American Water Works Company Inc. 2016 Annual Report
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THE CYCLE OF SUCCESS 2016 Annual Repo rt 2016 ANNUAL REPORT 2015 ANNUAL REPORT 2016 ANNUAL REPORT • THE CYCLE OF SUCCESS DEAR FELLOW STOCKHOLDER, DEAR FELLOW STOCKHOLDER, American Water and its 6,800 employees delivered another year of strong financial performance, as detailed in this annual report, which gives the board confidence that the company is well positioned to achieve its stated target of 7 to 10 percent compound annual growth rate in diluted earnings per share (EPS) growth, anchored off 2015 EPS. In recognition of this financial performance, during 2016 our board continued its long-standing commitment to the company’s dividend, and increased the quarterly cash dividend payment from 34 cents to 37.5 cents per share, an increase of approximately 10 percent. The company has increased its dividend every year since its initial public offering in April 2008, and this is our fourth consecutive year of dividend increases of about 10 percent. This dividend is also consistent with our stated target payout ratio of 50 to 60 percent. As an owner of American Water, you enjoyed a total shareholder return (TSR) of 23.6 percent during 2016 — well above the total shareholder return for the S&P 500 Index, which for 2016 was 12 percent. These results stem from the successful execution of American Water’s business strategy, which allowed the company to continue to provide safe, clean, reliable and affordable water and wastewater services. Through a concentrated focus on engaged employees, smart investments, safe and efficient operations, and highly satisfied customers, American Water has a pathway to sustainable and profitable growth. On behalf of the company and the board, we want to thank you for your continued support and investment. We look forward to what American Water will accomplish in 2017. Sincerely, George MacKenzie Chairman of the Board 1 DEAR FELLOW STOCKHOLDER, American Water is pleased to provide you another year of strong financial performance with a record level of safety, investment, O&M efficiency and regulated acquisitions. Our board of directors approved a quarterly dividend increase of 10 percent during 2016, marking the fourth year in a row of dividend increases of about 10 percent. Yes, it was a really good year financially. But financial success is an outcome of many factors. For our company, success is a cycle that starts with our employees and their commitment to our customers. In this report, you will see examples of how engaged employees, safe and efficient operations and smart investments lead to highly satisfied customers. In turn, highly satisfied customers translate to more constructive regulatory outcomes and the sustainable financial performance American Water delivers consistently. Let’s start with our people. The 6,800 professionals who make up American Water once again achieved exceptional water quality results — in fact, compared to the US Environmental Protection Agency's drinking water quality database, our water systems were 21 times better than the industry average. This is foundational to us and our business. During 2016, we saw a heightened awareness of water quality issues, including the lead tragedy in Flint, Mich., and the disruptive algae blooms in Florida’s Lake Okeechobee. But lead service lines and biological incidents are only two of the many challenges the water industry faces. We are also focused on aging infrastructure, emerging contaminants and water supply issues. This is why we at American Water remain steadfast in our commitment to be a leader in the U.S. water and wastewater industry and a provider of solutions to these challenges. Safety and environmental stewardship are paramount to us. This is why our people work safely and watch out for one another. Our goal is that every single employee goes home to his or her family each night in the same shape in which he or she came to work. In 2016, we saw 23 percent fewer injuries on the job than we did in the prior year, but we won’t be satisfied until there are none. And this safety mindset also extends to the safety of our customers. Our people also continued to find ways to work more efficiently, because they understand that for every $1 we save, we can invest $7 in capital without impacting our customers’ bills. From leveraging value engineering to technology to supply chain, we worked smarter, drove capital efficiency and did more work with the same amount of money. In 2016, we invested approximately $1.3 billion in our regulated water and wastewater systems. 