hardening our assets.
Economic Regulation and Rate Making
Our Regulated Businesses operate under a regulatory compact whereby, in exchange for exclusive rights to
provide water and wastewater services in defined service territories, we have an obligation to serve customers
within those territories requesting service, within reasonable limits. In return for agreeing to invest capital into
our water and wastewater systems, we are given the opportunity to recover our costs of doing business and earn a
reasonable rate of return on our investments.
6
The operations of our Regulated Businesses are generally subject to economic regulation by PUCs in the
state in which they operate, with the primary responsibility of the PUCs to promote the overall public interest by
balancing the interest of customers and utility investors. Specific authority might differ from state to state, but in
most states, PUCs review and approve rates charged to customers, accounting treatments, long-term financing
programs and cost of capital, O&M expenses, capital expenditures, taxes, affiliated transactions and
relationships, reorganizations and mergers and acquisitions, along with imposing certain penalties or granting
certain incentives. Regulatory policies vary from state to state and could potentially change over time. These
policies will affect the timing, as well as the extent, of recovery of expenses and the realized return on invested
capital.
The process to obtain approval for a change in rates generally occurs by way of a rate case filed by the
utility with the PUC on a periodic basis. The timing of rate case filings is typically determined by either periodic
requirements in the regulatory jurisdiction or by the utility’s need to increase its revenue requirement to recover
capital investment costs, changes in operating revenues, operating costs or other market conditions. Our rate case
management program is guided by the principles of (i) obtaining timely recovery of capital investment costs,
(ii) recognizing declining sales resulting from reduced consumption, and (iii) obtaining appropriate recovery of
utility O&M costs, including costs incurred for compliance with environmental regulations. The program
attempts to minimize “regulatory lag,” which is the time between the occurrence of an event that triggers a
change in the utility’s revenue requirement and its recognition in rates. For example, regulatory lag describes the
time between when a capital investment is placed into service for the benefit of the customer and when the
Company can begin earning a return of and on that capital investment, through the ratemaking process. It also
applies to the lag in the recognition in rate recovery of changes in expenses and revenues.
7
Our Regulated Businesses support regulatory practices at the PUCs and state legislatures that mitigate the
adverse impact of regulatory lag. The following table provides examples of approved regulatory practices:
Regulatory Practices
Infrastructure
replacement surcharges
Future test year
Hybrid test year
Utility plant recovery
mechanisms
Expense mechanisms
Revenue stability
mechanisms
Consolidated tariffs
Description
Allows rates to change periodically, outside a general rate
case proceeding, to reflect recovery of capital investments
made to replace infrastructure necessary to sustain safe,
reliable services for our customers. These mechanisms
typically involve periodic filings and reviews to ensure
transparency.
A test period used for setting rates, which begins with the
date new rates are effective. This allows current or
projected revenues, expenses and capital investments to be
collected on a timelier basis.
Allows an update to historical data for “known and
measurable” changes that occur subsequent to the historical
test year.
Allows recovery of the full return on utility plant costs
during the construction period, instead of capitalizing an
allowance for funds used during construction. In addition,
some states allow the utility to seek pre-approval of certain
capital projects and associated costs. In this pre-approval
process, the PUC may assess the prudency of such projects.
Allows changes in certain operating expenses, which may
fluctuate based on conditions beyond the utility’s control, to
be recovered outside of a general rate case proceeding or
deferred until the next general rate case proceeding.
Separates a utility’s cost recovery from the amount of water
it sells to recover its fixed costs and ongoing infrastructure
investment needs. Such a mechanism adjusts rates
periodically to ensure that a utility’s revenue will be
sufficient to cover its costs, regardless of sales volume,
including recognition of declining sales resulting from
reduced consumption, while providing an incentive for
customers to use water more efficiently.
Use of a unified rate structure for water systems owned and
operated by a single utility, which may or may not be
physically interconnected. The consolidated tariff pricing
structure may be used fully or partially in a state, and is
generally used to prioritize capital investments and
moderate the impact of periodic fluctuations in local costs,
while lowering administrative costs for customers.
Pennsylvania also permits a blending of water and
wastewater revenue requirements.
States Allowed
IA, IL, IN, MO, NJ,
NY, PA, TN, VA, WV
CA, HI, IA, IL, IN,
KY, NY, PA, TN, VA
MD, MO, NJ, WV
CA, IL, KY, NY, PA,
TN, VA
CA, IL, MD, MO, NJ,
NY, PA, TN, VA
CA, IL, NY
CA, IA, IL, IN, KY,
MD, MO, NJ, NY,
PA, VA, WV
We pursue or seek enhancement to these regulatory practices to facilitate efficient recovery of our costs and
capital investments in order to continue to provide safe, clean, reliable and affordable services to our customers.
The ability to seek regulatory treatment as described above does not guarantee that the PUCs will accept our
proposal in the context of a particular rate case, and these regulatory practices may reduce, but not eliminate,
8
regulatory lag associated with traditional rate making processes. It is also our strategy to expand their use in areas
where they may not currently apply.
Acquisitions and Strategic Growth
The U.S. water and wastewater industries include investor-owned systems as well as municipal systems that
are owned and operated by local governments or governmental subdivisions. Both industries are highly
fragmented. According to the U.S. Environmental Protection Agency (“EPA”), approximately 84% of the water
market is served by municipal systems and approximately 98% of the country’s wastewater systems are
government owned. The EPA also estimates that there are approximately 50,000 community water systems and
approximately 15,000 community wastewater systems in the United States, with approximately 80% of the
community water systems serving a population of 3,000 or less. This large number of relatively small,
fragmented water and wastewater systems may result in inefficiencies in the marketplace, since such utilities may
not have the operating expertise, financial and technological capability or economies of scale to provide services
or raise capital as efficiently as larger utilities. Larger utilities that have greater access to capital are generally
more capable of making mandated and other necessary infrastructure upgrades to their water and wastewater
systems. In addition, water and wastewater utilities with large customer bases, spread across broad geographic
regions, may more easily absorb the impact of significant variations in precipitation and temperatures, such as
droughts, excessive rain and cool or warm temperatures in specific areas. Larger utilities generally are able to
spread support services over a larger customer base, thereby reducing the costs to serve each customer. Since
many administrative and support activities can be efficiently centralized to gain economies of scale, companies
that participate in industry consolidation have the potential to improve operating efficiencies, lower costs per unit
and improve service at the same time. Larger utilities also typically have the expertise to operate systems more
efficiently and can attract and retain employees needed to operate the utility over time.
A fundamental aspect of our growth strategy is to pursue acquisitions of small and medium water and/or
wastewater systems of between 3,000 and 30,000 customers, in geographic proximity to areas where we operate
our Regulated Businesses. The proximity of acquisition opportunities to our regulated footprint allows us to
integrate and manage the acquired systems and operations primarily using our existing management, although we
typically retain the majority of employees, and to achieve operational efficiencies and prioritize capital
investment needs. Our current customer mix of 94% water and 6% wastewater also presents strategic
opportunities for wastewater growth and systems consolidation, allowing us to add wastewater customers where
we already serve water customers. We intend to continue to expand our regulated footprint geographically by
acquiring water and wastewater systems in our existing markets and, if appropriate, pursuing acquisition
opportunities in certain domestic markets where we do not currently operate our Regulated Businesses. Before
entering new regulated markets, we will evaluate the business and regulatory climates to ensure that we will have
the opportunity to achieve an appropriate rate of return on our investment while maintaining our high standards
for providing safe, reliable and affordable services to our customers, as well as a line of sight to grow our base
customers to attain efficiencies after entering the new domestic market.
Increasingly stringent environmental, health and safety, and water quality regulations, the amount of
infrastructure in need of significant capital investment, financial challenges and industry legislation are several
elements that may drive more municipalities to consider selling their water and wastewater assets.
We are an experienced utility with proven access to capital and financial, technical, and managerial
resources with public service commission oversight. We are a solution provider and believe that many
communities could benefit from receiving safe and reliable water and wastewater service.
Industry Legislation
In 2017, New Jersey enacted the Water Quality Accountability Act (the “WQAA”), which sets new
operational standards for all water utilities in New Jersey, including municipal and investor-owned utilities with
9
more than 500 service connections. This law imposes new requirements in areas such as cybersecurity, asset
management, water quality reporting, remediation of notices of violation, and hydrant and valve maintenance.
The WQAA requires the most senior water manager, or either the executive director for municipal utility
authorities or the mayor or chief executive officer for municipally owned public water systems, to certify that the
system meets the requirements under the WQAA. On October 19, 2018, our New Jersey American Water
subsidiary certified that it was in compliance with all aspects of the Act.
In 2018, similar legislation was passed in Indiana, which sets new operational standards and requirements
for water and wastewater treatment plants in areas such as capital asset management, cost-benefit analysis and
cybersecurity.
Also, in 2018, President Trump signed America’s Water Infrastructure Act of 2018. The legislation includes
policies intended to improve water and wastewater system management and authorization for states to assess
options for consolidation for systems that do not comply with the federal Safe Drinking Water Act and its rules
and regulations. The legislation increases funding to water system funding programs, including the State
Revolving Loan Fund program and the Water Infrastructure Finance and Innovation Act.
Our regulated subsidiaries in California, Illinois, Indiana, Iowa, Maryland, Missouri, New Jersey and
Pennsylvania have access to fair market value legislation for private sector investment in public sector systems.
We support full optionality for municipalities, including state legislation that enables the consolidation of the
largely fragmented water and wastewater industries through third-party fair market valuations of purchased
property. Fair market value assessment of water and wastewater systems is an alternative to the traditional
depreciated original cost method of valuation, providing municipalities with a purchase price that is reflective of
the assets’ value, while the utility has increased assurance of recovering the purchase price over the life of the
assets, subject to state regulatory commission approval.
Consolidated tariffs use a unified rate structure for systems owned and operated by a single utility, which
may or may not be physically interconnected. Consolidated tariff pricing moderates the impact of periodic
fluctuations in local costs and promotes a more universal water infrastructure investment in the state. As a result,
consolidated tariffs can make it easier to incorporate new systems into an existing utility and can ensure
economies of scale for even the smallest of systems and prioritize capital needs across the state. Overall, this
brings cost-effective, higher quality services to a larger number of citizens. Eleven of our regulated subsidiaries
currently have some form of consolidated tariff pricing, including Illinois, Indiana, Iowa, Kentucky, Maryland,
Missouri, New Jersey, New York, Pennsylvania, Virginia, and West Virginia.
In 2018, legislation was passed in our Missouri and California subsidiaries changing the public vote
requirement for the sale of water or wastewater systems. In Missouri, the public vote requirement for the sale of a
municipal water or wastewater system changed to a simple majority for more than 500 small towns. Historically,
only larger communities required a simple majority, while smaller communities needed a two-thirds
majority. This legislation increases the options for small towns, should they decide to address their water and
sewer challenges through an asset sale. In California, the vote required to allow cities to sell sewer systems
changed to a simple majority as compared to a two-thirds majority.
Competition
In our Regulated Businesses, we generally do not face direct competition in our existing markets because
(i) we operate in those markets pursuant to franchises, charters, certificates of public convenience and necessity
or similar authorizations (collectively, “CPCNs”) issued by state PUCs, and (ii) the high cost of constructing a
new water and wastewater system in an existing market creates a high barrier to market entry. However, our
Regulated Businesses do face competition from governmental agencies, other investor-owned utilities, large
industrial customers with the ability to provide their own water supply/treatment process and strategic buyers that
are entering new markets and/or making strategic acquisitions. When pursuing acquisitions, our largest investor-
10
owned competitors, based on a comparison of operating revenues and population served, are Aqua America, Inc.,
Suez North America, American States Water Company and California Water Service Group. From time to time,
we also face competition from infrastructure funds, multi-utility companies and others, such as Algonquin Power
and Utilities Corp., Eversource Energy and Corix.
Condemnation and Eminent Domain
All or portions of our Regulated Businesses’ utility assets could be acquired by state, municipal or other
government entities through one or more of the following methods: (i) eminent domain (also known as
condemnation); (ii) the right of purchase given or reserved by a municipality or political subdivision when the
original CPCN was granted; and (iii) the right of purchase given or reserved under the law of the state in which
the utility subsidiary was incorporated or from which it received its CPCN. The acquisition consideration related
to such a proceeding initiated by a local government may be determined consistent with applicable eminent
domain law, or may be negotiated or fixed by appraisers as prescribed by the law of the state or in the particular
CPCN.
As such, we are periodically subject to condemnation proceedings in the ordinary course of business. For
example, a citizens group in Monterey, California successfully added “Measure J” to the November 6, 2018
election ballot asking voters to decide whether the Monterey Peninsula Water Management District (the
“MPWMD”) should conduct a feasibility study concerning the potential purchase of our California subsidiary’s
Monterey water service assets, and, if feasible, to proceed with a purchase of those assets without an additional
public vote. This service territory represents approximately 40,000 customers. On November 27, 2018, Measure J
was certified to have passed. The MPWMD has until August 27, 2019 to complete a feasibility study and submit
to its board a written plan for acquiring the system assets. If the MPWMD were to determine that such an
acquisition is feasible, then the MPWMD would commence a multi-year eminent domain proceeding against our
California subsidiary to first establish the MPWMD’s right to take the system assets and, if such right is
established, determine the amount of just compensation to be paid for the system assets.
Also, five municipalities in the Chicago, Illinois area (approximately 30,300 customers in total) formed a
water agency and filed an eminent domain lawsuit against our Illinois subsidiary in January 2013, seeking to
condemn the water pipeline that serves those five municipalities. Before filing its eminent domain lawsuit, the
water agency made an offer of $38 million for the pipeline. A jury trial will take place to establish the value of
the pipeline. Although the date of this trial has not currently been scheduled, it is likely to commence in the
fourth quarter of 2019.
Furthermore, the law in certain jurisdictions in which our Regulated Businesses operate provides for
eminent domain rights allowing private property owners to file a lawsuit to seek just compensation against a
public utility, if a public utility’s infrastructure has been determined to be a substantial cause of damage to that
property. In these actions, the plaintiff would not have to prove that the public utility acted negligently. In
California, most recently, lawsuits have been filed in connection with large-scale natural events such as wildfires.
Some have included allegations that infrastructure of certain utilities triggered the natural event that resulted in
damage to the property. In some cases, the PUC has allowed certain costs or losses incurred by the utility to be
recovered from customers in rates, but in other cases such recovery in rates has been disallowed. Also, the utility
may have obtained insurance that could respond to some or all of such losses, although the utility would be at
risk for any losses not ultimately subject to rate or insurance recovery or losses that exceed the limits of such
insurance.
Water Supply and Wastewater Services
Our Regulated Businesses generally own the physical assets used to store, pump, treat and deliver water to
our customers and collect, treat, transport and recycle wastewater. Typically, we do not own the water itself,
which is held in public trust and is allocated to us through contracts, permits and allocation rights granted by
11
federal and state or multi-state agencies or through the ownership of water rights pursuant to local law. We are
dependent on defined sources of water supply and obtain our water supply from surface water sources such as
reservoirs, lakes, rivers and streams; from groundwater sources, such as wells and aquifers; and water purchased
from third-party water suppliers. The level of water treatment we apply varies significantly depending upon the
quality of the water source and customer stipulations. Surface water sources typically generally require
significant treatment, while groundwater sources often require chemical treatment only.
The following chart depicts our sources of water supply as of December 31, 2018:
Sources of Water Supply
Purchased Water: 7%
Groundwater: 26%
Surface Water: 67%
The following table provides percentages of water supply by source type for our top seven states for 2018
were as follows:
Surface Water Ground Water
Purchased Water
New Jersey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Missouri
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
California . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
West Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
71%
91%
79%
53%
—
44%
99%
24%
7%
20%
36%
64%
56%
—
5%
2%
1%
11%
36%
—
1%
Our ability to meet the existing and future water demands of our customers depends on an adequate water
supply. Drought, governmental restrictions, overuse of sources of water, the protection of threatened species or
habitats, contamination or other factors may limit the availability of ground and surface water. We employ a
variety of measures in an effort to obtain adequate sources of water supply, both in the short-term and over the
long-term. The geographic diversity of our service areas may mitigate some of the economic effects on the water
supply associated with weather extremes we might encounter in any particular service territory. For example, in
any given summer, some areas may experience drier than average weather, which may reduce the amount of
source water available, while other areas we serve may experience wetter than average weather.
In our long-term planning, we evaluate quality, quantity, growth needs and alternate sources of water supply
as well as transmission and distribution capacity. Water supply is seasonal in nature and weather conditions can
have a pronounced effect on supply. In order to ensure that we have adequate water supply, we use long-term
planning processes and maintain contingency plans to minimize the potential impact on service caused by
12
climate variability and a wide range of weather fluctuations. In connection with supply planning for most surface
or groundwater sources, we employ models to determine safe yields under different rainfall and drought
conditions. Surface and ground water levels are routinely monitored so that supply capacity deficits may, to the
extent possible, be predicted and mitigated through demand management and additional supply development. An
example of our use of long-term planning to ensure that we have adequate water supply is our involvement in the
Monterey Peninsula Water Supply Project (the “Water Supply Project”) in California. The Water Supply Project
includes the construction of a desalination plant, owned by our California subsidiary, and the construction of
wells that would supply water to the desalination plant. In addition, the Water Supply Project also includes our
California subsidiary’s purchase of water from a groundwater replenishment project between the Monterey
Regional Water Pollution Control Agency (now known as Monterey One Water) and the MPWMD. The Water
Supply Project is intended, among other things, to fulfill obligations of our California subsidiary to eliminate
unauthorized diversions from the Carmel River as required under orders of the California State Water Resources
Control Board (the “SWRCB”). For more information, see Item 3—Legal Proceedings—Alternative Water
Supply in Lieu of Carmel River Diversions.
Wastewater services involve the collection of wastewater from customers’ premises through sewer lines.
The wastewater is then transported through a sewer network to a treatment facility, where it is treated to meet
required regulatory standards for wastewater before being returned to the environment. The solid waste
by-product of the treatment process is disposed of or recycled in accordance with applicable standards and
regulations.
Seasonality
Customer demand for our water service is affected by weather and tends to vary with temperature, rainfall
levels and the frequency of rainfall. Customer demand is generally greater during the warmer months, primarily
due to increased water usage for irrigation systems and other outdoor water use. As such, we typically expect our
operating revenues to be the highest in the third quarter of each year. Weather that is hotter and drier than
average generally increases operating revenues, whereas, weather that is cooler and/or wetter than average
generally serves to suppress customer water demand and can reduce water operating revenues. Three of our
jurisdictions, California, Illinois and New York, have adopted revenue stability mechanisms which permit us to
collect state PUC-authorized revenue for a given period which is not tied to the volume of water sold during that
period, thereby lessening the impact of weather variability. See “Economic Regulation and Rate Making” for
additional information regarding revenue stability mechanisms.
Market-Based Businesses
Through our Market-Based Businesses, we provide a broad range of related and complementary water and
wastewater services primarily to residential and smaller commercial customers, the U.S. government on military
installations and shale natural gas exploration and production companies, as well as municipalities, utilities and
industrial customers. These businesses are not subject to economic regulation by state PUCs and the services
provided generally do not require significant capital investment. Operating revenues for our Market-Based
Businesses were $476 million for 2018, $422 million for 2017 and $451 million for 2016, accounting for 14%,
13% and 14%, respectively, of the Company’s total operating revenues for the same periods.
Our primary Market-Based Businesses include the following operating segments:
• Homeowner Services Group, which provides various warranty protection programs to residential and
smaller commercial customers;
• Military Services Group, which enters into long-term contracts with the U.S. government to provide
water and wastewater services on various military installations; and
• Keystone Clearwater Solutions, LLC (“Keystone”), which provides customized water transfer services
for shale natural gas exploration and production companies.
13
We also enter into contracts with municipal, commercial and industrial customers to operate and manage
water and wastewater facilities and provide other related services through our Contract Services Group. During
2018, we closed on the sale of the majority of our Contract Services Group’s O&M contracts to subsidiaries of
Veolia Environnement S.A. See Note 4—Acquisitions and Divestitures in the Notes to Consolidated Financial
Statements for additional information. We will retain four of our Contract Services Group’s O&M contracts due
to their proximity to our existing service areas, and expect the majority of the remaining contracts to be sold to
other parties, or expire within the next twelve months.
Homeowner Services Group
Our Homeowner Services Group, which includes our June 4, 2018 acquisition of Pivotal Home Solutions
(“Pivotal”), provides warranty protection programs to residential and smaller commercial customers to protect
against repair costs for interior and exterior water and sewer lines, interior gas and electric lines, heating and
cooling systems, water heaters and other home appliances, as well as power surge protection and other related
services. We also develop partnerships with municipalities, utilities and other organizations to offer our
protection programs to customers serviced by, or affiliated with, those municipalities, utilities and organizations.
The term of these partnership agreements is typically three to five years, with mutual optional renewals. As of
December 31, 2018, our Homeowner Services Group had approximately 3 million customer contracts in 43
states, and 26 partnership agreements with utilities, municipalities and other organizations.
Military Services Group
Our Military Services Group operates on 14 military installations under 50-year contracts with the U.S.
government as part of its Utility Privatization Program. The scope of these contracts generally includes the
operation and maintenance of the installation’s water and wastewater systems and a capital program focused on
asset replacement and, in certain instances, systems expansion. The replacement of assets assumed when a
contract is awarded to the Company is funded from the contract fee. At times, new assets are required to support
the installation’s mission and the construction of these assets are funded by the U.S. government as separate
modifications or amendments to the contract. The capital program historically has not used the Company’s equity
or debt borrowings; rather, we have used limited working capital for short-term needs under these contracts. In
April 2018, the U.S. Army instituted a requirement that a bidder must offer financing in its proposal for a new
capital project. The Company is currently exploring strategies to address the U.S. Army’s revised requirements
for new projects on which it may seek to bid, including partnering with third parties for off-balance sheet
financing.
The contract price for nine of our contracts with the U.S. government is subject to redetermination two years
after commencement of operations, and every three years thereafter. Price redetermination is a contract
mechanism to periodically adjust the service fee in the next period, to reflect changes in contract obligations and
anticipated market conditions. The remaining five contracts with the U.S. government are subject to annual price
adjustments under a mechanism similar to price redetermination called “Economic Price Adjustment.” All of
these contracts may be terminated, in whole or in part, prior to the end of the 50-year term for convenience of the
U.S. government, or as a result of default or non-performance by the subsidiary performing the contract. In either
event, pursuant to termination provisions applicable to these contracts, we would be entitled to recover allowable
costs that we may have incurred under the contract, plus the contract profit margin on incurred costs. Our
backlog of revenue associated with our contracts with the U.S. government is approximately $4.3 billion, with an
average remaining contract term of 42 years.
Keystone
In July 2015, we acquired a 95% interest in Water Solutions Holdings, LLC, including its wholly owned
subsidiary, Keystone. During 2018, pursuant to the exercise of put options by the minority owners, we acquired
the remaining 5% interest in Keystone, bringing our ownership interest to 100%. Keystone is a water service and
14
management solutions company that serves shale natural gas exploration and production customers in the
Appalachian Basin. During 2018, Keystone exited its construction and water trucking business lines, narrowing
the scope of its business going forward to customized water transfer services. Keystone operates under master
service agreements that are generally shorter term in nature. When the initial term of these agreements expire,
they typically renew automatically on an annual basis, and are generally cancelable by either party with 30 days
prior notice. As of December 31, 2018, Keystone serves approximately 47 customers.
Competition
We face competition in our Market-Based Businesses from a number of service providers, including
HomeServe USA in our Homeowner Services Group, and American States Water Company, Suez North
America, and Veolia Environnement S.A. in our Military Services Group. Keystone currently faces competition
from water service providers that typically provide services to particular segments of the water management
cycle, such as Select Energy Services, Inc., TETRA Technologies, Inc. and Baker Corp.
Environmental, Health and Safety, and Water Quality Regulation
Our water and wastewater operations, including the services provided by both our Regulated Businesses and
Market-Based Businesses, are subject to extensive federal, state and local laws and regulations, and in the case of
our Canadian operations, Canadian laws and regulations, governing the protection of the environment, health and
safety, the provision of water and wastewater services, particularly with respect to the quality of water we deliver
to our customers, and the manner in which we collect, treat, discharge, recycle and dispose of wastewater. In the
United States, these regulations are developed under legislation including the Safe Drinking Water Act, the
Reduction of Lead in Drinking Water Act and the Clean Water Act. States also have the authority to develop
their standards and requirements in these areas. We are subject to various federal, state, local and Canadian laws
and regulations governing the storage of hazardous materials, the management and disposal of hazardous and
solid wastes, discharges to air and water, the cleanup of contaminated sites, dam safety and other matters relating
to the protection of the environment and health and safety. PUCs also set conditions and standards for the water
and wastewater services we deliver.
Environmental, health and safety, and water quality regulations are complex and change frequently. For
example, while the EPA has issued a non-enforceable Health Advisory for the combined level of two
perfluorinated compounds, the New Jersey Department of Environmental Protection has adopted a more stringent
maximum contaminant level for a third compound, perfluorononanoic acid, or PFNA, and perfluorooctanoic
acid, or PFOA, and will be seeking to adopt similar standards for other perfluoroalkyl and polyfluoroalkyl
substances, or PFAS. The overall trend has been that drinking water standards have become increasingly more
stringent over time. As newer or stricter standards are introduced, our capital and operating costs could increase.
We incur substantial costs associated with compliance with the environmental, health and safety, and water
quality standards to which our operations are subject and we invest in technology solutions for enhanced
detection and monitoring. In the past, our Regulated Businesses have generally been able to recover the costs
associated with compliance; however, this recovery is affected by regulatory lag and the corresponding
uncertainties surrounding rate recovery. We estimate that we will make capital expenditures of $133 million and
$120 million during 2019 and 2020, respectively, for environmental control facilities, which we define for this
purpose as any project (or portion thereof) that involves the preservation of air, water or land. We also maintain
an environmental program that includes responsible business practices, compliance with environmental laws and
regulations, and effective use of natural resources. We believe that our operations are materially in compliance
with, and in many cases surpass, minimum standards required by applicable environmental laws and regulations.
Our operations also involve the use, storage and disposal of hazardous substances and wastes. For example,
our water and wastewater treatment facilities store and use chlorine and other chemicals that generate wastes that
require proper handling and disposal under applicable environmental requirements. We also could incur remedial
costs in connection with any contamination relating to our operations or facilities or our off-site disposal of
15
wastes. The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”),
authorizes the EPA, and comparable state laws authorize state environmental authorities, to issue orders and
bring enforcement actions to compel responsible parties to investigate and take remedial actions at any site that is
determined to present an actual or potential threat to human health or the environment because of an actual or
threatened release of one or more hazardous substances. Parties that generated or transported hazardous
substances to such sites, as well as current and former owners and operators of such sites, may be deemed liable,
without regard to fault, under CERCLA or comparable state laws. Although we are not aware of any material
cleanup or decontamination obligations, the discovery of contamination or the imposition of such obligations in
the future could result in additional costs. Our facilities and operations are also subject to requirements under the
U.S. Occupational Safety and Health Act and inspections thereunder. Certain of our subsidiaries are involved in
pending legal proceedings relating to environmental matters. See Item 3—Legal Proceedings for additional
information.
Safe Drinking Water Act
The Safe Drinking Water Act and related regulations establish national quality standards for drinking water.
The EPA has issued rules governing the levels of numerous, naturally occurring and man-made chemical and
microbial contaminants and radionuclides allowable in drinking water, and continues to propose new rules. These
rules also prescribe testing requirements for detecting regulated contaminants, the treatment systems that may be
used for removing those contaminants, and other requirements. To date, the EPA has set standards for
approximately 90 contaminants and indicators for drinking water, and there is a process in place to make a
regulatory determination on at least five additional compounds every five years.
To help formulate the basis for future regulations, the EPA has the authority to require monitoring for
additional, unregulated contaminants under the Unregulated Contaminant Monitoring Rule (the “Monitoring
Rule”). Our facilities have participated in the data gathering effort for the Monitoring Rule in previous rounds,
which occurs every five years, and are also a participant in the ongoing fourth round, which is scheduled for
completion by the end of 2020. There are millions of other chemical compounds that are not regulated, many of
which are lacking a testing methodology, occurrence data, health effects information and/or treatment
technology. The process of developing new drinking water standards is long and complex, but we actively
participate with the EPA and other water industry groups by sharing research and water quality operational
knowledge. See Item 1—Business—Research and Development—Emerging Containments for additional
information.
To effect the removal or inactivation of microbial organisms, the EPA has established various rules to
improve the disinfection and filtration of drinking water and to reduce consumers’ exposure to disinfectants and
by-products of the disinfection process. In 2006, the EPA issued the Long-Term 2 Enhanced Surface Water
Treatment Rule and the Stage 2 Disinfectants and Disinfection Byproduct Rule and finalized the Ground Water
Rule, which is applicable to systems providing water from underground sources. In 2016, the revised Total
Coliform Rule implemented a “find and fix” process where exceeding bacterial trigger levels requires an
assessment to correct any sanitary defects. We are within the EPA’s time frame for compliance with these
standards, which includes sample collection, data analysis, engineering planning and system implementation.
Recent monitoring under the Long-Term 2 Rule has resulted in the need for more than 30 of our surface water
systems to provide additional protection against cryptosporidium. In most cases, this will involve installing UV
disinfection at an estimated cost ranging from $150 million to $250 million. Further, the EPA is actively
considering regulations for a number of contaminants, including strontium, hexavalent chromium, fluoride,
nitrosamines, perchlorate, some pharmaceuticals and certain volatile organic compounds. We do not anticipate
that any such regulations, if enacted, will require implementation in 2019.
Across the Company, we conduct over one million water quality tests each year at our laboratory facilities
and plant operations, including continuous online instrumentations such as monitoring turbidity levels,
disinfectant residuals and adjustments to chemical treatment based on changes in incoming water. We participate
16
in the Partnership for Safe Water, the EPA’s voluntary program to meet more stringent goals for reducing
microbial contaminants. With 69 of our 81 surface water treatment plants receiving the EPA program’s
prestigious “Director” award, which recognizes utilities that (i) have completed a comprehensive self-assessment
report, (ii) created an action plan for continuous improvement, and (iii) produced high-quality drinking water, we
account for approximately one-third of the plants receiving such awards nationwide. In addition, 67 of our
surface water treatment plants have received the “Five-Year Phase III” award, 62 plants have received the
“Ten-Year Phase III” award, 58 plants have received the “Fifteen-Year Phase III” award, and 3 plants have
received the “Twenty-Year Phase III” award; these awards recognize plants that have met the Director award
status for five, 10, 15 and 20 years, respectively. Further, nine of our surface water plants have received the
“Presidents” award, which recognizes treatment plants that achieve the Partnership’s rigorous individual filter
effluent turbidity standards.
Although it is difficult to project the ultimate costs of complying with the above or other pending or future
requirements, we expect current requirements under the Safe Drinking Water Act and other similar laws to be
recoverable through the regulatory process and therefore compliance costs are not expected to have a material
impact on our operations or financial condition. In addition, capital expenditures and operating costs to comply
with environmental mandates have been traditionally recognized by PUCs as appropriate for inclusion in
establishing rates. As a result, we expect to recover the operating and capital costs resulting from these pending
or future requirements.
Lead and Copper Rule and Reduction of Lead in Drinking Water Act
Across the country, there is a renewed focus on the potential risk of lead in drinking water. In 1991, the EPA
published the Lead and Copper Rule (“LCR”) to control lead and copper in drinking water and, since that time,
has issued minor revisions in 2000, 2004 and 2007, enhancing monitoring, reporting and public education
requirements. In 2011, Congress enacted the Reduction of Lead in Drinking Water Act regarding the use and
introduction into commerce of lead pipes, plumbing fittings for fixtures, solder and flux. While these advances
have made an impact in reducing lead exposure in drinking water, legacy lead plumbing materials, primarily in
building plumbing, still remain in many communities. The EPA is currently working to develop long-term
revisions to the LCR, with a revised draft likely in 2019. It is currently estimated that approximately 5% of our
service lines contain lead (“LSLs”). We have reviewed our inventories of company owned service lines, our
related practices and are working with stakeholders to develop feasible solutions to remove legacy lead from
service lines in older neighborhoods. Our goal is to replace our LSLs in most areas over an approximate 10-year
time frame, at an estimated cost ranging from $600 million to $1.2 billion. In cases where we are replacing an
American Water owned LSL, our standard approach will be to replace the company-owned portion of the service
line, and work with the customer to replace the customer-owned portion of the service line at the same time.
Replacing the full service line is considered a best practice as advised by the Lead Service Line Replacement
Collaborative and the American Water Works Association. The Lead Service Line Replacement Collaborative is
a diverse group of public health, water utility, environmental, labor, consumer, and housing organizations from
across the country working together to encourage communities to accelerate the full replacement of LSLs
through collaborative efforts at the local level. The prioritization of this work will depend on several factors,
including our planned water main and service line renewal projects, adjacent projects by municipalities or other
utilities, LCR compliance monitoring results and cooperation with our customers with respect to the customer-
owned portion of the service line. There is also a special focus placed on low-income neighborhoods.
Clean Water Act
The Clean Water Act regulates discharges from drinking water and wastewater treatment facilities into
lakes, rivers, streams and groundwater. In addition to requirements applicable to our wastewater collection
systems, our operations require discharge permits under the National Pollutant Discharge Elimination System
(“NPDES”) permit program established under the Clean Water Act, which must be renewed every five years.
Pursuant to the NPDES permit program, the EPA and implementing states set maximum discharge limits for
17
wastewater effluents and overflows from wastewater collection systems. Discharges that exceed the limits
specified under NPDES permits can lead to the imposition of fines and penalties, and persistent non-compliance
could lead to significant fines and penalties and other compliance costs. In addition, the difficulty of obtaining
and complying with NPDES permits, and renewing expiring permits, may impose time and cost burdens on our
operations. From time to time, discharge violations occur at our facilities, some of which result in fines. We do
not expect any such violations or fines to have a material impact on our results of operations or financial
condition.
Environmental, Social Responsibility and Governance
Integrating environmental, social responsibility and governance (“ESG”) policies and practices into our
daily operations emphasizes our belief that the only way to do business is to do it responsibly, and that the “how”
is just as important as the “what” for long-term financial sustainability. Being committed to ESG principles
means striving to:
•
•
•
keep employees safe and injury-free, and develop each person to his or her full potential;
be a leader in environmental sustainability, caring for the planet, and leading the nation in outstanding
water safety and quality;
deliver personalized customer service with empathy and care;
• make communities better because we are there; and
•
be transparent, accessible and well-governed for our shareholders and investors.
This focus is derived from our vision statement, “clean water for life,” and our core values: (i) safety; (ii)
trust; (iii) environmental leadership; (iv) teamwork; and (v) high performance, the principles by which we work
and live. Our vision and values drive our company strategy, which is centered on five central themes:
•
Safety—The safety of our employees and our customers is the number one focus for American Water.
• Customers—Our customers are at the center of everything we do, helping us to shape our strategic
priorities. We challenge ourselves so that if our regulated utility customers had a choice of providers,
we would want them to choose us.
•
People—Maintaining an environment which is open, transparent, diverse and inclusive, and where our
people feel valued, included and accountable, is critical to our ability to serve our customers every day.
• Operational Excellence—Our operational excellence strategy helps us to find better and more efficient
ways to do business, and to provide safe, clean and affordable water services for our customers.
• Growth—We believe that when companies grow, they can invest more in creating stable jobs, training,
benefits, infrastructure and our communities. Our growth benefits all of our stakeholders, including our
shareholders.
In 2017, we issued our fourth biennial Corporate Responsibility Report, covering our performance in 2015
to 2016. Our first report was issued in 2011, making us the first large water services company to measure its
performance against the Global Reporting Index. In addition, our sustainability practices have supported our
inclusion in the Euronext Vigeo® U.S. 50 index, FTSE4Good index series, 2018 Constituent MSCI ESG Leaders
Indexes, NAACP Equity Inclusion and Empowerment Index and the most recent 2019 Bloomberg Gender-
Equality Index. Highlights of our commitment to our ESG policies and practices are summarized below:
Environmental and Sustainability Practices
• Energy Use
• Lowered our greenhouse gas emissions through December 31, 2017 by approximately 31% since
our base year of 2007 with a goal of reducing 40% by 2025.
• Design, construct, operate and maintain our systems for efficiency and best practices.
18
• Water Supply
• Deconstructed the San Clemente Dam in California to restore the “run of the river” and we are
building the Water Supply Project using marine life friendly slant wells.
• Water Policy Leadership
• Expect to spend between $8.0 billion and $8.6 billion on capital investments from 2019 to 2023 to
address aging infrastructure, reduce or eliminate leaks, improve cyber and physical security, and
increase resiliency of critical assets from the impacts of climate variability.
•
Scientists dedicated to research and partnering with water research foundations, on water quality
and technology-water source monitoring.
• Collaboration and partnerships with federal and state agencies to support effective environmental,
health and safety and water quality standards and regulations.
Social Responsibility
• Our People
• During 2018, nearly 80,000 hours of safety training were completed by our employees.
• During 2018, over 86% of our job requisitions had a diverse candidate pool, with more than 50%
of transfers or promotions filled by minority, female, veteran or disabled individuals.
• Our Customers
• Achieved a customer satisfaction rating in the top quartile among our industry peer group.
• Our Communities
• More than 5,000 hours of Company-sponsored community service performed during 2018 by our
employees.
• Company-sponsored workplace giving campaigns with the United Way and Water For People.
• Through annual contributions from the American Water Charitable Foundation, we focused on
supporting our employees in their own charitable endeavors, providing support for disaster relief
efforts, and providing funding for initiatives related to clean water, conservation, education and
community sustainability.
Governance
• Board and Committee
• The Board of Directors and each of its committees are led by an independent, non-executive
chairperson.
• Board of Directors met 13 times in 2018.
• Established the Safety, Environmental, Technology and Operations committee of the Board of
Directors.
• Diversity
• We have achieved gender parity among the members of the Board of Directors.
• Our average director tenure is approximately seven years.
• Demonstrated & Representative Expertise
• Our Board of Directors has demonstrated expertise, including experience in utilities,
cybersecurity, financial services, serving as a public company CEO, operational and
manufacturing, and global entity management.
19
Research and Development
Our Research and Development Program
We maintain an industry-leading Research and Development (“R&D”) program that is designed to enhance
our services, help ensure compliance, and improve quality and operational effectiveness. Our R&D personnel are
located in New Jersey and Illinois, the latter housing our quality control and testing laboratory, which supports
our R&D activities through testing and analysis.
We continue to leverage the Company’s expertise and collaborate with the EPA and state agencies to help
establish effective environmental, health and safety, and water quality standards and regulation. This relationship
includes the sharing of our research, such as our treatment and distribution system optimization research and our
national water quality monitoring data. Our engagement with the EPA provides us with early insight into
emerging regulatory issues and initiatives, thereby allowing us to anticipate and to accommodate our future
compliance requirements. We also frequently engage with the Centers for Disease Control and other state
environmental agencies. We believe that continued R&D activities are critical for providing safe, reliable and
affordable services, as well as maintaining our leadership position in the industry, which provides us with a
competitive advantage as we seek additional business with new and existing customers.
Emerging Contaminants
Emerging contaminants include chemicals such as pharmaceuticals, personal care products, pesticides,
herbicides and endocrine disrupting compounds, as well as some naturally occurring microbes, such as bacteria,
viruses and parasites, which have been detected in drinking water supplies, for which the risk to the public’s
health is not fully understood and/or has not been quantified. While these contaminants have been present in our
drinking water for as long as they have been in use, technological advances have only recently made it possible
to detect many of them. The ability to detect contaminants, even at trace levels, has raised questions among
regulators and government agencies, further affecting the public’s perception of drinking water quality.
The Chemicals Abstract Service Registry contains over 140 million registered chemicals, with a new
substance being produced approximately every 3 seconds from chemical breakdown and reformation. There are
over 1,400 microbes which can affect drinking water. We are continually investigating new substances and
contaminants, employing a team of scientists, engineers and public health professionals to identify threats to our
water supply, to act on emerging regulations and new health advisories, and to evaluate the benefits of alternative
or advanced treatment technologies. We maintain state-of-the-art water quality testing equipment and implement
new and emerging technologies to help predict and manage potential water supply contamination issues.
Examples of our efforts include:
•
•
•
•
using our research findings to communicate information to our customers on the actions they can take
to manage Legionella (the Centers for Disease Control statistics indicate that water-associated disease
from Legionella is on the rise, with exposure typically associated with customer-owned plumbing
systems in large buildings);
aerial drone testing to detect harmful algal blooms and testing ultrasonic technology to help prevent
taste and odor events and to eliminate cyanotoxins before they get to the water treatment plant;
the implementation of water source assessment tools, including sensors and analytics, to evaluate and
track chemical storage and transport through watersheds and to detect source water contamination
events; and
the implementation of activated carbon and biofiltration for the control of emerging contaminants.
Service Company and Security
American Water Works Service Company, Inc. (the “Service Company”) is our wholly owned subsidiary
that provides support and operational services to the Company’s operating subsidiaries. These services are
20
predominantly provided to our Regulated Businesses under contracts that have been approved by PUCs, where
necessary, and are also provided to our Market-Based Businesses organized under American Water Enterprises,
LLC, our wholly owned subsidiary (“AWE”), and Keystone as requested or may otherwise be necessary.
Services provided by the Service Company may include accounting and finance, administration, business
development, communications, compliance, education and training, engineering, health and safety, human
resources, information systems, internal audit, investor relations, legal and governance, operations, procurement,
rates and regulatory support, security, risk management and insurance, treasury, water quality and R&D. The
Service Company also operates two national customer service centers located in Alton, Illinois and Pensacola,
Florida, which provide customer relations, field service and operational support to our Regulated Businesses.
Services are provided by the Service Company at cost, enabling our operating subsidiaries to fulfill their
responsibilities in a cost-effective manner, while providing them access to in-depth, functional expertise.
Our security team provides oversight and policy guidance on physical, cyber and information security, as
well as business continuity, throughout our operations. It is responsible for designing, implementing, monitoring
and supporting effective physical and technical security controls for our physical assets, business systems and
operational technologies. Risk assessments are conducted periodically to evaluate the effectiveness of existing
security controls and serve as the basis for additional safeguards, security controls and measures. Operational and
technical security controls are deployed and integrated as safeguards against unauthorized access to the
Company’s information systems. These controls (i) are aimed at assuring the continuity of business processes
that are dependent upon automation, (ii) seek to maintain the integrity of our data, (iii) support regulatory and
legislative compliance requirements, and (iv) are aimed at maintaining safe and reliable service to our customers.
We engage in partnerships with U.S. federal, state and local law enforcement agencies to coordinate and improve
the security of our water delivery systems and to safeguard our water supply and operations.
Employee Matters
As of December 31, 2018, approximately 49% of our workforce was represented by unions, which include
70 collective bargaining agreements with 15 different unions. Additionally, as of December 31, 2018 we had two
collective bargaining agreement beyond expiration, affecting approximately 220 employees, all of which are
actively working under the terms of the existing agreement, and another collective bargaining agreement in its
initial stage of renegotiation, affecting approximately 140 employees. During 2019, 18 of our collective
bargaining agreements will be expiring in accordance with their terms.
Every five years, we negotiate national health and welfare benefits with our union-represented employees.
On July 31, 2018, a new, five -year national benefits agreement was ratified, covering approximately 3,200 of
our union-represented employees. Highlights of the new agreement include union-represented employees’
participation in the Company’s cash-based annual performance plan, changes to certain retiree medical benefits
and additional medical plan options for our employees and their families.
21
Executive Officers
The following table provides the name, age, offices held and business experience for each of our executive
officers, as of February 19, 2019:
Name
Age
Office and Experience
Susan N. Story
59 President and Chief Executive Officer. Ms. Story has served as
President and Chief Executive Officer of the Company since May 2014.
Ms. Story served as Senior Vice President and Chief Financial Officer of
the Company from April 2013 until May 2014. Prior to joining American
Water, she served as President and Chief Executive Officer of Southern
Company Services, a subsidiary of Southern Company, from January
2011 until March 2013 and President and Chief Executive Officer of Gulf
Power Company, also a subsidiary of Southern Company, from 2003 until
December 2010. Since 2008, Ms. Story has served as a member of the
Board of Directors of Raymond James Financial, Inc., a diversified
financial services company, and as lead director since 2016. Since
January 2017, Ms. Story has also served on the Board of Directors of
Dominion Energy, Inc., a producer and transporter of energy.
Senior Vice President, Strategic Financial Planning. Mr. Chin joined
the Company as its Senior Vice President, Planning and Strategy
Integration in June 2017. He has had his current title since February 15,
2019, and he also served as Interim Treasurer from October 26, 2018 until
February 15, 2019. Prior to joining the Company, from May 2013 to April
2017, Mr. Chin served as the lead utility analyst for the North America
research function at Bank of America Merrill Lynch. From 2001 to 2013,
Mr. Chin worked in Electric Utilities Research at Citigroup. Within that
period, Mr. Chin was the global head of Electric Utilities Research for
Citigroup.
Senior Vice President, Human Resources. Since March 1, 2017,
Ms. Kennedy has served as the Company’s Senior Vice President, Human
Resources. From August 2014 until February 2017, Ms. Kennedy served
as Vice President, Human Resources of the Company, and from August
2012 to August 2014, she served as Director, Human Resources in the
Company’s Northeast Division. Ms. Kennedy initially joined the
Company in 2007, and before that time, she practiced law for nine years.
Brian Chin
45
Melanie M. Kennedy
45
Walter J. Lynch
56 Executive Vice President and Chief Operating Officer. Mr. Lynch has
over 20 years of experience in the water and wastewater industry. He has
served as the Company’s Executive Vice President and Chief Operating
Officer since January 2016, as Chief Operating Officer of Regulated
Operations from February 2010 to December 2015, and President of
Regulated Operations from July 2008 to December 2015. Mr. Lynch
joined the Company in 2001. Mr. Lynch is on the Board of Directors of
the National Association of Water Companies and serves on its Executive
Committee. In addition, Mr. Lynch also serves on the Water Research
Foundation Board of Trustees.
22
Name
Age
Office and Experience
James S. Merante
44 Vice President and Treasurer. Mr. Merante was appointed as the
Michael A. Sgro
Linda G. Sullivan
Company’s Vice President and Treasurer on February 15, 2019. Prior to
that, Mr. Merante was Vice President, Internal Audit, from February 2018
to February 15, 2019, and served as Divisional Chief Financial Officer for
the Company’s Mid-Atlantic Division from July 2014 to February 2018.
Prior to joining American Water, Mr. Merante served as Vice President of
Operations for FSM, Inc., a private digital media company, from February
2010 until July 2014. Mr. Merante is licensed as a Certified Public
Accountant in Pennsylvania.
60 Executive Vice President, General Counsel and Secretary. Mr. Sgro
has 25 years of experience in the water and wastewater industry. He has
served as the Company’s Executive Vice President, General Counsel and
Secretary since January 1, 2016 and its Senior Vice President, General
Counsel and Secretary from February 2015 to January 2016. Prior to that,
he served as the Company’s Interim General Counsel and Secretary from
January 2015 until February 2015 and as Vice President, General Counsel
and Secretary of American Water’s Northeast Division beginning in 2002.
55 Executive Vice President and Chief Financial Officer. Ms. Sullivan has
served as the Company’s Executive Vice President and Chief Financial
Officer since January 1, 2016 and the Company’s Senior Vice President and
Chief Financial Officer from May 2014 to December 31, 2015. Prior to
joining American Water, Ms. Sullivan served as the Senior Vice President
and Chief Financial Officer of Southern California Edison Company, a
subsidiary of Edison International, from July 2009 until May 2014, and
Vice President and Controller of both Edison International and Southern
California Edison Company, from July 2004 until July 2009. Ms. Sullivan
is a Certified Public Accountant (inactive) and a Certified Management
Accountant. On April 27, 2017, Ms. Sullivan was elected to the Board of
Directors of NorthWestern Corporation, where she serves as the Chair of its
Audit Committee and on its Human Resources Committee. In addition,
Ms. Sullivan serves on the Board of Directors of University of Maryland
University College Ventures and on its Audit & Finance Committee and is
a member of the EPA’s Finance Advisory Board.
Radhakrishnan Swaminathan
57 Executive Vice President, Chief Customer, Strategy and Technology
Officer. Mr. Swaminathan has served as our Executive Vice President,
Chief Customer, Strategy and Technology Officer since November 1, 2018.
Prior to that, he served as Senior Vice President, Chief Technology and
Innovation Officer of the Company from November 1, 2017 to October 31,
2018. Mr. Swaminathan joined the Company in March 2016 as our Chief
Technology and Innovation Officer. Prior to that, from October 2012
through February 2016, he served as Vice President and Chief Technology
Officer, Energy, Natural Resources and Utilities, of WIPRO Technologies.
Prior to that, he served as the Director of Smart Grid Technologies at
NextEra Energy, Inc. from January 2009 through September 2012.
23
Name
Loyd “Aldie” Warnock
Age
59
Office and Experience
Senior Vice President of External Affairs and Business Development.
Mr. Warnock has served as the Company’s Senior Vice President of
External Affairs and Business Development since August 1, 2017. From
April 2014 to July 31, 2017, Mr. Warnock served as the Company’s Senior
Vice President of External Affairs, Communications and Public Policy.
Prior to joining the Company, he served as Senior Vice President of
External Affairs at Midwest Independent System Operator, Inc., a
non-profit, self-governing organization, from March 2011 to April 2014.
Prior to that, he served as Vice President of External Affairs for Allegheny
Energy, Inc. from December 2005 to February 2011 and Senior Vice
President of Governmental and Regulatory Affairs at Mirant Corporation
from July 2004 to November 2005. Mr. Warnock serves on the Board of
Directors of the National Association of Water Companies and on the
Executive Advisory Board of the Mississippi State University College of
Business.
Melissa K. Wikle
53 Vice President and Controller. Ms. Wikle joined the Company in July
2016 as its Vice President and Controller, and assumed the duties of the
Company’s principal accounting officer in August 2016. Prior to joining the
Company, Ms. Wikle served as Corporate Controller and Chief Accounting
Officer of Columbus McKinnon Corporation, a publicly-traded worldwide
designer, manufacturer and marketer of material handling products, systems
and services, since April 2011. Ms. Wikle is a Certified Public Accountant.
Each executive officer is elected annually by the Board of Directors and serves until his or her respective
successor has been elected and qualified or his or her earlier death, resignation or removal.
Available Information
We are subject to the reporting requirements of the Exchange Act. We file or furnish annual, quarterly and
current reports, proxy statements and other information with the SEC. You may obtain a copy of our annual
reports on Form 10-K, our quarterly reports on Form 10-Q or our current reports on Form 8-K, or any
amendments to them, that are filed with or furnished to the SEC, free of charge, from the Investor Relations
section of our website, http://ir.amwater.com, as soon as reasonably practicable after we file or furnish the
information to the SEC. Information contained on our website shall not be deemed incorporated into, or to be a
part of, this report, and any website references included herein are not intended to be made through active
hyperlinks. We recognize our website as a key channel of distribution to reach public investors and as a means of
disclosing material non-public information to comply with our disclosure obligations under SEC Regulation FD.
The American Water corporate governance guidelines and the charters for each of the standing committees
of the Board of Directors, together with the American Water Code of Ethics and additional information regarding
our corporate governance, are available on our Investor Relations website, http://ir.amwater.com, and will be
made available, without charge, in print to any shareholder who requests such documents from our Investor
Relations Department, American Water Works Company, Inc., 1 Water Street, Camden, NJ, 08102.
ITEM 1A. RISK FACTORS
We operate in a market and regulatory environment that involves significant risks, many of which are
beyond our control. In addition to the other information included or incorporated by reference in this Form 10-K,
the following factors should be considered in evaluating our business and future prospects. Any of the following
risks, either alone or taken together, could materially and adversely affect our business, financial position, results
of operations, cash flows and liquidity.
24
Risks Related to Our Industry and Business Operations
Our utility operations are subject to extensive economic regulation by state PUCs and other regulatory
agencies, which significantly affects our business, financial condition, results of operations and cash flows.
Our utility operations also may be subject to fines, penalties and other sanctions for the inability to meet these
regulatory requirements.
Our Regulated Businesses provide water and wastewater services to our customers through subsidiaries that
are subject to economic regulation by state PUCs. Economic regulation affects the rates we charge our customers
and has a significant impact on our business and results of operations. Generally, the state PUCs authorize us to
charge rates that they determine are sufficient to recover our prudently incurred operating expenses, including,
but not limited to, operating and maintenance costs, depreciation, financing costs and taxes, and provide us the
opportunity to earn an appropriate rate of return on invested capital.
Our ability to successfully implement our business plan and strategy depends on the rates authorized by the
various state PUCs. We periodically file rate increase applications with state PUCs. The ensuing administrative
process may be lengthy and costly. Our rate increase requests may or may not be approved, or may be partially
approved, and any approval may not occur in a timely manner. Moreover, a PUC may not approve a rate request
to an extent that is sufficient to:
•
•
•
cover our expenses, including purchased water and costs of chemicals, fuel and other commodities
used in our operations;
enable us to recover our investment; and
provide us with an opportunity to earn an appropriate rate of return on our investment.
Approval of the PUCs is also required in connection with other aspects of our utilities’ operations. Some
state PUCs are empowered to impose financial penalties, fines and other sanctions for non-compliance with
applicable rules and regulations. Our utilities are also required to have numerous permits, approvals and
certificates from the PUCs that regulate their businesses and authorize acquisitions. Although we believe that
each utility subsidiary has obtained or sought renewal of the material permits, approvals and certificates
necessary for its existing operations, we are unable to predict the impact that future regulatory activities may
have on our business.
In any of these cases, our business, financial condition, results of operations, cash flows and liquidity may
be adversely affected. Even if rates are sufficient, we face the risk that we will not achieve the rates of return on
our invested capital to the extent permitted by state PUCs. This could occur if certain conditions exist, including,
but not limited to, if water usage is less than the level anticipated in establishing rates, or if our investments or
expenses prove to be higher than the level estimated in establishing rates.
Our operations and the quality of water we supply are subject to extensive and increasingly stringent
environmental, water quality and health and safety laws and regulations, including with respect to emerging
contaminants, compliance with which could impact our operating costs, and violations of which could subject
us to substantial liabilities and costs, as well as damage to our reputation.
Our regulated water and wastewater operations and the operations of our Market-Based Businesses are
subject to extensive federal, state and local laws and regulations and, in the case of our Canadian operations,
Canadian laws and regulations that govern the protection of the environment, health and safety, the quality of the
water we deliver to our customers, water allocation rights, and the manner in which we collect, treat, discharge
and dispose of wastewater. These requirements include CERCLA, the Clean Water Act and the Safe Drinking
Water Act, EPA requirements and similar federal, state and Canadian laws and regulations. For example,
CERCLA authorizes the EPA to issue orders and bring enforcement actions to compel responsible parties to
investigate and take remedial actions with respect to actual or threatened releases of hazardous substances, and
can impose joint and several liability, without regard to fault, on responsible parties for the costs thereof. We are
also required to obtain various environmental permits from regulatory agencies for our operations.
