Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read together with the Consolidated Financial Statements and the notes thereto included elsewhere in this Form 10-K. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about our business, operations and financial performance. The cautionary statements made in this Form 10-K should be read as applying to all related forward-looking statements whenever they appear in this Form 10-K. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under “Forward-Looking Statements,” Item 1A—Risk Factors and elsewhere in this Form 10-K.

Overview

American Water is the largest and most geographically diverse, publicly-traded water and wastewater utility company in the United States, as measured by both operating revenues and population served. We employ approximately 6,900 professionals who provide drinking water, wastewater and other related services to an estimated 15 million people in 46 states, the District of Columbia and Ontario, Canada. Our primary business involves the ownership of utilities that provide water and wastewater services to residential, commercial, industrial, public authority, fire service and sale for resale customers, collectively presented as our “Regulated Businesses.” Our utilities operate in 16 states and serve approximately 3.4 million customers, based on the number of active service connections to our water and wastewater networks. Our Regulated Businesses are generally subject to economic regulation by certain state utility commissions or other entities engaged in utility regulation, collectively referred to as PUCs. We also operate market-based businesses within four operating segments, providing a broad range of related and complementary water and wastewater services to military bases, municipalities, oil and gas exploration and production companies, as well as commercial, industrial and residential customers. Individually, these four operating segments do not meet the criteria of a reportable segment in accordance with generally accepted accounting principles in the United States (“GAAP”), and are collectively presented as our Market-Based Businesses, which is consistent with how management assesses the results of these businesses.

2017 Financial Results

The following table provides highlights of our diluted earnings per share and our adjusted diluted earnings per share (a non-GAAP measure):

	For the Years Ended December 31,
	2017				2016				2015
Diluted earnings per share (GAAP):
Net income attributable to common stockholders	$	2.38			$	2.62			$	2.64
Non-GAAP adjustments:
Impact of Freedom Industries settlement activities	(0.12		)		0.36				—
Income tax impact	0.05				(0.14		)		—
Net non-GAAP adjustment	(0.07		)		0.22				—
Early extinguishment of debt at the parent company	0.03				—				—
Income tax impact	(0.01		)		—				—
Net non-GAAP adjustment	0.02				—				—
Impact of re-measurement from the Tax Cuts and Jobs Act	0.70				—				—
Total net non-GAAP adjustments	0.65				0.22				—
Adjusted diluted earnings per share (non-GAAP)	$	3.03			$	2.84			$	2.64

For the year ended December 31, 2017, net income attributable to common stockholders was $2.38 per diluted share, a decrease of $0.24 per diluted share, or 9.2%, as compared to the prior year. Included in the 2017 amount was: (i) 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 chemical spill; (ii) an after-tax charge of $4 million, or $(0.02) per diluted share, resulting from the early extinguishment of debt at the parent company; and (iii) a non-cash, after-tax re-measurement charge of $125 million, or $0.70 per diluted share, resulting from the impact of the change in the federal tax rate on the Company’s deferred income taxes from the enactment of the TCJA on December 22, 2017. Included in the 2016 amounts 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. For additional information, see Item 3—Legal Proceedings—West Virginia Elk River Freedom Industries Chemical Spill.

Excluding these items, adjusted diluted earnings per share (a non-GAAP measure) was $3.03 for the year ended December 31, 2017, an increase of $0.19 per diluted share, or 6.7%, as compared to the prior year. This increase was primarily due to continued growth in our Regulated Businesses, largely driven by infrastructure investment, acquisitions and organic growth, combined with growth in our Market-Based Businesses from our Homeowner Services Group and Keystone. These increases were partially offset by lower water services demand in 2017 in our Regulated Businesses, attributable in part to overall warmer weather in 2016, as well as lower capital upgrades in our Military Services Group. For further discussion of our consolidated results of operations, as well as financial results for our Regulated Businesses segment and our Market-Based Businesses, see “Consolidated Results of Operations” and “Segment Results of Operations” for additional information.

Adjusted diluted earnings per share represents a non-GAAP financial measure and means diluted earnings per share, calculated in accordance with GAAP, excluding the impact of: (i) the third quarter of 2017 insurance settlement related to the Freedom Industries chemical spill; (ii) the early extinguishment of debt at the parent company in the third quarter of 2017; (iii) the non-cash, after-tax re-measurement charge in the fourth quarter of 2017 resulting from the impact of the change in the federal tax rate on the Company’s deferred income taxes from enactment of the TCJA; and (iv) the fourth quarter of 2016 binding global agreement in principle to settle claims related to the Freedom Industries chemical spill. We believe that this non-GAAP measure provides investors with useful information by excluding certain matters that may not be indicative of our ongoing operating results, and that providing this non-GAAP measure will allow investors to understand better our businesses’ operating performance and facilitate a meaningful year-to-year comparison of our results of operations. Although management uses this non-GAAP financial measure internally to evaluate our results of operations, we do not intend results excluding the adjustments to represent results as defined by GAAP, and the reader should not consider them as indicators of performance. This non-GAAP financial measure is derived from our consolidated financial information but is not presented in our financial statements prepared in accordance with GAAP, and thus it should be considered in addition to, and not as a substitute for, measures of financial performance prepared in accordance with GAAP. In addition, this non-GAAP financial measure as defined and used above may not be comparable to similarly titled non-GAAP measures used by other companies, and, accordingly, it may have significant limitations on its use.

Strategic Focus and 2017 Achievements

We believe our success in the future will be driven by engaged employees, smart investments and safe, efficient operations, leading to satisfied customers which in turn will lead to constructive regulatory outcomes and sustainable financial performance. Our strategy, which is driven by our vision and core values, will continue to be anchored on our five central themes:

•	Customer—Our customers are at the center of everything we do. We want to be the best, and if our customers have a choice as to who serves them, we want it to be us.

•	In 2017, we:

•	achieved both a customer satisfaction rating and a service quality rating in the top quartile among our water industry peers;

•	expanded our customer experience initiative, designed to make it easier for customers to do business with us, and enhanced our quality of service through implementation and upgrades of technology tools; and

•	continued to make needed infrastructure investment while implementing operational efficiency improvements to keep customer rates affordable.

•	Looking forward, we will:

•

target the achievement of customer satisfaction and service quality targets in the top quartile of service industries, beyond the water and wastewater industry. We have a three year plan to enhance technology and innovation in our customer experience through: (i) leveraging secure artificial intelligence to better serve our customers; (ii) using on-line customer communities for immediate input and reactions before rolling out programs; and (iii) mapping our most frequent customer interactions and re-working our internal processes to how the customer wants services; and

•	aim for top quartile targets for drinking water quality and being an industry leader in system resiliency and environmental stewardship. We intend to continue to make needed infrastructure investments while implementing operational efficiency improvements to help keep customer rates affordable.

•	Safety—Safety is both a strategy and a value at American Water. We put safety first in everything that we do.

•	In 2017, we:

•	finished the year with fewer employee injuries than the prior year and exceeded our targeted results for our Occupational Safety and Health Administration recordable incident rate and our Days Away Restricted or Transferred rate; and

•

strengthened our safety culture as measured by employee responses to safety-related questions in the Company’s culture survey, and scored 13 points above “High Performing Companies” in the category of safety, as measured by CEB, Inc. Our safety council, consisting of management and labor employees from across the Company, continued its mission of developing and implementing recommendations to reinforce the Company’s commitment to safety.

•	Looking forward, we will:

•	strive toward zero workplace injuries;

•	focus on requiring that the contractors that perform work for the Company are approved in accordance with the Contractor Safety Qualification Practice and are held to the same standards as our employees; and

•	continue our focus on “near miss reporting,” to promote continuous learning and corrective action regarding potential safety hazards.

•	People—We are building a diverse, fully-engaged, high performance workforce and culture and creating an environment where our people feel valued, included and accountable.

•	In 2017, we continued to demonstrate our commitment to employees by expanding training and development across the Company, with the vast majority of our employees completing at least 20 hours of training during 2017. We also added new Respect and Diversity training to strengthen our values-based culture.

•	Looking forward, we will continue to:

•	improve the diversity of our overall employee population, reflective of our customers and communities;

•	implement a strategic workforce plan which will address the changing requirements of our business and our jobs, and how we will fill those critical positions throughout the Company to promote continuity and help us to meet future operational needs; and

•	dedicate ourselves to personal development through effective training and development plans.

•

Growth—We expect to continue to grow our businesses, with the significant majority of our growth to be achieved in our Regulated Businesses through: (i) continued investment in infrastructure to provide safe, clean, reliable and affordable water and wastewater services to our customers; and (ii) regulated acquisitions to expand our services to new customers. We also expect to continue to grow our Market-Based Businesses, which leverage our core water and wastewater competencies.

•	In 2017, we invested $1.7 billion, a record level of annual investment since the Company went public in 2008, and $200 million more than 2016, which had previously been a record year for investment. Our 2017 investment included:

•	$1.4 billion, of which the majority was in our Regulated Businesses for infrastructure replacements and improvements; and

•	$210 million to fund acquisitions in our Regulated Businesses, which added approximately 40,000 water and wastewater customers, including bulk customers, highlighted by the:

•	April 3, 2017 acquisition of Shorelands Water Company, Inc. (“Shorelands”) in a stock transaction for $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; and the

•

December 18, 2017 acquisition of the McKeesport system for $159 million. This acquisition was the first acquisition executed under Pennsylvania’s Act 12 of 2016, which allows municipalities to sell water and wastewater systems for a price based upon the fair market value of the system. Under Act 12, the rate base for this acquisition was approved at $158 million. The McKeesport system, which is now part of our Pennsylvania subsidiary, represents approximately 22,000 customers; comprised of 11,000 customer connections, as well as service to an additional 11,000 customers under bulk contracts to 13 municipalities in Allegheny County, Pennsylvania.

•

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. In the fourth quarter of 2017, a bid protest was filed on this contract by an unsuccessful bidder. In January 2018, the bid protest was sustained because a required element of the solicitation was not properly considered. The protester’s bid proposal will be re-evaluated, and we believe that the contract previously awarded to our Military Services Group will be reinstated.

•	Looking forward, we expect to invest between $8.0 billion to $8.6 billion from 2018 to 2022, including a range of $1.6 billion to $1.8 billion in 2018. Our expected future investment includes:

•	capital investment for infrastructure improvements in our Regulated Businesses of $7.2 billion over the next five years, including a range of $1.4 billion to $1.5 billion expected in 2018;

•	growth from acquisitions in our Regulated Businesses to expand our water and wastewater customer base of between $600 million to $1.2 billion over the next five years, including a range of $120 million to $240 million expected in 2018; and

•

strategic capital investments of approximately $200 million over the next five years, including approximately $100 million expected in 2018. These investments include strategic growth opportunities in our Market-Based Businesses and the construction of our new corporate headquarters in Camden, New Jersey, which is expected to be completed during the second half of 2018 and is eligible for up to $164 million in tax credits from New Jersey’s Economic Development Authority.

The following chart depicts the estimated allocation of our expected capital investment for infrastructure improvements in our Regulated Businesses from 2018 to 2022, by purpose:

•	Technology and Operational Efficiency—We continue to strive for industry-leading operational efficiency, driven by technology. Our technology investments are aimed at enhancing our customer experience and operational efficiency.

•	In 2017:

•

our Regulated Businesses achieved an adjusted O&M efficiency ratio (a non-GAAP measure) of 33.8% for the year ended December 31, 2017, compared to 34.9% and 35.9% for the years ended December 31, 2016 and 2015, respectively. The continued improvement in our adjusted O&M efficiency ratio in 2017 was attributable to both an increase in operating revenues and a decrease in O&M expenses (see the following table). The improvement in the 2016 adjusted O&M efficiency ratio over the 2015 ratio was primarily attributable to an increase in operating revenues;

•

we introduced new tools such as FSR Customer One View, which provides our employees with information such as neighborhood maps, customer usage data, billing and payment history, and real-time meter reads; and MapCall, which helps to manage location based assets such as hydrants, valves, meters, among others; along with implementing technology upgrades to our national customer services, focused on helping us improve customer service;

•	we continued our commitment to water quality and the environment by leveraging new technologies; we now have advanced water quality sensors at all of our major drinking water intake sites and we are automating our reporting and compliance systems; and

•	we implemented other technology tools that will enhance communication, collaboration and mobility to help our operations and support employees work more safely and efficiently, and enhance the customer experience.

•	Looking forward, we will focus on technology and efficiency to:

•	be the leader in optimizing technology deployment across the water and wastewater industry, with a keen focus on specific, innovative projects that will set us apart from other utilities, and to help us serve our customers with greater ease, make us safer and help us operate more efficiently; and

•	achieve our goal of an adjusted O&M efficiency ratio equal to or below 32.0% by 2022.

