Table	of	Contents

# UNITED	STATES

# SECURITIES	AND	EXCHANGE	COMMISSION

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

# For	the	fiscal	year	ended	December	31,	2017

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

# AMERICAN	WATER	WORKS	COMPANY,	INC.

(Exact	name	of	registrant	as	specified	in	its	charter)

Delaware

(State	or	other	jurisdiction	of	incorporation	or	organization)

1025	Laurel	Oak	Road,	Voorhees,	NJ

(Address	of	principal	executive	offices)

(I.R.S.	Employer	Identification	No.)

(Zip	Code)

(Registrant's	telephone	number,	including	area	code)

Securities	registered	pursuant	to	Section	12(b)	of	the	Act:

Title	of	each	class

Common	stock,	par	value	$0.01	per	share

Name	of	each	exchange	on	which	registered

New	York	Stock	Exchange,	Inc.

Securities	registered	pursuant	to	Section	12(g)	of	the	Act:	None.

Indicate	by	check	mark	if	the	registrant	is	a	well-known	seasoned	issuer,	as	defined	in	Rule	405	of	the	Securities	Act.				Yes		☒				No		☐

Indicate	by	check	mark	if	the	registrant	is	not	required	to	file	reports	pursuant	to	Section	13	or	Section	15(d)	of	the	Act.					Yes		☐				No		☒

Indicate	by	check	mark	whether	the	registrant	(1)	has	filed	all	reports	required	to	be	filed	by	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934	during	the	preceding 12	months	(or	for	such	shorter	period	that	the	registrant	was	required	to	file	such	reports),	and	(2)	has	been	subject	to	such	filing	requirements	for	the	past	90	days.				Yes		☒				No		☐

Indicate	by	check	mark	whether	the	registrant	has	submitted	electronically	and	posted	on	its	corporate	Web	site,	if	any,	every	Interactive	Data	File	required	to	be	submitted	and posted	pursuant	to	Rule	405	of	Regulation	S-T	(§	232.405	of	this	chapter)	during	the	preceding	12	months	(or	for	such	shorter	period	that	the	registrant	was	required	to	submit	and post	such	files).				Yes		☒				No		☐

Indicate	by	check	mark	if	disclosure	of	delinquent	filers	pursuant	to	Item	405	of	Regulation	S-K	is	not	contained	herein,	and	will	not	be	contained,	to	the	best	of	registrant's knowledge,	in	definitive	proxy	or	information	statements	incorporated	by	reference	in	Part	III	of	this	Form	10-K	or	any	amendment	to	this	Form	10-K.		☐

Indicate	by	check	mark	whether	the	registrant	is	a	large	accelerated	filer,	an	accelerated	filer,	a	non-accelerated	filer,	a	smaller	reporting	company,	or	an	emerging	growth company.	See	the	definitions	of	"large	accelerated	filer,"	"accelerated	filer,"	"smaller	reporting	company,"	and	"emerging	growth	company"	in	Rule	12b-2	of	the	Exchange	Act.:

Large	accelerated	filer ☒

Non-accelerated	filer ☐ 		(do	not	check	if	a	smaller	reporting	company)

Accelerated	filer

Smaller	reporting	company ☐

Emerging	growth	company

If	an	emerging	growth	company,	indicate	by	check	mark	if	the	registrant	has	elected	not	to	use	the	extended	transition	period	for	complying	with	any	new	or	revised	financial accounting	standards	provided	pursuant	to	Section	13(a)	of	the	Exchange	Act.	☐

Indicate	by	check	mark	whether	the	registrant	is	a	shell	company	(as	defined	in	Rule	12b-2	of	the	Act).				Yes		☐				No			☒

State	the	aggregate	market	value	of	the	voting	and	non-voting	common	equity	held	by	non-affiliates	computed	by	reference	to	the	price	at	which	the	common	equity	was	last sold,	or	the	average	bid	and	asked	price	of	such	common	equity,	as	of	the	last	business	day	of	the	registrant's	most	recently	completed	second	fiscal	quarter.