25
In addition, state PUCs and environmental regulators also set conditions and standards for the water and
wastewater services we deliver. If we deliver water or wastewater services to our customers that do not comply
with regulatory standards, or otherwise violate environmental laws, regulations or permits, or other health and
safety and water quality regulations, we could incur substantial fines, penalties or other sanctions or costs, as well
as damage to our reputation. In the most serious cases, regulators could reduce requested rate increases or force
us to discontinue operations and sell our operating assets to another utility or to a municipality. Given the nature
of our business which, in part, involves supplying water for human consumption, any potential non-compliance
with, or violation of, environmental, water quality and health and safety laws or regulations would likely pose a
more significant risk to us than to a company not similarly involved in the water and wastewater industry.
We incur substantial operating and capital costs on an ongoing basis to comply with environmental, water
quality and health and safety laws and regulations. These laws and regulations, and their enforcement, generally
have become more stringent over time, and new or stricter requirements could increase our costs. Although we
may seek to recover ongoing compliance costs in our Regulated Businesses through customer rates, there can be
no guarantee that the various state PUCs or similar regulatory bodies that govern our Regulated Businesses
would approve rate increases that would enable us to recover such costs or that such costs will not materially and
adversely affect our financial condition, results of operations, cash flows and liquidity.
We may also incur liabilities if, under environmental laws and regulations, we are required to investigate
and clean up environmental contamination, including potential spills of hazardous chemicals, such as chlorine,
which we use to treat water, or at off-site locations where we have disposed of waste or caused an adverse
environmental impact. The discovery of previously unknown conditions, or the imposition of cleanup obligations
in the future, could result in significant costs and could adversely affect our financial condition, results of
operations, cash flows and liquidity. Such remediation costs may not be covered by insurance and may make it
difficult for us to secure insurance at acceptable rates in the future.
Attention is being given to emerging contaminants, including, without limitation, chemicals and other
substances that currently do not have any regulatory standard in drinking water or have been recently created or
discovered (including by means of scientific achievements in the analysis and detection of trace amounts of
substances). Examples of sources of emerging contaminants include, but are not limited to, newly created
chemical compounds (including, for example, manufactured nanomaterials); human and veterinary products;
perfluorinated and polyfluorinated compounds, including PFNA, PFOA and other PFAS; bacteria, microbes,
viruses, amoebae and other pathogens; and residual by-products of disinfection. We rely upon governmental
agencies to set appropriate regulatory standards to protect the public from these and other contaminants, and our
role is to provide service that meets these standards, if any. In some of our states, PUCs may disapprove of cost
recovery, in whole or in part, for implementation of treatment infrastructure for an emerging contaminant in the
absence of a regulatory standard. Furthermore, given the rapid pace at which emerging contaminants are being
created and/or discovered, we may not be able to detect and/or mitigate all such substances in our drinking water
system or supplies, which could have a material adverse impact on our financial condition, results of operations
and reputation. In addition, we believe emerging contaminants may form the basis for additional or increased
federal or state regulatory initiatives and requirements in the future, which could significantly increase the cost of
our operations.
Limitations on availability of water supplies or restrictions on our use of water supplies as a result of
government regulation or action may adversely affect our access to sources of water, our ability to supply
water to customers or the demand for our water services.
Our ability to meet the existing and future demand of our customers depends on the availability of an
adequate supply of water. As a general rule, sources of public water supply, including rivers, lakes, streams and
groundwater aquifers, are held in the public trust and are not owned by private interests. As a result, we typically
do not own the water that we use in our operations, and the availability of our water supply is established through
allocation rights (determined by legislation or court decisions) and passing-flow requirements set by
26
governmental entities. Passing-flow requirements set minimum volumes of water that must pass through
specified water sources, such as rivers and streams, in order to maintain environmental habitats and meet water
allocation rights of downstream users. Allocation rights are imposed to ensure sustainability of major water
sources and passing-flow requirements are most often imposed on source waters from smaller rivers, lakes and
streams. These requirements, which can change from time to time, and vary by state or region, may adversely
impact our water supply. Supply issues, such as drought, overuse of sources of water, the protection of threatened
species or habitats, contamination or other factors may limit the availability of ground and surface water.
For example, in our Monterey County, California operations, we are seeking to augment our sources of
water supply, principally to comply with an October 20, 2009 cease and desist order (the “2009 Order”), as
amended by an order in July 2016 (the “2016 Order”), of the SWRCB that requires California-American Water
Company, our wholly owned subsidiary (“Cal Am”), to significantly decrease its diversions from the Carmel
River in accordance with a reduction schedule that terminates on December 31, 2021 (the “2021 Deadline”). We
are also required to augment our Monterey County sources of water supply to comply with the requirements of
the Endangered Species Act. We cannot predict whether Cal Am will be able to secure alternative sources of
water, or if Cal Am will be exposed to liabilities if it is unable to meet the 2021 Deadline under the 2009 Order
and the 2016 Order. If Cal Am or any of our other subsidiaries are unable to secure an alternative source of
water, or if other adverse consequences result from the events described above, our business, financial condition,
results of operations and cash flows could be adversely affected. See Item 3—Legal Proceedings—Alternative
Water Supply in Lieu of Carmel River Diversions, which includes additional information regarding this matter.
The current regulatory rate setting process may result in a significant delay, also known as “regulatory lag,”
from the time that we invest in infrastructure improvements, incur increased operating expenses or experience
declining water usage, to the time at which we can seek to address these events in rate case applications; our
inability to minimize regulatory lag could adversely affect our business.
There is typically a delay, known as “regulatory lag,” between the time one of our regulated subsidiaries
makes a capital investment or incurs an operating expense increase and the time when those costs are reflected in
rates. In addition, billings permitted by state PUCs typically are, to a considerable extent, based on the volume of
water usage in addition to a minimum base rate. Thus, we may experience regulatory lag between the time our
revenues are affected by declining usage and the time we are able to adjust the rate per gallon of usage to address
declining usage. Our inability to reduce regulatory lag could have an adverse effect on our financial condition,
results of operations, cash flows and liquidity.
We endeavor to reduce regulatory lag by pursuing constructive regulatory policies. For example, three of
our states have approved revenue stability mechanisms that adjust rates periodically to ensure that a utility’s
revenue will be sufficient to cover its costs regardless of sales volume, including recognition of declining sales
resulting from reduced consumption, while providing an incentive for customers to use water more efficiently. In
addition, ten of our state PUCs permit rates to be adjusted outside of the general rate case application process
through surcharges that address certain capital investments, such as replacement of aging infrastructure. These
surcharges are adjusted periodically based on factors such as project completion or future budgeted expenditures,
and specific surcharges are eliminated once the related capital investment is incorporated in new PUC approved
rates. Furthermore, in setting rates, ten of our state PUCs allow us to use future test years, which extend beyond
the date a rate request is filed to allow for current or projected revenues, expenses and investments to be reflected
in rates on a more timely basis. Other examples of such programs include states that allow us to increase rates for
certain cost increases that are beyond our control, such as purchased water costs, property or other taxes, or
power, conservation, chemical or other expenditures. These surcharge mechanisms enable us to adjust rates in
less time after costs have been incurred than would be the case under the general rate case application process.
While these programs have reduced regulatory lag in several of our regulated states, we continue to seek
expansion of programs to reduce regulatory lag in those jurisdictions that have not approved such programs.
Furthermore, PUCs may fail to adopt new surcharge programs and existing programs may not continue in their
27
current form, or at all. Although we intend to continue our efforts to expand state PUC approval of surcharges to
address issues of regulatory lag, our efforts may not be successful, or even if successful they may not completely
address our regulatory lag, in which case our business, financial condition, results of operations, cash flows and
liquidity may be materially and adversely affected.
Changes in laws and regulations and changes in certain agreements can significantly affect our business,
financial condition, results of operations, cash flows and liquidity.
New legislation, regulations, government policies or court decisions, including, without limitation with
respect to federal and state income and other tax laws, can materially affect our operations, results of operations
and cash flows. The individuals who serve as regulators are elected or political appointees. Therefore, elections
which result in a change of political administration or new appointments may also result in changes in the
individuals who serve as regulators and the policies of the regulatory agencies that they serve. New laws or
regulations, new interpretations of existing laws or regulations, changes in agency policy, including those made
in response to shifts in public opinion, or conditions imposed during the regulatory hearing process could have
the following consequences, among others:
• making it more difficult for us to increase our rates and, as a consequence, to recover our costs or earn
our expected rates of return;
•
•
•
•
•
•
•
•
changing the determination of the costs, or the amount of costs, that would be considered recoverable
in rate cases;
restricting our ability to terminate our services to customers who owe us money for services previously
provided or limiting our bill collection efforts;
requiring us to provide water or wastewater services at reduced rates to certain customers;
limiting or restricting our ability to acquire water or wastewater systems, purchase or dispose of assets
or issue securities, or making it less cost-effective for us to do so;
negatively impacting the deductibility of expenses under federal or state tax laws, the amount of tax
credits or tax abatement benefits that may be available, the amount of taxes owed, or the ability to
utilize our net operating loss carryforwards;
changing regulations that affect the benefits we expected to receive when we began offering services in
a particular area;
increasing the costs associated with complying with environmental, health, safety and water quality
regulations to which our operations are subject;
changing or placing additional limitations on change in control requirements relating to any
concentration of ownership of our common stock;
• making it easier for governmental entities to convert our assets to public ownership via condemnation,
eminent domain or other similar process, or for governmental agencies or private plaintiffs to assess
liability against us for damages under these or similar processes;
•
•
•
placing limitations, prohibitions or other requirements with respect to the sharing of information and
participation in transactions by or between a regulated subsidiary and us or our other affiliates,
including Service Company and any of our other subsidiaries;
restricting or prohibiting our extraction of water from rivers, streams, reservoirs or aquifers; and
revoking or altering the terms of the CPCN issued to us by state PUCs.
Any of the foregoing consequences could have an adverse effect on our business, financial condition, results
of operations, cash flows and liquidity.
28
In addition, new Federal, state and local laws, changes in existing laws, rules or regulations, or
administrative interpretations thereof, could impact us. On December 22, 2017, the TCJA was signed into law,
which, among other things, enacted significant and complex changes to the Internal Revenue Code of 1986, as
amended (the “Code”), including a reduction in the maximum U.S. federal corporate income tax rate from 35%
to 21% as of January 1, 2018, and certain other provisions related specifically to the public utility industry,
including continuation of interest expense deductibility, the exclusion from utilizing bonus depreciation and the
normalization of deferred income taxes. The enactment of the TCJA required re-measurement of our deferred
income taxes, which materially impacted our 2017 results of operations and financial position and had a lesser
impact on our 2018 results of operations and financial position. During 2018, all of our 14 jurisdictions subject to
economic regulation opened formal proceedings related to the TCJA, and proceedings presently remain open in
three of them. Further, the regulatory treatment of the re-measured deferred income taxes remains open in a
number of these jurisdictions. At this time, we cannot predict the impacts on us of the regulatory treatment of the
TCJA in these open proceedings or matters, or of the enactment or adoption of any Related Interpretations, if and
when issued. Moreover, we are unable to determine or predict the potential impacts, if any, of any other new or
amended laws, rules or regulations, or interpretations thereof, to the extent they may be ultimately enacted,
adopted or issued, on us or our businesses, financial condition, results of operations, cash flows and liquidity.
Service disruptions caused by severe weather conditions, climate variability patterns or natural disasters may
disrupt our operations or reduce the demand for our water services, which could adversely affect our financial
condition, results of operations, cash flows and liquidity.
Service interruptions due to severe weather, climate variability patterns and other natural events are possible
across all our businesses. These include, among other things, storms, freezing conditions, high wind conditions,
hurricanes, tornadoes, earthquakes, landslides, drought, wildfires, coastal and intercoastal floods or high water
conditions, including those in or near designated flood plains, severe electrical storms and solar flares. Weather
and other natural events such as these may affect the condition or operability of our facilities, limiting or
preventing us from delivering water or wastewater services to our customers, or requiring us to make substantial
capital expenditures to repair any damage. Tariffs in place or cost recovery proceedings with respect to our
Regulated Businesses may not provide reimbursement to us, in whole or in part, for any of these impacts.
Government restrictions on water use may also result in decreased use of water services, even if our water
supplies are sufficient to serve our customers, which may adversely affect our financial condition, results of
operations and cash flows. Seasonal drought conditions that may impact our water services are possible across all
of our service areas. Governmental restrictions imposed in response to a drought may apply to all systems within
a region independent of the supply adequacy of any individual system. As examples, drought conditions had
persisted in California over a five-year period, and had been declared in New Jersey in 2016. In 2017, these
droughts were declared concluded, but other droughts that may occur from time to time may result in the
imposition of voluntary or mandatory water use targets, rationing restrictions, water conservation regulations,
and requirements to minimize water system leaks. While expenses incurred in implementing water conservation
and rationing plans may generally be recoverable provided the relevant PUC determines they were reasonable
and prudent, we cannot assure that any such expenses incurred will, in fact, be fully recovered. Moreover,
reductions in water consumption, including those resulting from installation of equipment or changed consumer
behavior, may persist even after drought restrictions are repealed and the drought has ended, which could
adversely affect our business, financial condition, results of operations and cash flows.
Climate variability may cause increased volatility in weather and may impact water usage and related revenue
or require additional expenditures, all of which may not be fully recoverable in rates or otherwise.
The issue of climate variability is receiving increasing attention nationally and worldwide. Some scientific
experts are predicting a worsening of weather volatility in the future associated with climate variability. Many
29
climate variability predictions, if true, present several potential challenges to water and wastewater utilities, such
as:
•
•
•
•
•
•
•
•
•
increased frequency and duration of droughts;
increased precipitation and flooding;
increased frequency and severity of storms and other weather events;
challenges associated with changes in temperature or increases in ocean levels;
potential degradation of water quality;
decreases in available water supply and changes in water usage patterns;
increases in disruptions in service;
increased costs to repair damaged facilities; or
increased costs to reduce risks associated with the increasing frequency of natural events, including to
improve the resiliency and reliability of our water production and delivery facilities and systems.
Because of the uncertainty of weather volatility related to climate variability, we cannot predict its potential
impact on our business, financial condition, results of operations, cash flows and liquidity. Although some or all
potential expenditures and costs with respect to our Regulated Businesses could be recovered through rates,
infrastructure replacement surcharges or other regulatory mechanisms, there can be no assurance that state PUCs
would authorize rate increases to enable us to recover such expenditures and costs, in whole or in part.
A loss of one or more large industrial customers could have a material adverse impact upon the results of
operations of one or more of our Regulated Businesses.
Adverse economic conditions or other factors can cause our customers, particularly industrial customers, to
curtail operations. A curtailment of operations by an industrial customer would typically result in reduced water
usage by that customer. In more severe circumstances, the decline in usage could be permanent. Any decrease in
demand resulting from difficult economic conditions affecting these industrial customers could adversely affect
our financial condition and results of operations. Tariffs in place with respect to our Regulated Businesses may
not reimburse us, in whole or in part, for any of these impacts.
Our Regulated Businesses require significant capital expenditures and may suffer if we fail to secure
appropriate funding to make investments, or if we experience delays in completing major capital expenditure
projects.
The water and wastewater utility business is capital intensive. We invest significant amounts of capital to
add, replace and maintain property, plant and equipment, and to improve aging infrastructure. In 2018, we
invested $1.5 billion in net Company-funded capital improvements. The level of capital expenditures necessary
to maintain the integrity of our systems will continue into the future and may increase. We expect to fund capital
improvement projects using cash generated from operations, borrowings under our revolving credit facility and
commercial paper programs and issuances of long-term debt. We may not be able to access our revolving credit
facility or the commercial paper, long-term debt and equity capital markets, when necessary or desirable to fund
capital improvements on favorable terms or at all. If we are not able to obtain sufficient financing, we could be
unable to maintain our existing property, plant and equipment, fund our capital investment strategies, meet our
growth targets and expand our rate base to enable us to earn satisfactory future returns on our investments. Even
with adequate financial resources to make required capital expenditures, we face the additional risk that we will
not complete our major capital projects on time, as a result of construction delays, permitting delays, labor
shortages or other disruptions, environmental restrictions, or other obstacles. Each of these outcomes could
adversely affect our financial condition, results of operations and cash flows.
30
Seasonality could adversely affect the volume of water sold and our revenues.
The volume of water we sell during the warmer months, typically in the summer, is generally greater than
during other months, due primarily to increased water usage for irrigation systems, swimming pools, cooling
systems and other applications. Throughout the year, and particularly during typically warmer months, the
volume of water sold tends to vary with temperature, rainfall levels and rainfall frequency. In the event that
temperatures during the typically warmer months are cooler than normal, or if there is more rainfall than normal,
the amount of water we sell may decrease and adversely affect our revenues.
Three of our jurisdictions, California, Illinois, and New York, have adopted revenue stability mechanisms
that permit us to collect state PUC-authorized revenue for a given period, which is not tied to the volume of
water sold during that period. Revenue stability mechanisms are designed to allow utilities to recover the fixed
cost of operations while supporting water conservation goals. In those jurisdictions that have not adopted a
revenue stability mechanism, operating results could continue to be affected by seasonality.
Regulatory and environmental risks associated with the collection, treatment and disposal of wastewater may
impose significant costs.
The wastewater collection, treatment and disposal operations of our subsidiaries are subject to substantial
regulation and involve environmental risks. If collection, treatment or disposal systems fail, overflow, or do not
operate properly, untreated wastewater or other contaminants could spill onto nearby properties or into nearby
streams and rivers, causing damage to persons or property, injury to aquatic life and economic damages. This risk
is most acute during periods of substantial rainfall or flooding, which are the main causes of sewer overflow and
system failure. Liabilities resulting from such damage could adversely and materially affect our business,
financial condition, results of operations and cash flows.
Contamination of water supplies or our water service provided to our customers could result in service
limitations and interruptions and exposure to substances not typically found in potable water supplies, and
could subject us and our subsidiaries to reductions in usage and other responsive obligations, government
enforcement actions, damage to our reputation and private litigation.
The water supplies that flow into our treatment plants or are delivered through our distribution system, or
the water service that is provided to our customers, may be subject to contamination, including, among other
items, contamination from naturally-occurring compounds, chemicals in groundwater systems, pollution
resulting from man-made sources (such as perchlorate, methyl tertiary butyl ether, lead and other materials,
chemical spills or other accidents that result in contaminants entering the water source), and possible terrorist
attacks. In addition, new categories of these substances continue to emerge in the water industry. If one of our
water supplies or the water service provided to our customers is contaminated, depending on the nature of the
contamination, we may have to take responsive actions that could include, among other things (1) continuing
limited use of the water supply under a “Do Not Use” protective order that enables continuation of basic
sanitation and essential fire protection, or (2) interrupting the use of that water supply. If service is disrupted, our
financial condition, results of operations, cash flows, liquidity and reputation may be adversely affected. In
addition, we may incur significant costs in order to treat the contaminated source through the expansion of our
current treatment facilities or the development of new sources of supply or new treatment methods. We may be
unable to recover costs associated with treating or decontaminating water supplies through insurance, customer
rates, tariffs or contract terms. Any recovery of these costs that we are able to obtain through regulatory
proceedings or otherwise may not occur in a timely manner. Moreover, we could be subject to claims for
damages arising from government enforcement actions or toxic tort or other lawsuits arising out of an
interruption of service or human exposure to hazardous substances in our drinking water and water supplies.
Since we engage in the business of providing water service to our customers, contamination of the water
supply, or the water service provided to our customers, could result in substantial injury or damage to our
31
customers, employees or others and we could be exposed to substantial claims and litigation. Such claims could
relate to, among other things, personal injury, loss of life, business interruption, property damage, pollution, and
environmental damage and may be brought by our customers or third parties. Litigation and regulatory
proceedings are subject to inherent uncertainties and unfavorable rulings can and do occur, and we may not be
protected from these claims or negative impacts therefrom in whole or in part by tariffs or other contract terms.
Negative impacts to our reputation may occur even if we are not liable for any contamination or other
environmental damage or the consequences arising out of human exposure to contamination or hazardous
substances in the water or water supplies. In addition, insurance coverage may not cover all or a portion of these
losses, and are subject to deductibles and other limitations. Pending or future claims against us could have a
material adverse impact on our business, financial condition, results of operations and cash flows.
We may sustain losses that exceed or are excluded from our insurance coverage or for which we are self-
insured.
We maintain insurance coverage as part of our overall legal and risk management strategy to minimize
potential liabilities arising from our utility operations, as well as the operations of our Market-Based Businesses.
Our insurance programs have varying coverage limits, exclusions and maximums, and insurance companies may
seek to deny claims we might make. Generally, our insurance policies cover property damage, worker’s
compensation, employer’s liability, general liability, cybersecurity, terrorism risks and automobile liability. Each
policy includes deductibles or self-insured retentions and policy limits for covered claims. As a result, we may
sustain losses that exceed or that are excluded from our insurance coverage or for which we are self-insured.
Although in the past we have been generally able to obtain insurance coverage related to our business, there
can be no assurance that we can secure all necessary or appropriate insurance in the future, or that such insurance
can be economically secured. For example, catastrophic events can result in decreased coverage limits, more
limited coverage, increased premium costs or deductibles.
We are subject to adverse publicity and reputational risks, which make us vulnerable to negative customer
perception and could lead to increased regulatory oversight or sanctions.
Water and wastewater utilities, including our regulated subsidiaries and our Market-Based Businesses, have
a large direct and indirect customer base and, as a result, are exposed to public criticism regarding, among other
things, the reliability of their water, wastewater and related or ancillary services, the quality of water provided,
and the amount, timeliness, accuracy and format of bills that are provided for such services. Adverse publicity
and negative consumer sentiment may render legislatures and other governing bodies, state PUCs and other
regulatory authorities, and government officials less likely to view us in a favorable light, and may cause us to be
susceptible to less favorable legislative, regulatory and economic outcomes, as well as increased regulatory or
other oversight and more stringent regulatory or economic requirements. Unfavorable regulatory and economic
outcomes may include the enactment of more stringent laws and regulations governing our operations and less
favorable economic terms in our agreements related to our Market-Based Businesses, as well as fines, penalties
or other sanctions or requirements. The imposition of any of the foregoing could have a material negative impact
on us and our financial condition, results of operations and cash flows.
New York American Water Company, Inc. (“NYAW”) has been the subject of a New York State Public
Service Commission (“NYSPSC”) investigation related to the unintentional provision of incorrect data to a
taxing authority that resulted in an over-assessment of real property taxes. NYAW self-reported this issue to the
NYSPSC promptly after NYAW’s senior leadership became aware of it. Neither NYAW nor any of its
employees received any financial benefit as a result of this matter, as all customer overpayments were provided
to the local taxing authorities. The NYSPSC investigation also related to the failure of a few employees working
on NYAW’s 2016 general rate case to properly disclose these issues in that rate case. On September 11, 2018,
the Supreme Court of the State of New York, Albany County, approved a settlement of these matters, and
NYAW is cooperating with the NYSDPS to implement its terms. As part of the settlement, NYAW agreed that it
32
would provide up to $4.5 million to benefit NYAW customers through several different mechanisms, which
amounts would not be recoverable in rates. NYAW also agreed to accelerate the timing of the payment of
approximately $6.4 million in aggregate customer credits. Finally, NYAW agreed to engage and cooperate with
an independent monitor through September 30, 2021. While the settlement resolves the NYSPSC’s investigation
involving NYAW and those matters set forth above, there can be no assurance that NYAW will not be subject to
additional federal, state or local proceedings regarding these and other related matters, and these proceedings
could result in increased oversight and civil, administrative and/or criminal sanctions, which may have a material
adverse effect upon our reputation and perception.
Unfavorable regulatory and economic outcomes also may include the enactment of more stringent laws and
regulations governing our operations and less favorable economic terms in our agreements related to our Market-
Based Businesses, as well as fines, penalties or other sanctions or requirements. The imposition of any of the
foregoing could have a material negative impact on us and our financial condition, results of operations and cash
flows.
The failure of, or the requirement to repair, upgrade or dismantle, any of our dams may adversely affect our
financial condition, results of operations, cash flows and liquidity.
The properties of our Regulated Businesses segment include 80 dams, the majority of which are earthen
dams, and the failure of any of which could result in personal injury and property damage, including without
limitation downstream property damage, for which we may be liable. The failure of a dam would also adversely
affect our ability to supply water in sufficient quantities to our customers and could adversely affect our financial
condition and results of operations. Any losses or liabilities incurred due to a failure of one of our dams might
not be covered by insurance policies or be recoverable in rates, and such losses may make it difficult for us to
secure insurance at acceptable rates in the future.
We also are required from time to time to decommission, repair or upgrade the dams that we own. The cost
of such repairs or upgrades can be and has been material. The federal and state agencies that regulate our
operations may adopt rules and regulations requiring us to dismantle our dams, which also could entail material
costs. Although in most cases, the PUC has permitted recovery of expenses and capital investment related to dam
rehabilitation, we might not be able to recover costs of repairs, upgrades or dismantling through rates in the
future. The inability to recover these costs or delayed recovery of the costs as a result of regulatory lag can affect
our financial condition, results of operations, cash flows and liquidity.
Any failure of our network of water and wastewater pipes and water reservoirs could result in losses and
damages that may affect our financial condition and reputation.
Our operating subsidiaries distribute water and collect wastewater through an extensive network of pipes
and storage systems located across the United States. A failure of major pipes or reservoirs could result in
injuries, property and other damage for which we may be liable. The failure of major pipes and reservoirs may
also result in the need to shut down some facilities or parts of our network in order to conduct repairs. Such
failures and shutdowns may limit our ability to supply water in sufficient quantities to our customers and to meet
the water and wastewater delivery requirements prescribed by government regulators, including state PUCs with
jurisdiction over our operations, and adversely affect our financial condition, results of operations, cash flows,
liquidity and reputation. Any business interruption or other losses might not be covered by insurance policies or
be recoverable in rates, and such losses may make it difficult for us to secure insurance at acceptable rates in the
future. Moreover, to the extent such business interruptions or other losses are not covered by insurance, they may
not be recovered through rate adjustments.
33
An important part of our growth strategy is the acquisition of water and wastewater systems, which involves
risks, including competition for acquisition opportunities from other regulated utilities, governmental entities
and other buyers, that may hinder or limit our ability to grow our business.
An important element of our growth strategy is the acquisition of water and wastewater systems in order to
broaden our current, and move into new, service areas. We may not be able to acquire other systems or
businesses if we cannot identify suitable acquisition opportunities or reach mutually agreeable terms with
acquisition candidates. Further, competition for acquisition opportunities from other regulated utilities,
governmental entities, and other buyers may hinder our ability to expand our business.
The negotiation of potential acquisitions as well as the integration of acquired systems or businesses with
our existing operations could require us to incur significant costs and cause diversion of our management’s time
and resources. Future acquisitions by us could result in, among other things:
•
•
•
•
•
•
•
•
•
incurrence or assumption of debt, contingent liabilities and environmental liabilities of or with respect
to an acquired business, including liabilities that were unknown at the time of acquisition;
failure to recover acquisition premiums;
unanticipated capital expenditures;
failure to maintain effective internal control over financial reporting;
recording goodwill and other intangible assets at values that ultimately may be subject to impairment
charges;
fluctuations in quarterly results;
unanticipated acquisition-related expenses;
failure to realize anticipated benefits, such as cost savings and revenue enhancements; and
difficulties in assimilating personnel, benefits, services and systems.
Some or all of these items could have a material adverse effect on our business. The systems and businesses
we acquire in the future may not achieve anticipated sales and profitability or other perceived synergies, and any
difficulties we encounter in the integration process could interfere with our operations, reduce our operating
margins and adversely affect our internal control over financial reporting.
We compete with governmental entities, other regulated utilities, and strategic and financial buyers for
acquisition opportunities. If consolidation becomes more prevalent in the water and wastewater industries and
competition for acquisitions increases, the prices for suitable acquisition candidates may increase and limit our
ability to expand through acquisitions.
Our Regulated Businesses are subject to condemnation and other proceedings through eminent domain or
other similar authorized process, which could materially and adversely affect their results of operations and
financial condition.
Municipalities and other government subdivisions have historically been involved in the provision of water
and wastewater services in the United States, and organized efforts may arise from time to time in one or more of
the service areas in which our Regulated Businesses operate to convert our assets to public ownership and
operation through exercise of the governmental power of eminent domain, or another similar authorized process.
If a municipality or other government subdivision or a citizen group seeks to acquire our assets through eminent
domain or such other process, either directly or indirectly as a result of a citizen petition, we may resist the
acquisition.
For example, on November 27, 2018, Monterey, California ballot Measure J was certified as having been
approved by a public vote, requiring the MPWMD to conduct a feasibility study and submit a written plan
34
concerning the feasibility of a potential purchase of our California subsidiary’s Monterey water service assets
without an additional public vote. Also, five municipalities in the Chicago, Illinois area formed a water agency
that filed an eminent domain lawsuit against our Illinois subsidiary in January 2013, seeking to condemn a water
pipeline that serves those five municipalities. See Item 1—Business—Regulated Businesses—Condemnation and
Eminent Domain, which includes additional information regarding these matters.
Furthermore, the law in certain jurisdictions in which our Regulated Businesses operate provides for
eminent domain rights allowing private property owners to file a lawsuit to seek just compensation against a
public utility, if the public utility’s infrastructure has been determined to be a substantial cause of damage to that
property. In these actions, the plaintiff would not have to prove that the public utility acted negligently. In
California, most recently, lawsuits have been filed in connection with large-scale natural events such as wildfires.
Some have included allegations that infrastructure of certain utilities triggered the natural event that resulted in
damage to the property. In some cases, the PUC has disallowed recovery in rates of losses incurred by these
utilities as a result of such lawsuits.
Contesting an exercise of condemnation, eminent domain or other similar process, or responding to a citizen
petition, may result in costly legal proceedings and may divert the attention of management. Moreover, our
efforts to resist the condemnation, eminent domain or other process may not be successful, which may require us
to sell the operations at issue in a condemnation proceeding or to pay a private property owner compensation for
the property damage suffered. If a municipality or other government subdivision succeeds in acquiring the assets
of one or more of our Regulated Businesses through eminent domain or other process, there is a risk that we will
not receive adequate compensation for the business, that we will not be able to keep the compensation, or that we
will not be able to divest the business without incurring significant charges. Any of these outcomes may have a
material adverse effect on our business, results of operations, financial condition, cash flows and liquidity.
We rely on technology systems to facilitate the management of our business and customer and supplier
relationships, and a disruption of these systems could adversely affect our business.
Our technology systems are an integral part of our business, and any disruption of these systems could
significantly limit our ability to manage and operate our business efficiently, which, in turn, could cause our
business and competitive position to suffer and adversely affect our results of operations. For example, we
depend on these systems to bill customers, process orders, provide customer service, manage certain plant
operations and construction projects, manage our financial records, track assets, remotely monitor certain of our
plants and facilities and manage human resources, supply chain, inventory and accounts receivable collections.
Although we do not believe that these systems are at a materially greater risk of failure than other similar
organizations, our technology systems remain vulnerable to damage or interruption from:
•
•
•
•
•
power loss, computer systems failures, and internet, telecommunications or data network failures;
operator error or improper operation by, the negligent or improper supervision of, or the intentional
acts of, employees and contractors;
physical and electronic loss of customer or employee data due to security breaches, cyber attacks,
hacking, denial of services action, misappropriation of data or other property and similar events;
computer viruses; and
severe weather and other events, including without limitation, hurricanes, tornadoes, fires, floods,
earthquakes and other disasters.
These events may result in physical and electronic loss of customer, employee or financial data, security
breaches, misappropriation of property and other adverse consequences. In addition, a lack of or inadequate
levels of redundancy for certain of these systems, including billing systems, could exacerbate the impact of any
35
of these events on us. We may not be successful in developing or acquiring technology that is competitive and
responsive to the needs of our business, and we might lack sufficient resources to make the necessary upgrades or
replacements of outdated existing technology to enable us to continue to operate at our current level of
efficiency. Any or all of these events could have a material adverse impact on our business, results of operations,
financial condition and cash flows.
We may be subject to physical and/or cyber attacks.
As operators of critical infrastructure, we may face a heightened risk of physical and/or cyber attacks from
internal or external sources. Our water and wastewater systems may be vulnerable to disability or failures as a
result of physical or cyber attacks, acts of war or terrorism, vandalism or other causes. Our operational
technology and IT systems throughout our businesses may be vulnerable to unauthorized external or internal
access, due to hacking, viruses, acts of war or terrorism, and other causes. Unauthorized access to confidential
information located or stored on these systems could negatively and materially impact our customers, employees,
suppliers and other third parties. Further, third parties, including vendors, suppliers and contractors, who perform
certain services for us or administer and maintain our sensitive information, could also be targets of cyber attacks
and unauthorized access. While we have instituted safeguards to protect our operational technology and IT
systems, those safeguards may not always be effective due to the evolving nature of cyber attacks and cyber
vulnerabilities. We cannot guarantee that such protections will be completely successful in the event of a cyber
attack.
If, despite our security measures, a significant physical attack or cyber breach occurred, our operations
could be disrupted, property damaged, and customer and other confidential information lost or stolen; experience
substantial loss of revenues, response costs and other financial loss; suffer a loss of management time, attention
and resources from our regular business operations; and be subject to increased regulation, litigation, and damage
to our reputation, any of which could have a negative impact on our business, results of operations and cash
flows. Experiencing a cyber security incident could also cause us to be non-compliant with applicable laws and
regulations or contracts that require us to securely maintain confidential data, causing us to incur costs related to
legal claims or proceedings and regulatory fines or penalties. These types of events, either impacting our
facilities or the industry in general, could also cause us to incur additional security and insurance related costs.
In addition, in the ordinary course of business, we collect and retain sensitive information, including
personally identifiable information, about our customers and employees. In many cases, we outsource
administration of certain functions to vendors that could be targets of cyber attacks. Any theft, loss and/or
fraudulent use of customer, employee or proprietary data as a result of a cyber attack could subject us to
significant litigation, liability and costs, as well as adversely impact our reputation with customers and regulators,
among others.
We have obtained cyber insurance to provide coverage for a portion of the losses and damages that may
result from a security breach of our IT systems, but such insurance is subject to a number of exclusions and may
not cover the total loss or damage caused by a breach. The market for cybersecurity insurance is relatively new
and coverage available for cybersecurity events may evolve as the industry matures. In the future, adequate
insurance may not be available at rates that we believe are reasonable, and the costs of responding to and
recovering from a cyber incident may not be covered by insurance or recoverable in rates.
Our inability to efficiently upgrade and improve our operational technology and IT systems, or implement new
systems, could result in higher than expected costs or otherwise adversely impact our internal controls
environment, operations and profitability.
Upgrades and improvements to computer systems and networks, or the implementation of new systems,
may require substantial amounts of management’s time and financial resources to complete, and may also result
in system or network defects or operational errors due to multiple factors, including employees’ ability to
36
effectively use the new or upgraded system. We continue to implement technology to improve our business
processes and customer interactions, and have installed new, and upgraded existing, technology systems. These
efforts support our broader strategic initiatives and are intended to improve our operations and enhance our
customer service capabilities. Any technical or other difficulties in upgrading and improving existing or
implementing new technology systems may increase costs beyond those anticipated and have an adverse or
disruptive effect on our operations and reporting processes, including our internal control over financial
reporting. We may also experience difficulties integrating current systems with new or upgraded systems, which
may impact our ability to serve our customers effectively or efficiently. Although we make efforts to minimize
any adverse impact on our controls, business and operations, we cannot assure that all such impacts have been or
will be mitigated, and any such impacts could harm our business (individually or collectively) and have a
material adverse effect on our results of operations, financial condition and cash flows.
Our business has inherently dangerous workplaces. If we fail to maintain safe work sites, we may experience
workforce injuries or loss of life, and be exposed to financial losses, including penalties and other liabilities.
Our safety record is critical to our reputation. We maintain health and safety standards to protect our
employees, customers, contractors, vendors and the public. Although we intend to adhere to such health and
safety standards and aim for zero injuries, it is extremely difficult to avoid all accidents or other safety incidents
at all times.
Our business sites, including construction and maintenance sites, often put our employees, contractors and
others in close proximity with large pieces of equipment, moving vehicles, pressurized water, underground
trenches and vaults, chemicals and other regulated materials. On many sites we are responsible for safety and,
accordingly, must implement safety procedures. If we fail to implement such procedures or if the procedures we
implement are ineffective or are not followed by our employees or others, our employees, contractors and others
may be injured or die. Unsafe work sites also have the potential to increase employee turnover, expose us to
litigation and raise our operating costs. Any of the foregoing could result in financial losses, which could have a
material adverse impact on our business, financial condition, results of operations and cash flows.
In addition, our operations can involve the delivery, handling and storage of hazardous chemicals, which, if
improperly delivered, handled, stored or disposed of, could result in serious injury, death or property damage,
and could subject us to penalties or other liabilities. We are also subject to regulations dealing with occupational
health and safety. Although we maintain functional employee groups whose primary purpose is to ensure we
implement effective health, safety, and environmental work procedures throughout our organization, including
construction sites and maintenance sites, the failure to comply with such regulations or procedures could subject
us to liability.
Work stoppages and other labor relations matters could adversely affect our results of operations.
As of December 31, 2018, approximately 49% of our workforce was represented by unions, and we had 70
collective bargaining agreements in place with 15 different unions representing our unionized employees. These
collective bargaining agreements, including 20 which expired in 2018, and 18 which will expire during 2019, are
subject to periodic renewal and renegotiation. We may not be able to successfully renew or renegotiate these
labor contracts on terms that are fair to us. Any negotiations or dispute resolution processes undertaken in
connection with our labor contracts could be delayed or affected by labor actions or work stoppages. Labor
actions, work stoppages or the threat of work stoppages, and our failure to obtain favorable labor contract terms
during renegotiations, may disrupt our operations and result in higher labor costs, which could adversely affect
our financial condition, results of operations, cash flows and liquidity. While we have developed contingency
plans to be implemented as necessary if a work stoppage or strike does occur, a strike or work stoppage may have
a material adverse impact on our financial position, results of operations and cash flows.
37
Our continued success is dependent upon our ability to hire, retain, and utilize qualified personnel.
The success of our business is dependent upon our ability to hire, retain, and utilize qualified personnel,
including engineers, licensed operators, water quality and other operating and craft personnel, and management
professionals who have the required experience and expertise. From time to time, it may be difficult to attract and
retain qualified individuals with the expertise and in the timeframe demanded for our business needs. In certain
geographic areas, for example, we may not be able to satisfy the demand for our services because of our inability
to successfully hire and retain qualified personnel.
In addition, as some of our key personnel approach retirement age, we need to have appropriate succession
plans in place and to successfully implement such plans. If we cannot attract and retain qualified personnel or
effectively implement appropriate succession plans, it could have a material adverse impact on our business,
financial condition, results of operations and cash flows.
Financial and Market-Related Risks
Our indebtedness could affect our business adversely and limit our ability to plan for or respond to changes in
our business, and we may be unable to generate sufficient cash flows to satisfy our liquidity needs.
As of December 31, 2018, our aggregate long-term and short-term debt balance (including preferred stock
with mandatory redemption requirements) was $8.6 billion, and our working capital (defined as current assets
less current liabilities) was in a deficit position. Our indebtedness could have important consequences, including:
•
•
•
•
•
•
•
limiting our ability to obtain additional financing to fund future working capital requirements or capital
expenditures;
exposing us to interest rate risk with respect to the portion of our indebtedness that bears interest at
variable rates;
limiting our ability to pay dividends on our common stock or make payments in connection with our
other obligations;
impairing our access to the capital markets for debt and equity;
requiring that an increasing portion of our cash flows from operations be dedicated to the payment of
the principal and interest on our debt, thereby reducing funds available for future operations, dividends
on our common stock or capital expenditures;
limiting our ability to take advantage of significant business opportunities, such as acquisition
opportunities, and to react to changes in market or industry conditions; and
placing us at a competitive disadvantage compared to those of our competitors that have less debt.
In order to meet our capital expenditure needs, we may be required to make additional borrowings under our
revolving credit facility or issue new short-term and long-term debt securities. Moreover, additional borrowings
may be required to refinance outstanding indebtedness. Debt maturities and sinking fund payments in 2019, 2020
and 2021 will be $72 million, $32 million and $303 million, respectively. We can provide no assurance that we
will be able to access the debt capital markets on favorable terms, if at all. Moreover, if new debt is added to our
current debt levels, the related risks we now face could intensify, limiting our ability to refinance existing debt on
favorable terms.
In an attempt to manage our exposure to interest rate risk associated with our issuance of variable and fixed
rate debt, we have entered into, and in the future may enter into, financial derivative instruments, including
without limitation, interest rate swaps, forward starting swaps, swaptions and U.S. Treasury lock agreements. See
Item 7A—Quantitative and Qualitative Disclosures About Market Risk. However, these efforts may not be
effective to fully mitigate interest rate risk, and may expose us to other risks and uncertainties, including
quarterly “mark to market” valuation risk associated with these instruments, that could negatively and materially
affect our financial condition, results of operations and cash flows.
38
We will depend primarily on cash flows from operations to fund our expenses and to pay the principal and
interest on our outstanding debt. Therefore, our ability to pay our expenses and satisfy our debt service
obligations depends on our future performance, which will be affected by financial, business, economic,
competitive, legislative (including tax initiatives and reforms, and other similar legislation or regulation),
regulatory and other factors largely beyond our control. If we do not have sufficient cash flows to pay the
principal and interest on our outstanding debt, we may be required to refinance all or part of our existing debt,
reduce capital investments, sell assets, borrow additional funds or sell additional equity. In addition, if our
business does not generate sufficient cash flows from operations, or if we are unable to incur indebtedness
sufficient to enable us to fund our liquidity needs, we may be unable to plan for or respond to changes in our
business, which could cause our financial condition, operating results and prospects to be affected adversely.
Our inability to access the capital or financial markets or other events could affect our ability to meet our
liquidity needs at reasonable cost and our ability to meet long-term commitments, which could adversely affect
our financial condition and results of operations.
In addition to cash from operations, we rely primarily on our revolving credit facility, commercial paper
programs, and the capital markets to satisfy our liquidity needs. In this regard, our principal external sources of
short-term liquidity are our $2.10 billion commercial paper program and our $2.25 billion revolving credit
facility. Our revolving credit facility expires in accordance with its terms in March 2023. We regularly use our
commercial paper program under this revolving credit facility as a principal source of short-term borrowing due
to the generally more attractive rates we generally can obtain in the commercial paper market. As of
December 31, 2018, American Water Capital Corp. (“AWCC”), our wholly owned financing subsidiary, had no
outstanding borrowings under the revolving credit facility, and had $954 million of commercial paper
outstanding and $81 million in outstanding letters of credit. There can be no assurance that AWCC will be able to
continue to access its commercial paper program or its revolving credit facility, when, as and if desired, or that
the amount of capital available thereunder will be sufficient to meet all of our liquidity needs at a reasonable, or
any, cost.
Under the terms of our revolving credit facility, our consolidated debt cannot exceed 70% of our
consolidated capitalization, as determined under the terms of the credit facility. If our equity were to decline or
debt were to increase to a level that caused our debt to exceed this limit, lenders under the credit facility would be
entitled to refuse any further extension of credit and to declare all of the outstanding debt under the credit facility
immediately due and payable. To avoid such a default, a waiver or renegotiation of this covenant would be
required, which would likely increase funding costs and could result in additional covenants that would restrict
our operational and financing flexibility.
Our ability to comply with this and other covenants contained in the revolving credit facility and our other
consolidated indebtedness is subject to various risks and uncertainties, including events beyond our control. For
example, events that could cause a reduction in equity include, without limitation, a significant write-down of our
goodwill. Even if we are able to comply with this or other covenants, the limitations on our operational and
financial flexibility could harm our business by, among other things, limiting our ability to incur indebtedness or
reduce equity in connection with financings or other corporate opportunities that we may believe would be in our
best interests or the interests of our shareholders to complete.
Disruptions in the capital markets or changes in our credit ratings could also limit our ability to access
capital on terms favorable to us or at all. On January 2018, Moody’s Investors Service changed its rating outlook
from stable to negative for 24 regulated utilities and utility holding companies, including us. While the lending
banks that participate in our revolving credit facility have met all of their obligations, disruptions in the credit
markets, changes in our credit ratings, or deterioration of the banking industry’s financial condition could
discourage or prevent lenders from meeting their existing lending commitments, extending the terms of such
commitments, or agreeing to new commitments. These or other occurrences may cause our lenders to not meet
their existing commitments, and we may not be able to access the commercial paper or loan or debt markets in
39
the future on terms acceptable to us or at all. Furthermore, our inability to maintain, renew or replace
commitments under this facility could materially increase our cost of capital and adversely affect our financial
condition, results of operations and liquidity. Longer-term disruptions in the capital and credit markets as a result
of uncertainty, including as a result of changes in U.S. tax and other laws, reduced financing alternatives, or
failures of significant financial institutions could adversely affect our access to the liquidity needed for our
business. Any significant disruption in the capital, debt or credit markets, or financial institution failures could
require us to take measures to conserve cash until the market stabilizes or until alternative financing can be
arranged. Such measures could include deferring capital expenditures, reducing or suspending dividend
payments, and reducing other discretionary expenditures.
Any of the foregoing events that impede our access to the capital markets, or the failure of any of our
lenders to meet their commitments that result from financial market disruptions, could expose us to increased
interest expense, require us to institute cash conservation measures or otherwise adversely and materially affect
our business, financial condition, results of operations, cash flows and liquidity.
American Water may be unable to meet its ongoing and future financial obligations and to pay dividends on
its common stock if its subsidiaries are unable to pay upstream dividends or repay funds to American Water.
American Water is a holding company and, as such, American Water has no substantive operations of its
own. Substantially all of our consolidated assets are held by subsidiaries. American Water’s ability to meet its
financial obligations and to pay dividends on its common stock is primarily dependent on the net income and
cash flows of its subsidiaries and their ability to pay upstream dividends to American Water or repay
indebtedness to American Water. Prior to paying dividends to American Water, American Water’s regulated
subsidiaries must comply with applicable regulatory restrictions and financial obligations, including, for
example, debt service and preferred and preference stock dividends, as well as applicable corporate, tax and other
laws and regulations and agreements, and covenants and other agreements made or entered into by American
Water and its subsidiaries. American Water’s subsidiaries are separate legal entities and have no obligation to
pay dividends to American Water. A failure or inability of any of these subsidiaries to pay such dividends or
repay intercompany obligations could have a material adverse impact on American Water’s liquidity and its
ability to pay dividends on its common stock and meet its other obligations.
We may not be able to fully utilize our U.S. and state net operating loss carryforwards.
As of December 31, 2018, we had U.S. federal and state NOL carryforwards of approximately $707 million
and $547 million, respectively, and management believes it is more likely than not that these NOL carryforwards
will be recovered in the future. With the enactment of the TCJA, the Company analyzed the impacts of the
reduction in the U.S. federal corporate income tax rate from 35% to 21% on the Company’s deferred tax assets
and liabilities, including its NOL carryforwards, and as a result, remeasured those NOL carryforwards as of the
date of enactment of the TCJA based on this tax rate change.
Our federal NOL carryforwards will begin to expire in 2028, and our state NOL carryforwards began to
expire in 2019 and will continue to expire through 2037. We expect to fully utilize our federal NOL balance
before it expires, and our ability to do so is primarily dependent upon our ability to generate sufficient taxable
income. We have, in the past, been unable to utilize certain of our state NOL carryforwards, and the
establishment or increase of a valuation allowance in the future would reduce our deferred income tax assets and
our net income.
Our actual results may differ from those estimated by management in making its assessment as to our ability
to use the NOL carryforwards. Moreover, adoption of Related Interpretations with respect to the TCJA and other
changes in income tax laws, the economy and the general business environment could affect the future utilization
of our NOL carryforwards. If we are unable to fully utilize our NOL carryforwards to offset taxable income
generated in the future, our financial position, results of operations and cash flows could be materially adversely
affected.
40
We have recorded a significant amount of goodwill, and we may never realize the full value of our intangible
assets, causing us to record impairments that may negatively affect our results of operations.
Our total assets include $1.6 billion of goodwill at December 31, 2018. The goodwill is primarily associated
with the acquisition of American Water by an affiliate of our previous owner in 2003, the acquisition of E’town
Corporation by a predecessor to our previous owner in 2001, the acquisition of Pivotal in 2018 and, to a lesser
extent, the acquisition of Keystone in 2015. Goodwill represents the excess of the purchase price the purchaser
paid over the fair value of the net tangible and other intangible assets acquired. Goodwill is recorded at fair value
on the date of an acquisition and is reviewed annually or more frequently if changes in circumstances indicate the
carrying value may not be recoverable. As required by the applicable accounting rules, we have taken significant
non-cash charges to operating results for goodwill impairments in the past.
We may be required to recognize an impairment of goodwill in the future due to market conditions or other
factors related to our performance or the performance of an acquired business. These market conditions could
include a decline over a period of time of our stock price, a decline over a period of time in valuation multiples of
comparable water utilities, market price performance of our common stock that compares unfavorably to our peer
companies, decreases in control premiums, or, with respect to Keystone, fluctuations in the level of exploration
and production activities in the Marcellus and Utica shale regions served by Keystone, a prolonged depression of
natural gas prices or other factors that negatively impact our current or future forecasts of operating results, cash
flows or key assumptions. In this regard, in the third quarter of 2018, we strategically narrowed the scope of the
Keystone business solely to water transfer services due to operational and financial challenges in the other
businesses of Keystone. As a result of this strategic change, we recorded a non-cash, pre-tax impairment charge
of $57 million in the third quarter of 2018 related to Keystone. See Note 8—Goodwill and Other Intangible
Assets in the Notes to Consolidated Financial Statements for further information.
A decline in the results forecasted in our business plan due to events such as changes in rate case results,
capital investment budgets or interest rates, could also result in an impairment charge. Recognition of
impairments of goodwill would result in a charge to income in the period in which the impairment occurred,
which may negatively affect our financial condition, results of operations and total capitalization. The effects of
any such impairment could be material and could make it more difficult to maintain our credit ratings, secure
financing on attractive terms, maintain compliance with debt covenants and meet the expectations of our
regulators.
Market conditions may impact the value of benefit plan assets and liabilities, as well as assumptions related to
the benefit plans, which may require us to provide significant additional funding.
The performance of the capital markets affects the values of the assets that are held in trust to satisfy
significant future obligations under our pension and postretirement benefit plans. The value of these assets is
subject to market fluctuations, which may cause investment returns to fall below our projected return rates. A
decline in the market value of the pension and postretirement benefit plan assets can increase the funding
requirements under our pension and postretirement benefit plans. Additionally, our pension and postretirement
benefit plan liabilities are sensitive to changes in interest rates. If interest rates decrease, our liabilities would
increase, potentially increasing benefit expense and funding requirements. Further, changes in demographics,
such as increases in life expectancy assumptions and increasing trends in health care costs may also increase our
funding requirements. Future increases in pension and other postretirement costs as a result of reduced plan
assets may not be fully recoverable in rates, in which case our results of operations and financial position could
be negatively affected.
In addition, market factors can affect assumptions we use in determining funding requirements with respect
to our pension and postretirement plans. For example, a relatively modest change in our assumptions regarding
discount rates can materially affect our calculation of funding requirements. To the extent that market data
compels us to reduce the discount rate used in our assumptions, our benefit obligations could be materially
increased, which could adversely affect our financial position, results of operations and cash flows.
41
New accounting standards or changes to existing accounting standards could materially impact how we report
our results of operations, cash flow and financial condition.
Our Consolidated Financial Statements are prepared in accordance with GAAP. The SEC, the Financial
Accounting Standards Board or other authoritative bodies or governmental entities may issue new
pronouncements or new interpretations of existing accounting standards that may require us to change our
accounting policies. These changes are beyond our control, can be difficult to predict and could materially impact
how we report our results of operations, cash flow and financial condition. We could be required to apply a new
or revised standard retroactively, which could adversely affect our results of operations, cash flow and financial
condition.
Undetected errors in internal controls and information reporting could result in the disallowance of cost
recovery and noncompliant disclosure.
Our internal controls, accounting policies and practices and internal information systems are designed to
enable us to capture and process transactions and information in a timely and accurate manner in compliance
with GAAP, taxation requirements, federal securities laws and regulations and other laws and regulations
applicable to us. Such compliance permits us to, among other things, disclose and report financial and other
information in connection with the recovery of our costs and with the reporting requirements under federal
securities, tax and other laws and regulations.
We have implemented corporate governance, internal control and accounting policies and procedures in
connection with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and relevant SEC rules, as well as
other applicable regulations. Such internal controls and policies have been and continue to be closely monitored
by our management and Board of Directors to ensure continued compliance with these laws, rules and
regulations. Management is also responsible for establishing and maintaining internal control over financial
reporting and is required to assess annually the effectiveness of these controls. While we believe these controls,
policies, practices and systems are adequate to verify data integrity, unanticipated and unauthorized actions of
employees or temporary lapses in internal controls due to shortfalls in oversight or resource constraints could
lead to undetected errors that could result in the disallowance of cost recovery and noncompliant disclosure and
reporting. The consequences of these events could have a negative impact on our results of operations and
financial condition. The inability of management to certify as to the effectiveness of these controls due to the
identification of one or more material weaknesses in these controls could also increase financing costs or could
also adversely affect our or AWCC’s ability to access the capital markets.
Additional Risks Related to Our Market-Based Businesses
We (excluding our regulated subsidiaries) provide performance guarantees with respect to certain obligations
of our Market-Based Businesses, including financial guarantees or deposits, to our public-sector and public
clients, and these clients may seek to enforce the guarantees if our Market-Based Businesses do not satisfy
these obligations.
Under the terms of some of our agreements for the provision of services to water and wastewater facilities
with municipalities, other governmental entities and other customers, American Water (excluding our regulated
subsidiaries) provides guarantees of specified performance obligations of our Market-Based Businesses,
including financial guarantees or deposits, primarily related to Military Service Group. In the event our Market-
Based Businesses fail to perform these obligations, the entity holding the guarantees may seek to enforce the
performance commitments against us or proceed against the deposit. In that event, our financial condition, results
of operations, cash flows, and liquidity could be adversely affected.
At December 31, 2018, we had remaining performance commitments as measured by remaining contract
revenue totaling approximately $4.3 billion related to our Military Services Group contracts, and this amount is
likely to increase if our Market-Based Businesses expand. The presence of these commitments may adversely
affect our financial condition and make it more difficult for us to secure financing on attractive terms.
42
Our Market-Based Businesses’ operations under our Military Services Group are subject to various risks
associated with doing business with the U.S. government.
We enter into contracts with the U.S. government for the operation and maintenance of water and
wastewater systems, which contracts may be terminated, in whole or in part, prior to the end of the 50-year term
for convenience of the U.S. government or as a result of default or non-performance by the subsidiary performing
the contract. In addition, the contract price for each of these military contracts is typically subject to
redetermination two years after commencement of operations and every three years thereafter. Price
redetermination is a contract mechanism to periodically adjust the service fee in the next period to reflect
changes in contract obligations and anticipated market conditions. Any early contract termination or unfavorable
price redetermination could adversely affect our financial condition, results of operations and cash flows.