Our adjusted O&M efficiency ratio is defined as our regulated operation and maintenance expenses divided by our regulated operating revenues, where both operation and maintenance expenses and operating revenues were adjusted to eliminate purchased water expense. Additionally, from operation and maintenance expenses, we have excluded the allocable portion of non-operation and maintenance support services costs, mainly depreciation and general taxes, that are reflected in our Regulated Businesses segment as operation and maintenance expenses, but for consolidated financial reporting purposes, are categorized within other line items in the accompanying Consolidated Statements of Operations. For the years ended December 31, 2017 and 2016, we have also excluded from operation and maintenance expenses the impact of certain Freedom Industries chemical spill settlement activities. We excluded all of the above items from the calculation as we believe such items are not reflective of management’s ability to increase efficiency of our regulated operations. Going forward, we expect changes to our adjusted O&M efficiency ratio related to the impact of the enactment of the TCJA and the adoption of new accounting standards in the future.

We evaluate our operating performance using this ratio because we believe it directly measures improvement in the efficiency of our regulated operations. This information is intended to enhance an investor’s overall understanding of our operating performance. Our adjusted O&M efficiency ratio is not a GAAP financial measure and may not be comparable to other companies’ operating measures, and should not be used in place of the GAAP information provided elsewhere in this Form 10-K.

With respect to our adjusted O&M efficiency ratio goal for 2022, we are unable to provide without unreasonable efforts a quantitative reconciliation of each component of this ratio to the most comparable financial measure calculated in accordance with GAAP. In calculating the components of the ratio, certain items that may ultimately be excluded would be reflective of events that cannot be reasonably predicted at this time. The unavailable information would include, among other things, the impact of items currently excluded from the calculation of the components, adjustments for weather conditions that exceed a certain threshold of variability and adjustments for events or circumstances that may not be reflective of ongoing operating results. The probable significance of these items is also presently unknown and cannot be reasonably estimated.

The following table provides the calculation of our adjusted O&M efficiency ratio and a reconciliation that compares operation and maintenance expenses and operating revenues, each as determined in accordance with GAAP, to those amounts utilized in the calculation of our adjusted O&M efficiency ratio:

	For the Years Ended December 31,
(Dollars in millions)	2017				2016				2015
Total operation and maintenance expenses	$	1,378			$	1,504			$	1,404
Less:
Operation and maintenance expenses—Market-Based Businesses	337				372				358
Operation and maintenance expenses—Other	(50		)		(44		)		(49		)
Total operation and maintenance expenses—Regulated Businesses	1,091				1,176				1,095
Less:
Regulated purchased water expenses	128				122				117
Allocation of non-operation and maintenance expenses	29				30				35
Impact of Freedom Industries settlement activities (a)	(22		)		65				—
Adjusted operation and maintenance expenses—Regulated Businesses (i)	$	956			$	959			$	943
Total operating revenues	$	3,357			$	3,302			$	3,159
Less:
Operating revenues—Market-Based Businesses	422				451				434
Operating revenues—Other	(23		)		(20		)		(18		)
Total operating revenues—Regulated Businesses	2,958				2,871				2,743
Less:
Regulated purchased water revenues (b)	128				122				117
Adjusted operating revenues—Regulated Businesses (ii)	$	2,830			$	2,749			$	2,626
Adjusted O&M efficiency ratio—Regulated Businesses (i) / (ii)	33.8		%		34.9		%		35.9		%

(a)	Includes the impact of the binding global agreement in principle to settle claims in 2016 and a settlement with one of our general liability insurance carriers in 2017.

(b)	The calculation assumes regulated purchased water revenues approximate regulated purchased water expenses.

Regulatory Matters

The following table provides general rate case authorizations effective from 2015 through 2017, and depicts annualized incremental revenues assuming a constant water sales volume:

(In millions)	2017				2016				2015
General rate case authorizations by state:
New York (effective June 1, 2017)	$	4			$	—			$	—
Virginia (a)	5				—				—
Iowa (effective March 27, 2017)	4				—				—
California (b)	5				2				5
Illinois (effective January 1, 2017)	25				—				—
Kentucky (effective August 28, 2016)	—				7				—
Missouri (effective July 20, 2016 and July 22, 2016)	—				5				—
West Virginia (effective February 25, 2016)	—				18				—
Indiana (effective January 29, 2016 and January 29, 2015)	—				2				5
New Jersey (effective September 21, 2015)	—				—				22
Other	—				—				1
Total general rate case authorizations	$	43			$	34			$	33

(a)	The effective date of the rate order was May 24, 2017, authorizing the implementation of interim rates as of April 1, 2016.

(b)	Step rates for 2017 effective January 13, 2017 through February 2, 2017. Step rates for 2016 and 2015 effective January 1, 2016 and January 1, 2015, respectively.

On December 7, 2017, a settlement in our Pennsylvania subsidiary’s general rate case filing was approved authorizing additional annualized revenues of $62 million, effective on January 1, 2018.

Pending General Rate Case and Cost of Capital Filings

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, our California subsidiary filed an application requesting a cost of capital of 8.49%, compared to 8.41% currently authorized. On February 6, 2018, a proposed decision was issued by the administrative law judge and we plan to work through the regulatory process with the CPUC over the next several months.

During the third quarter of 2016, our California subsidiary filed a 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.

A number of states have authorized the use of regulatory mechanisms that permit rates to be adjusted outside of a general rate case for certain costs and investments, such as infrastructure surcharge mechanisms that permit recovery of capital investments to replace aging infrastructure.

The following table provides infrastructure surcharge authorizations effective from 2015 through 2017, and depicts annualized incremental revenues assuming a constant water sales volume:

(In millions)	2017				2016				2015
Infrastructure surcharge authorizations by state:
Missouri (effective December 15, 2017 and June 27, 2015)	$	6			$	—			$	2
New Jersey (a)	14				19				9
Indiana (effective March 22, 2017 and May 4, 2016)	8				3				—
Tennessee (effective March 14, 2017, March 15, 2016 and June 29, 2015)	2				2				2
Pennsylvania (b)	1				28				14
West Virginia (effective January 1, 2017)	2				—				—
Illinois (c)	—				7				6
New York (effective December 1, 2015)	—				—				1
Total infrastructure surcharge authorizations	$	33			$	59			$	34

(a)	For 2017, $10 million effective June 1 and $4 million effective December 10. For 2016, $9 million effective June 1 and $10 million effective December 1. For 2015, $9 million effective January 1.

(b)	For 2017, $1 million effective January 1 (the infrastructure surcharge cap was reached after the first quarter of 2017). For 2016, $11 million, $2 million, $6 million and $9 million effective January 1, April 1, July 1 and October 1, respectively. For 2015, $2 million, $4 million and $8 million effective April 1, July 1 and October 1, respectively.

(c)	For 2016, $1 million effective January 1 and $6 million effective August 1. For 2015, $5 million effective January 1 and $1 million effective February 1.

On December 28, 2017, our West Virginia subsidiary received a decision on its infrastructure surcharge filing authorizing additional annualized revenues of $3 million, effective on January 1, 2018. Additionally, on December 20, 2017, our Illinois subsidiary filed for an infrastructure surcharge requesting $3 million in additional annualized revenues, which will become effective on January 1, 2018.

There is no assurance that all or any portion of these requests will be granted.

Pending Infrastructure Surcharge Filings

The following table details of our pending infrastructure surcharge filings:

(In millions)	Date Filed		Amount
Pending infrastructure surcharge filings by state:
Indiana	January 18, 2018		$	7
Tennessee	November 7, 2017		2
Virginia	October 31, 2017		1
Total pending infrastructure surcharge filings			$	10

There is no assurance that all or any portion of these requests will be granted.

Other Regulatory Matters

On August 4, 2017, our Illinois subsidiary filed a petition with the Illinois Commerce Commission (“ICC”) to place into effect, revised depreciation rates applicable to our depreciable water and wastewater plant, resulting from a new depreciation study. The petition requested that these new rates would be effective January 1, 2017. On November 21, 2017, the ICC approved this petition, which resulted in lower depreciation expense of $16 million in 2017.

Tax Matters

Tax Cuts and Jobs Act

On December 22, 2017, the TCJA was signed into law, which, among other things, enacted significant and complex changes to the Internal Revenue Code of 1986, including a reduction in the maximum U.S. federal corporate income tax rate from 35% to 21% as of January 1, 2018, and certain other provisions related specifically to the public utility industry, including continuation of interest expense deductibility, the exclusion from utilizing bonus depreciation and the normalization of deferred income tax. The enactment of the TCJA required a re-measurement of our deferred income taxes that materially impacted our 2017 results of operations and financial position. The portion of this re-measurement related to our Regulated Businesses was substantially offset by a regulatory liability, as we believe it is probable that the deferred income tax excesses created by the TCJA will be refunded to customers in future rates. The remaining portion of this re-measurement of the net deferred income tax liability was recorded as a non-cash charge to earnings of $125 million during the fourth quarter of 2017.

Other Tax Matters

On April 11, 2017, the state of New York enacted legislation that increased the state income tax rate on our 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, we were required to re-measure our cumulative deferred income 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 our unitary deferred income tax liability of $11 million. The portion of this increase related to our New York subsidiary calculated on a stand-alone basis was $7 million, and was offset by a regulatory asset, as we believe it is probable of recovery in future rates. The remaining increase in the deferred income 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 million 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 our taxable income attributable to Illinois from 7.75% to 9.5%. As a result of the legislative change, we were required to re-measure our cumulative deferred income tax balances using the higher state income tax rate in the third quarter of 2017. This change in legislation was the primary cause of an increase to our unitary deferred income tax liability of $7 million. The portion of this increase related to our Illinois subsidiary calculated on a stand-alone basis was $4 million, and was offset by a regulatory asset, as we believe it is probable of recovery in future rates. The remaining increase in the deferred income tax liability was recorded at the consolidated level, resulting in a non-cash, cumulative charge to earnings of $3 million during the third quarter of 2017.

Consolidated Results of Operations

The following table presents our consolidated results of operations and the ensuing discussions provide explanations for the variances related to the major components:

	For the Years Ended December 31,												Increase (Decrease)							Increase (Decrease)
	2017				2016				2015				2017 vs. 2016							2016 vs. 2015
(Dollars in millions)													$				%			$				%
Operating revenues	$	3,357			$	3,302			$	3,159			$	55			1.7			$	143			4.5
Operating expenses:
Operation and maintenance	1,378				1,504				1,404				(126		)		(8.4	)		100				7.1
Depreciation and amortization	492				470				440				22				4.7			30				6.8
General taxes	259				258				243				1				0.4			15				6.2
Gain on asset dispositions and purchases	(16		)		(10		)		(3		)		(6		)		60.0			(7		)		233.3
Total operating expenses, net	2,113				2,222				2,084				(109		)		(4.9	)		138				6.6
Operating income	1,244				1,080				1,075				164				15.2			5				0.5
Other income (expense):
Interest, net	(342		)		(325		)		(308		)		(17		)		5.2			(17		)		5.5
Loss on early extinguishment of debt	(7		)		—				—				(7		)		100.0			—				—
Other, net	17				15				15				2				13.3			—				—
Total other income (expense)	(332		)		(310		)		(293		)		(22		)		7.1			(17		)		5.8
Income before income taxes	912				770				782				142				18.4			(12		)		(1.5	)
Provision for income taxes	486				302				306				184				60.9			(4		)		(1.3	)
Net income attributable to common stockholders	$	426			$	468			$	476			$	(42	)		(9.0	)		$	(8	)		(1.7	)

Operating Revenues

In 2017, operating revenues increased $55 million, or 1.7%, primarily due to a:

•	$87 million increase in our Regulated Businesses principally due to authorized rate increases to fund infrastructure investment growth, as well as acquisitions and organic growth, offset in part by lower water services demand in 2017, including a $15 million reduction due to warmer weather in 2016; partially offset by a

•	$29 million decrease in our Market-Based Businesses mainly due to lower capital upgrades in our Military Services Group, driven largely by reduced military base budgets, offset in part by incremental revenues in our Homeowner Services Group from contract growth and price increases, and in Keystone from an increase in operations as a result of market recovery in the natural gas industry.

In 2016, operating revenues increased $143 million, or 4.5%, primarily due to a:

•	$128 million increase in our Regulated Businesses principally due to authorized rate increases to fund infrastructure investment growth, as well as acquisitions and organic growth; and a

•	$17 million increase in our Market-Based Businesses mainly due to our acquisition of Keystone in the third quarter of 2015 and incremental revenues from our Homeowner Services and Contract Operations Groups from contract growth, partially offset by lower capital upgrades in our Military Services Group.