Common	Stock,	$0.01	par	value—$12,477,500,000	as	of	June	30,	2017	(solely	for	purposes	of	calculating	this	aggregate	market	value,	American	Water	has	defined	its affiliates	to	include	(i)	those	persons	who	were,	as	of	June	30,	2017,	its	executive	officers,	directors	or	known	beneficial	owners	of	more	than	10%	of	its	common	stock,	and	(ii)	such other	persons	who	were	deemed,	as	of	June	30,	2017,	to	be	controlled	by,	or	under	common	control	with,	American	Water	or	any	of	the	persons	described	in	clause	(i)	above).

Indicate	the	number	of	shares	outstanding	of	each	of	the	registrant's	classes	of	common	stock	as	of	the	latest	practicable	date:	Common	Stock,	$0.01	par	value	per	share —178,551,923	shares	as	of	February	15,	2018.

# DOCUMENTS	INCORPORATED	BY	REFERENCE

Portions	of	the	American	Water	Works	Company,	Inc.	definitive	proxy	statement	for	the 2018	Annual	Meeting	of	Stockholders	to	be	filed	with	the	Securities	and	Exchange Commission	within	120	days	after	December	31,	2017	are	incorporated	by	reference	into	Part	III	of	this	report.

|  |  | Page |
| :--- | :--- | :--- |
| Forward-Looking\tStatements |  | 1 |
|  | Part\tI |  |
| Item\t1. | Business | 3 |
| Item\t1A. | Risk\tFactors | 18 |
| Item\t1B. | Unresolved\tStaff\tComments | 33 |
| Item\t2. | Properties | 33 |
| Item\t3. | Legal\tProceedings | 34 |
| Item\t4. | Mine\tSafety\tDisclosures | 39 |
|  | Part\tII |  |
| Item\t5. | Market\tFor\tRegistrant's\tCommon\tEquity,\tRelated\tStockholder\tMatters\tand\tIssuer\tPurchases\tof\tEquity\tSecurities | 40 |
| Item\t6. | Selected\tFinancial\tData | 41 |
| Item\t7. | Management's\tDiscussion\tand\tAnalysis\tof\tFinancial\tCondition\tand\tResults\tof\tOperations | 42 |
| Item\t7A. | Quantitative\tand\tQualitative\tDisclosures\tAbout\tMarket\tRisk | 74 |
| Item\t8. | Financial\tStatements\tand\tSupplementary\tData | 76 |
| Item\t9. | Changes\tin\tand\tDisagreements\twith\tAccountants\ton\tAccounting\tand\tFinancial\tDisclosure | 126 |
| Item\t9A. | Controls\tand\tProcedures | 126 |
| Item\t9B. | Other\tInformation | 126 |
|  | Part\tIII |  |
| Item\t10. | Directors,\tExecutive\tOfficers\tof\tthe\tRegistrant\tand\tCorporate\tGovernance | 128 |
| Item\t11. | Executive\tCompensation | 128 |
| Item\t12. | Security\tOwnership\tof\tCertain\tBeneficial\tOwners\tand\tManagement\tand\tRelated\tStockholder\tMatters | 128 |
| Item\t13. | Certain\tRelationships\tand\tRelated\tTransactions\tand\tDirector\tIndependence | 128 |
| Item\t14. | Principal\tAccountant\tFees\tand\tServices | 128 |
|  | Part\tIV |  |
| Item\t15. | Exhibits\tand\tFinancial\tStatement\tSchedules | 129 |
| Item\t16. | Form\t10-K\tSummary | 129 |
| Exhibit\tIndex |  | 130 |
| Signatures |  | 134 |