Moreover, entering into contracts with the U.S. government subjects us to a number of operational and
compliance risks, including dependence on the level of government spending and compliance with and changes
in governmental procurement and security regulations. We are subject to potential government investigations of
our business practices and compliance with government procurement and security regulations, which are
complex, and compliance with these regulations can be expensive and burdensome. If we were charged with
wrongdoing as a result of an investigation, we could be suspended or barred from bidding on or receiving awards
of new contracts with the U.S. government or our existing contracts could be terminated, which could have a
material adverse effect on our results of operations and cash flows.
Our Market-Based Businesses under the Contract Services Group operate a limited number of water and
wastewater systems under long-term O&M contracts and face the risk that the owners of those systems may
fail to provide capital to properly maintain those systems, which may negatively affect the Contract Services
Group as the operator of the systems, and we may incur costs in excess of payments received.
The Contract Services Group operates a limited number of water and wastewater systems under O&M
contracts. Pursuant to these contracts, the Contract Services Group operates the system according to the standards
set forth in the applicable contract, and it is generally the responsibility of the owner of the system to undertake
capital improvements. In some cases, the Contract Services Group may not be able to convince the owner to
make needed improvements in order to maintain compliance with applicable regulations. Although violations and
fines incurred by water and wastewater systems may be the responsibility of the owner of the system under these
contracts, those non-compliance events may reflect poorly on the Contract Services Group as the operator of the
system and us, and damage our reputation, and in some cases, may result in liability to us to the same extent as if
we were the owner.
In addition, the Contract Services Group has entered into long-term contracts under which they agree to
operate and maintain a municipality’s or other party’s water or wastewater treatment and delivery facilities,
which includes specified major maintenance for some of those facilities, in exchange for an annual fee. The
Contract Services Group is generally subject to the risk that costs associated with operating and maintaining the
facilities, including production costs such as purchased water, electricity, fuel and chemicals used in water
treatment, may exceed the fees received from the municipality or other contracting party. Losses under these
contracts or guarantees may adversely affect our financial condition, results of operations, cash flows and
liquidity.
Keystone’s operations may expose us to substantial costs and liabilities with respect to environmental laws and
matters.
Keystone’s operations, and the operation generally of natural gas and oil exploration and production
facilities by Keystone’s customers, are subject to stringent federal, state and local laws, rules, regulations and
ordinances governing the release of materials into the environment or otherwise relating to environmental
protection. These provisions may require the acquisition by Keystone of permits or licenses before providing its
43
services to customers, prohibit the release of substances defined thereunder as hazardous in connection with these
activities, and impose substantial liabilities for the violation thereof that may result from these operations. Failure
to comply with these laws, rules, regulations and ordinances may result in substantial environmental remediation
and other costs to Keystone, the assessment of administrative, civil and criminal penalties or the issuance of
injunctions restricting or prohibiting certain activities. Under existing environmental laws and regulations,
Keystone could be held strictly liable for the removal or remediation of previously released materials or property
contamination regardless of whether the release resulted from its operations, or whether its operations were in
compliance with all applicable laws at the time they were performed. While we have structured and maintained
our ownership and control of Keystone’s operations in such a way that we believe should insulate the Company,
its regulated subsidiaries and its other Market-Based Businesses from any liabilities associated with Keystone’s
operations, including liabilities for environmental matters, there can be no assurance that such efforts will be
sufficient to prevent the Company from incurring liability for the operations of Keystone.
Changes in environmental laws and regulations occur frequently, and any changes to these or other laws
governing the natural gas and oil exploration industry that result in more stringent or costly water or wastewater
handling, storage, transport, disposal or cleanup requirements could require Keystone to make significant
expenditures to maintain compliance with such requirements, may harm Keystone’s business and results of
operations by reducing the demand for Keystone’s water and related services, and may otherwise have a material
adverse effect on Keystone’s competitive position, financial condition, results of operations and cash flows.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Our properties consist primarily of (i) water and wastewater treatment plants, (ii) mains and pipes used for
transmission, distribution and collection of water and wastewater, (iii) wells and other sources of water supply,
such as reservoirs, (iv) water and wastewater pumping stations, (v) meters and fire hydrants, (vi) general
structures, including buildings, dams and treated water storage facilities, (vii) land and easements, (viii) vehicles,
(ix) software rights, and (x) other equipment and facilities, the majority of which are used directly in the
operation of our systems. Substantially all of our properties are owned by our subsidiaries, with a large
percentage subject to liens of our mortgage bonds. We own our corporate headquarters, located in Camden, New
Jersey, and we lease office space, equipment and furniture from certain of our wholly owned subsidiaries. These
properties are utilized by our directors, officers and staff in the conduct of the business.
The properties of our Regulated Businesses consist mainly of approximately:
•
•
•
•
•
•
•
•
•
81 surface water treatment plants;
530 groundwater treatment plants;
10 combined (surface water and groundwater) treatment plants;
130 wastewater treatment plants;
51,000 miles of transmission, distribution and collection mains and pipes;
1,000 groundwater wells;
1,400 water and wastewater pumping stations;
1,300 treated water storage facilities; and
80 dams.
44
We have ongoing infrastructure renewal programs in all states in which our Regulated Businesses operate.
These programs consist of both the rehabilitation of existing mains and equipment, and the replacement of mains
and equipment that have been damaged or have reached, or are near, the end of their useful service lives. The
properties of our Market-Based Businesses consist mainly of office furniture and IT equipment, and are primarily
located in New Jersey. Approximately 52% of all properties that we own are located in New Jersey and
Pennsylvania.
We maintain property insurance against loss or damage to our properties by fire or other perils, subject to
certain exceptions. For insured losses, we are self-insured to the extent that any losses are within the policy
deductible or exceed the amount of insurance maintained.
We believe that our properties are generally maintained in good operating condition and in accordance with
current standards of good water and wastewater industry practice.
ITEM 3. LEGAL PROCEEDINGS
Alternative Water Supply in Lieu of Carmel River Diversions
Compliance with SWRCB Orders to Reduce Carmel River Diversions
Under the 2009 Order, Cal Am is required, among other things, to decrease significantly its yearly
diversions of water from the Carmel River according to a set reduction schedule. The 2009 Order responded to
claims that Cal Am had not sufficiently implemented actions to terminate its unpermitted diversions of water
from the Carmel River as required by a 1995 order of the SWRCB. In July 2016, at the request of Cal Am and
several Monterey County government agencies, the SWRCB issued the 2016 Order approving a five-year
extension of the deadline to comply with the 2009 Order, to December 31, 2021.
The 2009 Order includes a condition prohibiting Cal Am from diverting water from the Carmel River for
new service connections or for any increased use of water at existing service addresses resulting from a change in
zoning or use. In 2011, the California Public Utilities Commission (the “CPUC”) issued a decision directing
modifications in Cal Am’s tariffs to recognize the moratorium mandated by the 2009 Order, and directing Cal
Am to seek written guidance from the SWRCB with respect to any unresolved issues of interpretation or
implementation of this condition. In 2012, the Deputy Director of the SWRCB sent a letter to Cal Am providing
an interpretation as to the calculation of a baseline to determine increases in use of water at existing service
addresses. On March 19, 2018, the MPWMD adopted a resolution directing Cal Am to interpret the baseline in a
manner that conflicts with the SWRCB’s written interpretation. On May 4, 2018, Cal Am notified the MPWMD
and the SWRCB that it intends to seek declaratory relief concerning the conflicting regulatory interpretations
under the 2009 Order. In an attempt to resolve these conflicting interpretations prior to seeking judicial
intervention, Cal Am met with the MPWMD and the SWRCB several times. The SWRCB has circulated
revisions to its 2012 interpretive letter, which are being reviewed and discussed by the parties. Any failure to
follow the MPWMD’s resolution or the SWRCB’s written interpretation, despite these conflicting
interpretations, could potentially result in fines, penalties and other actions against Cal Am.
The 2016 Order provides that if the CPUC authorizes Cal Am to acquire more than 1,000 acre-feet per year
of water from a source other than the Water Supply Project, proponents of the alternative water source could
submit revised milestones to the SWRCB for consideration. On May 8, 2018, certain parties to the Water Supply
Project proceeding submitted a petition to the SWRCB to add parallel milestones to the 2009 Order for 2019,
2020, and 2021, based on the proposed expansion of the Pure Water Monterey project, another groundwater
replenishment project under construction on the Monterey peninsula. Petitioners claim that compliance with the
alternate milestones would still provide for cessation of Cal Am’s unauthorized diversions from the Carmel River
by 2021. A preliminary report on feasibility concluded that the expanded Pure Water Monterey project could
provide an additional 2,250 acre-feet of water per year. Cal Am believes that (i) the petition is premature, (ii) the
expanded Pure Water Monterey project is not yet a sufficiently certain or reliable water supply and, even if
45
construction is successfully completed, would provide an insufficient quantity of water to allow full compliance
with the 2009 Order, and (iii) the imposition of parallel milestones would distract from completion of the Water
Supply Project. This petition remains pending.
Regional Desalination Project Litigation
Review of CPUC-Approved Settlement Agreement
The Regional Desalination Project (the “RDP”) involved the construction of a desalination facility in the
City of Marina, north of Monterey. The RDP was intended to, among other things, eliminate unauthorized
diversions from the Carmel River as required under the 2009 Order. In December 2010, the CPUC approved the
RDP, which was to be implemented through a Water Purchase Agreement and ancillary agreements (collectively,
the “Agreements”) among the Marina Coast Water District (“MCWD”), the Monterey County Water Resources
Agency (“MCWRA”) and Cal Am. In 2011, due to a conflict of interest concerning a former member of
MCWRA’s Board of Directors, MCWRA stated that the Agreements were void, and, as a result, Cal Am
terminated the Agreements. In April 2015, the CPUC approved a settlement agreement among Cal Am,
MCWRA and the County of Monterey to resolve these matters among the parties signing the agreement. In
March 2016, the Supreme Court of California granted MCWD’s petition for review of the CPUC approval, and
following the court’s disposition of a related issue in another case, MCWD’s petition for review of the CPUC-
approved settlement agreement was remanded to the CPUC, and remains pending.
Cal Am’s Action for Damages Following RDP Termination
In October 2012, Cal Am filed a Complaint for Declaratory Relief against MCWRA and MCWD, which
was ultimately transferred to the San Francisco County Superior Court, seeking a determination as to whether the
Agreements are void as a result of the alleged conflict of interest. In June 2015, the court entered a final
judgment agreeing with Cal Am’s position that four of the five Agreements are void, and one, the credit line
agreement, is not void. In November 2016, the Supreme Court of California denied MCWD’s final appeal of this
judgment, which allows further proceedings, discussed below, to determine the amount of damages that may be
awarded in the proceeding.
In July 2015, Cal Am and MCWRA filed a Complaint in San Francisco County Superior Court against
MCWD and RMC Water and Environment (“RMC”), a private engineering consulting firm, seeking to recover
compensatory damages in excess of $10 million associated with the failure of the RDP, as well as punitive and
treble damages, statutory penalties and attorneys’ fees. Shortly thereafter, complaints seeking similar damages
were filed in the same court by MCWD and RMC against Cal Am and MCWRA in excess of $19 million in the
aggregate. In December 2015, the court consolidated all of these complaints into a single action. Trial in the
consolidated action currently remains set for March 25, 2019 in San Francisco County Superior Court.
Monterey Peninsula Water Supply Project
CPUC Final Approval of Water Supply Project
The Water Supply Project is intended to reduce water diversions from the Carmel River and involves
construction of a desalination plant, owned by Cal Am, and purchase of water by Cal Am from a groundwater
replenishment project (the “GWR Project”) between the Monterey Regional Water Pollution Control Agency and
the MPWMD. Cal Am’s ability to move forward on the Water Supply Project is and has been subject to
extensive administrative review by the CPUC and other government agencies, obtaining necessary permits, and
intervention from other parties. In September 2016, the CPUC unanimously approved a decision to authorize Cal
Am to enter into a water purchase agreement for the GWR Project and to construct a pipeline and pump station
facilities and recover up to $50 million in associated costs, subject to meeting certain criteria. If construction
costs exceed $50 million, Cal Am would be allowed to seek additional cost recovery.
46
On August 13, 2018, the CPUC issued its proposed decision granting Cal Am’s request for a CPCN for a
6.4 million gallons per day desalination plant, certifying the final Environmental Impact Report/Environmental
Impact Statement (“EIR/EIS”) and denying all other outstanding motions. On September 13, 2018, the CPUC
unanimously adopted a final decision (i) finding that the Water Supply Project meets the CPUC’s requirements
for a CPCN, and (ii) finding that (a) the issuance of the final decision should not be delayed, and (b) an additional
procedural phase was not necessary to consider alternative projects. The CPUC’s decision directs Cal Am to
enter into negotiations regarding expansion of the GWR Project between the Monterey Regional Water Pollution
Control Agency and the MPWMD and to indicate whether Cal Am plans to file an application for approval of an
agreement to purchase additional water from the GWR Project. The decision notes, however, that the CPUC will
only consider such an application if the Water Supply Project is delayed such that Cal Am would not be able to
meet the December 31, 2021 deadline to comply with the 2009 Order. The decision accepts Cal Am’s estimates
of future water demand in Monterey and concludes that the Water Supply Project is the best project to address
those needs, and adopts Cal Am’s most recent cost estimates. The decision also allows Cal Am to earn an
allowance for funds used during construction, or AFUDC, at a rate representative of its actual financing costs.
The final decision adopted frameworks as to cost caps, O&M costs, financing, ratemaking and contingency
matters.
In addition, the CPUC final decision imposes numerous reporting and filing requirements to ensure the
expenditures for the Water Supply Project are reasonable, including that the financing is the lowest cost and most
beneficial for ratepayers, and that construction is progressing in a timely manner and within the authorized cost
caps. The reasonableness of Water Supply Project costs will be reviewed in the first general rate case filed by Cal
Am after the Water Supply Project becomes operational. Cal Am is also required to implement mitigation
measures to avoid, minimize or offset significant environmental impacts from the construction and operation of
the Water Supply Project and comply with a mitigation monitoring and reporting program, a reimbursement
agreement for CPUC costs associated with that program, and reporting requirements on plant operations
following placement of the Water Supply Project in service. Consistent with that decision, on December 31,
2018, Cal Am sought adjustments to certain financing and ratemaking provisions, including the timing and
amount of surcharge recovery, and addressed related implementation issues.
On October 19, 2018, MCWD and the City of Marina filed applications for rehearing before the CPUC. Cal
Am filed its response to the applications for rehearing on November 5, 2018. On January 31, 2019, the CPUC
denied these applications for rehearing.
On October 12, 2018, MCWD and the City of Marina filed petitions for writ of review in the Supreme Court
of California challenging the sufficiency of the final EIR/EIS. On December 12, 2018, the Supreme Court of
California denied the petitions for writ of review without prejudice to the filing of renewed submissions upon
completion of the rehearing proceedings pending before the CPUC. The City of Marina and MCWD filed their
renewed petitions for writ of review on January 16, 2019 and January 17, 2019, respectively.
Coastal Development Permit Application
On June 22, 2018, Cal Am submitted a coastal development permit application to the City of Marina for
those project components of the Water Supply Project located within the City of Marina’s coastal zone. Members
of the City’s Planning Commission, as well as City councilpersons, have publicly expressed opposition to the
Water Supply Project. On August 9, 2018, the City deemed Cal Am’s application incomplete pending
certification and submission of the final environmental impact report, and stated that the City could not rule on
the permit until certification. As noted above, the CPUC certified the final EIR/EIS for the Water Supply Project
on September 13, 2018. A public hearing before the Planning Commission on Cal Am’s application was held on
February 14, 2019, and the Planning Commission voted to direct staff to prepare findings supporting a denial of
the application. The Planning Commission continued the hearing until March 7, 2019, at which time it is
expected to take formal action on the application.
47
Proposed Zoning Changes at Cemex Site for Slant Wells
On August 30, 2018, the City circulated a public review draft of proposed amendments to its local coastal
program and zoning ordinance, and placed the matter for consideration on the Planning Commission’s agenda for
its September 13, 2018 meeting. The proposed amendments would change zoning at the Cemex site to open
space and restrict future uses, including with respect to Cal Am’s planned use of the site for the slant wells for
the Water Supply Project. Any change to the City’s local coastal program must ultimately be approved by the
California Coastal Commission (the “Coastal Commission”). Cal Am, Cemex and the Coastal Commission each
submitted letters opposing the proposed amendments. At its November 8, 2018 meeting, the Planning
Commission adopted a resolution recommending that the Marina City Council consider approving the
amendments.
On December 4, 2018, the Marina City Council considered the proposed amendments. Cal Am, Cemex and
the Coastal Commission again submitted letters opposing the proposed changes, but the City Council
unanimously adopted a resolution amending its local coastal plan and a draft amendment to its zoning ordinance.
Changes to the ordinance require a second reading before becoming final, which occurred at the City’s
December 18, 2018 meeting. The changes to the local coastal plan must be submitted to the Coastal Commission
for approval and are not effective until such approval is obtained.
Test Slant Well Permitting
A preliminary step to building the Water Supply Project desalination plant is the construction and operation
of a test slant well to confirm the suitability of the property on which intake wells will be located to draw water
from under Monterey Bay. In November 2014, the Coastal Commission approved coastal development permits
for the test slant well, enabling Cal Am to construct and operate the test slant well. The Coastal Commission has
approved permit amendments to allow the test slant well to remain and place and be maintained until
February 28, 2020. A required lease obtained from the California State Lands Commission, as amended, will
expire on December 16, 2019. Effective February 28, 2018, test slant well pumping ceased, except for minimal
maintenance pumping activities, in accordance with Cal Am’s coastal development permits.
In November 2015, MCWD filed a Petition for Writ of Mandate and Complaint for Declaratory and
Injunctive Relief in Santa Cruz County Superior Court against the Coastal Commission and Cal Am challenging
the amendment of the coastal development permits and seeking an injunction against further test well pumping.
In orders issued in September 2016 and October 2017, the court denied MCWD’s challenges. On January 12,
2018, MCWD filed a notice of appeal of the court’s judgment. On March 13, 2018, Cal Am filed a motion to
dismiss MCWD’s appeal, which was denied on June 25, 2018. The appeal remains pending.
In July 2017, the Coastal Commission adopted a consent agreement and cease and desist order requiring
sand mining operations on the property on which intake wells will be located to cease by the end of 2020 and the
property to be sold to either a non-profit or governmental entity. The consent agreement strictly limits future use
of the property but preserves Cal Am’s existing property rights and allows uses consistent with existing
easements and other rights of record.
Based on all of the foregoing, Cal Am estimates that the earliest date by which the Water Supply Project
desalination plant could be completed is sometime in 2021. There can be no assurance that the Water Supply
Project will be completed on a timely basis, if ever. Furthermore, there can be no assurance that Cal Am will be
able to comply with the diversion reduction requirements and other remaining requirements under the 2009
Order and the 2016 Order, or that any such compliance will not result in material additional costs or obligations
to Cal Am or the Company.
West Virginia Elk River Freedom Industries Chemical Spill
See Note 16—Commitments and Contingencies—Contingencies—West Virginia Elk River Freedom
Industries Chemical Spill in the Notes to Consolidated Financial Statements for information regarding the final
48
court approval of the global settlement with respect to the January 2014 Freedom Industries, Inc. chemical spill,
which is incorporated herein by reference.
In April 2017, the Lincoln County (West Virginia) Commission (the “LCC”) filed a complaint in Lincoln
County state court against West Virginia-American Water Company (“WVAWC”) and certain other defendants
not affiliated with the Company, which in June 2017 was transferred to the West Virginia Mass Litigation Panel,
alleging that the Freedom Industries chemical spill caused a public nuisance in Lincoln County under an
ordinance enacted by the LCC in March 2017, more than three years after the Freedom Industries chemical spill
occurred. The complaint sought an injunction against WVAWC that would have required the creation of various
databases and public repositories of documents related to the Freedom Industries chemical spill, as well as
further study and risk assessments regarding the alleged exposure of Lincoln County residents to the released
chemicals. On July 31, 2018, WVAWC filed a motion to dismiss the LCC’s complaint. On December 12, 2018,
the Mass Litigation Panel granted WVAWC’s motion to dismiss on several grounds, including being barred by
the applicable statute of limitations, failure to allege a nuisance under applicable law, lack of standing, improper
retroactive application of the nuisance ordinance and violation of WVAWC’s due process. The LCC declined to
appeal this ruling.
Dunbar, West Virginia Water Main Break Class Action Litigation
On the evening of June 23, 2015, a 36-inch pre-stressed concrete transmission water main, installed in the
early 1970s, failed. The water main is part of WVAWC’s West Relay pumping station located in the City of
Dunbar. The failure of the main caused water outages and low pressure to up to approximately 25,000 WVAWC
customers. In the early morning hours of June 25, 2015, crews completed a repair, but that same day, the repair
developed a leak. On June 26, 2015, a second repair was completed and service was restored that day to
approximately 80% of the impacted customers, and to the remaining approximately 20% by the next morning.
The second repair showed signs of leaking but the water main was usable until June 29, 2015 to allow tanks to
refill. The system was reconfigured to maintain service to all but approximately 3,000 customers while a final
repair was completed safely on June 30, 2015. Water service was fully restored on July 1, 2015 to all customers
affected by this event.
On June 2, 2017, a class action complaint was filed in West Virginia Circuit Court in Kanawha County
against WVAWC on behalf of a purported class of residents and business owners who lost water service or
pressure as a result of the Dunbar main break. The complaint alleges breach of contract by WVAWC for failure
to supply water, violation of West Virginia law regarding the sufficiency of WVAWC’s facilities and negligence
by WVAWC in the design, maintenance and operation of the water system. The plaintiffs seek unspecified
alleged damages on behalf of the class for lost profits, annoyance and inconvenience, and loss of use, as well as
punitive damages for willful, reckless and wanton behavior in not addressing the risk of pipe failure and a large
outage.
In October 2017, WVAWC filed with the court a motion seeking to dismiss all of the plaintiffs’ counts
alleging statutory and common law tort claims. Furthermore, WVAWC asserted that the Public Service
Commission of West Virginia, and not the court, has primary jurisdiction over allegations involving violations of
the applicable tariff, the public utility code and related rules. On May 30, 2018, the court, at a hearing, denied
WVAWC’s motion to apply the primary jurisdiction doctrine, and on October 11, 2018, the court issued a written
order to that effect. The court has not yet issued a written order on WVAWC’s motion to dismiss plaintiffs’ tort
claims. The court has requested the parties submit a scheduling order with a trial date of August 26, 2019, and
WVAWC has sought to prevent further discovery while its motion to dismiss is pending.
The Company and WVAWC believe that WVAWC has valid, meritorious defenses to the claims raised in
this class action complaint and WVAWC will continue to vigorously defend itself against these allegations.
49
Contract Services Group—East Palo Alto Water System Voluntary Report
In April 2017, AWE, the parent entity of the Company’s Contract Services Group, voluntarily reported to
the Division of Drinking Water of the SWRCB potential violations of the California Safe Drinking Water Act
(the “CSDWA”) in connection with AWE’s operation of the City of East Palo Alto’s water distribution system.
Upon the resignation of the system’s general manager in March 2017, AWE discovered that it may have operated
the system without a properly certified operator for two years, the triennial LCR sampling was not completed,
and the 2015 Consumer Confidence Report improperly reported data for lead and copper samples from the
system’s upstream water provider. Promptly after discovering these issues, AWE engaged an outside law firm to
conduct an internal investigation and reported the results of that investigation to the SWRCB.
On June 15, 2017, the SWRCB issued to AWE a citation that required AWE to, among other things: comply
with regulations related to water operator certifications, lead and copper tap sampling requirements and the
publishing of a Consumer Confidence Report; provide public notification of the LCR violation; and prepare a
corrective action plan to evaluate the causes leading to these incidents and measures to be taken to prevent
recurrence of future incidents. The citation did not impose on AWE any monetary penalties, but the SWRCB
reserved the right to take additional enforcement action.
In October 2017, the SWRCB advised AWE that it is in compliance with all of the directives and relevant
statutory and administrative provisions specified in the SWRCB’s June 2017 citation. While AWE has completed
all required compliance activities with respect to the citation, the SWRCB has previously reserved the right to
take additional enforcement action. In February 2018, the SWRCB referred this matter to the San Mateo County,
California District Attorney’s office for further investigation. AWE continues to cooperate with the SWRCB, the
City of East Palo Alto and the San Mateo County District Attorney regarding this matter. Proven violations of the
CSDWA may result in civil and criminal penalties.
General
Periodically, the Company is involved in other proceedings or litigation arising in the ordinary course of
business. Other than those proceedings described in this Item 3—Legal Proceedings, the Company does not
believe that the ultimate resolution of these matters will materially affect its financial position or results of
operations. However, litigation and other proceedings are subject to many uncertainties, and the outcome of
individual matters is not predictable with assurance. It is possible that some litigation and other proceedings
could be decided unfavorably to the Company, and that any such unfavorable decisions could have a material
adverse effect on its business, financial condition, results of operations and cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
50
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Since April 23, 2008, our common stock has traded on the New York Stock Exchange (“NYSE”) under the
symbol “AWK.” As of February 14, 2019, there were 180,751,697 shares of common stock outstanding held by
approximately 2,619 record holders. Holders of our common stock are entitled to receive dividends when they
are declared by our Board of Directors. See Note 9—Shareholders’ Equity in the Notes to Consolidated Financial
Statements for additional information regarding our dividends.
In February 2015, our Board of Directors authorized an anti-dilutive stock repurchase program to mitigate
the dilutive effect of shares issued through our dividend reinvestment, employee stock purchase and executive
compensation activities. The program allows us to purchase up to 10 million shares of our outstanding common
stock over an unrestricted period of time in the open market or through privately negotiated transactions. The
program is conducted in accordance with Rule 10b-18 of the Exchange Act, and, to facilitate these repurchases,
we enter into Rule 10b5-1 stock repurchase plans with a third-party broker, which allows us to repurchase shares
of our common stock at times when we otherwise might be prevented from doing so under insider trading laws or
because of self-imposed trading blackout periods. Subject to applicable regulations, we may elect to amend or
cancel the program or stock repurchase parameters at our discretion to manage dilution.
From April 1, 2015, the date repurchases under the anti-dilutive stock repurchase program commenced,
through December 31, 2018, we repurchased an aggregate of 4,510,000 shares of our common stock under the
program, including 560,000 shares repurchased during the first quarter of 2018. There were no repurchases of
common stock in the last three quarters of 2018.
51
ITEM 6. SELECTED FINANCIAL DATA
(In millions, except per share data)
Statement of Operations data:
For the Years Ended December 31,
2018
2017
2016
2015
2014
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to common shareholders (a) . . .
Net income attributable to common shareholders per
$ 3,440
567
$ 3,357
426
$ 3,302
468
$ 3,159
476
$ 3,011
430
basic common share (a) . . . . . . . . . . . . . . . . . . . . . . . .
$
3.16
$
2.39
$
2.63
$
2.66
$
2.40
Net income attributable to common shareholders per
diluted common share (a)
. . . . . . . . . . . . . . . . . . . . . .
3.15
2.38
2.62
2.64
2.39
Balance Sheet data:
Total assets (b) (c)
Long-term debt and redeemable preferred stock at
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$21,223
$19,482
$18,482
$17,241
$16,038
redemption value (b) . . . . . . . . . . . . . . . . . . . . . . . . . .
7,576
6,498
5,759
5,874
5,442
Other data:
Cash dividends declared per common share . . . . . . . . .
Net cash provided by operating activities (d) (e) . . . . . . .
. . . . . . . . . . . . .
Net cash used in investing activities (e)
Net cash provided by (used in) financing
$
1.82
1,386
(2,036)
$
1.66
1,449
(1,672)
$
1.50
1,289
(1,590)
$
1.36
1,195
(1,459)
$
1.24
1,122
(1,029)
activities (d) (e)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
726
207
328
290
(104)
Capital expenditures included in net cash used in
investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,586)
(1,434)
(1,311)
(1,160)
(956)
(a)
(b)
(c)
(d)
(e)
In November 2014, we disposed of our Class B Biosolids operating segment by selling our subsidiary, Terratec Environmental Ltd
(“Terratec”) in Ontario, Canada. The results of Terratec are presented as discontinued operations and, as such, have been excluded
from Net income attributable to common shareholders in the table above, for the year ended December 31, 2014.
The information for the year ended December 31, 2014, has been revised to reflect the retrospective application of Accounting
Standards Update 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit
Arrangements, which was adopted by the Company as of December 31, 2015.
The information for the year ended December 31, 2014, has been revised to reflect the retrospective application of Accounting
Standards Update 2015-17, Balance Sheet Classification of Deferred Taxes, which was adopted by the Company as of December 31,
2015.
The information for the years ended December 31, 2016, 2015 and 2014, has been revised to reflect the retrospective application of
Accounting Standards Update 2016-09, Improvements to Employee Share-Based Payment Accounting, which was adopted by the
Company as of January 1, 2017.
The information for the years ended December 31, 2016, 2015 and 2014, has been revised to reflect the retrospective application of
Accounting Standards Update 2016-18, Restricted Cash, which was adopted by the Company as of December 31, 2017.
52
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read together with the Consolidated Financial Statements and the Notes
thereto included elsewhere in this Form 10-K. 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-K should be read as applying to all
related forward-looking statements whenever they appear in this Form 10-K. Our actual results may differ
materially from those currently anticipated and expressed in such forward-looking statements as a result of a
number of factors, including those we discuss under “Forward-Looking Statements,” Item 1A—Risk Factors and
elsewhere in this Form 10-K.
Overview
American Water is the largest and most geographically diverse, publicly-traded water and wastewater utility
company in the United States, as measured by both operating revenues and population served. We employ
approximately 7,100 professionals who provide drinking water, wastewater and other related services to more
than 14 million people in 46 states and Ontario, Canada. Our primary business involves the ownership of utilities
that provide water and wastewater services to residential, commercial, industrial, public authority, fire service
and sale for resale customers, collectively presented as our “Regulated Businesses.” Our utilities operate in
approximately 1,600 communities in 16 states in the United States, with approximately 3.4 million active
customers to our water and wastewater networks. Services provided by our utilities are generally subject to
economic regulation by certain state utility commissions or other entities engaged in utility regulation. We also
operate market-based businesses which provide a broad range of related and complementary water, wastewater
and other services to residential and smaller commercial customers, the U.S. government on military installations
and shale natural gas exploration and production companies, as well as municipalities, utilities and industrial
customers, collectively presented as our Market-Based Businesses. See Item 1—Business for additional
information.
53
Financial Results
The following table provides our diluted earnings per share (GAAP) and our adjusted diluted earnings per
share (a non-GAAP measure):
For the Years Ended December 31,
2016
2017
2018
Diluted earnings per share (GAAP):
Net income attributable to common shareholders . . . . . . . . . . . . . . . .
$
3.15
$
2.38
$
2.62
Adjustments:
Gain on sale of Contract Services Group contracts . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax impact
Net adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Keystone impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax impact
. . . . . . . . . . . . . . . . . .
Net loss attributable to noncontrolling interest
Net adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Freedom Industries settlement and insurance recoveries . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax impact
Net adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Early extinguishment of debt at the parent company . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax impact
Net adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of re-measurement from the TCJA . . . . . . . . . . . . . . . . . . . . .
Total net adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(0.08)
0.02
(0.06)
0.31
(0.08)
(0.01)
0.22
(0.11)
0.03
(0.08)
—
—
—
0.07
0.15
—
—
—
—
—
—
—
(0.12)
0.05
(0.07)
0.03
(0.01)
0.02
0.70
0.65
Adjusted diluted earnings per share (non-GAAP) . . . . . . . . . . . . . . . . . . . .
$
3.30
$
3.03
$
—
—
—
—
—
—
—
0.36
(0.14)
0.22
—
—
—
—
0.22
2.84
For the year ended December 31, 2018, diluted earnings per share (GAAP) were $3.15, an increase of $0.77
per diluted share, or 32.4% compared to the prior year, which includes the net adjustments presented in the table
above and discussed in greater detail in the “Adjustments to GAAP” section below.
Excluding the net adjustments presented in the table above, adjusted diluted earnings per share (non-GAAP)
were $3.30 for the year ended December 31, 2018, an increase of $0.27 per diluted share, or 8.9% compared to
the prior year.
These results were driven by continued growth in our Regulated Businesses from infrastructure investment,
acquisitions and organic growth, combined with strong results in our Market-Based Businesses, primarily in our
Homeowner Services Group with the mid-year acquisition of Pivotal. These increases were partially offset by
higher O&M and depreciation expenses from the growth of the business and a lower tax shield on interest
expense at the parent company resulting from the TCJA.
For the year ended December 31, 2017, diluted earnings per share (GAAP) were $2.38 per diluted share, a
decrease of $0.24 per diluted share, or 9.2% compared to the prior year, which includes the net adjustments
presented in the table above and discussed in greater detail in the “Adjustments to GAAP” section below.
Excluding the net adjustments presented in the table above, adjusted diluted earnings per share (non-GAAP)
were $3.03 for the year ended December 31, 2017, an increase of $0.19 per diluted share, or 6.7% compared to
the prior year.
54
These results were driven by continued growth in our Regulated Businesses from infrastructure investment,
acquisitions and organic growth, combined with growth in our Market-Based Businesses from our Homeowner
Services Group and Keystone. These increases were partially offset by lower water services demand in our
Regulated Businesses and lower capital upgrades in our Military Services Group.
Adjustments to GAAP
Adjusted diluted earnings per share represents a non-GAAP financial measure and is calculated as GAAP
diluted earnings per share, excluding the impact of one or more of the following events: (i) a gain in the third
quarter of 2018 on the sale of the majority of our Contract Services Group’s O&M contracts; (ii) a goodwill and
intangible impairment charge in the third quarter of 2018 resulting from narrowing the scope of the Keystone
business; (iii) insurance settlements received in the third quarter of 2017 and the second quarter of 2018 related
to the Freedom Industries chemical spill in West Virginia; (iv) non-cash re-measurement charges recorded in the
fourth quarters of 2017 and 2018 resulting from the impact of the change in the federal corporate income tax rate
on the Company’s deferred income taxes from the enactment of the TCJA; (v) an early extinguishment of debt
charge at the parent company in the third quarter of 2017; and (vi) a charge in the fourth quarter of 2016 related
to the binding global agreement in principle to settle claims related to the Freedom Industries chemical spill.
We believe that this non-GAAP measure provides investors with useful information by excluding certain
matters that may not be indicative of our ongoing operating results, and that providing this non-GAAP measure
will allow investors to understand better our businesses’ operating performance and facilitate a meaningful
year-to-year comparison of our results of operations. Although management uses this non-GAAP financial
measure internally to evaluate our results of operations, we do not intend results excluding the adjustments to
represent results as defined by GAAP, and the reader should not consider them as indicators of performance. This
non-GAAP financial measure is derived from our consolidated financial information and it should be considered
in addition to, and not as a substitute for, measures of financial performance prepared in accordance with GAAP.
In addition, this non-GAAP financial measure as defined and used above may not be comparable to similarly
titled non-GAAP measures used by other companies, and, accordingly, it may have significant limitations on its
use.
Achievements and Strategic Focus
We believe our success has, and will continue to be, guided by the following strategic philosophies:
•
•
Purpose Driven—“We keep life flowing” is our trademark purpose, for our customers and our
communities, because we provide the most precious of life’s critical needs.
People Powered—A company is its people. People who have a safe place to work, both physically and
emotionally.
• Customer Obsessed—Without customers, we don’t exist. They are why we are here.
• Trusted Source of Everything Water— Best in class, ensuring we have safe, reliable and affordable
water.
Our strategy, which is driven by our vision and values, will continue to be anchored on our five central
themes:
•
Safety—Safety is both a strategy and a value at American Water. We put safety first in everything that
we do.
•
In 2018, we:
•
finished the year with fewer employee injuries than the prior year, improving both our
Occupational Safety and Health Administration Recordable Incident Rate (“ORIR”) and
Days Away, Restricted or Transferred (“DART”) injury severity rate;
55
•
•
•
continued to strengthen our safety culture as measured by employee responses to safety-
related questions in the Company’s culture survey, and feedback from our in-person, labor-
management conferences;
initiated a frontline safety leadership strategic action group, developed to provide
recommendations to improve safety leadership training, tools, and engagement; and
championed, through our safety council which consists of management and labor employees,
our annual Safety Day, the CEO Safety Award and other recognition programs.
• Looking forward, we will:
•
•
•
•
•
strive toward zero workplace incidents and eliminate hazards to reduce the potential for
incidents;
continue our focus on “near miss reporting” and promoting continuous learning and
corrective action regarding potential safety hazards before incidents can occur;
improve toward the achievement of our ORIR and DART targets;
continue our focus on requiring contractors that perform work for the Company be held to the
same safety standards as our employees; and
continue to promote the Company’s employee Stop Work Authority, where every employee
is empowered to stop any work he or she perceives as unsafe, and to initiate a review to
resolve concerns and to eliminate safety hazards.
• Customer—Our customers are at the center of everything we plan and do. Customer input, their ideas
and experiences will drive how we improve our processes and systems. We want to be the best, and if
our customers have a choice as to who serves them, we want it to be us.
•
In 2018, we:
•
•
•
achieved a customer satisfaction rating in the top quartile among our industry peer group;
expanded our customer experience initiative, designed to make it easier for customers to do
business with us, and enhanced our quality of service through implementation and upgrades
of technology tools; and
continued to make needed infrastructure investments while implementing operational
efficiency improvements to keep customer bills affordable.
• Looking forward, we will:
•
•
aim to achieve customer satisfaction and service quality ratings in the top quartile of service
industries beyond the water and wastewater industry. We are implementing a multi-year plan
to enhance technology and innovation in our customer experience through (i) leveraging
secure artificial intelligence to better serve our customers, (ii) using online customer
communities for immediate input and reactions before implementing programs, and
(iii) mapping our most frequent customer interactions and re-working our internal processes
to how customers want services; and
aim for top quartile ratings for drinking water quality and being an industry leader in system
resiliency and environmental stewardship.
•
People—We are building an inclusive, diverse, fully-engaged, high performance workforce and
culture, creating an environment where our people feel valued, included and accountable.
•
In 2018, we:
•
continued to demonstrate our commitment to employees by expanding training and
development across the Company, with virtually all employees completing at least 20 hours
of formal training during 2018;
56
•
•
•
expanded the executive leadership team to include key operational leaders across the
Company to enable a broader operational focus and stronger communication throughout the
organization;
reached a new, five -year national benefits agreement with approximately 3,200 of our union-
represented employees, including their participation in the Company’s annual performance
plan, which will align Company goals across all employees, as well as providing additional
medical plan options for our employees and their families; and
simplified our performance management process to foster meaningful feedback conversations
and ensure feedback is the focus of performance management.
• Looking forward, we will:
•
•
•
•
implement a strategic workforce plan which will address the changing requirements of our
business and our jobs, largely driven by our customer’s expectations and new technologies;
continue to improve inclusion and diversity of our overall employee population, ensuring our
workforce is reflective of the customers and communities we serve;
implement a new and more frequent culture survey focused on employee insights into how
American Water can become a better company to work for, and to implement
recommendations with the goal of increasing employees’ likelihood to recommend American
Water as a place to work; and
leverage technology to ensure our employees have the tools and resources they need to keep
the customer at the center of everything that we plan and do.
• Growth—We expect to continue to grow our businesses, with the majority of our growth to be
achieved in our Regulated Businesses through (i) continued capital investment in our infrastructure to
provide safe, clean, reliable and affordable water and wastewater services to our customers, and
(ii) regulated acquisitions to expand our services to new customers. We also expect to continue to grow
our Market-Based Businesses, which leverage our core water and wastewater competencies.
•
In 2018, we invested $2.0 billion in our Regulated Businesses and Market-Based Businesses.
Regulated Businesses Growth
•
•
$1.5 billion capital investment in our Regulated Businesses, the majority for infrastructure
improvements and replacements.
$33 million to fund acquisitions in our Regulated Businesses, which added approximately
14,000 water and wastewater customers.
• Entered into agreements as of January 31, 2019 for pending acquisitions to add
approximately 61,000 customers including:
• On May 30, 2018, our Pennsylvania subsidiary entered into an agreement to acquire the
wastewater assets of Exeter Township, Pennsylvania, for approximately $96 million.
This system currently serves approximately 9,000 customers. We are expecting to close
this acquisition during the third quarter of 2019, pending regulatory approval.
• On April 13, 2018, our Illinois subsidiary entered into an agreement to acquire the City
of Alton, Illinois’ regional wastewater system for approximately $54 million. This
system currently represents approximately 23,000 customers, comprised of
approximately 11,000 customers in Alton and an additional 12,000 customers under
bulk contracts in the nearby communities of Bethalto and Godfrey. In connection with
the execution of the purchase agreement, our Illinois subsidiary made a $5 million
non-escrowed deposit to the seller during January 2019. We are expecting to close this
acquisition during the second quarter of 2019, pending regulatory approval.
57
Market-Based Businesses Growth and Optimization
• We invested $365 million to acquire Pivotal, a leading provider of home warranty protection
products and services for gas, electric and other service lines inside and around a home,
heating and cooling systems, and home appliances. Pivotal, which joins our Homeowner
Services Group, operates in 18 states with approximately 1.2 million customer contracts at
the time of acquisition.
• Our Military Services Group was awarded a contract for ownership, operation and
maintenance of the water and wastewater systems at Fort Leonard Wood in Missouri,
effective October 1, 2018. Designated as the U.S. Army’s Maneuver Support Center of
Excellence and the home to three U.S. Army schools, Fort Leonard Wood directly and
indirectly supports 36,400 jobs across the state of Missouri. The contract award includes
estimated revenues of approximately $591 million over a 50 -year period, subject to an
annual economic price adjustment.
• On July 5, 2018, we entered into an agreement for the sale of 22 of our Contract Services
Group’s 33 O&M contracts to subsidiaries of Veolia Environnement S.A. for $27 million.
We closed on the sale of 20 of the 22 contracts during the third quarter of 2018, and expect to
close on the sale of the remaining two contracts, subject to customer consents, in the first half
of 2019. We will retain four of our O&M contracts due to their proximity to our existing
service areas, and expect the majority of our remaining O&M contracts to be sold to other
parties, or expire within the next year.
• As a result of operational and financial challenges encountered in the construction business
of Keystone, the Company decided to exit this business line during the third quarter of 2018.
This action, along with the exit of the water trucking business line during the first half of
2018, narrowed the scope of the Keystone business going forward, focusing solely on
providing water transfer services. These factors prompted the impairment testing of
Keystone’s goodwill and customer relationship intangible asset at September 30, 2018,
resulting in a non-cash, after-tax, impairment charge of $40 million, net of noncontrolling
interest. See Note 8—Goodwill and Other Intangible Assets in the Notes to the Consolidated
Financial Statements for additional information.
• Looking forward, we expect to invest between $8.0 billion to $8.6 billion from 2019 to 2023,
including a range of $1.7 billion to $1.8 billion in 2019. Our expected future investment includes:
•
•
•
capital investment for infrastructure improvements in our Regulated Businesses of
$7.3 billion over the next five years, including $1.6 billion expected in 2019;
growth from acquisitions in our Regulated Businesses to expand our water and wastewater
customer base of between $600 million to $1.2 billion over the next five years, including a
range of $120 million to $240 million expected in 2019; and
strategic capital investments of approximately $100 million over the next five years, which
consists primarily of intellectual property development and strategic growth opportunities in
our Market-Based Businesses.
58
The following chart depicts the estimated allocation of our expected capital investment for
infrastructure improvements in our Regulated Businesses over the next five years, by purpose:
2019 – 2023 Regulated Businesses’ Expected Capital Investment by Purpose
Other: 6%
System Expansion: 7%
Resiliency: 8%
Water Quality: 8%
Operational Efficiency,
Technology & Innovation: 9%
Infrastructure Renewal: 62%
• Operational Excellence—We continue to strive for industry-leading operational efficiency, driven
largely by technology. Our technology investments are aimed at enhancing our customer experience
and operational efficiency.
•
In 2018:
•
our Regulated Businesses achieved an adjusted O&M efficiency ratio (a non-GAAP
measure) of 35.6% for the year ended December 31, 2018, compared to 35.3% and 36.6% for
the years ended December 31, 2017 and 2016, respectively. The unfavorability in our
adjusted O&M efficiency ratio in 2018, when compared to 2017, was primarily due to a
settlement agreement in our New York subsidiary and higher expenses incurred from the
colder weather experienced during the first quarter of 2018. The improvement in our adjusted
O&M efficiency ratio in 2017, when compared to 2016, was attributable to both an increase
in operating revenues and a decrease in O&M expenses;
• we worked to decrease costs and deploy capital efficiently, including using trenchless
technologies for pipeline rehabilitation and leveraging our buying power and strategic
sourcing to drive cost savings;
• we continued our commitment to water quality and the environment by leveraging new
technologies; we now have advanced water quality sensors at all of our major drinking water
intake sites and we are automating our reporting and compliance systems; and
• we implemented other technology tools that will enhance communication, collaboration and
mobility to help our employees work safely and efficiently, and enhance the customer
experience.
• Looking forward, we will focus on technology and efficiency to:
•
be the leader in optimizing technology deployment across the water and wastewater industry,
with a keen focus on specific, innovative projects that will set us apart from other utilities;
aiding us in serving our customers with greater ease, making us safer and helping us operate
more efficiently; and
•
achieve our goal of an adjusted O&M efficiency ratio of 31.5% by 2023.
59
Our adjusted O&M efficiency ratio is defined as the operation and maintenance expenses from
our Regulated Businesses, divided by the pro forma operating revenues from our Regulated Businesses,
where both operation and maintenance expenses and pro forma operating revenues were adjusted to
eliminate purchased water expense. Additionally, from operation and maintenance expenses, we
excluded the allocable portion of non-operation and maintenance support services costs, mainly
depreciation and general taxes, that are reflected in our Regulated Businesses segment as operation and
maintenance expenses, but for consolidated financial reporting purposes, are categorized within other
line items in the accompanying Consolidated Statements of Operations.
In addition to the adjustments discussed above, for period-to-period comparability purposes, we
have presented the estimated impact of the TCJA on operating revenues for our Regulated Businesses
on a pro forma basis for all periods presented prior to January 1, 2018, as if the lower federal corporate
income tax rate was in effect for these periods (see Note 7—Regulatory Assets and Liabilities in the
Notes to Consolidated Financial Statements for additional information). We also made the following
adjustments to our O&M efficiency ratio: (i) excluded from operation and maintenance expenses, the
impact of certain Freedom Industries chemical spill settlement activities recognized in 2016, 2017 and
2018; and (ii) excluded from operation and maintenance expenses, the impact of the Company’s
January 1, 2018 adoption of Accounting Standards Update 2017-07, Improving the Presentation of Net
Periodic Pension Cost and Net Periodic Post-Retirement Benefit Cost (“ASU 2017-07”) for 2016, 2017
and 2018. See Note 2—Significant Accounting Policies in the Notes to the Consolidated Financial
Statements for additional information. We excluded the items discussed above from the calculation as
we believe such items are not reflective of management’s ability to increase the efficiency of our
Regulated Businesses.
We evaluate our operating performance using this ratio because we believe it directly measures
improvement in the efficiency of our Regulated Businesses. This information is intended to enhance an
investor’s overall understanding of our operating performance. Our adjusted O&M efficiency ratio is
not an accounting measure that is based on GAAP, may not be comparable to other companies’
operating measures and should not be used in place of the GAAP information provided elsewhere in
this Form 10-K.
With respect to our adjusted O&M efficiency ratio goal for 2023, we are unable to provide
without unreasonable efforts a quantitative reconciliation of each component of this ratio to the most
comparable financial measure calculated in accordance with GAAP. In calculating the components of
the ratio, certain items that may ultimately be excluded would be reflective of events that cannot be
reasonably predicted at this time. The unavailable information would include, among other things, the
impact of items currently excluded from the calculation of the components, adjustments for weather
conditions that exceed a certain threshold of variability and adjustments for events or circumstances
that may not be reflective of ongoing operating results. The probable significance of these items is also
presently unknown and cannot be reasonably estimated.
60
The following table provides the calculation of our adjusted O&M efficiency ratio and a reconciliation that
compares operation and maintenance expenses and operating revenues, each as determined in accordance with
GAAP, to those amounts utilized in the calculation of our adjusted O&M efficiency ratio:
For the Years Ended December 31,
2017
2018
2016
(Dollars in millions)
Total operation and maintenance expenses (a) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less:
$ 1,479
$ 1,369
$ 1,499
Operation and maintenance expenses—Market-Based Businesses . . . . . . .
Operation and maintenance expenses—Other (a) . . . . . . . . . . . . . . . . . . . . .
362
(42)
337
(44)
372
(38)
Total operation and maintenance expenses—Regulated Businesses (a)
Less:
. . . . . . .
1,159
1,076
1,165
Regulated purchased water expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allocation of non-operation and maintenance expenses . . . . . . . . . . . . . . .
Impact of Freedom Industries settlement activities (b) . . . . . . . . . . . . . . . . .
133
31
(20)
128
29
(22)
Adjusted operation and maintenance expenses—Regulated Businesses (i) . . . . .
$ 1,015
$
941
$
122
30
65
948
Total operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less:
Pro forma adjustment for impact of the TCJA (c)
. . . . . . . . . . . . . . . . . . . .
Total pro forma operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less:
—
3,440
Operating revenues—Market-Based Businesses . . . . . . . . . . . . . . . . . . . . .
Operating revenues—Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
476
(20)
166
3,191
422
(23)
161
3,141
451
(20)
$ 3,440
$ 3,357
$ 3,302
Total operating revenues—Regulated Businesses . . . . . . . . . . . . . . . . . . . . . . . .
Less:
2,984
2,792
2,710
Regulated purchased water revenues (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
133
128
122
Adjusted operating revenues—Regulated Businesses (ii)
. . . . . . . . . . . . . . . . . .
$ 2,851
$ 2,664
$ 2,588
Adjusted O&M efficiency ratio—Regulated Businesses (i)/(ii)
. . . . . . . . . . . . . .
35.6%
35.3%
36.6%
NOTE The adjusted O&M efficiency ratios previously reported for the years ended December 31, 2017 and 2016, were 33.8% and 34.9%,
respectively, which did not include the adjustments for the items discussed in footnotes (a) and (c) below.
Includes the impact of the Company’s adoption of ASU 2017-07 on January 1, 2018. See Note 2—Significant Accounting Policies in
the Notes to Consolidated Financial Statements for additional information.
Includes the impact of the binding global agreement in principle to settle claims in 2016, and settlements in 2017 and 2018 with two of
our general liability insurance carriers in connection with the Freedom Industries chemical spill.
Includes the estimated impact of the TCJA on operating revenues for our Regulated Businesses for all periods presented prior to
January 1, 2018, as if the lower federal corporate income tax rate was in effect for these periods. See Note 7—Regulatory Assets and
Liabilities in the Notes to Consolidated Financial Statements for additional information.
The calculation assumes regulated purchased water revenues approximate regulated purchased water expenses.
(a)
(b)
(c)
(d)
61
Regulatory Matters
General Rate Cases
The following table provides annualized incremental revenues resulting from general rate case
authorizations that became effective during 2016 through 2018, assuming a constant water sales volume:
2018
2017
2016
(In millions)
General rate cases by state:
$
New Jersey (a)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Missouri (effective May 28, 2018, July 22, 2016 and July 20, 2016) . . . . . . . . . . . . . . .
New York (effective April 1, 2018 and June 1, 2017) . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania (effective January 1, 2018)
California (b)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Virginia (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Iowa (effective March 27, 2017) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois (effective January 1, 2017)
Kentucky (effective August 28, 2016) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
West Virginia (effective February 25, 2016)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indiana (effective January 29, 2016)
$
40
33
5
62
10
—
—
—
—
—
—
Total general rate case authorizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
150
$
— $
—
4
—
5
5
4
25
—
—
—
43
$
—
5
—
—
2
—
—
—
7
18
2
34
(a)
(b)
(c)
The effective date was June 15, 2018. As part of the resolution of the general rate case, our New Jersey customers will receive refunds
for the amount of provisional rates implemented as of June 15, 2018 and collected that exceeded the final rate increase, plus interest.
On December 13, 2018, a settlement in our California subsidiary’s general rate case filing was approved, authorizing rates effective
January 1, 2018. In 2017, step rates were effective January 13 through February 2. In 2016, step rates were effective January 1.
The effective date was May 24, 2017, authorizing the implementation of interim rates as of April 1, 2016.
On February 8, 2019, a settlement in our West Virginia subsidiary’s general rate case filing was approved
authorizing additional annualized revenues of $19 million, effective February 25, 2019, exclusive of
infrastructure replacement surcharges effective in 2017 and 2018.
On February 5, 2019, a settlement in our Maryland subsidiary’s general rate case filing was approved
authorizing additional annualized revenues of $1 million, effective February 5, 2019.
Pending General Rate Case Filings
On November 28, 2018, our Kentucky subsidiary filed a general rate case requesting $20 million in
additional annualized revenues.
On November 2, 2018, our Virginia subsidiary filed a general rate case requesting $5 million in additional
annualized revenues.
On September 14, 2018, our Indiana subsidiary filed a general rate case requesting $18 million
and $21 million in additional annualized revenues in 2019 and 2020, respectively.
62
Infrastructure Surcharges
A number of states have authorized the use of regulatory mechanisms that permit rates to be adjusted
outside of a general rate case for certain costs and investments, such as infrastructure surcharge mechanisms that
permit recovery of capital investments to replace aging infrastructure. The following table provides annualized
incremental revenues resulting from infrastructure surcharge authorizations that became effective during 2016
through 2018, assuming a constant water sales volume:
2018
2017
2016
(In millions)
Infrastructure surcharges by state:
. . . . . . . . . . . . . . . . . $
Missouri (effective December 15, 2018 and December 15, 2017)
Tennessee (effective April 10, 2018, March 14, 2017 and March 15, 2016) . . . . . . . . . . . . .
Indiana (effective March 14, 2018, March 22, 2017 and May 4, 2016)
. . . . . . . . . . . . . .
Virginia (effective March 1, 2018) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois (a)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
West Virginia (effective January 1, 2018 and January 1, 2017) . . . . . . . . . . . . . . . . . .
New Jersey (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania (c)
Total infrastructure surcharge authorizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
6 $
1
7
1
3
3
—
—
21 $
6 $
2
8
—
—
2
14
1
33 $
—
2
3
—
7
—
19
28
59
(a)
(b)
(c)
In 2018, the effective date was January 1. In 2016, $1 million was effective January 1 and $6 million was effective August 1.
In 2017, $10 million was effective June 1 and $4 million was effective December 10. In 2016, $9 million was effective June 1 and
$10 million was effective December 1.
In 2017, the effective date was January 1. In 2016, $11 million, $2 million, $6 million and $9 million were effective January 1,
April 1, July 1 and October 1, respectively.
