Edgar Filing: American Water Works Company, Inc.

awk-10q_20160331.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2016

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-34028

AMERICAN WATER WORKS COMPANY, INC.

(Exact name of registrant as specified in its charter)

Delaware		51-0063696
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1025 Laurel Oak Road, Voorhees, NJ		08043
(Address of principal executive offices)		(Zip Code)

(856) 346-8200

(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 or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	x	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	¨

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 April 28, 2016

Common Stock, $0.01 par value per share

177,714,495 shares

(excludes 3,721,496 treasury shares as of April 28, 2016)

TABLE OF CONTENTS

AMERICAN WATER WORKS COMPANY, INC.

Quarterly REPORT ON FORM 10-Q

FOR THE QUARTER ENDED March 31, 2016

INDEX

FORWARD LOOKING STATEMENTS	1

PART I. FINANCIAL INFORMATION	3

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS	3
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	30
ITEM 4. CONTROLS AND PROCEDURES	30

PART II. OTHER INFORMATION	31

ITEM 1. LEGAL PROCEEDINGS	31
ITEM 1A. RISK FACTORS	31
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	32
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	32
ITEM 4. MINE SAFETY DISCLOSURES	32
ITEM 5. OTHER INFORMATION	32
ITEM 6. EXHIBITS	33

SIGNATURES	34
EXHIBIT INDEX	35

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,” “assume,” “forecast,” “outlook,” “future,” “pending,” “goal,” “objective,” “potential,” “continue,” “seek to,” “may,” “can,” “should,” “will” and “could” or the negative of such terms or other variations or similar expressions. Forward-looking statements may relate to, among other things, our future financial performance, including our operation and maintenance (“O&M”) efficiency ratio, cash flows, our growth and portfolio optimization strategies, our projected capital expenditures and related funding requirements, our ability to repay debt, our projected strategy to finance current operations and growth initiatives, the impact of legal proceedings and potential fines and penalties, business process and technology improvement initiatives, trends in our industry, regulatory or legal developments or rate adjustments, including rate case filings, filings for infrastructure surcharges and filings to address regulatory lag.

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 rates;

the timeliness of regulatory commissions’ actions concerning rates, permitting and other decisions;

changes in customer demand for, and patterns of use of, water, such as may result from conservation efforts;

changes in laws, governmental regulations and policies, including environmental, health and safety, water quality and public utility regulations and policies;

weather conditions, patterns, events or natural disasters, including drought or abnormally high rainfall, strong winds, coastal and intercoastal flooding, earthquakes, landslides, hurricanes and tornados;

the outcome of litigation and government action related to the Freedom Industries spill in West Virginia;

our ability to appropriately maintain current infrastructure, including our technology systems, and manage expansion of our business;

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 and attacks on, or infiltration of or other disruptions to, our computer systems or other critical infrastructure;

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 business and capitalize on growth opportunities, including our ability to, among other things:

acquire and integrate water and wastewater systems into our regulated operations; and

enter into contracts and other agreements with, or otherwise acquire, new customers in our market-based businesses, including with respect to the provision of water services to customers in the natural gas exploration and production market;

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 law and similar matters resulting from, among other things, the provision of water services to customers in the natural gas exploration and production market;

changes in general economic, 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 our current or future debt that could increase our financing costs 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 income tax laws, including tax reform, the availability of tax credits and tax abatement programs, and our ability to utilize our U.S. and state net operating loss 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, or the inability to obtain, insurance at acceptable rates and on acceptable terms and conditions;

the incurrence of impairment charges related to our goodwill or other assets;

labor actions, including work stoppages and strikes;

ability to retain and attract qualified employees; and

civil disturbances or terrorist threats or acts, or public apprehension about future disturbances or terrorist threats or acts.

