Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 

FORM 10-Q
 
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017March 31, 2019
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 numberFile Number: 001-34028
 
 
AMERICAN WATER WORKS COMPANY, INC.
(Exact name of registrant as specified in its charter) 
 
 
Delaware51-0063696
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
1025 Laurel Oak Road, Voorhees,
1 Water Street, Camden, NJ0804308102-1658
(Address of principal executive offices)(Zip Code)
(856) 346-8200955-4001
(Registrant’s telephone number, including area code)
 
 
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.    ☒x  Yes    ☐¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    ☒x  Yes    ☐¨  No
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☒xAccelerated filer☐¨
Non-accelerated filer☐¨
Smaller reporting company☐¨
 (Do not check if a 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 Exchange Act.).  ☐¨  Yes  ☒  x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 Class
 Outstanding as of October 26, 2017April 25, 2019
Common Stock, $0.01 par value per share 
178,375,400180,518,810 shares
(excludes 4,064,0105,089,782 treasury shares as of October 26, 2017)April 25, 2019)



TABLE OF CONTENTS
AMERICAN WATER WORKS COMPANY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2017
INDEX
Page
FORWARD LOOKING STATEMENTSForward-Looking Statements
1
 
Part I
 
Item 1.
PART I. FINANCIAL INFORMATIONConsolidated Financial Statements
3
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
22
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
34
Item 4.
Controls and Procedures
35
Part II
 
Item 1.
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTSLegal Proceedings
336
Item 1A.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSRisk Factors
2336
Item 2.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKUnregistered Sales of Equity Securities and Use of Proceeds
3837
Item 3.
ITEMDefaults Upon Senior Securities
37
Item 4. CONTROLS AND PROCEDURES
Mine Safety Disclosures
37
Item 5.
Other Information
37
Item 6.
Exhibits
38
  
PART II. OTHER INFORMATION
39
 
ITEM 1. LEGAL PROCEEDINGSSignatures
39
ITEM 1A. RISK FACTORS
42
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
42
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
42
ITEM 4. MINE SAFETY DISCLOSURES
42
ITEM 5. OTHER INFORMATION
42
ITEM 6. EXHIBITS
43
SIGNATURES
4440
*    *    *

Throughout this Quarterly Report on Form 10-Q (“Form 10-Q”), 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.


i

Table of Contents

FORWARD-LOOKING STATEMENTS
We have made statements in Part I, Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations and in other sections of this Quarterly Report on Form 10-Q, (“Form 10-Q”), 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,things: our future financial performance, including our adjusted operation and maintenance (“O&M”) efficiency ratio,ratio; our liquidity and future cash flows,flows; our growth and portfolio optimization strategies,strategies; our projected capital expenditures and related funding requirements,requirements; our ability to repay debt,debt; our projected strategy to finance current operations and growth initiatives,initiatives; the impact of legal and similar governmental and regulatory proceedings and related potential fines and penalties,penalties; business process, and technology improvement initiatives,and other strategic initiatives; trends in our industry,industry; regulatory, legislative, political, tax policy or legal developments ordevelopments; rate adjustments, including through general rate case filings, filings for infrastructure surcharges and filings to address regulatory lag.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 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 changevariability 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 government actions, including matters related to the Freedom Industries chemical spill in West Virginiagovernmental and the preliminarily approved global class action settlement agreement related to this chemical spill;regulatory proceedings, investigations or actions;
our ability to appropriately maintain current infrastructure, including our operational and information technology (“IT”) systems, and manage the expansion of our business;
exposure or infiltration of our critical infrastructure operationaland our technology and IT systems, including the disclosure of sensitive, personal or confidential information contained therein, through physical or cyber attacks or other disruptions;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 businessregulated and market-based businesses, either individually or in the aggregate, and capitalize on growth opportunities, including our ability to, among other things, things:
acquire, close and successfully integrate water and wastewater systems into our 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 management solutions that aretransfer 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 tax reform,any further rules, regulations, interpretations and guidance by the U.S. Department of the Treasury and state or local taxing authorities 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;
difficulty in obtaining,systems, or the assertion by private landowners of similar rights against us;
our difficulty or inability to obtain insurance, our inability to obtain insurance at acceptable rates and on acceptable terms and conditions, or anour 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;
theour 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 and other statements contained in our Annual Report on Form 10-K for the year ended December 31, 20162018 (“Form 10-K”), and in this Form 10-Q, 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-Q 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.


PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Balance Sheets (Unaudited)
(In millions, except share and per share data) 
September 30, 2017 December 31, 2016March 31, 2019 December 31, 2018
ASSETS
Property, plant and equipment$20,946
 $19,954
$23,476
 $23,204
Accumulated depreciation(5,265) (4,962)(5,853) (5,795)
Property, plant and equipment, net15,681
 14,992
17,623
 17,409
Current assets: 
  
 
  
Cash and cash equivalents93
 75
63
 130
Restricted funds28
 20
22
 28
Accounts receivable, net312
 269
307
 301
Unbilled revenues234
 263
170
 186
Materials and supplies42
 39
44
 41
Other151
 118
85
 95
Total current assets860
 784
691
 781
Regulatory and other long-term assets: 
  
 
  
Regulatory assets1,374
 1,289
1,161
 1,156
Operating lease right-of-use assets116
 —
Goodwill1,373
 1,345
1,575
 1,575
Intangible assets80
 84
Postretirement benefit asset161
 155
Other73
 72
57
 63
Total regulatory and other long-term assets2,820
 2,706
3,150
 3,033
TOTAL ASSETS$19,361
 $18,482
Total assets$21,464
 $21,223
The accompanying notes are an integral part of these consolidated financial statements.

Consolidated Financial Statements.

American Water Works Company, Inc. and Subsidiary Companies
Consolidated Balance Sheets (Unaudited)
(In millions, except share and per share data) 
September 30, 2017 December 31, 2016March 31, 2019 December 31, 2018
CAPITALIZATION AND LIABILITIES
Capitalization:      
Common stock ($0.01 par value, 500,000,000 shares authorized, 182,437,980 and 181,798,555 shares issued, respectively)$2
 $2
Common stock ($0.01 par value; 500,000,000 shares authorized; 185,602,948 and 185,367,158 shares issued, respectively)$2
 $2
Paid-in-capital6,423
 6,388
6,668
 6,657
Accumulated deficit(573) (873)(353) (464)
Accumulated other comprehensive loss(87) (86)(47) (34)
Treasury stock, at cost (4,064,010 and 3,701,867 shares, respectively)(247) (213)
Total common stockholders' equity5,518
 5,218
Treasury stock, at cost (5,089,782 and 4,683,156 shares, respectively)(338) (297)
Total common shareholders' equity5,932
 5,864
Long-term debt6,672
 5,749
7,562
 7,569
Redeemable preferred stock at redemption value9
 10
6
 7
Total long-term debt6,681
 5,759
7,568
 7,576
Total capitalization12,199
 10,977
13,500
 13,440
Current liabilities: 
  
 
  
Short-term debt103
 849
1,201
 964
Current portion of long-term debt687
 574
68
 71
Accounts payable144
 154
130
 175
Accrued liabilities498
 609
406
 556
Taxes accrued61
 31
Interest accrued103
 63
Accrued taxes64
 45
Accrued interest83
 87
Other151
 112
204
 196
Total current liabilities1,747
 2,392
2,156
 2,094
Regulatory and other long-term liabilities: 
  
 
  
Advances for construction279
 300
246
 252
Deferred income taxes, net2,862
 2,596
Deferred investment tax credits23
 23
Deferred income taxes and investment tax credits1,769
 1,740
Regulatory liabilities408
 403
1,891
 1,907
Accrued pension expense421
 419
394
 390
Accrued postretirement benefit expense84
 87
Operating lease liabilities101
 —
Other74
 67
75
 78
Total regulatory and other long-term liabilities4,151
 3,895
4,476
 4,367
Contributions in aid of construction1,264
 1,218
1,332
 1,322
Commitments and contingencies (see Note 9)

 

TOTAL CAPITALIZATION AND LIABILITIES$19,361
 $18,482
Commitments and contingencies (See Note 9)

 

Total capitalization and liabilities$21,464
 $21,223
The accompanying notes are an integral part of these consolidated financial statements.Consolidated Financial Statements.



American Water Works Company, Inc. and Subsidiary Companies
Consolidated Statements of Operations (Unaudited)
(In millions, except per share data)
For the Three Months Ended September 30, For the Nine Months Ended September 30,For the Three Months Ended March 31,
2017 2016 2017 20162019 2018
Operating revenues$936
 $930
 $2,536
 $2,500
$813
 $761
Operating expenses:          
Operation and maintenance324
 432
 1,010
 1,131
365
 347
Depreciation and amortization128
 119
 378
 350
144
 129
General taxes61
 65
 192
 195
69
 70
Gain on asset dispositions and purchases(7) (5) (9) (8)
(Gain) on asset dispositions and purchases(3) (2)
Total operating expenses, net506
 611
 1,571
 1,668
575
 544
Operating income430
 319
 965
 832
238
 217
Other income (expense):          
Interest, net(89) (81) (259) (242)(93) (84)
Loss on early extinguishment of debt(6) —
 (6) —
Non-operating benefit costs, net4
 3
Other, net5
 5
 11
 14
3
 4
Total other income (expense)(90) (76) (254) (228)(86) (77)
Income before income taxes340
 243
 711
 604
152
 140
Provision for income taxes137
 95
 284
 237
39
 34
Net income attributable to common stockholders$203
 $148
 $427
 $367
Net income attributable to common shareholders$113
 $106
          
Basic earnings per share: (a)
          
Net income attributable to common stockholders$1.14
 $0.83
 $2.39
 $2.06
Net income attributable to common shareholders$0.62
 $0.60
Diluted earnings per share:          
Net income attributable to common stockholders$1.13
 $0.83
 $2.39
 $2.05
Net income attributable to common shareholders$0.62
 $0.59
Weighted-average common shares outstanding:          
Basic178
 178
 178
 178
181
 178
Diluted179
 178
 179
 179
181
 179
Dividends declared per common share$0.415
 $0.375
 $0.83
 $0.75
(a)Amounts may not calculate due to rounding.
The accompanying notes are an integral part of these consolidated financial statements.


Consolidated Financial Statements.

American Water Works Company, Inc. and Subsidiary Companies
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(In millions)
 For the Three Months Ended September 30, For the Nine Months Ended September 30,
 2017 2016 2017 2016
Net income attributable to common stockholders$203
 $148
 $427
 $367
Other comprehensive income (loss), net of tax:       
Pension amortized to periodic benefit cost:       
Actuarial loss, net of tax of $1 for the three months and $3 for the nine months ended September 30, 2017 and 2016, respectively1
 1
 5
 4
Foreign currency translation adjustment—
 —
 (1) —
Unrealized loss on cash flow hedges, net of tax of $(3) and $(3) for the three months and $(4) and $(10) for the nine months ended September 30, 2017 and 2016, respectively(3) (4) (5) (15)
Net other comprehensive income (loss)(2) (3) (1) (11)
Comprehensive income (loss) attributable to common stockholders$201
 $145
 $426
 $356
 For the Three Months Ended March 31,
 2019 2018
Net income attributable to common shareholders$113
 $106
Other comprehensive (loss) income, net of tax:   
Defined benefit pension plan actuarial loss (gain), net of tax of $0 and $(1) for the three months ended March 31, 2019 and 2018, respectively1
 (2)
Unrealized (loss) gain on cash flow hedges, net of tax of $(6) and $2 for the three months ended March 31, 2019 and 2018, respectively(14) 6
Net other comprehensive (loss) income(13) 4
Comprehensive income attributable to common shareholders$100
 $110
The accompanying notes are an integral part of these consolidated financial statements.



Consolidated Financial Statements.

American Water Works Company, Inc. and Subsidiary Companies
Consolidated Statements of Cash Flows (Unaudited)
(In millions)
For the Nine Months Ended September 30,For the Three Months Ended March 31,
2017 20162019 2018
CASH FLOWS FROM OPERATING ACTIVITIES      
Net income$427
 $367
$113
 $106
Adjustments to reconcile to net cash flows provided by operating activities:      
Depreciation and amortization378
 350
144
 129
Deferred income taxes and amortization of investment tax credits264
 243
35
 33
Provision for losses on accounts receivable21
 18
4
 3
Gain on asset dispositions and purchases(9) (8)(3) (2)
Pension and non-pension postretirement benefits44
 43
5
 8
Other non-cash, net(39) (48)(28) (10)
Changes in assets and liabilities:      
Receivables and unbilled revenues(34) (83)5
 20
Pension and non-pension postretirement benefit contributions(36) (42)
Pension and postretirement benefit contributions(7) —
Accounts payable and accrued liabilities(22) 184
(87) (73)
Other assets and liabilities, net(8) (79)(13) 5
Net cash provided by operating activities986
 945
168
 219
CASH FLOWS FROM INVESTING ACTIVITIES      
Capital expenditures(964) (928)(326) (364)
Acquisitions(10) (29)
Proceeds from sale of assets and securities9
 5
Acquisitions, net of cash acquired(22) (8)
Proceeds from sale of assets15
 6
Removal costs from property, plant and equipment retirements, net(51) (62)(18) (20)
Net funds restricted(5) —
Net cash used in investing activities(1,021) (1,014)(351) (386)
CASH FLOWS FROM FINANCING ACTIVITIES      
Proceeds from long-term debt1,382
 2
2
 10
Repayments of long-term debt(334) (20)(12) (6)
Net short-term borrowings with maturities less than three months(746) 322
237
 278
Proceeds from issuances of employee stock plans and DRIP21
 22
Advances and contributions for construction, net of refunds of $16 and $17, respectively23
 16
Debt issuance costs(13) (1)
Proceeds from issuances of employee stock plans and direct stock purchase plan, net of taxes paid of $6 and $5 for the three months ended March 31, 2019 and 2018, respectively(1) (1)
Advances and contributions for construction, net of refunds of $9 and $4 for the three months ended March 31, 2019 and 2018, respectively2
 4
Dividends paid(215) (194)(82) (74)
Anti-dilutive stock repurchase(54) (65)
Taxes paid related to employee stock plans(11) (12)
Anti-dilutive share repurchases(36) (45)
Net cash provided by financing activities53
 70
110
 166
Net increase in cash and cash equivalents18
 1
Cash and cash equivalents as of beginning of period75
 45
Cash and cash equivalents as of end of period$93
 $46
Net decrease in cash, cash equivalents and restricted funds(73) (1)
Cash, cash equivalents and restricted funds at beginning of period159
 83
Cash, cash equivalents and restricted funds at end of period$86
 $82
Non-cash investing activity:      
Capital expenditures acquired on account but unpaid as of end of period$175
 $182
Acquisition financed by treasury stock$33
 $—
Capital expenditures acquired on account but unpaid as of the end of period$184
 $175
 
The accompanying notes are an integral part of these consolidated financial statements.


Consolidated Financial Statements.

American Water Works Company, Inc. and Subsidiary Companies
Consolidated Statements of Changes in Stockholders’Shareholders’ Equity (Unaudited)
(In millions)
Common Stock Paid-in-Capital Accumulated Deficit Accumulated Other Comprehensive Loss Treasury Stock Total Stockholders' EquityCommon Stock Paid-in-Capital Accumulated Deficit Accumulated Other Comprehensive Loss Treasury Stock Shareholders' Equity
Shares Par Value Shares At Cost Shares Par Value Shares At Cost 
Balance as of December 31, 2016181.8
 $2
 $6,388
 $(873) $(86) (3.7) $(213) $5,218
Balance as of December 31, 2018185.4
 $2
 $6,657
 $(464) $(34) (4.7) $(297) $5,864
Cumulative effect of change in accounting principle—
 —
 —
 21
 —
 —
 —
 21
—
 —
 —
 (2) —
 —
 —
 (2)
Net income attributable to common stockholders—
 —
 —
 427
 —
 —
 —
 427
Direct stock reinvestment and purchase plan0.1
 —
 6
 —
 —
 —
 —
 6
Employee stock purchase plan—
 —
 5
 —
 —
 —
 —
 5
Stock-based compensation activity0.5
 —
 18
 —
 —
 (0.1) (7) 11
Acquisitions via treasury stock—
 —
 6
 —
 —
 0.4
 27
 33
Repurchases of common stock—
 —
 —
 —
 —
 (0.7) (54) (54)
Net other comprehensive loss—
 —
 —
 —
 (1) —
 —
 (1)
Dividends—
 —
 —
 (148) —
 —
 —
 (148)
Balance as of September 30, 2017182.4
 $2
 $6,423
 $(573) $(87) (4.1) $(247) $5,518
               
Common Stock     Accumulated Other Comprehensive Loss Treasury Stock Total Stockholders' Equity
Shares Par Value Paid-in-Capital Accumulated Deficit Shares At Cost 
Balance as of December 31, 2015180.9
 $2
 $6,351
 $(1,073) $(88) (2.6) $(143) $5,049
Net income attributable to common stockholders—
 —
 —
 367
 —
 —
 —
 367
Net income attributable to common shareholders—
 —
 —
 113
 —
 —
 —
 113
Direct stock reinvestment and purchase plan—
 —
 4
 —
 —
 —
 —
 4
—
 —
 1
 —
 —
 —
 —
 1
Employee stock purchase plan—
 —
 5
 —
 —
 —
 —
 5
—
 —
 2
 —
 —
 —
 —
 2
Stock-based compensation activity0.8
 —
 28
 —
 —
 (0.1) (6) 22
0.2
 —
 8
 —
 —
 (0.1) (5) 3
Repurchases of common stock—
 —
 —
 —
 —
 (1.0) (65) (65)—
 —
 —
 —
 —
 (0.3) (36) (36)
Net other comprehensive loss—
 —
 —
 —
 (11) —
 —
 (11)—
 —
 —
 —
 (13) —
 —
 (13)
Dividends—
 —
 —
 (133) —
 —
 —
 (133)
Balance as of September 30, 2016181.7
 $2
 $6,388
 $(839) $(99) (3.7) $(214) $5,238
Balance as of March 31, 2019185.6
 $2
 $6,668
 $(353) $(47) (5.1) $(338) $5,932
               
Common Stock Paid-in-Capital Accumulated Deficit Accumulated Other Comprehensive Loss Treasury Stock Shareholders' Equity
Shares Par Value Shares At Cost 
Balance as of December 31, 2017182.5
 $2
 $6,432
 $(723) $(79) (4.1) $(247) $5,385
Net income attributable to common shareholders—
 —
 —
 106
 —
 —
 —
 106
Direct stock reinvestment and purchase plan—
 —
 1
 —
 —
 —
 —
 1
Employee stock purchase plan—
 —
 1
 —
 —
 —
 —
 1
Stock-based compensation activity0.2
 —
 4
 —
 —
 (0.1) (5) (1)
Repurchases of common stock—
 —
 —
 —
 —
 (0.5) (45) (45)
Net other comprehensive income—
 —
 —
 —
 4
 —
 —
 4
Balance as of March 31, 2018182.7
 $2
 $6,438
 $(617) $(75) (4.7) $(297) $5,451
The accompanying notes are an integral part of these consolidated financial statements.



Consolidated Financial Statements.