On February 8, 2019, our West Virginia subsidiary received authorization for additional annualized
revenues of $2 million from an infrastructure surcharge filing, effective January 1, 2019.
On December 20, 2018, our Illinois subsidiary filed for an infrastructure surcharge requesting $8 million in
additional annualized revenues, which will become effective on January 1, 2019.
Pending Infrastructure Surcharge Filings
On November 16, 2018, our Tennessee subsidiary filed for an infrastructure surcharge requesting $2 million
in additional annualized revenues.
There is no assurance that all or any portion of these requests will be granted.
Tax Matters
Tax Cuts and Jobs Act
On December 22, 2017, the TCJA was signed into law, which, among other things, enacted significant and
complex changes to the Internal Revenue Code of 1986, including a reduction in the federal corporate income tax
rate from 35% to 21% as of January 1, 2018, and certain other provisions related specifically to the public utility
industry, including continuation of interest expense deductibility, the exclusion from utilizing bonus depreciation
and the normalization of deferred income tax. The enactment of the TCJA required a re-measurement of our
deferred income taxes that materially impacted our 2017 results of operations and financial position. The portion
of this re-measurement related to our Regulated Businesses was substantially offset by a regulatory liability, as
we believe it is probable that the deferred income tax excesses created by the TCJA will benefit our regulated
customers in future rates. The remaining portion of this re-measurement of the net deferred income tax liability
63
was recorded as a non-cash charge to earnings during the fourth quarter of 2017. During 2018, we continued to
gather, assess and evaluate additional guidance and regulations related to the changes related to the TCJA. As a
result of this process, we have recorded additional adjustments to finalize our initial 2017 estimates. See Note
14—Income Taxes in the Notes to Consolidated Financial Statements for additional information.
During 2018, the Company’s 14 regulatory jurisdictions began to consider the impacts of the TCJA. The
Company has adjusted customer rates to reflect the lower income tax rate in 10 states. In one of those 10 states, a
portion of the tax savings is being used to reduce certain regulatory assets. In one additional state, we are using
the tax savings to offset additional capital investment and to reduce a regulatory asset. Proceedings in the other
three jurisdictions remain pending. With respect to excess accumulated deferred income taxes, regulators in the
eight states that have considered the issue have agreed with our overall timeline of passing the excess back to
customers beginning no earlier than 2019, when the Company is able to produce the normalization schedule
using the average rate assumption method. In one of those states, we will use the amortization of the excess
accumulated deferred income taxes to offset future infrastructure investments.
On March 23, 2018, President Trump signed the Consolidated Appropriations Act of 2018 (the “CAA”).
The CAA corrects and clarifies some aspects of the TCJA related to bonus depreciation eligibility. Specifically,
property that was acquired, or the construction began, prior to September 27, 2017, is eligible for bonus
depreciation. This clarification allowed the Company to benefit from additional bonus depreciation deductions on
the 2017 tax return, and as a result, we believe that we will likely begin paying federal income taxes towards the
end of 2019, when we expect our federal NOL carryforwards balance will be fully used, and expect to be a full
year cash taxpayer by 2020, although this timing could be impacted by any significant changes in our future
results of operations and the outcome of pending regulatory proceedings regarding the TCJA.
On November 26, 2018, the U.S. Department of the Treasury released proposed regulations concerning
interest expense limitation rules. The TCJA revised and broadened the existing interest expense limitation
regulations. The Company has considered all the rules set forth in the proposed regulation including allocated
interest expense and interest income based on the relative amounts of the Company’s adjusted basis in the assets
used in its excepted and non-excepted trades or business, or our Regulated Businesses and Market-Based
Businesses. Based on our interpretation of the new guidance, the Company reasonably believes the deductibility
of its interest expense will not be limited under the new regulations.
Other Tax Matters
On June 1, 2018, the State of Missouri enacted legislation that decreased the state income tax rate on our
taxable income attributable to Missouri from 6.25% to 4.00%, beginning in the 2020 tax year. As a result, we
were required to re-measure our cumulative deferred income tax balances using the lower state income tax rate in
the second quarter of 2018. This resulted in a decrease to the Company’s unitary deferred income tax liability of
$12 million, and an increase to a regulatory liability of $13 million, as we believe it is probable of refund in
future rates.
On May 30, 2018, the State of Iowa enacted legislation that decreased the state income tax rate on our
taxable income attributable to Iowa from 12.0% to 9.8%, beginning in the 2021 tax year. The deferred income
tax liability for our Iowa subsidiary was reduced by $1 million, and offset by a regulatory liability, as we believe
this liability is probable of refund in future rates.
On April 13, 2018, the State of Kentucky enacted legislation that decreased the state income tax rate on our
taxable income attributable to Kentucky from 6% to 5%, beginning in the 2018 tax year. In addition, beginning in
the 2019 tax year, a consolidated return, including all affiliated group members, will be required. As a result, we
were required to record a deferred income tax liability of $7 million for our Kentucky unitary filing group, and
the existing deferred income tax liability related to our Kentucky subsidiary was reduced by $1 million, offset by
a regulatory liability, as we believe this liability is probable of refund in future rates.
64
The Company performed its annual review of the apportionment rates in all of its unitary filing jurisdictions
and implemented changes to reflect considerations for historical results and future business outlooks in each of
the jurisdictions. As of December 31, 2018, we recorded a non-cash, cumulative charge to earnings of
$12 million, resulting from the legislative changes described above and the adjustments made through various
state income tax apportionment rates.
On July 1, 2018, the State of New Jersey enacted legislation that increased the corporate business tax rate
from 9.0% to 11.5% for the 2018 and 2019 tax years, and to 10.5% for the 2020 and 2021 tax years. The tax rate
will revert back to 9.0% for tax year 2022 and beyond. Additionally, the new legislation states that for the year
beginning on and after January 1, 2019, a unitary group will be required to file a combined unitary New Jersey
tax return. The legislation allows a deduction over a 10-year period, commencing five years after the enactment
of unitary combined reporting, if the combined reporting provisions result in an aggregate increase to the net
deferred income tax liability or an aggregate decrease to the net deferred income tax asset. Thus, the deferred
income tax liability resulting from the unitary filing requirement would be completely offset by the deferred
income tax asset derived from this deduction. There are no underlying impacts to the Company’s earnings as a
result of the new filing requirement. On October 4, 2018, New Jersey’s governor signed a technical correction
bill into law. The correction bill provides an exclusion for water and wastewater utility companies whose rates
are regulated from the combined reporting requirement. The Company’s tax credit granted by the State of New
Jersey will not be impacted by the law changes mentioned above.
Legislative Updates
During 2018, our regulatory jurisdictions enacted legislation as follows:
• House File 2307 in Iowa and House Bill 1566 in Maryland allow a fair market value methodology to
be included in rate base with respect to prospective acquisitions.
•
•
•
Senate Enrolled Act 362 in Indiana, which, similar to the Water Quality Accountability Act enacted in
New Jersey in 2017, sets new operational standards and requirements for water and wastewater
treatment plants in areas such as capital asset management, cost-benefit analysis and cybersecurity.
Senate Bill 705 in Missouri allows the Missouri Public Service Commission to approve a revenue
stability mechanism (“RSM”) for water utilities. In an effort to encourage conservation, a RSM adjusts
rates periodically to ensure that a utility’s revenue will be sufficient to cover its costs, and customers
will not overpay for service.
Senate Bill 592 in Missouri changes the public vote requirement for the sale of a municipal water or
wastewater system to a simple majority for more than 500 small towns. Historically, only larger
communities required a simple majority, while smaller communities needed a two-thirds majority. This
legislation increases the options for small towns, should they decide to address their water and sewer
challenges through an asset sale.
• Legislation was passed in Iowa that allows private water utilities to use a future test year approach in
rate cases, decreasing potential regulatory lag and helping to spread out the time between rate cases.
•
In California, Assembly Bill 2179 changed the vote required to allow cities to sell sewer systems to a
simple majority as compared to a two-thirds majority, and Assembly Bill 2339 allowed certain cities to
sell water systems without an election.
• Act 58 of 2018 in Pennsylvania allows public utilities to implement alternative rates and rate
mechanisms in rate base proceedings. These alternative rates and rate mechanisms include, but are not
limited to the following: revenue stability mechanisms, performance-based rates, formula rates, multi-
year rate plans, or a combination of those mechanisms or other mechanisms. Petitions to establish
alternative rate mechanisms are subject to PUC review and approval and can only be filed by a utility
in a rate base proceeding.
65
• On October 17, 2018, the Pennsylvania General Assembly passed legislation that allows an investor-
owned water utility to include the replacement costs for customer-owned LSLs and customer-owned
damaged wastewater laterals in rate base when replaced as part of a Pennsylvania Public Utility
Commission approved program. The law became effective December 23, 2018. Prior to the new law,
our Pennsylvania subsidiary sought the approval of the Pennsylvania Public Utility Commission to
revise the Company’s rules to permit it to replace customer-owned LSLs and to recover associated
costs. Our Pennsylvania subsidiary’s proposed replacement of customer-owned LSL program is being
reviewed under the provisions of the new law.
• On October 23, 2018, President Trump signed America’s Water Infrastructure Act of 2018. The
legislation includes policies intended to improve water and wastewater system management and
authorization for states to assess options for consolidation for systems that do not comply with the
federal Safe Drinking Water Act and its rules and regulations. The legislation increases funding to
water system funding programs, including the State Revolving Loan Fund program and the Water
Infrastructure Finance and Innovation Act.
Consolidated Results of Operations
The following table provides our consolidated results of operations and the ensuing discussions provide
explanations for the variances related to the major components:
(Dollars in millions)
Operating revenues . . . . . . . . . . . . . . . . . . . . $ 3,440 $ 3,357 $ 3,302 $
$
83
%
2.5
$
$
55
%
1.7
For the Years Ended December 31,
Increase
(Decrease)
Increase
(Decrease)
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
Operating expenses:
Operation and maintenance . . . . . . . . .
Depreciation and amortization . . . . . . .
General taxes . . . . . . . . . . . . . . . . . . . .
(Gain) on asset dispositions and
purchases . . . . . . . . . . . . . . . . . . . . .
Impairment charge . . . . . . . . . . . . . . . .
Total operating expenses, net . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . .
Other income (expense):
Interest, net . . . . . . . . . . . . . . . . . . . . . .
. . . . . . .
Non-operating benefit costs, net
Loss on early extinguishment of debt . . . .
. . . . . . . . . . . . . . . . . . . . . . .
Other, net
Total other income (expense) . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . .
Consolidated net income . . . . . . . . . . . . . . .
Net loss attributable to noncontrolling
1,479
545
277
(20)
57
2,338
1,102
(350)
20
(4)
19
(315)
787
222
565
1,369
492
259
(16)
—
2,104
1,253
(342)
(9)
(7)
17
(341)
912
486
426
interest
. . . . . . . . . . . . . . . . . . . . . . .
(2)
—
Net income attributable to common
1,499
470
258
(10)
—
2,217
1,085
(325)
(5)
—
15
(315)
770
302
468
—
110
53
18
8.0
10.8
6.9
(130)
22
1
(8.7)
4.7
0.4
(4)
57
25.0
100.0
(6) 60.0
—
—
234
11.1
(113)
(5.1)
(151)
(12.1)
168
15.5
(8)
29
3
2
26
(125)
(264)
2.3
322.2
(42.9)
11.8
(7.6)
(13.7)
(54.3)
5.2
(17)
(4) 80.0
(7) 100.0
13.3
2
(26)
8.3
142
184
18.4
60.9
139
32.6
(42)
(9.0)
(2) (100.0)
—
—
shareholders . . . . . . . . . . . . . . . . . . . . . . . $
567 $
426 $
468 $
141
33.1
$
(42)
(9.0)
66
In 2018, net income attributable to common shareholders increased $141 million, or 33.1 percent, compared
to the same period in 2017. This increase was due to a $125 million non-cash charge in 2017 related to the
implementation of TCJA, continued growth in the Regulated Businesses, driven by infrastructure investment,
acquisitions and organic growth and growth in the Market-Based Businesses, mainly from our Homeowner
Services Group due to the mid-year acquisition of Pivotal. These increases were partially offset by higher O&M
and depreciation expenses across the Company due to growth of the business and the asset impairment charge
recorded for our Keystone subsidiary during the third quarter of 2018.
In 2017, net income attributable to common shareholders decreased $42 million, or 9.0 percent, as compared
to the same period in 2016. This decrease was due to a $125 million non-cash charge in 2017 related to the
implementation of TCJA resulting from the re-measurement of deferred taxes primarily at the parent company
from the reduction in the federal corporate income tax rate from 35% to 21%. Partially offsetting this non-cash
charge was continued growth in the Regulated Businesses driven mainly by infrastructure investment,
acquisitions and organic growth, combined with growth in the Market-Based Businesses mainly from the
Homeowner Services Group and Keystone.
Segment Results of Operations
Our operating segments are comprised of the revenue-generating components of the business for which
separate financial information is internally produced and regularly used by management to make operating
decisions, assess performance and allocate resources. The Company operates its business primarily through one
reportable segment, the Regulated Businesses segment. We also operate several market-based businesses within
operating segments that individually do not meet the criteria of a reportable segment in accordance with GAAP.
These non-reportable operating segments are collectively presented as our Market-Based Businesses, which is
consistent with how management assesses the results of these businesses.
Regulated Businesses Segment
The following table provides financial information for our Regulated Businesses:
For the Years Ended December 31,
Increase
(Decrease)
Increase
(Decrease)
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
(Dollars in millions)
Operating revenues . . . . . . . . . . . . . . . . . . . . . . $
Operation and maintenance . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . .
General taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) on asset dispositions and purchases . . .
Interest, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expenses) . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . .
Net income attributable to common
2,984 $
1,159
500
261
(7)
(280)
(247)
826
224
2,958 $
1,076
462
244
(16)
(268)
(266)
925
367
2,871 $
1,165
440
242
(7)
(256)
(257)
775
303
$
26
83
38
17
%
0.9 $
7.7
8.2
7.0
9 (56.3)
4.5
(12)
19
(7.1)
(99) (10.7)
(143) (39.0)
$
%
3.0
87
(7.6)
(89)
5.0
22
0.8
2
(9) 128.6
4.7
3.5
19.4
21.1
(12)
(9)
150
64
shareholders . . . . . . . . . . . . . . . . . . . . . . . . .
602
559
472
43
7.7
87
18.4
67
Operating Revenues
The following tables provide provide information regarding the main components of our Regulated
Businesses’ operating revenues and the ensuing discussions provide explanation for the material variances:
For the Years Ended December 31,
Increase
(Decrease)
Increase
(Decrease)
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
(Dollars in millions)
Water services:
Residential . . . . . . . . . . . . . . . . . . . . .
Commercial
. . . . . . . . . . . . . . . . . . . .
Fire service . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
Industrial
Public and other . . . . . . . . . . . . . . . . .
$
Total water services . . . . . . . . . . . . . . . . . .
Wastewater services . . . . . . . . . . . . . . . . . .
Other (a)
. . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,663
616
137
136
216
2,768
161
55
$
1,644
601
139
137
244
2,765
142
51
$
1,601
582
134
134
259
2,710
112
49
Total operating revenues . . . . . . . . . . . . . .
$
2,984
$
2,958
$
2,871
$
$
%
$
%
19
15
(2)
(1)
(28)
3
19
4
26
$
1.2
2.5
(1.4)
(0.7)
(11.5)
0.1
13.4
7.8
0.9
$
43
19
5
3
(15)
55
30
2
87
2.7
3.3
3.7
2.2
(5.8)
2.0
26.8
4.1
3.0
(a)
Includes other operating revenues consisting primarily of miscellaneous utility charges, fees and rents.
(Gallons in millions)
Billed water services volumes:
For the Years Ended December 31,
Increase
(Decrease)
Increase
(Decrease)
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
Gallons %
Gallons
%
Residential . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Commercial
. . . . . . . . . . . . . . . . . . . . . .
Industrial
Fire service, public and other . . . . . . .
172,827
82,572
38,432
50,651
174,420
82,147
39,404
51,341
174,599
82,489
38,465
50,678
(1,593)
425
(972)
(690)
(0.9)
0.5
(2.5)
(1.3)
(179)
(342)
939
663
(0.1)
(0.4)
2.4
1.3
Total billed water services volumes . . . . . .
344,482
347,312
346,231
(2,830)
(0.8)
1,081
0.3
In 2018, operating revenues increased $26 million, or 0.9%, primarily due to a:
•
•
•
$149 million increase from authorized rate increases, including infrastructure surcharges, principally to
fund infrastructure investment in various states;
$22 million increase from water and wastewater acquisitions, as well as organic growth in existing
systems; and
$148 million decrease from the impacts of the TCJA which have or are expected to benefit customers.
This decrease is made up of two components: (i) a reserve on revenue billed during 2018, for the
estimated income tax savings expected to benefit customers in future rates; and (ii) rate adjustments
made in certain subsidiaries where our Regulators have authorized lower rates or offsets to regulatory
assets or capital investments to pass the benefits to customers.
In 2017, operating revenues increased $87 million, or 3.0%, primarily due to a:
•
•
$81 million increase from authorized rate increases, including infrastructure surcharges, principally to
fund infrastructure investment in various states;
$43 million increase from water and wastewater acquisitions, as well as organic growth in existing
systems; and
68
•
•
$9 million increase from higher wastewater treatment volumes and an increase in private fire service
connections; partially offset by a
$48 million decrease from lower water services demand, including a $15 million reduction due to
warmer weather in 2016.
Operation and Maintenance
The following tables provide information regarding the main components of our Regulated Businesses’
operating and maintenance expense and the ensuing discussions provide an explanation for the material
variances:
For the Years Ended December 31,
Increase
(Decrease)
Increase
(Decrease)
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
(Dollars in millions)
Production costs . . . . . . . . . . . . . . . . . . . . .
Employee-related costs . . . . . . . . . . . . . . . .
Operating supplies and services . . . . . . . . .
Maintenance materials and supplies . . . . . .
Customer billing and accounting . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
313
451
227
81
60
27
$
298
431
209
70
51
17
288 $
431
212
73
54
107
$
%
5.0
15
4.6
20
18
8.6
11 15.7
9 17.6
10 58.8
$
$10
—
(3)
(3)
(3)
(90)
%
3.5
—
(1.4)
(4.1)
(5.6)
(84.1)
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,159
$
1,076
$
1,165 $
83
7.7
$
(89)
(7.6)
Production Costs
For the Years Ended December 31,
Increase
(Decrease)
Increase
(Decrease)
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
(Dollars in millions)
Purchased water . . . . . . . . . . . . . . . . . . . . .
Fuel and power . . . . . . . . . . . . . . . . . . . . . .
Chemicals . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
Waste disposal
$
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
133
91
52
37
313
$
$
128
89
47
34
298
$
$
$
122 $
87
47
32
$
%
3.9
5
2
2.2
5 10.6
8.8
3
$
288 $
15
5.0
$
6
2
—
2
10
%
4.9
2.3
—
6.3
3.5
In 2018, production costs increased $15 million, or 5.0%, primarily due to a:
•
•
•
$5 million increase in purchased water from higher prices in our California subsidiary;
$5 million increase in chemicals from higher usage, the result of wet weather conditions in 2018,
primarily in the Northeast and Mid-Atlantic; and
$3 million increase in waste disposal from higher sludge removal costs, primarily in our New Jersey
subsidiary.
In 2017, production costs increased $10 million, or 3.5%, primarily due to a:
•
•
$6 million increase in purchased water from higher usage in our California subsidiary, the result of the
California water usage restrictions, which were mandated in 2015 due to the state’s extreme drought,
being lifted in the second quarter of 2017; and
$2 million increase in waste disposal from higher sludge removal costs in our Illinois and Missouri
subsidiaries.
69
Employee-Related Costs
For the Years Ended December 31,
Increase
(Decrease)
Increase
(Decrease)
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
(Dollars in millions)
Salaries and wages . . . . . . . . . . . . . . . . . . . . . . .
Pensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Group insurance . . . . . . . . . . . . . . . . . . . . . . . . .
Other benefits . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
349
19
57
26
451
$
$
334
14
57
26
431
$
$
$
$
%
4.5
15
5
35.7
— —
— —
$
$
%
(0.6)
(22.2)
1.8
23.8
(2)
(4)
1
5
$
20
4.6
$ —
—
336
18
56
21
431
In 2018, employee-related costs increased $20 million, or 4.6%, primarily due to a:
•
•
$15 million increase in salaries and wages to support growth of the business, as well as an increase in
overtime related to a higher volume of main breaks during the first quarter of 2018, the result of
harshly frigid weather in the Midwest, Northeast and parts of the Mid-Atlantic; and
$5 million increase in pensions from an authorized change in regulatory recovery of pension expense in
our Pennsylvania subsidiary.
In 2017, employee-related costs remained consistent primarily due to a:
•
•
$5 million increase in other benefits from higher employer 401(k) savings plan contributions and an
increase in training costs; partially offset by a
$4 million decrease in pensions from higher capitalization rates in 2017.
Operating Supplies and Services
In 2018, operating supplies and services increased $18 million, or 8.6%, primarily due to a $17 million
increase in contracted services from higher costs for various legal matters including a settlement agreement in
our New York subsidiary and costs associated with condemnation proceedings in Monterey, California, higher
costs from temporary workers as a result of restructuring initiatives in our technology support services, as well as
an increase in other operating expenses.
In 2017, operating supplies and services decreased $3 million, or 1.4%, primarily due to a decrease in
charges recorded in 2016, including a $5 million write-off of timekeeping system costs that were previously
capitalized and a $7 million judgment in litigation, partially offset by an increase in office supplies and services
from higher employee relocation, telecommunication and office supplies costs.
Maintenance Materials and Supplies
In 2018, maintenance materials and supplies increased $11 million, or 15.7%, from a higher volume of main
breaks and paving costs, driven by the colder weather experienced during the first quarter of 2018, as well as
higher tank painting costs in our New Jersey subsidiary and various maintenance projects in our Pennsylvania,
Missouri and Indiana subsidiaries.
In 2017, maintenance materials and supplies decreased $3 million, or 4.1%, from lower tank painting costs
in our New Jersey subsidiary and the timing of maintenance activities.
Customer Billing and Accounting
In 2018, customer billing and accounting increased $9 million, or 17.6%, from an increase in customer
uncollectible expense, primarily in our Pennsylvania, Missouri and New York subsidiaries, and higher call
volumes experienced at our customer service centers.
70
In 2017, customer billing and accounting decreased $3 million or 5.6%, from lower customer uncollectible
expense attributable to focused collection efforts.
Other (Operation and Maintenance)
In 2018, other (operation and maintenance) increased $10 million, or 58.8%, primarily due to higher
casualty insurance claims in 2018, and a $3 million charge from a regulatory authorization allowing a portion of
the income tax savings resulting from the TCJA to be used to reduce certain regulatory assets. During 2018, we
recorded a $20 million benefit resulting from an insurance settlement with one of our general liability insurance
carriers associated with the Freedom Industries chemical spill in West Virginia.
In 2017, other (operation and maintenance) decreased $90 million, or 84.1%, primarily due to a $65 million
net charge recorded in 2016, resulting from the binding global agreement in principle to settle claims associated
with the Freedom Industries chemical spill in West Virginia, and a $22 million benefit recorded in 2017,
resulting from a related insurance settlement with one of our general liability insurance carriers, as well as a
decrease in casualty insurance expense attributable to a lower claims experience in 2017.
Depreciation and Amortization
In 2018 and 2017, depreciation and amortization increased $38 million and $22 million, or 8.2% and 5.0%,
respectively. The increase for both periods was primarily due to additional utility plant placed in service.
General Taxes
In 2018 and 2017, general taxes increased $17 million and $2 million, or 7.0% and 0.8%, respectively. The
increase in 2018 was primarily due to incremental property taxes in several of our subsidiaries, including in
Missouri and New York.
(Gain) on Asset Dispositions and Purchases
In 2018 and 2017, (gain) on asset dispositions and purchases increased $9 million, or 56.3%, and decreased
$9 million, or 128.6%, respectively. The decrease in 2018 was primarily due to higher gains recognized in 2017,
including a $7 million gain on a land sale in our Kentucky subsidiary, along with acquisition and land sale gains
in our Pennsylvania, Missouri and California subsidiaries, partially offset by gains recognized in 2018 for the
sale of a treatment plant in our Illinois subsidiary and a building in our New Jersey subsidiary.
Interest, net
In 2018 and 2017, interest, net increased $12 million and $12 million, respectively. The increase in interest
expense during 2018 was driven by the issuance of incremental long-term debt in the third quarter of 2018 to
support growth of the business, and higher levels of short-term borrowings during 2018, coupled with an increase
in the average short-term borrowing rate in the current year. For the year ended December 31, 2017, the increase
in interest expense was driven by the issuance of incremental long-term debt in 2017 to support growth of the
business.
Other Income (Expenses)
In 2018, other income (expenses) increased $19 million, or 7.1%, primarily due to a reduction in the
non-service cost components of pension and other postretirement benefits expense resulting from favorable
actuarial performance, and an increase in allowance for funds used during construction attributable to higher
capital investment in 2018, partially offset by an increase in interest expense as discussed above. For the year
ended December 31, 2017, the increase in other income (expenses) was primarily due to an increase in interest
expense as discussed above.
71
Provision for Income Taxes
For the year ended December 31, 2018, our provision for income taxes decreased primarily due to the
reduction in the federal corporate income tax rate from 35% to 21% as of January 1, 2018, resulting from the
enactment of the TCJA. We expect the reduced tax rate will benefit our customers through established
ratemaking, tax and regulatory normalization provisions. During 2018, we continued assessing the impacts of the
TCJA as allowed by Staff Accounting Bulletin 118 (“SAB 118”), and as a result we recorded adjustments to
federal and state income tax TCJA estimates. For the year ended December 31, 2017, our provision for income
taxes increased primarily due to higher pretax income in 2017 compared to 2016.
Market-Based Businesses
The following table provides financial information for our Market-Based Businesses and the ensuing
discussions provide explanation for the material variances:
For the Years Ended December 31,
Increase
(Decrease)
Increase
(Decrease)
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
(Dollars in millions)
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operation and maintenance . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . .
(Gain) on asset dispositions and purchases . . . . . . . . .
Impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . .
Net loss attributable to noncontrolling interest . . . . . .
Net income attributable to common shareholders . . . .
476 $
362
29
(13)
57
41
11
(2)
32
422 $
337
18
—
—
66
28
—
38
$
%
12.8 $
451 $ 54
7.4
25
372
15
61.1
11
(13) (100.0)
(1)
— 57 100.0
(37.9)
(25)
65
26
(60.7)
(17)
— (2) (100.0)
(15.8)
(6)
39
%
$
(6.4)
(29)
(9.4)
(35)
3
20.0
1 (100.0)
—
—
1.5
1
7.7
2
—
—
(2.6)
(1)
Operating Revenues
In 2018, operating revenues increased $54 million, or 12.8%, primarily due to a:
•
•
•
•
$76 million increase in our Homeowner Services Group from contract growth, including $67 million
from the acquisition of Pivotal on June 4, 2018; and
$6 million increase in Keystone from an increase in water transfer operations resulting from market
recovery in the shale natural gas industry; partially offset by a
$16 million decrease in our Military Services Group from lower capital upgrades; and
$14 million decrease in our Contract Services Group from the sale of the majority of our O&M
contracts to subsidiaries of Veolia Environnement S.A. during the third quarter of 2018.
In 2017, operating revenues decreased $29 million, or 6.4%, primarily due to a:
•
•
•
•
$56 million decrease in our Military Services Group from lower capital upgrades, largely driven by
reduced military base budgets and the completion of a large project in the first half of 2017 at Fort
Polk; and
$6 million decrease in our Contract Services Group from the completion of several O&M contracts
during 2017; partially offset by a
$18 million increase in our Homeowner Services Group from contract growth, as well as expansion
into new geographic areas and price increases for existing customers; and
$16 million increase in Keystone due to an increase in operations resulting from market recovery in the
shale natural gas industry.
72
Operation and Maintenance
The following table provides information regarding the main components of our Market-Based Businesses’
operating and maintenance expense and the ensuing discussions provide an explanation for the material
variances:
For the Years Ended December 31,
Increase
(Decrease)
Increase
(Decrease)
2018
2017
2016
2018 vs. 2017
2017 vs. 2016
(Dollars in millions)
Production costs . . . . . . . . . . . . . . . . . . . . . . .
Employee-related costs . . . . . . . . . . . . . . . . . .
Operating supplies and services . . . . . . . . . . .
Maintenance materials and supplies . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
32
104
142
69
15
362
$
$
37
97
121
67
15
337
$
$
$
%
$
35
94
165
68
10
372
$
(5)
7
21
2
—
(13.5) $
7.2
17.4
3.0
—
$
25
7.4
$
2
3
(44)
(1)
5
(35)
%
5.7
3.2
(26.7)
(1.5)
50.0
(9.4)
In 2018, operation and maintenance expense increased $25 million, or 7.4%, primarily due to a:
•
•
•
$7 million increase in employee-related costs mainly in our Homeowner Services Group related to the
acquisition of Pivotal on June 4, 2018, partly offset by lower costs in our Contract Services Group
resulting from the sale of the majority of our O&M contracts during the third quarter of 2018; and
$21 million increase in operating supplies and services from the acquisition of Pivotal and higher
advertising and marketing expense in our Homeowner Services Group, as well as an increase in water
transfer operations in Keystone, offset in part by lower capital upgrades in our Military Services Group
and the sale of the majority of our Contract Services Group’s O&M contracts during the third quarter
of 2018, as discussed above; partially offset by a
$5 million decrease in production costs from lower purchased water and chemical usage in our
Contract Services Group resulting from the sale of the majority of our O&M contracts during the third
quarter of 2018.
In 2017, operation and maintenance expense decreased $35 million, or 9.4%, primarily due to a:
•
•
•
$44 million decrease in operating supplies and services from lower capital upgrades in our Military
Services Group, as discussed above, as well as lower advertising and marketing expense in our
Homeowner Services Group; partially offset by a
$3 million increase in employee-related costs from higher headcount in Keystone from an increase in
operations, as discussed above, offset in part in our Contract Services Group from the completion of
several O&M contracts during 2017; and
$5 million increase in other (operating and maintenance expense) from an increase in customer
uncollectible expense in our Homeowner Services Group resulting from contract growth in 2017.
Depreciation and Amortization
In 2018 and 2017, depreciation and amortization increased $11 million and $3 million, or 61.1% and 20.0%,
respectively. The increase in 2018 was primarily due to the addition of property, plant and equipment and
intangible assets from the acquisition of Pivotal on June 4, 2018.
(Gain) on Asset Dispositions and Purchases
In 2018, (gain) on asset dispositions and purchases increased $13 million primarily due to the (gain)
recognized on the sale of the majority of our Contract Services Group’s O&M contracts to subsidiaries of Veolia
73
Environnement S.A. during the third quarter of 2018, partially offset by a loss recognized on the sale of property,
plant and equipment in Keystone. See Note 4—Acquisitions and Divestitures in the Notes to Consolidated
Financial Statements for additional information regarding the Veolia Environnement S.A. transaction.
Impairment Charge
During the third quarter of 2018, a goodwill and intangible asset impairment charge of $57 million was
recorded for Keystone, the result of operational and financial challenges encountered in the construction
business, and the Company’s determination to narrow the scope of the Keystone business, to focus on its core
operations of providing water transfer services. See Note 8—Goodwill and Other Intangible Assets in the Notes
to Consolidated Financial Statements for additional information.
Provision for Income Taxes
In 2018 and 2017, provision for income taxes decreased $17 million, or 60.7%, and increased $2 million, or
7.7%, respectively. The decrease in 2018 was primarily due to the reduction in the federal corporate income tax
rate from 35% to 21% as of January 1, 2018, resulting from the enactment of the TCJA.
Liquidity and Capital Resources
We regularly evaluate and monitor our cash requirements for capital investments, acquisitions, operations,
commitments, debt maturities, interest and dividends. Our business is capital intensive, with a majority of this
capital funded by cash flows from operations. When necessary, we also obtain funds from external sources,
primarily in the debt markets and through short-term commercial paper borrowings. We also have access to
equity capital markets, if needed. Our access to external financing on reasonable terms depends on our credit
ratings and current business conditions, including that of the utility and water utility industry in general, as well
as conditions in the debt or equity capital markets, and the national and international economic and geopolitical
arenas. If these business, market, financial and other conditions deteriorate to the extent that we no longer are
able to access the capital markets on reasonable terms, we have access to an unsecured revolving credit facility
with aggregate bank commitments of $2.25 billion, with an expiration date of June 2023 (subject to extension by
us for up to two one-year periods). We rely on this revolving credit facility and the capital markets to fulfill our
short-term liquidity needs, to issue letters of credit and to support our $2.10 billion commercial paper program.
Disruptions in the credit markets may discourage lenders from extending the terms of such commitments or
agreeing to new commitments. Market disruptions may also limit our ability to issue debt and equity securities in
the capital markets. See “Credit Facilities and Short-Term Debt” section below for additional information.
In order to meet our short-term liquidity needs, we, through AWCC, our wholly owned financing subsidiary,
issue commercial paper, which is supported by the revolving credit facility. As of December 31, 2018, AWCC had
no outstanding borrowings and $81 million of outstanding letters of credit under its revolving credit facility, with
$2.25 billion available to fulfill our short-term liquidity needs and to issue letters of credit, which supported
$954 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. We have no plans to issue equity under normal operating conditions in the foreseeable future with the
limited exception of privately or investor-owned acquisitions whose sellers require equity to complete the
acquisition or other opportunistic acquisitions. We believe we have sufficient liquidity and the ability to manage our
expenditures, should there be a disruption of the capital and credit markets. However, we can provide no assurances
that the lenders will meet their existing commitments to AWCC under the revolving 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.
In addition, our Regulated Businesses receive advances and contributions from customers, home builders
and real estate developers to fund construction necessary to extend service to new areas. Advances for
construction are refundable for limited periods, which vary according to state regulations, as new customers
74
begin to receive service or other contractual obligations are fulfilled. Amounts which are no longer refundable
are reclassified to contributions in aid of construction. Utility plant funded by advances and contributions is
excluded from our Regulated Businesses rate base. Generally, we depreciate contributed property and amortize
contributions in aid of construction at the composite rate of the related property. Some of our subsidiaries do not
depreciate contributed property, based upon regulatory guidelines. The taxability of advances and contributions
in aid of construction was changed with the enactment of the TCJA. Previously, the majority of advances and
contributions that we collected were not taxable; however, with the enactment of the TCJA, they are now treated
as taxable income. Regulatory treatment for advances and contributions under the TCJA has been resolved by
most of our regulatory jurisdictions in a manner that passes the tax consequences of the change in law to the
customer making the advance or contribution, or allows the utility to pass those consequences onto a larger base
of customers. We are working with the remaining regulatory jurisdictions to determine impacts to the Company
and our customers.
We use our capital resources, including cash, primarily to (i) fund operating and capital requirements,
(ii) pay interest and meet debt maturities, (iii) pay dividends, (iv) fund acquisitions, (v) fund pension and
postretirement benefit obligations, and (vi) we estimate beginning at the end of 2019, to pay federal income
taxes. We invest a significant amount of cash on regulated capital projects where we expect to earn a long-term
return on investment. Additionally, we operate in rate regulated environments in which the amount of new
investment recovery may be limited, and where such recovery generally takes place over an extended period of
time, and certain capital recovery is also subject to regulatory lag. See Item 1—Business—Regulated
Businesses—Economic Regulation and Rate Making for additional information. We expect to fund future
maturities of long-term debt through a combination of external debt and, to the extent available, cash flows from
operations. Since we expect our capital investments over the next few years to be greater than our cash flows
from operating activities, we have no plans to reduce debt significantly. If necessary, we may delay certain
capital investments or other funding requirements, or pursue financing from other sources to preserve liquidity.
In this event, we believe we can rely upon cash flows from operations to meet our obligations and fund our
minimum required capital investments for an extended period of time.
With the enactment of the TCJA and the reduction of the U.S. federal corporate income tax rate from 35%
to 21%, we anticipate a decrease in future revenue authorizations associated with our Regulated Businesses,
initially leading to lower cash flows. We expect this cash flow impact to decline over time, as our Regulated
Businesses’ rate base grows, the result of lower deferred income tax liabilities, which offset rate base. The lower
deferred income tax liabilities are mainly due to (i) a lower U.S. federal corporate income tax rate, (ii) the
normalization (refunding to customers) of the re-measured deferred income tax liabilities over the remaining life
of the associated assets, and (iii) the loss of future bonus depreciation deductions on capital projects that began
after September 27, 2017.
The Water Infrastructure Finance and Innovation Act of 2014 (“WIFIA”) established the WIFIA program, a
federal credit program administered by the EPA for eligible water and wastewater infrastructure projects. The
WIFIA program accelerates investment in our nation’s water infrastructure by providing long-term, low-cost
supplemental loans for regionally and nationally significant projects. Our letters of interest have been approved
by the EPA, and we have begun the full application process for two WIFIA loans totaling $187 million for two
separate projects in our Missouri subsidiary.
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 warmer months. Our future cash flows
provided by operating activities will be affected by, among other things; economic utility regulation inflation;
compliance with environmental, health and safety standards; production costs; maintenance costs; customer
growth; declining customer usage of water; employee-related costs, including pension funding; weather and
seasonality; taxes; and overall economic conditions.
75
We expect that the enactment of the TCJA to be accretive to our consolidated earnings over time through
(i) growth in rate base for the same level of expected capital expenditures due to the impact of the lower U.S.
federal corporate income tax rate and the re-measurement of our deferred income tax assets and liabilities,
(ii) increased earnings in our Market-Based Businesses due to the lower U.S. federal corporate income tax rate,
all partially offset by (iii) the lower tax shield on interest expense at the parent, as well as increased debt levels
from lower cash flows from operations as we pass the lower tax rate benefits to our regulated customers. We
believe that we will likely begin paying federal income taxes towards the end of 2019, when we expect our
federal NOL carryforwards balance will be fully used, and expect to be a full year cash taxpayer by 2020,
although this timing could be impacted by any significant changes in our future results of operations and the
outcome of regulatory proceedings regarding the TCJA.
Cash flows provided by operating activities have been a reliable, steady source of funding, sufficient to meet
operating requirements and fund the majority of our capital investments. We expect to seek access to debt capital
markets to meet the balance of our capital investment, if any, and fund our dividend payments, as needed. We
also have access to equity capital markets, if needed. We do not foresee the need to access equity markets over
the next five years under normal operating conditions. Operating cash flows can be negatively affected by
changes in our rate regulated environments, changes in our Market-Based Businesses, changes in the economy,
interest rates, the timing of tax payments, and our customers’ ability to pay for service in a timely manner, among
other items. We can provide no assurance that our customers’ historical payment pattern will continue in the
future. Sometimes our current liabilities exceed current assets mainly from debt maturities due within one year
and the periodic use of short-term debt as a funding source, primarily to meet scheduled maturities of long-term
debt, fund acquisitions and construction projects, as well as cash needs which can fluctuate significantly due to
the seasonality of the business. We address cash timing differences through the aforementioned liquidity funding
mechanisms.
The following table provides a summary of the major items affecting our cash flows provided by operating
activities:
(In millions)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add (less):
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes and amortization of investment tax credits . . . . . . .
Non-cash impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-cash activities (a)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in working capital (b)
Pension and postretirement benefit contributions . . . . . . . . . . . . . . . . . . . . .
Impact of Freedom Industries settlement activities . . . . . . . . . . . . . . . . . . .
For the Years Ended December 31,
2018
2017
2016
$
565
$
426
$
468
545
195
57
56
30
(22)
(40)
492
462
—
16
123
(48)
(22)
470
295
—
35
9
(53)
65
Net cash flows provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,386
$ 1,449
$ 1,289
(a)
(b)
Includes provision for losses on accounts receivable, (gain) on asset dispositions and purchases, pension and non-pension
postretirement benefits and other non-cash, net. Details of each component can be found on the Consolidated Statements of Cash
Flows.
Changes in working capital include changes to receivables and unbilled revenues, accounts payable and accrued liabilities, and other
current assets and liabilities, net.
In 2018, cash flows provided by operating activities decreased $63 million, primarily due to lower revenues
as a result of the enactment of the TCJA and changes in working capital. These decreases are partially offset by
an increase in net income. The main factors contributing to the net income increase are described in this section
under “Consolidated Results of Operations” and included higher operating revenue and a lower provision for
income taxes.
76
In 2017, cash flows provided by operations increased $160 million, primarily due to an increase in net
income after non-cash adjustments, including the impact of the enactment of the TCJA, and an increase in cash
flows from working capital. The main factors contributing to the net income increase are described in the
“Consolidated Results of Operations” section and include higher operating revenues, partially offset by higher
income taxes due to a $125 million re-measurement charge resulting from the impact of the change in the federal
tax rate on the Company’s deferred income taxes from the enactment of the TCJA. The increase in non-cash
activities was mainly attributable to the increase in deferred income taxes, as mentioned above, and an increase
in depreciation and amortization due to additional utility plant placed in service. The change in working capital
was principally due to (i) the timing of accounts payable and accrued liabilities, including the accrual recorded
during 2016 for the binding global agreement in principle to settle claims associated with the Freedom Industries
chemical spill in West Virginia, (ii) a decrease in unbilled revenues as a result of our Military Services Group
achieving significant capital project milestones during 2016, and (iii) a change in other current assets and
liabilities, including the decrease in other current assets associated with the termination of our four forward
starting swap agreements and timing of payments clearing our cash accounts.
The Company expects to make pension contributions to the plan trusts of up to $31 million in 2019. In
addition, we estimate that contributions will amount to $32 million, $29 million, $29 million and $29 million in
2020, 2021, 2022 and 2023, respectively. Actual amounts contributed could change materially from these
estimates as a result of changes in assumptions and actual investment returns, among other factors.
Cash Flows Used in Investing Activities
The following table provides a summary of the major items affecting our cash flows used in investing
activities:
For the Years Ended December 31,
2018
2017
2016
(In millions)
Net capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investing activities, net (a)
$
(1,586) $
(398)
(52)
(1,434) $
(177)
(61)
(1,311)
(204)
(75)
Net cash flows used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(2,036) $
(1,672) $
(1,590)
(a)
Includes removal costs from property, plant and equipment retirements and proceeds from sale of assets.
In 2018 and 2017, cash flows used in investing activities increased primarily due to an increase in our
regulated capital expenditures, principally from incremental investments associated with the replacement and
renewal of our transmission and distribution infrastructure in our Regulated Businesses, as well as acquisitions in
both our Regulated Businesses and Market-Based Businesses, as discussed below.
Our infrastructure investment plan consists of both infrastructure renewal programs, where we replace
infrastructure, as needed, and major capital investment projects, where we construct new water and wastewater
treatment and delivery facilities to meet new customer growth and water quality regulations. Our projected
capital expenditures and other investments are subject to periodic review and revision to reflect changes in
economic conditions and other factors.
77
The following table provides a summary of our historical capital expenditures related to the upgrading of
our infrastructure and systems:
For the Years Ended December 31,
2018
2017
2016
(In millions)
Transmission and distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treatment and pumping . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Services, meter and fire hydrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General structure and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sources of supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wastewater . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
572
231
303
371
26
83
$
551
171
281
281
54
96
568
151
297
202
59
34
Total capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,586
$
1,434
$
1,311
In 2018, our capital expenditures increased $152 million, or 10.6%, primarily due to investment across the
majority of our infrastructure categories. In 2017, our capital expenditures increased $123 million, or 9.4%,
primarily due to investment in our general structure and equipment and wastewater categories.
We also grow our business primarily through acquisitions of water and wastewater systems, as well as other
water-related services. These acquisitions are complementary to our existing business and support continued
geographical diversification and growth of our operations. Generally, acquisitions are funded initially with short-
term debt, and later refinanced with the proceeds from long-term debt.
The following is a summary of the acquisitions and dispositions affecting our cash flows from investing
activities:
2018:
• The majority of cash paid for acquisitions pertained to the $365 million purchase of Pivotal within our
Homeowner Services Group.
•
Paid $33 million for 15 water and wastewater systems, representing approximately 14,000 customers.
• Received $35 million for the sale of assets, including $27 million for the sale of the majority of the
O&M contracts in our Contract Services Group during the third quarter of 2018.
• The majority of cash paid for acquisitions pertained to the $159 million purchase of the wastewater
collection and treatment system assets of the Municipal Authority of the City of McKeesport,
Pennsylvania (the “McKeesport system”), excluding a $5 million non-escrowed deposit made in 2016.
•
Paid $18 million for 16 water and wastewater systems, excluding the McKeesport system and
Shorelands (a stock-for-stock transaction), representing approximately 7,000 customers.
• Received $15 million for the sale of assets.
2017:
2016:
•
Paid $199 million for 15 water and wastewater systems, representing approximately 42,000 customers.
• Made a non-escrowed deposit of $5 million related to the McKeesport system acquisition.
• Received $9 million for the sale of assets.
As previously noted, we expect to invest between $8.0 billion to $8.6 billion from 2019 to 2023, with
$7.3 billion of this range for infrastructure improvements in our Regulated Businesses. In 2019, we expect to
78
invest between a range of $1.7 billion to $1.8 billion in 2019, with $1.6 billion for infrastructure improvements in
our Regulated Businesses. Also in 2019, we expect to invest between $120 million to $240 million for
acquisitions in our Regulated Businesses.
Cash Flows from Financing Activities
The following table provides a summary of the major items affecting our cash flows provided by financing
activities:
(In millions)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from long-term debt
Repayments of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net proceeds from short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Anti-dilutive stock repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other financing activities, net (a)
For the Years Ended December 31,
2018
2017
2016
$
$
$
1,358
(526)
60
183
(319)
(45)
15
1,395
(896)
55
—
(289)
(54)
(4)
553
(144)
221
—
(261)
(65)
24
Net cash flows provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . .
$
726
$
207
$
328
(a)
Includes proceeds from issuances of common stock under various employee stock plans and our dividend reinvestment plan, net of
taxes paid, advances and contributions for construction, net of refunds, and debt issuance costs and make-whole premium on early
debt redemption.
In 2018, cash flows provided by financing activities increased $519 million, primarily due to the issuance of
common stock to finance a portion of the purchase price of the Pivotal acquisition and a decrease in cash used for
short-term borrowings. Short-term borrowings were used to fund the growth of our Regulated Businesses,
finance approximately 50% of the Pivotal acquisition, pay dividends and repay long-term debt, offset by the use
of the $1.325 billion long-term debt issuance to support growth of the business and repay short-term borrowings.
Our financing activities, primarily focused on funding regulated infrastructure expenditures, regulated and
market-based acquisitions and payment of dividends. These activities included the issuance of long-term and
short-term debt, primarily through AWCC and in 2018, included an equity issuance for approximately 50% of
the Pivotal acquisition. In addition, new infrastructure may be funded with customer advances and contributions
in aid of construction, net of refunds, which amounted to $21 million, $28 million and $16 million for the years
ended December 31, 2018, 2017 and 2016, respectively. Based on the needs of our Regulated Businesses and the
Company, AWCC may borrow funds or issue its debt in the capital markets and then, through intercompany
loans, provide those borrowings to the Regulated Businesses and the parent company. The Regulated Businesses
and the parent company are obligated to pay their portion of the respective principal and interest to AWCC, in
the amount necessary to enable AWCC to meet its debt service obligations. The parent company’s borrowings
are not a source of capital for the Regulated Businesses, therefore, the parent company is not able to recover the
interest charges on its debt through regulated water and wastewater rates. As of December 31, 2018, AWCC has
made long-term fixed rate loans and commercial paper loans to our Regulated Businesses amounting to
$4.4 billion and $392 million, respectively. Additionally, as of December 31, 2018, AWCC has made long-term
fixed rate loans and commercial paper loans to the parent company amounting $1.7 billion and $533 million,
respectively. As of December 31, 2018, the parent company has made long-term fixed rate loans to our Market-
Based Businesses amounting to $183 million related to the acquisition of Pivotal on June 4, 2018.
On August 9, 2018, AWCC completed a $1.325 billion debt offering which included the sale
of $625 million aggregate principal amount of its unsecured 3.75% Senior Notes due in 2028, and $700 million
aggregate principal amount of its unsecured 4.20% Senior Notes due in 2048. At the closing of the offering,
79
AWCC received, after deduction of underwriting discounts and before deduction of offering expenses, net
proceeds of approximately $1.3 billion. AWCC used proceeds from the offering to (i) lend funds to American
Water and its regulated operating subsidiaries, (ii) repay $191 million principal amount of AWCC’s 5.62%
Senior Notes due 2018 upon maturity on December 21, 2018, (iii) prepay $100 million aggregate principal
amount of AWCC’s outstanding 5.62% Series E Senior Notes due March 29, 2019 (the “Series E Notes”) and
$100 million aggregate principal amount of AWCC’s outstanding 5.77% Series F Senior Notes due March 29,
2022 (the “Series F Notes,” and, together with the Series E Notes, the “Series Notes”), and (iv) repay AWCC’s
commercial paper obligations and for general corporate purposes.
As a result of AWCC’s prepayment of the Series Notes, a make-whole premium of $10 million was paid to
the holders thereof on September 11, 2018. Substantially all of the early debt extinguishment costs were allocable
to our utility subsidiaries and recorded as regulatory assets, as we believe they are probable of recovery in future
rates.
On August 6, 2018, the Company terminated four forward starting swap agreements with an aggregate
notional amount of $400 million, realizing a net gain of $9 million, to be amortized through interest, net over 10 -
and 30 -year periods, in correlation with the terms of the new debt issued on August 9, 2018.
On August 17, 2018, we entered into two forward starting swap agreements, each with a notional amount
of $80 million, to reduce interest rate exposure on debt expected to be issued in 2019. These forward starting
swap agreements terminate in August 2019 and have an average fixed rate of 2.98%. On October 11, 2018, we
entered into two additional forward starting swap agreements, each with a notional amount of $100 million, to
reduce interest rate exposure on debt expected to be issued in 2019. These forward starting swap agreements
terminate in December 2019, and have an average fixed rate of 3.31%. On January 8, 2019, we entered into an
additional forward starting swap agreement, with a notional amount of $150 million, to reduce interest rate
exposure on debt expected to be issued in 2019. This forward starting swap agreement terminates in December
2019, and has an average fixed rate of 2.76%. We have designated these forward starting swap agreements as
cash flow hedges, with their fair value recorded in accumulated other comprehensive gain or loss. Upon
termination, the cumulative gain or loss recorded in accumulated other comprehensive gain or loss will be
amortized through interest, net over the term of the new debt.
One of the principal market risks to which the Company is exposed is changes in interest rates. In order to
manage the exposure, we follow risk management policies and procedures, including the use of derivative
contracts such as swaps. We reduce exposure to interest rates by managing commercial paper and debt
maturities. We do not enter into derivative contracts for speculative purposes and do not use leveraged
instruments. The derivative contracts entered into are for periods consistent with the related underlying
exposures. The Company is exposed to the risk that counterparties to derivative contracts will fail to meet their
contractual obligations. We minimize the counterparty credit risk on these transactions by only dealing with
leading, credit-worthy financial institutions, having long-term credit ratings of “A” or better.
On April 11, 2018, we effected an equity forward transaction by entering into a forward sale agreement with
each of two forward purchasers in connection with a public offering of 2,320,000 shares of our common stock. In
the equity forward transaction, the forward purchasers, or an affiliate, borrowed an aggregate of 2,320,000 shares
of our common stock from third parties and sold them to the underwriters in the public offering. On June 7, 2018,
we elected to fully and physically settle both forward sale agreements, resulting in the issuance of a total of
2,320,000 shares of our common stock at a price of $79.01 per share, for aggregate net proceeds of $183 million.
The net proceeds of the transaction were used to pay a portion of the purchase price of the Pivotal acquisition on
June 4, 2018.
In May 2018, the parent company 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
80
other equity and hybrid securities, and AWCC debt securities, all subject to market conditions and demand,
general economic conditions, and as applicable, rating status. The shelf registration statement will expire in May
2021. During 2018, 2017 and 2016, $1.325 billion, $1.350 billion and $550 million, respectively, of debt
securities were issued pursuant to this and predecessor registration statements. Additionally, during 2018 under
this registration statement, we issued 2,320,000 shares of our common stock at a price of $79.01 per share, for
aggregate net proceeds of $183 million.
The following table provides the issuances of long-term debt in 2018:
Company
Type
Rate
Maturity
Amount
(in millions)
. . . . . . . . . . . Senior notes—fixed rate
AWCC (a)
Other American Water
subsidiaries . . . . . . . .
Private activity bonds and government
funded debt—fixed rate (b)
3.75%-4.20% 2028-2048
$
1,325
0.00%-5.00% 2021-2048
33
Total issuances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,358
(a)
(b)
This indebtedness is considered “debt” for purposes of a support agreement between American Water and AWCC, the Company’s
wholly owned finance subsidiary, which serves as a functional equivalent of a guarantee by American Water of AWCC’s payment
obligations under such indebtedness.
Approximately $29 million of this debt relates to the New Jersey Environmental Infrastructure Financing Program.
The following table provides the retirements and redemptions of long-term debt in 2018 through sinking
fund provisions, optional redemption or payment at maturity:
Company
Type
Rate
Maturity
Amount
(in millions)
AWCC . . . . . . . . . . . . . . . . . . Senior notes—fixed rate
5.62%-6.25% 2018-2022 $
501
AWCC . . . . . . . . . . . . . . . . . .
Other American Water
subsidiaries . . . . . . . . . . . .
Other American Water
Private activity bonds and government
funded debt—fixed rate
Private activity bonds and government
funded debt—fixed rate
1.79%-2.90% 2021-2031
0.00%-5.50% 2018-2047
subsidiaries . . . . . . . . . . . . Mortgage bonds—fixed rate
9.13%
2021
Other American Water
subsidiaries . . . . . . . . . . . .
Other American Water
Mandatorily redeemable preferred
stock
8.49%-9.18% 2031-2036
subsidiaries . . . . . . . . . . . . Term loan
4.83%-5.69%
2021
1
18
1
2
3
Total retirements and redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
526
The following table provides the issuances of long-term debt in 2017:
Company
Type
Rate
Maturity
Amount
(in millions)
AWCC . . . . . . . . . . . . . . Senior notes—fixed rate
Other American Water
Private activity bonds and government
funded debt—fixed rate
subsidiaries . . . . . . . .
Other American Water
2.95%-3.75% 2027-2047 $
1,350
0.00%-1.44% 2020-2037
subsidiaries . . . . . . . . Mortgage bonds—fixed rate
3.92%
2020
Other American Water
subsidiaries . . . . . . . . Term Loan
4.48%-4.98%
2021
31
3
11
Total issuances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,395
81
The following table provides the retirements and redemptions of long-term debt in 2017 through sinking
fund provisions, optional redemption or payment at maturity:
Company
Type
Rate
Maturity
Amount
(in millions)
AWCC . . . . . . . . . . . . . . . Senior notes—fixed rate
5.62%-6.09% 2017-2021 $
844
AWCC . . . . . . . . . . . . . . .
Other American Water
subsidiaries . . . . . . . . .