These forward-looking statements are qualified by, and should be read together with, the risk factors and other statements contained in our Annual Report on Form 10-K for the year ended December 31, 2015 (“Form 10-K”), and in this Form 10-Q, and investors should refer to such risk factors and other statements 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 United States Securities and Exchange Commission. 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)

	March 31,			December 31,
	2016			2015
ASSETS
Property, plant and equipment	$	18,745		$	18,504
Accumulated depreciation		(4,647	)		(4,571	)
Property, plant and equipment, net		14,098			13,933
Current assets:
Cash and cash equivalents		66			45
Restricted funds		22			21
Accounts receivable, net		220			255
Unbilled revenues		247			267
Materials and supplies		41			38
Other		42			31
Total current assets		638			657
Regulatory and other long-term assets:
Regulatory assets		1,289			1,271
Goodwill		1,313			1,302
Other		79			78
Total regulatory and other long-term assets		2,681			2,651
TOTAL ASSETS	$	17,417		$	17,241

The accompanying notes are an integral part of these consolidated financial statements.

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Balance Sheets (Unaudited)

(In millions, except share and per share data)

	March 31,			December 31,
	2016			2015
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock ($0.01 par value, 500,000,000 shares authorized, 181,408,112 and 180,907,483 shares outstanding, respectively)	$	2		$	2
Paid-in-capital		6,368			6,351
Accumulated deficit		(991	)		(1,073	)
Accumulated other comprehensive loss		(87	)		(88	)
Treasury stock, at cost (3,672,671 and 2,625,112 shares, respectively)		(210	)		(143	)
Total common stockholders' equity		5,082			5,049
Long-term debt		5,850			5,862
Redeemable preferred stock at redemption value		11			12
Total long-term debt		5,861			5,874
Total capitalization		10,943			10,923
Current liabilities:
Short-term debt		839			628
Current portion of long-term debt		54			54
Accounts payable		116			126
Accrued liabilities		368			493
Taxes accrued		58			26
Interest accrued		96			62
Other		83			144
Total current liabilities		1,614			1,533
Regulatory and other long-term liabilities:
Advances for construction		352			349
Deferred income taxes, net		2,358			2,310
Deferred investment tax credits		23			24
Regulatory liabilities		407			402
Accrued pension expense		342			342
Accrued postretirement benefit expense		168			169
Other		70			68
Total regulatory and other long-term liabilities		3,720			3,664
Contributions in aid of construction		1,140			1,121
Commitments and contingencies (see Note 9)	—			—
TOTAL CAPITALIZATION AND LIABILITIES	$	17,417		$	17,241

The accompanying notes are an integral part of these 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 March 31,
	2016			2015
Operating revenues	$	743		$	698
Operating expenses:
Operation and maintenance		348			324
Depreciation and amortization		116			107
General taxes		66			64
Gain on asset dispositions and purchases		(1	)		(1	)
Total operating expenses, net		529			494
Operating income		214			204
Other income (expense):
Interest, net		(80	)		(75	)
Other, net		2			4
Total other income (expense)		(78	)		(71	)
Income from continuing operations before income taxes		136			133
Provision for income taxes		54			53
Net income attributable to common stockholders	$	82		$	80

Basic earnings per share:
Net income attributable to common stockholders	$	0.46		$	0.45
Diluted earnings per share:
Net income attributable to common stockholders	$	0.46		$	0.44
Weighted average common shares outstanding:
Basic		178			179
Diluted		179			180
Dividends declared per common share	$	—		$	—

The accompanying notes are an integral part of these consolidated financial statements.

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Comprehensive Income (Unaudited)

(In millions)

	For the Three Months Ended March 31,
	2016			2015
Net income attributable to common stockholders	$	82		$	80
Other comprehensive income (loss), net of tax:
Pension amortized to periodic benefit cost:
Actuarial loss, net of tax of $1 in 2016 and 2015		1			1
Foreign currency translation adjustment		1			(1	)
Unrealized loss on cash flow hedges, net of tax of $(1) in 2016		(1	)		—
Net other comprehensive income (loss)		1			—
Comprehensive income attributable to common stockholders	$	83		$	80

The accompanying notes are an integral part of these consolidated financial statements.