Operation and Maintenance

In 2017, operation and maintenance expense decreased $126 million, or 8.4%, primarily due to a:

•

$85 million decrease in our Regulated Businesses principally due to a $65 million net charge recorded in 2016, resulting from the binding global agreement in principle to settle claims associated with the Freedom Industries chemical spill in West Virginia, and a $22 million benefit recorded in 2017, resulting from a related insurance settlement with one of our general liability insurance carriers; and a

•	$35 million decrease in our Market-Based Businesses mainly due to lower capital upgrades in our Military Services Group, as discussed above, partially offset by higher employee-related costs from growth in Keystone and increased customer uncollectible expense in Homeowner Services from contract growth during 2017.

In 2016, operation and maintenance expense increased $100 million, or 7.1%, primarily due to a:

•

$81 million increase in our Regulated Businesses principally due to a $65 million charge recorded in 2016, resulting from the binding global agreement in principle to settle claims associated with the Freedom Industries chemical spill in West Virginia, as well as higher employee-related costs and litigation expenses, partially offset by lower casualty insurance and customer uncollectible expense; and an

•	$14 million increase in our Market-Based Businesses which included $11 million from our acquisition of Keystone in the third quarter of 2015, as well as incremental costs associated with growth in our Homeowner Services and Contract Operations Group, partially offset by lower capital upgrades in our Military Services Group, as discussed above.

Depreciation and Amortization

In 2017 and 2016, depreciation and amortization expense increased $22 million and $30 million, or 4.7% and 6.8%, respectively. The increase for both periods was primarily due to additional utility plant placed in service. Included in 2017 was the impact of revised depreciation rates from a depreciation study approved by the ICC in our Illinois subsidiary, resulting in lower depreciation expense of $16 million. Included in 2016 was incremental depreciation and amortization expense resulting from our acquisition of Keystone in the third quarter of 2015.

General Taxes

In 2017 and 2016, general taxes increased $1 million and $15 million, or 0.4% and 6.2%, respectively. The increase in 2016 was primarily due to incremental property and gross receipts taxes in our Regulated Businesses.

Gain on Asset Dispositions and Purchases

In 2017 and 2016, gain on asset dispositions and purchases increased $6 million and $7 million, or 60.0% and 233.3%, respectively. The increase in 2017 was primarily due to a $7 million gain recognized on a land sale in our Kentucky subsidiary. The increase in 2016 was largely attributable to a gains recognized on a land sale in our Pennsylvania subsidiary and an acquisition in our Missouri subsidiary.

Other Income (Expense)

In 2017 and 2016, other expenses increased $22 million and $17 million, or 7.1% and 5.8%, respectively. The increase in 2017 was primarily due to an increase in interest expense from the issuance of incremental long-term debt in 2017 and the fourth quarter of 2016, as well as a $6 million charge resulting from the early extinguishment of debt at the parent company. The increase in 2016 was largely attributable to an increase in interest expense from the issuance of incremental long-term debt, as well as an increase in short-term interest expense, mainly due to higher levels of short-term borrowings during 2016, coupled with an increase in the average short-term borrowing rates in 2016, as compared to the prior year.

Provision for Income Taxes

In 2017, our provision for income taxes increased by $184 million, or 60.9%, from the previous year. The increase is primarily due to higher pretax income and a non-cash, after-tax re-measurement charge of $125 million, resulting from the impact of the change in the federal tax rate on the Company’s deferred income taxes from the enactment of the TCJA, which included a reduction in the maximum U.S. federal corporate income tax rate from 35% to 21%. The $125 million charge includes $6 million allocated to our Regulated Businesses segment, $5 million to our Market-Based Businesses and $114 million to our Other segment. In 2016, our provision for income taxes decreased $4 million, or 1.3%, from the previous year. This decrease was primarily due to the decrease in pre-tax income. The effective tax rates were 53.3%, 39.2% and 39.1% for the years ended December 31, 2017, 2016 and 2015, respectively.

As of December 31, 2017, we’ve recognized federal NOL carryforwards of $1.05 billion. The TCJA eliminated the bonus depreciation deduction for property acquired or constructed after September 27, 2017, and we currently expect to utilize the benefits of our federal NOL carryforwards over the next two years. See Note 13—Income Taxes in the Notes to Consolidated Financial Statements for additional information.

Segment Results of Operations

Our segments are determined based on how we assess performance and allocate resources. We evaluate the performance of our segments and allocate resources based on several factors, with the primary measure being net income attributable to common stockholders. The majority of our business is conducted through our Regulated Businesses reportable 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, which is consistent with how management assesses the results of these businesses.

Regulated Businesses Segment

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

	For the Years Ended December 31,												Increase (Decrease)							Increase (Decrease)
	2017				2016				2015				2017 vs. 2016							2016 vs. 2015
(Dollars in millions)													$				%			$				%
Operating revenues	$	2,958			$	2,871			$	2,743			$	87			3.0			$	128			4.7
Operation and maintenance	1,091				1,176				1,095				(85		)		(7.2	)		81				7.4
Operating expenses, net	1,781				1,852				1,732				(71		)		(3.8	)		120				6.9
Net income attributable to common stockholders	559				472				473				87				18.4			(1		)		(0.2	)

Operating Revenues

The following tables and the ensuing discussions provide explanations for the variances related to the three components of operating revenues––water services revenues, wastewater services revenues and other revenues:

	For the Years Ended December 31,												Increase (Decrease)							Increase (Decrease)
	2017				2016				2015				2017 vs. 2016							2016 vs. 2015
(Dollars in millions)													$				%			$				%
Billed water services revenues:
Residential	$	1,654			$	1,592			$	1,536			$	62			3.9			$	56			3.6
Commercial	603				580				559				23				4.0			21				3.8
Industrial	137				134				130				3				2.2			4				3.1
Public and other	351				338				331				13				3.8			7				2.1
Other	31				53				39				(22		)		(41.5	)		14				35.9
Total billed water services revenues	2,776				2,697				2,595				79				2.9			102				3.9
Unbilled water services revenues	(11		)		13				(3		)		(24		)		(184.6	)		16				(533.3	)
Total water services revenues	2,765				2,710				2,592				55				2.0			118				4.6
Wastewater services revenues	142				112				97				30				26.8			15				15.5
Other revenues	51				49				54				2				4.1			(5		)		(9.3	)
Total operating revenues	$	2,958			$	2,871			$	2,743			$	87			3.0			$	128			4.7

	For the Years Ended December 31,									Increase (Decrease)						Increase (Decrease)
	2017			2016			2015			2017 vs. 2016						2016 vs. 2015
(Gallons in millions)										Gallons			%			Gallons			%
Billed water services volumes:
Residential	174,420			174,599			175,653			(179	)		(0.1	)		(1,054	)		(0.6	)
Commercial	82,147			82,489			81,772			(342	)		(0.4	)		717			0.9
Industrial	39,404			38,465			38,991			939			2.4			(526	)		(1.3	)
Public and other	51,341			50,678			51,324			663			1.3			(646	)		(1.3	)
Total billed water services volumes	347,312			346,231			347,740			1,081			0.3			(1,509	)		(0.4	)

Note:

The correlation between water revenues and billed water volumes shown in the preceding tables is impacted by the California drought. In 2015, and to a lesser extent in 2016, California experienced a severe drought. In April 2015, the Governor mandated water usage restrictions to reduce overall water usage by 25% in the state compared to 2013 levels. In April 2017, the mandated water usage restrictions were removed. In California, revenue is decoupled from sales volume through the WRAM/MCBA, aligning our water conservation goals with those of the state and our customers, and therefore usage reductions do not impact earnings.

In 2017, operating revenues increased $87 million, or 3.0%, primarily due to a:

•	$81 million increase from authorized rate increases, including infrastructure surcharges, principally to fund investment growth in various states;

•	$43 million increase attributable to water and wastewater acquisitions, as well as organic growth in existing systems; and a

•	$9 million increase resulting from higher wastewater treatment volumes and an increase in private fire service connections; partially offset by a

•	$48 million decrease due to lower water services demand, including a $15 million reduction due to warmer weather in 2016.

In 2016, operating revenues increased $128 million, or 4.7%, primarily due to a:

•	$92 million increase from authorized rate increases, including infrastructure surcharges, principally to fund investment growth in various states;

•	$19 million increase attributable to water and wastewater acquisitions, as well as organic growth in existing systems;

•	$4 million increase resulting from higher wastewater treatment volumes and an increase in private fire service connections; and

•	$13 million increase mainly due to revenues from balancing accounts, primarily in our California subsidiary, as well as surcharges and other adjustments.

Operation and Maintenance

The following tables and the ensuing discussions provide explanations for the variances related to the major components of operation and maintenance expense:

	For the Years Ended December 31,												Increase (Decrease)							Increase (Decrease)
	2017				2016				2015				2017 vs. 2016							2016 vs. 2015
(Dollars in millions)													$				%			$				%
Production costs	$	298			$	288			$	282			$	10			3.5			$	6			2.1
Employee-related costs	446				443				430				3				0.7			13				3.0
Operating supplies and services	209				212				194				(3		)		(1.4	)		18				9.3
Maintenance materials and supplies	70				73				70				(3		)		(4.1	)		3				4.3
Customer billing and accounting	51				54				63				(3		)		(5.6	)		(9		)		(14.3	)
Other	17				106				56				(89		)		(84.0	)		50				89.3
Total	$	1,091			$	1,176			$	1,095			$	(85	)		(7.2	)		$	81			7.4

Production Costs

	For the Years Ended December 31,												Increase (Decrease)						Increase (Decrease)
	2017				2016				2015				2017 vs. 2016						2016 vs. 2015
(Dollars in millions)													$				%		$				%
Purchased water	$	128			$	122			$	117			$	6			4.9		$	5			4.3
Fuel and power	89				87				89				2				2.3		(2		)		(2.2	)
Chemicals	47				47				48				—				—		(1		)		(2.1	)
Waste disposal	34				32				28				2				6.3		4				14.3
Total	$	298			$	288			$	282			$	10			3.5		$	6			2.1

In 2017, production costs increased $10 million, or 3.5%, primarily due to a:

•	$6 million increase in purchased water principally due to usage increases in our California subsidiary, the result of the lifting in April 2017 of California water usage restrictions that had been mandated in 2015 due to the state’s extreme drought;

•	$2 million increase in fuel and power largely attributable to higher system delivery of water and supplier price increases in our Missouri and California subsidiaries; and

•	$2 million increase in waste disposal mainly due to higher sludge removal costs in our Illinois and Missouri subsidiaries.

In 2016, production costs increased $6 million, or 2.1%, primarily due to a:

•	$5 million increase in purchased water principally due to price increases in our California subsidiary; and a

•	$4 million increase in waste disposal largely attributable to higher sludge removal costs in several of our subsidiaries; partially offset by a

•	$2 million decrease in fuel and power mainly due to a price decrease in our New Jersey subsidiary.

Employee-Related Costs

	For the Years Ended December 31,												Increase (Decrease)							Increase (Decrease)
	2017				2016				2015				2017 vs. 2016							2016 vs. 2015
(Dollars in millions)													$				%			$				%
Salaries and wages	$	334			$	336			$	321			$	(2	)		(0.6	)		$	15			4.7
Pensions	32				28				30				4				14.3			(2		)		(6.7	)
Group insurance	54				58				60				(4		)		(6.9	)		(2		)		(3.3	)
Other benefits	26				21				19				5				23.8			2				10.5
Total	$	446			$	443			$	430			$	3			0.7			$	13			3.0

In 2017, employee-related costs increased $3 million, or 0.7%, primarily due to a:

•	$4 million increase in pensions principally due to a lower discount rate in 2017, resulting in increased plan obligations; and a

•	$5 million increase in other benefits largely attributable to higher employer 401(k) savings plan contributions and an increase in training costs; partially offset by a

•	$4 million decrease in group insurance mainly due to lower medical claims experienced in 2017 and a decrease in other postretirement benefit plan costs resulting from plan amendments approved in 2016, offset in part by higher enrollment in 2017 and increases in group insurance rates.

In 2016, employee-related costs increased $13 million, or 3.0%, primarily due to a:

•	$15 million increase in salaries and wages principally due to higher annual performance plan expense and an increase in compensation expense in support of the growth of the business, offset in part by an increase in capitalized labor attributable to higher capital investment; partially offset by a

•	$2 million decrease in group insurance largely attributable to a $10 million decrease in other postretirement benefit plan costs resulting from plan amendments approved in 2016, offset in part by $9 million of higher medical claims experienced in 2016.