Other American Water
Private activity bonds and government
funded debt—fixed rate
Private activity bonds and government
funded debt—fixed rate
1.79%-2.90% 2021-2031
0.00%-5.38% 2017-2041
subsidiaries . . . . . . . . . Mortgage bonds—fixed rate
7.08%
2017
Other American Water
subsidiaries . . . . . . . . . Mandatorily redeemable preferred stock
8.49%-9.18% 2031-2036
Other American Water
subsidiaries . . . . . . . . . Term loan
4.31%-5.31%
2021
1
15
33
2
1
Total retirements and redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
896
The following table provides the issuances of long-term debt in 2016:
Company
Type
Rate
Maturity
Amount
(in millions)
AWCC . . . . . . . . . . . . . . . Senior notes—fixed rate
Other American Water
Private activity bonds and government
funded debt—fixed rate
subsidiaries . . . . . . . . .
3.00%-4.00% 2026-2046 $
1.00%-1.36% 2026-2037
Total issuances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
The following table provides the retirements and redemptions of long-term debt in 2016 through sinking
fund provisions, optional redemption or payment at maturity:
550
3
553
Company
Type
AWCC . . . . . . . . . . . . . . . . . . Senior notes—fixed rate
AWCC . . . . . . . . . . . . . . . . . .
Other American Water
subsidiaries . . . . . . . . . . . .
Other American Water
subsidiaries . . . . . . . . . . . .
Private activity bonds and government
funded debt—fixed rate
Private activity bonds and government
funded debt—fixed rate
Mandatorily redeemable preferred
stock
1.79%-2.90% 2021-2031
0.00%-5.30% 2016-2041
8.49%-9.18% 2031-2036
Total retirements and redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
37
1
104
2
144
Rate
5.52%
Maturity
Amount
(in millions)
2016
$
From time to time and as market conditions warrant, we may engage in long-term debt retirements through
tender offers, open market repurchases or other viable alternatives to strengthen our balance sheets.
In February 2015, our Board of Directors authorized an anti-dilutive, common stock repurchase program to
mitigate the effect of shares issued through our dividend reinvestment, employee stock purchase and executive
compensation activities. The program allows the Company to purchase up to 10 million shares of its outstanding
common stock, over an unrestricted period of time, in the open market or through privately negotiated
transactions. The program is conducted in accordance with Rule 10b-18 of the Exchange Act, and to facilitate the
repurchases, we have also entered into Rule 10b5-1 share repurchase plans with a third-party broker, which
82
allows us to repurchase shares at times when we may otherwise be prevented from doing so under insider trading
laws or because of self-imposed trading blackout periods. Subject to applicable regulations, we may elect to
amend or cancel this repurchase program or the share repurchase parameters at our discretion. As of
December 31, 2018, we have repurchased an aggregate of 4,510,000 shares of common stock under this program.
Credit Facilities and Short-Term Debt
We have an unsecured revolving credit facility of $2.25 billion that expires in June 2023. In March 2018,
AWCC and its lenders amended and restated the credit agreement with respect to AWCC’s revolving credit
facility to increase the maximum commitments under the facility from $1.75 billion to $2.25 billion, and to
extend the expiration date of the facility from June 2020 to March 2023. All other terms, conditions and
covenants with respect to the existing facility remained unchanged. Subject to satisfying certain conditions, the
credit agreement also permits AWCC to increase the maximum commitment under the facility by up to an
aggregate of $500 million, and to request extensions of its expiration date for up to two, one-year periods.
Interest rates on advances under the facility are based on a credit spread to the LIBOR rate or base rate in
accordance with Moody Investors Service’s and Standard & Poor’s Financial Services’ then applicable credit
rating on AWCC’s senior unsecured, non-credit enhanced debt. The facility is used principally to support
AWCC’s commercial paper program and to provide up to $150 million in letters of credit. Indebtedness under
the facility is considered “debt” for purposes of a support agreement between the Company and AWCC, which
serves as a functional equivalent of a guarantee by the Company of AWCC’s payment obligations under the
credit facility.
AWCC also has an outstanding commercial paper program that is backed by the revolving credit facility, the
maximum aggregate outstanding amount of which was increased in March 2018, from $1.60 billion to
$2.10 billion.
The following table provides the aggregate credit facility commitments, letter of credit sub-limit under the
revolving credit facility and commercial paper limit, as well as the available capacity for each as of
December 31, 2018 and 2017:
Credit Facility
Commitment
Available
Credit Facility
Capacity
Letter of Credit
Sublimit
Available
Letter of Credit
Capacity
Commercial
Paper Limit
Available
Commercial
Paper
Capacity
(In millions)
December 31, 2018 . . . . . . . . $
December 31, 2017 . . . . . . . .
2,262 $
1,762
2,177 $
1,673
150 $
150
69 $
66
2,100 $
1,600
1,146
695
The weighted average interest rate on AWCC short-term borrowings for the years ended December 31, 2018
and 2017 was approximately 2.28% and 1.24%, respectively.
Capital Structure
The following table provides the percentage of our capitalization represented by the components of our
capital structure as of December 31:
Total common shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt and redeemable preferred stock at redemption value . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
Short-term debt and current portion of long-term debt
40.4% 41.0% 42.1%
52.4% 49.6% 46.4%
9.4% 11.5%
7.2%
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100%
100%
100%
2018
2017
2016
83
The changes in the capital structure between periods were mainly attributable to an increase in long-term
debt.
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 December 31, 2018, our ratio was 0.59 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.
The following table provides our long-term and short-term credit rating and rating outlook as of
February 19, 2019:
Securities
Moody’s Investors
Service
Standard & Poor’s
Ratings Service
Rating Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior unsecured debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Negative
A3
P-2
Stable
A
A-1
On June 11, 2018, Standard & Poor’s Ratings Service affirmed the Company’s long-term ‘A’ and short-term
‘A-1’ credit ratings, with a stable outlook remaining unchanged.
On January 19, 2018, Moody’s Investors Service changed its rating outlook to negative, from stable, for 24
regulated utilities and utility holding companies, including the Company, all of which were primarily impacted
by the enactment of the TCJA.
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 the 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, chemicals 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
84
grounds for doing so. In accordance with the contracts and applicable contract law, if we are 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 rely on 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 to post any collateral which will have a material adverse impact on the Company’s results of
operations, financial position or cash flows.
Dividends and Regulatory Restrictions
For discussion of our dividends, dividend restrictions and dividend policy, see Note 9—Shareholders’
Equity in the Notes to Consolidated Financial Statements for additional information.
Insurance Coverage
We carry various property, casualty and financial insurance policies with limits, deductibles and exclusions
that we believe are consistent with industry standards. However, insurance coverage may not be adequate or
available to cover unanticipated losses or claims. Additionally, annual policy renewals can be impacted by claims
experience which in turn can impact coverage terms and conditions on a going-forward basis. We are self-insured
to the extent that losses are within the policy deductible or exceed the amount of insurance maintained. Such
losses could have a material adverse effect on our short-term and long-term financial condition and our results of
operations and cash flows.
Contractual Obligations and Commitments
We enter into contractual obligations with third parties in the ordinary course of business. The following
table provides information related to our contractual obligations as of December 31, 2018:
(In millions)
Total
1 year or less
2-3 years
4-5 years
More than
5 years
$
Long-term debt obligations (a) . . . . . . . .
Interest on long-term debt (b) . . . . . . . . .
Operating lease obligations (c) . . . . . . . .
. . . . . . . .
Purchase water obligations (d)
Other purchase obligations (e)
. . . . . . . .
. . . . . . . . . .
Pension plan obligations (f)
Other obligations (g) . . . . . . . . . . . . . . . .
$
7,655
5,832
141
957
637
156
924
$
72
352
17
65
637
31
312
$
335
688
27
130
—
64
255
$
184
648
17
121
—
61
62
7,064
4,144
80
641
—
—
295
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
16,302
$
1,486
$
1,499
$
1,093
$
12,224
(a)
(b)
NOTE The above table reflects only financial obligations and commitments. Therefore, performance obligations associated with our Market-
Based Businesses are not included in the above amounts. Also, uncertain tax positions of $97 million are not reflected in this table as
we cannot predict when open tax years will close with completed examinations. See Note 14—Income Taxes in the Notes to
Consolidated Financial Statements.
Represents sinking fund obligations, debt maturities, capital lease obligations and preferred stocks with mandatory redemption
requirements.
Represents expected interest payments on outstanding long-term debt and interest on preferred stock with mandatory redemption
requirements. Amounts reported may differ from actual due to future financing of debt.
Represents future minimum payments under non-cancelable operating leases, primarily for the lease of motor vehicles, buildings, land
and other equipment including water facilities and systems constructed by partners under the Public-Private Partnerships described
below.
Represents future payments under water purchase agreements for minimum quantities of water.
Represents the open purchase orders as of December 31, 2018 for goods and services purchased in the ordinary course of business.
Represents contributions expected to be made to pension for the years 2019 through 2023.
Includes an estimate of advances for construction to be refunded, capital expenditures estimated to be required under legal and binding
contractual obligations, contracts entered into for energy purchases, a liability associated with a conservation agreement, and service
agreements.
(d)
(e)
(f)
(g)
(c)
85
Public-Private Partnerships
WVAWC has entered into a series of agreements with various public entities, which we refer to as the
Partners, to establish certain joint ventures, commonly referred to as “public-private partnerships.” Under the
public-private partnerships, WVAWC constructed utility plant, financed by WVAWC, and the Partners
constructed utility plant (connected to WVAWC’s property), financed by the Partners. WVAWC agreed to
transfer and convey some of its real and personal property to the Partners in exchange for an equal principal
amount of Industrial Development Bonds, commonly referred to as IDBs, issued by the Partners under a state
Industrial Development Bond and Commercial Development Act. WVAWC leased back the total facilities,
including portions funded by both WVAWC and the Partners, under leases for a period of 40 years.
The leases have payments that approximate the payments required by the terms of the IDBs. These
payments are considered “PILOT payments” which represent payments that WVAWC otherwise would pay as
property taxes on the properties. We have presented the transaction on a net basis on the Consolidated Financial
Statements. The carrying value of the transferred facilities, which is presented in property, plant and equipment
on the Consolidated Balance Sheets, was approximately $147 million as of December 31, 2018.
Performance Obligations
We have entered into agreements for the provision of services to water and wastewater facilities for the
United States military, municipalities and other customers. For discussion of our performance obligations see
Note 3—Revenue Recognition in the Notes to Consolidated Financial Statements for additional information.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires that management apply
accounting policies and make estimates, assumptions and judgments that could affect the Company’s financial
condition, results of operations and cash flows. Actual results could differ from these estimates, assumptions and
judgments. Management believes that the areas described below require significant judgment in the application
of accounting policy or in making estimates and assumptions in matters that are inherently uncertain and that
may change in subsequent periods. Accordingly, changes in the estimates, assumptions and judgments applied to
these accounting policies could have a significant impact on our financial condition, results of operations and
cash flows, as reflected in our Consolidated Financial Statements. Management has reviewed the critical
accounting polices described below with our Audit, Finance and Risk Committee, including the estimates,
assumptions and judgments used in their application. Additional discussion regarding these critical accounting
policies and their application can be found in Note 2—Significant Accounting Policies in the Notes to
Consolidated Financial Statements.
Regulation and Regulatory Accounting
Our regulated utilities are generally subject to economic regulation by PUCs and, as such, we follow the
authoritative accounting principles required for rate regulated utilities, which requires us to reflect the effects of
rate regulation in our Consolidated Financial Statements. Use of this authoritative guidance is applicable to utility
operations that meet the following criteria: (i) third-party regulation of rates; (ii) cost-based rates; and (iii) a
reasonable assumption that rates will be set to recover the estimated costs of providing service, plus a return on
net investment, or rate base. As of December 31, 2018, we concluded that the operations of our utilities met the
criteria.
Application of this authoritative guidance has a further effect on our financial statements as it pertains to
allowable costs used in the ratemaking process. We make significant assumptions and estimates to quantify
amounts recorded as regulatory assets and liabilities. Such judgments include, but are not limited to, assets and
liabilities related to regulated acquisitions, pension and postretirement benefits, depreciation rates and taxes. Due
86
to timing and other differences in the collection of revenues, these authoritative accounting principles allow a
cost that would otherwise be charged as an expense by a non-regulated entity, to be deferred as a regulatory asset
if it is probable that such cost is recoverable through future rates. Conversely, the principles require the creation
of a regulatory liability for amounts collected in rates to recover costs expected to be incurred in the future, or
amounts collected in excess of costs incurred and are refundable to customers. Regulators may also impose
certain fines or penalties.
For each regulatory jurisdiction where we conduct business, we assess, at the end of each reporting period,
whether the regulatory assets and liabilities continue to meet the criteria for probable, future recovery or
settlement. This assessment includes consideration of factors such as changes in applicable regulatory
environments; recent rate orders on recovery of a specific or similar incurred cost to other regulated entities in
the same jurisdiction and the status of any pending or potential legislation that could impact the ability to recover
costs through regulated rates. If subsequent events indicate that the regulatory assets or liabilities no longer meet
the criteria for probable, future recovery or settlement, our Consolidated Statements of Operations and financial
position could be materially affected. In addition, if we conclude in a future period that a separable portion of the
business no longer meets the criteria, we are required to eliminate the financial statement effects of regulation for
that part of the business, which would include the elimination of any or all regulatory assets and liabilities that
had been recorded in the Consolidated Financial Statements. Failure to meet the criteria of this authoritative
guidance could materially impact our Consolidated Financial Statements.
On December 22, 2017, the TCJA was signed into law, which, among other things, enacted significant and
complex changes to the Internal Revenue Code of 1986, including a reduction in the maximum U.S. federal
corporate income tax rate from 35% to 21% as of January 1, 2018. The TCJA created significant excess deferred
income taxes that we and our regulatory jurisdictions believe should be refunded to customers. As such, we
recorded these amounts as regulatory liabilities.
As of December 31, 2018 and 2017, our regulatory asset balance was $1.2 billion and $1.1 billion,
respectively, and our regulatory liability balance was $1.9 billion and $1.7 billion, respectively. See Note 7—
Regulatory Assets and Liabilities in the Notes to Consolidated Financial Statements for further information
regarding our significant regulatory assets and liabilities.
Goodwill
As of December 31, 2018 and 2017, our goodwill balances were $1.6 billion and $1.4 billion, respectively.
In accordance with GAAP, goodwill must be allocated at the reporting unit level, which is defined as an
operating segment or one level below, and tested for impairment at least annually. We perform our annual
impairment testing of goodwill as of November 30 of each year, or more frequently if an event occurs or
circumstances change that would more likely than not, reduce the fair value of a reporting unit below its carrying
value. Adverse industry or economic trends, lower projections of profitability, or a sustained decline in our
market capitalization, among other things, may be indicators of potential goodwill impairment issues, requiring
further testing of a reporting unit’s carrying value.
Entities testing goodwill for impairment have the option of first performing a qualitative assessment to
determine whether quantitative testing is necessary. In performing a qualitative assessment, we assess and make
judgments, among other things, around macroeconomic conditions, industry and market conditions, overall
financial performance, cost factors and entity specific events. These factors require significant judgment and
estimates, and application of alternative assumptions could produce significantly different results. If it is
determined, based upon qualitative factors, that the estimated fair value of a reporting unit is more likely than
not, greater than its carrying value, no further testing is required. If we bypass the qualitative assessment, or
perform the qualitative assessment and determine that the estimated fair value of a reporting unit is more likely
than not less than its carrying value, a quantitative, fair value-based test is performed. This quantitative test
compares the estimated fair value of the reporting unit to its respective net carrying value, including goodwill, on
87
the measurement date. An impairment loss will be recognized in the amount equal to the excess of the reporting
unit’s carrying value compared to its estimated fair value, limited to the total amount of goodwill allocated to that
reporting unit.
Application of goodwill impairment testing requires management judgment, including the identification of
reporting units and determining the fair value of reporting units. We estimate fair value using a combination of a
discounted cash flow analysis and a market multiples analysis. Significant assumptions used in these fair value
analyses include, but are not limited to, forecasts of future operating results, discount and growth rates, capital
expenditures, tax rates, working capital, weighted average cost of capital and projected terminal values. Changes
in estimates or the application of alternative assumptions could produce significantly different results. See Note
8—Goodwill and Other Intangible Assets in the Notes to Consolidated Financial Statements for additional
information regarding our goodwill.
Impairment of Long-Lived Assets
Long-lived assets include property, plant and equipment, goodwill, intangible assets and long-term
investments. We evaluate our long-lived assets for impairment when circumstances indicate the carrying value of
those assets may not be recoverable. Such circumstances include, but are not limited to, a significant decrease in
the market value of the asset, a change in the asset’s expected useful life or physical condition, a history of
operating or cash flow losses associated with the use of the asset or a significant adverse change in the manner in
which the asset is being used or is planned to be used. When such indicators arise, we estimate the fair value of
the long-lived asset from future cash flows expected to result from its use and, if applicable, the eventual
disposition of the asset, and compare the estimated value fair to the carrying value of the asset. An impairment
loss will be recognized in the amount equal to the excess of the long-lived asset’s carrying value compared to its
estimated fair value. Key variables that must be estimated include assumptions regarding sales volume, rates,
operating costs, labor and other benefit costs, capital additions, assumed discount rates and other economic
factors. These variables require management judgment and include inherent uncertainties, since they are
forecasting future events. A variation in the assumptions used could lead to a different conclusion regarding the
realizability of a long-lived asset and, thus, could have a significant effect on our Consolidated Financial
Statements.
The long-lived assets of our Regulated Businesses are grouped on a separate entity basis for impairment
testing, as they are integrated state-wide operations that do not have the option to curtail service and generally
have uniform tariffs. A regulatory asset is charged to earnings if and when future recovery in rates of that asset is
no longer probable.
The Company holds other investments in privately held companies and joint ventures accounted for using
the equity method. The estimated fair value of the long-term investments are dependent on the financial
performance and solvency of the entities in which the Company invests, as well as volatility inherent in the
external markets. If such long-term investments are considered impaired, an impairment loss will be recognized
in the amount equal to the excess of the investment’s carrying value compared to its estimated fair value.
The Company believes the assumptions and other considerations used to value long-lived assets to be
appropriate, however, if actual experience differs from the assumptions and considerations used in its estimates,
the resulting change could have a material adverse impact on the Consolidated Financial Statements.
Revenue Recognition
Revenue from the Company’s Regulated Businesses is generated primarily from water and wastewater
services delivered to customers. These contracts contain a single performance obligation, the delivery of water or
wastewater services, as the promise to transfer the individual good or service is not separately identifiable from
other promises within the contracts and, therefore, is not distinct. Revenues are recognized over time, as services
88
are provided. There are generally no significant financing components or variable consideration. Revenues
include amounts billed to customers on a cycle basis, and unbilled amounts calculated based on estimated usage
from the date of the meter reading associated with the latest customer bill, to the end of the accounting period.
The amounts that the Company has a right to invoice are determined by each customer’s actual usage, an
indicator that the invoice amount corresponds directly to the value transferred to the customer.
Increases or decreases in the volumes delivered to customers and rate mix due to changes in usage patterns
in customer classes in the period could be significant to the calculation of unbilled revenue. In addition, changes
in the timing of meter reading schedules and the number and type of customers scheduled for each meter reading
date would also have an effect on the unbilled revenue calculation. Unbilled revenue for our regulated utilities as
of December 31, 2018 and 2017 was $144 million and $152 million, respectively.
The Company also recognizes revenue when it is probable that future recovery of previously incurred costs
or future refunds that are to be credited to customers will occur through the ratemaking process.
Revenue from the Company’s Homeowner Services Group is generated through various protection
programs in which the Company provides fixed fee services to domestic homeowners and smaller commercial
customers to protect against repair costs for interior and external water and sewer lines, interior electric and gas
lines, heating and cooling systems, water heaters, power surge protection and other related services. Most of the
contracts have a one-year term and each service is a separate performance obligation, satisfied over time, as the
customers simultaneously receive and consume the benefits provided from the service. Customers are obligated
to pay for the protection programs ratably over 12 months or via a one-time, annual fee, with revenues
recognized ratably over time for these services. Advances from customers are deferred until the performance
obligation is satisfied.
The Company also has long-term, fixed fee contracts to operate and maintain water and wastewater facilities
with the U.S. government on various military bases and facilities owned by municipal and industrial customers,
as well as shorter-term contracts that provide customized water transfer services for shale natural gas companies
and customers. Billing and revenue recognition for the fixed fee revenues occurs ratably over the term of the
contract, as customers simultaneously receive and consume the benefits provided by the Company. Additionally,
these contracts allow the Company to make capital improvements to underlying infrastructure, which are
initiated through separate modifications or amendments to the original contract, whereby stand-alone, fixed
pricing is separately stated for each improvement. The Company has determined that these capital improvements
are separate performance obligations, with revenue recognized over time based on performance completed at the
end of each reporting period. Losses on contracts are recognized during the period in which the losses first
become probable and estimable. Revenues recognized during the period in excess of billings on construction
contracts are recorded as unbilled revenues, with billings in excess of revenues recorded as other current
liabilities until the recognition criteria are met. Changes in contract performance and related estimated contract
profitability may result in revisions to costs and revenues, and are recognized in the period in which revisions are
determined. Unbilled revenue for our Market-Based Businesses as of December 31, 2018 and 2017 was
$42 million and $60 million, respectively.
Accounting for Income Taxes
Significant management judgment is required in determining the provision for income taxes, primarily due
to the uncertainty related to tax positions taken, as well as deferred tax assets and liabilities, valuation allowances
and the utilization of NOL carryforwards.
In accordance with applicable authoritative guidance, we account for uncertain income tax positions using a
benefit recognition model with a two-step approach, including a more-likely-than-not recognition threshold and a
measurement approach based on the largest amount of tax benefit that is greater than 50% likely of being realized
upon ultimate settlement. If it is not more-likely-than-not that the benefit of the tax position will be sustained on
89
its technical merits, no benefit is recorded. Uncertain tax positions that relate only to timing of when an item is
included on a tax return are considered to have met the recognition threshold. Management evaluates each
position based solely on the technical merits and facts and circumstances of the position, assuming the position
will be examined by a taxing authority having full knowledge of all relevant information. Significant judgment is
required to determine whether the recognition threshold has been met and, if so, the appropriate amount of
unrecognized tax benefit to be recorded in the Consolidated Financial Statements.
We evaluate the probability of realizing deferred tax assets quarterly by reviewing a forecast of future
taxable income and our intent and ability to implement tax planning strategies, if necessary, to realize deferred
tax assets. We also assess our ability to utilize tax attributes, including those in the form of carryforwards, for
which the benefits have already been reflected in the financial statements. We record valuation allowances for
deferred tax assets when we conclude it is more-likely-than-not such benefit will not be realized in future
periods.
Under GAAP, specifically Accounting Standards Codification Topic 740, Income Taxes (“ASC 740”), the
tax effects of changes in tax laws must be recognized in the period in which the law is enacted. ASC 740 also
requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when
temporary differences are to be realized or settled. Thus, at the date of enactment of the TCJA, the Company’s
deferred taxes were re-measured based upon the new tax rate. For our regulated entities, the change in deferred
taxes are recorded as either an offset to a regulatory asset or liability and may be subject to refund to customers.
For our unregulated operations, the change in deferred taxes are recorded as a non-cash re-measurement
adjustment to earnings.
The staff of the SEC has recognized the complexity of reflecting the impacts of changes in tax law, more
specifically the TCJA, and on December 22, 2017, issued guidance in SAB 118 which clarifies accounting for
income taxes under ASC 740 if information is not yet available or complete and provides for up to a one year
period in which to complete the required analyses and accounting. SAB 118 describes three scenarios or buckets
associated with a company’s status of accounting for the TCJA: (i) a company is complete with its accounting for
certain effects of tax reform; (ii) a company is able to determine a reasonable estimate for certain effects of tax
reform and records that estimate as a provisional amount; or (iii) a company is not able to determine a reasonable
estimate and therefore continues to apply ASC 740, based on the provisions of the tax laws that were in effect
immediately prior to the TCJA being enacted. The significant assumptions considered and evaluated by the
Company relating to accounting for the TCJA, include, but are not limited to, the:
•
•
•
•
recording of regulatory liabilities from the re-measurement of the Company’s deferred income taxes,
and the uncertainty of regulatory treatment in various jurisdictions in which the Company currently
operates;
allocation to our subsidiaries of interest deductibility at the parent;
bonus depreciation deductions for assets constructed and placed in service during the period from
September 28, 2017 through December 31, 2017; and
normalization periods for our re-measured deferred taxes.
Actual income taxes could vary from estimated amounts due to the future impacts of various items,
including changes in income tax laws, our forecasted financial condition and results of operations, failure to
successfully implement tax planning strategies and recovery of taxes through the regulatory process for our
Regulated Businesses, as well as results of audits and examinations of filed tax returns by taxing authorities.
While we believe the resulting tax balances as of December 31, 2018 and 2017 are appropriately accounted for in
accordance with the applicable authoritative guidance, the ultimate outcome of tax matters could result in
favorable or unfavorable adjustments to our Consolidated Financial Statements and such adjustments could be
material. See Note 14—Income Taxes in the Notes to Consolidated Financial Statements for additional
information regarding income taxes.
90
Accounting for Pension and Postretirement Benefits
We maintain noncontributory defined benefit pension plans covering eligible employees of our regulated
utility and shared service operations. See Note 15—Employee Benefits in the Notes to Consolidated Financial
Statements for additional information regarding the description of and accounting for the defined benefit pension
plans and postretirement benefit plans.
The Company’s pension and postretirement benefit costs are developed from actuarial valuations. Inherent
in these valuations are key assumptions provided by the Company to its actuaries, including the discount rate and
expected long-term rate of return on plan assets. Material changes in the Company’s pension and postretirement
benefit costs may occur in the future due to changes in these assumptions as well as fluctuations in plan assets.
The assumptions are selected to represent the average expected experience over time and may differ in any one
year from actual experience due to changes in capital markets and the overall economy. These differences will
impact the amount of pension and other postretirement benefit expense that the Company recognizes. The
primary assumptions are:
• Discount Rate—The discount rate is used in calculating the present value of benefits, which are based
on projections of benefit payments to be made in the future. The objective in selecting the discount rate
is to measure the single amount that, if invested at the measurement date in a portfolio of high-quality
debt instruments, would provide the necessary future cash flows to pay the accumulated benefits when
due.
• Expected Return on Plan Assets (“EROA”)—Management projects the future return on plan assets
considering prior performance, but primarily based upon the plans’ mix of assets and expectations for
the long-term returns on those asset classes. These projected returns reduce the net benefit costs we
record currently.
• Rate of Compensation Increase—Management projects employees’ pay increases, which are used to
project employees’ pension benefits at retirement.
• Health Care Cost Trend Rate—Management projects the expected increases in the cost of health care.
• Mortality—Management retained the Society of Actuaries RP-2014 mortality base table, which
provides rates of mortality in 2006, but adopted the new MP-2018 mortality improvement scale to
gradually adjust future mortality rates downward due to increased longevity in each year after 2006.
The discount rate assumption, which is determined for the pension and postretirement benefit plans
independently, is subject to change each year, consistent with changes in applicable high-quality, long-term
corporate bond indices. We use an approach that approximates the process of settlement of obligations tailored to
the plans’ expected cash flows by matching the plans’ cash flows to the coupons and expected maturity values of
individually selected bonds. For each plan, the discount rate was developed as the level equivalent rate that
would yield the same present value as using spot rates aligned with the projected benefit payments. The discount
rate for determining pension benefit obligations was 4.38%, 3.75% and 4.28% at December 31, 2018, 2017 and
2016, respectively. The discount rate for determining other postretirement benefit obligations was 4.32%, 3.73%
and 4.26% at December 31, 2018, 2017 and 2016, respectively.
In selecting an EROA, we considered tax implications, past performance and economic forecasts for the
types of investments held by the plans. The long-term EROA assumption used in calculating pension cost was
5.95% for 2018, 6.49% for 2017, and 7.02% for 2016. The weighted average EROA assumption used in
calculating other postretirement benefit costs was 4.77% for 2018, 5.09% for 2017 and 5.37% for 2016.
91
The following table provides the allocations of the pension plan assets by asset category:
Asset Category
2019
Target
Allocation
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real Estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate investment trusts (“REITs”) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
43%
50%
5%
2%
Percentage of Plan Assets
as of December 31,
2018
42%
52%
5%
1%
2017
44%
49%
5%
2%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100%
100%
100%
During 2017, the Company reduced the risk of its investments in the pension plan by reducing its exposure
to equities from 60% to 50%, and increasing its long duration fixed-income allocation from 40% to 50%. This
structure is designed to reduce the plan’s funded status volatility. It is also intended to reduce the pension plan’s
exposure to interest rates since a higher proportion of long duration fixed-income securities that have a duration
similar to that of the pension liabilities should reduce interest rate risk associated with the plan’s liabilities.
Postretirement Medical Bargaining Plan Changes
On July 31, 2018, a new, five-year national benefits agreement was ratified, covering approximately 3,200
of our union-represented employees. Most of the benefits under this new agreement will become effective on
January 1, 2019, and include, among other things, union-represented employees’ participation in the Company’s
cash-based annual performance plan, additional medical plan options and changes to certain retiree medical
benefits, which required the Company to remeasure its other postretirement benefit plan obligation during the
third quarter of 2018.
For those eligible union retirees and dependents over age 65, the current supplemental retiree medical plan
will be replaced with a Health Reimbursement Arrangement (“HRA”) similar to the cap currently in place for
non-union retirees. The Company is providing a subsidy allowing the post-65 retirees to purchase a Medicare
supplemental plan on a private exchange network. The pre-65 coverage plan was also amended to provide a cap
on future employer costs designed to limit the employer costs to 2018 levels. For pre-65 union members retiring
early in 2019-2021 a supplemental benefit will be provided to alleviate the effect of the cap.
On August 31, 2018, the Postretirement Medical Benefit Plan was remeasured to reflect this plan change.
The plan change resulted in a $175 million reduction in future benefits payable to plan participants, and, in
combination with other experience reflected as of the remeasurement date, resulted in a $227 million reduction to
the net accumulated postretirement benefit obligation. The plan amendment will be amortized over 10.2 years,
the average future working lifetime to full eligibility age for all plan participants.
After the remeasurement, the Retirement and Benefit Plans Investment Committee (the “Investment
Committee”), which is responsible for overseeing the investment of the Company’s pension and other
postretirement benefit plans’ assets, determined that the funded status of the Postretirement Medical Bargaining
Plan was in excess of that needed to pay current and future benefits.
Given the change in funded status, the Investment Committee commissioned a new asset-liability study for
the Postretirement Medical Bargaining Plan. This study concluded that it was prudent to decrease the risk in the
plan and to remove its equity exposure. The study also recommended reducing its exposure to changes in interest
rates by matching the assets of the plan to the projected cash flows for future benefit payments of the liability.
The Investment Committee agreed with the recommendations and approved the investment of the Postretirement
Medical Bargaining Plan assets in fixed-income securities.
The restructuring of the plan was initiated toward year-end. Once fully completed, the plan’s assets will be
invested in fixed-income securities. The majority of the securities will be used to match the projected cash flows
92
for future benefit payments of the liability. Plan assets in excess of those securities designed to match the long-
term liabilities will be invested in shorter duration securities with a duration of about three years.
The following table provides the allocations of the other postretirement benefit plan assets by asset
category:
Asset Category
2019
Target
Allocation (a)
Percentage of Plan Assets
as of December 31,
2018
2017
Equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fixed income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
REITs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14%
86%
—
17%
83%
—
35%
65%
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100%
100%
100%
(a)
Includes the American Water Postretirement Medical Benefits Bargaining Plan, the New York Water Service Corporation
Postretirement Medical Benefits Bargaining Plan, the American Water Postretirement Medical Benefits Non-Bargaining Plan, and the
American Water Life Insurance Trust.
The investments of the pension and postretirement welfare plan trusts include debt and equity securities held
either directly or through commingled funds. The trustee for the Company’s defined benefit pension and
postretirement welfare plans uses an independent valuation firm to calculate the fair value of plan assets.
Additionally, the Company independently verifies the assets’ values. Approximately 88% of the assets are valued
using the quoted market price for the assets in an active market at the measurement date, while 12% of the assets
are valued using other inputs.
In selecting a rate of compensation increase, we consider past experience in light of movements in inflation
rates. Our rate of compensation increase was 3% for 2018, 3.02% for 2017 and 3.07% for 2016.
In selecting health care cost trend rates, we consider past performance and forecasts of increases in health
care costs. As of January 1, 2017, our health care cost trend rate assumption used to calculate the periodic cost
was 7% in 2018 gradually declining to 4.5% in 2026 and thereafter. As of December 31, 2018, the Company is
projecting that medical inflation will be 6.75% in 2019 and, it will ultimately trend down to 5%, but not until
2026.
We will use a discount rate and EROA of 4.38% and 6.2%, respectively, for estimating our 2019 pension
costs. Additionally, we will use a discount rate and expected blended return based on weighted assets of 4.32%
and 3.56%, respectively, for estimating our 2019 other postretirement benefit costs. A decrease in the discount
rate or the EROA would increase our pension expense. Our 2018 and 2017 pension and postretirement benefit
costs were $21 million and $56 million, respectively. The Company expects to make pension and postretirement
benefit contributions to the plan trusts up to $31 million in 2019, and $32 million, $29 million, $29 million and
$29 million in 2020, 2021, 2022 and 2023, respectively. Actual amounts contributed could change significantly
from these estimates. The assumptions are reviewed annually and at any interim re-measurement of the plan
obligations. The impact of assumption changes is reflected in the recorded pension and postretirement benefit
amounts as they occur, or over a period of time if allowed under applicable accounting standards. As these
assumptions change from period to period, recorded pension and postretirement benefit amounts and funding
requirements could also change.
Accounting for Contingencies
We record loss contingencies when management determines that the outcome of future events is probable of
occurring and when the amount of the loss or a range of losses can be reasonably estimated. The determination of
a loss contingency is based on management’s judgment and estimates about the likely outcome of the matter,
93
which may include an analysis of different scenarios. Liabilities are recorded or adjusted when events or
circumstances cause these judgments or estimates to change. In assessing whether a loss is reasonably possible,
management considers many factors, which include, but are not limed to: the nature of the litigation, claim or
assessment, review of applicable law, opinions or views of legal counsel and other advisors, and the experience
gained from similar cases or situations. We provide disclosures for material contingencies when management
deems there is a reasonable possibility that a loss or an additional loss may be incurred. We provide estimates of
reasonably possible losses when such estimates may be reasonably determined, either as a single amount or
within a reasonable range.
Actual amounts realized upon settlement of contingencies may be different than amounts recorded and
disclosed and could have a significant impact on the liabilities, revenue and expenses recorded on the
Consolidated Financial Statements. See Note 16—Commitments and Contingencies in the Notes to Consolidated
Financial Statements for additional information regarding contingencies.
New Accounting Standards
See Note 2—Significant Accounting Policies in the Notes to Consolidated Financial Statements for a
description of recent accounting standards.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk associated with changes in commodity prices, equity prices and interest rates.
We are exposed to risks from changes in interest rates as a result of our issuance of variable and fixed rate debt
and commercial paper. We manage our interest rate exposure by limiting our variable rate exposure and by
monitoring the effects of market changes in interest rates. We also have the ability to enter into financial
derivative instruments, which could include instruments such as, but not limited to, interest rate swaps, forward
starting swaps, swaptions and U.S. Treasury lock agreements to manage and mitigate interest rate risk exposure.
As of December 31, 2018, a hypothetical increase of interest rates by 1% associated with our short-term
borrowings would result in a $10 million increase in short-term interest expense.
As of December 31, 2018, the Company had four forward starting swap agreements with an aggregate
notional amount of $360 million to reduce interest rate exposure on debt expected to be issued in 2019. The
forward starting swap agreements terminate in 2019 and have an average fixed rate of 3.16%. When entering into
forward starting interest rate swaps, the Company is subject to market risk with respect to changes in the
underlying benchmark interest rate that impacts the fair value of the forward starting interest rate swaps. We
manage market risk by matching terms of the swaps with the critical terms of the expected debt issuance. The fair
value of the forward starting swaps at December 31, 2018 was in a loss position of $14 million. A hypothetical
1% adverse change in interest rates would result in a decrease in the fair value of our forward starting swaps of
approximately $66 million at December 31, 2018.
On January 8, 2019, we entered into an additional forward starting swap agreement, with a notional amount
of $150 million, to reduce interest rate exposure on debt expected to be issued in 2019. This forward starting
swap agreement terminates in December 2019, and has an average fixed rate of 2.76%.
Our risks associated with price increases for chemicals, electricity and other commodities are reduced
through contractual arrangements and the expected ability to recover price increases through rates, in the next
general rate case proceeding or other regulatory mechanism, as authorized by each regulatory jurisdiction.
Non-performance by these commodity suppliers could have a material adverse impact on our results of
operations, financial position and cash flows.
The market price of our common stock may experience fluctuations, which may be unrelated to our
operating performance. In particular, our stock price may be affected by general market movements as well as
94
developments specifically related to the water and wastewater industry. These could include, among other things,
interest rate movements, quarterly variations or changes in financial estimates by securities analysts and
governmental or regulatory actions. This volatility may make it difficult for us to access the capital markets in
the future through additional offerings of our common stock, regardless of our financial performance, and such
difficulty may preclude us from being able to take advantage of certain business opportunities or meet business
obligations.
We are exposed to credit risk through our water, wastewater and other water-related services provided by
our Regulated Businesses and Market-Based Businesses. Our Regulated Businesses serve residential,
commercial, industrial and other customers while our Market-Based Businesses engage in business activities
with developers, government entities and other customers. Our primary credit risk is exposure to customer
default on contractual obligations and the associated loss that may be incurred due to the non-payment of
customer accounts receivable balances. Our credit risk is managed through established credit and collection
policies which are in compliance with applicable regulatory requirements and involve monitoring of customer
exposure and the use of credit risk mitigation measures such as letters of credit or prepayment arrangements. Our
credit portfolio is diversified with no significant customer or industry concentrations. In addition, our Regulated
Businesses are generally able to recover all prudently incurred costs including uncollectible customer accounts
receivable expenses and collection costs through rates.
The Company’s retirement trust assets are exposed to the market prices of debt and equity securities.
Changes to the retirement trust asset values can impact the Company’s pension and other benefits expense,
funded status and future minimum funding requirements. Changes in interest rates can impact retirement
liabilities. We aim to reduce risk through asset diversification and by investing in long duration fixed-income
securities that have a duration similar to that of our pension liabilities, seeking to hedge some of the interest rate
sensitivity of our liabilities. That way, if interest rates fall and liabilities increase, we expect that the fixed-
income assets in our retirement trust will also increase in value. We also expect our risk to be reduced through
our ability to recover pension and other benefit costs through rates.
We are also exposed to a potential national economic recession or deterioration in local economic
conditions in the markets in which we operate. The credit quality of our customer accounts receivable is
dependent on the economy and the ability of our customers to manage through unfavorable economic cycles and
other market changes. In addition, there can be no assurances that regulators will grant sufficient rate
authorizations. Therefore, our ability to fully recover operating expense, recover our investment and provide an
appropriate return on invested capital made in our Regulated Businesses may be adversely impacted.
95
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 2018 and 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
97
99
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016 . . . . . . . . .
101
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017, and
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
102
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016 . . . . . . . . .
103
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2018,
2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
104
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
105
96
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
American Water Works Company, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of American Water Works Company, Inc.
and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements
of operations, comprehensive income, cash flows, and changes in shareholders’ equity for each of the three years
in the period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated
financial statements”). We also have audited the Company’s internal control over financial reporting as of
December 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects,
the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control—Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining
effective internal control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting, included in Management’s Report on Internal Control over Financial Reporting
appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial
statements and on the Company’s internal control over financial reporting based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws
and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement, whether due to error or fraud, and whether effective internal control over
financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of
material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
As described in Management’s Report on Internal Control over Financial Reporting, management has
excluded Pivotal Home Solutions from its assessment of internal control over financial reporting as of
December 31, 2018 because it was acquired by the Company in a purchase business combination during 2018.
We have also excluded Pivotal Home Solutions from our audit of internal control over financial reporting.
97
Pivotal Home Solutions is a wholly-owned subsidiary whose total assets and total revenues excluded from
management’s assessment and our audit of internal control over financial reporting represent less than 1% and
approximately 2%, respectively, of the related consolidated financial statement amounts as of and for the year
ended December 31, 2018.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 19, 2019
We have served as the Company’s auditor since 1948.
98
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Balance Sheets
(In millions, except share and per share data)
December 31,
2018
December 31,
2017
ASSETS
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
23,204
(5,795)
$
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,409
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unbilled revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory and other long-term assets:
Regulatory assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement benefit asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total regulatory and other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
130
28
301
186
41
95
781
1,156
1,575
84
155
63
3,033
21,716
(5,470)
16,246
55
27
272
212
41
113
720
1,061
1,379
9
—
67
2,516
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
21,223
$
19,482
The accompanying notes are an integral part of these Consolidated Financial Statements.
99
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Balance Sheets
(In millions, except share and per share data)
December 31,
2018
December 31,
2017
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock ($0.01 par value, 500,000,000 shares authorized, 185,367,158 and
182,508,564 shares issued, respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Paid-in-capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . .
Treasury stock, at cost (4,683,156 and 4,064,010 shares, respectively)
$
Total common shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable preferred stock at redemption value . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2
6,657
(464)
(34)
(297)
5,864
7,569
7
7,576
2
6,432
(723)
(79)
(247)
5,385
6,490
8
6,498
Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,440
11,883
Current liabilities:
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Taxes accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest accrued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
964
71
175
556
45
87
196
905
322
195
630
33
73
167
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,094
2,325
Regulatory and other long-term liabilities:
Advances for construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes, net
Deferred investment tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued pension expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued postretirement benefit expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total regulatory and other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions in aid of construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies (See Note 16)
252
1,718
22
1,907
390
—
78
4,367
1,322
271
1,551
22
1,664
384
40
66
3,998
1,276
Total capitalization and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
21,223
$
19,482
The accompanying notes are an integral part of these Consolidated Financial Statements.
100
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Statements of Operations
(In millions, except per share data)
For the Years Ended December 31,
2017
2018
2016
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,440
$
3,357
$
3,302
Operating expenses:
Operation and maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Gain) on asset dispositions and purchases . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense):
Interest, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-operating benefit costs, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on early extinguishment of debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
Total other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss attributable to noncontrolling interest
. . . . . . . . . . . . . . . . . . . . .
1,479
545
277
(20)
57
2,338
1,102
(350)
20
(4)
19
(315)
787
222
565
(2)
Net income attributable to common shareholders . . . . . . . . . . . . . . . . . . . . . . .
$
567
Basic earnings per share: (a)
Net income attributable to common shareholders . . . . . . . . . . . . . . . . . . .
$
3.16
Diluted earnings per share: (a)
Net income attributable to common shareholders . . . . . . . . . . . . . . . . . . .
$
3.15
$
$
$
1,369
492
259
(16)
—
2,104
1,253
(342)
(9)
(7)
17
(341)
912
486
426
—
426
2.39
$
$
1,499
470
258
(10)
—
2,217
1,085
(325)
(5)
—
15
(315)
770
302
468
—
468
2.63
2.38
$
2.62
Weighted average common shares outstanding:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
180
180
178
179
178
179
(a)
Amounts may not calculate due to rounding.
The accompanying notes are an integral part of these Consolidated Financial Statements.
101
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Statements of Comprehensive Income
(In millions)
For the Years Ended December 31,
2017
2016
2018
Net income attributable to common shareholders . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), net of tax:
Change in employee benefit plan funded status, net of tax of $20, $2 and
$(14) in 2018, 2017 and 2016, respectively . . . . . . . . . . . . . . . . . . . . . . .
Pension amortized to periodic benefit cost:
Actuarial loss, net of tax of $3, $5 and $4 in 2018, 2017 and 2016,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension reclassification from accumulated other comprehensive loss of tax
effects resulting from the Tax Cuts and Jobs Act . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized (loss) gain on cash flow hedges, net of tax of $0, $(4) and $10
in 2018, 2017 and 2016, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flow hedges reclassification from accumulated other comprehensive
loss of tax effects resulting from the Tax Cuts and Jobs Act
. . . . . . . . . .
Net other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
567
$
426
$
468
60
7
(22)
—
(2)
2
45
7
7
—
(1)
(6)
—
7
(21)
6
—
—
17
—
2
Comprehensive income attributable to common shareholders . . . . . . . . . . . . . . .
$
612
$
433
$
470
The accompanying notes are an integral part of these Consolidated Financial Statements.
102
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Statements of Cash Flows
(In millions)
For the Years Ended December 31,
2017
2016
2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile to net cash flows provided by operating activities:
$
565
$
426
$
468
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes and amortization of investment tax credits . . . . . . . . . .
Provision for losses on accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on asset dispositions and purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension and non-pension postretirement benefits . . . . . . . . . . . . . . . . . . . . . . .
Other non-cash, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in assets and liabilities:
Receivables and unbilled revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension and non-pension postretirement benefit contributions . . . . . . . . .
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets and liabilities, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of Freedom Industries settlement activities . . . . . . . . . . . . . . . . . .
545
195
33
(20)
57
23
20
(17)
(22)
25
22
(40)
492
462
29
(16)
—
57
(54)
21
(48)
38
64
(22)
470
295
27
(10)
—
54
(36)
(31)
(53)
60
(20)
65
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,386
1,449
1,289
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . .
Removal costs from property, plant and equipment retirements, net
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments of long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net short-term borrowings with maturities less than three months . . . . . . . . . . . . . .
Issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuances of employee stock plans and direct stock purchase plan,
net of taxes paid of $8, $11 and $13 in 2018, 2017 and 2016, respectively . . . . .
Advances and contributions for construction, net of refunds of $22, $22 and $31 in
2018, 2017 and 2016, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt issuance costs and make-whole premium on early debt redemption . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Anti-dilutive share repurchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents and restricted funds . . . . . . . . . . . .
Cash and cash equivalents and restricted funds at beginning of period . . . . . . . . . . . . . .
Cash and cash equivalents and restricted funds at end of period . . . . . . . . . . . . . . . . . . .
Cash paid during the year for:
Interest, net of capitalized amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes, net of refunds of $0 in 2018, 2017 and 2016 . . . . . . . . . . . . . . . . . . .
Non-cash investing activity:
Capital expenditures acquired on account but unpaid as of year end . . . . . . . . . . . .
Acquisition financed by treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
(1,586)
(398)
35
(87)
(2,036)
1,358
(526)
60
183
(1,434)
(177)
15
(76)
(1,311)
(204)
9
(84)
(1,672)
(1,590)
1,395
(896)
55
—
553
(144)
221
—
16
15
13
21
(22)
(319)
(45)
726
76
83
159
332
38
$
$
$
181
$
— $
28
(47)
(289)
(54)
207
(16)
99
83
338
30
204
33
16
(5)
(261)
(65)
328
27
72
99
327
16
$
$
$
$
171
$ —
The accompanying notes are an integral part of these Consolidated Financial Statements.
103
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Statements of Changes in Shareholders’ Equity
(In millions, except per share data)
Balance as of December 31, 2015 . . . . . . . . . .
Net income attributable to common
Common Stock
Shares Par Value
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Treasury Stock
Shares At Cost
Total
Shareholders’
Equity
180.9 $
2 $ 6,351 $
(1,073) $
(88)
(2.6) $ (143) $
5,049
shareholders . . . . . . . . . . . . . . . . . . . . . .
Direct stock reinvestment and purchase
plan . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee stock purchase plan . . . . . . . . . .
Stock-based compensation activity . . . . . .
Repurchases of common stock . . . . . . . . .
Net other comprehensive income . . . . . . .
Dividends ($1.50 declared per common
share) . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
0.1
0.1
0.7
—
—
—
—
—
—
—
—
—
—
—
5
7
25
—
—
—
Balance as of December 31, 2016 . . . . . . . . . .
Cumulative effect of change in accounting
principle . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to common
shareholders . . . . . . . . . . . . . . . . . . . . . .
Direct stock reinvestment and purchase
plan . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee stock purchase plan . . . . . . . . . .
Stock-based compensation activity . . . . . .
Acquisitions via treasury stock . . . . . . . . .
Repurchases of common stock . . . . . . . . .
Net other comprehensive income . . . . . . .
Dividends ($1.66 declared per common
share) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2017 . . . . . . . . . .
Cumulative effect of change in accounting
principle . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to common
shareholders . . . . . . . . . . . . . . . . . . . . . .
Direct stock reinvestment and purchase
plan . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee stock purchase plan . . . . . . . . . .
Stock-based compensation activity . . . . . .
Issuance of common stock . . . . . . . . . . . . .
Repurchases of common stock . . . . . . . . .
Net other comprehensive income . . . . . . .
Dividends ($1.82 declared per common
share) . . . . . . . . . . . . . . . . . . . . . . . . . . .
181.8 $
2 $ 6,388 $
—
—
0.1
0.1
0.5
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8
7
22
7
—
—
—
182.5 $
2 $ 6,432 $
—
—
0.1
0.1
0.4
2.3
—
—
—
—
—
—
—
—
—
—
—
—
—
—
8
8
26
183
—
—
—
Balance as of December 31, 2018 . . . . . . . . . .
185.4 $
2 $ 6,657 $
468
—
—
(1)
—
—
(267)
(873) $
21
426
—
—
—
—
—
—
(297)
(723) $
20
567
—
—
(1)
—
—
—
(327)
(464) $
—
—
—
—
—
2
—
—
—
—
—
(0.1)
(1.0)
—
—
—
(5)
(65)
—
—
—
(86)
(3.7) $ (213) $
—
—
—
—
—
—
—
7
—
—
—
—
—
(0.1)
0.4
(0.7)
—
—
—
—
—
(7)
27
(54)
—
—
—
(79)
(4.1) $ (247) $
—
—
—
—
—
—
—
45
—
—
—
—
—
(0.1)
—
(0.5)
—
—
—
—
—
(5)
—
(45)
—
—
—
(34)
(4.7) $ (297) $
468
5
7
19
(65)
2
(267)
5,218
21
426
8
7
15
34
(54)
7
(297)
5,385
20
567
8
8
20
183
(45)
45
(327)
5,864
The accompanying notes are an integral part of these Consolidated Financial Statements.
104
American Water Works Company, Inc. and Subsidiary Companies
Notes to Consolidated Financial Statements
(Unless otherwise noted, in millions, except per share data)
Note 1: Organization and Operation
American Water Works Company, Inc. (the “Company” or “American Water”) is a holding company for
regulated and market-based subsidiaries throughout the United States and Ontario, Canada. The Company’s
primary business involves the ownership of regulated utilities that provide water and wastewater services in 16
states in the United States, collectively referred to as the “Regulated Businesses.” The Company also operates
market-based businesses that provide a broad range of related and complementary water and wastewater services
within non-reportable operating segments, collectively referred to as the “Market-Based Businesses.” The
Company’s primary Market-Based Businesses include the Homeowner Services Group, which provides warranty
protection programs to residential and smaller commercial customers; the Military Services Group, which
provides water and wastewater services to the U.S. government on military installations; and Keystone
Clearwater Solutions, LLC, which provides water transfer services for shale natural gas exploration and
production companies.
Note 2: Significant Accounting Policies
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of American Water and all of its
subsidiaries in which a controlling interest is maintained after the elimination of intercompany balances and
transactions. The Company uses the equity method to report its investments in joint ventures where it holds up to
a 50% voting interest and cannot exercise control over the operations and policies of the investments. Under the
equity method, the Company records its interests as an investment and its percentage share of the investee’s
earnings as income or losses.
In July 2015, the Company acquired a 95% interest in Water Solutions Holdings, LLC, including its wholly
owned subsidiary, Keystone Clearwater Solutions, LLC (collectively referred to as “Keystone”). During the
fourth quarter of 2018, pursuant to the exercise of put options by the minority owners, the Company acquired the
remaining 5% interest in Keystone, bringing its ownership interest to 100%. The former minority owners’
interest was recognized as redeemable noncontrolling interest and was included in Other long-term liabilities on
the Consolidated Balance Sheets. There was no remaining redeemable noncontrolling interest as of December 31,
2018, and $7 million of redeemable noncontrolling interest as of December 31, 2017.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States (“GAAP”) requires that management make estimates, assumptions and judgments that could affect
the Company’s financial condition, results of operations and cash flows. Actual results could differ from these
estimates, assumptions and judgments. The Company considers its critical accounting estimates to include (i) the
application of regulatory accounting principles and the related determination and estimation of regulatory assets
and liabilities, (ii) assumptions used in impairment testing of goodwill and long-lived assets, including regulatory
assets, (iii) revenue recognition and the estimates used in the calculation of unbilled revenue, (iv) accounting for
income taxes and the enacted Tax Cuts and Jobs Act (the “TCJA”), (v) benefit plan assumptions and (vi) the
estimates and judgments used in determining loss contingencies. The Company’s critical accounting estimates
that are particularly sensitive to change in the near term are amounts reported for regulatory assets and liabilities,
goodwill, income taxes, benefit plan assumptions and contingency-related obligations.
105
Regulation
The Company’s regulated utilities are generally subject to economic regulation by certain state utility
commissions or other entities engaged in utility regulation, collectively referred to as Public Utility Commissions
(“PUCs” or “Regulators”). As such, the Company follows authoritative accounting principles required for rate
regulated utilities, which requires the effects of rate regulation to be reflected in the Company’s Consolidated
Financial Statements. PUCs generally authorize revenue at levels intended to recover the estimated costs of
providing service, plus a return on net investments, or rate base. Regulators may also approve accounting
treatments, long-term financing programs and cost of capital, operation and maintenance (“O&M”) expenses,
capital expenditures, taxes, affiliated transactions and relationships, reorganizations, mergers, and acquisitions,
along with imposing certain penalties or granting certain incentives. Due to timing and other differences in the
collection of a regulated utility’s revenues, these authoritative accounting principles allow a cost that would
otherwise be charged as an expense by a non-regulated entity, to be deferred as a regulatory asset if it is probable
that such cost is recoverable through future rates. Conversely, these principles also require the creation of a
regulatory liability for amounts collected in rates to recover costs expected to be incurred in the future, or
amounts collected in excess of costs incurred and are refundable to customers. See Note 7—Regulatory Assets
and Liabilities for additional information.
Property, Plant and Equipment
Property, plant and equipment consists primarily of utility plant utilized by the Company’s regulated
utilities. Additions to utility plant and replacement of retirement units of utility plant are capitalized and include
costs such as materials, direct labor, payroll taxes and benefits, indirect items such as engineering and
supervision, transportation and an allowance for funds used during construction (“AFUDC”). Costs for repair,
maintenance and minor replacements are charged to O&M expense as incurred.
The cost of utility plant is depreciated using the straight-line average remaining life, group method. The
Company’s regulated utilities record depreciation in conformity with amounts approved by PUCs, after
regulatory review of the information the Company submits to support its estimates of the assets’ remaining useful
lives.