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Cash Flows (Unaudited)

(In millions)

	For the Three Months Ended March 31,
	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	82		$	80
Adjustments to reconcile to net cash flows provided by operating activities:
Depreciation and amortization		116			107
Deferred income taxes and amortization of investment tax credits		52			34
Provision for losses on accounts receivable		6			8
Gain on asset dispositions and purchases		(1	)		(1	)
Pension and non-pension postretirement benefits		15			15
Other non-cash, net		(24	)		(13	)
Changes in assets and liabilities:
Receivables and unbilled revenues		49			(9	)
Pension and non-pension postretirement benefit contributions		(14	)		(13	)
Accounts payable and accrued liabilities		15			2
Other assets and liabilities, net		(49	)		(12	)
Net cash provided by operating activities		247			198
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(284	)		(226	)
Acquisitions		(22	)	—
Proceeds from sale of assets and securities		1			1
Removal costs from property, plant and equipment retirements, net		(17	)		(14	)
Net funds restricted		(1	)		(7	)
Net cash used in investing activities		(323	)		(246	)
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of long-term debt		(11	)		(4	)
Net short-term borrowings with maturities less than three months		211			95
Proceeds from issuances of employee stock plans and DRIP		10			6
Advances and contributions for construction, net of refunds of $5 and $4, respectively		7			5
Debt issuance costs		(1	)	—
Dividends paid		(61	)		(56	)
Anti-dilutive stock repurchases		(62	)	—
Tax benefit realized from equity compensation		4			3
Net cash provided by financing activities		97			49
Net increase in cash and cash equivalents		21			1
Cash and cash equivalents as of beginning of period		45			23
Cash and cash equivalents as of end of period	$	66		$	24
Non-cash investing activity:
Capital expenditures acquired on account but unpaid as of end of period	$	166		$	134

The accompanying notes are an integral part of these consolidated financial statements.

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

(In millions)

	Common Stock						Accumulated			Accumulated Other Comprehensive			Treasury Stock						Total Stockholders'
	Shares		Par Value		Paid-in Capital		Deficit			Loss			Shares			At Cost			Equity
Balance as of December 31, 2015		180.9	$	2	$	6,351	$	(1,073	)	$	(88	)		(2.6	)	$	(143	)	$	5,049
Net income attributable to common stockholders		—		—		—		82			—			—			—			82
Direct stock reinvestment and purchase plan		—		—		1		—			—			—			—			1
Employee stock purchase plan		—		—		1		—			—			—			—			1
Stock-based compensation activity		0.5		—		15		—			—			(0.1	)		(5	)		10
Repurchases of common stock		—		—		—		—			—			(1.0	)		(62	)		(62	)
Other comprehensive income		—		—		—		—			1			—			—			1
Balance as of March 31, 2016		181.4	$	2	$	6,368	$	(991	)	$	(87	)		(3.7	)	$	(210	)	$	5,082


	Common Stock						Accumulated			Accumulated Other Comprehensive			Treasury Stock						Total Stockholders'
	Shares		Par Value		Paid-in Capital		Deficit			Loss			Shares			At Cost			Equity
Balance as of December 31, 2014		179.5	$	2	$	6,302	$	(1,296	)	$	(82	)		(0.2	)	$	(11	)	$	4,915
Cumulative effect of change in accounting principle	—		—		—			(8	)	—			—			—				(8	)
Net income attributable to common stockholders		—		—		—		80			—			—			—			80
Direct stock reinvestment and purchase plan	—			—		1		—			—			—			—			1
Employee stock purchase plan		—		—		1		—			—			—			—			1
Stock-based compensation activity		0.4		—		10		—			—			(0.1	)		(6	)		4
Balance as of March 31, 2015		179.9	$	2	$	6,314	$	(1,224	)	$	(82	)		(0.3	)	$	(17	)	$	4,993

The accompanying notes are an integral part of these 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 provided in this report include the accounts of American Water Works Company, Inc. and all of its subsidiaries (collectively, “American Water” or the “Company”) in which a controlling interest is maintained after the elimination of intercompany accounts and transactions. The 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 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 March 31, 2016 and 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 Consolidated Balance Sheet as of December 31, 2015 is derived from the Company's audited consolidated financial statements as of December 31, 2015. The unaudited financial statements and notes 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, 2015 (“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, due primarily to the seasonality of the Company’s operations.