American Water Works Company, Inc. and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited)
(Unless otherwise noted, in millions, except per share data)
Note 1: Basis of Presentation
The unaudited consolidated financial statements providedConsolidated Financial Statements included in this report include the accounts of American Water Works Company, Inc. and all of its subsidiaries (collectively,(the “Company” or “American Water” or the “Company”), in which a controlling interest is maintained after the elimination of intercompany accountsbalances and transactions. The financial statementsunaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting, and with the rules and regulations for reporting on Quarterly Reports on Form 10-Q.10-Q (“Form 10-Q”). Accordingly, they do not contain certain information and disclosures required by GAAP for comprehensive financial statements. In the opinion of management, all adjustments necessary for a fair statement of the financial position as of September 30, 2017March 31, 2019, and the results of operations and cash flows for all periods presented have been made. All adjustments are of a normal, recurring nature, except as otherwise disclosed.
The unaudited Consolidated Balance Sheet as of December 31, 2016 is derived from the Company’s audited consolidated financial statements as of December 31, 2016. The unaudited consolidated financial statementsFinancial Statements and notesNotes included in this report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 20162018 (“Form 10-K”), which provides a more complete discussion of the Company’s accounting policies, financial position, operating results and other matters. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the year, primarily due primarily to the seasonality of the Company’s operations.
Note 2: Significant Accounting Policies
New Accounting Standards
The Company adopted the following accounting standard on January 1, 2017:standards were adopted by the Company in 2019:
Standard Description 
Date of
Adoption
 Application 
Effect on the Consolidated Financial Statements
(or Other Significant Matters)
Simplification of Employee Share-Based Payment Accounting
Simplified accounting and disclosure requirements for share-based payment awards. The updated guidance addresses simplification in areas such as: (i) the recognition of excess tax benefits and deficiencies; (ii) the classification of excess tax benefits and taxes paid on the Consolidated Statements of Cash Flows; (iii) election of an accounting policy for forfeitures; and (iv) the amount an employer can withhold to cover income taxes and still qualify for equity classification.

January 1, 2017
Modified retrospective for the recognition of excess tax benefits and deficiencies; full retrospective for the classification of excess tax benefits and taxes paid on the Consolidated Statements of Cash Flows

The cumulative effect of adoption increased retained earnings by $21, with an offsetting decrease to deferred income taxes, net. Adoption also increased cash flows from operating activities and decreased cash flows from financing activities by $17 and $20 for the nine months ended September 30, 2017 and 2016, respectively, on the Consolidated Statements of Cash Flows.



The following recently issued accounting standards are not yet required to be adopted by the Company as of September 30, 2017:
StandardDescription
Date of
Adoption
Permitted Application
Estimated Effect on the Consolidated Financial Statements
(or Other Significant Matters)
Revenue from Contracts with Customers
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.

January 1, 2018; early adoption permittedFull or modified retrospective
The Company has substantially completed its evaluation and does not expect a material change. The Company continues to monitor for new interpretative guidance, which could impact the current evaluation. The Company plans to adopt using the modified retrospective method.

Classification of Certain Cash Receipts and Cash Payments on the Statement of Cash FlowsProvides guidance on the presentation and classification in the statement of cash flows for the following cash receipts and payments: (i) debt prepayment or debt extinguishment costs; (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (iii) contingent consideration payments made after a business combination; (iv) proceeds from the settlement of insurance claims; (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (vi) distributions received from equity method investees; (vii) beneficial interests in securitization transactions and (viii) separately identifiable cash flows and application of the predominance principle.January 1, 2018; early adoption permittedRetrospective
The Company will reclassify a $34 make-whole premium payment from operating activities to financing activities on its Consolidated Statements of Cash Flows upon adoption. See Note 6: Long-Term Debt in the Notes to Consolidated Financial Statements for further information regarding this make-whole premium payment.

Presentation of Changes in Restricted Cash on the Statement of Cash FlowsUpdates the accounting and disclosure guidance for the classification and presentation of changes in restricted cash on the statements of cash flows. The amended guidance requires that the statements of cash flows explain the change during the period in the total of cash, cash equivalents and amounts described as restricted cash or restricted cash equivalents. Restricted cash and restricted cash equivalents will now be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows.January 1, 2018; early adoption permittedRetrospectiveThe Company does not anticipate significant impacts on its Consolidated Statements of Cash Flows.
Clarifying the Definition of a BusinessUpdates 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.January 1, 2018; early adoption permittedProspectiveThe update could result in more acquisitions being accounted for as asset acquisitions. The effect on the Company’s consolidated financial statements will be dependent on the acquisitions that close subsequent to adoption.
Gains and Losses from the Derecognition of Nonfinancial AssetsUpdated the guidance to clarify the accounting for gains and losses resulting from the derecognition of nonfinancial assets and partial sale of nonfinancial assets. The guidance also clarifies the definition of an in-substance nonfinancial asset.January 1, 2018; early adoption permittedFull or modified retrospective
The Company does not expect the adoption to have a material impact on its consolidated financial statements. The Company plans to adopt using the modified retrospective method.


Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit CostUpdated authoritative guidance requires 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; early adoption permittedRetrospective for the presentation of net periodic benefit cost components in the income statement; prospective for the capitalization of net periodic benefit costs components in total assetsLeases
 The Company will reclassify net periodic benefit cost components, other than the service cost component, to other, net in the Consolidated Statements of Operations. The Company will continue to capitalize and will record net periodic benefit costs probable of recovery from customers as a regulatory asset or liability, other than the service cost components.
Accounting for Leases

Updated the accounting and disclosure guidance for leasing arrangements. Under this guidance, a lessee will beis 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. UnderA package of optional transition practical expedients allows an entity not to reassess under the new guidance lessor accounting is largely unchanged.

(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.		 
January 1, 2019; early adoption permitted


2019		 
Modified retrospective

 
The Company is evaluating the effect on its consolidated financial statements.




See Note 12—Leases.
StandardDescription
Date of
Adoption
Permitted ApplicationEstimated Effect on the Consolidated Financial Statements
(or Other Significant Matters)
Targeted Improvements to Accounting for Hedging Activities

 
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.

 
January 1, 2019; early adoption permitted

2019		 
Modified retrospective for adjustments related to the measurement of ineffectiveness for cash flow hedges; prospective for the updated presentation and disclosure requirements

requirements.		 
The Company doesadoption did not expect the adoption to have a material impact on its consolidated financial statementsthe Consolidated Financial Statements.
Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting PurposesDesignated the OIS rate based on the hedges heldSOFR as of the balance sheet date. The Company is evaluating the timing of adoption.

Simplification of Goodwill Impairment TestingUpdated authoritative guidance which simplifies 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 recognizedeligible U.S. benchmark interest rate for the amount by which the carrying value exceeds the reporting unit’s fair value, however, the loss recognized should not exceed the total amountpurposes 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.applying hedge accounting. January 1, 2020; early adoption permitted2019 Prospective
 
The Company is evaluating theadoption did not have a material impact on its consolidated financial statements, as well as the timing of adoption.Consolidated Financial Statements.

The following recently issued accounting standards have not yet been adopted by the Company as of March 31, 2019:
StandardDescriptionDate of AdoptionApplicationEstimated Effect on the Consolidated Financial Statements
Measurement of Credit Losses on Financial Instruments 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. January 1, 2020; early adoption permitted Modified retrospective The Company is evaluating the impact on its consolidated financial statements,the Consolidated Financial Statements, as well as the timing of adoption.
Changes to the Disclosure Requirements for Fair Value MeasurementUpdated 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 permittedProspective for added disclosures and for the narrative description of measurement uncertainty; retrospective for all other amendments.
The standard will not have a material impact on the Consolidated Financial Statements. The Company is evaluating the timing of adoption.

Cash, Cash Equivalents and Restricted 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 periods ended March 31:
 2019 2018
Cash and cash equivalents$63
 $55
Restricted funds22
 26
Restricted funds included in other long-term assets1
 1
Cash, cash equivalents and restricted funds as presented on the Consolidated Statements of Cash Flows$86
 $82
Reclassifications
Certain reclassifications have been made to prior periods in the Consolidated Financial Statements and Notes to conform to the current presentation.
Note 3: Revenue Recognition
Disaggregated Revenues
The Company’s primary business involves the ownership of regulated utilities that provide water and wastewater services to residential, commercial, industrial, public authority, fire service and sale for resale customers, collectively presented as the Company’s “Regulated Businesses.” The Company also operates market-based businesses that 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 the Company’s “Market-Based Businesses.”

The following table provides operating revenues disaggregated for the three months ended March 31, 2019:

Revenues from Contracts with Customers Other Revenues Not from Contracts with Customers (a) Total Operating Revenues
Regulated Businesses:     
Water services:     
Residential$378
 $—
 $378
Commercial136
 —
 136
Fire service34
 —
 34
Industrial32
 —
 32
Public and other45
 —
 45
Total water services625
 —
 625
Wastewater services: 
    
Residential29
 —
 29
Commercial7
 —
 7
Industrial1
 —
 1
Public and other3
 —
 3
Total wastewater services40
 —
 40
Miscellaneous utility charges10
 —
 10
Alternative revenue programs—
 7
 7
Lease contract revenue—
 3
 3
Total Regulated Businesses675
 10
 685
Market-Based Businesses134
 —
 134
Other(5) (1) (6)
Total operating revenues$804
 $9
 $813
(a)
Includes revenues associated with alternative revenue programs, lease contracts and intercompany rent which are outside the scope of Accounting Standards Codification Topic 606, Revenue From Contracts With Customers,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 March 31, 2019.

The following table provides the changes in contract assets and liabilities for the three months ended March 31, 2019:
 Amount
Contract assets: 
Balance as of January 1, 2019$14
Additions6
Transfers to accounts receivable, net(13)
Balance as of March 31, 2019$7
  
Contract liabilities: 
Balance as of January 1, 2019$20
Additions19
Transfers to operating revenues(16)
Balance as of March 31, 2019$23
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 U.S. military, municipalities and other customers. As of March 31, 2019, 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 March 31, 2019, 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 $585 million as of March 31, 2019, as measured by estimated remaining contract revenue.
Note 4: Acquisitions
During the ninethree months ended September 30, 2017,March 31, 2019, the Company closed on 14 acquisitionsthe acquisition of variousthree regulated water and wastewater systems for a total aggregate purchase price of $43. Included in this total was the Company’s acquisition of all the outstanding capital stock of the Shorelands Water Company, Inc. on April 3, 2017, for total consideration of $33, in the form of approximately 0.4 shares of the Company’s common stock.$22 million. Assets acquired in the aforementionedthese acquisitions, principally utility plant, totaled $40. Liabilities assumed totaled $23, including $10 of contributions in aid of construction and assumed debt of $7. The Company recorded additional goodwill of $28 associated with three of the acquisitions, which is reported in the Company’s Regulated Businesses segment, and recognized a bargain purchase gain of $2 associated with one of the acquisitions.$22 million. 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.
Note 5: Shareholders' Equity
Anti-Dilutive Stock Repurchase Program
During the first quarter of 2017,three months ended March 31, 2019, the Company made a non-escrowed depositrepurchased 0.4 million shares of $2 related toits common stock in the asset purchase agreement to acquire substantially allopen market at an aggregate cost of $36 million under the wastewater collection and treatment system assets of the Municipal Authority of the City of McKeesport, Pennsylvania for approximately $159. On October 26, 2017, a joint petition for settlement of this acquisition was approvedanti-dilutive stock repurchase program authorized by the Pennsylvania Public Utility Commission. The closingCompany’s Board of this acquisition is subject toDirectors in 2015. As of March 31, 2019, there were 5.1 million shares of common stock available for repurchase under the satisfaction of various conditions and covenants. The Company expects to close this acquisition by the end of 2017.

program.

Note 4: Stockholders’ Equity
Accumulated Other Comprehensive Loss
The following table presentsprovides the changes in accumulated other comprehensive loss by component, net of tax, for the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, respectively:
Defined Benefit Plans Foreign Currency Translation Gain (Loss) on Cash Flow Hedges Accumulated Other Comprehensive LossDefined Benefit Plans Foreign Currency Translation Gain (Loss) on Cash Flow Hedges Accumulated Other Comprehensive Loss
Employee
Benefit Plan
Funded Status		 Amortization
of Prior
Service Cost		 Amortization
of Actuarial
Loss		 Employee Benefit Plan Funded Status Amortization of Prior Service Cost Amortization of Actuarial Loss 
Beginning balance as of December 31, 2016$(147) $1
 $42
 $2
 $16
 $(86)
Balance as of December 31, 2018$(102) $1
 $56
 $1
 $10
 $(34)
Other comprehensive loss before reclassifications—
 —
 —
 (1) (5) (6)—
 —
 —
 —
 (14) (14)
Amounts reclassified from accumulated other comprehensive loss—
 —
 5
 —
 —
 5
—
 —
 1
 —
 —
 1
Net other comprehensive income (loss)—
 —
 5
 (1) (5) (1)—
 —
 1
 —
 (14) (13)
Ending balance as of September 30, 2017$(147) $1
 $47
 $1
 $11
 $(87)
Balance as of March 31, 2019$(102) $1
 $57
 $1
 $(4) $(47)
                      
Beginning balance as of December 31, 2015$(126) $1
 $36
 $2
 $(1) $(88)
Other comprehensive loss before reclassifications—
 —
 —
 —
 (15) (15)
Balance as of December 31, 2017$(140) $1
 $49
 $1
 $10
 $(79)
Other comprehensive income before reclassifications—
 —
 —
 —
 6
 6
Amounts reclassified from accumulated other comprehensive loss—
 —
 4
 —
 —
 4
—
 —
 (2) —
 —
 (2)
Net other comprehensive income (loss)—
 —
 4
 —
 (15) (11)—
 —
 (2) —
 6
 4
Ending balance as of September 30, 2016$(126) $1
 $40
 $2
 $(16) $(99)
Balance as of March 31, 2018$(140) $1
 $47
 $1
 $16
 $(75)
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 havehas been capitalized as a regulatory asset. These accumulated other comprehensive income loss components are included in the computation of net periodic pension cost. See Note 8— Pension and Other Postretirement Benefits.
The amortization of the lossgain (loss) on cash flow hedges is reclassified to net income during the period incurred and is included in interest, net in the accompanying Consolidated Statements of Operations.
Anti-dilutive Stock Repurchase ProgramDividends
During the nine months ended September 30, 2017,On March 1, 2019, the Company repurchased 0.7 sharespaid a cash dividend of common stock in the open market at an aggregate cost$0.455 per share to shareholders of $54 under the anti-dilutive stock repurchase program authorized byrecord as of February 7, 2019.
On April 17, 2019, the Company’s Board of Directors declared a quarterly cash dividend payment of $0.50 per share, payable on June 4, 2019 to shareholders of record as of May 13, 2019. Future dividends, when and as declared at the discretion of the Board of Directors, will be dependent upon future earnings and cash flows, compliance with various regulatory, financial and legal requirements, and other factors. See Note 9—Shareholders' Equity in 2015. Asthe Notes to Consolidated Financial Statements in the Company’s Form 10-K for additional information regarding the payment of September 30, 2017, there were 6.1 shares ofdividends on the Company’s common stock available for repurchase under the program.stock.
Note 5: Stock Based Compensation
On May 12, 2017, the Company’s stockholders approved the American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan (the “2017 Omnibus Plan”). A total of 7.2 shares of common stock may be issued 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, which may be granted only on stock units or other stock-based awards.


Note 6: Long-Term Debt
The following table provides the issuances of long-term debt was issued during the ninethree months ended September 30, 2017:March 31, 2019:
Company Type Rate Maturity Amount Type Rate Maturity Amount
American Water Capital Corp. (a)
 Senior Notes 2.95%-3.75% 2027-2047 $1,350
 
Private activity bonds and government funded debt—fixed rate (a)
 0.00%-5.00% 2021-2047 $2
Other American Water subsidiaries Private activity bonds and government
funded debt—fixed rate		 0.00%-3.92% 2020-2036 21
Other American Water subsidiaries Term Loan 4.48%-4.98% 2021 11
Total issuances       $1,382
       $2
(a)American Water Capital Corp. (“AWCC”), which is a wholly owned subsidiary ofThis debt relates to the Company, has a support agreement with the Company that, under certain circumstances, is the functional equivalent of a parent company guarantee. This indebtedness is considered “debt” for purposes of this support agreement.New Jersey Environmental Infrastructure Financing Program.

The following table provides the long-term debt that was retired through sinking fund provisions, optional redemptions or payment at maturity during the ninethree months ended September 30, 2017:March 31, 2019:
Company Type Rate Maturity Amount Type Rate Maturity Amount
American Water Capital Corp. Senior Notes 5.62%-5.77% 2018-2021 $319
 Private activity bonds and government funded debt—fixed rate 1.79%-2.90% 2021-2031 $1
American Water Capital Corp. Private activity bonds and government
funded debt—fixed rate		 1.79%-2.90% 2021-2031 1
Other American Water subsidiaries Private activity bonds and government funded debt—fixed rate 0.00%-5.50% 2019-2048 3
Other American Water subsidiaries Private activity bonds and government
funded debt—fixed rate		 0.00%-5.38% 2017-2041 12
 Mortgage bonds—fixed rate 7.84% 2019 1
Other American Water subsidiaries Term Loan 4.48%-4.98% 2021 1
 Term loan 5.76%-5.81% 2021 6
Other American Water subsidiaries Mandatorily redeemable preferred stock 8.49% 2036 1
 Mandatorily redeemable preferred stock 8.49% 2036 1
Total retirements and redemptions       $334
       $12
On August 10, 2017, AWCC completed a $1,350 debt offering which included the sale of $600 aggregate principal amount of its 2.95% Senior Notes due in 2027 and $750 aggregate principal amount of its 3.75% Senior Notes due in 2047. At the closing of the offering, AWCC received, after deduction of underwriting discounts and debt issuance costs, $1,333. On September 13, 2017, AWCC used proceeds from the offering to: (i) prepay $138 of its outstanding 5.62% Series C Senior Notes due December 21, 2018 (“Series C Senior Notes”) and $181 of its outstanding 5.77% Series D Senior Notes due December 21, 2021 (“Series D Senior Notes”); (ii) repay commercial paper obligations; and (iii) for general corporate purposes. Subsequently, AWCC used proceeds from the offering to repay at maturity, $524 of its 6.085% Senior Notes on October 15, 2017. In addition, theThe Company repaid $33 of 7.08% subsidiary debt at maturity on November 1, 2017.
As a result of AWCC’s prepayment of the Series C and Series D Senior Notes and payment of a make-whole premium to the holders thereof of $34, the Company recorded an early debt extinguishment charge of $6, which was associated with the portion of the debt allocable to the Company’s parent. Substantially all of the early debt extinguishment costs allocable to the Company’s utility subsidiaries were recorded as regulatory assets that the Company believes are probable of recovery in future rates.
On August 7, 2017, the Company terminated fourhas five forward starting swap agreements with an aggregate notional amount of $300, realizing a gain of $19 to be amortized through interest, net over 30 years. The Company has one remaining forward starting swap agreement, which was entered into on February 8, 2017, with a notional amount of $100$510 million to reduce interest rate exposure for a portion of theon debt expected refinancing of AWCC’s Series C Senior Notes. Thisto be issued in 2019. These forward starting swap agreement terminatesagreements terminate in November 2018December 2019, and hashave an average fixed rate of 2.67%3.04%. The Company has designated thisthese forward starting swap agreementagreements as a cash flow hedgehedges, with itstheir 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 an interest rate swap to hedge $100 of its 6.085% Senior Notes maturing in the fourth quarter of 2017. The Company pays variable interest of six-month LIBOR plus 3.422% and has designated this interest rate swap as a fair value hedge accounted for at fair value with gains or losses, as well as the offsetting gains or losses on the hedged item, recognized in interest, net. The net gain and loss recognized by the Company for the three and nine months ended September 30, 2017 and 2016 was de minimis. This interest rate swap matured on October 15, 2017.