Nonutility property consists primarily of buildings and equipment utilized by the Company’s Market-Based
Businesses and for internal operations. This property is stated at cost, net of accumulated depreciation, which is
calculated using the straight-line method over the useful lives of the assets.
When units of property, plant and equipment are replaced, retired or abandoned, the carrying value is
credited against the asset and charged to accumulated depreciation. To the extent the Company recovers cost of
removal or other retirement costs through rates after the retirement costs are incurred, a regulatory asset is
recorded. In some cases, the Company recovers retirement costs through rates during the life of the associated
asset and before the costs are incurred. These amounts result in a regulatory liability being reported based on the
amounts previously recovered through customer rates, until the costs to retire those assets are incurred.
The costs incurred to acquire and internally develop computer software for internal use are capitalized as a
unit of property. The carrying value of these costs amounted to $336 million and $346 million as of
December 31, 2018 and 2017, respectively.
Cash and Cash Equivalents, and Restricted Funds
Substantially all cash is invested in interest-bearing accounts. All highly liquid investments with a maturity
of three months or less when purchased are considered to be cash equivalents.
Restricted funds consists primarily of proceeds from financings for the construction and capital
improvement of facilities, and deposits for future services under O&M projects. Proceeds are held in escrow or
106
interest-bearing accounts until the designated expenditures are incurred. Restricted funds are classified on the
Consolidated Balance Sheets as either current or long-term based upon the intended use of the funds.
The following table provides a reconciliation of the Cash and cash equivalents and Restricted funds amounts
as presented on the Consolidated Balance Sheets, to the sum of such amounts presented on the Consolidated
Statements of Cash Flows for the years ended December 31:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted funds included in other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
130
28
1
Cash and cash equivalents and restricted funds as presented on the Consolidated
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
159
$
55
27
1
83
2018
2017
Accounts Receivable and Unbilled Revenues
Accounts receivable include regulated utility customer accounts receivable, which represent amounts billed
to water and wastewater customers generally on a monthly basis. Credit is extended based on the guidelines of
the applicable PUCs and collateral is generally not required. Also included are market-based trade accounts
receivable and nonutility customer receivables of the regulated subsidiaries. Unbilled revenues are accrued when
service has been provided but has not been billed to customers and when costs exceed billings on market-based
construction contracts.
Allowance for Uncollectible Accounts
Allowances for uncollectible accounts are maintained for estimated probable losses resulting from the
Company’s inability to collect receivables from customers. Accounts that are outstanding longer than the
payment terms are considered past due. A number of factors are considered in determining the allowance for
uncollectible accounts, including the length of time receivables are past due and previous loss history. The
Company generally writes off accounts when they become uncollectible or are over a certain number of days
outstanding. See Note 6—Allowance for Uncollectible Accounts for additional information.
Materials and Supplies
Materials and supplies are stated at the lower of cost or net realizable value. Cost is determined using the
average cost method.
Goodwill
Goodwill represents the excess of the purchase price paid over the estimated fair value of the assets acquired
and liabilities assumed in the acquisition of a business. Goodwill is not amortized and must be allocated at the
reporting unit level, which is defined as an operating segment or one level below, and tested for impairment at
least annually, or more frequently if an event occurs or circumstances change that would more likely than not,
reduce the fair value of a reporting unit below its carrying value.
The Company’s goodwill is primarily associated with (i) the acquisition of American Water by an affiliate
of the Company’s previous owner in 2003, (ii) the acquisition of E’town Corporation by a predecessor to the
Company’s previous owner in 2001, (iii) the acquisition of Pivotal Home Solutions (“Pivotal”) in 2018, and
(iv) the acquisition of Keystone in 2015; and has been allocated to reporting units based on the fair values at the
date of the acquisitions. For purposes of testing goodwill for impairment, the reporting units in the Regulated
Businesses segment are aggregated into a single reporting unit. The Market-Based Businesses is comprised of the
Homeowner Services Group reporting unit, the Military Services Group reporting unit and the Keystone
reporting unit.
107
The Company’s annual impairment testing is performed as of November 30 of each year, in conjunction
with the completion of the Company’s annual business plan. The Company assesses qualitative factors to
determine whether quantitative testing is necessary. If it is determined, based upon qualitative factors, that the
estimated fair value of a reporting unit is more likely than not, greater than its carrying value, no further testing is
required. If the Company bypasses the qualitative assessment, or performs the qualitative assessment and
determines that the estimated fair value of a reporting unit is more likely than not, less than its carrying value, a
quantitative, fair value-based test is performed. This quantitative testing compares the estimated fair value of the
reporting unit to its respective net carrying value, including goodwill, on the measurement date. An impairment
loss will be recognized in the amount equal to the excess of the reporting unit’s carrying value compared to its
estimated fair value, limited to the total amount of goodwill allocated to that reporting unit.
Application of goodwill impairment testing requires management judgment, including the identification of
reporting units and determining the fair value of reporting units. Management estimates fair value using a
combination of a discounted cash flow analysis and a market multiples analysis. Significant assumptions used in
these fair value estimations include, but are not limited to, forecasts of future operating results, discount and
growth rates, capital expenditures, tax rates, working capital, weighted average cost of capital and projected
terminal values.
The Company believes the assumptions and other considerations used to value goodwill to be appropriate,
however, if actual experience differs from the assumptions and considerations used in its analysis, the resulting
change could have a material adverse impact on the Consolidated Financial Statements. See Note 8—Goodwill
and Other Intangible Assets for additional information.
Intangible Assets
Intangible assets consist primarily of finite-lived customer relationships associated with the acquisition of
Pivotal and Keystone. Finite-lived intangible assets are initially measured at their estimated fair values, and are
amortized over their estimated useful lives based on the pattern in which the economic benefits of the intangible
assets are consumed or otherwise used. See Note 8—Goodwill and Other Intangible Assets for additional
information.
Impairment of Long-Lived Assets
Long-lived assets include property, plant and equipment, goodwill, intangible assets and long-term
investments. The Company evaluates long-lived assets for impairment when circumstances indicate the carrying
value of those assets may not be recoverable. When such indicators arise, the Company estimates the fair value
of the long-lived asset from future cash flows expected to result from its use and, if applicable, the eventual
disposition of the asset, comparing the estimated value fair to the carrying value of the asset. An impairment loss
will be recognized in the amount equal to the excess of the long-lived asset’s carrying value compared to its
estimated fair value.
The long-lived assets of the Company’s regulated utilities are grouped on a separate entity basis for
impairment testing, as they are integrated state-wide operations that do not have the option to curtail service and
generally have uniform tariffs. A regulatory asset is charged to earnings if and when future recovery in rates of
that asset is no longer probable.
The Company holds other long-term investments in privately held companies and joint ventures accounted
for using the equity method, and are classified as other Long-term assets on the Consolidated Balance Sheets.
The estimated fair value of the long-term investments are dependent on the financial performance and solvency
of the entities in which the Company invests, as well as volatility inherent in the external markets. If such long-
term investments are considered impaired, an impairment loss will be recognized in the amount equal to the
excess of the investment’s carrying value compared to its estimated fair value.
108
The Company believes the assumptions and other considerations used to value long-lived assets to be
appropriate, however, if actual experience differs from the assumptions and considerations used in its estimates,
the resulting change could have a material adverse impact on the Consolidated Financial Statements.
Advances for Construction and Contributions in Aid of Construction
Regulated utility subsidiaries may receive advances for construction and contributions in aid of construction
from customers, home builders and real estate developers to fund construction necessary to extend service to new
areas.
Advances are refundable for limited periods of time as new customers begin to receive service or other
contractual obligations are fulfilled. Included in Other current liabilities as of December 31, 2018 and 2017 on
the Consolidated Balance Sheets are estimated refunds of $23 million and $23 million, respectively. Those
amounts represent expected refunds during the next 12-month period.
Advances that are no longer refundable are reclassified to contributions. Contributions are permanent
collections of plant assets or cash for a particular construction project. For ratemaking purposes, the amount of
such contributions generally serves as a rate base reduction since the contributions represent non-investor
supplied funds.
Generally, the Company depreciates utility plant funded by contributions and amortizes its contributions
balance as a reduction to depreciation expense, producing a result which is functionally equivalent to reducing
the original cost of the utility plant for the contributions. In accordance with applicable regulatory guidelines,
some of the Company’s utility subsidiaries do not amortize contributions, and any contribution received remains
on the balance sheet indefinitely. Amortization of contributions in aid of construction was $28 million,
$27 million and $27 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Revenue Recognition
On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, Revenue From
Contracts With Customers, and all related amendments (collectively, “ASC 606”), using the modified
retrospective approach, applied to contracts which were not completed as of January 1, 2018. Under this
approach, periods prior to the adoption date have not been restated and continue to be reported under the
accounting standards in effect for those periods.
Under ASC 606, a performance obligation is a promise within a contract to transfer a distinct good or
service, or a series of distinct goods and services, to a customer. Revenue is recognized when performance
obligations are satisfied and the customer obtains control of promised goods or services. The amount of revenue
recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for
goods or services. Under ASC 606, a contract’s transaction price is allocated to each distinct performance
obligation. To determine revenue recognition for arrangements that the Company determines are within the scope
of ASC 606, the Company performs the following five steps: (i) identifies the contracts with a customer;
(ii) identifies the performance obligations within the contract, including whether any performance obligations are
distinct and capable of being distinct in the context of the contract; (iii) determines the transaction price;
(iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenue
when, or as, the Company satisfies each performance obligation.
The Company’s revenues from contracts with customers are discussed below. Customer payments for
contracts are generally due within 30 days of billing and none of the contracts with customers have payment
terms that exceed one year; therefore, the Company elected to apply the significant financing component
practical expedient and no amount of consideration has been allocated as a financing component.
109
Regulated Businesses Revenue
Revenue from the Company’s Regulated Businesses is generated primarily from water and wastewater
services delivered to customers. These contracts contain a single performance obligation, the delivery of water
and/or wastewater services, as the promise to transfer the individual good or service is not separately identifiable
from other promises within the contracts and, therefore, is not distinct. Revenues are recognized over time, as
services are provided. There are generally no significant financing components or variable consideration.
Revenues include amounts billed to customers on a cycle basis and unbilled amounts calculated based on
estimated usage from the date of the meter reading associated with the latest customer bill, to the end of the
accounting period. The amounts that the Company has a right to invoice are determined by each customer’s
actual usage, an indicator that the invoice amount corresponds directly to the value transferred to the customer.
The Company also recognizes revenue when it is probable that future recovery of previously incurred costs or
future refunds that are to be credited to customers will occur through the ratemaking process.
Market-Based Businesses Revenue
Through various warranty protection programs, the Company provides fixed fee services to residential and
smaller commercial customers to protect against repair costs for interior and exterior water and sewer lines,
interior electric and gas lines, heating and cooling systems, water heaters and other home appliances, as well as
power surge protection and other related services. Most of the contracts have a one-year term and each service is
a separate performance obligation, satisfied over time, as the customers simultaneously receive and consume the
benefits provided from the service. Customers are obligated to pay for the protection programs ratably over 12
months or via a one-time, annual fee, with revenues recognized ratably over time for these services. Advances
from customers are deferred until the performance obligation is satisfied.
The Company also has long-term, fixed fee contracts to operate and maintain water and wastewater systems
for the U.S. government on various military installations and facilities owned by municipal and industrial
customers, as well as shorter-term contracts that provide customized water transfer services for shale natural gas
companies and customers. Billing and revenue recognition for the fixed fee revenues occurs ratably over the term
of the contract, as customers simultaneously receive and consume the benefits provided by the Company.
Additionally, these contracts allow the Company to make capital improvements to underlying infrastructure,
which are initiated through separate modifications or amendments to the original contract, whereby stand-alone,
fixed pricing is separately stated for each improvement. The Company has determined that these capital
improvements are separate performance obligations, with revenue recognized over time based on performance
completed at the end of each reporting period. Losses on contracts are recognized during the period in which the
losses first become probable and estimable. Revenues recognized during the period in excess of billings on
construction contracts are recorded as unbilled revenues, with billings in excess of revenues recorded as other
current liabilities until the recognition criteria are met. Changes in contract performance and related estimated
contract profitability may result in revisions to costs and revenues, and are recognized in the period in which
revisions are determined. See Note 3—Revenue Recognition for additional information.
Income Taxes
The Company and its subsidiaries participate in a consolidated federal income tax return for U.S. tax
purposes. Members of the consolidated group are charged with the amount of federal income tax expense
determined as if they filed separate returns.
Certain income and expense items are accounted for in different time periods for financial reporting than for
income tax reporting purposes. The Company provides deferred income taxes on the difference between the tax
basis of assets and liabilities and the amounts at which they are carried in the financial statements. These deferred
income taxes are based on the enacted tax rates expected to be in effect when these temporary differences are
projected to reverse. In addition, the regulated utility subsidiaries recognize regulatory assets and liabilities for
the effect on revenues expected to be realized as the tax effects of temporary differences, previously flowed
through to customers, reverse.
110
Investment tax credits have been deferred by the regulated utility subsidiaries and are being amortized to
income over the average estimated service lives of the related assets.
The Company recognizes accrued interest and penalties related to tax positions as a component of income
tax expense and accounts for sales tax collected from customers and remitted to taxing authorities on a net basis.
See Note 14—Income Taxes for additional information.
Allowance for Funds Used During Construction
AFUDC is a non-cash credit to income with a corresponding charge to utility plant that represents the cost
of borrowed funds or a return on equity funds devoted to plant under construction. The regulated utility
subsidiaries record AFUDC to the extent permitted by the PUCs. The portion of AFUDC attributable to
borrowed funds is shown as a reduction of Interest, net on the Consolidated Statements of Operations. Any
portion of AFUDC attributable to equity funds would be included in Other, net on the Consolidated Statements
of Operations. AFUDC is provided in the following table for the years ended December 31:
Allowance for other funds used during construction . . . . . . . . . . . . . . . . . . . . .
Allowance for borrowed funds used during construction . . . . . . . . . . . . . . . . .
$
$
24
13
$
19
8
15
6
2018
2017
2016
Environmental Costs
The Company’s water and wastewater operations and the operations of its Market-Based Businesses are
subject to U.S. federal, state, local and foreign requirements relating to environmental protection, and as such, the
Company periodically becomes subject to environmental claims in the normal course of business. Environmental
expenditures that relate to current operations or provide a future benefit are expensed or capitalized as
appropriate. Remediation costs that relate to an existing condition caused by past operations are accrued, on an
undiscounted basis, when it is probable that these costs will be incurred and can be reasonably estimated. A
conservation agreement entered into by a subsidiary of the Company with the National Oceanic and Atmospheric
Administration in 2010 and amended in 2017 required the subsidiary to, among other provisions, implement
certain measures to protect the steelhead trout and its habitat in the Carmel River watershed in the State of
California. The subsidiary agreed to pay $1 million annually commencing in 2010 with the final payment being
made in 2021. Remediation costs accrued amounted to $4 million and $6 million as of December 31, 2018 and
2017, respectively.
Derivative Financial Instruments
The Company uses derivative financial instruments for purposes of hedging exposures to fluctuations in
interest rates. These derivative contracts are entered into for periods consistent with the related underlying
exposures and do not constitute positions independent of those exposures. The Company does not enter into
derivative contracts for speculative purposes and does not use leveraged instruments.
All derivatives are recognized on the balance sheet at fair value. On the date the derivative contract is
entered into, the Company may designate the derivative as a hedge of the fair value of a recognized asset or
liability (fair-value hedge) or a hedge of a forecasted transaction or of the variability of cash flows to be received
or paid related to a recognized asset or liability (cash-flow hedge).
Changes in the fair value of a fair-value hedge, along with the gain or loss on the underlying hedged item,
are recorded in current-period earnings. The gains and losses on the effective portion of cash-flow hedges are
recorded in other comprehensive income, until earnings are affected by the variability of cash flows. Any
ineffective portion of designated cash-flow hedges is recognized in current-period earnings.
111
Cash flows from derivative contracts are included in Net cash provided by operating activities on the
Consolidated Statements of Cash Flows. See Note 11—Long-Term Debt for additional information.
New Accounting Standards
The following accounting standards were adopted by the Company in 2018:
Standard
Description
Date of
Adoption
Application
Effect on the Consolidated
Financial Statements
Revenue from Contracts
with Customers
Clarifying the Definition
of a Business
Improving the
Presentation of Net
Periodic Pension Cost and
Net Periodic
Postretirement Benefit
Cost
Changes the criteria for recognizing
revenue from a contract with a
customer. Replaces existing guidance
on revenue recognition, including most
industry-specific guidance. The
objective is to provide a single,
comprehensive revenue recognition
model for all contracts with customers
to improve comparability within
industries, across industries and across
capital markets. The underlying
principle is that an entity will
recognize revenue to depict the
transfer of goods and services to
customers at an amount the entity
expects to be entitled to in exchange
for those goods or services. The
guidance also requires a number of
disclosures regarding the nature,
amount, timing and uncertainty of
revenue and the related cash flows.
Updated the accounting guidance to
clarify the definition of a business,
with the objective of assisting entities
with evaluating whether transactions
should be accounted for as
acquisitions, or disposals, of assets or
businesses.
Updated authoritative guidance to
require the service cost component of
net periodic benefit cost to be
presented in the same income
statement line item(s) as other
employee compensation costs arising
from services rendered during the
period. The remaining components of
net periodic benefit cost are required to
be presented separately from the
service cost component, in an income
statement line item outside of
operating income. Also, the guidance
only allows for the service cost
component to be eligible for
capitalization. The updated guidance
does not impact the accounting for net
periodic benefit costs as regulatory
assets or liabilities.
January 1,
2018
Modified
retrospective
The adoption had no material
impact on the Consolidated
Financial Statements. Additional
disclosures were added in the
Notes to Consolidated Financial
Statements. See Note 3—
Revenue Recognition for
additional information.
January 1,
2018
Prospective
The adoption had no material
impact on the Consolidated
Financial Statements.
The Company presented in the
current period, and reclassified
in the prior periods, net periodic
benefit costs, other than the
service cost component, in
non-operating benefit costs, net
on the Consolidated Statements
of Operations.
January 1,
2018
Retrospective for the
presentation of the
service cost
component and the
other components of
net periodic benefit
costs on the
Consolidated
Statements of
Operations;
prospective for the
limitation of
capitalization to only
the service cost
component of net
periodic benefit costs
in total assets.
112
Standard
Description
Simplifying the Test for
Goodwill Impairment
Accounting for
Implementation Costs
Incurred in a Cloud
Computing Arrangement
that is a Service Contract
Changes to the Disclosure
Requirements for Defined
Benefit Plans
Reclassification of Certain
Tax Effects from
Accumulated Other
Comprehensive Income
Updated authoritative guidance to
simplify the subsequent measurement
of goodwill by eliminating Step 2 from
the goodwill impairment test. Under
the amendments in the update, an
entity should perform its annual or
interim goodwill impairment test by
comparing the fair value of a reporting
unit with its carrying amount. An
impairment charge should be
recognized for the amount by which
the carrying value exceeds the
reporting unit’s fair value; however,
the loss recognized should not exceed
the total amount of goodwill allocated
to that reporting unit. An entity still
has the option to perform the
qualitative assessment for a reporting
unit to determine if the quantitative
impairment test is necessary.
Updated the accounting and disclosure
guidance for cloud computing
arrangements that are service
contracts. Under this guidance,
implementation costs incurred in cloud
computing arrangements and in
developing or obtaining internal-use
software follow the same capitalization
requirements. The accounting for the
service element of the arrangement
remains unchanged.
Updated the disclosure requirements
for defined benefit plans. The guidance
removes the requirement to disclose
the amounts in accumulated other
comprehensive income to be
recognized as net periodic benefit cost,
the effects of a one percent change in
assumed healthcare costs and a number
of other disclosures. The guidance
clarifies that projected benefit
obligations and accumulated benefit
obligations should be disclosed, and
adds disclosure requirements for the
weighted average interest crediting
rates for promised interest crediting
rates and an explanation of the reasons
for significant gains and losses related
to changes in the benefit obligation.
Permits an entity to reclassify tax
effects in accumulated other
comprehensive income (“AOCI”) as a
result of the TCJA, to retained
earnings.
Date of
Adoption
August 31,
2018
Application
Prospective
Effect on the Consolidated
Financial Statements
See Note 8—Goodwill and
Other Intangible Assets for
additional information.
September 30,
2018
Prospective
The adoption had no material
impact on the Consolidated
Financial Statements.
December 31,
2018
Retrospective
The adoption had no material
impact on the Consolidated
Financial Statements.
December 31,
2018
In the period of
adoption.
See Note 14—Income Taxes for
additional information.
113
The following recently issued accounting standards have not yet been adopted by the Company as of
December 31, 2018:
Date of
Adoption
January 1,
2019; early
adoption
permitted
Application
Modified
retrospective
January 1,
2019; early
adoption
permitted
Modified
retrospective for
adjustments related
to the measurement
of ineffectiveness for
cash flow hedges;
prospective for the
updated presentation
and disclosure
requirements.
Estimated Effect on the
Consolidated Financial
Statements
The adoption will result in
recording operating lease
right-of-use assets of
approximately $118 million and
operating lease liabilities of
approximately $116 million on
the Consolidated Balance
Sheets. The immaterial
difference between the operating
lease right-of-use assets and
operating lease liabilities will be
recorded as an adjustment to
retained earnings. The Company
has defined a process and
implemented internal controls
and software to meet the
accounting and reporting
requirements of the guidance
and did not elect early adoption
for the standard. The Company
will elect all practical expedients
available under the new lease
accounting and disclosure
guidance. The practical
expedient related to land
easements allowed the Company
to carry forward accounting
treatment for existing land
easements, which is to record
easements as land and land
rights in utility plant.
The adoption will not have a
material impact on the
Consolidated Financial
Statements based upon the
Company’s hedging activities as
of the most recent balance sheet
date.
Standard
Description
Accounting for Leases
Targeted Improvements to
Accounting for Hedging
Activities
Updated the accounting and disclosure
guidance for leasing arrangements.
Under this guidance, a lessee will be
required to recognize the following for
all leases, excluding short-term leases, at
the commencement date: (i) a lease
liability, which is a lessee’s obligation to
make lease payments arising from a
lease, measured on a discounted basis;
and (ii) a right-of-use asset, which is an
asset that represents the lessee’s right to
use, or control the use of, a specified
asset for the lease term. Under the
guidance, lessor accounting is largely
unchanged. A package of optional
transition practical expedients allows an
entity not to reassess under the new
guidance (i) whether any existing
contracts are or contain leases (ii) lease
classification, and (iii) initial direct
costs. Additional optional transition
practical expedients are available which
allow an entity not to evaluate existing
land easements if the easements were
not previously accounted for as leases,
and to apply the new lease standard at
the adoption date and recognize a
cumulative-effect adjustment in the
opening balance of retained earnings in
the period of adoption.
Updated the accounting and disclosure
guidance for hedging activities, which
allows for more financial and
nonfinancial hedging strategies to be
eligible for hedge accounting. Under this
guidance, a qualitative effectiveness
assessment is permitted for certain
hedges if an entity can reasonably
support an expectation of high
effectiveness throughout the term of the
hedge, provided that an initial
quantitative test establishes that the
hedge relationship is highly effective.
Also, for cash flow hedges determined
to be highly effective, all changes in the
fair value of the hedging instrument will
be recorded in other comprehensive
income, with a subsequent
reclassification to earnings when the
hedged item impacts earnings.
114
Standard
Description
Date of
Adoption
Designates the OIS rate based on SOFR
as an eligible U.S. benchmark interest
rate for the purposes of applying hedge
accounting.
January 1,
2019; early
adoption
permitted
Application
Prospective
Estimated Effect on the
Consolidated Financial
Statements
The adoption will not have a
material impact on the
Consolidated Financial
Statements based upon the
Company’s hedging activities as
of the most recent balance sheet
date.
The Company is evaluating any
impact on its Consolidated
Financial Statements, as well as
the timing of adoption.
Modified
retrospective
January 1,
2020; early
adoption
permitted
Inclusion of the Secured
Overnight Financing Rate
(“SOFR”) Overnight
Index Swap (“OIS”) Rate
as a Benchmark Interest
Rate for Hedge
Accounting Purposes
Measurement of Credit
Losses on Financial
Instruments
Changes to the Disclosure
Requirements for Fair
Value Measurement
Updated the accounting guidance on
reporting credit losses for financial
assets held at amortized cost basis and
available-for-sale debt securities. Under
this guidance, expected credit losses are
required to be measured based on
historical experience, current conditions
and reasonable and supportable forecasts
that affect the collectability of the
reported amount of financial assets.
Also, this guidance requires that credit
losses on available-for-sale debt
securities be presented as an allowance
rather than as a direct write-down.
Updated the disclosure requirements for
fair value measurement. The guidance
removes the requirements to disclose
transfers between Level 1 and Level 2
measurements, the timing of transfers
between levels, and the valuation
processes for Level 3 measurements.
Disclosure of transfers into and out of
Level 3 measurements will be required.
The guidance adds disclosure
requirements for the change in
unrealized gains and losses in other
comprehensive income for recurring
Level 3 measurements, as well as the
range and weighted average of
significant unobservable inputs used to
develop Level 3 measurements.
January 1,
2020; early
adoption
permitted
Prospective for
added disclosures
and for the narrative
description of
measurement
uncertainty;
retrospective for all
other amendments.
The Company does not expect
the adoption to have a material
impact on its Consolidated
Financial Statements, and the
Company is evaluating the
timing of adoption.
Reclassifications
Certain reclassifications have been made to prior periods in the Consolidated Financial Statements and
Notes to conform to the current presentation.
115
Note 3: Revenue Recognition
Disaggregated Revenues
The following table provides operating revenues disaggregated for the year ended December 31, 2018:
Revenues from
Contracts with
Customers
Other Revenues
Not from
Contracts with
Customers (a)
Total Operating
Revenues
Regulated Businesses:
Water services:
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fire service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Public and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total water services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wastewater services:
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial
Industrial
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Public and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total wastewater services . . . . . . . . . . . . . . . . . . . . . . . . . . .
Miscellaneous utility charges . . . . . . . . . . . . . . . . . . . . . . . . .
Alternative revenue programs . . . . . . . . . . . . . . . . . . . . . . . .
Lease contract revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,663
616
137
136
197
2,749
115
30
2
14
161
48
—
—
$
— $
—
—
—
—
1,663
616
137
136
197
2,749
115
30
2
14
161
48
19
7
2,984
476
(20)
—
—
—
—
—
—
—
19
7
26
—
(3)
23
Total Regulated Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,958
Market-Based Businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other
476
(17)
Total operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
3,417
$
$
3,440
(a)
Includes revenues associated with alternative revenue programs, lease contracts and intercompany rent which are outside the scope of
ASC 606 and accounted for under other existing GAAP.
Contract Balances
Contract assets and contract liabilities are the result of timing differences between revenue recognition,
billings and cash collections. In the Company’s Market-Based Businesses, certain contracts are billed as work
progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of
contractual milestones. Contract assets are recorded when billing occurs subsequent to revenue recognition, and
are reclassified to accounts receivable when billed and the right to consideration becomes unconditional.
Contract liabilities are recorded when the Company receives advances from customers prior to satisfying
contractual performance obligations, particularly for construction contracts and home warranty protection
program contracts, and are recognized as revenue when the associated performance obligations are satisfied.
Contract assets are included in Unbilled revenues and contract liabilities are included in Other current liabilities
on the Consolidated Balance Sheets as of December 31, 2018.
116
The following table provides the changes in contract assets and liabilities for the year ended December 31,
2018:
Contract assets:
Balance at January 1, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers to accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contract liabilities:
Balance at January 1, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers to operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
$
$
$
$
35
18
(39)
14
25
52
(57)
20
Remaining Performance Obligations
Remaining performance obligations (“RPOs”) represent revenues the Company expects to recognize in the
future from contracts that are in progress. The Company enters into agreements for the provision of services to
water and wastewater facilities for the United States military, municipalities and other customers. As of
December 31, 2018, the Company’s operation and maintenance and capital improvement contracts in the Market-
Based Businesses have RPOs. Contracts with the U.S. government for work on various military installations
expire between 2051 and 2069 and have RPOs of $4.4 billion as of December 31, 2018, as measured by
estimated remaining contract revenue. Such contracts are subject to customary termination provisions held by the
U.S. government, prior to the agreed-upon contract expiration. Contracts with municipalities and commercial
customers expire between 2019 and 2038 and have RPOs of $596 million as of December 31, 2018, as measured
by estimated remaining contract revenue. Some of the Company’s long-term contracts to operate and maintain a
municipality’s, the federal government’s or other party’s water or wastewater treatment and delivery facilities
include responsibility for certain maintenance for some of those facilities, in exchange for an annual fee. Unless
specifically required to perform certain maintenance activities, the maintenance costs are recognized when the
maintenance is performed. Approximately $61 million of RPOs were eliminated in conjunction with the sale of
20 of the Contract Services Group’s contracts to subsidiaries of Veolia Environnement S.A. See Note 4—
Acquisitions and Divestitures for further discussion of this transaction.
Note 4: Acquisitions and Divestitures
Regulated Businesses
Acquisitions
During 2018, the Company closed on 15 various regulated water and wastewater systems for a total
aggregate purchase price of $33 million. Assets acquired in these acquisitions, principally utility plant, totaled
$32 million. Liabilities assumed, primarily contributions in aid of construction, totaled $1 million. The Company
recorded additional goodwill of $2 million associated with one of its acquisitions, which is reported in its
Regulated Businesses segment. Of this total goodwill, none is expected to be deductible for tax purposes. The
preliminary purchase price allocations related to these acquisitions will be finalized once the valuation of assets
acquired has been completed, no later than one year after their acquisition date.
During 2017, the Company closed on 18 acquisitions of various regulated water and wastewater systems for
a total aggregate purchase price of $210 million. This included the acquisition of the wastewater system assets of
the Municipal Authority of the City of McKeesport, Pennsylvania, on December 18, 2017. Assets acquired,
principally utility plant, totaled $207 million. Liabilities assumed totaled $23 million, including $9 million of
117
contributions in aid of construction and assumed debt of $7 million. The Company recorded additional goodwill
of $29 million associated with four of its acquisitions, which is reported in its Regulated Businesses segment. Of
this total goodwill, approximately $1 million is expected to be deductible for tax purposes. Additionally, the
Company recognized a bargain purchase gain of $3 million associated with three of the acquisitions.
During 2016, the Company closed on 15 acquisitions of various regulated water and wastewater systems for
a total aggregate purchase price of $199 million. This included the acquisition of substantially all of the
wastewater collection and treatment assets of the Sewer Authority of the City of Scranton, Pennsylvania
(“Scranton”) in December 2016. Assets acquired, principally utility plant, totaled $194 million. Liabilities
assumed totaled $30 million, including $14 million of contributions in aid of construction and assumed debt of
$6 million. During 2017, the Company recorded additional goodwill of $43 million associated with five of its
acquisitions, which is reported in its Regulated Businesses segment. Of this total goodwill, approximately
$31 million is expected to be deductible for tax purposes. Additionally, during 2018 the Company recorded a
measurement period adjustment of $5 million, increasing the goodwill recognized from the Scranton acquisition.
Highlighted Pending Acquisitions
On April 13, 2018, the Company’s Illinois subsidiary entered into an agreement to acquire the City of Alton,
Illinois’ regional wastewater system for approximately $54 million. This system currently serves approximately
23,000 customers, comprised of approximately 11,000 customers in Alton and an additional 12,000 customers
under bulk contracts in the nearby communities of Bethalto and Godfrey. In connection with the execution of the
purchase agreement, the Company’s Illinois subsidiary made a $5 million non-escrowed deposit to the seller
during January 2019. The Company expects to close this acquisition during the second quarter of 2019, pending
regulatory approval.
On May 30, 2018, the Company’s Pennsylvania subsidiary entered into an agreement to acquire the
wastewater assets of Exeter Township, Pennsylvania, for approximately $96 million. This system currently
serves approximately 9,000 customers and the Company expects to close this acquisition during the third quarter
of 2019, pending regulatory approval.
Market-Based Businesses
Pivotal Acquisition
On June 4, 2018, the Company, through its wholly-owned subsidiary American Water Enterprises, LLC,
completed the acquisition of Pivotal for a total purchase price of $365 million, net of cash received and including
$9 million in working capital. Pivotal is headquartered in Naperville, Illinois, and is a provider of home warranty
protection products and services, operating in 18 states, with approximately 1.2 million customer contracts at the
time of acquisition. Pivotal is complementary to the Company’s Homeowner Services Group product offerings,
and enhances its presence in the home warranty solutions markets through utility partnerships. The results of
Pivotal have been consolidated into the Homeowner Services Group non-reportable operating segment.
This acquisition was funded through the issuance of common stock, as described below, and from
borrowings through the Company’s commercial paper program, which were subsequently refinanced with the
issuance of long-term debt during the third quarter of 2018. This acquisition is being accounted for as a business
combination which requires, among other things, the assets acquired and the liabilities assumed to be recognized
at their fair values at the acquisition date. The measurement period adjustments for Pivotal were complete as of
December 31, 2018.
118
The following table provides the purchase price allocation for the Pivotal acquisition as of June 4, 2018, and
the adjustments that were made through December 31, 2018:
June 4, 2018
(as initially reported)
Measurement Period
Adjustments
June 4, 2018
(as adjusted)
Identifiable assets acquired:
Accounts receivable . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . .
Property, plant and equipment
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . .
$
Total identifiable assets acquired . . . . . . . . . . . . . . .
Liabilities assumed:
Accounts payable and accrued liabilities . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . .
Long-term liabilities . . . . . . . . . . . . . . . . . . . . .
Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . .
Net identifiable assets acquired . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . .
$
23
1
21
96
141
(5)
(14)
(1)
(20)
121
242
363
$
$
(1) $
1
1
(6)
(5)
—
2
—
2
(3)
5
2
$
22
2
22
90
136
(5)
(12)
(1)
(18)
118
247
365
Goodwill was calculated as the excess of the consideration transferred over the net assets recognized, and
represents the expected revenue and cost synergies of the combined business and assembled workforce of
Pivotal. The goodwill is included in the Company’s Homeowner Services Group reporting unit, within
the Market-Based Businesses, and is deductible for income tax purposes.
Customer relationships, which comprise the majority of the intangible assets balance, are amortized based
on historical attrition rates over their estimated useful lives of up to 21 years, with a weighted average life of
approximately six years, as the assets are expected to contribute to the cash flows of the Company. The
remaining intangible assets are amortized over their expected benefit periods of up to six years, with a weighted
average life of approximately three years. The following table provides the valuation of the intangible assets
acquired:
Intangible asset class:
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amount
$
$
78
12
90
Pivotal’s revenue and net income included on the Company’s Consolidated Statements of Operations for the
year ended December 31, 2018, did not have a material impact on the overall consolidated results of operations
of the Company.
Equity Forward Transaction and Common Stock Issuance
On April 11, 2018, the Company effected an equity forward transaction by entering into a forward sale
agreement with each of two forward purchasers in connection with a public offering of 2,320,000 shares of the
Company’s common stock. In the equity forward transaction, the forward purchasers, or an affiliate, borrowed an
aggregate of 2,320,000 shares of the Company’s common stock from third parties and sold them to the
underwriters in the public offering. On June 7, 2018, the Company elected to fully and physically settle both
119
forward sale agreements, resulting in the issuance of a total of 2,320,000 shares of its common stock at a price of
$79.01 per share, for aggregate net proceeds of $183 million. The net proceeds of the transaction were used to
finance a portion of the purchase price of the Pivotal acquisition described above.
Divestitures
On July 5, 2018, the Company entered into an agreement for the sale of the majority of the O&M contracts
in its Contract Services Group to subsidiaries of Veolia Environnement S.A. for $27 million. The Company
closed on the sale of 20 of the 22 contracts associated with this agreement during the third quarter of 2018, and
expects to close on the remaining two contracts, subject to customer consents, during the first half of 2019. As
part of the sale, the Company recognized a pre-tax gain of $14 million during the third quarter of 2018.
The pro forma impact of the Company’s acquisitions was not material to the Consolidated Statements of
Operations for the years ended December 31, 2018, 2017 and 2016.
Note 5: Property, Plant and Equipment
The following table provides the major classes of property, plant and equipment by category as of
December 31:
Utility plant:
2018
2017
Range of Remaining
Useful Lives
Weighted Average
Useful Life
Land and other non-depreciable assets . . . . . . . .
Sources of supply . . . . . . . . . . . . . . . . . . . . . . . . .
Treatment and pumping facilities . . . . . . . . . . . .
Transmission and distribution facilities . . . . . . . .
Services, meters and fire hydrants . . . . . . . . . . . .
General structures and equipment
. . . . . . . . . . . .
Waste collection . . . . . . . . . . . . . . . . . . . . . . . . . .
Waste treatment, pumping and disposal
. . . . . . .
Construction work in progress . . . . . . . . . . . . . . .
$
155
821
3,607
10,164
4,008
1,625
943
570
593
$
151
798
3,356
9,583
3,754
1,458
904
557
585
Total utility plant . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonutility property . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,486
718
21,146
570
Total property, plant and equipment
. . . . . . . . . . . . . .
$23,204
$21,716
2 to 127 Years
3 to 101 Years
9 to 149 Years
5 to 90 Years
3 to 109 Years
5 to 114 Years
3 to 139 Years
47 years
40 years
70 years
31 years
15 years
60 years
41 years
3 to 50 Years
6 years
Property, plant and equipment depreciation expense amounted to $497 million, $460 million and
$435 million for the years ended December 31, 2018, 2017 and 2016, respectively and was included in
Depreciation and amortization expense on the Consolidated Statements of Operations. The provision for
depreciation expressed as a percentage of the aggregate average depreciable asset balances was 3.09%, 3.07%
and 3.14% for years December 31, 2018, 2017 and 2016, respectively.
120
Note 6: Allowance for Uncollectible Accounts
The following table provides the changes in the allowances for uncollectible accounts for the years ended
December 31:
Balance as of January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts charged to expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amounts written off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries of amounts written off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(42) $
(33)
34
(4)
(40) $
(29)
30
(3)
Balance as of December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(45) $
(42) $
(39)
(27)
29
(3)
(40)
2018
2017
2016
Note 7: Regulatory Assets and Liabilities
Regulatory Assets
Regulatory assets represent costs that are probable of recovery from customers in future rates. The majority
of the regulatory assets earn a return. The following table provides the composition of regulatory assets as of
December 31:
Deferred pension expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Removal costs recoverable through rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory balancing accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
San Clemente Dam project costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase premium recoverable through rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tank painting costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Make-whole premium on early extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2018
2017
$
362
292
110
85
70
56
42
33
106
285
269
113
89
67
57
42
27
112
Total regulatory assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,156
$
1,061
The Company’s deferred pension expense includes a portion of the underfunded status that is probable of
recovery through rates in future periods of $352 million and $270 million as of December 31, 2018 and 2017,
respectively. The remaining portion is the pension expense in excess of the amount contributed to the pension
plans which is deferred by certain subsidiaries and will be recovered in future service rates as contributions are
made to the pension plan.
Removal costs recoverable through rates represent costs incurred for removal of property, plant and
equipment or other retirement costs.
Regulatory balancing accounts accumulate differences between revenues recognized and authorized revenue
requirements until they are collected from customers or are refunded. Regulatory balancing accounts include low
income programs and purchased power and water accounts.
San Clemente Dam project costs represent costs incurred and deferred by the Company’s utility subsidiary
in California pursuant to its efforts to investigate alternatives and remove the dam due to potential earthquake
and flood safety concerns. In June 2012, the California Public Utilities Commission (“CPUC”) issued a decision
authorizing implementation of a project to reroute the Carmel River and remove the San Clemente Dam. The
project includes the Company’s utility subsidiary in California, the California State Conservancy and the
National Marine Fisheries Services. Under the order’s terms, the CPUC has authorized recovery for
121
pre-construction costs, interim dam safety measures and environmental costs and construction costs. The
authorized costs were being recovered via a surcharge over a twenty-year period which began in October 2012.
The unrecovered balance of project costs incurred, including cost of capital, net of surcharges totaled $85 million
and $89 million as of December 31, 2018 and 2017, respectively. Surcharges collected were $8 million and
$7 million for the years ended December 31, 2018 and 2017, respectively. Pursuant to the general rate case
approved in December 2018, approval was granted to reset the twenty-year amortization period to begin
January 1, 2018 and to establish an annual revenue requirement of $8 million to be recovered through base rates.
Debt expense is amortized over the lives of the respective issues. Call premiums on the redemption of long-
term debt, as well as unamortized debt expense, are deferred and amortized to the extent they will be recovered
through future service rates.
Purchase premium recoverable through rates is primarily the recovery of the acquisition premiums related to
an asset acquisition by the Company’s utility subsidiary in California during 2002, and acquisitions in 2007 by
the Company’s utility subsidiary in New Jersey. As authorized for recovery by the California and New Jersey
PUCs, these costs are being amortized to depreciation and amortization on the Consolidated Statements of
Operations through November 2048.
Tank painting costs are generally deferred and amortized to operations and maintenance expense on the
Consolidated Statements of Operations on a straight-line basis over periods ranging from five to fifteen years, as
authorized by the regulatory authorities in their determination of rates charged for service.
As a result of the prepayment by American Water Capital Corp., the Company’s wholly owned finance
subsidiary (“AWCC”), of the 5.62% Series C Senior Notes due upon maturity on December 21, 2018 (the “Series
C Notes”), 5.62% Series E Senior Notes due March 29, 2019 (the “Series E Notes”) and 5.77% Series F Senior
Notes due December 21, 2022 (the “Series F Notes,” and together with the Series E Notes, the “Series Notes”), a
make-whole premium of $10 million was paid to the holders of the Series Notes on September 11, 2018.
Substantially all of these early debt extinguishment costs were allocable to the Company’s utility subsidiaries and
recorded as regulatory assets, as the Company believes they are probable of recovery in future rates.
Other regulatory assets include certain construction costs for treatment facilities, property tax stabilization,
employee-related costs, deferred other postretirement benefit expense, business services project expenses, coastal
water project costs, rate case expenditures and environmental remediation costs among others. These costs are
deferred because the amounts are being recovered in rates or are probable of recovery through rates in future
periods.
Regulatory Liabilities
Regulatory liabilities generally represent amounts that are probable of being credited or refunded to
customers through the rate-making process. Also, if costs expected to be incurred in the future are currently
being recovered through rates, the Company records those expected future costs as regulatory liabilities. The
following table provides the composition of regulatory liabilities as of December 31:
Income taxes recovered through rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Removal costs recovered through rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement benefit liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension and other postretirement benefit balancing accounts . . . . . . . . . . . . . . . . . . . . . . .
TCJA reserve on revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,279
309
209
46
36
28
$
1,242
315
33
48
—
26
Total regulatory liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,907
$
1,664
2018
2017
122
Income taxes recovered through rates relate to deferred taxes that will likely be refunded to the Company’s
customers. On December 22, 2017, the TCJA was signed into law, which, among other things, enacted
significant and complex changes to the Internal Revenue Code of 1986, including a reduction in the maximum
U.S. federal corporate income tax rate from 35% to 21% as of January 1, 2018. The TCJA created significant
excess deferred income taxes that the Company and its regulatory jurisdictions believe should be refunded to
customers. Since these are significant refundable amounts, the Company believes it is probable these amounts
will be refunded to customers through future rates, and as such the amounts have been recorded to a regulatory
liability.
Removal costs recovered through rates are estimated costs to retire assets at the end of their expected useful
life that are recovered through customer rates over the life of the associated assets. In December 2008, the
Company’s utility subsidiary in New Jersey, at the direction of the New Jersey Board of Public Utilities, began to
depreciate $48 million of the total balance into depreciation and amortization expense on the Consolidated
Statements of Operations via straight line amortization through November 2048.
On August 31, 2018, the Postretirement Medical Benefit Plan was remeasured to reflect an announced plan
amendment which changed benefits for certain union and non-union plan participants. As a result of the
remeasurement, the Company recorded a $227 million reduction to the net accumulated postretirement benefit
obligation, with a corresponding regulatory liability. See Note 15—Employee Benefits for additional
information.
Pension and other postretirement benefit balancing accounts represent the difference between costs incurred
and costs authorized by the PUCs that are expected to be refunded to customers.
During 2018, the Company’s 14 regulatory jurisdictions began to consider the impacts of the TCJA. The
Company has adjusted customer rates to reflect the lower income tax rate in 10 states. In one of those 10 states, a
portion of the tax savings is being used to reduce certain regulatory assets. In one additional state, the Company
is using the tax savings to offset additional capital investment and to reduce a regulatory asset. Proceedings in the
other three jurisdictions remain pending. With respect to excess accumulated deferred income taxes, regulators in
the eight states that have considered the issue have agreed with the Company’s overall timeline of passing the
excess back to customers beginning no earlier than 2019, when the Company is able to produce the normalization
schedule using the average rate assumption method. In one of those states, the Company will use the
amortization of the excess accumulated deferred income taxes to offset future infrastructure investments.
The Company generally expects its regulated customers to benefit from the tax savings resulting from the
TCJA. As a result, the Company has recorded a $54 million reserve on revenue during the year ended
December 31, 2018, for the estimated tax savings resulting from the TCJA, with a corresponding regulatory
liability, of which the current portion is $18 million and is recorded in other current liabilities, and the long-term
portion is $36 million and is recorded in regulatory liabilities. The Company cannot predict how each jurisdiction
may calculate the amount of credits due to customers. If any of the Company’s regulatory jurisdictions
determines the credits due to customers are higher than the expected reduction to income tax expense, this would
result in an adverse impact to the Company’s results of operations and cash flows.
Other regulatory liabilities include legal settlement proceeds, deferred gains and various regulatory
balancing accounts.
123
Note 8: Goodwill and Other Intangible Assets
Goodwill
The following table provides the changes in the carrying value of goodwill for the years ended
December 31, 2018 and 2017:
Regulated Businesses
Market-Based
Businesses
Cost
Accumulated
Impairment Cost
Accumulated
Impairment
Cost
Consolidated
Accumulated
Impairment
Total
Net
Balance as of January 1, 2017 . . . . . . . $3,458 $
Goodwill from acquisitions . . . . . . .
Measurement period adjustments . .
29
5
Balance as of December 31, 2017 . . . . $3,492 $
Goodwill from acquisitions . . . . . . .
Goodwill impairment charge . . . . . .
2
—
(2,332) $327 $
— —
— —
(2,332) $327 $
— 247
— —
(108)
—
—
(108)
—
(53)
$3,785 $
29
5
$3,819 $
249
—
(2,440) $1,345
29
5
—
—
(2,440) $1,379
249
(53)
—
(53)
Balance as of December 31, 2018 . . . . $3,494 $
(2,332) $574 $
(161)
$4,068 $
(2,493)
$1,575
In 2018, the Company acquired goodwill of $247 million associated with its acquisition of Pivotal, which
was allocated to the Homeowner Services Group reporting unit, within the Market-Based Businesses.
Additionally, the Company acquired goodwill of $2 million associated with one of its acquisitions in the
Regulated Businesses segment.
In 2017, the Company recorded aggregate goodwill of $29 million associated with four of its acquisitions in
the Regulated Businesses segment. Additionally, the Company recorded a measurement period adjustment of
$5 million, increasing the goodwill recognized from the Scranton acquisition completed in December 2016.
As a result of operational and financial challenges encountered in the construction business of Keystone, the
Company substantially exited this business line during the third quarter of 2018. This action, along with the exit
of the water trucking business line during the first half of 2018, narrowed the scope of the Keystone business
going forward, focusing solely on providing water transfer services. Based on these factors, the Company
concluded there were indicators that the Keystone reporting unit may be impaired. Accordingly, impairment
testing was performed as part of the preparation of the Company’s Consolidated Financial Statements during the
third quarter of 2018.
In terms of the process followed, the Company first completed an impairment test of the Keystone reporting
unit’s customer relationship intangible asset as of September 30, 2018. The results of this impairment test
showed the fair value of the intangible asset was lower than its carrying value, resulting in a non-cash, pre-tax
impairment charge of $4 million.
The Company then completed an interim goodwill impairment test of the Keystone reporting unit as of
September 30, 2018. The results of this impairment test showed the fair value of the Keystone reporting unit was
lower than its carrying value, resulting in a non-cash, pre-tax impairment charge of $53 million. The Company
estimated the fair value of the Keystone reporting unit using an income approach valuation technique which
estimates the amount and timing of future discounted cash flows from operations of the Keystone reporting unit,
relying on multiple projected scenarios. Significant assumptions used in estimating the fair value included, but
was not limited to, forecasts of future operating results, including revenue and revenue growth, profit margins,
and weighted average cost of capital.
In aggregate, a non-cash, pre-tax impairment charge of $57 million was recorded in Impairment charge on
the Consolidated Statement of Operations for the year ended December 31, 2018, of which, $54 million was
124
attributable to the Company, after adjustment for noncontrolling interest. See Note 18—Fair Value of Financial
Information for further information.
During 2018, the Company adopted Accounting Standards Update 2017-04, Simplifying the Test for
Goodwill Impairment. See Note 2—Significant Accounting Policies for additional information.
The Company completed its annual impairment testing of goodwill as of November 30, 2018, which
included qualitative assessments of its Regulated Businesses, Homeowner Services Group, Military Services
Group and Keystone reporting units. Based on these assessments, the Company determined that there were no
factors present that would indicate that the fair value of these reporting units was less than their respective
carrying values and, as such, quantitative, fair value-based testing was not necessary for these reporting units as
of November 30, 2018.
There can be no assurances that the Company will not be required to recognize an impairment of goodwill
in the future due to market conditions or other factors related to the performance of the Company’s reporting
units. These market events could include a decline over a period of time of the Company’s stock price, a decline
over a period of time in valuation multiples of comparable water utilities and reporting unit companies, the lack
of an increase in the Company’s market price consistent with its peer companies, decreases in control premiums,
or continued downward pressure on commodity prices. A decline in the forecasted results in the Company’s
business plan, such as changes in rate case results, capital investment budgets or interest rates, could also result
in an impairment of goodwill. In regards to the Keystone reporting unit’s goodwill, adverse developments in
market conditions, including prolonged depression of natural gas or oil prices or other factors that negatively
impact the Company’s forecasted operating results, cash flows or key assumptions, could result in an impairment
of a portion, or all, of Keystone’s goodwill.
Intangible Assets
The following tables provides the gross carrying value and accumulated amortization of the finite-lived
intangible assets held by the Company as of December 31:
Customer relationships . . . . . . . . . . . . . . . .
Other intangible assets . . . . . . . . . . . . . . . .
Total gross carrying value . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . .
Other intangible assets . . . . . . . . . . . . . . . .
Total accumulated amortization . . . . . . . . .
Total intangible assets, net
. . . . . . . . . . . . .
2017
Acquisitions
Impairments
Other
2018
$
$
$
$
$
$
$
$
$
12
2
14
2017
(4)
(1)
(5)
9
78
12
90
Amortization
(9)
(3)
(12)
$
$
$
$
(4)
—
(4)
$
$
— $
(1)
(1)
$
86
13
99
Impairments
Other
2018
— $
—
— $
— $
2
2
$
$
(13)
(2)
(15)
84
In 2018, the Company acquired finite-lived intangibles of $90 million associated with its acquisition of
Pivotal. See Note 4—Acquisitions and Divestitures for additional information. Additionally, the Company
recorded a $4 million impairment charge associated with Keystone’s customer relationships intangible asset. See
the “Goodwill” section above for additional information.
125
Intangible asset amortization expense amounted to $12 million, $4 million and $4 million for the years
ended December 31, 2018, 2017 and 2016, respectively. Estimated amortization expense for the next five years
subsequent to December 31, 2018 is as follows:
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
15
13
11
10
7
Amount
Note 9: Shareholders’ Equity
Common Stock
Under the dividend reinvestment and direct stock purchase plan (the “DRIP”), shareholders may reinvest
cash dividends and purchase additional Company common stock, up to certain limits, through the plan
administrator without commission fees. Shares purchased by participants through the DRIP may be newly issued
shares, treasury shares, or at the Company’s election, shares purchased by the plan administrator in the open
market or in privately negotiated transactions. Purchases generally will be made and credited to DRIP accounts
once each week. As of December 31, 2018, there were approximately 4.2 million shares available for future
issuance under the DRIP.
Anti-dilutive Stock Repurchase Program
In February 2015, the Company’s Board of Directors authorized an anti-dilutive stock repurchase program,
which allowed the Company to purchase up to 10 million shares of its outstanding common stock over an
unrestricted period of time. The Company repurchased 0.6 million shares and 0.7 million shares of common
stock in the open market at an aggregate cost of $45 million and $54 million under this program for the years
ended December 31, 2018 and 2017, respectively. As of December 31, 2018, there were 5.5 million shares of
common stock available for purchase under the program.
126
Accumulated Other Comprehensive Loss
The following table provides the changes in accumulated other comprehensive loss by component, net of
tax, for the years ended December 31, 2018 and 2017:
Defined Benefit Plans
Employee
Benefit Plan
Funded Status
Amortization
of Prior
Service Cost
Amortization
of Actuarial
Loss
Foreign
Currency
Translation
Gain (Loss)
on Cash
Flow Hedge
Accumulated
Other
Comprehensive
Loss
Beginning balance as of
January 1, 2017 . . . . . . . . . . . . $
(147) $
1 $
42 $
2 $
16 $
(86)
Other comprehensive
income (loss) before
reclassification . . . . . . . . .
Amounts reclassified from
accumulated other
comprehensive loss . . . . .
Net other comprehensive income
(loss) . . . . . . . . . . . . . . . . . . . .
Ending balance as of
7
—
7
—
—
—
—
7
7
(1)
—
(1)
(6)
—
(6)
—
7
7
December 31, 2017 . . . . . . . . . $
(140) $
1 $
49 $
1 $
10 $
(79)
Other comprehensive
income (loss) before
reclassification . . . . . . . . .
TCJA tax effects reclassified
from accumulated other
comprehensive loss . . . . .
Amounts reclassified from
accumulated other
comprehensive loss . . . . .
Net other comprehensive
income . . . . . . . . . . . . . . . . . . .
Ending balance as of
60
(22)
—
38
—
—
—
—
—
—
7
7
—
—
—
—
(2)
58
2
—
—
(20)
7
45
December 31, 2018 . . . . . . . . . $
(102) $
1 $
56 $
1 $
10 $
(34)
The Company does not reclassify the amortization of defined benefit pension cost components from
accumulated other comprehensive loss directly to net income in its entirety, as a portion of these costs have been
capitalized as a regulatory asset. These accumulated other comprehensive loss components are included in the
computation of net periodic pension cost. See Note 15—Employee Benefits for additional information.
The amortization of the loss on cash flow hedge is reclassified to net income during the period incurred and
is included in interest, net in the accompanying Consolidated Statements of Operations.
As of December 31, 2018, the Company adopted Accounting Standards Update 2018-02, Reclassification of
Certain Tax Effects from Accumulated Other Comprehensive Income, which permits entities to reclassify the tax
effects in AOCI as a result of the TCJA to retained earnings. See Note 14—Income Taxes for additional
information.