Note 2: New Accounting Pronouncements

The following recently issued accounting standard has been adopted by the Company as of March 31, 2016:

Standard

Description

Date of Adoption

Application

Effect on the Consolidated Financial Statements

(or Other Significant Matters)

Accounting for Fees Paid in a Cloud Computing Arrangement

Clarified accounting guidance for fees paid in a cloud computing arrangement. Software license elements in a cloud computing arrangement should be accounted for consistent with other software licenses. A cloud computing arrangement without a software license is accounted for as a service contract.

January 1, 2016

Prospective

Adoption of this standard did not impact the Company’s results of operations, financial position or cash flows.

The following recently issued accounting standards are not yet required to be adopted by the Company as of March 31, 2016:

Standard	Description	Date of Adoption	Application	Effect on the Consolidated Financial Statements (or Other Significant Matters)
Accounting for Leases	Updated the accounting and disclosure guidance for leasing arrangements. Under this guidance, a lessee will be required to recognize the following for all leases, excluding short-term leases, at the commencement date: (i) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Under the guidance, lessor accounting is largely unchanged.	January 1, 2019*	Modified retrospective	The Company is currently evaluating the effect on the financial statements and related disclosures.
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 on the Consolidated Statements of Cash Flows; (iii) election of an accounting policy for forfeitures; (iv) the amount an employer can withhold to cover income taxes and still qualify for equity classification; and (v) the classification of taxes paid on the Consolidated Statements of Cash Flows.	January 1, 2017*	Various	The Company is currently evaluating the effect on the financial statements and related disclosures.
Revenue from Contracts with Customers	Provided new accounting guidance for revenue recognition replacing most existing guidance, including industry-specific guidance. Upon adoption, a company will recognize revenue for the transfer of goods or services to customers equal to the amount it expects to be entitled to receive for those goods or services. The guidance also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments.	January 1, 2018*	Retrospective	The Company is currently evaluating the effect on the financial statements and related disclosures.

*	Early adoption is permitted. The Company is currently evaluating the effect of early adoption and may elect to early adopt in a future period.

Note 3: Acquisitions

During the three-month period ended March 31, 2016, the Company closed on seven acquisitions of various regulated water and wastewater systems for a total aggregate purchase price of $22, net of cash received. Assets acquired, principally utility plant, totaled $27. Liabilities assumed totaled $16, including $6 of contributions in aid of construction and $6 of other long-term liabilities. The Company recorded additional goodwill of $11 associated with two of its acquisitions, which is reported in its Regulated Businesses segment and is expected to be fully deductible for tax purposes.

Note 4: Stockholders’ Equity

Accumulated Other Comprehensive Loss

The following table presents changes in accumulated other comprehensive loss by component, net of tax, for the three months ended March 31, 2016 and 2015, respectively:

	Defined Benefit Plans													Accumulated
	Employee Benefit Plan Funded Status			Amortization of Prior Service Cost		Amortization of Actuarial Loss		Foreign Currency Translation			Loss on Cash Flow Hedges			Other Comprehensive Loss
Beginning balance at January 1, 2016	$	(126	)	$	1	$	36	$	2		$	(1	)	$	(88	)
Other comprehensive income before reclassifications		—			—		—		1			(1	)		—
Amounts reclassified from accumulated other comprehensive loss		—			—		1		—			—			1
Net other comprehensive income (loss)		—			—		1		1			(1	)		1
Ending balance as of March 31, 2016	$	(126	)	$	1	$	37	$	3		$	(2	)	$	(87	)

Beginning balance at January 1, 2015	$	(116	)	$	1	$	31	$	3		$	(1	)	$	(82	)
Other comprehensive loss before reclassifications		—			—		—		(1	)		—			(1	)
Amounts reclassified from accumulated other comprehensive loss		—			—		1		—			—			1
Net other comprehensive income (loss)		—			—		1		(1	)		—			—
Ending balance as of March 31, 2015	$	(116	)	$	1	$	32	$	2		$	(1	)	$	(82	)

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. These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension cost. (See Note 8)

The amortization of the loss on cash flow hedges is reclassified to net income attributable to common stockholders during the period incurred and is included in interest, net in the accompanying Consolidated Statements of Operations.