Operating Supplies and Services

	For the Years Ended December 31,												Increase (Decrease)							Increase (Decrease)
	2017				2016				2015				2017 vs. 2016							2016 vs. 2015
(Dollars in millions)													$				%			$				%
Contracted services	$	84			$	84			$	81			$	—			—			$	3			3.7
Office supplies and services	49				45				44				4				8.9			1				2.3
Transportation	14				13				16				1				7.7			(3		)		(18.8	)
Rents	15				14				14				1				7.1			—				—
Other	47				56				39				(9		)		(16.1	)		17				43.6
Total	$	209			$	212			$	194			$	(3	)		(1.4	)		$	18			9.3

In 2017, operating supplies and services decreased $3 million, or 1.4%, primarily due to a:

•	$9 million decrease in other principally due to charges recorded in 2016, including a $5 million write-off of timekeeping system costs that were previously capitalized and a $7 million judgment in litigation; partially offset by a

•	$4 million increase in office supplies and services largely attributable to higher employee relocation, telecommunication and office supplies expense.

In 2016, operating supplies and services increased $18 million, or 9.3%, primarily due to a:

•	$17 million increase in other 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 2016, and a $3 million adjustment recorded in 2015 to recognize previously expensed business transformation costs as a regulatory asset in our California subsidiary, resulting from a rate case decision.

Maintenance Materials and Supplies

In 2017, maintenance materials and supplies decreased $3 million, or 4.1%, primarily due to lower tank painting expense in our New Jersey subsidiary and the timing of maintenance activities.

In 2016, maintenance materials and supplies increased $3 million, or 4.3%, primarily due to a:

•	$10 million increase in tank painting expense in several of our subsidiaries; partially offset by a

•	$5 million decrease in main breaks driven by milder winter weather in 2016.

Customer Billing and Accounting

In 2017 and 2016, customer billing and accounting decreased $3 million and $9 million, or 5.6% and 14.3%, respectively. The decrease in both years was primarily due to lower customer uncollectible expense attributable to focused collection efforts.

Other

In 2017, other operation and maintenance decreased $89 million, or 84.0%, primarily due to a:

•	$65 million net charge recorded in 2016, resulting from the binding global agreement in principle to settle claims associated with the Freedom Industries chemical spill in West Virginia, and a $22 million benefit recorded in 2017, resulting from a related insurance settlement with one of our general liability insurance carriers; and

•	$5 million decrease in casualty insurance expense attributable to a lower claims experience.

In 2016, other operation and maintenance expenses increased $50 million, or 89.3%, primarily due to a:

•	$65 million charge recorded in 2016, resulting from the binding global agreement in principle to settle claims associated with the Freedom Industries chemical spill in West Virginia; partially offset by a

•	$15 million decrease in casualty insurance expense attributable to a lower claims experience.

Operating Expenses, net.

In 2017, operating expenses, net decreased $71 million, or 3.8%, primarily due to a:

•	$85 million decrease in operation and maintenance expense as explained above; and a

•	$7 million gain recognized on a land sale in our Kentucky subsidiary; partially offset by a

•	$22 million increase in depreciation and amortization expense attributable to additional utility plant placed in service; included in the 2017 expense amount was the impact of revised rates from a depreciation study approved by the ICC in our Illinois subsidiary, resulting in lower depreciation expense of $16 million.

In 2016, operating expenses, net increased $120 million, or 6.9%, primarily due to a:

•	$81 million increase in operation and maintenance expense as explained above;

•	$30 million increase in depreciation and amortization expense attributable to additional utility plant placed in service and incremental depreciation and amortization expense resulting from our acquisition of Keystone in the third quarter of 2015; and

•	$14 million increase in general taxes principally due to incremental property and gross receipts taxes.

Market-Based Businesses

The following table summarizes certain financial information for our Market-Based Businesses and the ensuing discussions provide explanations for the variance related to operating revenues:

	For the Years Ended December 31,												Increase (Decrease)							Increase (Decrease)
	2017				2016				2015				2017 vs. 2016							2016 vs. 2015
(Dollars in millions)													$				%			$				%
Operating revenues	$	422			$	451			$	434			$	(29	)		(6.4	)		$	17			3.9
Operation and maintenance	337				372				358				(35		)		(9.4	)		14				3.9
Operating expenses, net	360				391				370				(31		)		(7.9	)		21				5.7
Net income attributable to common stockholders	38				39				42				(1		)		(2.6	)		(3		)		(7.1	)

Operating Revenues

In 2017, operating revenues decreased $29 million, or 6.4%, primarily due to a:

•	$56 million decrease in our Military Services Group principally due to lower capital upgrades in 2017, largely driven by reduced military base budgets and the completion of a large project in mid-2016 at Fort Polk; and a

•	$6 million decrease in our Contract Operations Group largely attributable to the completion of several contracts in 2017; partially offset by a

•	$18 million increase in our Homeowner Services Group mainly due to contract growth, as well as expansion into new geographic areas and price increases for existing customers; and a

•	$16 million increase in Keystone primarily due to an increase in operations as a result of market recovery in the natural gas industry.

In 2016, operating revenues increased $17 million, or 3.9%, primarily due to a:

•	$15 million increase from Keystone, which was acquired in the third quarter of 2015;

•	$11 million increase in our Homeowner Services Group mainly due to contract growth, as well as expansion into new geographic areas and price increases for existing customers; and a

•	$11 million increase in our Contract Operations Group largely attributable to contract growth, specifically from our contract in Camden, New Jersey; partially offset by a

•	$21 million decrease in our Military Services Group principally due to lower capital upgrades in 2016, offset in part by incremental revenues from the addition of the Vandenberg Air Force Base contract in 2016.

Operation and Maintenance

The following table and ensuing discussions provide explanations for the variances related to the major components of operation and maintenance expense:

	For the Years Ended December 31,												Increase (Decrease)							Increase (Decrease)
	2017				2016				2015				2017 vs. 2016							2016 vs. 2015
(Dollars in millions)													$				%			$				%
Production costs	$	37			$	35			$	36			$	2			5.7			$	(1	)		(2.8	)
Employee-related costs	97				94				76				3				3.2			18				23.7
Operating supplies and services	121				165				182				(44		)		(26.7	)		(17		)		(9.3	)
Maintenance materials and supplies	67				68				57				(1		)		(1.5	)		11				19.3
Other	15				10				7				5				50.0			3				42.9
Total	$	337			$	372			$	358			$	(35	)		(9.4	)		$	14			3.9

In 2017, operation and maintenance expense decreased $35 million, or 9.4%, primarily due to a:

•	$44 million decrease in operating supplies and services principally 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

•	$3 million increase in employee-related costs largely attributable to higher headcount in Keystone due to an increase in operations as a result of market recovery in the natural gas industry, offset in part in our Contract Operations Group as several contracts were completed in 2017; and a

•	$5 million increase in other mainly due to an increase in customer uncollectible expense in our Homeowner Services Group as a result of contract growth in 2017.

In 2016, operation and maintenance expense increased $14 million, or 3.9%, primarily due to a:

•	$11 million increase from Keystone, which was acquired in the third quarter of 2015, including $8 million in employee-related costs and $1 million each in production costs, operating supplies and services, and an;

•	$11 million increase in maintenance materials and supplies largely attributable to contract growth in our Homeowner Services and Contract Operations Groups, and higher claims, marketing expenses and costs associated with our investment in a new customer information system in our Homeowner Services Group; and a

•	$10 million increase in employee-related costs principally due to the addition of the Vandenberg Air Force Base contract in 2016, and increased headcount resulting from contract growth in our Homeowner Services and Contract Operations Groups; partially offset by a

•	$18 million decrease in operating supplies and services mainly due to lower capital upgrades in our Military Services Group, as discussed above.

Liquidity and Capital Resources

We regularly evaluate and monitor our cash requirements for capital investments, acquisitions, operations, commitments, debt maturities, interest and dividends. Our business is capital intensive, with a majority of this capital funded by cash flows from operations. When necessary, we also obtain funds from external sources, primarily in the debt markets and through short-term commercial paper borrowings. We also have access to equity capital markets, if needed. Our access to external financing on reasonable terms depends on our credit ratings and current business conditions, including that of the utility and water utility industries in general, as well as conditions in the debt or equity capital markets, and the national and international economic and geopolitical arenas. If these business, market, financial and other conditions deteriorate to the extent that we no longer are able to access the capital markets on reasonable terms, we have access to an unsecured revolving credit facility with aggregate bank commitments of $1.75 billion, with an expiration date of June 2020 (subject to extension by us for up to two one-year periods). We rely on this revolving credit facility and the capital markets to fulfill our short-term liquidity needs, to issue letters of credit and to support our $1.6 billion commercial paper program. Disruptions in the credit markets may discourage lenders from extending the terms of such commitments or agreeing to new commitments. Market disruptions may also limit our ability to issue debt and equity securities in the capital markets. See “Credit Facilities and Short-Term Debt” for further discussion.

In order to meet our short-term liquidity needs, we, through AWCC, our wholly owned financing subsidiary, issue commercial paper, which is supported by the revolving credit facility. As of December 31, 2017, AWCC had no outstanding borrowings and $84 million of outstanding letters of credit under its revolving credit facility, with $1.75 billion available to fulfill our short-term liquidity needs and to issue letters of credit, which supported $905 million in outstanding commercial paper. We believe that our ability to access the capital markets, our revolving credit facility and our cash flows from operations will generate sufficient cash to fund our short-term requirements. We have no plans to issue equity under normal operating conditions in the foreseeable future with the limited exception of privately or investor-owned acquisitions whose sellers require equity as necessary to complete the acquisition. We believe we have sufficient liquidity and the ability to manage our expenditures, should there be a disruption of the capital and credit markets. However, we can provide no assurances that the lenders will meet their existing commitments to AWCC under the revolving credit facility or that we will be able to access the commercial paper or loan markets in the future on terms acceptable to us or at all.

In addition, our regulated subsidiaries receive advances and contributions from customers, home builders and real estate developers to fund construction necessary to extend service to new areas. Advances for construction are refundable for limited periods, which vary according to state regulations, as new customers begin to receive service or other contractual obligations are fulfilled. Amounts which are no longer refundable are reclassified to contributions in aid of construction. Utility plant funded by advances and contributions is excluded from our Regulated Businesses rate base. Generally, we depreciate contributed property and amortize contributions in aid of construction at the composite rate of the related property. Some of our subsidiaries do not depreciate contributed property, based upon regulatory guidelines. The taxability of advances and contributions in aid of construction was changed with the enactment of the TCJA. Previously, the majority of advances and contributions that we collected were not taxable however, with the enactment of the TCJA, they will be taxable going forward. Regulatory treatment for advances and contributions under the TCJA has not yet been defined and we are working with our regulatory jurisdictions to determine impacts to the Company and our customers.

We use our capital resources, including cash, primarily to: (i) fund operating and capital requirements; (ii) pay interest and meet debt maturities; (iii) pay dividends; (iv) fund acquisitions; and (v) fund pension and postretirement benefit obligations. We invest a significant amount of cash on regulated capital projects where we expect to earn a long-term return on investment. Additionally, we operate in rate regulated environments in which the amount of new investment recovery may be limited, and where such recovery generally takes place over an extended period of time, and certain capital recovery is also subject to regulatory lag. See Item 1—Business—Regulated Businesses—Economic Regulation and Rate Making. We expect to fund future maturities of long-term debt through a combination of external debt and, to the extent available, cash flows from operations. Since we expect our capital investments over the next few years to be greater than our cash flows from operating activities, we have no plans to reduce debt significantly. If necessary, we may delay certain capital investments or other funding requirements, or pursue financing from other sources to preserve liquidity. In this event, we believe we can rely upon cash flows from operations to meet our obligations and fund our minimum required capital investments for an extended period of time.

With the enactment of the TCJA and the reduction of the U.S. federal corporate income tax rate from 35% to 21%, we anticipate a decrease in future revenue authorizations associated with our Regulated Businesses, initially leading to lower cash flows. We expect this cash flow impact to decline over time, as our Regulated Businesses’ rate base grows, the result of lower deferred income tax liabilities, which offset rate base. The lower deferred income tax liabilities are mainly due to: (i) a lower U.S. federal corporate income tax rate; (ii) the normalization (refunding to customers) of the re-measured deferred income tax liabilities over the remaining life of the associated assets; and (iii) the loss of future bonus depreciation deductions on capital projects that began after September 27, 2017.

Cash Flows Provided by Operating Activities

Cash flows provided by operating activities primarily result from the sale of water and wastewater services and, due to the seasonality of demand, are generally greater during the warmer months. Our future cash flows provided by operating activities will be affected by, among other things: economic utility regulation; inflation; compliance with environmental, health and safety standards; production costs; customer growth; declining customer usage of water; employee-related costs, including pension funding; weather and seasonality; taxes; and overall economic conditions.

We expect that the enactment of the TCJA to be accretive to our consolidated earnings over time through: (i) growth in rate base for the same level of expected capital expenditures due to the impact of the lower U.S. federal corporate income tax rate and the re-measurement of our deferred income tax assets and liabilities; (ii) increased earnings in our Market-Based Businesses due to the lower U.S. federal corporate income tax rate; all partially offset by (iii) the impact of increased debt due to lower cash flows from operations. We believe that we will likely begin paying federal income taxes towards the end of 2019, when we expect our federal NOL carryforwards balance will be fully benefited or used, and expect to be a full cash taxpayer by 2020, although this timing could be impacted by any significant changes in our future results of operations and the outcome of regulatory proceedings regarding the TCJA.