# FORWARD-LOOKING	STATEMENTS

We	have	made	statements	in	Item	1—Business,	Item	1A—Risk	Factors,	and	Item	7—Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results of	Operations,	and	in	other	sections	of	this	Form	10-K,	or	incorporated	certain	statements	by	reference	into	this	Form	10-K,	that	are	forward-looking	statements	within the	meaning	of	Section	27A	of	the	Securities	Act	of	1933,	as	amended,	Section	21E	of	the	Securities	Exchange	Act	of	1934,	as	amended	(the	"Exchange	Act"),	and	the Private	Securities	Litigation	Reform	Act	of	1995.	In	some	cases,	these	forward-looking	statements	can	be	identified	by	words	with	prospective	meanings	such	as "intend,"	"plan,"	"estimate,"	"believe,"	"anticipate,"	"expect,"	"predict,"	"project,"	"assume,"	"forecast,"	"likely,"	"uncertain,"	"outlook,"	"future,"	"pending,"	"goal," "objective,"	"potential,"	"continue,"	"seek	to,"	"may,"	"can,"	"should,"	"will"	and	"could"	or	the	negative	of	such	terms	or	other	variations	or	similar	expressions. Forward-looking	statements	may	relate	to,	among	other	things,	our	future	financial	performance,	including	our	operation	and	maintenance	("O&M")	efficiency	ratio, cash	flows,	our	growth	and	portfolio	optimization	strategies,	our	projected	capital	expenditures	and	related	funding	requirements,	our	ability	to	repay	debt,	our	projected strategy	 to	finance	current	operations	and	growth	 initiatives,	 the	 impact	 of	 legal	 proceedings	 and	 potential	 fines	 and	 penalties,	 business	 process	 and	 technology improvement	initiatives,	trends	in	our	industry,	regulatory,	legislative,	tax	policy	or	legal	developments	or	rate	adjustments,	including	rate	case	filings,	filings	for infrastructure	surcharges	and	filings	to	address	regulatory	lag.

Forward-looking	statements	are	predictions	based	on	our	current	expectations	and	assumptions	regarding	future	events.	They	are	not	guarantees	or	assurances	of any	outcomes,	financial	results	or	levels	of	activity,	performance	or	achievements,	and	you	are	cautioned	not	to	place	undue	reliance	upon	them.	These	forward-looking statements	are	subject	to	a	number	of	estimates	and	assumptions,	and	known	and	unknown	risks,	uncertainties	and	other	factors.	Our	actual	results	may	vary	materially from	those	discussed	in	the	forward-looking	statements	included	herein	as	a	result	of	the	factors	discussed	under	Item	1A—Risk	Factors,	and	the	following	important factors:

•the	decisions	of	governmental	and	regulatory	bodies,	including	decisions	to	raise	or	lower	customer

rates;

•the	timeliness	and	outcome	of	regulatory	commissions'	actions	concerning	rates,	capital	structure,	authorized	return	on	equity,	capital	investment,	system acquisitions,	taxes,	permitting	and	other	decisions;

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

efforts;

•limitations	on	the	availability	of	our	water	supplies	or	sources	of	water,	or	restrictions	on	our	use	thereof,	resulting	from	allocation	rights,	governmental	or regulatory	requirements	and	restrictions,	drought,	overuse	or	other	factors;

•changes	 in	 laws,	 governmental	 regulations	 and	 policies,	 including	 with	 respect	 to	 environmental,	 health	 and safety,	 water	 quality	 and	 emerging contaminants,	public	utility	and	tax	regulations	and	policies,	and	impacts	resulting	from	U.S.,	state	and	local	elections;

•weather	conditions	and	events,	climate	variability	patterns,	and	natural	disasters,	including	drought	or	abnormally	high	rainfall,	prolonged	and	abnormal	ice or	freezing	conditions,	strong	winds,	coastal	and	intercoastal	flooding,	earthquakes,	landslides,	hurricanes,	tornadoes,	wildfires,	electrical	storms	and	solar flares;

•the	outcome	of	litigation	and	similar	governmental	proceedings,	investigations	or	actions,	including	matters	related	to	the	Freedom	Industries	chemical	spill in	West	Virginia	and	the	preliminarily	approved	global	class	action	settlement	agreement	related	to	this	chemical	spill;

•our	 ability	 to	 appropriately	 maintain	 current infrastructure, including	 our	 operational	 and information technology ("IT")	 systems,	 and	 manage the expansion	of	our	business;

•exposure	 or	 infiltration	 of	 our	 critical	 infrastructure,	 operational	 technology	 and IT systems, including the	 disclosure	 of sensitive	 or	 confidential information	contained	therein,	through	physical	or	cyber	attacks	or	other	means;

•our	 ability to obtain permits and other approvals for projects;

•changes in our capital requirements;

•our	 ability to control operating expenses and to achieve efficiencies in our operations;