Anti-dilutive Stock Repurchase Program

In February 2015, the Company’s Board of Directors authorized an anti-dilutive stock repurchase program, which allowed the Company to purchase up to 10.0 shares of its outstanding common stock over an unrestricted period of time. During the three months ended March 31, 2016, the Company repurchased 1.0 shares of common stock in the open market at an aggregate cost of $62 under the program. As of March 31, 2016, there were 6.8 shares of common stock available for repurchase under the program.

Note 5: Stock Based Compensation

Stock Options

During the three months ended March 31, 2016, the Company granted non-qualified stock options to certain employees under the Company’s 2007 Omnibus Equity Compensation Plan (the “2007 Plan”). Stock options have a maximum term of seven years, are granted with exercise prices equal to the fair market value of the Company’s common stock on the date of grant, vest ratably over a three-year service period beginning January 1 of the year of the grant and generally are subject to the employee’s continued employment with the Company. Stock options granted are valued using the Black-Scholes option-pricing model.

The following table presents the weighted-average assumptions used in the Black-Scholes option-pricing model and the resulting weighted-average grant date fair value per share of stock options granted during the three months ended March 31, 2016:

Dividend yield		2.09	%
Expected volatility		15.89	%
Risk-free interest rate		1.15	%
Expected life (years)		4.0
Exercise price	$	65.15
Grant date fair value per share	$	6.59

The grant date fair value is amortized through expense over the requisite service period using the straight-line method. As of March 31, 2016, $3 of total unrecognized compensation cost related to the non-vested stock options is expected to be recognized over the weighted-average period of 2.2 years.

The table below summarizes stock option activity for the three months ended March 31, 2016:

	Shares (in thousands)			Weighted- Average Exercise Price (per share)		Weighted- Average Remaining Life (years)		Aggregate Intrinsic Value
Options outstanding as of January 1, 2016		1,187		$	39.70		3.9	$	24
Granted		339			65.15
Forfeited or expired		(20	)		57.66
Exercised		(228	)		33.86
Options outstanding as of March 31, 2016		1,278		$	47.22		4.6	$	28
Exercisable as of March 31, 2016		684		$	37.49		3.2	$	22

The following table summarizes additional information regarding stock options exercised for the three months ended March 31, 2016 and 2015:

	2016		2015
Intrinsic value	$	7	$	4
Exercise proceeds		8		5
Income tax benefit		2		1

Restricted Stock Units (“RSUs”)

During the three months ended March 31, 2016, the Company granted RSUs, both with and without performance conditions, to certain employees under the 2007 Plan. The RSUs without performance conditions generally vest ratably over a three-year service period beginning January 1 of the year of grant and are valued at the market value of the Company’s common stock on the date of grant. The RSUs with performance conditions include those with internal performance measures, and separately, certain market thresholds and vest ratably over a three-year performance period beginning January 1 of the year of grant (the “Performance Period”). Distribution of the performance shares is contingent upon the achievement of internal performance measures and, separately, certain market thresholds over the Performance Period. The RSUs with internal performance measures are valued at the market value of the Company’s common stock on the date of grant. The RSUs granted with market conditions are valued using the Monte Carlo simulation model.

The following table presents the weighted-average assumptions used in the Monte Carlo simulation model for RSUs with market conditions granted during the three months ended March 31, 2016:

Expected volatility		15.90	%
Risk-free interest rate		0.91	%
Expected life (years)		3.0
Grant date fair value per share	$	76.88

During 2013, the Company granted selected employees RSUs with performance conditions (the “2013 RSUs”) comprised of internal performance measures and, separately, market thresholds expressed in the form of a relative total shareholder return. An aggregate of 128 thousand of the 2013 RSUs vested in January 2016. The terms of the 2013 RSUs specified that, so long as the participant continued to be employed by the Company during the Performance Period and to the extent the performance conditions were achieved, the RSUs would vest at target; if the performance conditions were surpassed, up to 175% of the target number of shares would be distributed; and to the extent that the performance thresholds were not met, the award would be forfeited. In January 2016, an additional 74 thousand RSUs were granted and immediately vested because performance thresholds associated with the 2013 RSUs were exceeded.