Cash flows provided by operating activities have been a reliable, steady source of funding, sufficient to meet operating requirements, make our dividend payments and fund a portion of our capital expenditure requirements. We expect to seek access to debt capital markets to meet the balance of our capital expenditure requirements as needed. We also have access to equity capital markets, if needed. Operating cash flows can be negatively affected by changes in our rate regulated environments or changes in our customers’ economic outlook and ability to pay for service in a timely manner. As such, our working capital needs are primarily limited to funding increases in customer accounts receivable and unbilled revenues, mainly associated with revenue increases in our Regulated Businesses. We can provide no assurance that our customers’ historical payment pattern will continue in the future. Sometimes our current liabilities exceed current assets because of our debt due within one year and the periodic use of short-term debt as a funding source, primarily to meet scheduled maturities of long-term debt, as well as cash needs which can fluctuate significantly due to the seasonality of the business, stage of our acquisitions and construction projects. We address cash timing differences through the aforementioned liquidity funding mechanisms.

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

	For the Years Ended December 31,
(In millions)	2017				2016				2015
Net income	$	426			$	468			$	476
Add (less):
Depreciation and amortization	492				470				440
Deferred income taxes and amortization of investment tax credits	462				295				312
Other non-cash activities (a)	16				35				37
Impact of Freedom Industries settlement activities	(22		)		65				—
Changes in working capital (b)	123				9				(13		)
Pension and postretirement benefit contributions	(48		)		(53		)		(57		)
Net cash flows provided by operating activities	$	1,449			$	1,289			$	1,195

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

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

In 2017, cash flows provided by operating activities increased $160 million, primarily due to an increase in net income after non-cash adjustments, including the impact of the enactment of the TCJA, and an increase in cash flows from working capital. The main factors contributing to the net income increase are described in the “Consolidated Results of Operations” section and include higher operating revenues, partially offset by higher income taxes due to a $125 million re-measurement charge resulting from the impact of the change in the federal tax rate on the Company’s deferred income taxes from the enactment of the TCJA. The increase in non-cash activities was mainly attributable to the increase in deferred income taxes, as mentioned above, and an increase in depreciation and amortization due to additional utility plant placed in service. The change in working capital was principally due to: (i) the timing of accounts payable and accrued liabilities, including the accrual recorded during 2016 for the binding global agreement in principle to settle claims associated with the Freedom Industries chemical spill in West Virginia; (ii) a decrease in unbilled revenues as a result of our Military Services Group achieving significant capital project milestones during 2016; and (iii) a change in other current assets and liabilities, including the decrease in other current assets associated with the termination of our four forward starting swap agreements and timing of payments clearing our cash accounts.

In 2016, cash flows provided by operations increased $94 million, primarily due to an increase in net income after non-cash adjustments, including the impact of the binding global agreement in principle to settle claims associated with the Freedom Industries chemical spill in West Virginia, and an increase in cash flows from working capital. The main factors contributing to the net income increase are described in the “Consolidated Results of Operations” section and include higher operating revenues, partially offset by higher O&M expenses. The increase in non-cash activities was mainly attributable to an increase in depreciation and amortization due to additional utility plant placed in service. The change in working capital was principally due to: (i) a change in accounts receivable and unbilled revenues resulting from continuous improvement in our Regulated Businesses’ collection efforts, as well as a decrease in unbilled revenues in our Military Services Group attributable to lower capital upgrades in 2016 as compared to the same period in 2015; (ii) the timing of accounts payable and accrued liabilities; and (iii) a change in other current assets and liabilities.

The Company expects to make pension and postretirement contributions to the plan trusts up to $45 million in 2018. In addition, we estimate that contributions will amount to $47 million, $47 million, $51 million and $58 million in 2019, 2020, 2021 and 2022, respectively. Actual amounts contributed could change materially from these estimates as a result of changes in assumptions and actual investment returns, among other factors.

Cash Flows Used in Investing Activities

The following table provides a summary of the major items affection our cash flows used in investing activities:

	For the Years Ended December 31,
(In millions)	2017				2016				2015
Capital expenditures	$	(1,434	)		$	(1,311	)		$	(1,160	)
Acquisitions	(177		)		(204		)		(197		)
Other investing activities, net (a)	(61		)		(75		)		(102		)
Net cash flows used in investing activities	$	(1,672	)		$	(1,590	)		$	(1,459	)

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

In 2017 and 2016, cash flows used in investing activities increased primarily due to an increase in our regulated capital expenditures, principally from incremental investments associated with the replacement and renewal of our transmission and distribution infrastructure in our Regulated Businesses.

Our infrastructure investment plan consists of both infrastructure renewal programs, where we replace infrastructure, as needed, and major capital investment projects, where we construct new water and wastewater treatment and delivery facilities to meet new customer growth and water quality regulations. Our projected capital expenditures and other investments are subject to periodic review and revision to reflect changes in economic conditions and other factors.

The following table provides a summary of our historical capital expenditures related to the upgrading of our infrastructure and systems:

	For the Years Ended December 31,
(In millions)	2017				2016				2015
Transmission and distribution	$	551			$	568			$	527
Treatment and pumping	171				151				136
Services, meter and fire hydrants	281				297				214
General structure and equipment	281				202				174
Sources of supply	54				59				53
Wastewater	96				34				56
Total capital expenditures	$	1,434			$	1,311			$	1,160

In 2017, our capital expenditures increased $123 million, or 9.4%, primarily due to investment in our general structure and equipment and wastewater categories. In 2016, our capital expenditures increased $151 million, or 13.0%, principally due to investment across the majority of our infrastructure categories.

We also grow our business through acquisitions of water and wastewater systems, as well as other water-related services. These acquisitions are complementary to our existing business and support continued geographical diversification and growth of our operations. Generally, acquisitions are funded initially with short-term debt, and later refinanced with the proceeds from long-term debt.

The following provides a summary of the acquisitions and dispositions affecting our cash flows from investing activities:

2017:

•	The majority of cash paid for acquisitions pertained to the $159 million purchase of the McKeesport system, excluding a $5 million non-escrowed deposit made in 2016.

•	Paid $18 million for 16 water and wastewater systems, excluding the McKeesport system and Shorelands (a stock transaction), representing approximately 7,000 customers.

•	Received $15 million for the sale of assets and securities.

2016:

•	Paid $199 million for 15 water and wastewater systems, representing approximately 42,000 customers.

•	Made a non-escrowed deposit of $5 million related to the McKeesport system acquisition.

•	Received $9 million for the sale of assets and securities.

2015:

•	Paid $133 million for the acquisition of our 95% interest in Water Solutions Holdings, LLC, the parent company of Keystone.

•	Paid $64 million for 14 water and wastewater systems, representing approximately 24,000 customers.

•	Received $5 million for the sale of assets and securities.

As previously noted, we expect to invest between $8.0 billion to $8.6 billion from 2018 to 2022, with $7.2 billion of this range for infrastructure improvements in our Regulated Businesses. In 2018, we expect to invest between $1.6 billion to $1.8 billion, with a range of $1.4 billion to $1.5 billion for infrastructure improvements in our Regulated Businesses. Also in 2018, we expect to invest between $120 million to $240 million for acquisitions in our Regulated Businesses, and approximately $100 million for strategic growth opportunities, including the construction of our new corporate headquarters in Camden, New Jersey, which is expected to be completed during the second half of 2018 and is eligible for tax credits from New Jersey’s Economic Development Authority.

Cash Flows from Financing Activities

Our financing activities, primarily focused on funding infrastructure construction expenditures, include the issuance of long-term and short-term debt, primarily through AWCC. In addition, new infrastructure may be funded with customer advances and contributions in aid of construction, net of refunds, which amounted to $28 million, $16 million and $26 million for the years ended December 31, 2017, 2016 and 2015, respectively. Based on the needs of our Regulated Businesses and the Company, AWCC may borrow funds or issue its debt in the capital markets and then, through intercompany loans, provide those borrowings to the Regulated Businesses and the parent company. The Regulated Businesses and the parent company are obligated to pay their portion of the respective principal and interest to AWCC, in the amount necessary to enable AWCC to meet its debt service obligations. The parent company’s borrowings are not a source of capital for the Regulated Businesses, therefore, the parent company is not able to recover the interest charges on its debt through regulated water and wastewater rates. As of December 31, 2017, AWCC has made long-term fixed rate loans and commercial paper loans to our Regulated Businesses amounting to $3.9 billion and $586 million, respectively. Additionally, as of December 31, 2017, AWCC has made long-term fixed rate loans and commercial paper loans to the parent company amounting $1.6 billion and $319 million, respectively.

On August 10, 2017, AWCC completed a $1.35 billion debt offering which included the sale of $600 million aggregate principal amount of its 2.95% Senior Notes due 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, $1.33 billion. On September 13, 2017, AWCC used proceeds from the offering 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”). AWCC also used the proceeds of this offering to repay commercial paper obligations and for general corporate purposes, and subsequently, on October 15, 2017, to repay at maturity, $524 million of its 6.085% Senior Notes.

As a result of AWCC’s prepayment of the Series C Senior Notes and the Series D Senior Notes, and payment of a make-whole premium amount to the holders thereof of $34 million, we recorded a $6 million charge resulting from the early extinguishment of debt at the parent company. Substantially all of the early debt extinguishment costs allocable to the Regulated Businesses were recorded as regulatory assets for we believe they are probable of recovery in future rates. Approximately $1 million of the early debt extinguishment costs allocable to the Regulated Businesses were amortized in 2017.

One of the principal market risks to which the Company is exposed is changes in interest rates. In order to manage the exposure, we follow risk management policies and procedures, including the use of derivative contracts such as swaps. We reduce exposure to interest rates by managing commercial paper and debt maturities. We do not enter into derivative contracts for speculative purposes and do not use leveraged instruments. The derivative contracts entered into are for periods consistent with the related underlying exposures. The Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. We minimize the counterparty credit risk on these transactions by only dealing with leading, credit-worthy financial institutions, having long-term credit ratings of “A” or better.

On August 7, 2017, coinciding with AWCC’s $1.35 billion debt offering, we terminated four existing 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. On February 8, 2017, and December 11, 2017, we entered into forward starting swap agreements, each with notional amounts of $100 million, to reduce interest rate exposure on debt expected to be issued in 2018. These forward starting swap agreements terminate in November 2018, and have an average fixed rate of 2.59%. We have designated these forward starting swap agreements as cash flow hedges, with their fair values 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.

In October 2017, we terminated our interest-rate swap to hedge $100 million of its 6.085% Senior Notes maturing in the fourth quarter of 2017. The Company paid variable interest of six-month LIBOR plus 3.422%, and had 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 was de minimis for the periods ended December 31, 2017 and 2016.

In May 2015, the parent company and AWCC filed with the SEC, a universal shelf registration statement that enables us to meet our capital needs through the offer and sale to the public from time to time of an unlimited amount of various types of securities, including American Water common stock, preferred stock, and other equity and hybrid securities, and AWCC debt securities, all subject to market conditions and demand, general economic conditions, and as applicable, rating status. The shelf registration will expire in May 2018. During 2017, 2016 and 2015, $1.35 billion, $550 million and $550 million, respectively, of debt securities were issued pursuant to this registration statements.

The following table details the issuances of long-term debt in 2017:

Company		Type		Rate		Maturity		Amount (In millions)
AWCC		Senior notes—fixed rate		2.95%-3.75%		2027-2047		$	1,350
Other American Water subsidiaries		Private activity bonds and government funded debt—fixed rate		0.00%-1.44%		2020-2037		31
Other American Water subsidiaries		Mortgage bonds—fixed rate		3.92%		2020		$	3
Other American Water subsidiaries		Term loan		4.62%-5.12%		2021		$	11
Total issuances								$	1,395

The following table details the long-term debt that was retired through sinking fund provisions, optional redemption or payment at maturity during 2017:

Company		Type		Rate		Maturity		Amount (In millions)
AWCC		Senior notes—fixed rate		5.62%-6.09%		2017-2021		$	844
AWCC		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%-5.38%		2017-2041		15
Other American Water subsidiaries		Mortgage bonds—fixed rate		7.08%		2017		33
Other American Water subsidiaries		Mandatorily redeemable preferred stock		8.49%-9.18%		2031-2036		2
Other American Water subsidiaries		Term loan		4.31%-5.31%		2021		1
Total retirements and redemptions								$	896

The following table details the issuances of long-term debt in 2016:

Company		Type		Rate		Maturity		Amount (In millions)
AWCC (a)		Senior notes—fixed rate		3.00%-4.00%		2026-2046		$	550
Other American Water subsidiaries		Private activity bonds and government funded debt—fixed rate		1.00%-1.36%		2026-2037		3
Total issuances								$	553

(a)	On November 17, 2016, AWCC completed an offering of its senior fixed rate notes. Proceeds from this offering were used to lend funds to the Company and its Regulated Businesses, to repay commercial paper borrowings and for general corporate purposes.