•the	 intentional	 or	 unintentional	 actions	 of	 a third	 party, including	 contamination	 of	 our	 water	 supplies	 or	 water	 provided to	 our customers;

•our	ability to	obtain	adequate	and	cost-effective	supplies	of	chemicals,	 electricity,	 fuel,	 water	 and	 other	 raw	 materials that	 are	 needed	 for	 our operations;

•our	ability	to	successfully	meet	growth	projections	for	our	business	and	capitalize	on	growth	opportunities,	including	our	ability	to,	among	other	things, acquire	and	integrate	water	and	wastewater	systems	into	our	regulated	operations,	and	enter	into	contracts	and	other	agreements	with,	or	otherwise	obtain, new	customers	in	our	market-based	businesses;

•risks	and	uncertainties	associated	with	contracting	with	the	U.S.	government,	including	ongoing	compliance	with	applicable	government	procurement	and security	regulations;

•cost	 overruns relating to improvements in or the expansion of our operations;

•our ability to	 maintain safe	 work sites;

•our	exposure	to	liabilities	related	to	environmental	laws	and	similar	matters	resulting	from,	among	other	things,	water	and	wastewater	service	provided	to customers,	including,	for	example,	our	water	service	and	management	solutions	that	are	focused	on	customers	in	the	natural	gas	exploration	and production	market;

•changes	 in general economic, political, business and financial market conditions;

•access	to	sufficient	capital	on	satisfactory	terms	and	when	and	as	needed	to	support	operations	and	capital	expenditures;

•fluctuations	in	interest	rates;

•restrictive	covenants	in	or	changes	to	the	credit	ratings	on	us	or	our	current	or	future	debt	that	could	increase	our	financing	costs	or	funding	requirements or	affect	our	ability	to	borrow,	make	payments	on	debt	or	pay	dividends;

•fluctuations in the value of benefit plan assets and liabilities that could increase our cost and funding requirements;

•changes	in	federal	or	state	general,	income	and	other	tax	laws,	including	any	further	rules,	regulations,	interpretations	and	guidance	by	the	U.S.	Department of	the	Treasury	and	state	or	local	taxing	authorities	(collectively,	the	"Related	Interpretations")	related	to	the	enactment	of	the	Tax	Cuts	and	Jobs	Act	(the "TCJA"),	the	availability	of	tax	credits	and	tax	abatement	programs,	and	our	ability	to	utilize	our	U.S.	federal	and	state	income	tax	net	operating	loss ("NOL")	carryforwards;

•migration of customers into or out of our service territories;

•the	use	by	municipalities	of	the	power	of	eminent	domain	or	other	authority	to	condemn	our	systems,	or	the	assertion	by	private	landowners	of	similar rights	against	us;

•difficulty	or	inability	to	obtain	insurance,	our	inability	to	obtain	insurance	at	acceptable	rates	and	on	acceptable	terms	and	conditions,	or	our	inability	to obtain	reimbursement	under	existing	insurance	programs	for	any	losses	sustained;

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

•labor	actions,	including	work	stoppages	and	strikes;

•the ability to retain and attract qualified employees;

•civil	disturbances	or	terrorist	threats	or	acts,	or	public	apprehension	about	future	disturbances	or	terrorist	threats	or	acts; and

•the	 impact of new, and changes to existing, accounting standards.

These	forward-looking	statements	are	qualified	by,	and	should	be	read	together	with,	the	risks	and	uncertainties	set	forth	above	and	the	risk	factors	included	in Item	1A—Risk	Factors	and	other	statements	contained	in	this	Form	10-K,	and	you	should	refer	to	such	risks,	uncertainties	and	risk	factors	in	evaluating	such	forward- looking	statements.	Any	forward-looking	statements	we	make	speak	only	as	of	the	date	this	Form	10-K	was	filed	with	the	United	States	Securities	and	Exchange Commission	("SEC").	Except	as	required	by	the	federal	securities	laws,	we	do	not	have	any	obligation,	and	we	specifically	disclaim	any	undertaking	or	intention,	to publicly	update	or	revise	any	forward-looking	statements,	whether	as	a	result	of	new	information,	future	events,	changed	circumstances	or	otherwise.	New	factors emerge	from	time	to	time,	and	it	is	not	possible	for	us	to	predict	all	such	factors.	Furthermore,	it	may	not	be	possible	to	assess	the	impact	of	any	such	factor	on	our businesses,	either	viewed	independently	or	together,	or	the	extent	to	which	any	factor,	or	combination	of	factors,	may	cause	results	to	differ	materially	from	those contained	in	any	forward-looking	statement.	The	foregoing	factors	should	not	be	construed	as	exhaustive.