Dividends
The Company’s Board of Directors authorizes the payment of dividends. The Company’s ability to pay
dividends on its common stock is subject to having access to sufficient sources of liquidity, net income and cash
127
flows of the Company’s subsidiaries, the receipt of dividends and repayments of indebtedness from the
Company’s subsidiaries, compliance with Delaware corporate and other laws, compliance with the contractual
provisions of debt and other agreements, and other factors. The Company’s dividend rate on its common stock is
determined by the Board of Directors on a quarterly basis and takes into consideration, among other factors,
current and possible future developments that may affect the Company’s income and cash flows. When dividends
on common stock are declared, they are typically paid in March, June, September and December. Historically,
dividends have been paid quarterly to holders of record less than 30 days prior to the distribution date. Since the
dividends on the Company’s common stock are not cumulative, only declared dividends are paid.
During 2018, 2017 and 2016, the Company paid $319 million, $289 million and $261 million in cash
dividends, respectively. The following table provides the per share cash dividends paid for the years ended
December 31:
December . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
June . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
0.455
0.455
0.455
0.415
$
$
$
$
0.415
0.415
0.415
0.375
$
$
$
$
0.375
0.375
0.375
0.34
2018
2017
2016
On December 7, 2018, the Company’s Board of Directors declared a quarterly cash dividend payment of
$0.455 per share payable on March 1, 2019, to shareholders of record as of February 7, 2019.
Equity Forward Transaction
See Note 4—Acquisitions and Divestitures for information regarding the forward sale agreements entered
into by the Company on April 11, 2018, and the subsequent settlement of these agreements on June 7, 2018.
Regulatory Restrictions
The issuance of long-term debt or equity securities by the Company or American Water Capital Corp.
(“AWCC”), the Company’s wholly owned financing subsidiary, does not require authorization of any state PUC
if no guarantee or pledge of the regulated subsidiaries is utilized. However, state PUC authorization is required to
issue long-term debt at most of the Company’s regulated subsidiaries. The Company’s regulated subsidiaries
normally obtain the required approvals on a periodic basis to cover their anticipated financing needs for a period
of time or in connection with a specific financing.
Under applicable law, the Company’s subsidiaries can pay dividends only from retained, undistributed or
current earnings. A significant loss recorded at a subsidiary may limit the dividends that the subsidiary can
distribute to American Water. Furthermore, the ability of the Company’s subsidiaries to pay upstream dividends
or repay indebtedness to American Water is subject to compliance with applicable regulatory restrictions and
financial obligations, including, for example, debt service and preferred and preference stock dividends, as well
as applicable corporate, tax and other laws and regulations, and other agreements or covenants made or entered
into by the Company and its subsidiaries.
Note 10: Stock Based Compensation
The Company has granted stock options, stock units and dividend equivalents to non-employee directors,
officers and other key employees of the Company pursuant to the terms of its 2007 Omnibus Equity
Compensation Plan (the “2007 Plan”). Stock units under the 2007 Plan generally vest based on (i) continued
employment with the Company (“RSUs”), or (ii) continued employment with the Company where distribution of
the shares is subject to the satisfaction in whole or in part of stated performance-based goals (“PSUs”). The total
aggregate number of shares of common stock that may be issued under the 2007 Plan is 15.5 million. As of
128
December 31, 2018, 7.5 million shares were available for issuance under the 2007 Plan. The 2007 Plan has been
replaced by the 2017 Omnibus Plan, as defined below, and no additional awards may be granted under the 2007
Plan. However, shares may still be issued under the 2007 Plan pursuant to the terms of awards previously issued
under that plan prior to May 12, 2017.
In May 2017, the Company’s shareholders approved the American Water Works Company, Inc. 2017
Omnibus Equity Compensation Plan (the “2017 Omnibus Plan”). The Company has granted stock units,
including RSUs and PSUs, stock awards and dividend equivalents to non-employee directors, officers and
employees under the 2017 Omnibus Plan. A total of 7.2 million shares of common stock may be issued under the
2017 Omnibus Plan. As of December 31, 2018, 6.9 million shares were available for grant under the 2017
Omnibus Plan. The 2017 Omnibus Plan provides that grants of awards may be in any of the following forms:
incentive stock options, nonqualified stock options, stock appreciation rights, stock units, stock awards, other
stock-based awards and dividend equivalents. Dividend equivalents may be granted only on stock units or other
stock-based awards.
The cost of services received from employees in exchange for the issuance of stock options and restricted
stock awards is measured based on the grant date fair value of the awards issued. The value of stock options and
stock unit awards at the date of the grant is amortized through expense over the three-year service period. All
awards granted in 2018, 2017 and 2016 are classified as equity. The Company recognizes compensation expense
for stock awards over the vesting period of the award. The Company stratified its grant populations and used
historic employee turnover rates to estimate employee forfeitures. The estimated rate is compared to the actual
forfeitures at the end of the reporting period and adjusted as necessary. The following table provides the stock-
based compensation expense recorded in operation and maintenance expense in the accompanying Consolidated
Statements of Operations for the years ended December 31:
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs and PSUs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nonqualified employee stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1
15
1
17
(5)
$
1
9
1
11
(4)
Stock-based compensation expense, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . .
$
12
$
7
$
2
8
1
11
(4)
7
2018
2017
2016
There were no significant stock-based compensation costs capitalized during the years ended December 31,
2018, 2017 and 2016.
The Company receives a tax deduction based on the intrinsic value of the award at the exercise date for
stock options and the distribution date for stock units. For each award, throughout the requisite service period,
the Company recognizes the tax benefits, which have been included in deferred income tax assets, related to
compensation costs. The tax deductions in excess of the benefits recorded throughout the requisite service period
are recorded to the Consolidated Statements of Operations and are presented in the financing section of the
Consolidated Statements of Cash Flows.
Stock Options
There were no grants of stock options to employees in 2018 and 2017. In 2016, the Company granted
non-qualified stock options to certain employees under the 2007 Plan. The stock options vest ratably over the
three-year service period beginning on January 1 of the year of the grant and have no performance vesting
conditions. Expense is recognized using the straight-line method and is amortized over the requisite service
period.
129
The following table provides the weighted average assumptions used in the Black-Scholes option-pricing
model for grants and the resulting weighted average grant date fair value per share of stock options granted for
the years ended December 31:
Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercise price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Grant date fair value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—%
—%
—%
0
—%
—%
—%
0
$ — $ — $
$ — $ — $
2.09%
15.89%
1.15%
4.0
65.25
6.61
2018
2017
2016
The Company used the actual historical experience of exercises or expirations of the 2009 grant to
determine the expected stock option life. The Company began granting stock options at the time of its initial
public offering in April 2008. Expected volatility is based on a weighted average of historic volatilities of traded
common stock of peer companies (regulated water companies) over the expected term of the stock options and
historic volatilities of the Company’s common stock during the period it has been publicly traded. The dividend
yield is based on the Company’s expected dividend payments and the stock price on the date of grant. The risk-
free interest rate is the market yield on U.S. Treasury strips with maturities similar to the expected term of the
stock options. The exercise price of the stock options is equal to the fair market value of the underlying stock on
the date of option grant. Stock options vest over periods ranging from one to three years and have a maximum
term of seven years from the effective date of the grant.
The following table provides stock option activity for the year ended December 31, 2018:
Shares
(in thousands)
Weighted
Average
Exercise Price
(per share)
Weighted
Average
Remaining Life
(years)
Aggregate
Intrinsic Value
Options outstanding as of December 31, 2017 . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited or expired . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options outstanding as of December 31, 2018 . . . .
Options exercisable as of December 31, 2018 . . . . .
$
711
—
(7)
(187)
517
$
(434) $
53.51
—
65.15
49.32
54.92
52.93
3.67
$
29
2.96
2.76
$
$
19
16
As of December 31, 2018, less than $1 million of total unrecognized compensation cost related to nonvested
stock options is expected to be recognized over the remaining weighted average period of less than one year. The
total fair value of stock options vested was $1 million, $2 million and $1 million for the years ended
December 31, 2018, 2017 and 2016, respectively.
The following table provides additional information regarding stock options exercised during the years
ended December 31:
Intrinsic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercise proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax benefit realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
9
7
2
$
10
11
3
18
15
6
2018
2017
2016
Stock Units
During 2018, 2017 and 2016, the Company granted RSUs to certain employees under the 2007 Plan and
2017 Omnibus Plan, as applicable. RSUs generally vest based on continued employment with the Company over
periods ranging from one to three years.
130
During 2018 and 2017, the Company granted stock units to non-employee directors under the 2017
Omnibus Plan, and during 2016, these awards were granted under the 2007 Plan. The stock units were vested in
full on the date of grant; however, distribution of the shares will be made within 30 days of the earlier of (i) 15
months after the grant date, subject to any deferral election by the director, or (ii) the participant’s separation
from service. Because these stock units vested on the grant date, the total grant date fair value was recorded in
operation and maintenance expense on the grant date.
The RSUs are valued at the market value of the closing price of the Company’s common stock on the date
of the grant and the majority vest ratably over the three-year service period beginning January 1 of the year of the
grant. These RSUs are amortized through expense over the requisite service period using the straight-line
method.
The following table provides RSU activity for the year ended December 31, 2018:
Shares
(in thousands)
Weighted Average
Grant Date Fair
Value (per share)
Non-vested total as of December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
89
107
(57)
(6)
Non-vested total as of December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
133
$
67.48
82.75
72.11
74.34
77.44
As of December 31, 2018, $5 million of total unrecognized compensation cost related to the nonvested
RSUs is expected to be recognized over the weighted average remaining life of 2.1 years. The total fair value of
stock units and RSUs vested was $4 million, $3 million and $2 million for the years ended December 31, 2018,
2017 and 2016, respectively.
During 2018, 2017 and 2016, the Company granted PSUs to certain employees under the 2007 Plan and
2017 Omnibus Plan, as applicable. The majority of PSUs vest ratably based on continued employment with the
Company over the three-year performance period beginning January 1 of the year of the grant (the “Performance
Period”). Distribution of the performance shares is contingent upon the achievement of one or more internal
performance measures and, separately, a relative total shareholder return performance measure, over the
Performance Period.
The following table provides PSU activity for the year ended December 31, 2018:
Shares
(in thousands)
Weighted Average
Grant Date Fair
Value (per share)
Non-vested total as of December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
281
165
(122)
(16)
Non-vested total as of December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
308
$
67.33
72.50
58.18
73.87
73.39
As of December 31, 2018, $4 million of total unrecognized compensation cost related to the nonvested
PSUs is expected to be recognized over the weighted average remaining life of 1.35 years. The total fair value of
PSUs vested was $12 million, $13 million and $12 million for the years ended December 31, 2018, 2017 and
2016, respectively.
PSUs granted with one or more internal performance measures are valued at the market value of the closing
price of the Company’s common stock on the date of grant. PSUs granted with a relative total shareholder return
131
condition are valued using a Monte Carlo model. Expected volatility is based on historical volatilities of traded
common stock of the Company and comparative companies using daily stock prices over the past three years.
The expected term is three years and the risk-free interest rate is based on the three-year U.S. Treasury rate in
effect as of the measurement date. The following table provides the weighted average assumptions used in the
Monte Carlo simulation and the weighted average grant date fair values of PSUs granted for the years ended
December 31:
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life (years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Grant date fair value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17.23% 17.40% 15.90%
2.36% 1.53% 0.91%
3.0
3.0
$72.81
$ 73.62
3.0
$77.16
2018
2017
2016
The grant date fair value of PSUs that vest ratably and have market and/or performance conditions are
amortized through expense over the requisite service period using the graded-vesting method.
If dividends are paid with respect to shares of the Company’s common stock before the RSUs and PSUs are
distributed, the Company credits a liability for the value of the dividends that would have been paid if the RSUs
and PSUs were shares of Company common stock. When the RSUs and PSUs are distributed, the Company pays
the participant a lump sum cash payment equal to the value of the dividend equivalents accrued. The Company
accrued dividend equivalents totaling $1 million, less than $1 million and $1 million to accumulated deficit in the
accompanying Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31,
2018, 2017 and 2016, respectively.
Employee Stock Purchase Plan
The Company maintains a nonqualified employee stock purchase plan (the “ESPP”) through which
employee participants may use payroll deductions to acquire Company common stock at a discount. Prior to
February 5, 2019, the purchase price of common stock acquired under the ESPP was the lesser of 90% of the fair
market value of the common stock at either the beginning or the end of a three -month purchase period. On
July 27, 2018, the ESPP was amended, effective February 5, 2019, to permit employee participants to acquire
Company common stock at 85% of the fair market value of the common stock at the end of the purchase period.
As of December 31, 2018, there were 1.9 million shares of common stock reserved for issuance under the ESPP.
The ESPP is considered compensatory. During the years ended December 31, 2018, 2017 and 2016, the
Company issued 95 thousand, 93 thousand and 93 thousand shares, respectively, under the ESPP.
132
Note 11: Long-Term Debt
The Company obtains long-term debt primarily to fund capital expenditures of the Regulated Businesses
and to lend funds to the parent company to refinance debt and for other purposes. The following table provides
the components of long-term debt as of December 31:
Long-term debt of AWCC: (a)
Senior notes—fixed rate . . . . . . . . . . . . . . .
Private activity bonds and government
Weighted
Average
Rate
Rate
Maturity
2018
2017
2.95%-8.27% 4.26% 2019-2048
$
6,116
$
5,292
funded debt—fixed rate . . . . . . . . . . . . . .
1.79%-6.25% 5.45% 2021-2040
192
193
Long-term debt of other American Water
subsidiaries:
Private activity bonds and government
funded debt—fixed rate (b)
. . . . . . . . . . .
Mortgage bonds—fixed rate . . . . . . . . . . . .
Mandatorily redeemable preferred stock . .
Capital lease obligations . . . . . . . . . . . . . . .
Term loan . . . . . . . . . . . . . . . . . . . . . . . . . .
0.00%-6.20% 4.54% 2019-2048
3.92%-9.71% 7.41% 2019-2039
8.47%-9.75% 8.60% 2019-2036
12.91%
5.60%-5.63% 5.62%
2026
2021
12.91%
727
606
8
1
6
712
607
10
1
9
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,656
6,824
Unamortized debt premium, net (c)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7
(16)
(71)
9
(13)
(322)
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
7,576
$
6,498
(a)
(b)
(c)
This indebtedness 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 such indebtedness.
Includes $3 million and $5 million of variable rate debt as of December 31, 2018 and 2017, respectively, with variable-to-fixed
interest rate swaps ranging between 3.93% and 4.72%. This debt was assumed via an acquisition in 2013.
Primarily fair value adjustments previously recognized in acquisition purchase accounting.
All mortgage bonds, term loans and $725 million of the private activity bonds and government funded debt
held by the Company’s subsidiaries were collateralized as of December 31, 2018.
Long-term debt indentures contain a number of covenants that, among other things, limit, subject to certain
exceptions, the Company from issuing debt secured by the Company’s assets. Certain long-term notes require the
Company to maintain a ratio of consolidated total indebtedness to consolidated total capitalization of not more
than 0.70 to 1.00. The ratio as of December 31, 2018 was 0.59 to 1.00. In addition, the Company has
$889 million of notes which include the right to redeem the notes at par value, in whole or in part, from time to
time, subject to certain restrictions.
The following table provides future sinking fund payments and debt maturities:
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Amount
72
32
303
26
159
7,064
133
The following table provides the issuances of long-term debt in 2018:
Company
Type
Rate
Maturity
Amount
. . . . . . . . . . . . . Senior notes—fixed rate
AWCC (a)
Other American Water
subsidiaries . . . . . . . . . .
Private activity bonds and government
funded debt—fixed rate (b)
3.75%-4.20% 2028-2048
$
1,325
0.00%-5.00% 2021-2048
33
Total issuances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,358
(a)
Approximately $29 million of this debt relates to the New Jersey Environmental Infrastructure Financing Program.
The Company incurred debt issuance costs of $12 million related to the above issuances.
The following table provides the retirements and redemptions of long-term debt in 2018 through sinking
fund provisions, optional redemption or payment at maturity:
Company
Type
Rate
Maturity
Amount
AWCC . . . . . . . . . . . . . . . . . Senior notes—fixed rate
AWCC . . . . . . . . . . . . . . . . . Private activity bonds and government
5.62%-6.25% 2018-2022 $
501
Other American Water
subsidiaries . . . . . . . . . . .
Other American Water
funded debt—fixed rate
Private activity bonds and government
funded debt—fixed rate
1.79%-2.90% 2021-2031
0.00%-5.50% 2018-2047
subsidiaries . . . . . . . . . . . Mortgage bonds—fixed rate
9.13%
2021
Other American Water
subsidiaries . . . . . . . . . . . Mandatorily redeemable preferred stock
8.49%-9.18% 2031-2036
Other American Water
subsidiaries . . . . . . . . . . . Term loan
4.83%-5.69%
2021
1
18
1
2
3
Total retirements and redemptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
526
On August 9, 2018, AWCC completed a $1.325 billion debt offering which included the sale
of $625 million aggregate principal amount of its 3.75% Senior Notes due in 2028, and $700 million aggregate
principal amount of its 4.20% Senior Notes due in 2048. At the closing of the offering, AWCC received, after
deduction of underwriting discounts and before deduction of offering expenses, net proceeds of approximately
$1.3 billion. AWCC used proceeds from the offering to (i) lend funds to American Water and its regulated
operating subsidiaries, (ii) repay $191 million principal amount of AWCC’s Series C Notes upon maturity on
December 21, 2018, (iii) prepay $100 million aggregate principal amount of AWCC’s outstanding Series E Notes
and $100 million aggregate principal amount of AWCC’s outstanding Series F Notes, and (iv) repay AWCC’s
commercial paper obligations and for general corporate purposes.
As a result of AWCC’s prepayment of the Series Notes, a make-whole premium of $10 million was paid to
the holders thereof on September 11, 2018. Substantially all of these early debt extinguishment costs were
allocable to the Company’s utility subsidiaries and recorded as regulatory assets, as the Company believes they
are probable of recovery in future rates.
Interest, net includes interest income of approximately $11 million, $14 million and $14 million in 2018,
2017 and 2016, respectively.
One of the principal market risks to which the Company is exposed is changes in interest rates. In order to
manage the exposure, the Company follows risk management policies and procedures, including the use of
derivative contracts such as swaps. The Company reduces exposure to interest rates by managing commercial
134
paper and debt maturities. The Company also does not enter into derivative contracts for speculative purposes
and does not use leveraged instruments. The derivative contracts entered into are for periods consistent with the
related underlying exposures. The Company is exposed to the risk that counterparties to derivative contracts will
fail to meet their contractual obligations and minimizes this risk by dealing only with leading, credit-worthy
financial institutions having long-term credit ratings of “A” or better.
On August 6, 2018, the Company terminated four forward starting swap agreements with an aggregate
notional amount of $400 million, realizing a net gain of $9 million, to be amortized through interest, net over 10 -
and 30-year periods, in correlation with the terms of the new debt issued on August 9, 2018.
On August 17, 2018, the Company entered into two forward starting swap agreements, each with a notional
amount of $80 million, to reduce interest rate exposure on debt expected to be issued in 2019. These forward
starting swap agreements terminate in August 2019, and have an average fixed rate of 2.98%. On October 11,
2018, the Company entered into two additional forward starting swap agreements, each with a notional amount
of $100 million, to reduce interest rate exposure on debt expected to be issued in 2019. These forward starting
swap agreements terminate in December 2019, and have an average fixed rate of 3.31%. On January 8, 2019, the
Company entered into an additional forward starting swap agreement, with a notional amount of $150 million, to
reduce interest rate exposure on debt expected to be issued in 2019. This forward starting swap agreement
terminates in December 2019, and has an average fixed rate of 2.76%. The Company has designated these
forward starting swap agreements as cash flow hedges, with their fair value recorded in accumulated other
comprehensive gain or loss. Upon termination, the cumulative gain or loss recorded in accumulated other
comprehensive gain or loss will be amortized through interest, net over the term of the new debt.
The Company has employed interest rate swaps to fix the interest cost on a portion of its variable-rate debt
with an aggregate notional amount of $3 million. The Company has designated these instruments as economic
hedges, accounted for at fair value, with gains or losses recognized in interest, net. The gain recognized by the
Company was de minimis for the years ended 2018 and 2017.
The following table provides the gross fair value of the Company’s derivative liabilities, as well as the
location of the liability balances on the Consolidated Balance Sheets as of December 31:
Derivative Instrument
Liability derivative:
Derivative Designation
Balance Sheet Classification
2018
2017
Forward starting swaps . . . . . . . . . . . . . . . . . . Cash flow hedge
Other current liabilities
14
3
Note 12: Short-Term Debt
Short-term debt consists of commercial paper and credit facility borrowings totaling $964 million and
$905 million as of December 31, 2018 and 2017, respectively. On March 21, 2018, AWCC increased the
maximum aggregate principal amount of borrowings authorized for issuance under its commercial paper program
from $1.60 billion to $2.10 billion. The weighted average interest rate on AWCC short-term borrowings was
approximately 2.28% and 1.24% for the year ended December 31, 2018 and 2017, respectively. As of
December 31, 2018 there were no borrowings outstanding with maturities greater than three months.
On March 21, 2018, AWCC and certain lenders amended and restated the credit agreement with respect to
AWCC’s revolving credit facility to increase the maximum commitments under the facility from $1.75 billion to
$2.25 billion, and to extend the expiration date of the facility from June 2020 to March 2023. The facility is used
principally to support AWCC’s commercial paper program and to provide a sub-limit of up to $150 million for
letters of credit. Subject to satisfying certain conditions, the credit agreement also permits AWCC to increase the
maximum commitment under the facility by up to an aggregate of $500 million, and to request extensions of its
expiration date for up to two one-year periods. As of December 31, 2018, AWCC had no outstanding borrowings
and $81 million of outstanding letters of credit under the revolving credit facility, with $2.17 billion available to
135
fulfill the Company’s short-term liquidity needs and to issue letters of credit. Letters of credit are non-debt
instruments maintained to provide credit support for certain transactions as requested by third parties. The
financial covenants with respect to the facility remained unchanged from the credit agreement in effect on
December 31, 2017. Issuance costs related to the increased lending commitments will be amortized over the
remaining life of the credit facility and is included in interest, net in the accompanying Consolidated Statements
of Operations. Interest rates on advances under the facility are based on a credit spread to the LIBOR rate or base
rate in accordance with Moody Investors Service’s and Standard & Poor’s Financial Services’ then applicable
credit rating on AWCC’s senior unsecured, non-credit enhanced debt.
The following table provides the aggregate credit facility commitments, letter of credit sub-limit under the
revolving credit facility and commercial paper limit, as well as the available capacity for each as of
December 31, 2018 and 2017:
Credit Facility
Commitment (a)
Available
Credit
Facility
Capacity (a)
Letter of
Credit
Sublimit
Available
Letter of
Credit
Capacity
Commercial
Paper Limit
Available
Commercial
Paper
Capacity
December 31, 2018 . . . . . . . .
December 31, 2017 . . . . . . . .
$
2,262
1,762
$
$
2,177
1,673
$
150
150
$
69
66
$
2,100
1,600
1,146
695
(a)
Includes amounts related to the revolving credit facility of Keystone. As of December 31, 2018, the total commitment under the
Keystone revolving credit facility was $12 million, of which $8 million was available for borrowing, subject to compliance with a
collateral base calculation.
The following table provides the short-term borrowing activity for AWCC for the years ended
December 31:
Average borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum borrowings outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average interest rates, computed on daily basis . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average interest rates, as of December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 779
1,135
$ 1,029
1,905
2.28% 1.24%
2.84% 1.61%
2018
2017
The credit facility requires the Company to maintain a ratio of consolidated debt to consolidated
capitalization of not more than 0.70 to 1.00. The ratio as of December 31, 2018 was 0.59 to 1.00.
None of the Company’s borrowings are subject to default or prepayment as a result of a downgrading of
securities, although such a downgrading could increase fees and interest charges under the Company’s credit
facility.
As part of the normal course of business, the Company routinely enters contracts for the purchase and sale
of water, energy, fuels and other services. These contracts either contain express provisions or otherwise permit
the Company and its 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 the Company 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 rely on such a downgrade as a basis for making a demand for
adequate assurance of future performance. Depending on the Company’s net position with the counterparty, the
demand could be for the posting of collateral. In the absence of expressly agreed provisions that specify the
collateral that must be provided, the obligation to supply the collateral requested will be a function of the facts
and circumstances of the Company’s situation at the time of the demand. If the Company can reasonably claim
that it is willing and financially able to perform its obligations, it may be possible that no collateral would need to
be posted or that only an amount equal to two or three months of future payments should be sufficient. The
Company does not expect to post any collateral which will have a material adverse impact on the Company’s
results of operations, financial position or cash flows.
136
Note 13: General Taxes
The following table provides the components of general tax expense for the years ended December 31:
Gross receipts and franchise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payroll . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other general . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total general taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2018
2017
2016
112
120
33
12
277
$
$
110
105
31
13
259
$
$
106
106
32
14
258
Note 14: Income Taxes
The following table provides the components of income tax expense for the years ended December 31:
Current income taxes:
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal
Total current income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes:
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred investment tax credits . . . . . . . . . . . . . . . . . . . . . . .
Total deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2017
2016
$
$
$
26
1
27
33
163
(1)
195
$
$
$
25
(1)
24
50
413
(1)
462
$
$
$
20
1
21
24
258
(1)
281
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
222
$
486
$
302
The following table provides a reconciliation between the statutory federal income tax rate and the
Company’s effective tax rate for the years ended December 31:
Income tax at statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases (decreases) resulting from:
2018
2017
2016
21.0% 35.0% 35.0%
State taxes, net of federal taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TCJA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net
5.5%
5.4%
1.5% 13.7%
0.2% (0.8)%
3.8%
—%
0.4%
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28.2% 53.3% 39.2%
On December 22, 2017, President Trump signed into law the TCJA. Substantially all of the provisions of the
TCJA are effective for taxable years beginning after December 31, 2017. The TCJA includes significant changes
to the Internal Revenue Code of 1986, including amendments which significantly change the taxation of
individuals and business entities, and includes specific provisions related to regulated public utilities. The more
significant changes that impact the Company included in the TCJA are reductions in the corporate federal income
tax rate from 35% to 21%, and several technical provisions including, among others, limiting the utilization of
net operating losses (“NOLs”) arising after December 31, 2017 to 80% of taxable income with an indefinite
carryforward. The specific provisions related to regulated public utilities in the TCJA generally allow for the
continued deductibility of interest expense, the elimination of full expensing for tax purposes of certain property
acquired after September 27, 2017 and continue certain rate normalization requirements for accelerated
depreciation benefits. Non-regulated segments of the Company’s business may be able to take advantage of the
full expensing provisions of the TCJA.
137
Changes in the Code from the TCJA had a material impact on the Company’s financial statements in 2017.
Under GAAP, specifically Accounting Standards Codification Topic 740, Income Taxes (“ASC 740”), the tax
effects of changes in tax laws must be recognized in the period in which the law is enacted. ASC 740 also
requires deferred income tax assets and liabilities to be measured at the enacted tax rate expected to apply when
temporary differences are to be realized or settled. Thus, at the date of enactment, the Company’s deferred
income taxes were re-measured based upon the new tax rate. For the Company’s regulated entities, substantially
all of the change in deferred income taxes are recorded as either an offset to a regulatory asset or liability because
changes are expected to be recovered by or refunded to customers. For the Company’s unregulated operations,
the change in deferred income taxes is recorded as a non-cash re-measurement adjustment to earnings.
The staff of the U.S. Securities and Exchange Commission recognized the complexity of reflecting the
impacts of the TCJA, and on December 22, 2017 issued guidance in Staff Accounting Bulletin 118 (“SAB 118”)
which clarifies accounting for income taxes under ASC 740 if information is not yet available or complete and
provides for up to a one year period in which to complete the required analyses and accounting. The Company
made a reasonable estimate for the measurement and accounting of certain effects of the TCJA which were
reflected in the financial statements as of December 31, 2017. The re-measurement of deferred income taxes at
the new federal tax rate increased the 2017 deferred income tax provision by $125 million for the year ending
December 31, 2017. Additionally, the accumulated deferred income tax liability decreased by $1.39 billion and
regulatory liabilities increased by $1.51 billion, respectively, as of December 31, 2017.
As of December 31, 2018, the Company has recorded all its reasonable estimates resulting from the TCJA
under SAB 118. These estimates, however, are still subject to changes due to the future impacts of various items,
including further changes in income tax laws, forecasted financial conditions and the actual tax return filings
with the tax authorities.
ASC 740 requires the re-measurement of deferred income tax assets and liabilities as a result of a change in
tax laws or rates to be presented in net income. Adjusting temporary differences originally recorded to AOCI
through the income statement result in disproportionate tax effects remaining in AOCI. As of December 31,
2018, the Company adopted Accounting Standards Update 2018-02, Reclassification of Certain Tax Effects from
Accumulated Other Comprehensive Income, which allows companies to reclassify the income tax effects of
TCJA on items within AOCI to retained earnings. As a result of the TCJA tax rate reduction, there were income
tax effects related to the Company’s hedge and pension positions of $2 million and $22 million, respectively,
remaining in the Company’s accumulated other comprehensive loss balance. The Company reclassified these tax
effects from accumulated other comprehensive loss to accumulated deficit as of December 31, 2018.
During 2018, the Company continued to assess the impacts of the TCJA and filed its 2017 federal and state
income tax returns. As of December 31, 2018, the Company completed its analysis of the estimated impact of
TCJA on its federal and state income taxes based on information available to date, and recorded adjustments to
its provisional estimates under SAB 118 in the amount of $12 million. These estimates may be revised in the
future for changes in income tax laws, additional regulatory guidance, changes to forecasted financial conditions,
and actual tax return filings with the tax authorities.
138
The following table provides the components of the net deferred tax liability as of December 31:
2018
2017
Deferred tax assets:
Advances and contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax losses and credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension and other postretirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
402
131
339
91
44
395
196
327
96
49
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,007
1,063
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(14)
(13)
Total deferred tax assets, net of allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Property, plant and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred pension and other postretirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
993
$
1,050
2,537
77
97
2,711
$
2,429
69
103
2,601
Total deferred tax liabilities, net of deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (1,718) $ (1,551)
As of December 31, 2018 and 2017, the Company recognized federal NOL carryforwards of $707 million
and $1.05 billion, respectively. The Company believes the federal NOL carryforwards are more likely than not to
be recovered and require no valuation allowance. The Company’s federal NOL carryforwards will begin to
expire in 2028.
As of December 31, 2018 and 2017, the Company had state NOLs of $547 million and $322 million,
respectively, a portion of which are offset by a valuation allowance because the Company does not believe these
NOLs are more likely than not to be realized. The state NOL carryforwards began to expire in 2018 through
2037.
As of December 31, 2018 and 2017, the Company had an insignificant amount of Canadian NOL
carryforwards and capital loss carryforwards for federal income tax purposes.
The Company files income tax returns in the United States federal jurisdiction and various state and foreign
jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local or non-U.S.
income tax examinations by tax authorities for years on or before 2012. The Company has state income tax
examinations in progress and does not expect material adjustments to result.
The following table provides the changes in gross liability, excluding interest and penalties, for
unrecognized tax benefits:
Balance as of January 1, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases in current period tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decreases in prior period measurement of tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases in current period tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decreases in prior period measurement of tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Balance as of December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Amount
169
8
(71)
106
13
(22)
97
139
The Company’s tax positions relate primarily to the deductions claimed for repair and maintenance costs on
its utility plant. The gross liability was reduced primarily as a result of the Section 481(a) adjustment allocated
for the current year related to the accounting method change the Company filed with its 2015 tax return. The
Company does not anticipate material changes to its unrecognized tax benefits within the next year. However, the
Company expects to utilize a significant portion of the remaining NOLs in 2019 and fully utilize its NOLs in
2020, as a result, a balance sheet reclassification between the unrecognized tax benefits and deferred income tax
asset is anticipated due to the lack of available NOLs to offset. If the Company sustains all of its positions as of
December 31, 2018, an unrecognized tax benefit of $10 million, excluding interest and penalties, would impact
the Company’s effective tax rate. The Company had an insignificant amount of interest and penalties related to
its tax positions as of December 31, 2018 and 2017.
The following table provides the changes in the valuation allowance:
Balance as of January 1, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decreases in current period tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decreases in current period tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases in current period tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
8
(2)
6
7
13
1
14
Amount
Note 15: Employee Benefits
Pension and Other Postretirement Benefits
The Company maintains noncontributory defined benefit pension plans covering eligible employees of its
regulated utility and shared services operations. Benefits under the plans are based on the employee’s years of
service and compensation. The pension plans have been closed for all new employees. The pension plans were
closed for most employees hired on or after January 1, 2006. Union employees hired on or after January 1, 2001,
except for specific eligible groups specified in the plan, had their accrued benefit frozen and will be able to
receive this benefit as a lump sum upon termination or retirement. Union employees hired on or after January 1,
2001 and non-union employees hired on or after January 1, 2006 are provided with a 5.25% of base pay defined
contribution plan. The Company does not participate in a multi-employer plan. The Company also has unfunded
noncontributory supplemental non-qualified pension plans that provide additional retirement benefits to certain
employees.
The Company’s pension funding practice is to contribute at least the greater of the minimum amount
required by the Employee Retirement Income Security Act of 1974 or the normal cost. Further, the Company will
consider additional contributions if needed to avoid “at risk” status and benefit restrictions under the Pension
Protection Act of 2006 (“PPA”). The Company may also consider increased contributions, based on other
financial requirements and the plans’ funded position. Pension expense in excess of the amount contributed to the
pension plans is deferred by certain regulated subsidiaries pending future recovery in rates charged for utility
services as contributions are made to the plans. See Note 7—Regulatory Assets and Liabilities for additional
information. Pension plan assets are invested in a number of actively managed, commingled funds, and limited
partnerships including equities, fixed income securities, guaranteed annuity contracts with insurance companies,
real estate funds and real estate investment trusts (“REITs”).
The Company maintains other postretirement benefit plans providing varying levels of medical and life
insurance to eligible retirees. The retiree welfare plans are closed for union employees hired on or after
January 1, 2006. The plans had previously closed for non-union employees hired on or after January 1, 2002. The
140
Company’s policy is to fund other postretirement benefit costs up to the amount recoverable through rates.
Assets of the plans are invested in a number of actively managed and commingled funds including equities and
fixed income securities.
The investment policy guideline of the pension plan is focused on diversification, improving returns and
reducing the volatility of the funded status over a long-term horizon. The investment policy guidelines of the
postretirement plans focus on the appropriate strategy given the funded status of the plans. None of the
Company’s securities are included in pension or other postretirement benefit plan assets.
The Company uses fair value for all classes of assets in the calculation of market-related value of plan
assets. As of 2017, the fair values and asset allocations of the pension plan assets include the American Water
Pension Plan, the New York Water Service Corporation Pension Plan, and the Shorelands Water Company, Inc.
Pension Plan.
The following tables provide the fair values and asset allocations of the pension plan assets as of
December 31, 2018 and 2017, respectively, by asset category:
Asset Category
2019 Target
Allocation
Total
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Percentage of
Plan Assets as of
December 31,
2018
Cash . . . . . . . . . . . . . . . . . . . . . .
Equity securities:
50%
$
24 $
24 $
— $
U.S. large cap . . . . . . . . . . .
U.S. small cap . . . . . . . . . .
International . . . . . . . . . . . .
Real estate fund . . . . . . . . .
REITs . . . . . . . . . . . . . . . . .
Fixed income securities:
50%
U.S. Treasury securities
and government
bonds . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . .
Mortgage-backed
securities . . . . . . . . . . . .
Municipal bonds . . . . . . . .
Long duration bond
fund . . . . . . . . . . . . . . . .
Guarantee annuity
contracts . . . . . . . . . . . . .
297
76
256
65
20
181
491
11
28
7
43
297
70
2
—
—
167
—
—
—
7
—
—
6
132
—
20
14
491
11
28
—
—
—
—
—
122
65
—
—
—
—
—
—
43
2%
20%
5%
17%
4%
1%
12%
33%
1%
2%
—
3%
Total . . . . . . . . . . . . . . . . . . . . . .
100% $1,499 $
567 $
702 $
230
100%
141
Asset Category
2018
Target
Allocation
Total
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Percentage of
Plan Assets as of
December 31,
2017
Cash . . . . . . . . . . . . . . . . . . . . . . .
Equity Securities:
50%
$
7 $
7 $
— $
U.S. large cap . . . . . . . . . . . .
U.S. small cap . . . . . . . . . . . .
. . . . . . . . . . . . .
International
Real estate fund . . . . . . . . . .
REITs . . . . . . . . . . . . . . . . . .
Fixed income securities:
50%
U.S. Treasury securities and
government bonds . . . . . . .
Corporate bonds . . . . . . . . . .
Mortgage-backed
securities . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . .
Long duration bond fund . . .
Guarantee annuity
contracts . . . . . . . . . . . . . .
344
84
295
86
26
200
519
1
31
8
48
344
79
2
—
—
180
—
—
—
8
—
—
5
149
—
26
20
519
1
31
—
—
—
—
—
144
86
—
—
—
—
—
—
48
—
21%
5%
18%
5%
2%
12%
31%
—
2%
1%
3%
Total
. . . . . . . . . . . . . . . . . . . . . . .
100% $1,649 $
620 $
751 $
278
100%
The following tables provide a reconciliation of the beginning and ending balances of the fair value
measurements using significant unobservable inputs (Level 3) for 2018 and 2017, respectively:
Balance as of January 1, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases, issuances and settlements, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Balance as of December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Balance as of January 1, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases, issuances and settlements, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Balance as of December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Level 3
278
(23)
(25)
230
Level 3
140
2
136
278
The Company’s postretirement benefit plans have different levels of funded status and the assets are held
under various trusts. The investments and risk mitigation strategies for the plans are tailored specifically for each
trust. In setting new strategic asset mixes, consideration is given to the likelihood that the selected asset
allocation will effectively fund the projected plan liabilities and meet the risk tolerance criteria of the Company.
The Company periodically updates the long-term, strategic asset allocations for these plans through asset liability
studies and uses various analytics to determine the optimal asset allocation. Considerations include plan liability
characteristics, liquidity needs, funding requirements, expected rates of return and the distribution of returns.
In 2012, the Company implemented a de-risking strategy for the American Water Pension Plan after
conducting an asset-liability study to reduce the volatility of the funded status of the plan. As part of the
de-risking strategy, the Company revised the asset allocations to increase the matching characteristics of fixed-
income assets relative to liabilities. The fixed income portion of the portfolio was designed to match the bond-
142
like and long-dated nature of the postretirement liabilities. In 2017, the Company further increased its exposure
to liability-driven investing and increased its fixed-income allocation to 50%, up from 40%, in an effort to further
decrease the funded status volatility of the plan and hedge the portfolio from movements in interest rates.
In 2012, the Company also implemented a de-risking strategy for the medical bargaining trust within the
plan to minimize volatility. In 2017, the Company conducted a new asset-liability study that indicated medical
trend inflation that outpaced the Consumer Price Index by more than 2% for the last 20 years. Given
continuously rising medical costs, the Company decided to increase the equity exposure of the portfolio to 30%,
up from 20%, while reducing the fixed-income portion of the portfolio from 80% to 70%.The Company also
conducted an asset-liability study for the Postretirement Non-Bargaining Medical Plan. Its allocation was
adjusted to make it more conservative, reducing the equity allocation from 70% to 60% and increasing the fixed-
income allocation from 30% to 40%.The Postretirement Medical Non-Bargaining plan’s equity allocation was
reduced due to the cap on benefits for some non-union participants and resultant reduction in the plan’s
liabilities.
In 2018, the Company announced plan design changes to the medical bargaining benefit plan, which
resulted in a cap on future benefits and an over funded postretirement medical benefits bargaining plan. Given
the change in funded status, the Retirement and Benefit Plans Investment Committee (the “Investment
Committee”), which is responsible for overseeing the investment of the Company’s pension and other
postretirement benefit plans’ assets, commissioned a new asset-liability study for the postretirement medical
bargaining plan. This study concluded that it was prudent to decrease the risk in the plan and to remove its equity
exposure. The study also recommended reducing its exposure to changes in interest rates by matching the assets
of the plan to the projected cash flows for future benefit payments of the liability. The Investment Committee
agreed with the recommendations and voted to invest the postretirement medical bargaining plan assets in fixed-
income securities.
The restructuring of the plan was initiated towards the end of 2018. Once fully completed, the plans assets
will be invested in fixed-income securities. The majority of the securities will be used to match the projected
cash flows for future benefit payments of the liability. Plan assets in excess of those securities designed to match
the long-term liabilities will be invested in shorter duration securities with a duration of about three years.
The Company engages third-party investment managers for all invested assets. Managers are not permitted
to invest outside of the asset class (e.g. fixed income, equity, alternatives) or strategy for which they have been
appointed. Investment management agreements and recurring performance and attribution analysis are used as
tools to ensure investment managers invest solely within the investment strategy they have been provided.
Futures and options may be used to adjust portfolio duration to align with a plan’s targeted investment policy.
In order to minimize asset volatility relative to the liabilities, a portion of plan assets is allocated to fixed
income investments that are exposed to interest rate risk. Increases in interest rates generally will result in a
decline in the value of fixed income assets while reducing the present value of the liabilities. Conversely, rate
decreases will increase fixed income assets, partially offsetting the related increase in the liabilities. Within
equities, risk is mitigated by constructing a portfolio that is broadly diversified by geography, market
capitalization, manager mandate size, investment style and process. For the postretirement medical bargaining
plan, all of its assets are in fixed-income securities and the asset structure is designed to meet the cash flows of
the liabilities. This design reduces the plan’s exposure to changes in interest rates.
Actual allocations to each asset class vary from target allocations due to periodic investment strategy
updates, market value fluctuations, the length of time it takes to fully implement investment allocations, and the
timing of benefit payments and contributions. The asset allocation is rebalanced on a quarterly basis, if
necessary. Voluntary Employees’ Beneficiary Association (“VEBA”) Trust assets include the American Water
Postretirement Medical Benefits Bargaining Plan, the New York Water Service Corporation Postretirement
Medical Benefits Bargaining Plan, the American Water Postretirement Medical Benefits Non-Bargaining Plan,
and the American Water Life Insurance Trust.
143
The following tables provide the fair values and asset allocations of the postretirement benefit plan assets as
of December 31, 2018 and 2017, respectively, by asset category:
Asset Category
Allocation Total
2019
Target
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Percentage of
Plan Assets as of
December 31,
2018
Bargain VEBA:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities:
U.S. large cap . . . . . . . . . . . . . . . . .
International
. . . . . . . . . . . . . . . . . .
Fixed income securities:
2%
98%
U.S. Treasury securities and
government bonds . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . .
Long duration bond fund . . . . . . . .
. . . .
Future and option contracts (a)
$ 31 $
31 $
— $
1
17
179
141
9
4
—
1
—
178
—
—
4
—
—
—
1
141
9
—
—
Total bargain VEBA . . . . . . . . . . . . . . . .
100% $382 $
214 $
151 $
Non-bargain VEBA:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities:
U.S. large cap . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . .
International
Fixed income securities:
Core fixed income bond fund (a) . . .
$
3 $
3 $
— $
60%
40%
43
24
52
43
24
—
—
—
52
Total non-bargain VEBA . . . . . . . . . . . .
100% $122 $
70 $
52 $
Life VEBA:
Equity securities:
U.S. large cap . . . . . . . . . . . . . . . . .
Fixed income securities:
Core fixed income bond fund (a) . . .
70%
30%
2
1
2
1
—
—
Total life VEBA . . . . . . . . . . . . . . . . . . .
100% $ 3 $
3 $
— $
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
100% $507 $
287 $
203 $
(a)
Includes cash for margin requirements.
—
—
17
—
—
—
—
—
17
—
—
—
—
—
—
—
—
17
—
—
4%
47%
37%
3%
1%
8%
100%
—
35%
20%
45%
100%
67%
33%
100%
100%
144
Asset Category
Allocation Total
2018
Target
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Percentage of
Plan Assets as of
12/31/2017
Bargain VEBA:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities:
U.S. large cap . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . .
Fixed income securities:
30%
70%
U.S. Treasury securities and
government bonds . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . .
Municipal bonds . . . . . . . . . . . . . . . .
Long duration bond fund . . . . . . . . .
Future and option contracts (a) . . . . .
$ 18 $
18 $
— $
44
51
48
233
26
4
2
44
51
21
—
—
4
2
—
—
27
233
26
—
—
Total bargain VEBA . . . . . . . . . . . . . . . .
100% $426 $
140 $
286 $
Non-bargain VEBA:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities:
U.S. large cap . . . . . . . . . . . . . . . . . .
U.S. small cap . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . .
Fixed income securities:
Core fixed income bond fund (a)
. . .
$
1 $
1 $
— $
60%
40%
53
5
47
36
53
5
47
36
—
—
—
—
Total non-bargain VEBA . . . . . . . . . . . . .
100% $142 $
142 $
— $
Life VEBA:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity securities:
U.S. large cap . . . . . . . . . . . . . . . . . .
Fixed income securities:
Core fixed income bond fund (a)
. . .
$
3 $
3 $
— $
70%
30%
3
2
3
2
—
—
Total life VEBA . . . . . . . . . . . . . . . . . . . .
100% $
8 $
8 $
— $
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100% $576 $
290 $
286 $
(a)
Includes cash for margin requirements.
Valuation Techniques Used to Determine Fair Value
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
10%
12%
11%
55%
6%
1%
5%
100%
—
37%
4%
33%
26%
100%
—
38%
62%
100%
100%
Cash—Cash and investments with maturities of three months or less when purchased, including certain
short-term fixed-income securities, are considered cash and are included in the recurring fair value measurements
hierarchy as Level 1.
Equity securities—For equity securities, the trustees obtain prices from pricing services, whose prices are
obtained from direct feeds from market exchanges, that the Company is able to independently corroborate.
Equity securities are valued based on quoted prices in active markets and categorized as Level 1. Certain
equities, such as international securities held in the pension plan are invested in commingled funds and/or limited
partnerships. These funds are valued to reflect the plan fund’s interest in the fund based on the reported year-end
net asset value. Since net asset value is not directly observable or not available on a nationally recognized
145
securities exchange for the commingled funds, they are categorized as Level 2. For limited partnerships, the
assets as a whole are categorized as Level 3 due to the fact that the partnership provides the pricing and the
pricing inputs are less readily observable. In addition, the limited partnership vehicle cannot be readily traded.
Fixed-income securities—The majority of U.S. Treasury securities and government bonds have been
categorized as Level 1 because they trade in highly-liquid and transparent markets and their prices can be
corroborated. The fair values of corporate bonds, mortgage backed securities, and certain government bonds are
based on prices that reflect observable market information, such as actual trade information of similar securities.
They are categorized as Level 2 because the valuations are calculated using models which utilize actively traded
market data that the Company can corroborate. Exchange-traded options and futures, for which market
quotations are readily available, are valued at the last reported sale price or official closing price on the primary
market or exchange on which they are traded and are classified as Level 1.
Real estate fund—Real estate fund is categorized as Level 3 as the fund uses significant unobservable inputs
for fair value measurement and the vehicle is in the form of a limited partnership.
REITs—REITs are invested in commingled funds. Commingled funds are valued to reflect the plan fund’s
interest in the fund based on the reported year-end net asset value. Since the net asset value is not directly
observable for the commingled funds, they are categorized as Level 2.
Guaranteed annuity contracts—Guaranteed annuity contracts are categorized as Level 3 because the
investments are not publicly quoted. Since these market values are determined by the provider, they are not
highly observable and have been categorized as Level 3. Exchange-traded future and option positions are
reported in accordance with changes in variation margins that are settled daily.
146
The following table provides a rollforward of the changes in the benefit obligation and plan assets for the
two most recent years, for all plans combined:
Pension Benefits
Other Benefits
2018
2017
2018
2017
Change in benefit obligation:
Benefit obligation as of January 1, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost
Plan participants’ contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal subsidy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$ 2,034
34
76
—
(23)
(153)
—
(76)
—
$ 1,864
33
80
—
—
118
9
(70)
—
$
614
8
20
2
(174)
(89)
—
(29)
1
610
10
26
2
—
(9)
—
(26)
1
Benefit obligation as of December 31, . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,892
$ 2,034
$
353
$
614
Change in plan assets:
Fair value of plan assets as of January 1, . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Plan participants’ contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$ 1,649
(97)
24
—
—
(77)
$ 1,443
227
42
—
7
(70)
Fair value of plan assets as of December 31, . . . . . . . . . . . . . . . . . . . . . .
$ 1,499
$ 1,649
$
Funded value as of December 31,
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (393) $ (385) $
Amounts recognized on the balance sheet:
Noncurrent asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncurrent liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ — $
(3)
(390)
(1)
(384)
576
(40)
(2)
2
—
(29)
507
154
$
$
$
155 $
—
(1)
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (393) $ (385) $
154
$
525
69
6
2
—
(26)
576
(38)
2
—
(40)
(38)
The pension and postretirement plans were negatively impacted from the market’s volatile and abrupt fourth
quarter 2018 decline, that reversed all market gains in 2018.
On July 31, 2016, the other postretirement benefit plan was re-measured to reflect a plan amendment, which
capped benefits for certain non-union plan participants. The re-measurement included a $156 million reduction in
future benefits payable to plan participants, and resulted in an $89 million reduction to the net accrued
postretirement benefit obligation. The plan amendment will be amortized over 10.2 years, the average future
working lifetime to full eligibility age for all plan participants.
On August 31, 2018, the Postretirement Medical Benefit Plan was remeasured to reflect a plan change. The
plan change resulted in a $175 million reduction in future benefits payable to plan participants, and, in
combination with other experience reflected as of the remeasurement date, resulted in a $227 million reduction to
the net accumulated postretirement benefit obligation.
147
The following table provides the components of accumulated other comprehensive income and regulatory
assets that have not been recognized as components of periodic benefit costs as of December 31:
Net actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior service cost (credit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amount recognized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory assets (liabilities) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension Benefits
Other Benefits
2018
2017
2018
2017
$
$
$
$
431
(22)
409
352
57
409
$
$
$
$
416
2
418
270
148
418
$
$
83
(291)
108
(140)
$ (208) $
$ (208) $
—
$ (208) $
(32)
(32)
—
(32)
The following table provides the projected benefit obligation, accumulated benefit obligation and fair value
of plan assets for pension plans with a projected obligation in excess of plan assets as of December 31, 2018 and
2017:
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1,892
1,499
2,034
1,649
Projected Benefit
Obligation Exceeds the
Fair Value of Plans’ Assets
2018
2017
Accumulated Benefit
Obligation Exceeds the
Fair Value of Plans’ Assets
2018
2017
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
1,768
1,499
1,888
1,649
The accumulated postretirement plan assets exceed benefit obligations for all of the Company’s other
postretirement benefit plans, except for the Northern Illinois Retiree Welfare Plan.
In August 2006, the PPA was signed into law in the U.S. The PPA replaces the funding requirements for
defined benefit pension plans by requiring that defined benefit plans contribute to 100% of the current liability
funding target over seven years. Defined benefit plans with a funding status of less than 80% of the current
liability are defined as being “at risk” and additional funding requirements and benefit restrictions may apply.
The PPA was effective for the 2008 plan year with short-term phase-in provisions for both the funding target and
at-risk determination. The Company’s qualified defined benefit plan is currently funded above the at-risk
threshold, and therefore the Company expects that the plans will not be subject to the “at risk” funding
requirements of the PPA. The Company is proactively monitoring the plan’s funded status and projected
contributions under the law to appropriately manage the potential impact on cash requirements.
Minimum funding requirements for the qualified defined benefit pension plan are determined by
government regulations and not by accounting pronouncements. The Company plans to contribute amounts at
least equal to or greater than the minimum required contributions or the normal cost in 2019 to the qualified
pension plans. The Company plans to contribute to its 2019 other postretirement benefit cost for rate-making
purposes.
148
The following table provides information about the expected cash flows for the pension and postretirement
benefit plans:
2019 expected employer contributions:
To plan trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
To plan participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
31
2
$ —
—
The following table provides the net benefits expected to be paid from the plan assets or the Company’s
assets:
Pension
Benefits
Other
Benefits
Pension Benefits
Other Benefits
Expected Benefit
Payments
Expected Benefit
Payments
Expected Federal
Subsidy Payments
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024-2028 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
102
107
111
115
120
634
$
27
27
28
28
28
136
1
1
1
1
1
6
Because the above amounts are net benefits, plan participants’ contributions have been excluded from the
expected benefits.
Accounting for pensions and other postretirement benefits requires an extensive use of assumptions about
the discount rate, expected return on plan assets, the rate of future compensation increases received by the
Company’s employees, mortality, turnover and medical costs. Each assumption is reviewed annually. The
assumptions are selected to represent the average expected experience over time and may differ in any one year
from actual experience due to changes in capital markets and the overall economy. These differences will impact
the amount of pension and other postretirement benefit expense that the Company recognizes.
149
The following table provides the significant assumptions related to the pension and other postretirement
benefit plans:
Pension Benefits
Other Benefits
2018
2017
2016
2018
2017
2016
Weighted average assumptions used
to determine December 31 benefit
obligations:
Discount rate . . . . . . . . . . . . . . .
Rate of compensation
increase . . . . . . . . . . . . . . . . .
Medical trend . . . . . . . . . . . . . . .
Weighted average assumptions used
to determine net periodic cost:
Discount rate . . . . . . . . . . . . . . .
Expected return on plan
4.38% 3.75% 4.28%
4.32%
3.73%
4.26%
3.00% 3.02% 3.07%
N/A
N/A
N/A
N/A
N/A
N/A
graded from graded from graded from
7.00% in
2018
to 4.50%
in 2026+
7.00% in
2017
to 5.00%
in 2021+
6.75% in
2019
to 5.00%
in 2026+
3.75% 4.28% 4.66%
4.23%
4.26%
3.66%
assets . . . . . . . . . . . . . . . . . . .
5.95% 6.49% 7.02%
4.77%
5.09%
5.37%
Rate of compensation
increase . . . . . . . . . . . . . . . . .
Medical trend . . . . . . . . . . . . . . .
3.02% 3.07% 3.10%
N/A
N/A
N/A
N/A
N/A
N/A
graded from graded from graded from
7.00% in
2017
to 5.00%
in 2021+
7.00% in
2018
to 4.50%
in 2026+
6.50% in
2016
to 5.00%
in 2021+
NOTE “N/A” in the table above means assumption is not applicable.
The discount rate assumption was determined for the pension and postretirement benefit plans
independently. At year-end 2011, the Company began using an approach that approximates the process of
settlement of obligations tailored to the plans’ expected cash flows by matching the plans’ cash flows to the
coupons and expected maturity values of individually selected bonds. Historically, for each plan, the discount
rate was developed at the level equivalent rate that would produce the same present value as that using spot rates
aligned with the projected benefit payments.
The expected long-term rate of return on plan assets is based on historical and projected rates of return, prior
to administrative and investment management fees, for current and planned asset classes in the plans’ investment
portfolios. Assumed projected rates of return for each of the plans’ projected asset classes were selected after
analyzing historical experience and future expectations of the returns and volatility of the various asset classes.