The following table details the long-term debt that was retired through sinking fund provisions, optional redemption or payment at maturity during 2016:

Company		Type		Rate		Maturity		Amount (In millions)
AWCC		Senior notes—fixed rate		5.52%		2016		$	37
AWCC		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		104
Other American Water subsidiaries		Mandatorily redeemable preferred stock		8.49%-9.18%		2031-2036		2
Total retirements and redemptions								$	144

The following table details the issuances of long-term debt in 2015:

Company		Type		Rate		Maturity		Amount (In millions)
AWCC (a)		Senior notes—fixed rate		3.40%-4.30%		2025-2045		$	550
Other American Water subsidiaries		Private activity bonds and government funded debt—fixed rate		1.00%-1.56%		2032		15
Total issuances								$	565

(a)	On August 13, 2015, AWCC completed an offering of its senior fixed rate notes. Proceeds from this offering were used to lend funds to the Company and its Regulated Businesses, to repay commercial paper borrowings and to finance redemptions of long-term debt.

The following table details the long-term debt that was retired through sinking fund provisions, optional redemption or payment at maturity during 2015:

Company		Type		Rate		Maturity		Amount (In millions)
AWCC		Senior notes—fixed rate		6.00%		2015		30
AWCC		Private activity bonds and government funded debt—fixed rate		1.79%-5.25%		2015-2031		$	36
Other American Water subsidiaries (a)		Private activity bonds and government funded debt—fixed rate		0.00%-5.40%		2015-2041		61
Other American Water subsidiaries		Mandatorily redeemable preferred stock		8.49%-9.18%		2031-2036		4
Total retirements and redemptions								$	131

(a)	Includes $2 million of non-cash redemptions resulting from the use of restricted funds.

From time to time and as market conditions warrant, we may engage in long-term debt retirements through tender offers, open market repurchases or other viable alternatives to strengthen our balance sheets.

In February 2015, our Board of Directors authorized an anti-dilutive, common stock repurchase program to mitigate the effect of shares issued through our dividend reinvestment, employee stock purchase and executive compensation activities. The program allows the Company to purchase up to 10 million shares of its outstanding common stock, over an unrestricted period of time, in the open market or through privately negotiated transactions. The program is conducted in accordance with Rule 10b-18 of the Exchange Act, and to facilitate the repurchases, we have also entered into Rule 10b5-1 share repurchase plans with a third-party broker, which allows us to repurchase shares at times when we may otherwise be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. Subject to applicable regulations, we may elect to amend or cancel this repurchase program or the share repurchase parameters at our discretion. As of December 31, 2017, we have repurchased an aggregate of 3,950,000 shares of common stock under this program.

Credit Facilities and Short-Term Debt

We have an unsecured revolving credit facility of $1.75 billion that expires in June 2020. In March 2016, and under the terms of the revolving credit agreement dated June 30, 2015, AWCC exercised its right to increase its borrowing capacity available under our revolving credit facility from the aggregate maximum of $1.25 billion, to $1.75 billion. All other terms, conditions and covenants with respect to the existing facility remained unchanged. On June 30, 2015, AWCC and its lenders extended the termination date of the revolving credit facility from October 2018, to June 2020. This amended and restated agreement also allowed AWCC to request to extend further the term of the credit facility for up to two one-year periods. An extension request must satisfy certain conditions and receive approval of the lenders, as set forth in the revolving credit agreement.

Interest rates on advances under the facility are based on a credit spread to the Eurodollar rate or base rate in accordance with AWCC’s then-applicable Moody Investors Service or Standard & Poor’s Ratings Services credit rating. At current ratings, that spread would be 0.90%. The facility is used principally to support AWCC’s commercial paper program and to provide up to $150 million in letters of credit. Indebtedness under the facility is considered “debt” for purposes of a support agreement between the Company and AWCC, which serves as a functional equivalent of a guarantee by the Company of AWCC’s payment obligations under the credit facility.

AWCC also has an outstanding commercial paper program that is backed by the revolving credit facility, the maximum aggregate outstanding amount of which was increased on March 22, 2016, from $1.0 billion to $1.6 billion.

Keystone has its own line of credit facility with a maximum availability of up to $12 million, the actual amount of which is determined pursuant to a collateral base calculation. Borrowings under this facility are payable upon demand with interest being paid monthly. Interest accrues each day at a rate per annum equal to 2.75% above the greater of the one month or one day LIBOR. The borrowing base under the facility allows for financing up to the greater of the note or 80% of eligible accounts receivable. Based on the collateral assets at December 31, 2017, $7 million was available to borrow. At December 31, 2017, there were no outstanding borrowings.

The following table summarizes information regarding the Company’s aggregate credit facility commitments, letter of credit sub-limits and available funds under those revolving credit facilities, as well as outstanding amounts of commercial paper and outstanding borrowings under the respective facilities as of December 31, 2017 and 2016:

(Dollars in millions)	Credit Facility Commitment				Available Credit Facility Capacity				Letter of Credit Sublimit				Available Letter of Credit Capacity				Commercial Paper Limit				Available Commercial Paper Capacity
December 31, 2017	$	1,762			$	1,673			$	150			$	66			$	1,600			$	695
December 31, 2016	1,766				1,668				150				62				1,600				751

The weighted-average interest rate on AWCC short-term borrowings for the years ended December 31, 2017 and 2016 was approximately 1.24% and 0.78%, respectively.

Capital Structure

The following table indicates the percentage of our capitalization represented by the components of our capital structure as of December 31:

	2017			2016			2015
Total common stockholders' equity	41.0	%		42.1	%		43.5	%
Long-term debt and redeemable preferred stock at redemption value	49.6	%		46.4	%		50.6	%
Short-term debt and current portion of long-term debt	9.4	%		11.5	%		5.9	%
Total	100	%		100	%		100	%

The changes in the capital structure between periods were mainly attributable to an increase in the current portion of long-term debt.

Debt Covenants

Our debt agreements contain financial and non-financial covenants. To the extent that we are not in compliance with these covenants, an event of default may occur under one or more debt agreements and we or our subsidiaries may be restricted in our ability to pay dividends, issue new debt or access our revolving credit facility. Our long-term debt indentures contain a number of covenants that, among other things, prohibit or restrict the Company from issuing debt secured by the Company’s assets, subject to certain exceptions. Our failure to comply with any of these covenants could accelerate repayment obligations.

Covenants in certain long-term notes and the revolving credit facility require us to maintain a ratio of consolidated debt to consolidated capitalization (as defined in the relevant documents) of not more than 0.70 to 1.00. On December 31, 2017, our ratio was 0.59 to 1.00 and therefore we were in compliance with the covenants.

Security Ratings

Our access to the capital markets, including the commercial paper market, and respective financing costs in those markets, may be directly affected by our securities ratings. We primarily access the debt capital markets, including the commercial paper market, through AWCC. However, we have also issued debt through our regulated subsidiaries, primarily in the form of tax exempt securities or borrowings under state revolving funds, to lower our overall cost of debt.

The following table presents our long-term and short-term credit rating and rating outlook as of February 20, 2018:

Securities	Moody’s Investors Service		Standard & Poor’s Ratings Service
Rating Outlook	Negative		Stable
Senior unsecured debt	A3		A
Commercial paper	P-2		A-1

On January 19, 2018, Moody’s Investors Service changed the rating outlooks to negative, from stable, for 24 regulated utilities and utility holding companies, including the Company, all of which were primarily impacted by enactment of the TCJA. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency, and each rating should be evaluated independently of any other rating. Security ratings are highly dependent upon our ability to generate cash flows in an amount sufficient to service our debt and meet our investment plans. We can provide no assurances that our ability to generate cash flows is sufficient to maintain our existing ratings. None of our borrowings are subject to default or prepayment as a result of the downgrading of these security ratings, although such a downgrading could increase fees and interest charges under our credit facility.

As part of the normal course of business, we routinely enter into contracts for the purchase and sale of water, energy, chemicals and other services. These contracts either contain express provisions or otherwise permit us and our counterparties to demand adequate assurance of future performance when there are reasonable grounds for doing so. In accordance with the contracts and applicable contract law, if we are downgraded by a credit rating agency, especially if such downgrade is to a level below investment grade, it is possible that a counterparty would attempt to rely on such a downgrade as a basis for making a demand for adequate assurance of future performance, which could include a demand that we provide collateral to secure our obligations. We do not expect to post any collateral which will have a material adverse impact on the Company’s results of operations, financial position or cash flows.

Dividends

Our Board of Directors authorizes the payment of dividends. Our ability to pay dividends on our common stock is subject to having access to sufficient sources of liquidity, the net income and cash flows of our subsidiaries, the receipt of dividends and repayments of indebtedness from our subsidiaries, compliance with Delaware corporate and other laws, compliance with the contractual provisions of debt and other agreements, and other factors. The Company’s dividend rate on its common stock is determined by the Board of Directors on a quarterly basis and takes into consideration, among other factors, current and possible future developments that may affect the Company’s income and cash flows. Historically, dividends have been paid quarterly to holders of record less than 30 days prior to the distribution date. Since the dividends on our common stock are not cumulative, only declared dividends are paid.

During 2017, 2016 and 2015, we paid $289 million, $261 million and $239 million in cash dividends, respectively. The following table summarizes the per share cash dividends paid for the years ended December 31, 2017, 2016 and 2015:

	2017				2016				2015
December	$	0.415			$	0.375			$	0.34
September	$	0.415			$	0.375			$	0.34
June	$	0.415			$	0.375			$	0.34
March	$	0.375			$	0.34			$	0.31

On December 8, 2017, our Board of Directors declared a quarterly cash dividend payment of $0.415 per share payable on March 1, 2018, to stockholders of record as of February 7, 2018.

Regulatory Restrictions

The issuance by the Company or AWCC of long-term debt or equity securities does not require authorization of any state PUC if no guarantee or pledge of the regulated subsidiaries is utilized. However, state PUC authorization is required to issue long-term debt at most of our regulated subsidiaries. Our regulated subsidiaries normally obtain the required approvals on a periodic basis to cover their anticipated financing needs for a period of time or in connection with a specific financing.

Under applicable law, our subsidiaries can pay dividends only from retained, undistributed or current earnings. A significant loss recorded at a subsidiary may limit the dividends that the subsidiary can distribute to us. Furthermore, the ability of our subsidiaries to pay upstream dividends or repay indebtedness to American Water is subject to compliance with applicable regulatory restrictions and financial obligations, including, for example, debt service and preferred and preference stock dividends, as well as applicable corporate, tax and other laws and regulations, and other agreements or covenants made or entered into by American Water and its subsidiaries.

Insurance Coverage

We carry various property, casualty and financial insurance policies with limits, deductibles and exclusions that we believe are consistent with industry standards. However, insurance coverage may not be adequate or available to cover unanticipated losses or claims. Additionally, annual policy renewals can be impacted by claims experience which in turn can impact coverage terms and conditions on a going forward basis. We are self-insured to the extent that losses are within the policy deductible or exceed the amount of insurance maintained. Such losses could have a material adverse effect on our short-term and long-term financial condition and our results of operations and cash flows.

Contractual Obligations and Commitments

We enter into contractual obligations with third parties in the ordinary course of business. Information related to our contractual obligations as of December 31, 2017 is summarized in the table below:

Contractual obligation (In millions)		Total				1 year or Less				2-3 Years				4-5 years				More Than 5 years
Long-term debt obligations (a)		$	6,814			$	320			$	218			$	420			$	5,856
Interest on long-term debt (b)		5,047				324				600				571				3,552
Operating lease obligations (c)		123				15				26				17				65
Purchase water obligations (d)		979				59				130				129				661
Other purchase obligations (e)		235				235				—				—				—
Postretirement benefit plans' obligations (f)		3				—				3				—				—
Pension plan obligations (f)		239				39				91				109				—
Preferred stocks with mandatory redemption requirements		10				2				3				2				3
Interest on preferred stock with mandatory redemption requirements		5				1				1				1				2
Other obligations (g)		1,113				430				213				154				316
Total		$	14,568			$	1,425			$	1,285			$	1,403			$	10,455

Note: The above table reflects only financial obligations and commitments. Therefore, performance obligations associated with our Market-Based Businesses are not included in the above amounts. Also, uncertain tax positions of $106 million are not reflected in this table as we cannot predict when open tax years will close with completed examinations. See Note 13—Income Taxes in the Notes to the Consolidated Financial Statements.