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 $6.$3 million. The Company has designated these interest rate swapsinstruments as economic hedges, accounted for at fair value, with gains or losses deferred as a regulatory asset or regulatory liability.recognized in interest, net. The net gain recognized by the Company for the three and nine months ended September 30, 2017March 31, 2019 and 20162018 was de minimis.
No ineffectiveness was recognized on hedging instruments for the three and nine months ended September 30, 2017March 31, 2019 and 2016.2018.
The following table provides a summary of the gross fair value forof the Company’s derivative asset and liabilities, as well as the location of the asset and liability balances inon the Consolidated Balance Sheets:
Derivative Instruments Derivative Designation Balance Sheet Classification September 30, 2017 December 31, 2016
Asset Derivative      
  
Forward starting swaps Cash flow hedge Other current assets $—
 $27
Interest rate swap Fair value hedge Other current assets —
 1
         
Liability Derivative      
  
Interest rate swap Fair value hedge Current portion of long-term debt $—
 $1
Forward starting swaps Cash flow hedge Other long-term liabilities 2
 —
Derivative Instrument Derivative Designation Balance Sheet Classification March 31, 2019 December 31, 2018
Liability derivative:      
  
Forward starting swaps Cash flow hedge Other current liabilities $34
 $14
Note 7: Income Taxes
The Company’s effective income tax rate was 40.3%25.7% and 39.1%24.3% for the three months ended September 30, 2017March 31, 2019 and 2016, respectively, and 39.9% and 39.2% for2018, respectively. The increase in the nine months ended September 30, 2017 and 2016, respectively. 
On April 11, 2017, the State of New York enacted legislation that increased the stateCompany’s effective income tax rate onwas primarily due to changes in executive compensation and other deductions under the Company’s taxable income attributable to New York. This legislation eliminated the production of water as a qualified manufacturing activity in New York, which effectively increased the state income tax rate in New York. As a result of the legislative change, the Company was required to re-measure its cumulative deferred tax balances using the higher state income tax rate in the second quarter of 2017. This change in legislation was the primary cause of an increase to the Company’s unitary deferred tax liability of $11. The portion of this increase related to the Company’s New York subsidiary calculated on a stand-alone basis was $7,Tax Cuts and was offset by a regulatory asset, as the Company believes it is probable of recovery in future rates. The remaining increase in the deferred tax liability was calculated through state tax apportionment rates and recorded at the consolidated level, resulting in a non-cash, cumulative charge to earnings of $4 during the second quarter of 2017.
On July 7, 2017, the State of Illinois enacted legislation that increased, effective July 1, 2017, the state income tax rate on the Company’s taxable income attributable to Illinois from 7.75% to 9.5%. As a result of the legislative change, the Company was required to re-measure its cumulative deferred tax balances using the higher state income tax rate in the third quarter of 2017. This change in legislation was the primary cause of the increase to the Company’s unitary deferred tax liability of $7. The portion of this increase related to the Company’s Illinois subsidiary calculated on a stand-alone basis was $4, and was offset by a regulatory asset, as the Company believes it is probable of recovery in future rates. The remaining increase in the deferred tax liability was recorded at the consolidated level, resulting in a non-cash, cumulative charge of $3 during the third quarter of 2017.

Jobs Act.

Note 8: Pension and Other Postretirement Benefits
The following table provides the components of net periodic benefit costs:cost (credit):
For the Three Months Ended September 30, For the Nine Months Ended September 30,For the Three Months Ended March 31,
2017 2016 2017 20162019 2018
Components of net periodic pension benefit cost       
Service cost$8
 $8
 $25
 $24
Interest cost20
 20
 60
 60
Expected return on plan assets(23) (24) (70) (72)
Amortization of actuarial loss9
 7
 27
 21
Net periodic pension benefit cost$14
 $11
 $42
 $33
       
Components of net periodic other postretirement benefit cost       
Components of net periodic pension benefit cost:   
Service cost$3
 $3
 $8
 $9
$7
 $9
Interest cost7
 7
 20
 22
20
 19
Expected return on plan assets(7) (7) (20) (20)(22) (25)
Amortization of prior service credit(5) (3) (14) (4)(1) —
Amortization of actuarial loss3
 1
 8
 3
8
 7
Net periodic other postretirement benefit cost$1
 $1
 $2
 $10
Net periodic pension benefit cost$12
 $10
   
Components of net periodic other postretirement benefit credit:   
Service cost$1
 $3
Interest cost3
 6
Expected return on plan assets(4) (7)
Amortization of prior service credit(8) (5)
Amortization of actuarial loss1
 1
Net periodic other postretirement benefit credit$(7) $(2)
The Company made contributionscontributed $7 million for the funding of its defined benefit pension plans of $11 and $8 for the three months ended September 30, 2017March 31, 2019, and 2016, respectively, and $31 and $25made no funding contributions for the ninethree months ended September 30, 2017 and 2016, respectively, and expects to contribute $9 during the remainder of 2017. In addition, theMarch 31, 2018. The Company made no contributions for the funding of its other postretirement benefit plans for each of $2 and $6 for the three months ended September 30, 2017March 31, 2019 and 2016, respectively, and $5 and $17 for the nine months ended September 30, 2017 and 2016, respectively, and2018. The Company expects to contribute $1make pension contributions to the plan trusts of up to $24 million during the remainder of 2017.2019.
Note 9: Commitments and Contingencies
Contingencies
The Company is routinely involved in legal actions incident to the normal conduct of its business. As of September 30, 2017,March 31, 2019, the Company has accrued approximately $139$28 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 $27.$24 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 9,9—Commitments and Contingencies, will not have a material adverse effect on the Company.
West Virginia Elk River Freedom Industries Chemical Spill
Background
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 9, 2014 a chemical storage tank owned by Freedom Industries, Inc. leaked two substances, 4-methylcyclohexane methanol, or “MCHM”,chemical spill in West Virginia. The effective date of the Settlement was July 16, 2018.
Under the terms and PPH/DiPPH, a mixconditions of polyglycol ethers, into the Elk River near theSettlement, West Virginia-American Water Company (“WVAWC”) treatment plant intake in Charleston, West Virginia. After having been alerted to the leak of MCHM by the West Virginia Department of Environmental Protection (“DEP”), WVAWC took immediate steps to gather more information about MCHM, augment its treatment process as a precaution, and begin consultations with federal, state and local public health officials. As soon as possible after it was determined that the augmented treatment process would not fully remove the MCHM, a joint decision was reached in consultation with the West Virginia Bureau for Public Health to issue a “Do Not Use” order for all of its approximately 93,000 customer accounts in parts of nine West Virginia counties served by the Charleston treatment plant. By January 18, 2014, none of WVAWC’s customers were subject to the Do Not Use order.


Following the Freedom Industries chemical spill, numerous lawsuits were filed against WVAWC and certain other Company affiliated entities (collectively, the “American Water Defendants”) with respect to this matter in the U.S. District Court for the Southern District of West Virginia or West Virginia Circuit Courts in Kanawha, Boone and Putnam counties, and to date, 74 cases remain pending. Four of the cases pending before the U.S. district court were consolidated for purposes of discovery, and an amended consolidated class action complaint for those cases (the “Federal action”) was filed in December 2014 by several plaintiffs. On January 28, 2016, all of the then-filed state court cases were referred to West Virginia’s Mass Litigation Panel for further proceedings, which have been stayed pending the negotiation by the parties and approval by the court in the Federal action of a global agreement to settle all of such cases, as described below. On July 7, 2016, the court in the Federal action scheduled trial to begin on October 25, 2016, but the court has granted several continuances of the trial, which is currently postponed indefinitely in light of the preliminarily approved global settlement agreement described below. The Mass Litigation Panel has also stayed its proceedings until January 23, 2018.
Preliminary Approval of WVAWC Global Class Action Litigation Settlement
On October 31, 2016, the court in the Federal action approved the preliminary principles, terms and conditions of a binding global agreement in principle to settle claims among the American Water Defendants, and all class members, putative class members, claimants and potential claimants, arising out of the Freedom Industries chemical spill. On April 27, 2017, the parties filed with the court in the Federal action a proposed settlement agreement providing details of the terms of the settlement of these matters and requesting that the court in the Federal action grant preliminary approval of such settlement. On July 6, 2017, the court in the Federal action issued an opinion denying without prejudice the joint motion for preliminary approval of the Settlement. On August 25, 2017, the parties filed a proposed amended settlement agreement and related materials addressing the matters set forth in the July 6, 2017 order.
On September 21, 2017, the court in the Federal action issued an order granting preliminary approval of a settlement class and proposed class action settlement (the “Settlement”) with respect to claims against the American Water Defendants by all putative class members (collectively, the “Plaintiffs”) for all claims and potential claims arising out of the Freedom Industries chemical spill. The Settlement proposes a global resolution of all federal and state litigation and potential claims against the American Water Defendants and their insurers. Under the terms and conditions of the Settlement and the proposed amended settlement agreement, the American Water Defendants havedid not admitted,admit, and will not admit, any fault or liability for any of the allegations made by the Plaintiffs in any of the actions to bethat were resolved. Under federal class action rules, a claimant mayclaimants had the right, until December 8, 2017, to elect to opt out of the final Settlement. Less than 100 of the estimated 225,000 putative class members elected to opt out from the Settlement, in which case such claimantand these claimants will not receive any benefit from or be bound by the terms of the Settlement. The American Water Defendants would have
In June 2018, the right to withdraw from the Settlement if more than a certain number of putative class members opt out of the Settlement. The deadline imposed by the court in the Federal action for any Plaintiff to opt out of the Settlement or file an objection to the Settlement is December 8, 2017.
The proposed aggregate pre-tax amount of the Settlement is $126, of which $43 would be contributed by WVAWC,Company and the remainder would be contributed by certain of the Company’sits remaining non-participating general liability insurance carriers. The WVAWC contribution was reduced from $65 to $43 ($26 after tax) due tocarrier settled for a settlement in the third quarter of 2017 with another of the Company’s general liability insurance carriers, as discussed below. The Company has general liability insurance under a series of policies underwritten by a number of individual carriers. Two of these insurance carriers, which provide an aggregate of $50 in insurance coveragepayment to the Company under these policies, had been originally requested to participate in the Settlement at the time of the initial filing of the binding agreement in principle with the court in the Federal action, but did not agree to do so at that time. WVAWC filed a lawsuit against one of these carriers alleging that the carrier’s failure to agree to participate in the Settlement constituted a breach of contract. On September 19, 2017, the Company and the insurance carrier settled this lawsuit for $22,$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 Company and WVAWCAmerican Water Defendants of all claims against the insurance carrier related to the Freedom Industries chemical spill. WVAWC and the settling insurer have agreed to stay this litigation pending final approval of the Settlement. The Company and WVAWC continue to pursue vigorously their rights to insurance coverage for contributions by WVAWC to the Settlement in mandatory arbitration with the remaining non-participating carrier. This arbitration proceeding remains pending.

The proposed Settlement would establish a two-tier settlement fund for the payment of claims, comprised of (i) a simple claim fund, which is also referred to as the “guaranteed fund,” of $76, of which $29 will beaggregate pre-tax amount contributed by WVAWC including insurance deductibles, and $47 would be contributed by two of the Company’s general liability insurance carriers, and (ii) an individual review claim fund of up to $50, of which up to $14 would be contributed by WVAWC and up to $36 would be contributed by a number of the Company’s general liability insurance carriers. Separately, up to $25 would be contributed to the guaranteed fund by another defendant to the Settlement. If any final approval order by the court in the Federal action$126 million Settlement with respect to the Settlement is appealed and such appeal would delay potential payment to claimants under the Settlement, WVAWC and the other defendant to the Settlement will contribute up to $50 and $25, respectively, to the Settlement (not including, in the case of WVAWC, any contributions by the Company’s general liability insurance carriers which would not be made until such time as a final, non-appealable order is issued) into an escrow account during the pendency of such appeals. For certain claims, WVAWC and the other defendant to the Settlement may, in lieu of these escrowed contributions, make advance payments of such claims if agreed to by the parties. All administrative expenses of the Settlement and attorneys’ fees of class counsel related thereto would be paid from the funds designated to pay claims covered by the Settlement.


As a result of these events, in the third quarter of 2016, the Company, recorded a charge to earnings, net of insurance receivables,recoveries, is $19 million. As of $65 ($39 after-tax). Additionally, inMarch 31, 2019, $15 million of the third quarter of 2017, the Company recorded a benefit of $22 ($13 after-tax) as an additional insurance receivable reflecting the settlement with the insurance carrier described above. The settlementaggregate Settlement amount of $126 ismillion has been reflected in Accrued Liabilitiesaccrued liabilities, and $15 million in offsetting insurance receivables has been reflected in other current assets, each on the Consolidated Balance Sheets. The amount reflected in accrued liabilities as of March 31, 2019 reflects: (i) payments of $15 million made by WVAWC during the first quarter of 2019 under the terms of the Settlement; and (ii) an additional $10 million reduction in the liability, $6 million of which was also reflected as a reduction to the offsetting insurance receivables arereceivable reflected in Other Current Assets in the Consolidated Balance Sheet as of September 30, 2017.other current assets. The Company intends to fundhas funded WVAWC’s contributions to the Settlement through existing sources of liquidity, although no contribution by WVAWC will be required unless and until the terms of the Settlement are finally approved by the court in the Federal action. Furthermore, under the terms of the Settlement, WVAWC has agreed that it will not seek rate recovery from the Public Service Commission of West Virginia for approximately $4 in direct response costs expensed in 2014 by WVAWC relating to the Freedom Industries chemical spill as well as for amounts paid by WVAWC under the Settlement.
The Company’s insurance policies operate under a layered structure where coverage is generally provided in the upper layers after claims have exhausted lower layers of coverage. The $36 to be contributed by a number of the Company’s general liability insurance carriers to the individual review claim fund, as noted above, is from higher layers of the insurance structure than the insurance carrier that was requested, but presently has not agreed, to participate in the Settlement. Any recovery by WVAWC or the Company from the remaining non-participating carrier would reimburse WVAWC for its contributions to the guaranteed fund.
Other Related Proceedings
Additionally, investigations with respect to the matter have been initiated by the U.S. Chemical Safety and Hazard Investigation Board (the “CSB”), the U.S. Attorney’s Office for the Southern District of West Virginia, the West Virginia Attorney General, and the Public Service Commission of West Virginia (the “PSC”). As a result of the U.S. Attorney’s Office investigation, Freedom Industries and six former Freedom Industries employees (three of whom also were former owners of Freedom Industries), pled guilty to violations of the federal Clean Water Act.
In May 2014, the PSC issued an Order initiating a General Investigation into certain matters relating to WVAWC’s response to the Freedom Industries chemical spill. Three parties intervened in the proceeding, including the Consumer Advocate Division of the PSC and two attorney-sponsored groups, including one sponsored by some of the plaintiffs’ counsel involved in the civil litigation described above. On January 26, 2017, WVAWC and the other parties agreed to resolve the General Investigation and filed a joint stipulation with the PSC containing the terms of the settlement. The parties to the joint stipulation filed a proposed order with the PSC on February 8, 2017. On June 15, 2017, the PSC entered an order accepting the joint stipulation that had been filed by the parties in January 2017 as a reasonable basis for resolving the General Investigation and removing the proceeding from the docket. The PSC’s order did not require WVAWC to take any further action with respect to the matters covered by the General Investigation. The PSC order concludes the General Investigation.
The CSB is an independent investigatory agency with no regulatory mandate or ability to issue fines or citations; rather, the CSB can only issue recommendations for further action. In response to the Freedom Industries chemical spill, the CSB commenced an investigation shortly thereafter. On September 28, 2016, the CSB issued and adopted its investigation report in which it recommended that the Company conduct additional source water protection activities. The Company provided written comments to the CSB’s report suggesting that the recommendation made to the Company would be better directed to the U.S. Environmental Protection Agency in order to promote industry-wide implementation of the CSB’s recommendation. On February 15, 2017, the Company filed a response to the CSB’s recommendation. On April 4, 2017, the CSB indicated that the implementation by the Company of source water protection activities resolved the first two parts of the CSB’s recommendation. The CSB also noted that compliance by the Company with the third part of its recommendation is ongoing and that closure of this part is contingent upon completion of updated contingency planning for the Company’s water utilities outside of West Virginia. In light of public response to its original September 2016 investigation report, on May 11, 2017, the CSB issued a new version of this report. The primary substantive change addressed CSB’s factual evaluation of the duration and volume of contamination from the leaking tank, decreasing its estimate of the leak time but increasing the volume estimate by 10%. No substantive changes were made to the conclusions and recommendations in the original report.
On March 16, 2017, the Lincoln County (West Virginia) Commission (the “LCC”) passed a county ordinance entitled the “Lincoln County, WV Comprehensive Public Nuisance Investigation and Abatement Ordinance.” The ordinance establishes a mechanism that Lincoln County believes will allow it to pursue criminal or civil proceedings for the “public nuisance” it alleges was caused by the Freedom Industries chemical spill. On April 20, 2017, the LCC filed a complaint in Lincoln County state court against WVAWC and certain other defendants not affiliated with the Company, alleging that the Freedom Industries chemical spill caused a public nuisance in Lincoln County. On June 12, 2017, the Mass Litigation Panel entered an order granting a motion to transfer this case to its jurisdiction and stayed the case consistent with the existing stay order. The complaint seeks an injunction against WVAWC that would require the creation of various databases and public repositories of documents related to this chemical spill, as well as further study and risk assessments regarding the alleged exposure by Lincoln County residents to the released chemicals. WVAWC believes that the lawsuit is without merit and intends to vigorously contest the claims and allegations raised in the complaint.