Based on the target asset allocation for each asset class, the overall expected rate of return for the portfolio was
developed, adjusted for historical and expected experience of active portfolio management results compared to
the benchmark returns. The Company’s pension expense increases as the expected return on assets decreases.
The Company used an expected return on plan assets of 5.95% to estimate its 2018 pension benefit costs, and an
expected blended return based on weighted assets of 4.77% to estimate its 2018 other postretirement benefit
costs.
In the determination of year end 2014 projected benefit plan obligations, the Company adopted a new table
based on the Society of Actuaries RP 2014 mortality table including a generational BB-2D projection scale. The
150
adoption resulted in a significant increase to pension and other postretirement benefit plans’ projected benefit
obligations. In 2015, a new MP 2015 Projection Scale was issued, but not adopted by the Company since all of
the experience upon which the MP 2015 Projection Scale is based was considered by the Company in selecting
its 2014 assumptions. For year-end 2017, the Company retained the Society of Actuaries RP-2014 mortality table
as its base mortality table but adopted the new MP-2017 generational projection scale to project mortality
improvements after 2006. In 2018, the Company adopted the new MP-2018 mortality improvement scale to
gradually adjust future mortality rates downward.
The following table provides the components of net periodic benefit costs for the years ended December 31:
2018
2017
2016
Components of net periodic pension benefit cost:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
34
76
(97)
Amortization of:
Prior service cost (credit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net periodic pension benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1
27
41
$
$
33
80
(93)
1
34
55
$
$
Other changes in plan assets and benefit obligations recognized in other
comprehensive income:
Current year actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of actuarial gain (loss)
(60)
(7)
(7)
(7)
Total recognized in other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recognized in net periodic benefit cost and other comprehensive income . . .
Components of net periodic other postretirement benefit cost:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of:
Prior service cost (credit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
(67) $
(14) $
(26) $
41
$
$
8
20
(26)
(23)
3
$
10
26
(26)
(18)
10
Net periodic other postretirement benefit cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(18) $
2
$
32
80
(95)
1
27
45
21
(6)
15
60
12
28
(27)
(9)
5
9
The Company’s policy is to recognize curtailments when the total expected future service of plan
participants is reduced by greater than 10% due to an event that results in terminations and/or retirements.
Cumulative gains and losses that are in excess of 10% of the greater of either the projected benefit
obligation or the fair value of plan assets are amortized over the expected average remaining future service of the
current active membership for the plans.
Savings Plans for Employees
The Company maintains 401(k) savings plans that allow employees to save for retirement on a tax-deferred
basis. Employees can make contributions that are invested at their direction in one or more funds. The Company
makes matching contributions based on a percentage of an employee’s contribution, subject to certain limitations.
Due to the Company’s discontinuing new entrants into the defined benefit pension plan, on January 1, 2006, the
Company began providing an additional 5.25% of base pay defined contribution benefit for union employees
hired on or after January 1, 2001 and non-union employees hired on or after January 1, 2006. Plan expenses
151
totaled $12 million, $13 million and $9 million for 2018, 2017 and 2016, respectively. All of the Company’s
contributions are invested in one or more funds at the direction of the employees.
Note 16: Commitments and Contingencies
Commitments have been made in connection with certain construction programs. The estimated capital
expenditures required under legal and binding contractual obligations amounted to $419 million as of
December 31, 2018.
The Company’s regulated subsidiaries maintain agreements with other water purveyors for the purchase of
water to supplement their water supply. The following table provides the future annual commitments related to
minimum quantities of purchased water having non-cancelable:
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
65
65
65
64
57
641
The Company enters into agreements for the provision of services to water and wastewater facilities for the
United States military, municipalities and other customers. See Note 3—Revenue Recognition for additional
information regarding the Company’s performance obligations.
Amount
Contingencies
The Company is routinely involved in legal actions incident to the normal conduct of its business. As of
December 31, 2018, the Company has accrued approximately $54 million of probable loss contingencies and has
estimated that the maximum amount of losses associated with reasonably possible loss contingencies that can be
reasonably estimated is $26 million. For certain matters, claims and actions, the Company is unable to estimate
possible losses. The Company believes that damages or settlements, if any, recovered by plaintiffs in such
matters, claims or actions, other than as described in this Note 16—Commitments and Contingencies, will not
have a material adverse effect on the Company.
West Virginia Elk River Freedom Industries Chemical Spill
On June 8, 2018, the U.S. District Court for the Southern District of West Virginia granted final approval of
a settlement class and global class action settlement (the “Settlement”) for all claims and potential claims by all
putative class members (collectively, the “Plaintiffs”) arising out of the January 2014 Freedom Industries, Inc.
chemical spill in West Virginia. The effective date of the Settlement is July 16, 2018.
Under the terms and conditions of the Settlement, West Virginia-American Water Company (“WVAWC”)
and certain other Company affiliated entities (collectively, the “American Water Defendants”) did not admit, and
will not admit, any fault or liability for any of the allegations made by the Plaintiffs in any of the actions that
were resolved. Under federal class action rules, claimants had the right, until December 8, 2017, to elect to opt
out of the final Settlement. Less than 100 of the 225,000 estimated putative class members elected to opt out
from the Settlement, and these claimants will not receive any benefit from or be bound by the terms of the
Settlement.
In June 2018, the Company and its remaining non-participating general liability insurance carrier settled for
a payment to the Company of $20 million, out of a maximum of $25 million in potential coverage under the
terms of the relevant policy, in exchange for a full release by the American Water Defendants of all claims
against the insurance carrier related to the Freedom Industries chemical spill.
152
As a result, the aggregate pre-tax amount to be contributed by WVAWC of the $126 million Settlement with
respect to the Company, net of insurance recoveries, is $23 million. As of December 31, 2018, $40 million of the
aggregate settlement amount of $126 million, reflecting payments made by the Company under the terms of the
Settlement, is reflected in Accrued liabilities, and the offsetting insurance receivables are reflected in Other
current assets on the Consolidated Balance Sheet. The Company has funded WVAWC’s contributions to the
Settlement through existing sources of liquidity.
In April 2017, the Lincoln County (West Virginia) Commission (the “LCC”) filed a complaint in Lincoln
County state court against WVAWC and certain other defendants not affiliated with the Company, which in June
2017 was transferred to the West Virginia Mass Litigation Panel, alleging that the Freedom Industries chemical
spill caused a public nuisance in Lincoln County under an ordinance enacted by the LCC in March 2017, more
than three years after the Freedom Industries chemical spill occurred. The complaint sought an injunction against
WVAWC that would have required the creation of various databases and public repositories of documents related
to the Freedom Industries chemical spill, as well as further study and risk assessments regarding the alleged
exposure of Lincoln County residents to the released chemicals. On July 31, 2018, WVAWC filed a motion to
dismiss the LCC’s complaint. On December 12, 2018, the Mass Litigation Panel granted WVAWC’s motion to
dismiss on several grounds, including being barred by the applicable statute of limitations, failure to allege a
nuisance under applicable law, lack of standing, improper retroactive application of the nuisance ordinance and
violation of WVAWC’s due process. The LCC voted not to appeal this decision.
Dunbar, West Virginia Water Main Break Class Action Litigation
On the evening of June 23, 2015, a 36-inch pre-stressed concrete transmission water main, installed in the
early 1970s, failed. The water main is part of WVAWC’s West Relay pumping station located in the City of
Dunbar. The failure of the main caused water outages and low pressure to up to approximately 25,000 WVAWC
customers. In the early morning hours of June 25, 2015, crews completed a repair, but that same day, the repair
developed a leak. On June 26, 2015, a second repair was completed and service was restored that day to
approximately 80% of the impacted customers, and to the remaining approximately 20% by the next morning.
The second repair showed signs of leaking but the water main was usable until June 29, 2015 to allow tanks to
refill. The system was reconfigured to maintain service to all but approximately 3,000 customers while a final
repair was completed safely on June 30, 2015. Water service was fully restored by July 1, 2015 to all customers
affected by this event.
On June 2, 2017, a class action complaint was filed in West Virginia Circuit Court in Kanawha County
against WVAWC on behalf of a purported class of residents and business owners who lost water service or
pressure as a result of the Dunbar main break. The complaint alleges breach of contract by WVAWC for failure
to supply water, violation of West Virginia law regarding the sufficiency of WVAWC’s facilities and negligence
by WVAWC in the design, maintenance and operation of the water system. The plaintiffs seek unspecified
alleged damages on behalf of the class for lost profits, annoyance and inconvenience, and loss of use, as well as
punitive damages for willful, reckless and wanton behavior in not addressing the risk of pipe failure and a large
outage.
In October 2017, WVAWC filed with the court a motion seeking to dismiss all of the plaintiffs’ counts
alleging statutory and common law tort claims. Furthermore, WVAWC asserted that the Public Service
Commission of West Virginia, and not the court, has primary jurisdiction over allegations involving violations of
the applicable tariff, the public utility code and related rules. On May 30, 2018, the court, at a hearing, denied
WVAWC’s motion to apply the primary jurisdiction doctrine, and on October 11, 2018, the court issued a written
order to that effect. The court has not yet issued a written order on WVAWC’s motion to dismiss plaintiffs’ tort
claims. The court has requested the parties submit a scheduling order with a trial date of August 26, 2019, and
WVAWC has sought to prevent further discovery while its motion to dismiss is pending.
The Company and WVAWC believe that WVAWC has valid, meritorious defenses to the claims raised in
this class action complaint. WVAWC is vigorously defending itself against these allegations. Given the current
153
stage of this proceeding, the Company cannot reasonably estimate the amount of any reasonably possible losses
or a range of such losses related to this proceeding.
Note 17: Earnings per Common Share
The following table provides a reconciliation of the numerator and denominator for basic and diluted
earnings per share (“EPS”) calculations for the years ended December 31:
Numerator:
Net income attributable to common shareholders . . . . . . . . . . . . . . . . . . . . . .
$
567
$
426
$
468
Denominator:
Weighted average common shares outstanding—Basic . . . . . . . . . . . . . . . . . .
Effect of dilutive common stock equivalents . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average common shares outstanding—Diluted . . . . . . . . . . . . . . . .
180
—
180
178
1
179
178
1
179
2018
2017
2016
The effect of dilutive common stock equivalents is related to outstanding stock options, RSUs and PSUs
granted under the 2007 and 2017 Omnibus Equity Compensation Plans, as well as estimated shares to be
purchased under the Company’s 2017 Nonqualified Employee Stock Purchase Plan. Less than one million share-
based awards were excluded from the computation of diluted EPS for the years ended December 31, 2018, 2017
and 2016, because their effect would have been anti-dilutive under the treasury stock method.
Equity Forward Transaction and Common Stock Issuance
See Note 4—Acquisitions and Divestitures for information regarding the forward sale agreements entered
into by the Company on April 11, 2018, and the physical settlement of these agreements on June 7, 2018.
Note 18: Fair Value of Financial Information
The following methods and assumptions were used by the Company in estimating its fair value disclosures
for financial instruments:
Current assets and current liabilities—The carrying amounts reported on the Consolidated Balance Sheets
for current assets and current liabilities, including revolving credit debt, due to the short-term maturities and
variable interest rates, approximate their fair values.
Preferred stock with mandatory redemption requirements and long-term debt—The fair values of preferred
stock with mandatory redemption requirements and long-term debt are categorized within the fair value hierarchy
based on the inputs that are used to value each instrument. The fair value of long-term debt classified as Level 1
is calculated using quoted prices in active markets. Level 2 instruments are valued using observable inputs and
Level 3 instruments are valued using observable and unobservable inputs. The fair values of instruments
classified as Level 2 and Level 3 are determined by a valuation model that is based on a conventional discounted
cash flow methodology and utilizes assumptions of current market rates. As a majority of the Company’s debt is
not traded in active markets, the Company calculated a base yield curve using a risk-free rate (a U.S. Treasury
securities yield curve) plus a credit spread that is based on the following two factors: an average of the
Company’s own publicly-traded debt securities and the current market rates for U.S. Utility A debt securities.
The Company used these yield curve assumptions to derive a base yield for the Level 2 and Level 3 securities.
Additionally, the Company adjusted the base yield for specific features of the debt securities including call
features, coupon tax treatment and collateral for the Level 3 instruments.
154
The following tables provide the carrying amounts, including fair value adjustments previously recognized
in acquisition purchase accounting, and a fair value adjustment related to interest rate swap fair value hedges
(classified as Level 2 in the fair value hierarchy), and the fair values of the financial instruments:
Carrying
Amount
Level 1
December 31, 2018
Level 2
Level 3
Total
Preferred stock with mandatory redemption
requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
8 $
— $
Long-term debt (excluding capital lease obligations) . . .
7,638
5,760
— $
433
9 $
1,728
9
7,921
Preferred stock with mandatory redemption
requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
10 $
— $
Long-term debt (excluding capital lease obligations) . . .
6,809
4,846
— $
976
14 $
1,821
14
7,643
Carrying
Amount
December 31, 2017
Level 1
Level 2
Level 3
Total
Fair Value Measurements
To increase consistency and comparability in fair value measurements, GAAP establishes a fair value
hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as
follows:
• Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that the
Company has the ability to access as of the reporting date. Financial assets and liabilities utilizing
Level 1 inputs include active exchange-traded equity securities, exchange-based derivatives, mutual
funds and money market funds.
• Level 2—Inputs other than quoted prices included within Level 1 that are directly observable for the
asset or liability or indirectly observable through corroboration with observable market data. Financial
assets and liabilities utilizing Level 2 inputs include fixed income securities, non-exchange-based
derivatives, commingled investment funds not subject to purchase and sale restrictions and fair-value
hedges.
• Level 3—Unobservable inputs, such as internally-developed pricing models for the asset or liability
due to little or no market activity for the asset or liability. Financial assets and liabilities utilizing
Level 3 inputs include infrequently-traded non-exchange-based derivatives and commingled
investment funds subject to purchase and sale restrictions.
155
Recurring Fair Value Measurements
The following tables provide assets and liabilities measured and recorded at fair value on a recurring basis
and their level within the fair value hierarchy as of December 31, 2018 and 2017, respectively:
December 31, 2018
Level 1
Level 2
Level 3
Total
Assets:
Restricted funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rabbi trust investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities:
Deferred compensation obligations . . . . . . . . . . . . . . . . . . .
Mark-to-market derivative liabilities . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets (liabilities) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
29
15
3
3
50
17
—
17
33
$
— $
—
—
—
—
—
14
14
— $
—
—
—
—
—
—
—
$
(14) $
— $
29
15
3
3
50
17
14
31
19
December 31, 2017
Level 1
Level 2
Level 3
Total
Assets:
Restricted funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rabbi trust investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities:
Deferred compensation obligations . . . . . . . . . . . . . . . . . . .
Mark-to-market derivative liabilities . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets (liabilities) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
28
15
4
3
50
17
—
17
33
$
— $
—
—
—
—
—
3
3
— $
—
—
—
—
—
—
—
$
(3) $
— $
28
15
4
3
50
17
3
20
30
Restricted funds—The Company’s restricted funds primarily represent proceeds received from financings
for the construction and capital improvement of facilities and from customers for future services under
operations, maintenance and repair projects. Long-term restricted funds of $1 million and $1 million were
included in Other long-term assets on the Consolidated Balance Sheets as of December 31, 2018 and 2017,
respectively.
Rabbi trust investments—The Company’s rabbi trust investments consist of equity and index funds from
which supplemental executive retirement plan benefits and deferred compensation obligations can be paid. The
Company includes these assets in Other long-term assets on the Consolidated Balance Sheets.
Deposits—Deposits include escrow funds and certain other deposits held in trust. The Company includes
cash deposits in Other current assets on the Consolidated Balance Sheets.
Deferred compensation obligations—The Company’s deferred compensation plans allow participants to
defer certain cash compensation into notional investment accounts. The Company includes such plans in Other
long-term liabilities on the Consolidated Balance Sheets. The value of the Company’s deferred compensation
156
obligations is based on the market value of the participants’ notional investment accounts. The notional
investments are comprised primarily of mutual funds, which are based on observable market prices.
Mark-to-market derivative assets and liabilities—The Company utilizes fixed-to-floating interest rate swaps,
typically designated as fair value hedges, to achieve a targeted level of variable-rate debt as a percentage of total
debt. The Company also employs derivative financial instruments in the form of variable-to-fixed interest rate
swaps and forward starting interest rate swaps, classified as economic hedges and cash flow hedges, respectively,
in order to fix the interest cost on existing or forecasted debt. The Company uses a calculation of future cash
inflows and estimated future outflows, which are discounted, to determine the current fair value. Additional
inputs to the present value calculation include the contract terms, counterparty credit risk, interest rates and
market volatility.
Other investments—Other investments primarily represent money market funds used for active employee
benefits. The Company includes other investments in Other current assets on the Consolidated Balance Sheets.
Nonrecurring Fair Value Measurements
The following table provides assets measured and recorded at fair value on a nonrecurring basis and their
level within the fair value hierarchy as of December 31, 2018:
At Fair Value as of December 31, 2018
Level 1
Level 2
Level 3
Total
2018
Impairment
Charge
Assets:
Keystone goodwill (a)
. . . . . . . . . . .
Keystone intangible asset (a) . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
— $
—
— $
— $
—
— $
38
3
41
$
$
38
3
41
$
$
53
4
57
(a)
As of December 31, 2017, Keystone’s goodwill balance was $91 million and its intangible asset balance was $8 million. Subsequent
to the impairment charge recorded in the third quarter of 2018, Keystone’s goodwill and intangible asset balances were $38 million
and $3 million, respectively, as of December 31, 2018.
The Company’s estimation of the fair value of the Keystone reporting unit as part of evaluating its goodwill
and intangible asset for impairment represents a Level 3 fair value measurement, due to the use of internal
projections and unobservable measurement inputs. See Note 8—Goodwill and Other Intangible Assets for further
discussion.
Note 19: Leases
The Company has entered into operating leases involving certain real property, vehicles, and equipment.
Rental expenses under operating leases were $35 million, $29 million and $24 million for the years ended
December 31, 2018, 2017 and 2016, respectively. The operating leases for real property, vehicles, and equipment
will expire over the next 40 years, seven years and five years, respectively. Certain operating leases have renewal
options ranging from one to 60 years.
157
The following table provides the minimum annual future rental commitment under operating leases that
have initial or remaining non-cancelable lease terms over the next five years and thereafter:
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
17
15
12
11
6
80
Amount
The Company has a series of agreements with various public entities (the “Partners”) to establish certain
joint ventures, commonly referred to as “public-private partnerships.” Under the public-private partnerships, the
Company constructed utility plant, financed by the Company, and the Partners constructed utility plant
(connected to the Company’s property), financed by the Partners. The Company agreed to transfer and convey
some of its real and personal property to the Partners in exchange for an equal principal amount of Industrial
Development Bonds (“IDBs”), issued by the Partners under a state Industrial Development Bond and
Commercial Development Act. The Company leased back the total facilities, including portions funded by both
the Company and the Partners, under leases for a period of 40 years.
The leases related to the portion of the facilities funded by the Company have required payments from the
Company to the Partners that approximate the payments required by the terms of the IDBs from the Partners to
the Company (as the holder of the IDBs). As the ownership of the portion of the facilities constructed by the
Company will revert back to the Company at the end of the lease, the Company has recorded these as capital
leases. The lease obligation and the receivable for the principal amount of the IDBs are presented by the
Company on a net basis. The carrying value of the facilities funded by the Company recognized as a capital lease
asset was $147 million and $150 million as of December 31, 2018 and 2017, respectively, which is presented in
Property, plant and equipment on the Consolidated Balance Sheets. The future payments under the lease
obligations are equal to and offset by the payments receivable under the IDBs.
As of December 31, 2018, the minimum annual future rental commitment under the operating leases for the
portion of the facilities funded by the Partners that have initial or remaining non-cancelable lease terms in excess
of one year included in the preceding minimum annual rental commitments are $4 million in 2019 through 2023,
and $59 million thereafter.
Note 20: Segment Information
The Company’s operating segments are comprised of the revenue-generating components of its businesses
for which separate financial information is internally produced and regularly used by management to make
operating decisions and assess performance. The Company operates its businesses primarily through one
reportable segment, the Regulated Businesses segment. The Company also operates market-based businesses that
provide a broad range of related and complementary water and wastewater services within non-reportable
operating segments, collectively referred to as the Market-Based Businesses.
The Regulated Businesses segment is the largest component of the Company’s business and includes 20
subsidiaries that provide water and wastewater services to customers in 16 states.
The Company’s primary Market-Based Businesses include the Homeowner Services Group, which provides
warranty protection programs to residential and smaller commercial customers; the Military Services Group,
which provides water and wastewater services to the U.S. government on military installations; and Keystone,
which provides water transfer services for shale natural gas exploration and production companies.
158
The accounting policies of the segments are the same as those described in Note 2—Significant Accounting
Policies. The Regulated Businesses segment and Market-Based Businesses include intercompany costs that are
allocated by American Water Works Service Company, Inc. and intercompany interest that is charged by
AWCC, both of which are eliminated to reconcile to the Consolidated Statements of Operations. Inter-segment
revenues include the sale of water from a regulated subsidiary to market-based subsidiaries, leased office space,
and furniture and equipment provided by the market-based subsidiaries to regulated subsidiaries. “Other”
includes corporate costs that are not allocated to the Company’s operating segments, eliminations of inter-
segment transactions, fair value adjustments, and associated income and deductions related to the acquisitions
that have not been allocated to the operating segments for evaluation of performance and allocation of resource
purposes. The adjustments related to the acquisitions are reported in Other as they are excluded from segment
performance measures evaluated by management.
The following tables provide summarized segment information as of and for the years ended December 31:
2018
Regulated
Businesses
Market-Based
Businesses
Other
Consolidated
$
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses, net
Interest, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to common shareholders . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,984
500
—
1,912
(280)
826
224
602
18,680
1,477
$ (20) $
16
—
(15)
(74)
(80)
(13)
(67)
1,544
96
476
29
57
441
4
41
11
32
999
13
2017
3,440
545
57
2,338
(350)
787
222
567
21,223
1,586
Regulated
Businesses
Market-Based
Businesses
Other
Consolidated
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses, net
Interest, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to common shareholders . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,958
462
1,766
(268)
925
366
559
17,602
1,316
$
$ (23) $
12
(22)
(77)
(79)
92
(171)
1,281
100
3,357
492
2,104
(342)
912
486
426
19,482
1,434
422
18
360
3
66
28
38
599
18
2016
Regulated
Businesses
Market-Based
Businesses
Other
Consolidated
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses, net
Interest, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to common shareholders . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2,871
440
1,840
(256)
775
303
472
16,405
1,274
$
451
15
391
2
65
26
39
637
18
$ (20) $
15
(14)
(71)
(70)
(27)
(43)
1,440
19
3,302
470
2,217
(325)
770
302
468
18,482
1,311
159
Note 21: Unaudited Quarterly Data
The following tables provide supplemental, unaudited, consolidated, quarterly financial data for each of the
four quarters in the years ended December 31, 2018 and 2017, respectively. The operating results for any quarter
are not indicative of results that may be expected for a full year or any future periods.
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to common shareholders . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share:
2018
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 761
217
106
$ 853
302
162
$ 976
335
187
$ 850
248
112
Net income attributable to common shareholders . . . . . . . . . . . . . . . . .
$0.60
$0.90
$1.04
$0.62
Diluted earnings per share: (a)
Net income attributable to common shareholders . . . . . . . . . . . . . . . . .
0.59
0.91
1.04
0.62
(a)
Amounts may not sum due to rounding.
Operating revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to common shareholders . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share:
2017
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$ 756
230
93
$ 844
310
131
$ 936
432
203
$ 821
281
(1)
Net income attributable to common shareholders . . . . . . . . . . . . . . . . .
$0.52
$0.74
$1.14
$(0.01)
Diluted earnings per share:
Net income attributable to common shareholders . . . . . . . . . . . . . . . . .
0.52
0.73
1.13
—
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company, under the supervision and with the participation of its management, including the Chief
Executive Officer and the Chief Financial Officer, conducted an evaluation of the effectiveness of the design and
operation of the Company’s disclosure controls and procedures as such term is defined in Rule 13a-15(e) and
Rule 15d-15(e) under the Exchange Act as of the end of the period covered by this report.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of
December 31, 2018, our disclosure controls and procedures were effective at a reasonable level of assurance. Our
disclosure controls and procedures are designed to provide reasonable assurance that the information required to
be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms, 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.
160
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Rule 13a-15(f) of the Exchange Act. Our internal control over financial
reporting is a process designed by or under the supervision of our Chief Executive Officer and Chief Financial
Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with GAAP. Our internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect our transactions and dispositions of our assets, (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of the financial statements in
accordance with GAAP, and that our receipts and expenditures are being made only in accordance with
authorizations of our management and our directors, and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the
effectiveness of our internal control over financial reporting, as of December 31, 2018, using the criteria
described in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Management has excluded Pivotal from our assessment of internal control over financial reporting as of
December 31, 2018 since it was acquired by the Company in a business combination in June 2018. Pivotal is a
wholly owned subsidiary whose total assets and total revenues excluded from our assessment of internal control
over financial reporting represent less than 1% and approximately 2%, respectively, of the related consolidated
financial statement amounts as of and for the year ended December 31, 2018.
Based on our evaluation under the framework in Internal Control—Integrated Framework (2013), our
management concluded that our internal control over financial reporting was effective as of December 31, 2018.
The effectiveness of our internal control over financial reporting as of December 31, 2018 has been audited
by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report
appearing in Item 8—Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Changes in Internal Control over Financial Reporting
On June 4, 2018, the Company completed the acquisition of Pivotal. See Note 4—Acquisitions and
Divestitures in the Notes to Consolidated Financial Statements for additional information. We began to integrate
Pivotal into our internal control over financial reporting structure and expect to complete this integration in 2019.
We concluded that there have been no changes in internal control over financial reporting that occurred during
the three months ended December 31, 2018, other than changes resulting from the acquisition of Pivotal, that
have materially affected, or are reasonably likely to materially affect, the Company’s internal control over
financial reporting. As permitted by the SEC, management has elected to exclude Pivotal from its assessment of
the effectiveness of its internal controls over financial reporting as of December 31, 2018.
ITEM 9B. OTHER INFORMATION
None.
161
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item and not given below or in Item 1—Business—Executive Officers of
this Form 10-K, is incorporated by reference from the Company’s Proxy Statement for the 2019 Annual Meeting
of Shareholders, to be filed with the SEC within 120 days following the end of the fiscal year covered by this
report, under the captions entitled “Board of Directors and Corporate Governance,” “Proposal 1—Election of
Directors” and “Certain Beneficial Ownership Matters—Section 16(a) Beneficial Ownership Reporting
Compliance.”
We have adopted a Code of Ethics, which applies to directors, officers and employees. The full text of the
Code of Ethics is publicly available on our website at https://amwater.com. We intend to post on our website any
amendments to our Code of Ethics and any waivers of such provisions granted to certain principal officers.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference in the Company’s Proxy Statement for the
2019 Annual Meeting of Shareholders, under the captions entitled “Proposal 1—Election of Directors—Director
Compensation Table,” “Compensation Discussion and Analysis,” “Executive Compensation,” “Compensation
Committee Interlocks and Insider Participation” and “Compensation Committee Report.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Information required by this item setting forth the security ownership of certain beneficial owners and
management is incorporated by reference in the Company’s Proxy Statement for the 2019 Annual Meeting of
Shareholders, under the captions entitled “Certain Beneficial Ownership Matters—Security Ownership of
Management,” “Certain Beneficial Ownership Matters—Security Ownership of Certain Beneficial Owners” and
“Equity Compensation Plan Information.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information required by this item is incorporated by reference in the Company’s Proxy Statement for the
2019 Annual Meeting of Shareholders, under the caption entitled “Board of Directors and Corporate
Governance—Board Review of Related Person Transactions” and “Proposal 1—Election of Directors—Director
Independence.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this item is incorporated by reference in the Company’s Proxy Statement for the
2019 Annual Meeting of Shareholders, under the caption entitled “Proposal 3—Ratification of Appointment of
Independent Registered Public Accounting Firm—Fees Paid to Independent Registered Public Accounting Firm”
and “Proposal 3—Ratification of Appointment of Independent Registered Public Accounting Firm—
Pre-Approval of Services Provided by Independent Registered Public Accounting Firm.”
162
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents have been filed as a part of this Form 10-K:
PART IV
1.
2.
3.
The financial statements listed in the “Index to Consolidated Financial Statements” contained in
Item 8—Financial Statements and Supplementary Data of this Form 10-K are hereby incorporated
by reference in response to this Item 15(a).
Financial statement schedules have been omitted since they are either not required or are not
applicable as the information is otherwise included in the financial statements or notes thereto.
Exhibits. The list of documents contained in “Exhibit Index” in Part IV of this Form 10-K is
incorporated by reference in response to this Item 15(a). The warranties, representations and
covenants contained in any of the agreements included or incorporated by reference herein or
which appear as exhibits hereto should not be relied upon by buyers, sellers or holders of the
Company’s or its subsidiaries’ securities and are not intended as warranties, representations or
covenants to any individual or entity except as specifically set forth in such agreement.
The responses to Items 15(b) and (c) of Form 10-K are included above in response to Item 15(a).
ITEM 16. FORM 10-K SUMMARY
None.
163
Exhibit
Number
2.1#
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
EXHIBIT INDEX
Exhibit Description
Stock Purchase Agreement, dated April 11, 2018, by and among American Water Enterprises, LLC
and the other parties thereto (incorporated by reference to Exhibit 2.1 to American Water Works
Company, Inc.’s Current Report on Form 8-K, File No. 001-34028, filed April 11, 2018).
Restated Certificate of Incorporation of American Water Works Company, Inc. (incorporated by
reference to Exhibit 3.1 to American Water Works Company, Inc.’s Quarterly Report on Form
10-Q, File No. 001-34028, filed November 6, 2008).
Amended and Restated Bylaws of American Water Works Company, Inc. (incorporated by
reference to Exhibit 3.2 to American Water Works Company, Inc.’s Quarterly Report on Form
10-Q, File No. 001-34028, filed August 5, 2015).
Indenture, dated as of October 22, 2007, between American Water Capital Corp. and Wells Fargo
Bank, National Association (incorporated by reference to Exhibit 4.4 to American Water Capital
Corp.’s Registration Statement on Form S-4, File No. 333-148284, and American Water Works
Company, Inc.’s Registration Statement on Form S-4, File No. 333-148284-01, filed December 21,
2007).
Indenture, dated as of December 4, 2009, between American Water Capital Corp. and Wells Fargo
Bank, National Association (incorporated by reference to Exhibit 4.1 to American Water Works
Company, Inc.’s Current Report on Form 8-K, File No. 001-34028, filed December 3, 2010).
Officers’ Certificate, dated December 15, 2010, establishing the 6.00% Senior Monthly Notes due
2040 (incorporated by reference to Exhibit 4.1 to American Water Works Company, Inc.’s Current
Report on Form 8-K, File No. 001-34028, filed December 15, 2010).
Officers’ Certificate, dated December 17, 2012, establishing the 4.300% Senior Notes due 2042
(incorporated by reference to Exhibit 4.1 to American Water Works Company, Inc.’s Current
Report on Form 8-K, File No. 001-34028, filed December 17, 2012).
Officers’ Certificate, dated November 20, 2013, establishing the 3.850% Senior Notes due 2024
(incorporated by reference to Exhibit 4.1 to American Water Works Company, Inc.’s Current
Report on Form 8-K, File No. 001-34028, filed November 20, 2013).
Officers’ Certificate, dated August 14, 2014, establishing the 3.400% Senior Notes due 2025
(incorporated by reference to Exhibit 4.1 to American Water Works Company, Inc.’s Current
Report on Form 8-K, File No. 001-34028, filed August 14, 2014).
Officers’ Certificate, dated August 14, 2014, providing for a further issuance of the 4.300% Senior
Notes due 2042 (incorporated by reference to Exhibit 4.3 to American Water Works Company,
Inc.’s Current Report on Form 8-K, File No. 001-34028, filed August 14, 2014).
Officers’ Certificate, dated August 13, 2015, establishing the 4.300% Senior Notes due 2045
(incorporated by reference to Exhibit 4.1 to American Water Works Company, Inc.’s Current
Report on Form 8-K, File No. 001-34028, filed August 13, 2015).
Officers’ Certificate, dated August 13, 2015, providing for a further issuance of the 3.400% Senior
Notes due 2025 (incorporated by reference to Exhibit 4.3 to American Water Works Company,
Inc.’s Current Report on Form 8-K, File No. 001-34028, filed August 13, 2015).
Officers’ Certificate, dated November 17, 2016, establishing the 3.000% Senior Notes due 2026
(incorporated by reference to Exhibit 4.1 to American Water Works Company, Inc.’s Current
Report on Form 8-K, File No. 001-34028, filed November 17, 2016).
Officers’ Certificate, dated November 17, 2016, establishing the 4.000% Senior Notes due 2046
(incorporated by reference to Exhibit 4.2 to American Water Works Company, Inc.’s Current
Report on Form 8-K, File No. 001-34028, filed November 17, 2016).
164
Exhibit
Number
4.12
4.13
4.14
4.15
4.16
4.17
10.1
10.2
10.3
10.4
10.5.1*
Exhibit Description
Officers’ Certificate, dated August 10, 2017, establishing the 2.950% Senior Notes due 2027
(incorporated by reference to Exhibit 4.1 to American Water Works Company, Inc.’s Current
Report on Form 8-K, File No. 001-34028, filed August 10, 2017).
Officers’ Certificate, dated August 10, 2017, establishing the 3.750% Senior Notes due 2047
(incorporated by reference to Exhibit 4.2 to American Water Works Company, Inc.’s Current
Report on Form 8-K, File No. 001-34028, filed August 10, 2017).
Officer’s Certificate, dated August 9, 2018, establishing the 3.750% Senior Notes due 2028
(incorporated by reference to Exhibit 4.1 to American Water Works Company, Inc.’s Current
Report on Form 8-K, File No. 001-34028, filed August 9, 2018).
Officer’s Certificate, dated August 9, 2018, establishing the 4.200% Senior Notes due 2048
(incorporated by reference to Exhibit 4.2 to American Water Works Company, Inc.’s Current
Report on Form 8-K, File No. 001-34028, filed August 9, 2018).
Note Purchase Agreement, as amended, dated December 21, 2006, between American Water
Capital Corp. and the purchasers party thereto (incorporated by reference to Exhibit 4.2 to
American Water Capital Corp.’s Registration Statement on Form S-1, File No. 333-145757-01, and
American Water Works Company, Inc.’s Registration Statement on Form S-1, File
No. 333-145757, filed October 11, 2007) with respect to the 5.77% Series D Senior Notes due
December 21, 2021.
Note Purchase Agreement, dated May 15, 2008, between American Water Capital Corp. and the
purchasers party thereto (incorporated by reference to Exhibit 10.1 to American Water Works
Company, Inc.’s Current Report on Form 8-K, File No. 001-34028, filed May 19, 2008) with
respect to the 6.55% Series H Senior Notes due May 15, 2023.
Second Amended and Restated Credit Agreement, dated as of March 21, 2018, by and among
American Water Works Company, Inc., American Water Capital Corp., each of the Lenders party
thereto, Wells Fargo Bank, National Association, as administrative agent, JPMorgan Chase Bank,
N.A., as syndication agent, and Mizuho Bank, Ltd., PNC Bank, National Association, and U.S.
Bank National Association, as co-documentation agents (incorporated by reference to Exhibit 10.1
to American Water Works Company, Inc.’s Current Report on Form 8-K, File No. 001-34028, filed
on March 21, 2018).
Confirmation of Forward Sale Transaction, dated April 11, 2018, among American Water Works
Company, Inc., JPMorgan Chase Bank, National Association, and J.P. Morgan Securities LLC,
solely as agent (incorporated by reference to Exhibit 10.1 to American Water Works Company,
Inc.’s Current Report on Form 8-K, File No. 001-34028, filed April 16, 2018).
Confirmation of Forward Sale Transaction, dated April 11, 2018, between American Water Works
Company, Inc. and Wells Fargo Bank, National Association (incorporated by reference to Exhibit
10.2 to American Water Works Company, Inc.’s Current Report on Form 8-K, File No. 001-34028,
filed April 16, 2018).
Support Agreement, dated June 22, 2000, together with First Amendment to Support Agreement,
dated July 26, 2000, by and between American Water Works Company, Inc. and American Water
Capital Corp. (incorporated by reference to Exhibit 10.3 to American Water Capital Corp.’s
Registration Statement on Form S-1, File No. 333-145757-01, and American Water Works
Company, Inc.’s Registration Statement on Form S-1, File No. 333-145757, filed October 11,
2007).
Amended and Restated Letter Agreement between Loyd Warnock and American Water Works
Company, Inc., dated May 7, 2014 (incorporated by reference to Exhibit 10.4 to American Water
Works Company, Inc.’s Annual Report on Form 10-K, File No. 001-34028, filed February 25,
2016).
165
Exhibit
Number
10.5.2*
10.6.1*
10.6.2*
10.7*
10.8*
10.9.1*
10.9.2*
10.9.3*
10.9.4*
10.10*
10.11.1*
10.11.2*
10.12.1*
Exhibit Description
Amendment, dated April 25, 2018, to Amended and Restated Letter Agreement between Loyd
Warnock and American Water Works Company, Inc. (incorporated by reference to Exhibit 10.2.2
to American Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028,
filed May 2, 2018).
Letter Agreement, dated February 17, 2015, between Michael A. Sgro and American Water Works
Company, Inc. (incorporated by reference to Exhibit 10.4 to American Water Works Company,
Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed August 5, 2015).
Amendment, dated December 6, 2018, to Letter Agreement between Michael A. Sgro and
American Water Works Company, Inc. (filed herewith).
Executive Employment Agreement, dated November 1, 2018, between Radhakrishnan
Swaminathan and American Water Works Service Company, Inc. (filed herewith).
Amended and Restated American Water Works Company, Inc. Deferred Compensation Plan, dated
as of January 1, 2001 (incorporated by reference to Exhibit 10.9 to American Water Capital Corp.’s
Registration Statement on Form S-1, File No. 333-145757-01, and American Water Works
Company, Inc.’s Registration Statement on Form S-1, File No. 333-145757, filed October 11,
2007).
Nonqualified Savings and Deferred Compensation Plan for Employees of American Water Works
Company, Inc. and Its Designated Subsidiaries, as amended and restated, effective as of January 1,
2009 (incorporated by reference to Exhibit 10.37 to American Water Works Company, Inc.’s
Registration Statement on Form S-1, File No. 333-155245, filed November 18, 2008).
Nonqualified Savings and Deferred Compensation Plan for Employees of American Water Works
Company, Inc. and Its Designated Subsidiaries, as amended and restated, effective as of January 1,
2017 (filed herewith).
Nonqualified Savings and Deferred Compensation Plan for Employees of American Water Works
Company, Inc. and Its Designated Subsidiaries, as amended and restated, effective as of June 1,
2018 (filed herewith).
Nonqualified Deferred Compensation Plan for Non-Employee Directors of American Water Works
Company, Inc., as amended and restated, effective as of January 1, 2009 (incorporated by reference
to Exhibit 10.38 to American Water Works Company, Inc.’s Registration Statement on Form S-1,
File No. 333-155245, filed November 18, 2008).
Amended and Restated American Water Works Company, Inc. Executive Retirement Plan, dated as
of March 1, 2007 (incorporated by reference to Exhibit 10.8 to American Water Capital Corp.’s
Registration Statement on Form S-1, File No. 333-145757-01, and American Water Works
Company, Inc.’s Registration Statement on Form S-1, File No. 333-145757, filed October 11,
2007).
American Water Works Company, Inc. Annual Incentive Plan (incorporated by reference to
Appendix C to American Water Works Company, Inc.’s Definitive Proxy Statement, File
No. 001-34028, filed March 27, 2015).
Amendment 2016-1 to American Water Works Company, Inc. Annual Incentive Plan (now known
as the Annual Performance Plan), effective January 1, 2016 (incorporated by reference to Exhibit
10.14.2 to American Water Works Company, Inc.’s Annual Report on Form 10-K, File
No. 001-34028, filed February 25, 2016).
American Water Works Company, Inc. and its Designated Subsidiaries 2017 Nonqualified
Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.1 to American Water Works
Company, Inc.’s Registration Statement on Form S-8, File No. 333-219682, filed August 4, 2017).
166
Exhibit
Number
10.12.2*
10.12.3*
10.13.1*
10.13.2*
10.13.3*
10.13.4*
10.13.5*
10.13.6*
10.13.7*
10.13.8*
10.13.9*
10.13.10*
Exhibit Description
First Amended and Restated American Water Works Company, Inc. and its Designated
Subsidiaries 2017 Nonqualified Employee Stock Purchase Plan, adopted on December 7, 2017,
effective as of August 5, 2018 (incorporated by reference to Exhibit 10.1 to American Water Works
Company, Inc.’s Current Report on Form 8-K, File No. 001-34028, filed August 9, 2018).
Second Amended and Restated American Water Works Company, Inc. and its Designated
Subsidiaries 2017 Nonqualified Employee Stock Purchase Plan, adopted on July 27, 2018, effective
as of February 5, 2019 (incorporated by reference to Exhibit 10.2 to American Water Works
Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed October 31, 2018).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan, as amended
(incorporated by reference to Appendix B to American Water Works Company, Inc.’s Definitive
Proxy Statement, File No. 001-34028, filed March 27, 2015).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2013
Nonqualified Stock Option Grant Form for ML2 – L5 (incorporated by reference to Exhibit 10.13
to American Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028,
filed May 7, 2013).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2014
Nonqualified Stock Option Grant Form for ML2 – L5 (incorporated by reference to Exhibit 10.6 to
American Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028,
filed May 7, 2014).
Amendment to the American Water Works Company, Inc. 2007 Omnibus Equity Compensation
Plan 2014 Nonqualified Stock Option Grant Form for ML2 – L5 (incorporated by reference to
Exhibit 10.6A to American Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File
No. 001-34028, filed May 7, 2014).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan May 2014
Nonqualified Stock Option Grant Form for Susan N. Story (incorporated by reference to Exhibit
10.1 to American Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File
No. 001-34028, filed August 6, 2014).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2015
Nonqualified Stock Option Grant (incorporated by reference to Exhibit 10.13.10 to American
Water Works Company, Inc.’s Annual Report on Form 10-K, File No. 001-34028, filed
February 25, 2016).
Amendment to American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan
2015 Nonqualified Stock Option Grant (incorporated by reference to Exhibit 10.13.11 to American
Water Works Company, Inc.’s Annual Report on Form 10-K, File No. 001-34028, filed
February 25, 2016).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2015
Nonqualified Stock Option Grant (for certain executives) (incorporated by reference to Exhibit
10.13.12 to American Water Works Company, Inc.’s Annual Report on Form 10-K, File
No. 001-34028, filed February 25, 2016).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2016
Nonqualified Stock Option Grant (incorporated by reference to Exhibit 10.1.1 to American Water
Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed May 4, 2016).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2016
Nonqualified Stock Option Grant (for certain executives) (incorporated by reference to Exhibit
10.1.2 to American Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File
No. 001-34028, filed May 4, 2016).
167
Exhibit
Number
10.13.11*
10.13.12*
10.13.13*
10.13.14*
10.13.15*
10.13.16*
10.13.17*
10.13.18*
10.13.19*
10.13.20*
10.13.21*
10.13.22*
Exhibit Description
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2016 Restricted
Stock Unit Grant (incorporated by reference to Exhibit 10.2.1 to American Water Works Company,
Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed May 4, 2016).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2016 Restricted
Stock Unit Grant (for certain executives) (incorporated by reference to Exhibit 10.2.2 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed May 4,
2016).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2017 Restricted
Stock Unit Grant (incorporated by reference to Exhibit 10.1.1 to American Water Works Company,
Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed May 3, 2017).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2017 Restricted
Stock Unit Grant (for certain executives) (incorporated by reference to Exhibit 10.1.2 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed May 3,
2017).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2016
Performance Stock Unit Grant Form A-1 (incorporated by reference to Exhibit 10.3.1 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed May 4,
2016).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2016
Performance Stock Unit Grant Form A-2 (incorporated by reference to Exhibit 10.3.2 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed May 4,
2016).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2016
Performance Stock Unit Grant Form B-1 (incorporated by reference to Exhibit 10.3.3 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed May 4,
2016).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2016
Performance Stock Unit Grant Form B-2 (incorporated by reference to Exhibit 10.3.4 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed May 4,
2016).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2017
Performance Stock Unit Grant Form A-1 (incorporated by reference to Exhibit 10.2.1 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed May 3,
2017).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2017
Performance Stock Unit Grant Form A-2 (incorporated by reference to Exhibit 10.2.2 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed May 3,
2017).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2017
Performance Stock Unit Grant Form B-1 (incorporated by reference to Exhibit 10.2.3 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed May 3,
2017).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2017
Performance Stock Unit Grant Form B-2 (incorporated by reference to Exhibit 10.2.4 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed May 3,
2017).
168
Exhibit
Number
10.13.23*
10.13.24*
10.13.25*
10.13.26*
10.13.27*
10.13.28*
10.13.29*
10.13.30*
10.13.31*
10.13.32*
10.13.33*
10.13.34*
Exhibit Description
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2011 Stock Unit
Grant Form for Non-Employee Directors (incorporated by reference to Exhibit 10.2 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed
August 3, 2011).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2012 Stock Unit
Grant Form for Non-Employee Directors (incorporated by reference to Exhibit 10.1 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed
August 2, 2012).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2013 Stock Unit
Grant Form for Non-Employee Directors (incorporated by reference to Exhibit 10.1 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed
August 7, 2013).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2014 Stock Unit
Grant Form for Non-Employee Directors (incorporated by reference to Exhibit 10.5 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed
August 6, 2014).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2015 Stock Unit
Grant Form for Non-Employee Directors (incorporated by reference to Exhibit 10.1 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed
August 5, 2015).
American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2016 Stock Unit
Grant Form for Non-Employee Directors (incorporated by reference to Exhibit 10.1 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed
August 3, 2016).
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan (incorporated by
reference to Exhibit 10.1 to American Water Works Company, Inc.’s Quarterly Report on Form
10-Q, File No. 001-34028, filed August 2, 2017).
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2017 Restricted
Stock Unit Grant (incorporated by reference to Exhibit 10.3 to American Water Works Company,
Inc.’s Current Report on Form 8-K, File No. 001-34028, filed May 12, 2017).
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2017 Restricted
Stock Unit Grant (for certain executives) (incorporated by reference to Exhibit 10.4 to American
Water Works Company, Inc.’s Current Report on Form 8-K, File No. 001-34028, filed May 12,
2017).
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2018 Restricted
Stock Unit Grant (incorporated by reference to Exhibit 10.3 to American Water Works Company,
Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed May 2, 2018).
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2018 Restricted
Stock Unit Grant (for certain executives) (incorporated by reference to Exhibit 10.4 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed May 2,
2018).
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2018 Restricted
Stock Unit Grant (for Chief Executive Officer, Chief Financial Officer and Chief Operating
Officer) (incorporated by reference to Exhibit 10.5 to American Water Works Company, Inc.’s
Quarterly Report on Form 10-Q, File No. 001-34028, filed May 2, 2018).
169
Exhibit
Number
10.13.35*
10.13.36*
10.13.37*
10.13.38*
10.13.39*
10.13.40*
10.13.41*
10.13.42*
10.13.43*
10.13.44*
10.13.45*
Exhibit Description
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2018 Restricted
Stock Unit Grant (for Loyd A. Warnock) (incorporated by reference to Exhibit 10.6 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed May 2,
2018).
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2017
Performance Stock Unit Grant Form A-1 (incorporated by reference to Exhibit 10.5 to American
Water Works Company, Inc.’s Current Report on Form 8-K, File No. 001-34028, filed May 12,
2017).
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2017
Performance Stock Unit Grant Form A-2 (incorporated by reference to Exhibit 10.6 to American
Water Works Company, Inc.’s Current Report on Form 8-K, File No. 001-34028, filed May 12,
2017).
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2017
Performance Stock Unit Grant Form B-1 (incorporated by reference to Exhibit 10.7 to American
Water Works Company, Inc.’s Current Report on Form 8-K, File No. 001-34028, filed May 12,
2017).
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2017
Performance Stock Unit Grant Form B-2 (incorporated by reference to Exhibit 10.8 to American
Water Works Company, Inc.’s Current Report on Form 8-K, File No. 001-34028, filed May 12,
2017).
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2018
Performance Stock Unit Grant Form A-1 (incorporated by reference to Exhibit 10.7 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed May 2,
2018).
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2018
Performance Stock Unit Grant Form A-2 (incorporated by reference to Exhibit 10.8 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed May 2,
2018).
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2018
Performance Stock Unit Grant Form A-3 (incorporated by reference to Exhibit 10.9 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed May 2,
2018).
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2018
Performance Stock Unit Grant Form A (for Loyd A. Warnock) (incorporated by reference to
Exhibit 10.10 to American Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File
No. 001-34028, filed May 2, 2018).
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2018
Performance Stock Unit Grant Form B-1 (incorporated by reference to Exhibit 10.11 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed May 2,
2018).
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2018
Performance Stock Unit Grant Form B-2 (incorporated by reference to Exhibit 10.12 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed May 2,
2018).
170
Exhibit
Number
10.13.46*
10.13.47*
10.13.48*
10.13.49*
Exhibit Description
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2018
Performance Stock Unit Grant Form B-3 (incorporated by reference to Exhibit 10.13 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed May 2,
2018).
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2018
Performance Stock Unit Grant Form B (for Loyd A. Warnock) (incorporated by reference to
Exhibit 10.14 to American Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File
No. 001-34028, filed May 2, 2018).
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2017
Non-Employee Director Stock Unit Grant (incorporated by reference to Exhibit 10.9 to American
Water Works Company, Inc.’s Current Report on Form 8-K, File No. 001-34028, filed May 12,
2017).
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2018
Non-Employee Director Stock Unit Grant (incorporated by reference to Exhibit 10.1 to American
Water Works Company, Inc.’s Quarterly Report on Form 10-Q, File No. 001-34028, filed
August 1, 2018).
10.14*
American Water Works Company, Inc. Executive Severance Policy, dated as of December 16,
2008 (incorporated by reference to Exhibit 10.1 to American Water Works Company, Inc.’s
Quarterly Report on Form 10-Q, File No. 001-34028, filed November 3, 2010).
21.1
23.1
31.1
31.2
32.1
32.2
101
Subsidiaries of American Water Works Company, Inc. (filed herewith).
Consent of PricewaterhouseCoopers LLP (filed herewith).
Certification of Susan N. Story, President and Chief Executive Officer, pursuant to Section 302 of
the Sarbanes-Oxley Act (filed herewith).
Certification of Linda G. Sullivan, Executive Vice President and Chief Financial Officer, pursuant
to Section 302 of the Sarbanes-Oxley Act (filed herewith).
Certification of Susan N. Story, President and Chief Executive Officer, pursuant to Section 906 of
the Sarbanes-Oxley Act (furnished herewith).
Certification of Linda G. Sullivan, Executive Vice President and Chief Financial Officer, pursuant
to Section 906 of the Sarbanes-Oxley Act (furnished herewith).
The following financial statements from American Water Works Company, Inc.’s Annual Report
on Form 10-K for the period ended December 31, 2018, formatted in XBRL (eXtensible Business
Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of
Operations; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated
Statements of Cash Flows; (v) the Consolidated Statements of Changes in Shareholders’ Equity;
and (vi) the Notes to Consolidated Financial Statements (filed herewith).
* Denotes a management contract or compensatory plan or arrangement.
# Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company will
furnish the omitted schedules and exhibits to the SEC upon request.
Instruments defining the rights of holders of certain issues of long-term debt of the Company and certain of
its consolidated subsidiaries have not been filed as exhibits to this report because the authorized principal amount
of any one of such issues does not exceed 10% of the Company’s consolidated total assets. The Company agrees
to furnish a copy of each such instrument to the SEC upon request.
171
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the
19th day of February, 2019.
AMERICAN WATER WORKS COMPANY, INC.
BY:
/s/ SUSAN N. STORY
Susan N. Story
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report on Form 10-K has
been signed on the 19th day of February, 2019, by the following persons in the capacities indicated.
/s/ SUSAN N. STORY
Susan N. Story
President and Chief Executive Officer
(Principal Executive Officer and Director)
/s/ LINDA G. SULLIVAN
Linda G. Sullivan
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
/s/ MELISSA K. WIKLE
Melissa K. Wikle
Vice President and Controller
(Principal Accounting Officer)
/s/ JULIA L. JOHNSON
Julia L. Johnson
(Director)
/s/ GEORGE MacKENZIE
George MacKenzie
(Director)
/s/ JEFFREY N. EDWARDS
Jeffrey N. Edwards
(Director)
/s/ MARTHA CLARK GOSS
Martha Clark Goss
(Director)
/s/ VERONICA M. HAGEN
Veronica M. Hagen
(Director)
/s/ KARL F. KURZ
Karl F. Kurz
(Director)
/s/ JAMES G. STAVRIDIS
James G. Stavridis
(Director)
172
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos.
333-219682, 333-217975, 333-168543 and 333-150381) and Form S-3 (Nos. 333-209933 and 333-224558) of
American Water Works Company, Inc. of our report dated February 19, 2019 relating to the financial statements
and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.
Exhibit 23.1
/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 19, 2019
Exhibit 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
I, Susan N. Story, certify that:
1. I have reviewed this annual report on Form 10-K of American Water Works Company, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: February 19, 2019
By: /s/ SUSAN N. STORY
Susan N. Story
President and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
I, Linda G. Sullivan, certify that:
1. I have reviewed this annual report on Form 10-K of American Water Works Company, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of,
and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of
an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s
internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: February 19, 2019
By: /s/ LINDA G. SULLIVAN
Linda G. Sullivan
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
Exhibit 32.1
AMERICAN WATER WORKS COMPANY, INC.
CERTIFICATION PURSUANT TO
RULE 13a-14(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934 AND
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Susan N. Story, President and Chief Executive Officer of American Water Works Company, Inc.
(the “Company”), hereby certify that, based on my knowledge:
(1) The Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “Report”)
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
By: /s/ SUSAN N. STORY
Susan N. Story
President and Chief Executive Officer
(Principal Executive Officer)
February 19, 2019
Exhibit 32.2
AMERICAN WATER WORKS COMPANY, INC.
CERTIFICATION PURSUANT TO
RULE 13a-14(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934 AND
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Linda G. Sullivan, Executive Vice President and Chief Financial Officer of American Water Works Company,
Inc. (the “Company”), hereby certify that, based on my knowledge:
(1) The Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “Report”)
fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
By: /s/ LINDA G. SULLIVAN
Linda G. Sullivan
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
February 19, 2019
[THIS PAGE INTENTIONALLY LEFT BLANK]
amwater.com
1 Water Street | Camden, NJ 08102-1658
“American Water” and the star logo are the registered trademarks of American Water Works Company, Inc. All rights reserved.