(a)	Represents sinking fund obligations, debt maturities and capital lease obligations.

(b)	Represents expected interest payments on outstanding long-term debt. Amounts reported may differ from actual due to future financing of debt.

(c)	Represents future minimum payments under non-cancelable operating leases, primarily for the lease of motor vehicles, buildings, land and other equipment including water facilities and systems constructed by partners under the Public-Private Partnerships described below.

(d)	Represents future payments under water purchase agreements for minimum quantities of water.

(e)	Represents the open purchase orders as of December 31, 2017 for goods and services purchased in the ordinary course of business.

(f)	Represents contributions expected to be made to pension and postretirement benefit plans for the years 2018 through 2022.

(g)	Includes an estimate of advances for construction to be refunded, capital expenditures estimated to be required under legal and binding contractual obligations, contracts entered into for energy purchases, a liability associated with a conservation agreement and service agreements.

Public-Private Partnerships

WVAWC has entered into a series of agreements with various public entities, which we refer to as the Partners, to establish certain joint ventures, commonly referred to as “public-private partnerships.” Under the public-private partnerships, WVAWC constructed utility plant, financed by WVAWC, and the Partners constructed utility plant (connected to WVAWC’s property), financed by the Partners. WVAWC agreed to transfer and convey some of its real and personal property to the Partners in exchange for an equal principal amount of Industrial Development Bonds, commonly referred to as IDBs, issued by the Partners under a state Industrial Development Bond and Commercial Development Act. WVAWC leased back the total facilities, including portions funded by both WVAWC and the Partners, under leases for a period of 40 years.

The leases have payments that approximate the payments required by the terms of the IDBs. These payments are considered “PILOT payments” which represent payments that WVAWC otherwise would pay as property taxes on the properties. We have presented the transaction on a net basis in the Consolidated Financial Statements. The carrying value of the transferred facilities, which is presented in property, plant and equipment in the Consolidated Balance Sheets, was approximately $150 million as of December 31, 2017.

Performance Obligations

We have entered into agreements for the provision of services to water and wastewater facilities for the United States military, municipalities and other customers. These military services agreements expire between 2051 and 2068 and have remaining performance commitments as measured by estimated remaining contract revenues of $3.6 billion as of December 31, 2017. The operations and maintenance agreements with municipalities and other customers expire between 2018 and 2038 and have remaining performance commitments as measured by estimated remaining contract revenue of $711 million as of December 31, 2017. Some of the Company’s long-term contracts to operate and maintain a municipality’s, federal government’s or other party’s water or wastewater treatment and delivery facilities include responsibility for certain major maintenance for some of the facilities, in exchange for an annual fee.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires that management apply accounting policies and make estimates, assumptions and judgments that could significantly affect a company’s financial condition, results of operations and cash flows. Management believes that the areas described below require significant judgment in the application of accounting policy or in making estimates and assumptions in matters that are inherently uncertain and that may change in subsequent periods. Accordingly, changes in the estimates, assumptions and judgments applied to these accounting policies could have a significant impact on our financial condition, results of operations and cash flows, as reflected in our Consolidated Financial Statements. Management has reviewed the critical accounting polices described below with our audit committee, including the estimates, assumptions and judgments used in their application. Additional discussion regarding these critical accounting policies and their application can be found in Note 2—Significant Accounting Policies in the Notes to the Consolidated Financial Statements for additional information.

Rate Regulation and Regulatory Accounting

Our regulated utilities are subject to economic regulation by PUCs and, as such, we follow the authoritative accounting principles required for rate regulated utilities, which requires us to reflect the effects of rate regulation in our Consolidated Financial Statements. Use of this authoritative guidance is applicable to utility operations that meet the following criteria: (i) third-party regulation of rates; (ii) cost-based rates; and (iii) a reasonable assumption that rates will be set to recover the estimated costs of providing service, plus a return on net investment, or rate base. As of December 31, 2017, we concluded that the operations of our utilities met the criteria.

Application of this authoritative guidance has a further effect on our financial statements as it pertains to allowable costs used in the ratemaking process. We make significant assumptions and estimates to quantify amounts recorded as regulatory assets and liabilities. Such judgments include, but are not limited to, assets and liabilities related to regulated acquisitions, pension and postretirement benefits, depreciation rates and taxes. Due to timing and other differences in the collection of revenues, these authoritative accounting principles allow a cost that would otherwise be charged as an expense by an non-regulated entity, to be deferred as a regulatory asset if it is probable that such cost is recoverable through future rates. Conversely, the principles require the creation of a regulatory liability for amounts collected in rates to recover costs expected to be incurred in the future, or amounts collected in excess of costs incurred and are refundable to customers. Regulators may also impose certain fines or penalties.

For each regulatory jurisdiction where we conduct business, we assess, at the end of each reporting period, whether the regulatory assets and liabilities continue to meet the criteria for probable, future recovery or settlement. This assessment includes consideration of factors such as changes in applicable regulatory environments; recent rate orders on recovery of a specific or similar incurred cost to other regulated entities in the same jurisdiction and the status of any pending or potential legislation that could impact the ability to recover costs through regulated rates. If subsequent events indicate that the regulatory assets or liabilities no longer meet the criteria for probable, future recovery or settlement, our Consolidated Statements of Operations and financial position could be materially affected. In addition, if we conclude in a future period that a separable portion of the business no longer meets the criteria, we are required to eliminate the financial statement effects of regulation for that part of the business, which would include the elimination of any or all regulatory assets and liabilities that had been recorded in the Consolidated Financial Statements. Failure to meet the criteria of this authoritative guidance could materially impact our Consolidated Financial Statements.

On December 22, 2017, the TCJA was signed into law, which, among other things, enacted significant and complex changes to the Internal Revenue Code of 1986, including a reduction in the maximum U.S. federal corporate income tax rate from 35% to 21% as of January 1, 2018. The TCJA created significant excess deferred income taxes that the Company and its regulatory jurisdictions believe should be refunded to customers. As such, we recorded these amounts as regulatory liabilities. The PUCs in our regulatory jurisdictions have opened formal proceedings related to the TCJA and we have begun working with our regulators on options to provide the income tax savings to our customers, and to address customer rate impacts and cash flow impacts for the Company. The outcome of these proceedings will likely take some time and could vary by regulatory jurisdiction.

As of December 31, 2017 and 2016, our regulatory asset balance was $1.1 billion and $1.3 billion, respectively, and our regulatory liability balance was $1.7 billion and $403 million, respectively. See Note 6—Regulatory Assets and Liabilities in the Notes to Consolidated Financial Statements for further information regarding our significant regulatory assets and liabilities.

Goodwill

As of December 31, 2017 and 2016, our goodwill balance was $1.4 billion and $1.3 billion, respectively. Under GAAP, goodwill must be allocated at the reporting unit level, which is defined as an operating segment or one level below, and evaluated for impairment minimally, once a year. We perform an annual review for impairment of goodwill as of November 30 of each year, or more frequently if we determine that changes in circumstances or a triggering event that would more likely than not, reduce the fair value of a reporting unit below its carrying value, has occurred. Adverse industry or economic trends, lower projections of profitability, or a sustained decline in our market capitalization, among other things, may be indicators of potential goodwill impairment issues, requiring the testing of the carrying value for recoverability.

Entities evaluating goodwill for impairment have the option of first performing a qualitative assessment to determine whether a quantitative assessment is necessary. In performing a qualitative assessment, we assess and makes judgments, among other things, around macroeconomic conditions, industry and market conditions, overall financial performance, cost factors and entity specific events. These factors require significant judgment and estimates, and application of alternative assumptions could produce significantly different results. If it is determined, based upon qualitative factors, that the fair value of a reporting unit is more likely than not, greater than its carrying value, no further testing is required. If an entity bypasses the qualitative assessment, or performs the qualitative assessment but determines that the fair value of a reporting unit is more likely than not, less than its carrying value, a two-step, quantitative fair value assessment is performed.

The first step of a quantitative assessment compares the estimated fair value of the reporting unit to its respective net carrying value, including goodwill, on the measurement date. If the estimated fair value of the reporting unit is less than such reporting unit’s carrying value, then the second step of the quantitative assessment is performed to measure the amount of the impairment loss, if any, for such reporting unit.

The second step of a quantitative assessment requires an allocation of fair value to the individual assets and liabilities of the reporting unit, using purchase price allocation accounting guidance in order to determine the implied fair value of goodwill. If the implied fair value of goodwill is less than the carrying value for the reporting unit, an impairment loss is recorded as a reduction to goodwill and a charge to operating expense. Application of goodwill impairment testing requires significant management judgment, including the identification of reporting units and determining the fair value of the reporting unit. We estimate fair value using a combination of a discounted cash flow analysis and market multiples analysis. Significant assumptions used in these fair value analyses include, but are not limited to, forecasts of future operating results, discount and growth rates, capital expenditures, tax rates, working capital, weighted average cost of capital and projected terminal values. Changes in estimates or the application of alternative assumptions could produce significantly different results.

At November 30, 2017, we completed qualitative assessments for our Regulated Businesses, Military Services Group and Contract Operations Group reporting units, and determined that no qualitative factors were present that would indicate the estimated fair values of these reporting units were less than their respective carrying values. As such, we determined that the two-step, quantitative fair value assessment was not necessary for these reporting units as of November 30, 2017.

At November 30, 2017, we completed step one of the two-step, quantitative assessment for our Homeowner Services Group and Keystone reporting units, and concluded there were no impairments to their respective goodwill carry values. We used an income approach valuation technique which estimates discounted future cash flows from operations, which relies on a single scenario reflecting the best estimate of projected cash flows. The estimated fair value of the Homeowner Services Group reporting unit exceeded its carrying value by more than 156%. The estimated fair value of the Keystone reporting unit exceeded its carrying value by approximately 11%. If further decline in the fair value were to occur, the Keystone reporting unit would be at risk of failing step one of the two-step, quantitative assessment. Additional discussion regarding our goodwill can be found in Note 7—Goodwill and Other Intangible Assets in the Notes to the Consolidated Financial Statements.

Impairment of Long-Lived Assets

Long-lived assets include land, buildings, equipment and long-term investments. Other than land and long-term investments, our long-lived assets are depreciated over their estimated useful lives and are reviewed for impairment whenever changes in circumstances indicate that their carrying value may not be recoverable. Such circumstances include, but are not limited to, a significant decrease in the market value of the long-lived asset, a change in the asset’s expected useful life or physical condition, a history of operating or cash flow losses associated with the use of the asset or a significant adverse change in the manner in which the asset is being used or is planned to be used. When such events or changes occur, we estimate the fair value of the long-lived asset from future cash flows expected to result from its use and, if applicable, the eventual disposition of the asset, and compare it to the carrying value of the asset. If the carrying value of the long-lived asset is greater than its fair value, an impairment loss is recognized equal to the amount by which carrying value exceeds fair value. Key variables that must be estimated include assumptions regarding sales volume, rates, operating costs, labor and other benefit costs, capital additions, assumed discount rates and other economic factors. These variables require significant management judgment and include inherent uncertainties, since they are forecasting future events. A variation in the assumptions used could lead to a different conclusion regarding the realizability of a long-lived asset and, thus, could have a significant effect on our Consolidated Financial Statements.

The long-lived assets of our regulated utilities are grouped on a separate entity basis for impairment testing, as they are integrated state-wide operations that do not have the option to curtail service and generally have uniform tariffs. A regulatory asset is charged to earnings if and when future recovery in rates of that asset is no longer probable. The fair values of our long-term investments are dependent on the financial performance and solvency of the entities in which we invest, as well as volatility inherent in the external markets, all of which are factors that we consider when assessing the potential impairment of these investments. If such long-term investments are considered impaired, an impairment loss is recognized equal to the amount by which the investment’s carrying value exceeds its fair value.

Revenue Recognition

Revenue for our regulated utilities is recognized as water and wastewater services are delivered to customers and includes amounts billed to customers on a cycle basis, and unbilled amounts which are based on estimated usage from the date of the meter reading associated with the latest customer bill, to the end of the accounting period. Increases or decreases in the volumes delivered to customers and rate mix due to changes in usage patterns in customer classes in the period could be significant to the calculation of unbilled revenue. In addition, changes in the timing of meter reading schedules and the number and type of customers scheduled for each meter reading date would also have an effect on the unbilled revenue calculation. Unbilled revenue for our regulated utilities as of December 31, 2017 and 2016 was $152 million and $161 million, respectively.