California Public Utilities Commission Residential Rate Design Proceeding
In December 2016, the California Public Utilities Commission (the “CPUC”) issued a final decision in a proceeding involving California-American Water Company, the Company’s wholly owned subsidiary (“Cal Am”), adopting a new residential rate design for Cal Am’s Monterey District. The decision allowed for recovery by Cal Am of $32 in under-collections in the water revenue adjustment mechanism/modified cost balancing account (“WRAM/MCBA”) over a five-year period, plus interest, and modified existing conservation and rationing plans. In its decision, the CPUC noted concern regarding Cal Am’s residential tariff administration, specifically regarding the lack of verification of customer-provided information about the number of residents per household. This information was used for generating billing determinants under the tiered rate system. As a result, the CPUC kept this proceeding open to address several issues, including whether Cal Am’s residential tariff administration violated a statute, rule or CPUC decision, and if so, whether a penalty should be imposed.
On February 24, 2017, Cal Am, the Monterey Peninsula Water Management District, the CPUC’s Office of Ratepayer Advocates, and the Coalition of Peninsula Businesses filed for CPUC approval of a joint settlement agreement (the “Joint Settlement Agreement”), which among other things, proposed to resolve the CPUC’s residential tariff administration concerns by providing for a waiver by Cal Am of $0.5 of cost recovery for residential customers through the WRAM/MCBA in lieu of a penalty. Approval of the Joint Settlement Agreement, which is required for it to take effect, remains pending before the CPUC.
On March 28, 2017, the administrative law judge assigned to the proceeding issued a ruling stating there was sufficient evidence to conclude, on a preliminary basis, that Cal Am’s administration of the residential tariff violated certain provisions of the California Public Utilities Code and a CPUC decision. The ruling ordered Cal Am to show cause why it should not be penalized for these administrative violations and directed the settling parties to address whether the cost recovery waiver in the Joint Settlement Agreement was reasonable compared to a potential penalty range described by the administrative law judge. During hearings held on April 13-14, 2017, the administrative law judge clarified that this potential penalty range is $3 to $179 (calculated as a continuing violation dating back to 2000 and applying penalties of up to $20 thousand per day until January 1, 2012 and penalties of up to $50 thousand per day thereafter, reflecting a 2012 change to the relevant statute). The administrative law judge also noted that a per diem penalty may not be appropriate, as Cal Am’s monthly billing practices did not allow Cal Am to update customer-provided information for billing purposes on a daily basis. Hearings before the administrative law judge in this matter occurred in August and September 2017. Cal Am also submitted additional testimony on the issue of whether Cal Am should be penalized, and if so, the reasonable amount of any such penalty. A subsequent hearing in this proceeding is currently scheduled for November 27, 2017.
As of September 30, 2017, the portions of this loss contingency that are probable and/or reasonable possible have been determined to be immaterial to the Company and have been included in the aggregate maximum amounts described above in the first paragraph of “Contingencies” in this Note 9.
Missouri Infrastructure System Replacement Surcharge Litigation
In March 2016, the Western District of the Missouri Court of Appeals ruled that the Missouri Public Service Commission (“MoPSC”) did not have statutory authority to issue an order in June 2015 approving an infrastructure system replacement surcharge (“ISRS”) for Missouri-American Water Company (“MAWC”), a wholly owned subsidiary of the Company. The court held that the MoPSC’s June 2015 order authorizing the ISRS increase was invalid because St. Louis County did not have a population of at least one million residents, as required by the statute. MAWC believes that the MoPSC’s June 2015 order authorizing the collection of ISRS revenues is lawful. In June 2016, the Missouri Supreme Court granted MAWC’s application to transfer the case from the Court of Appeals to the Missouri Supreme Court, and as a result of that order, the March 2016 ruling of the Court of Appeals was vacated.
On March 14, 2017, in a unanimous decision, the Missouri Supreme Court dismissed the case as moot, finding that there were no longer any ISRS funds in dispute because MAWC had completed a rate case during the appellate process and the disputed charges were now incorporated in base rates. On May 30, 2017, the Missouri Supreme Court denied a Motion for Rehearing filed by the Missouri Office of Public Counsel, which action concluded the litigation in this matter.liquidity.
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 tofor 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 onby 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.
OnIn October 12, 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 assertsasserted 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. ThisOn May 30, 2018, the court, at a hearing, denied WVAWC’s motion remainsto apply the primary jurisdiction doctrine, and on October 11, 2018, the court issued a written order to that effect. On February 21, 2019, the court issued an order denying WVAWC’s motion to dismiss the 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 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.
NoteNote 10: Earnings per Common Share
The following istable provides a reconciliation of the numerator and denominator for the basic and diluted earnings per share (“EPS”) calculations:
For the Three Months Ended September 30, For the Nine Months Ended September 30,For the Three Months Ended March 31,
2017 2016 2017 20162019 2018
Numerator       
Net income attributable to common stockholders$203
 $148
 $427
 $367
Numerator:   
Net income attributable to common shareholders$113
 $106
          
Denominator 
  
  
  
Denominator: 
  
Weighted-average common shares outstanding—Basic178
 178
 178
 178
181
 178
Effect of dilutive common stock equivalents1
 —
 1
 1
—
 1
Weighted-average common shares outstanding—Diluted179
 178
 179
 179
181
 179
The effect of dilutive common stock equivalents is related to outstanding stock options, restricted stock units and performance stock units granted under the Company’s 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 three months ended March 31, 2019 and 2018 because their effect would have been anti-dilutive under the treasury stock method.

Note 11: Fair Value of Financial Assets and LiabilitiesInformation
Fair Value of Financial Instruments
The Company used the following methods and assumptions to estimatewere used by the Company in estimating its fair value disclosures for financial instruments:
Current assets and current liabilities—The carrying amounts reported inon the accompanying 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 portionmajority of the Company’s debts dodebt is not tradetraded 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: (i) an average of the Company’s own publicly-traded debt securities and (ii) 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.


The following tables provide the carrying amounts, including fair value adjustments previously recognized in acquisition purchase accounting and a fair value adjustment related to the Company’s interest rate swap fair value hedge (which is classifiedhedges (classified as Level 2 in the fair value hierarchy), and the fair values of the financial instruments were as follows:instruments:
Carrying Amount At Fair Value as of September 30, 2017Carrying Amount At Fair Value as of March 31, 2019
 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Preferred stock with mandatory redemption requirements$11
 $—
 $—
 $15
 $15
$7
 $—
 $—
 $9
 $9
Long-term debt (excluding capital lease obligations)7,357
 5,375
 990
 1,867
 8,232
Long-term debt (excluding finance lease obligations)7,628
 6,061
 436
 1,780
 8,277
                  
Carrying Amount At Fair Value as of December 31, 2016Carrying Amount At Fair Value as of December 31, 2018
 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Preferred stock with mandatory redemption requirements$12
 $—
 $—
 $15
 $15
$8
 $—
 $—
 $9
 $9
Long-term debt (excluding capital lease obligations)6,320
 3,876
 1,363
 1,805
 7,044
Long-term debt (excluding finance lease obligations)7,638
 5,760
 433
 1,728
 7,921

Recurring Fair Value Measurements
The following table presentstables provide assets and liabilities measured and recorded at fair value on a recurring basis and their level inwithin the fair value hierarchy:hierarchy as of March 31, 2019 and December 31, 2018:
At Fair Value as of September 30, 2017At Fair Value as of March 31, 2019
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
Assets:              
Restricted funds$29
 $—
 $—
 $29
$23
 $—
 $—
 $23
Rabbi trust investments14
 —
 —
 14
15
 —
 —
 15
Deposits4
 —
 —
 4
8
 —
 —
 8
Other investments4
 —
 —
 4
5
 —
 —
 5
Total assets51
 —
 —
 51
51
 —
 —
 51
              
Liabilities:              
Deferred compensation obligations16
 —
 —
 16
19
 —
 —
 19
Mark-to-market derivative liabilities—
 2
 —
 2
—
 34
 —
 34
Total liabilities16
 2
 —
 18
19
 34
 —
 53
Total net assets (liabilities)$35
 $(2) $—
 $33
Total assets (liabilities)$32
 $(34) $—
 $(2)
At Fair Value as of December 31, 2016At Fair Value as of December 31, 2018
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
Assets:              
Restricted funds$24
 $—
 $—
 $24
$29
 $—
 $—
 $29
Rabbi trust investments12
 —
 —
 12
15
 —
 —
 15
Deposits3
 —
 —
 3
3
 —
 —
 3
Mark-to-market derivative assets—
 28
 —
 28
Other investments1
 —
 —
 1
3
 —
 —
 3
Total assets40
 28
 —
 68
50
 —
 —
 50
              
Liabilities:              
Deferred compensation obligations13
 —
 —
 13
17
 —
 —
 17
Mark-to-market derivative liabilities—
 14
 —
 14
Total liabilities13
 —
 —
 13
17
 14
 —
 31
Total net assets (liabilities)$27
 $28
 $—
 $55
Total assets (liabilities)$33
 $(14) $—
 $19
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 maintenancerepair projects. The proceeds of these financings are held in escrow until the designated expenditures are incurred. Long-term restricted funds of $1 million and $4$1 million were included in other long-term assets on the Consolidated Balance Sheets as of September 30, 2017March 31, 2019 and December 31, 2016,2018, 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.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.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 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 assetassets and liability—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.assets on the Consolidated Balance Sheets.
Deferred compensation obligations—
Note 12: Leases
On January 1, 2019, the Company adopted Accounting Standards Update 2016-02, Leases (Topic 842),andall related amendments (collectively, the “Standard”).The Company implemented the guidance in the Standard using the modified retrospective approach and applied the optional transition method which allowed entities to apply the new Standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Under this approach, prior periods have not been restated and continue to be reported under the accounting standards in effect for those periods. The Standard includes practical expedients which relate to the identification and classification of leases that commenced before the adoption date, initial direct costs for leases that commenced before the adoption date, the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset and the ability to carry forward accounting treatment for existing land easements. The Company has made an accounting policy election not to include leases with a lease term of twelve months or less in the adoption of the Standard.
Adoption of the Standard resulted in the recognition of operating lease right-of-use (“ROU”) assets and operating lease liabilities as of January 1, 2019 of approximately $117 million and $115 million, respectively. The difference between the ROU assets and operating lease liabilities was recorded as an adjustment to retained earnings. The Standard did not materially impact the Company’s consolidated results of operations and had no impact on cash flows.
The Company’s deferred compensation plans allow participantsROU assets represent the right to defer certain cash compensation into notional investment accounts. The Company includes such plans in other long-term liabilities. Theuse an underlying asset for the lease term and the Company’s lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are generally recognized at the commencement date based on the present value of discounted lease payments over the lease term. As most of the Company’s deferred compensation obligations isleases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the marketinformation available at the commencement date in determining the present value of discounted lease payments. The implicit rate is used when readily determinable. ROU assets also include any upfront lease payments and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the participants’ notional investment accounts. lease when it is reasonably certain that the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term.
The notional investmentsCompany determines if an arrangement is a lease at inception. Operating leases are comprised primarily of mutual funds,included in operating lease right-of-use assets, accrued liabilities and operating lease liabilities on the Consolidated Balance Sheets. Finance leases are included in property, plant and equipment, accrued liabilities and other long-term liabilities on the Consolidated Balance Sheets.
The Company has lease agreements with lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) and non-lease components (e.g., common-area maintenance costs), which are basedgenerally accounted for separately; however, the Company accounts for the lease and non-lease components as a single lease component for certain leases. Additionally, the Company applies a portfolio approach to effectively account for the ROU assets and lease liabilities.
The Company has operating and finance leases involving real property including facilities, utility assets, vehicles, and equipment. Certain operating leases have renewal options ranging from one to 60 years. The exercise of lease renewal options is at the Company’s sole discretion. Renewal options that the Company was reasonably certain to exercise are included in the Company’s ROU assets. Certain operating leases contain the option to purchase the leased property. The operating leases for real property, vehicles, and equipment will expire over the next 40 years, seven years, and five years, respectively. Certain lease agreements include variable rental payments adjusted periodically for inflation. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company participates in a number of arrangements with various public entities (“Partners”) in West Virginia. Under these arrangements, the Company transferred a portion of its utility plant to the Partners in exchange for an equal principal amount of Industrial Development Bonds (“IDBs”) issued by the Partners under the Industrial Development and Commercial Development Bond Act. The Company leased back the utility plant under agreements for a period of 30 to 40 years. The Company has recorded these agreements as finance leases in property, plant and equipment, as ownership of the assets will revert back to the Company at the end of the lease term. The Company determined that the finance lease obligations and the investments in IDBs meet the conditions for offsetting, and as such, are reported net on observable market prices.the Consolidated Balance Sheets and excluded from the finance lease disclosure presented below.

The Company also enters into operation and maintenance (“O&M”) agreements with the Partners. The Company pays an annual fee for use of the Partners’ assets in performing under the O&M agreements. The O&M agreements are recorded as operating leases, and future annual use fees of $4 million in 2019 through 2023, and $59 million thereafter, are included in operating lease right-of-use assets and operating lease liabilities on the Consolidated Balance Sheets.
Rental expenses under operating and finance leases were $4 million for the three months ended March 31, 2019.
The following table provides supplemental cash flow information for the three months ended March 31, 2019:
 Amount
Cash paid for amounts in lease liabilities (a)
$4
Right-of-use assets obtained in exchange for new operating lease liabilities119
(a)Includes operating and financing cash flows from operating and finance leases.
The following table provides the weighed-average remaining lease terms and weighted-average discount rates for finance and operating leases:
As of March 31, 2019
Weighted-average remaining lease term:
Finance lease7 years
Operating leases18 years
Weighted-average discount rate:
Finance lease12%
Operating leases4%
The following table provides future maturities of lease liabilities at March 31, 2019:
 Amount
2019$13
202016
202113
202212
20238
Thereafter106
Total lease payments168
Imputed interest(54)
Total$114
The following table provides the minimum annual future rental commitment as of December 31, 2018 under operating leases that have initial or remaining non-cancelable lease terms over the next five years and thereafter:
 Amount
2019$17
202015
202112
202211
20236
Thereafter80
Total$141

Note 12:13: 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 conductsoperates its businessbusinesses primarily through one reportable segment, the Regulated Businesses segment. The Company also operates severalmarket-based businesses that provide a broad range of related and complementary water and wastewater services in four operating segments that individually do not meet the criteria of a reportable segment in accordance with GAAP. These fourwithin non-reportable operating segments, are collectively presentedreferred to as the Company’s “Market-BasedMarket-Based Businesses.” “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 include the Company’sprovide summarized segment information:
As of or for the Three Months Ended September 30, 2017As of or for the Three Months Ended March 31, 2019
Regulated
Businesses		 Market-Based
Businesses		 Other ConsolidatedRegulated Businesses Market-Based Businesses Other Consolidated
Operating revenues$842
 $100
 $(6) $936
$685
 $134
 $(6) $813
Depreciation and amortization121
 5
 2
 128
130
 9
 5
 144
Total operating expenses, net433
 80
 (7) 506
470
 108
 (3) 575
Interest, net(67) 1
 (23) (89)(73) 1
 (21) (93)
Income before income taxes347
 21
 (28) 340
150
 27
 (25) 152
Provision for income taxes135
 7
 (5) 137
40
 7
 (8) 39
Net income attributable to common stockholders212
 14
 (23) 203
Net income attributable to common shareholders110
 20
 (17) 113
Total assets17,390
 600
 1,371
 19,361
18,937
 1,019
 1,508
 21,464
Capital expenditures315
 4
 7
 326
 As of or for the Three Months Ended September 30, 2016
 Regulated
Businesses		 Market-Based
Businesses		 Other Consolidated
Operating revenues$826
 $109
 $(5) $930
Depreciation and amortization111
 4
 4
 119
Total operating expenses, net521
 98
 (8) 611
Interest, net(64) —
 (17) (81)
Income before income taxes246
 12
 (15) 243
Provision for income taxes94
 5
 (4) 95
Net income attributable to common stockholders152
 7
 (11) 148
Total assets16,020
 545
 1,406
 17,971
 As of or for the Nine Months Ended September 30, 2017
 Regulated
Businesses		 Market-Based
Businesses		 Other Consolidated
Operating revenues$2,247
 $306
 $(17) $2,536
Depreciation and amortization357
 13
 8
 378
Total operating expenses, net1,327
 263
 (19) 1,571
Interest, net(200) 2
 (61) (259)
Income before income taxes731
 46
 (66) 711
Provision for income taxes285
 17
 (18) 284
Net income attributable to common stockholders446
 29
 (48) 427
Total assets17,390
 600
 1,371
 19,361
As of or for the Nine Months Ended September 30, 2016As of or for the Three Months Ended March 31, 2018
Regulated
Businesses		 Market-Based
Businesses		 Other ConsolidatedRegulated Businesses Market-Based Businesses Other Consolidated
Operating revenues$2,176
 $338
 $(14) $2,500
$666
 $100
 $(5) $761
Depreciation and amortization328
 11
 11
 350
122
 4
 3
 129
Total operating expenses, net1,385
 300
 (17) 1,668
462
 86
 (4) 544
Interest, net(191) 1
 (52) (242)(69) 1
 (16) (84)
Income before income taxes610
 44
 (50) 604
142
 16
 (18) 140
Provision for income taxes236
 18
 (17) 237
38
 4
 (8) 34
Net income attributable to common stockholders374
 26
 (33) 367
Net income attributable to common shareholders104
 12
 (10) 106
Total assets16,020
 545
 1,406
 17,971
17,817
 604
 1,307
 19,728
Capital expenditures330
 6
 28
 364



ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read together with the unaudited consolidated financial statementsConsolidated Financial Statements and the notesNotes thereto included elsewhere in this Form 10-Q.10-Q, and in our Form 10-K for the year ended December 31, 2018. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business, operations and financial performance. The cautionary statements made in this Form 10-Q should be read as applying to all related forward-looking statements whenever they appear in this Form 10-Q. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under “Forward-Looking Statements,” and elsewhere in this Form 10-Q.
GeneralOverview
Through its subsidiaries, American Water Works Company, Inc. (“American Water” or the “Company”) is the largest and most geographically diverse, investor-owned publicly-traded water and wastewater utility company in the United States, as measured by both operating revenuerevenues and population served. Our primary business involves the ownership of utilities that provide water and wastewater services to residential, commercial, industrial, public authority, fire service and other customers, including sale for resale and public authority customers. Ourcustomers, collectively presented as our “Regulated Businesses.” Services provided by our utilities are generally subject to economic regulation by certain state utility commissions or other entities engaged in utility regulation. We report the results of our utilities in our Regulated Businesses segment.regulation, collectively referred to as public utility commissions (“PUCs” or “Regulators”). We also operate severalmarket-based businesses that provide a broad range of related and complementary water, wastewater and wastewaterother services thatto 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.” These businesses are not subject to economic regulation by state utility commissions or other entities engaged in utility regulation. We present the results of these businesses as our “Market-Based Businesses.” For further description of our businesses, seePUCs. See Part I, Item 1—Business in our Form 10-K.10-K for additional information.
You should read the following discussion in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this Form 10-Q andOperating Highlights
A settlement in our Form 10-K.West Virginia subsidiary’s general rate case filing was approved, authorizing additional annualized revenues of $19 million, effective February 25, 2019.
During 2019, we closed on the acquisition of five regulated water and wastewater systems adding 4,700 customers, including three acquisitions during the first quarter of 2019 for an aggregate purchase price of $22 million.
Since the launch of our partnership with the Philadelphia Energy Authority during the fourth quarter of 2018, our Homeowner Services Group has added approximately 103,000 new customer contracts, including approximately 76,000 during the first quarter of 2019.
Financial Results
Highlights ofThe following table provides our diluted earnings per share, as determined in accordance with accounting principles generally accepted in the United States (“GAAP”), and our adjusted diluted earnings per share (a non-GAAP measure) for the three and nine months ended September 30, 2017 are as follows::
 For the Three Months Ended September 30, For the Nine Months Ended September 30,
 2017 2016 2017 2016
Diluted earnings per share (GAAP):       
Net income attributable to common stockholders$1.13
 $0.83
 $2.39
 $2.05
Non-GAAP adjustments:       
Impact of Freedom Industries settlement activities(0.12) 0.36
 (0.12) 0.36
Income tax impact0.05
 (0.14) 0.05
 (0.14)
Net non-GAAP adjustment(0.07) 0.22
 (0.07) 0.22
        
Early debt extinguishment at the parent company0.03
 —
 0.03
 —
Income tax impact(0.01) —
 (0.01) —
Net non-GAAP adjustment0.02
 —
 0.02
 —
        
Total net non-GAAP adjustments(0.05) 0.22
 (0.05) 0.22
        
Adjusted diluted earnings per share (non-GAAP)$1.08
 $1.05
 $2.34
 $2.27
 For the Three Months Ended March 31,
 2019 2018
Diluted earnings per share (GAAP):   
Net income attributable to common shareholders$0.62
 $0.59
Adjustment:   
Freedom Industries liability reduction(0.02) —
Income tax impact0.01
 —
Net adjustment(0.01) —
Adjusted diluted earnings per share (non-GAAP)$0.61
 $0.59
For the three months ended September 30, 2017, net income attributable to common stockholders was $1.13 per diluted share, an increase of $0.30 per diluted share, or 36.1%, over the same period in 2016. Included in the 2017 amount was an after-tax benefit of $13 million, or $0.07 per diluted share, resulting from an insurance settlement with one of our general liability insurance carriers related to the Freedom Industries matter and an after-tax charge of $4 million, or $(0.02) per diluted share, resulting from an early debt extinguishment charge at the parent company. Included in the 2016 amount was an after-tax charge of $39 million, or $(0.22) per diluted share, resulting from the binding global agreement in principle to settle claims associated with the Freedom Industries chemical spill.