The table below summarizes RSU activity for the three months ended March 31, 2016:

	Shares (in thousands)			Weighted-Average Grant Date Fair Value (per share)
Non-vested total as of January 1, 2016		436		$	46.97
Granted		130			69.10
Performance share adjustment		74			39.89
Vested		(238	)		40.96
Forfeited		(9	)		59.55
Non-vested total as of March 31, 2016		393		$	56.31

The following table summarizes additional information regarding RSUs issued during the three months ended March 31, 2016 and 2015:

	2016		2015
Intrinsic value	$	15	$	15
Income tax benefit		2		2

The grant date fair value of the restricted stock awards that vest ratably and have market and/or performance and service conditions are amortized through expense over the requisite service period using the graded-vesting method. RSUs that have no performance conditions are amortized through expense over the requisite service period using the straight-line method. As of March 31, 2016, $10 of total unrecognized compensation cost related to the non-vested RSUs is expected to be recognized over the weighted-average remaining life of 1.6 years.

Note 6: Long-Term Debt

The following long-term debt was retired through sinking fund provisions, optional redemptions or payment at maturity during the first three months of 2016:

Company	Type	Rate		Maturity	Amount
American Water Capital Corp. (a)	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%-5.30%		2016-2041		9
Other American Water subsidiaries	Mandatorily redeemable preferred stock		8.49%	2036		1
Total retirements and redemptions					$	11

(a)	American Water Capital Corp. (“AWCC”) is the Company’s wholly owned financing subsidiary.

On March 24, 2016, the Company entered into three forward starting swap agreements with an aggregate notional amount of $225 to reduce interest rate exposure on debt expected to be issued in 2017. The forward starting swap agreements terminate in December 2017 and have a fixed rate of 2.30%. As of March 31, 2016, the Company recorded a derivative liability of $2 related to the fair value of the forward starting swap agreements. The Company has designated the forward starting swap agreements as cash flow hedges and the initial fair value, in addition to any subsequent changes in fair value, are recognized in accumulated other comprehensive loss. Upon termination, the cumulative gain or loss recorded in accumulated other comprehensive loss will be amortized through interest, net over the term of the issued debt.

The Company has an interest rate swap to hedge $100 of its 6.085% fixed-rate debt maturing 2017. The Company pays variable interest of six-month LIBOR plus 3.422% and the interest rate swap matures with the fixed-rate debt in 2017. The Company has designated the 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 recognized by the Company was de minimis for the three months ended March 31, 2016 and 2015.

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 $8. The Company has designated these instruments as economic hedges accounted for at fair value with gains or losses recognized in interest, net. The gain recognized by the Company was de minimis for the three months ended March 31, 2016 and 2015.

No ineffectiveness was recognized for the three months ended March 31, 2016 and 2015 related to hedging instruments.

The following table provides a summary of the gross fair value for the Company’s derivative asset and liabilities, as well as the location of the asset and liability balances in the Consolidated Balance Sheets:

Derivative Instruments

Derivative Designation

Balance Sheet Classification

March 31,

2016

December 31,

2015

Asset Derivative

Interest rate swap

Fair value hedge

Other long-term assets

Liability Derivatives

Forward starting swaps

Cash flow hedge

Other long-term liabilities

—

Interest rate swap

Economic hedge (non-designated)

Other long-term liabilities

Note 7: Short-Term Debt

On March 22, 2016, AWCC and its lenders agreed to increase total commitments under AWCC’s revolving credit facility to $1.75 billion from $1.25 billion. Other terms and conditions of the existing facility remained unchanged. The Company incurred $1 of issuance costs in connection with the increased lending commitments, which will be amortized over the remaining life of the credit facility.

On March 22, 2016, AWCC increased the size of its $1.0 billion commercial paper program to permit the issuance of short-term commercial paper notes by AWCC in an aggregate principal amount not to exceed $1.6 billion outstanding at any time. AWCC had $839 and $626 in commercial paper borrowings as of March 31, 2016 and December 31, 2015, respectively. Commercial paper borrowings are included in short-term debt in the Consolidated Balance Sheets.

Note 8: Pension and Other Postretirement Benefits

The following table provides the components of net periodic benefit costs:

	For the Three Months Ended March 31,
	2016	2015
Components of net periodic pension benefit cost