Revenues of the Market-Based Businesses are recognized as services are rendered. For certain construction contracts, revenue is recognized over the contract term based on a calculated ratio that compares the costs incurred to date during the period to the total estimated costs for the entire contract. Losses on contracts are recognized during the period in which the loss first becomes probable and estimable. Revenues recognized during the period in excess of billings on construction contracts are recorded as unbilled revenue. Billings in excess of revenues recognized on construction contracts are recorded as other current liabilities on the balance sheet until the recognition criteria are met. Changes in contract performance and related estimated contract profitability may result in revisions to costs and revenues and are recognized in the period in which revisions are determined. Unbilled revenue for our Market-Based Businesses as of December 31, 2017 and 2016 was $60 million and $102 million, respectively.

Accounting for Income Taxes

Significant management judgment is required in determining the provision for income taxes, primarily due to the uncertainty related to tax positions taken, as well as deferred tax assets and liabilities, valuation allowances and the utilization of net operating loss carryforwards.

In accordance with applicable authoritative guidance, we account for uncertain income tax positions using a benefit recognition model with a two-step approach, including a more-likely-than-not recognition threshold and a measurement approach based on the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. If it is not more-likely-than-not that the benefit of the tax position will be sustained on its technical merits, no benefit is recorded. Uncertain tax positions that relate only to timing of when an item is included on a tax return are considered to have met the recognition threshold. Management evaluates each position based solely on the technical merits and facts and circumstances of the position, assuming the position will be examined by a taxing authority having full knowledge of all relevant information. Significant judgment is required to determine whether the recognition threshold has been met and, if so, the appropriate amount of unrecognized tax benefit to be recorded in the Consolidated Financial Statements.

We evaluate the probability of realizing deferred tax assets quarterly by reviewing a forecast of future taxable income and our intent and ability to implement tax planning strategies, if necessary, to realize deferred tax assets. We also assess our ability to utilize tax attributes, including those in the form of carryforwards, for which the benefits have already been reflected in the financial statements. We record valuation allowances for deferred tax assets when we conclude it is more-likely-than-not such benefit will not be realized in future periods.

Under GAAP, specifically Accounting Standards Codification (“ASC”) Topic 740, Income Taxes the tax effects of changes in tax laws must be recognized in the period in which the law is enacted. ASC 740 also requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. Thus, at the date of enactment, the Company’s deferred taxes were re-measured based upon the new tax rate. For our regulated entities, the change in deferred taxes are recorded as either an offset to a regulatory asset or liability and may be subject to refund to customers. For our unregulated operations, the change in deferred taxes are recorded as a non-cash re-measurement adjustment to earnings.

The staff of the SEC has recognized the complexity of reflecting the impacts of changes in tax law, more specifically the TCJA, and on December 22, 2017, issued guidance in Staff Accounting Bulletin 118 (“SAB 118”) which clarifies accounting for income taxes under ASC 740 if information is not yet available or complete and provides for up to a one year period in which to complete the required analyses and accounting. SAB 118 describes three scenarios or buckets associated with a company’s status of accounting for the TCJA:(1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of tax reform and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply ASC 740, based on the provisions of the tax laws that were in effect immediately prior to the TCJA being enacted. The significant assumptions considered and evaluated by the Company relating to our accounting for the TCJA, include, but are not limited to, the:

•	recording of regulatory liabilities from the re-measurement of the Company’s deferred income taxes, and the uncertainty of regulatory treatment in our various jurisdictions in which the Company currently operates;

•	allocation of interest deductibility at the parent to our subsidiaries;

•	bonus depreciation deductions for assets constructed and placed in service during the period September 28, 2017 through December 31, 2017; and

•	normalization periods for our re-measured deferred taxes.

Actual income taxes could vary from estimated amounts due to the future impacts of various items, including changes in income tax laws, our forecasted financial condition and results of operations, failure to successfully implement tax planning strategies, recovery of taxes through the regulatory process for our Regulated Businesses, as well as results of audits and examinations of filed tax returns by taxing authorities. While we believe the resulting tax balances as of December 31, 2017 and 2016 are appropriately accounted for in accordance with the applicable authoritative guidance, the ultimate outcome of tax matters could result in favorable or unfavorable adjustments to our Consolidated Financial Statements and such adjustments could be material. See Note 13—Income Taxes in the Notes to Consolidated Financial Statements for additional information regarding income taxes.

Accounting for Pension and Postretirement Benefits

We maintain noncontributory defined benefit pension plans covering eligible employees of our regulated utility and shared service operations. See Note 14—Employee Benefits in the Notes to Consolidated Financial Statements for further information regarding the description of and accounting for the defined benefit pension plans and postretirement benefit plans.

The Company’s pension and postretirement benefit costs are developed from actuarial valuations. Inherent in these valuations are key assumptions provided by the Company to its actuaries, including the discount rate and expected long-term rate of return on plan assets. Material changes in the Company’s pension and postretirement benefit costs may occur in the future due to changes in these assumptions as well as fluctuations in plan assets. The assumptions are selected to represent the average expected experience over time and may differ in any one year from actual experience due to changes in capital markets and the overall economy. These differences will impact the amount of pension and other postretirement benefit expense that the Company recognizes. The primary assumptions are:

•

Discount Rate—The discount rate is used in calculating the present value of benefits, which are based on projections of benefit payments to be made in the future. The objective in selecting the discount rate is to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments, would provide the necessary future cash flows to pay the accumulated benefits when due;

•	Expected Return on Plan Assets (“EROA”)—Management projects the future return on plan assets considering prior performance, but primarily based upon the plans’ mix of assets and expectations for the long-term returns on those asset classes. These projected returns reduce the net benefit costs we record currently;

•	Rate of Compensation Increase—Management projects employees’ pay increases, which are used to project employees’ pension benefits at retirement;

•	Health Care Cost Trend Rate—Management projects the expected increases in the cost of health care; and

•	Mortality—Management retained the Society of Actuaries RP-2014 mortality table but adopted the new MP-2017 generational projection scale to project mortality improvements after 2006.

The discount rate assumption, which is determined for the pension and postretirement benefit plans independently, is subject to change each year, consistent with changes in applicable high-quality, long-term corporate bond indices. We use an approach that approximates the process of settlement of obligations tailored to the plans’ expected cash flows by matching the plans’ cash flows to the coupons and expected maturity values of individually selected bonds. The yield curve was developed for a portfolio containing the majority of United States-issued AA-graded non-callable (or callable with make-whole provisions) corporate bonds. For each plan, the discount rate was developed as the level equivalent rate that would yield the same present value as using spot rates aligned with the projected benefit payments. The discount rate for determining pension benefit obligations was 3.75%, 4.28% and 4.66% at December 31, 2017, 2016 and 2015, respectively. The discount rate for determining other post-retirement benefit obligations was 3.73%, 4.26% and 4.67% at December 31, 2017, 2016 and 2015, respectively.

In selecting an EROA, we considered tax implications, past performance and economic forecasts for the types of investments held by the plans. The long-term EROA assumption used in calculating pension cost was 6.49% for 2017, 7.02% for 2016, and 6.91% for 2015. The weighted average EROA assumption used in calculating other postretirement benefit costs was 5.09% for 2017, 5.37% for 2016 and 4.92% for 2015.

The asset allocations for the Company’s U.S. pension plan by asset category were as follows:

		Target Allocation			Percentage of Plan Assets as of December 31,
Asset Category		2018			2017			2016
Equity securities		43	%		44	%		49	%
Fixed income		50	%		49	%		42	%
Real Estate		5	%		5	%		7	%
Real estate investment trusts (“REITs”)		2	%		2	%		2	%
Total		100	%		100	%		100	%

During 2017, the Company reduced the risk of its investments in the pension plan by reducing its exposure to equities from 60% to 50%, and increasing its long duration fixed-income allocation from 40% to 50%. This new structure is designed to reduce the plan’s funded status volatility. It is also intended to reduce the pension plan’s exposure to interest rates since a higher proportion of long duration fixed-income securities that have a duration similar to that of the pension liabilities should reduce interest rate risk associated with the plan’s liabilities.

The Company’s other postretirement benefit plans are partially funded. The asset allocations for the Company’s other postretirement benefit plans by asset category were as follows:

		Target Allocation			Percentage of Plan Assets as of December 31,
Asset Category		2018			2017			2016
Equity securities		38	%		35	%		33	%
Fixed income		62	%		65	%		67	%
REITs		—			—			—
Total		100	%		100	%		100	%

The Company’s target asset allocation, is evaluated periodically through asset liability studies. The studies consider projected cash flows of maturity liabilities, projected asset class returns and risks, correlations, and the Company’s risk tolerance. In 2017, the Company conducted new asset-liability studies for the Post-Retirement Plans and approved new asset allocations for both plans. The Post-Retirement Medical Bargaining plan increased its equity allocation from 20% to 30% due to rising medical claims and medical inflation and the long duration portion of the portfolio was reduced from 80% to 70%. The Post-Retirement Non-Bargaining Medical Plan’s allocation was adjusted to reduce volatility and interest rate risk in a manner similar to that described above with respect to the pension plan, reducing the equity allocation from 70% to 60% and increasing the fixed-income allocation from 30% to 40%. The Post-Retirement Medical Non-Bargaining plan’s equity allocation was reduced due to the cap on benefits for some non-union participants and the resultant reduction in the plan’s liabilities. These changes will be implemented in 2018.

The investments of the pension and postretirement welfare plan trusts include debt and equity securities held either directly or through commingled funds. The trustee for the Company’s defined benefit pension and postretirement welfare plans uses an independent valuation firm to calculate the fair value of plan assets. Additionally, the Company independently verifies the assets values. Approximately 41% of the assets are valued using the quoted market price for the assets in an active market at the measurement date, while 59% of the assets are valued using other inputs.

In selecting a rate of compensation increase, we consider past experience in light of movements in inflation rates. Our rate of compensation increase was 3.02% for 2017, 3.07% for 2016 and 3.10% for 2015.

In selecting health care cost trend rates, we consider past performance and forecasts of increases in health care costs. As of January 1, 2017, our health care cost trend rate assumption used to calculate the periodic cost was 7% in 2017 gradually declining to 5% in 2021 and thereafter. As of December 31, 2017, the Company is projecting that medical inflation will continue to persist for longer than expected and, it will ultimately trend down to 4.50%, but not until 2026.

Assumed health care cost trend rates have a significant effect on the amounts reported for the other postretirement benefit plans. The health care cost trend rate is based on historical rates and expected market conditions. A one-percentage-point change in assumed health care cost trend rates would have the following effects:

Change in Actuarial Assumption (Dollars in millions)		Impact on Other Postretirement Benefit Obligation as of December 31, 2017				Impact on 2017 Total Service and Interest Cost Components
Increase assumed health care cost trend by 1%		$	73			$	5
Decrease assumed health care cost trend by 1%		$	(60	)		$	(4	)

We will use a discount rate and EROA of 3.75% and 5.95%, respectively, for estimating our 2018 pension costs. Additionally, we will use a discount rate and expected blended return based on weighted assets of 3.73% and 4.77%, respectively, for estimating our 2018 other postretirement benefit costs. A decrease in the discount rate or the EROA would increase our pension expense. Our 2017 and 2016 pension and postretirement benefit costs were $56 million and $54 million, respectively. The Company expects to make pension and postretirement benefit contributions to the plan trusts up to $45 million in 2018, and $47 million, $47 million, $51 million and $58 million in 2019, 2020, 2021 and 2022, respectively. Actual amounts contributed could change significantly from these estimates. The assumptions are reviewed annually and at any interim re-measurement of the plan obligations. The impact of assumption changes is reflected in the recorded pension and postretirement benefit amounts as they occur, or over a period of time if allowed under applicable accounting standards. As these assumptions change from period to period, recorded pension and postretirement benefit amounts and funding requirements could also change.

Accounting for Contingencies

We record loss contingencies when management determines that the outcome of future events is probable of occurring and when the amount of the loss or a range of losses can be reasonably estimated. The determination of a loss contingency is based on management judgment and estimates about the likely outcome of the matter, which may include an analysis of different scenarios. Liabilities are recorded or adjusted when events or circumstances cause these judgments or estimates to change. In assessing whether a loss is reasonably possible, management considers many factors, which include, but are not limed to: the nature of the litigation, claim or assessment, review of applicable law, opinions or views of legal counsel and other advisors, and the experience gained from similar cases or situations. We provide disclosures for material contingencies when management deems there is a reasonable possibility that a loss or an additional loss may be incurred. We provide estimates of reasonably possible losses when such estimates may be reasonably determined, either as a single amount or within a reasonable range.

Actual amounts realized upon settlement of contingencies may be different than amounts recorded and disclosed and could have a significant impact on the liabilities, revenue and expenses recorded on the Consolidated Financial Statements. For a discussion of contingencies, see Note 15—Commitments and Contingencies in the Notes to Consolidated Financial Statements.

New Accounting Standards

See Note 2—Significant Accounting Policies in the Notes to Consolidated Financial Statements for a description of recent accounting standards.