Excluding these items, adjustedMarch 31, 2019, diluted earnings per share (a non-GAAP measure) was $1.08 for the three months ended September 30, 2017,(GAAP) were $0.62, an increase of $0.03 per diluted share, or 2.9% over5.1% compared to the same periodprior year, which includes the item presented in 2016. Thisthe table above and discussed in greater detail in the “Adjustment to GAAP” section below.
Excluding the item presented in the table above, adjusted diluted earnings per share (non-GAAP) were $0.61 for the three months ended March 31, 2019, an increase was primarily due of $0.02 per diluted share, or 3.4% compared to the prior year.

These results were driven by continued growth in our Regulated Businesses segment, largely driven byfrom infrastructure investment, acquisitions and organic growth, combined with growth in our Market-Based Businesses from our Homeowner Services Group.Group’s 2018 acquisition of Pivotal Home Solutions (“Pivotal”) and from our Military Services Group’s addition of two new military contracts in 2018. These increases were partially offset by warmer weatherhigher interest expense to support growth in the third quarter of 2016 and a discrete tax adjustment recorded at the parent company associated with legislative changes in the State of Illinois impacting state tax apportionment.business.
For the nine months ended September 30, 2017, net income attributableAdjustment to common stockholders was $2.39 per diluted share, an increase of $0.34 per diluted share, or 16.6% over the same period in 2016. Included in the 2017 amount was an after-tax benefit of $13 million, or $0.07 per diluted share, resulting from an insurance settlement with one of our general liability insurance carriers related to the Freedom Industries matter and an after-tax charge of $4 million, or $(0.02) per diluted share, resulting from an early debt extinguishment charge at the parent company. Included in the 2016 amount was an after-tax charge of $39 million, or $(0.22) per diluted share, resulting from the binding global agreement in principle to settle claims associated with the Freedom Industries chemical spill.
Excluding these items, adjusted diluted earnings per share (a non-GAAP measure) was $2.34 for the nine months ended September 30, 2017, an increase of $0.07 per diluted share, or 3.1%, over the same period in 2016. This increase was primarily due to continued growth in our Regulated Businesses segment, largely driven by infrastructure investment, acquisitions and organic growth, combined with growth in our Market-Based Businesses from our Homeowner Services Group. These increases were partially offset by overall warmer weather in 2016 and two discrete tax adjustments recorded at the parent company associated with legislative changes in the States of New York and Illinois impacting state tax apportionment.GAAP
Adjusted diluted earnings per share represents a non-GAAP financial measure and meansis calculated as GAAP diluted earnings per share, calculated in accordance with U.S. GAAP, excluding the 2019 first quarter impact of (1) the September 2017 insurance settlementreduction in the Company’s portion of the liability related to the Freedom Industries chemical spill (2)settlement in West Virginia not subject to an offsetting insurance receivable. See Note 9—Commitments and Contingencies in the debt extinguishment charge incurred in September 2017 with respectNotes to the early extinguishment of debt allocated to the parent company and (3) the October 2016 binding global agreement in principle to settle claims related to the Freedom Industries chemical spill. Consolidated Financial Statements for additional information.
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 excludingreflected by the adjustmentsnon-GAAP measure to represent results as defined by U.S. GAAP, and the reader should not consider them as indicators of performance. This non-GAAP financial measure is derived from our consolidated financial information but is not presented in our financial statements prepared in accordance with U.S. GAAP, and thus itGAAP. This measure should be considered in addition to, and not as a substitute for, measures of financial performance prepared in accordance with U.S. 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.
Focusing on Central Themes
For 2017,In 2019, our focus continuesstrategy, which is driven by our vision and values, will continue to be anchored on our five central themes: 1) Safety, 2) Customers, 3) People, 4) Growth(i) safety; (ii) customer; (iii) people; (iv) growth; and 5) Technology and Operational Efficiency.(v) operational excellence. We continue ourto focus on operating our business responsibly and managing our operating and capital costs in a manner that benefits our customers and produces long-term value for our stockholders.shareholders. Additionally, we continue to execute on our ongoing strategy that ensures a safe workplace for our employees, emphasizes public safety for our customers and communities, and leverages our human resources, processes and technology innovation to make our business more effective and efficient. The progress that we have made during the first ninethree months of 20172019 with respect to growth and improvement in our operational efficiency ratioexcellence is described below.
Growth—Infrastructure improvements,We continue to grow our business through continued capital investment in our infrastructure and regulated acquisitions and strategic capital investments
During the first ninethree months of 2017,2019, we made capital investments of approximately $1.0 billion, focused in two key areas:
$963$337 million, the majority of which the majority was in our Regulated Businesses segment for infrastructure improvements;improvements. For the full year of 2019, our capital investments, including acquisitions, are expected to be in the range of $1.7 billion to $1.8 billion.
During 2019, we have added approximately 4,700 water and
$43 million to fund wastewater customers through closed acquisitions in our Regulated Businesses. We currently have entered into agreements for pending acquisitions in our Regulated Businesses segment, which addedto add approximately 16,000 water and wastewater61,500 additional customers. This includes the acquisition on April 3, 2017, of all the outstanding capital stock of Shorelands Water Company, Inc. (“Shorelands”),
Operational Excellence—We continue to strive for total consideration of $33 million in the form of 438,211 shares of our common stock. Shorelands, which is now a part of our New Jersey subsidiary, provides water service to approximately 11,000 customers in Monmouth County, New Jersey.industry-leading operational efficiency
For the full year of 2017, our capital investment, including regulated acquisitions, is expected to be approximately $1.65 billion.


Included in this range is the asset purchase agreement signed by our Pennsylvania subsidiary to acquire substantially all of the wastewater collection and treatment system assets of the Municipal Authority of the City of McKeesport, Pennsylvania for approximately $159 million, subject to certain adjustments provided in the agreement. The system currently represents approximately 22,000 wastewater customers. In connection with the execution of this agreement, $7 million in non-escrowed deposits have been made to the seller. On October 26, 2017, the Pennsylvania Public Utility Commission approved a joint petition for settlement of this acquisition. The closing of this acquisition is subject to the satisfaction of various conditions and covenants.  We are expecting to close this acquisition by the end of 2017.
On September 29, 2017, our Military Services Group was awarded a contract for ownership, operation and maintenance of the water and wastewater systems at Wright-Patterson Air Force Base, the largest single-site employer in the state of Ohio. The contract award includes estimated revenues of approximately $490 million over a 50-year period, subject to an annual economic price adjustment. With the addition of this base, our backlog of revenue associated with our military contracts is approximately $3.5 billion over their remaining contract terms.
Technology & Operational Efficiency—Continuing Improvement in Adjusted Operation and Maintenance (“O&M”) Efficiency Ratio for our Regulated Businesses
We continued to improve on our adjusted O&M efficiency ratio (a non-GAAP measure). Our adjusted O&M efficiency ratio, which we use as a measure of the operating performance of our Regulated Businesses, was 35.5% for the twelve months ended September 30, 2017 was 34.2%,March 31, 2019, as compared to 34.9%35.6% for the twelve months ended September 30, 2016.March 31, 2018, with all periods prior to January 1, 2018 presented on a pro forma basis to include the estimated impact of the TCJA on operating revenues. The improvement in this ratio for the twelve months ended September 30, 2017, as compared to the same period in 2016, was primarily attributabledue to an increase in regulated operating revenue.revenues from our Regulated Businesses.
Our adjusted O&M efficiency ratio is defined as our regulatedthe operation and maintenance expenses from our Regulated Businesses, divided by regulatedthe 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 cost,costs, mainly depreciation and general taxes, thatwhich 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 standardadjustments 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 the “Tax Matters” section below for additional information). We also made the following adjustments to our adjusted O&M efficiency ratio, for 2016 and 2017, we have alsoratio: (i) excluded from operation and maintenance expenses, the impact of certain Freedom Industries chemical spill settlement activities.activities recognized in 2017 and 2018, and the impact of the reduction of the liability related to the Freedom Industries chemical spill settlement recognized in the first quarter of 2019 (see Note 9—Commitments and Contingencies in the Notes to Consolidated Financial Statements and “—Financial Results—Adjustments to GAAP” above for additional information); 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 Postretirement Benefit Cost (“ASU 2017-07”) for 2017, 2018 and 2019 (see Note 2—Significant Accounting Policies in the Notes to Consolidated Financial Statements in our Form 10-K for additional information). We excluded all the items discussed above items from the calculation as we believe such items are not reflective of management’s ability to increase the efficiency of our regulated operations.Regulated Businesses.
We evaluate our operating performance using this ratio, and believe it is useful to investors, because we believe it directly measures improvement in the efficiency of our regulated operations.Regulated Businesses. This information is derived from our consolidated financial information but is not presented in our financial statements prepared in accordance with GAAP. This information is intended to enhance an investor’s overall understanding of our operating performance. Our adjusted O&M efficiency ratio is not aan accounting measure that is based on GAAP, financial measure, may not be comparable to other companies’ operating measures and should not be used in place of the GAAP information provided elsewhere in this report.

Form 10-Q.

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 twelve months ended September 30, 2017 as compared to the same period in 2016:ratio:
For the twelve months ended September 30,For the Twelve Months Ended March 31,
(In millions)2017 2016
(Dollars in millions)2019 2018
Total operation and maintenance expenses(a)$1,383
 $1,511
$1,496
 $1,382
Less:      
Operation and maintenance expenses—Market-Based Businesses334
 391
380
 329
Operation and maintenance expenses—Other(a)(46) (42)(43) (48)
Total operation and maintenance expenses—Regulated Businesses(a)1,095
 1,162
1,159
 1,101
Less:      
Regulated purchased water expenses124
 120
131
 131
Allocation of non-operation and maintenance expenses29
 29
32
 30
Impact of Freedom Industries settlement activities (a)(b)
(22) 65
(24) (22)
Adjusted operation and maintenance expenses—Regulated Businesses (i)
$964
 $948
$1,020
 $962
      
Total operating revenues$3,338
 $3,283
$3,493
 $3,362
Less:      
Pro forma adjustment for impact of the TCJA (c)
—
 129
Total pro forma operating revenues3,493
 3,233
Less:   
Operating revenues—Market-Based Businesses419
 464
511
 419
Operating revenues—Other(23) (17)(21) (22)
Total regulated operating revenues—Regulated Businesses2,942
 2,836
Total pro forma operating revenues—Regulated Businesses3,003
 2,836
Less:      
Regulated purchased water revenues (b)
124
 120
Adjusted operating revenues—Regulated Businesses (ii)
$2,818
 $2,716
Regulated purchased water revenues (d)
131
 131
Adjusted pro forma operating revenues—Regulated Businesses (ii)
$2,872
 $2,705
      
Adjusted operation and maintenance efficiency ratio—Regulated Businesses (i) / (ii)
34.2% 34.9%
Adjusted O&M efficiency ratio—Regulated Businesses (i) / (ii)
35.5% 35.6%
(a)
Includes binding agreement in principle in 2016 and settlement with general liability insurance carrier in 2017.the impact of the Company’s adoption of ASU 2017-07on January 1, 2018.
(b)CalculationIncludes the impact of settlements in 2017 and 2018 with two of our general liability insurance carriers, and the reduction of the liability related to the Freedom Industries chemical spill in the first quarter of 2019.
(c)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.
(d)The calculation assumes regulated purchased water revenues approximate regulated purchased water expenses.


Regulatory Matters
The following table below provides annualized incremental revenues resulting from rate authorizations that became effective during the nine months ended September 30, 2017 for general rate cases, assuming a constant water sales volume,case and infrastructure surcharge mechanisms. There were no rate authorizations that became effective during the three months ended September 30, 2017.March 31, 2019, assuming a constant water sales volume:
(In millions)For the Nine Months Ended September 30, 2017
General rate cases by state: 
New York (effective June 1, 2017)
$4
Virginia (a)
5
Iowa (effective March 27, 2017)
4
California (effective January 13, 2017 - February 2, 2017)
5
Illinois (effective January 1, 2017)
25
Total general rate cases$43
  
Infrastructure surcharges by state: 
New Jersey (effective June 1, 2017)
$10
Indiana (effective March 22, 2017)
8
Tennessee (effective March 14, 2017)
2
Pennsylvania (effective January 1, 2017)
1
West Virginia (effective January 1, 2017)
2
Total infrastructure surcharges$23
(In millions)For the Three Months Ended March 31, 2019
General rate cases by state: 
West Virginia (effective February 25, 2019)
$19
Maryland (effective February 5, 2019)
1
Total general rate cases$20
  
Infrastructure surcharges by state: 
Illinois (effective January 1, 2019)
$8
West Virginia (effective January 1, 2019)
2
Total infrastructure surcharges$10
(a)The effective date of the rate order was May 24, 2017, authorizing the implementation of interim rates as of April 1, 2016.
On April 1, 2019, our Pennsylvania subsidiary’s infrastructure surcharge filing became effective, authorizing additional annualized revenues of $2 million. Also effective on April 1, 2019 were $4 million of additional annualized revenues, awarded as part of our New York subsidiary’s most recent general rate case.
Pending General Rate Case and Cost of Capital Filings
During the second quarter of 2017, our PennsylvaniaOur California subsidiary filedis expected to file, on May 1, 2019, a general rate casepreliminary application requesting $108 million in additional annualized water and wastewater revenues. On October 16, 2017, a proposed settlement agreement was entered into by our Pennsylvania subsidiary and the other parties to the proceeding, providing for additional annualized water and wastewater revenues of $62 million, subject to approval by the administrative law judges assigned to the case and the PaPUC.
On September 15, 2017, our New Jersey subsidiary filed a general rate case requesting $129 million in additional annualized water and wastewater revenues.
On June 30, 2017, our Missouri subsidiary filed a general rate case requesting $84 million in additional annualized water and wastewater revenues.
On April 3, 2017, March 27, 2019, our California subsidiary filed an application requesting a cost of capital of 8.49%, compared to 8.41% currently authorized. The results of this proceeding will not become effective until January 2018.
Duringfor the third quarter of 2016, our California subsidiary filed asecond rate year (2019) step increase associated with its most recent general rate case requesting $35 million in additional annualized revenues and an increase of $8 million in the escalation year of 2019 and the attrition year of 2020. During the fourth quarter of 2016, our California subsidiary filed an update to its general rate case, adjusting its request for additional annualized revenues to $32 million and increasing its request to $9 million in the escalation year of 2019.
Pending Infrastructure Surcharge Filings
On October 31, 2017, our Virginia subsidiary filed for infrastructure surcharges requesting $1 million in additional annualized revenues.
On October 13, 2017, our New Jersey subsidiary filed for an infrastructure surchargeauthorization, requesting $4 million in additional annualized revenues.


During the second quarter of 2017,On March 18, 2019, our West Virginia subsidiary filed for an infrastructure surcharge requesting $3 million in additional annualized revenues. On October 11, 2017, our West VirginiaIndiana subsidiary filed a joint settlement agreement with all major parties with respect to its general rate case filing. The settlement agreement would provide for additional annualized revenues of $4 million in the Public Service Commission of West Virginia (“WVPSC”), whereby all partiesfirst rate year and an additional $14 million for the second rate year, and is subject to the proceeding have agreed to an infrastructure surcharge that provides for approximately the requested increase amount in annualized revenues, subject to approval by the WVPSC.Indiana Utility Regulatory Commission’s approval.
During the second quarter of 2017,In 2018, our Missouri subsidiaryKentucky and Virginia subsidiaries filed for an infrastructure surchargegeneral rate cases requesting $20 million and $5 million in additional annualized revenues. On August 29, 2017, our Missouri subsidiary refiled and adjusted its request for additional annualized revenues, to $6 million. 
Other Regulatory Filings
On August 4, 2017, our Illinois subsidiary filed a petition with Illinois Commerce Commission (“ICC”) to place into effect revised depreciation rates applicable to depreciable water and wastewater plant resulting from a new depreciation study. The petition requested that these new rates would be effective January 1, 2017. We expect the ICC to provide a final ruling on the petition in the fourth quarter of 2017. The estimated effect of the new study is to lower depreciation expense by approximately $16 million on an annualized basis.respectively.
There is no assurance that all or any portion of these requests will be granted.
Other Pending Infrastructure Surcharge Filings
The following table provides our pending infrastructure surcharge filings:
(In millions)Date Filed Amount
Pending infrastructure surcharge filings by state:   
MissouriFebruary 20, 2019 $8
TennesseeNovember 16, 2018 2
Total pending infrastructure surcharge filings  $10
There is no assurance that all or any portion of these requests will be granted.