2 2016 ANNUAL REPORT • THE CYCLE OF SUCCESS Additionally, our people are an integral part of the communities we serve. Across our footprint, they give back to the community by participating in organizations such as United Way, Habitat for Humanity and the American Heart Association. More than 2,200 American Water employees spent more than 4,000 hours in 116 different community volunteer projects during our annual month of service in 2016. Our employees create a measurable, lasting impact on so many in the communities they serve. All these efforts help us increase customer satisfaction. Highly satisfied customers are essential to a fair and constructive regulatory environment. Constructive regulatory frameworks are necessary for us to provide clean, safe and reliable water services. Since 2010, American Water has worked with regulators and staff to gain approval of 16 new regulatory mechanisms, all designed to help us invest more while keeping services affordable. And our employees continue to work with state and federal officials to help the nation and our states tackle serious water infrastructure challenges beyond those of our own. In the past five years, legislation has been enacted in five of the states we serve to directly help communities address distressed water and wastewater systems. We had a great year of growth in our regulated businesses in 2016. We added approximately 42,000 customers through acquisitions, 13,000 through organic growth and have pending acquisitions representing another 40,000 customers. On the market-based side of the business, our Contract Services Group signed a 10-year operation and maintenance agreement with the township of South Orange Village, N.J., serving 4,700 customers. Our Military Services Group began service at Vandenberg Air Force Base in California, and our Homeowner Services business launched a municipal partnership in Georgetown, S.C. We now have more than 1.6 million contracts in our Homeowner Services business. This type of growth is an outcome of our cycle of success. Engaged employees, safe and efficient operations, smart investments, highly satisfied customers and constructive regulatory environments deliver sustainable performance and financial results. For 2016, our total shareholder return was 23.6 percent, and we strengthened our balance sheet and increased our dividends. We are glad you have chosen to invest in American Water, and we don’t ever take that fact — or you — for granted. On behalf of the company and our employees, I want to thank you for your continued support. We are proud of what our people achieved in 2016 — and are even more excited about our future. We hope that you are, too. Sincerely, Susan N. Story President & Chief Executive Officer 3 THE CYCLE OF SUCCESS It begins with engagement. Every employee. Every way. The value of an engaged workforce can be measured in many ways. Teamwork. Trust. Increased productivity. More satisfied customers. And an even better bottom line: one recent study showed that companies with highly engaged workforces outperform their peers by almost 150 percent in earnings per share. But what motivates the people of American Water is more than the pursuit of a goal. It arises from a deep personal commitment to doing what needs to be done — both on and off the job. HERE ARE JUST A FEW EXAMPLES. Helping flood victims hundreds of miles away. Nick DiPaolo, of our Military Services Group, calls New Jersey home. And he remembers how volunteers came from afar to help in the aftermath of Superstorm Sandy. So when Louisiana was devastated by flooding this past August, Nick decided it was his turn to “pay it forward” and help. After setting up a GoFundMe page to Charles Kelley raise funds for flood victims, he traveled to Baton Rouge to give out supplies, and help clean up houses of residents who were too old, infirm or disabled to do it themselves. “It’s important to help others when they’re in distress,” he said. “I wish I could have done more.” Acting quickly to save lives. For crew members Dave Kerr, Jim Welker, Scott Graziani and Pat Acuri, it was just a routine service line repair on an ordinary street in New Castle, Pa. — until Jim noticed smoke coming out of a nearby attic window. While Jim called 911, the others ran to the door to alert the elderly couple who lived in the house. As the house filled with smoke, Scott and Pat escorted the husband from the kitchen, and Dave helped his wife down the stairs to safety. “It was automatic,” said Dave. “It had to be done and we did it.” Although, he added, “I hope we never have to do it again.” Coming together for the communities we serve. Every September, American Water employees are encouraged to volunteer for projects and programs in their local communities as part of our company wide AmerICANs in Action! Month of Service. In 2016, they responded at a record level: nearly 2,270 employees contributed more than 4,000 hours to 116 different projects — including a food drive in Pennsylvania, a toy drive in Illinois, a community garden project in California, the cleanup and repair of a children’s park in West Virginia, and many more.