Tax Matters
Tax Cuts and Jobs Act
On April 11,December 22, 2017, the StateTCJA was signed into law, which, among other things, enacted significant and complex changes to the Internal Revenue Code of New York enacted legislation that increased1986, including a reduction in the statefederal corporate income tax rate on our taxablefrom 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 attributabletaxes. 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 New York. This legislation eliminatedbonus depreciation eligibility. Specifically, property that was either acquired, or the productionconstruction began prior to September 27, 2017, is eligible for bonus depreciation. The Company had a federal net operating loss carryover balance as of water asDecember 31, 2018 that is not expected to be fully utilized until 2020, which is when it will become a qualified manufacturing activity in New York, which effectively increased the statecash taxpayer for federal income tax rate in New York. As a resultpurposes.
The enactment of the legislative change, we wereTCJA required to re-measurea re-measurement of our cumulative deferred tax balances using the higher state income tax rate in the second quartertaxes that materially impacted our 2017 results of 2017. This change in legislation was the primary cause of an increase to our unitary deferred tax liability of $11 million.operations and financial position. The portion of this increasere-measurement related to our New York subsidiary calculated on a stand-alone basisRegulated Businesses was $7 million, and wassubstantially offset by a regulatory asset,liability, as we believe it is probable of recoverythat the deferred income tax excesses created by the TCJA will benefit our regulated customers in future rates. In 2018, the Company’s 14 regulatory jurisdictions began to consider the impacts of the TCJA. The remaining increaseCompany 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 tax liability was calculated through state tax apportionment ratesincome 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, the timing and recorded atextent of which is subject to regulatory review and approval. We expect the consolidated level, resulting in a non-cash, cumulative chargeability to earningsproduce the normalization schedule using the average rate assumption method by the end of $4 million during the second quarter of 2017.2019. In one of those states, we will use the amortization of the excess accumulated deferred income taxes to offset future infrastructure investments.
On July 7, 2017,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 Statefollowing methods: (i) eminent domain (also known as condemnation); (ii) the right of Illinois enacted legislation that increased, effective July 1, 2017,purchase given or reserved by a municipality or political subdivision when the original certificate of public convenience and necessity (“CPCN”) was granted; and (iii) the right of purchase given or reserved under the law of the state income tax rate on our taxable income attributablein which the utility subsidiary was incorporated or from which it received its CPCN. The acquisition consideration related to Illinois from 7.75% to 9.5%. Assuch a resultproceeding 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 legislative change, we were required to re-measure our cumulative deferred tax balances using the higher state income tax rateor in the third quarterparticular CPCN.
As such, we are periodically subject to condemnation proceedings in the ordinary course of 2017.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 changeservice 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 legislation was the primary cause ofChicago, Illinois area (approximately 30,300 customers in total) formed a water agency and filed an increase to our unitary deferred tax liability of $7 million. The portion of this increase related toeminent domain lawsuit against our Illinois subsidiary calculated on a stand-alone basis was $4in 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 and was offset by a regulatory asset, as we believefor the pipeline. A jury trial will take place to establish the value of the pipeline. The parties have filed with the court updated valuation reports. Although the date of the valuation trial has not currently been scheduled, it is probablelikely to commence in the first quarter of 2020.
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 future rates. The remaining increase inrates has been disallowed. Also, the deferred tax liability was recordedutility 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 consolidated level, resulting in a non-cash, cumulative charge to earningslimits of $3 million during the third quarter of 2017.
During the second quarter of 2017, we were notified by the assessor for St. Louis County, Missouri, that it was changing its long standing practice of valuing regulated water and wastewater property located in the County using a seven-year life, and instead intends to use a twenty-year life for a substantial portion of this property. During the second quarter of 2017, we were also notified by the assessor for Platte County, Missouri, that it intended to change its long standing practice of valuing regulated water and wastewater property located in the County using a twenty-year life, and instead intends to use a fifty-year life for a substantial portion of this property. These changes in practice and the resulting valuations as assessed by the respective County, will increase our property tax obligation beginning in 2017. We have asked the Missouri regulator for an accounting recovery mechanism that would allow deferral of any increase in tax resulting from these changes in long standing practice, and we believe these increases are recoverable through future customer rates. As a result, during the second quarter of 2017, we recorded the additional estimated increase in property tax obligation of $2 million, with an offset to a regulatory asset. During the third quarter of 2017, we filed complaints with the Missouri State Tax Commission, seeking review of property assessments in Platte County.

such insurance.

Consolidated Results of Operations
The following table provides our consolidated results of operations and the ensuing discussions provide explanation for the material variances:
For the Three Months Ended September 30, For the Nine Months Ended September 30,For the Three Months Ended March 31,
2017 2016 Increase (Decrease) 2017 2016 Increase (Decrease)2019 2018 Increase (Decrease)
(In millions)               
(Dollars in millions)       
Operating revenues$936
 $930
 $6
 0.6 % $2,536
 $2,500
 $36
 1.4 %$813
 $761
 $52
 6.8 %
Operating expenses:                      
Operation and maintenance324
 432
 (108) (25.0)% 1,010
 1,131
 (121) (10.7)%365
 347
 18
 5.2 %
Depreciation and amortization128
 119
 9
 7.6 % 378
 350
 28
 8.0 %144
 129
 15
 11.6 %
General taxes61
 65
 (4) (6.2)% 192
 195
 (3) (1.5)%69
 70
 (1) (1.4)%
Gain on asset dispositions and purchases(7) (5) (2) 40.0 % (9) (8) (1) 12.5 %
(Gain) on asset dispositions and purchases(3) (2) (1) 50.0 %
Total operating expenses, net506
 611
 (105) (17.2)% 1,571
 1,668
 (97) (5.8)%575
 544
 31
 5.7 %
Operating income430
 319
 111
 34.8 % 965
 832
 133
 16.0 %238
 217
 21
 9.7 %
Other income (expenses):               
Other income (expense):       
Interest, net(89) (81) (8) 9.9 % (259) (242) (17) 7.0 %(93) (84) (9) 10.7 %
Loss on extinguishment of debt(6) —
 (6) 100.0%
 (6) —
 (6) 100.0%
Non-operating benefit costs, net4
 3
 1
 33.3 %
Other, net5
 5
 —
 — % 11
 14
 (3) (21.4)%3
 4
 (1) (25.0)%
Total other income (expenses)(90) (76) (14) 18.4 % (254) (228) (26) 11.4 %
Total other income (expense)(86) (77) (9) 11.7 %
Income before income taxes340
 243
 97
 39.9 % 711
 604
 107
 17.7 %152
 140
 12
 8.6 %
Provision for income taxes137
 95
 42
 44.2 % 284
 237
 47
 19.8 %39
 34
 5
 14.7 %
Net income attributable to common stockholders$203
 $148
 $55
 37.2 % $427
 $367
 $60
 16.3 %
Net income attributable to common shareholders$113
 $106
 $7
 6.6 %
Comparison of Consolidated Results of Operations
Operating revenues. For the three months ended September 30, 2017, operating revenuesMarch 31, 2019, net income attributable to common shareholders increased $7 million, or 6.6%, primarilydue to a:
$16 million increasecontinued growth in our Regulated Businesses, segment principally due to authorized rate increases to funddriven by infrastructure investment, growth, acquisitions and organic growth, partially offset by lower water services demand in 2017, including a $7 million reduction due to warmer weather in the third quarter of 2016; partially offset by a
$9 million decreasecombined with growth in our Market-Based Businesses primarily due to lower capital upgrades infrom our Homeowner Services Group’s 2018 acquisition of Pivotal and from our Military Services Group, largely from reducedGroup’s addition of two new military base budgets,contracts in 2018. These increases were partially offset by incremental revenues in our Homeowner Services Group from customerhigher interest expense to support growth and price increases for existing customers.
For the nine months ended September 30, 2017, operating revenues increased primarily due to a:
$71 million increase in our Regulated Businesses segment principally due to authorized rate increases to fund infrastructure investment growth, acquisitions and organic growth, partially offset by lower water services demand in 2017, including a $12 million reduction due to overall warmer weather in 2016; partially offset by a
$32 million decrease in our Market-Based Businesses primarily due to lower capital upgrades in our Military Services Group, largely from reduced military base budgets and the completion of a large project in mid-2016 at Fort Polk, partially offset by incremental revenues in our Homeowner Services Group from customer growth and price increases for existing customers.
Operation and maintenance. For the three months ended September 30, 2017,operation and maintenance expense decreased primarily due to a:
$88 million decrease in our Regulated Businesses segment principally due to a $65 million charge recorded in the third quarter of 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 the third quarter of 2017, resulting from an insurance settlement with one of our general liability insurance carriers also related to this matter in West Virginia; partially offset by a
$17 million decrease in our Market-Based Businesses primarily due to lower capital upgrades in our Military Services Group, as discussed above.


For the nine months ended September 30, 2017,operation and maintenance expense decreased primarily due to a:
$87 million decrease in our Regulated Businesses segment due to a $65 million charge recorded in the third quarter of 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 the third quarter of 2017, resulting from an insurance settlement with one of our general liability insurance carriers also related to this matter in West Virginia; and a
$6 million increase in our Regulated Business segment principally due to increases in production costs, employee-related costs and operating supplies and services; partially offset by a
$38 million decrease in our Market-Based Businesses primarily due to lower capital upgrades in our Military Services Group, as discussed above, partially offset by incremental costs associated with growth in our Homeowner Services Group.
Depreciation and amortization. For the three and nine months ended September 30, 2017, depreciation and amortization expense increased primarily due to additional utility plant placed in service.
General taxes. For the three and nine months ended September 30, 2017, general taxes decrease largely due to property tax refund credits in our Pennsylvania subsidiary.
Other income (expenses). For the three and nine months ended September 30, 2017, other income (expenses) increased principally due to: (i) an increase in interest expense from the issuance of long-term debt in the fourth quarter of 2016 and in the third quarter of 2017; (ii) a $6 million early debt extinguishment charge at the parent company; and (iii) additional interest expense incurred on long-term debt that was refinanced in August 2017, but did not mature until October 2017.
Provision for income taxes. For the three and nine months ended September 30, 2017, our provision for income taxes increased primarily due to higher pretax income and two discrete tax adjustments of $4 million and $3 million recorded at the parent company in the second and third quarters of 2017, associated with legislative changes in the States of New York and Illinois impacting state tax apportionment.business.
Segment Results of Operations
Our operating segments are determined based on how wecomprised 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 our resources. We evaluate the performance of our segments and allocate resources based on several factors, with the primary measure being income from continuing operations.
We conduct ourThe Company operates its business primarily through one reportable segment, ourthe Regulated Businesses segment. We also operate several market-based businesses that provide a broad range of related and complementary water and wastewater services within four operating segments that individually do not meet the criteria of a reportable segment in accordance with GAAP. These four non-reportable operating segments are collectively presented as our “Market-Based Businesses”,Market-Based Businesses, which is consistent with how management assesses the results of ourthese businesses.

Regulated Businesses Segment
The following table summarizes certainprovides financial information for our Regulated Businesses segment:Businesses:
 For the Three Months Ended September 30, For the Nine Months Ended September 30,
 2017 2016 Increase (Decrease) 2017 2016 Increase (Decrease)
(In millions)               
Operating revenues$842
 $826
 $16
 1.9 % $2,247
 $2,176
 $71
 3.3 %
Operation and maintenance262
 350
 (88) (25.1)% 800
 881
 (81) (9.2)%
Total operating expenses, net433
 521
 (88) (16.9)% 1,327
 1,385
 (58) (4.2)%
Net income attributable to common stockholders212
 152
 60
 39.5 % 446
 374
 72
 19.3 %
 For the Three Months Ended March 31,
 2019 2018 Increase (Decrease)
(Dollars in millions)       
Operating revenues$685
 $666
 $19
 2.9 %
Operation and maintenance278
 278
 —
 — %
Depreciation and amortization130
 122
 8
 6.6 %
General taxes64
 65
 (1) (1.5)%
Other income (expenses)(65) (63) (2) 3.2 %
Income before income taxes150
 142
 8
 5.6 %
Provision for income taxes40
 38
 2
 5.3 %
Net income attributable to common shareholders110
 104
 6
 5.8 %

Operating Revenues

Operating revenues.The following tables provide information regarding the main components of our Regulated Businesses’ operating revenues and discussionthe ensuing discussions provide explanation offor the variances related to the three components of operating revenues—water services revenues, wastewater services revenues and other revenues:material variances:
 For the Three Months Ended September 30, For the Nine Months Ended September 30,
 2017 2016 Increase (Decrease) 2017 2016 Increase (Decrease)
(In millions)               
Billed water services:               
Residential$477
 $468
 $9
 1.9 % $1,244
 $1,199
 $45
 3.8 %
Commercial176
 172
 4
 2.3 % 453
 436
 17
 3.9 %
Industrial37
 38
 (1) (2.6)% 103
 101
 2
 2.0 %
Public and other96
 94
 2
 2.1 % 262
 253
 9
 3.6 %
Other water revenues6
 16
 (10) (62.5)% 31
 42
 (11) (26.2)%
Billed water services792
 788
 4
 0.5 % 2,093
 2,031
 62
 3.1 %
Unbilled water services—
 (4) 4
 (100.0)% 8
 23
 (15) (65.2)%
Total water services revenues792
 784
 8
 1.0 % 2,101
 2,054
 47
 2.3 %
Wastewater services revenues36
 28
 8
 28.6 % 106
 83
 23
 27.7 %
Other revenues14
 14
 —
 — % 40
 39
 1
 2.6 %
Total operating revenues$842
 $826
 $16
 1.9 % $2,247
 $2,176
 $71
 3.3 %
 For the Three Months Ended March 31,
 2019 2018 Increase (Decrease)
(Dollars in millions)       
Water services:       
Residential$378
 $368
 $10
 2.7%
Commercial136
 133
 3
 2.3%
Fire service34
 34
 —
 —%
Industrial32
 31
 1
 3.2%
Public and other52
 49
 3
 6.1%
Total water services632
 615
 17
 2.8%
Wastewater services40
 38
 2
 5.3%
Other (a)
13
 13
 —
 —%
Total operating revenues$685
 $666
 $19
 2.9%
(a)Includes other operating revenues consisting primarily of miscellaneous utility charges, fees and rents.
For the Three Months Ended September 30, For the Nine Months Ended September 30,For the Three Months Ended March 31,
2017 2016 Increase (Decrease) 2017 2016 Increase (Decrease)2019 2018 Increase (Decrease)
(In millions)               
(Gallons in millions)       
Billed water services volumes:                      
Residential53,928
 55,108
 (1,180) (2.1)% 131,488
 132,453
 (965) (0.7)%35,767
 37,455
 (1,688) (4.5)%
Commercial24,913
 25,170
 (257) (1.0)% 61,793
 62,273
 (480) (0.8)%17,436
 17,747
 (311) (1.8)%
Industrial10,661
 11,013
 (352) (3.2)% 29,218
 29,194
 24
 0.1 %8,645
 9,024
 (379) (4.2)%
Public and other15,085
 14,512
 573
 3.9 % 38,920
 37,983
 937
 2.5 %
Fire service, public and other11,091
 11,580
 (489) (4.2)%
Billed water services volumes104,587
 105,803
 (1,216) (1.1)% 261,419
 261,903
 (484) (0.2)%72,939
 75,806
 (2,867) (3.8)%
For the three months ended September 30, 2017,March 31, 2019, operating revenues increased $19 million, or 2.9%, primarily due to a:
$2030 million increase from authorized rate increases, andincluding infrastructure surcharges, principally to fund infrastructure investment growth in various states; and a

$123 million increase attributable to recentfrom water and wastewater acquisitions, as well as organic growth in existing systems; partially offset by a
$1910 million decrease due tofrom lower water services demand, excluding the impact of completed acquisitions, including a $7primarily in our New Jersey, Missouri and California subsidiaries; and
$4 million reduction due to warmer weather in the third quarter of 2016.
For the nine months ended September 30, 2017, operating revenues increased primarily due to a:
$67 million increase from authorized rate increases and infrastructure surcharges to fund infrastructure investment growth in various states;
$31 million increase attributable to recent water and wastewater acquisitions, as well as organic growth in existing systems; and a
$6 million increase in wastewater services, excluding the impact of completed acquisitions,decrease resulting from higher treatment volumes, as well as an increase in private fire service connections; partially offset by a
$36 million decrease dueour Missouri subsidiary’s 2018 general rate case decision authorizing the adjustment of customer rates, effective May 28, 2018, to lower water services demand, excludingreflect the impact of completed acquisitions, including a $12 million reduction due to overall warmer weather in 2016.


income tax savings resulting from the TCJA.
Operation and maintenance. Maintenance
The following table summarizesprovides information regarding the main components of operationour Regulated Businesses’ operating and maintenance expense:expense and the ensuing discussions provide explanation for the material variances:
For the Three Months Ended September 30, For the Nine Months Ended September 30,For the Three Months Ended March 31,
2017 2016 Increase (Decrease) 2017 2016 Increase (Decrease)2019 2018 Increase (Decrease)
(In millions)               
(Dollars in millions)       
Production costs$87
 $86
 $1
 1.2 % $224
 $220
 $4
 1.8 %$69
 $69
 $—
 — %
Employee-related costs112
 107
 5
 4.7 % 334
 328
 6
 1.8 %117
 117
 —
 — %
Operating supplies and services51
 50
 1
 2.0 % 150
 149
 1
 0.7 %55
 48
 7
 14.6 %
Maintenance materials and supplies15
 16
 (1) (6.3)% 49
 46
 3
 6.5 %19
 22
 (3) (13.6)%
Customer billing and accounting14
 17
 (3) (17.6)% 37
 41
 (4) (9.8)%11
 10
 1
 10.0 %
Other(17) 74
 (91) (123.0)% 6
 97
 (91) (93.8)%7
 12
 (5) (41.7)%
Total$262
 $350
 $(88) (25.1)% $800
 $881
 $(81) (9.2)%$278
 $278
 $—
 — %
For the three months ended September 30, 2017,March 31, 2019, operation and maintenance expense decreasedremained consistent primarily due to a:
$913 million decrease in maintenance materials and supplies from a higher volume of main breaks and paving expense in the first quarter of 2018, driven by the colder weather experienced; and
$5 million decrease in other operation and maintenance expense principallyprimarily due to a $65$4 million charge recorded inassociated with the third quarterreduction of 2016, resulting from the binding global agreement in principleliability related to settle claims associated with the Freedom Industries chemical spill in West Virginia and a $22 million benefit recorded in the thirdfirst quarter of 2017, resulting from an insurance settlement with one of our general liability insurance carriers also related2019 (see Note 9—Commitments and Contingencies in the Notes to this matter in West Virginia; as well as lower casualty insurance expense attributable to a decrease in historical claims experience; and a
$3 million decrease in customer billing and accounting largely due to a decrease in customer uncollectible expense resulting from focused collection efforts;Consolidated Financial Statements for additional information); partially offset by a
$5 million increase in employee-related costs primarily due to higher pension expense resulting from a decrease in the discount rate and increased plan obligations, as well as higher other postretirement benefit plan expense resulting from plan amendments approved in the third quarter of 2016; and a
$17 million increase in operating supplies and services principally due tofrom higher costs from temporary workers as a $5 million write-off recordedresult of various initiatives in the third quarter of 2016, related to timekeeping system costs that were previously capitalized, partially offset by higher contractedour technology support services, expense.as well as an increase in other operating expenses.
Depreciation and Amortization
For the ninethree months ended September 30, 2017, operation and maintenance expense decreased primarily due to a:
$91 million decrease in other operation and maintenance expense principally due to a $65 million charge recorded in the third quarter of 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 the third quarter of 2017, resulting from an insurance settlement with one of our general liability insurance carriers also related to this matter in West Virginia; as well as lower casualty insurance expense attributable to a decrease in historical claims experience; and a
$4 million decrease in customer billing and accounting largely due to a decrease in customer uncollectible expense resulting from focused collection efforts; partially offset by a
$4 million increase in production costs primarily due to purchased water price and usage increases in our California subsidiary, as well as fuel and power price increases;
$6 million increase in employee-related costs primarily due to higher pension expense resulting from a decrease in the discount rate and increased plan obligations, as well as higher compensation expense in support of the growth of the business;
$1 million increase in operating supplies and services principally due to a $5 million write-off of timekeeping system costs that were previously capitalized and a $7 million judgment in litigation, both recorded in the third quarter of 2016, partially offset by higher contracted services expense; and a
$3 million increase in maintenance materials and supplies largely due to the timing of maintenance activities.
Operating expenses, net. For the three and nine months ended September 30, 2017, operating expenses, net decreased primarily due to the decrease in operating and maintenance expense as explained above, as well a $3 million decrease in property taxes in our Pennsylvania subsidiary from credit refunds and a $7 million gain recognized on a land sale in our Kentucky subsidiary, partially offset by higherMarch 31, 2019, depreciation and amortization expense of $10increased $8 million, and $29 million, respectively,or 6.6%, primarily due to additional utility plant placed in service.


Market-Based Businesses
The following table summarizes certainprovides financial information for our Market-Based Businesses:Businesses and the ensuing discussions provide explanation for the material variances:
 For the Three Months Ended September 30, For the Nine Months Ended September 30,
 2017 2016 Increase (Decrease) 2017 2016 Increase (Decrease)
(In millions)               
Operating revenues$100
 $109
 $(9) (8.3)% $306
 $338
 $(32) (9.5)%
Operation and maintenance75
 92
 (17) (18.5)% 247
 285
 (38) (13.3)%
Total operating expenses, net80
 98
 (18) (18.4)% 263
 300
 (37) (12.3)%
Net income attributable to common
stockholders		14
 7
 7
 100.0 % 29
 26
 3
 11.5 %
 For the Three Months Ended March 31,
 2019 2018 Increase (Decrease)
(Dollars in millions)       
Operating revenues$134
 $100
 $34
 34.0%
Operation and maintenance98
 80
 18
 22.5%
Depreciation and amortization9
 4
 5
 125.0%
Income before income taxes27
 16
 11
 68.8%
Provision for income taxes7
 4
 3
 75.0%
Net income attributable to common shareholders20
 12
 8
 66.7%

Operating revenues. Revenues
For the three months ended September 30, 2017,March 31, 2019, operating revenues decreasedincreased $34 million, or 34.0%, primarily due to a:
$12 million decrease in our Military Services Group principally due to lower capital upgrades in 2017, largely from reduced military base budgets; partially offset by a
$535 million increase in our Homeowner Services Group from customercontract growth, including $31 million from the acquisition of Pivotal in the second quarter of 2018; and
$5 million increase in our Military Services Group related to the addition of two new contracts in 2018 (Wright-Patterson Air Force Base and price increases for existing customers.Fort Leonard Wood), as well as increased capital work at Vandenberg Air Force Base; partially offset by a
$7 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. in the third quarter of 2018.
Operation and Maintenance
For the ninethree months ended September 30, 2017, operating revenues decreasedMarch 31, 2019, operation and maintenance expense increased $18 million, or 22.5%, primarily due to a:
$49 million decrease in our Military Services Group principally due to lower capital upgrades in 2017, largely from reduced military base budgets, and the completion of a large project in mid-2016 at Fort Polk; partially offset by a
$1522 million increase in our Homeowner Services Group largely from customer growththe acquisition of Pivotal in the second quarter of 2018, as well as contract growth; and price increases for existing customers.
Operation$2 million increase in our Military Services Group from the addition of two new military contracts in 2018, as discussed above; partially offset by an
$8 million decrease in our Contract Services Group from the sale of the majority of our O&M contracts in the third quarter of 2018.
Depreciation and maintenance. The following table summarizes information regarding the components of operation and maintenance expense:
 For the Three Months Ended September 30, For the Nine Months Ended September 30,
 2017 2016 Increase (Decrease) 2017 2016 Increase (Decrease)
(In millions)               
Production costs$9
 $10
 $(1) (10.0)% $28
 $27
 $1
 3.7 %
Employee-related costs21
 24
 (3) (12.5)% 69
 72
 (3) (4.2)%
Operating supplies and services26
 38
 (12) (31.6)% 84
 128
 (44) (34.4)%
Maintenance materials and supplies13
 18
 (5) (27.8)% 54
 51
 3
 5.9 %
Other6
 2
 4
 200.0 % 12
 7
 5
 71.4 %
Total$75
 $92
 $(17) (18.5)% $247
 $285
 $(38) (13.3)%
Amortization
For the three months ended September 30, 2017, operationMarch 31, 2019, depreciation and maintenance expense decreasedamortization increased $5 million, or 125%, primarily due to a:the addition of property, plant and equipment and intangible assets from the acquisition of Pivotal in the second quarter of 2018.
$12 million decrease in operating supplies and services primarily due to lower capital upgrades in our Military Services Group in 2017, as discussed above, as well as lower advertising and marketing expense in our Homeowners Services Group; and a
$5 million decrease in maintenance materials and supplies principally due to the timing of claims activity in our Homeowners Services Group, as well as the volume and timing of specific maintenance activities; partially offset by a
$4 million increase in other operation and maintenance expense largely due to an increase in customer uncollectible expense and billing and collection fees, primarily in our Homeowner Services Group.
For the nine months ended September 30, 2017, operation and maintenance expense decreased primarily due to a:
$44 million decrease in operating supplies and services primarily due to lower capital upgrades in our Military Services Group in 2017, as discussed above, as well as lower advertising and marketing expense in our Homeowners Services Group; partially offset by a
$5 million increase in other operation and maintenance expense largely due to an increase in customer uncollectible expense and billing and collection fees, principally in our Homeowner Services Group.


Liquidity and Capital Resources
For a general overview of our sources and uses of capital resources, see the introductory discussion in Part II, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources contained in our Form 10-K.
We fund liquidity needs for capital investment, working capital and other financial commitments through cash flows from operations, public and private debt offerings, commercial paper markets and, if and to the extent necessary, borrowingborrowings under the American Water Capital Corp. (“AWCC”) revolving credit facility. The revolving credit facility provides $1.75$2.25 billion in aggregate total commitments from a diversified group of financial institutions with an expirationinstitutions. On April 9, 2019, the termination date of June 2020 (subjectthe credit agreement with respect to extensionAWCC’s $2.25 billion revolving credit facility was extended pursuant to the terms of the credit agreement from March 21, 2023 to March 21, 2024. 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 usup to an aggregate of $500 million, and to request extensions of its expiration date for up to two, one-year periods).periods. As of March 31, 2019, AWCC had no outstanding borrowings and $80 million of outstanding letters of credit under the revolving credit facility, with $2.17 billion available to fulfill our short-term liquidity needs and to issue letters of credit. We regularly evaluate the capital markets and closely monitor the financial condition of the financial institutions with contractual commitments in our revolving credit facility.
In order to meet our short-term liquidity needs, we, through AWCC, our wholly owned financing subsidiary, issue commercial paper, which is supported by our revolving credit facility. The maximum aggregate principal amount of short-term borrowings authorized for issuance under its commercial paper program is $2.10 billion. As of September 30, 2017, AWCC had no outstanding borrowings and $86 million of outstanding letters of credit under the revolving credit facility, with $1.66 billion available to fulfill our short-term liquidity needs and to issue letters of credit. As of September 30, 2017,March 31, 2019, the revolving credit facility supported $103 million$1.2 billion in outstanding commercial paper. We believe that our ability to access the capital markets, our revolving credit facility and our cash flows from operations will generate sufficient cash to fund our short-term requirements. However, we can provide no assurances that the lenders will meet their existing commitments to AWCC under the 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.
On August 10, 2017, AWCC completed a $1,350 million debt offering which included the sale of $600 million aggregate principal amount of its 2.95% Senior Notes due in 2027 and $750 million aggregate principal amount of its 3.75% Senior Notes due in 2047. At the closing of the offering, AWCC received, after deduction of underwriting discounts and debt issuance costs, $1,333 million. On September 13, 2017, AWCC used proceeds from the offering: (i) to prepay $138 million of its outstanding 5.62% Series C Senior Notes due December 21, 2018 (“Series C Senior Notes”) and $181 million of its outstanding 5.77% Series D Senior Notes due December 21, 2021 (“Series D Senior Notes”); (ii) to repay commercial paper obligations; and (iii) for general corporate purposes. Subsequently, AWCC used proceeds from the offering to repay at maturity, $524 million of its 6.085% Senior Notes on October 15, 2017. In addition, the Company repaid $33 million of 7.08% subsidiary debt at maturity on November 1, 2017.
As a result of AWCC’s prepayment of the Series C and Series D Senior Notes and payment of a make-whole premium to the holders thereof of $34 million,January 8, 2019, we recordedentered into an early debt extinguishment charge of $6 million, which was associated with the portion of the debt allocable to our parent company. Substantially all of the early debt extinguishment costs allocable to our utility subsidiaries were recorded as regulatory assets that we believe are probable of recovery in future rates.
On August 7, 2017, we terminated fouradditional forward starting swap agreements with an aggregate notional amount of $300 million, realizing a gain of $19 million to be amortized through interest, net over 30 years. We have one remaining forward swap agreement, which was entered into on February 8, 2017, with a notional amount of $100$150 million, to reduce interest rate exposure for a portion of theon debt expected refinancing of AWCC’s Series C Senior Notes.to be issued in 2019. This forward starting swap agreement terminates in November 2018December 2019, and has an average fixed rate of 2.67%2.76%. We have designated this forward starting swap agreement as a cash flow hedge, with its 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.
On October 15, 2017, our interest rate swap to hedge $100 million of AWCC’s 6.085% Senior Notes matured. See Note 6—Long-Term Debt in the Notes to Consolidated Financial Statements for further information.



Cash Flows Provided by Operating Activities
Cash flows provided by operating activities primarily result from the sale of water and wastewater services and, due to the seasonality of demand, are generally greater during the third quarter of each fiscal year.warmer months. The following table provides a summary of the major items affecting our cash flows provided by our operating activities:
For the Nine Months Ended September 30,For the Three Months Ended March 31,
2017 20162019 2018
(In millions)      
Net income$427
 $367
$113
 $106
Add (less):      
Non-cash activities (a)
659
 598
Depreciation and amortization144
 129
Deferred income taxes and amortization of investment tax credits35
 33
Other non-cash activities (a)
(22) (1)
Changes in working capital (b)
(64) 22
(95) (48)
Pension and postretirement healthcare contributions(36) (42)(7) —
Net cash flows provided by operations$986
 $945
$168
 $219
(a)Includes depreciation and amortization, deferred income taxes and amortization of deferred investment tax credits, provision for losses on accounts receivable, gain(gain) on asset dispositions and purchases, pension and non-pension postretirement benefits expense and other non-cash, net. Details of each component can be found inon the Consolidated Statements of Cash Flows.
(b)Changes in working capital include changes to receivables and unbilled revenues, accounts payable and accrued liabilities, and other current assets and liabilities, net.
For the ninethree months ended September 30, 2017, the increase inMarch 31, 2019, cash flows from operating activities asdecreased $51 million compared to the same period in 2016, is2018, primarily due tothe change in other non-cash activities, an increase in net income after non-cash adjustments.pension healthcare contributions and changes in working capital. The main factors contributing to the net income increase are described in this section under “Comparison of Consolidated Results of Operations” and included higher operating revenue and lower operation and maintenance expense. The increase in non-cash activities was mainly the result of an increase in depreciation and amortization attributable to infrastructure investment projects placed into service and an increase in deferred income taxes.
The changechanges in working capital waswere primarily the result of the following: (i) timing of accounts payable and accrued liabilities, including the accrual recorded during the third quarter of 2016 for costs associated with the binding global agreement in principle as to settlement of claims related to the Freedom Industries chemical spill in West Virginia; (ii) the $34 million make-whole premium paid on early debt extinguishment associated with the prepayment of $138 million of outstanding Series C Senior Notes and $181 million of outstanding Series D Senior Notes; (iii) a decrease in unbilled revenues as a result of our Military Services Group achieving significant capital project milestones during 2016; and (iv)at the end of 2018; (ii) a change in other current assets and liabilities, including an increase in prepaid taxes, partially offset by the decreasetiming of other current assetsinterest payments associated with the terminationdebt offering we entered in to during the third quarter of our four forward starting swap agreements.2018; and (iii) timing of accounts payable and accrued liabilities. Partially offsetting these decreases is the increase in net income. The main factors contributing to the net income increase are described in this section under “Consolidated Results of Operations.”
Cash Flows Used in Investing Activities
The following table provides information regardinga summary of the major items affecting our cash flows used in our investing activities:
For the Nine Months Ended September 30,For the Three Months Ended March 31,
2017 20162019 2018
(In millions)      
Net capital expenditures$(964) $(928)$(326) $(364)
Acquisitions(10) (29)(22) (8)
Other investing activities, net (a)
(47) (57)(3) (14)
Net cash flows used in investing activities$(1,021) $(1,014)$(351) $(386)
(a)Includes removal costs from property, plant and equipment retirements net,and proceeds from sale of assets and net funds restricted.assets.
For the ninethree months ended September 30, 2017,March 31, 2019, cash used in investing activities increaseddecreased primarily due to continued investment across all infrastructure categories, mainly replacement and renewalthe timing of transmission and distribution infrastructure in our Regulated Businesses,payments for capital expenditures, partially offset by decreasedincreased cash used for acquisitions.acquisitions during 2019. We expect to make total investments in the range of approximately $1.65$1.7 billion to $1.8 billion in 20172019 for capital expenditures and acquisitions. Construction of our new corporate headquarters building in Camden, New Jersey is underway. The cost of construction is currently estimated to be up to $164 million, exclusive of any tax incentives, of which $72 million is expected to be incurred in 2017. During the nine months ended September 30, 2017, we spent approximately $36 million towards this construction.


Cash Flows Provided by Financing Activities
The following table provides information regardinga summary of the major items affecting our cash flows provided by our financing activities:
For the Nine Months Ended September 30,For the Three Months Ended March 31,
2017 20162019 2018
(In millions)      
Proceeds from long-term debt$1,382
 $2
$2
 $10
Repayments of long-term debt(334) (20)(12) (6)
Net proceeds from short-term borrowings(746) 322
237
 278
Dividends paid(215) (194)(82) (74)
Anti-dilutive stock repurchases(54) (65)(36) (45)
Other financing activities, net (a)
20
 25
1
 3
Net cash flows provided by financing activities$53
 $70
$110
 $166
(a)Includes proceeds from issuances of common stock under various employee stock plans and our dividend reinvestment plan, net of taxes paid, and advances and contributions for construction, net of refunds, taxes paid related to employee stock plans and debt issuance costs.refunds.
For the ninethree months ended September 30, 2017,March 31, 2019, the decrease in cash flows provided by financing activities, as compared to the same period in 2016, is2018, was primarily due to the increasea decrease in cash used for dividend payments in 2017. Additionally, the Company issued approximately $1,333 million of long-term debt, after deduction of underwriting discounts and debt issuance costs, as part of the August 10, 2017 debt financing, of which approximately $319 million was usedshort-term borrowings. Short-term borrowings for the early extinguishment of pre-existing long-term debt. Additional proceeds from the debt financingthree months ended March 31, 2019 were used forto fund the repaymentgrowth of pre-existing short-term borrowings, resulting in a net cash outflow for the nine months ended September 30, 2017 of $746 million.our Regulated Businesses, pay dividends and repay long-term debt.
Credit Facilities and Short-Term Debt
The following table summarizes information regarding ourprovides the aggregate credit facility commitments, letter of credit sub-limits and available fundssub-limit under thosethe revolving credit facilities,facility and commercial paper limit, as well as outstanding amounts of commercial paper and outstanding borrowings under the respective facilitiesavailable capacity for each as of September 30, 2017:March 31, 2019:
Credit Facilities Commitment (a) Available Credit Facility Capacity (a) Letter of Credit Sublimit Available Letter of Credit Capacity Commercial Paper Limit Available Commercial Paper CapacityCredit Facilities Commitment Available Credit Facility Capacity Letter of Credit Sublimit Available Letter of Credit Capacity Commercial Paper Limit Available Commercial Paper Capacity
(In millions)                      
September 30, 2017$1,762
 $1,669
 $150
 $86
 $1,600
 $1,497
March 31, 2019$2,262
 $2,181
 $150
 $70
 $2,100
 $898
(a)Includes amounts related to the revolving credit facility of Keystone Clearwater Solutions, LLC (“Keystone”), our water management solutions subsidiary. As of September 30, 2017, the total commitment under the Keystone revolving credit facility was $12 million, of which $5 million was available for borrowing, subject to compliance with a collateral base calculation. At September 30, 2017, there were no outstanding borrowings under this credit facility.
The weighted-average interest rate on AWCC short-term borrowings for three months ended September 30, 2017 and 2016 was approximately 1.38% and 0.78%, respectively. The weighted-average interest rate on AWCC short-term borrowings for the ninethree months ended September 30, 2017March 31, 2019 and 20162018 was approximately 1.19%2.76% and 0.76%1.88%, respectively.
Capital Structure
The following table indicates the percentage of our capitalization represented by the components of our capital structure as of the dates set forth below:
 September 30, 2017 December 31, 2016
Total common stockholders' equity42.5% 42.1%
Long-term debt and redeemable preferred stock at redemption value51.4% 46.4%
Short-term debt and current portion of long-term debt6.1% 11.5%
 100% 100%


Debt Covenants
Our debt agreements contain financial and non-financial covenants. To the extent that we are not in compliance with these covenants, an event of default may occur under one or more debt agreements and we or our subsidiaries may be restricted in our ability to pay dividends, issue new debt or access our revolving credit facility. Our long-term debt indentures contain a number of covenants that, among other things, prohibit or restrict the Company from issuing debt secured by the Company’s assets, subject to certain exceptions. Our failure to comply with any of these covenants could accelerate repayment obligations.
Covenants in certain long-term notes and the revolving credit facility require us to maintain a ratio of consolidated debt to consolidated capitalization (as defined in the relevant documents) of not more than 0.70 to 1.00. On September 30, 2017,March 31, 2019, our ratio was 0.580.60 to 1.00 and therefore we were in compliance with the covenants.
Security Ratings
Our access to the capital markets, including the commercial paper market, and respective financing costs in those markets, may be directly affected by our securities ratings. We primarily access the debt capital markets, including the commercial paper market, through AWCC. However, we have also issued debt through our regulated subsidiaries, primarily in the form of tax exempt securities or borrowings under state revolving funds, to lower our overall cost of debt.
Our
The following table presents our long-term and short-term credit ratingsrating and rating outlook as of September 30, 2017:May 1, 2019:
Securities Moody's
Investors Service		 Standard & Poor's
Ratings Service
Rating OutlookStableStable
Senior unsecured debt A3Baa1 A
Commercial paper P-2 A-1
On April 1, 2019, Moody’s Investors Service changed the Company’s senior unsecured debt rating to Baa1, from A3, with a stable outlook. The Company’s commercial paper rating remained unchanged.
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 athe downgrading of these security ratings, although such a downgrading could increase fees and interest charges under our credit facility.
Dividends
On September 1, 2017, we paid a cash dividend of $0.415 per share to our stockholders of record as of August 9, 2017.
On October 31, 2017, our Board of Directors declared a quarterly cash dividend payment of $0.415 per share payable on December 1, 2017 to stockholders of record as of November 10, 2017. Future dividends, when and as declared at the discretionAs part of the Boardnormal course of Directors, will be dependent upon future earningsbusiness, we routinely enter into contracts for the purchase and cash flows, compliance with various regulatory, financial and legal requirements,sale of water, energy, chemicals and other factors. See Part II, Item 7—Management’s Discussionservices. These contracts either contain express provisions or otherwise permit us and Analysisour counterparties to demand adequate assurance of Financial Conditionfuture performance when there are reasonable grounds for doing so. In accordance with the contracts and Resultsapplicable 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 Operations—Liquidity and Capital Resources—Dividends infuture performance, which could include a demand that we provide collateral to secure our Form 10-K for more information regarding restrictionsobligations. We do not expect to post any collateral which will have a material adverse impact on the paymentCompany’s results of operations, financial position or cash flows.
Dividends
For discussion of our dividends on our common stock.see Note 5—Shareholders' Equity in the Notes to Consolidated Financial Statements for additional information.
Application of Critical Accounting Policies and Estimates
Our financial condition, results of operations and cash flows are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. See Part II, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates in our Form 10-K for a discussion of our critical accounting policies. Additionally, see Note 2—Significant Accounting Policies in the Notes to Consolidated Financial Statements for updates to our significant accounting policies previously disclosed in our Form 10-K.
Recent Accounting Standards
See Note 2—NewSignificant Accounting Standards toPolicies in the Notes to Consolidated Financial Statements included in Part I, Item 1—Consolidated Financial Statements of this Quarterly Report on Form 10-Q for a description of new accounting standards recently adopted or pending adoption.


ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subjectexposed to market risksrisk in the normal course of business, including changes in commodity prices, equity prices and interest rates and equity prices.rates. For afurther discussion of our exposure to market risk, refer tosee Part II, Item 7A—Quantitative and Qualitative Disclosures about Market Risk contained in our Form 10-K. Except as described below, there have been no significant changes to our exposure to market risk since December 31, 2016.2018.
On FebruaryJanuary 8, 2017,2019, we entered into aan additional forward starting swap agreement, with a notional amount of $100$150 million, to reduce interest rate exposure on debt expected to be issued in 2018.2019. This forward starting swap agreement terminates in November 2018December 2019, and has an average fixed rate of 2.67%2.76%. A hypothetical one hundred basis point1% adverse change in the forward starting swapinterest rates would have resultedresult in a $21 million increase or decrease in the fair value of this swap agreement for the nine months ended September 30, 2017.our forward starting swaps of approximately $18 million at March 31, 2019.

ITEM 4.    CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
American Water maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
Our management, including the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2017.March 31, 2019.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2017,March 31, 2019, our disclosure controls and procedures were effective at a reasonable level of assurance.
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 in our Form 10-K for additional information. We began to integrate Pivotal into our internal control over financial reporting structure and expect to complete this integration by the end of the second quarter of 2019. We concluded that there have been no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2017,March 31, 2019, other than changes resulting from the acquisition of Pivotal, that have materially affected, or are reasonably likely to materially affect, ourthe Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act).

reporting.

PART II. OTHER INFORMATION
ITEM 1.    LEGAL PROCEEDINGS
The following information updates and amends the information provided in our Form 10-K in Part I, Item 3—Legal Proceedings, and in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2017 and June 30, 2017 in Part II, Item 1—Legal Proceedings. Capitalized terms used but not otherwise defined herein have the meanings set forth in our Form 10-K.
Alternative Water Supply in Lieu of Carmel River Diversions
Regional Desalination Project Litigation
Cal Am’s Action for Damages Following RDP Termination
On September 24, 2018, Cal Am filed a motion for summary judgment against MCWD. On February 15, 2019, the court’s dispositioncourt granted Cal Am's motion. As a result of this decision, no claims remain pending against Cal Am in this action.
On January 22, 2019, RMC filed a related issue in another case, MCWD’s petitionmotion for judgment on the pleadings against Cal Am. On February 25, 2019, the court granted RMC's motion as to Cal Am's tort claims. On April 8, 2019, Cal Am filed a writ with the SupremeCalifornia Court of CaliforniaAppeal challenging the trial court's ruling.
On March 1, 2019, MCWD filed a motion for review ofsummary judgment against Cal Am relating to Cal Am’s tort claims against it. A hearing on the CPUC approval of a settlement agreement resolving matters amongmotion is scheduled for May 15, 2019.
The parties have agreed to postpone the signatory parties has been remanded to the CPUC, and remains pending.
Trial has been set for June 18, 2018trial date in the consolidated action in San Francisco County Superior Court associated with the failure of the RDP.this matter until January 6, 2020.
Monterey Peninsula Water Supply Project
CPUC Final Approval of Water Supply Project
The City of Marina and MCWD filed amended petitions for writ of review with the Supreme Court of California on February 22, 2019 and February 26, 2019, respectively. On January 12, 2017,April 2, 2019, Cal Am, the CPUC issued a Draft Environmental Impact Report/Environmental Impact Statement. The comment period for this report expired March 29, 2017 and a final report is expected to be issued in the first quarter of 2018.
The CPUC has set hearings for October 25 through November 3, 2017 on Cal Am’s request for a certificate of public convenience and necessity for the Water Supply Project.
After conducting a trial on August 30, 2017 for all matters raised in MCWD’s November 2015 challengeMPWMD filed answers to the amendment ofpetitions.
Coastal Development Permit Application
On March 7, 2019, the Planning Commission adopted a resolution denying Cal Am’s coastal development permits forpermit application. Cal Am appealed the test slant well, other than claims that had been denied byPlanning Commission's decision to the court in September 2016, the court on October 3, 2017 denied all of MCWD’s claims with respect to these matters.
On July 13, 2017, the Coastal Commission adoptedCity Council, which set a consent agreement and cease and desist order requiring sand mining operationspublic hearing on the property on which intake wells will be locatedappeal for April 30, 2019. On April 25, 2019, Cal Am submitted a letter to cease by the end of 2020 andCity challenging the property to be sold to either a non-profit or governmental entity. The consent agreement strictly limits future useimpartiality of the property but preserves Cal Am’s existing property rightsCity and allows uses consistent with existing easements and other rights of record. If the test slant well is to remain at the site and be used as part of the Water Supply Project, as currently proposed, Cal Am will likely need to seek an amendment and extensionthree of its coastal development permit to allow the test slant well to remain and be maintained in the interim period until the Water Supply Project is operational. Cal Am will also need to seek an extension of its current lease for the test slant well with the State Lands Commission. This lease expires on December 16, 2017. Cal Am has filed an application for extension of this lease with the State Lands Commission, and approval of the application is to be considered at its November 29, 2017 meeting.
Based on the foregoing, including the information contained in our Form 10-Kcouncil members with respect to the Water Supply Project (other thanProject. On April 29, 2019, the City informed Cal Am that it intended to proceed with the hearing with the participation of the challenged City Council members. As a result, on April 29, 2019, Cal Am notified the City that it was withdrawing its appeal, as updated in this Form 10-Q),Cal Am believes it could not receive a fair and impartial hearing before the City Council. Cal Am intends to file an appeal of the Planning Commission decision to the Coastal Commission, as permitted under the City’s code and the California Coastal Act.
*     *    *
Based on 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 Cal Am’s application for the Water Supply Project will be approved or 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.
California Public Utilities Commission Residential Rate Design Proceeding
Hearings before the administrative law judge in this proceeding took place in August and September 2017, and a subsequent hearing is currently scheduled for November 27, 2017. Cal Am also submitted additional testimony on the issue of whether Cal Am should be penalized, and if so, the reasonable amount of any such penalty.
West Virginia Elk River Freedom Industries Chemical Spill
Preliminary Approval of WVAWC Global Class Action Litigation Settlement
On September 21, 2017, the court in the Federal action issued an order granting preliminary approval of a settlement class and proposed class action settlement (the “Settlement”) with respect to claims against the American Water Defendants by all putative class members (collectively, the “Plaintiffs”) for all claims and potential claims arising out of the January 9, 2014 Freedom Industries, Inc. chemical spill into the Elk River in West Virginia. Preliminary approval was granted after the parties to the Settlement filed with the court in the Federal action a proposed amended global agreement and related materials on August 25, 2017 addressing the matters set forth in the court’s July 6, 2017 order denying without prejudice the joint motion for preliminary approval of the Settlement.


The Settlement covered by the order proposes a global resolution of all federal and state litigation and potential claims against the American Water Defendants and their insurers. Under the terms and conditions of the Settlement and the proposed amended settlement agreement, the American Water Defendants have not admitted, and will not admit, any fault or liability for any of the allegations made by the Plaintiffs in any of the actions to be resolved. Under federal class action rules, a claimant may elect to opt out of the final Settlement, in which case such claimant will not receive any benefit from or be bound by the terms of the Settlement. The American Water Defendants would have the right to withdraw from the Settlement if more than a certain number of putative class members opt out of the Settlement. The deadline imposed by the court in the Federal action for any Plaintiff to opt out of the Settlement or file an objection to the Settlement is December 8, 2017.
The proposed aggregate pre-tax amount of the Settlement with respect to the Company remains at $126 million. However, the aggregate portion of the Settlement to be contributed by WVAWC, net of insurance recoveries, has been reduced from $65 million to $43 million (approximately $26 million after-tax) due to the recent settlement with one of the Company’s general liability insurance carriers, as discussed below. This reduction will apply to WVAWC’s contributions to the guaranteed fund. The contribution by another defendant to the Settlement remains at $25 million. If any final approval order by the court with respect to the Settlement is appealed and such appeal would delay potential payment to claimants under the Settlement, WVAWC and the other defendant to the Settlement will contribute up to $50 million and $25 million, respectively, to the Settlement (not including, in the case of WVAWC, any contributions by the Company’s general liability insurance carriers which would not be made until such time as a final, non-appealable order is issued) into an escrow account during the pendency of such appeals. For certain claims, WVAWC and the other defendant to the Settlement may, in lieu of these escrowed contributions, make advance payments of such claims if agreed to by the parties. All administrative expenses of the Settlement and attorneys’ fees of class counsel related thereto would be paid from the funds designated to pay claims covered by the Settlement.
Notice of the terms of the Settlement to members of the settlement class commenced on October 11, 2017 and is expected to be completed by November 8, 2017. Following the notice period, the court will hold a fairness hearing to consider final approval of the Settlement, which is currently scheduled to be held on January 9, 2018. There can be no assurance that the Settlement will not be amended further or that the court will provide its final approval as to any agreement negotiated between the parties reflecting the terms of the Settlement.
The court in the Federal action has currently postponed a trial indefinitely in light of the preliminary approval of the Settlement and the global settlement agreement described above, and the Mass Litigation Panel stayed its proceedings until January 23, 2018.
Two of the Company’s insurance carriers that provide an aggregate of $50 million in insurance coverage to the Company under its general liability policies, had been originally requested, but at the time of the initial filing of the binding agreement in principle with the court in the Federal action in October 2016, had not agreed, to participate in the Settlement. WVAWC had filed a lawsuit against one of these carriers alleging that the carrier’s failure to agree to participate in the Settlement constituted a breach of contract. On September 19, 2017, the Company and the insurance carrier settled this lawsuit for $22 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 Company and WVAWC of all claims against the insurance carrier related to the Freedom Industries chemical spill, and the parties agreed to stay this litigation pending final approval of the Settlement. The settlement with the insurance carrier reduced the total amount of WVAWC’s potential contributions to the Settlement from $65 million to $43 million. In the third quarter of 2017, WVAWC recorded an additional insurance receivable of $22 million, resulting in an after-tax benefit of $13 million.
The Company and WVAWC continue to pursue vigorously their rights to insurance coverage for contributions by WVAWC to the Settlement in mandatory arbitration with the remaining non-participating carrier. This arbitration proceeding remains pending. Despite these efforts, the Company may not ultimately be successful in obtaining further reimbursement under the remaining insurance policy for amounts that WVAWC may be required to contribute to the Settlement.
Dunbar, West Virginia Water Main Break Class Action Litigation
On October 12, 2017, WVAWC filed withFebruary 21, 2019, the court aWest Virginia Circuit Court in Kanawha County issued an order denying WVAWC’s motion seeking to dismiss all of the plaintiffs’ counts alleging statutory and common law tort claims. Furthermore, WVAWC asserts that the PSC, and not the court, has primary jurisdiction over allegations involving violations of the applicable tariff, the public utility code and related rules. This motion remains 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. While WVAWC and the Company are unable to predict the outcome of this matter, an adverse outcome could have a material adverse effect on the Company’s financial condition, results of operations, cash flows, liquidity and/or reputation.


Contract Operations Group -- East Palo Alto Water System Voluntary Report
By letter dated October 4, 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 15, 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. Proven violations of the CSDWA may result in civil and criminal penalties. AWE continues to cooperate with the SWRCB, the City of East Palo Alto and other authorities regarding this matter.


ITEM 1A.    RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A—Risk Factors in our Form 10-K, and in our other public filings, which could materially affect our business, financial condition or future results. There have been no material changes from the risk factors previously disclosed in Part I, Item 1A—Risk Factors in our Form 10-K.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In February 2015, the Board of Directors authorized an anti-dilutive stock repurchase program to mitigate the dilutive effect of shares issued through the Company’s 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 these repurchases, the Company enters into Rule 10b5-1 stock repurchase plans with a third-party broker, which allow the Company to repurchase shares of its common stock at times when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. Subject to applicable regulations, the Company may elect to amend or cancel the program or the stock repurchase parameters at its discretion to manage dilution.
The Company did not repurchasefollowing table provides a summary of information about the shares of common stock purchased by the Company during the three months ended September 30, 2017. From April 1, 2015, the date repurchases under the anti-dilutive stock repurchase program commenced, through September 30, 2017, the Company repurchased an aggregate of 3,950,000 shares of common stock under the program, leaving an aggregate of 6,050,000 shares available for repurchase under this program.March 31, 2019:
 Total Number of Shares Purchased Average Price per Share (a) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (b) Maximum Number of Shares Available to be Purchased Under the Plan or Program
January 1 - January 31, 2019—
 —
 —
 5,490,000
February 1 - February 28, 2019—
 —
 —
 5,490,000
March 1 - March 31, 2019350,000
 $101.54
 350,000
 5,140,000
 350,000
 $101.54
 350,000
  
(a)Average price paid per share includes brokerage fees and commissions incurred by the Company in connection with these repurchases.
(b)From April 1, 2015, the date repurchases under the anti-dilutive stock repurchase program commenced, through March 31, 2019, the Company repurchased an aggregate of 4,860,000 shares of common stock under the program.
ITEM 3.    DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4.    MINE SAFETY DISCLOSURES
None.
ITEM 5.    OTHER INFORMATION
None.


ITEM 6.    EXHIBITS
 Exhibit Number Exhibit Description
3.1 
Restated Certificate of Incorporation of American Water Works Company, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q, File No. 001-34028, filed November 6, 2008).
3.2 
Amended and Restated Bylaws of American Water Works Company, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q, File No. 001-34028, filed August 5, 2015).
4.1*10.1 
Officers’ CertificateAmerican Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2019 Restricted Stock Unit Grant.
*10.2
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2019 Restricted Stock Unit Grant (for certain executives).
*10.3
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2019 Restricted Stock Unit Grant (for Chief Executive Officer, Chief Financial Officer and Chief Operating Officer).
*10.4
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2019 Restricted Stock Unit Grant (for Loyd A. Warnock).
*10.5
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2019 Restricted Stock Unit Grant (for Radhakrishnan Swaminathan).
*10.6
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2019 Performance Stock Unit Grant Form A-1.
*10.7
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2019 Performance Stock Unit Grant Form A-2.
*10.8
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2019 Performance Stock Unit Grant Form A-3.
*10.9
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2019 Performance Stock Unit Grant Form A (for Loyd A. Warnock).
*10.10
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2019 Performance Stock Unit Grant Form A (for Radhakrishnan Swaminathan).
*10.11
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2019 Performance Stock Unit Grant Form B-1.
*10.12
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2019 Performance Stock Unit Grant Form B-2.
*10.13
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2019 Performance Stock Unit Grant Form B-3.
*10.14
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2019 Performance Stock Unit Grant Form B (for Loyd A. Warnock).
*10.15
American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan 2019 Performance Stock Unit Grant Form B (for Radhakrishnan Swaminathan).
*10.16
Second Amendment to the Pension Plan for Employees of American Water Works Company, Inc. and its Designated Subsidiaries, as amended and restated effective January 1, 2016.
10.17.1
Second Amended and Restated Credit Agreement, dated as of March 21, 2018, by and among American Water Works Company, Inc., American Water Capital Corp., dated August 10, 2017, establishingeach of the terms of its 2.95% Senior Notes due 2027Lenders 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 4.110.1 to the Company’sAmerican Water Works Company, Inc.’s Current Report on Form 8-K, File No. 001-34028, filed August 10, 2017)on March 21, 2018).
4.2*10.17.2 
Officers’ CertificateExtension Agreement, dated as of April 9, 2019, among American Water Works Company, Inc., American Water Capital Corp., dated August 10, 2017, establishingeach of the terms of its 3.75% Senior Notes due 2047 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, File No. 001-34028, filed August 10, 2017).Lenders party thereto, and Wells Fargo Bank, National Association, as administrative agent.
10.110.18 
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 4.110.2 to the Company’s Registration StatementAmerican Water Works Company, Inc.’s Quarterly Report on Form S-8,10-Q, File No. 333-219682,001-34028, filed August 4, 2017)October 31, 2018).
*31.1 
Certification of Susan N. Story, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act.
*31.2 
Certification of Linda G. Sullivan, Executive Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act.
**32.1 
Certification of Susan N. Story, President and Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act.
**32.2 
Certification of Linda G. Sullivan, Executive Vice President and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act.

 Exhibit NumberExhibit Description
*101 The following financial statements from American Water Works Company, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2017,March 31, 2019, filed with the Securities and Exchange Commission on NovemberMay 1, 2017,2019, 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 Stockholders’Shareholders’ Equity; and (vi) the Notes to Consolidated Financial Statements.
 *    Filed herewith.
**     Furnished herewith.



SIGNATURES
Pursuant to the requirements 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 1st day of November, 2017.May, 2019.
 
AMERICAN WATER WORKS COMPANY, INC.
 
(REGISTRANT)
By/s/ SUSAN N. STORY
 
Susan N. Story
President and Chief Executive Officer
(Principal Executive Officer)
By/s/ LINDA G. SULLIVAN
 
Linda G. Sullivan
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
By/s/ MELISSA K. WIKLE
 
Melissa K. Wikle
Vice President and Controller
(Principal Accounting Officer)


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