# PART	I

# ITEM	1. BUSINESS

# Our	Company

With	a	history	dating	back	to	1886,	American	Water	is	the	largest	and	most	geographically	diverse,	publicly-traded	water	and	wastewater	utility	company	in	the United	 States,	 as	 measured	 by	 both	 operating	 revenues	 and	 population	 served.	 A	 holding	 company	 originally	 incorporated	 in	 Delaware	 in	1936,	 we	 employ approximately	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.	The	largest	component	of	the	Company's	business	includes	rate	regulated	subsidiaries	that	provide	water	and	wastewater	services, collectively	presented	as	our	"Regulated	Businesses."	We	conduct	the	majority	of	our	business	through	the	Regulated	Businesses	segment.	We	also	operate	several market-based	businesses	that	provide	a	broad	range	of	related	and	complementary	water	and	wastewater	services	within	four	operating	segments	that	individually	do	not meet	the	criteria	of	a	reportable	segment	in	accordance	with	generally	accepted	accounting	principles	in	the	United	States	("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.

Throughout	this	Annual	Report	on	Form	10-K	(this	"Form	10-K"),	unless	the	context	otherwise	requires,	references	to	"we,"	"us,"	"our,"	the	"Company,"	and "American	Water"	mean	American	Water	Works	Company,	Inc.	and	its	subsidiaries,	taken	together	as	a	whole.	References	to	"parent	company"	mean	American	Water Works	Company,	Inc.,	without	its	subsidiaries.

# Regulated	Businesses

Our	primary	business	involves	the	ownership	of	utilities	that	provide	water	and	wastewater	services	to	residential,	commercial,	industrial,	public	authority,	fire service	and	sale	for	resale	customers.	Our	utilities	operate	in	approximately	1,600	communities	in	16	states	in	the	United	States,	with	approximately	3.4	million	active customer	connections	to	our	water	and	wastewater	networks.	Services	provided	by	our	utilities	are	generally	subject	to	economic	regulation	by	certain	state	utility commissions	or	other	entities	engaged	in	utility	regulation,	collectively	referred	to	as	Public	Utility	Commissions	("PUCs"	or	"Regulators").	Certain	federal,	state	and local	governments	also	regulate	environmental,	health	and	safety,	and	water	quality	matters.	We	report	the	results	of	the	services	provided	by	our	utilities	in	our Regulated	Businesses	segment.	Operating	revenues	for	our	Regulated	Businesses	were	$2,958	million	for	2017,	$2,871	million	for	2016	and	$2,743	million	for	2015, accounting	for	88%,	87%	and	87%,	respectively,	of	the	Company's	total	operating	revenues	for	the	same	periods.

The	following	table	geographically	summarizes	our	Regulated	Businesses'	operating	revenues	and	the	number	of	customers	we	serve	by	type	of	service,	each	as of	and	for	the	year	ended	December	31,	2017:

|  |  | Operating	Revenues	(In	millions) | Operating	Revenues	(In	millions) |  |  | Number	of	Customers	(In	thousands) | Number	of	Customers	(In	thousands) |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Water\t(a) | Wastewater | Total | %\tof\tTotal | Water | Wastewater | Total | %\tof\tTotal |
| New\tJersey | $698 | $41 | $739 | 25.0% | 639 | 48 | 687 | 20.5% |
| Pennsylvania | 617 | 44 | 661 | 22.3% | 658 | 64 | 722 | 21.5% |
| Illinois | 284 | 20 | 304 | 10.3% | 284 | 33 | 317 | 9.5% |
| Missouri | 280 | 9 | 289 | 9.8% | 466 | 13 | 479 | 14.3% |
| Indiana | 222 | — | 222 | 7.5% | 302 | — | 302 | 9.0% |
| California | 219 | 3 | 222 | 7.5% | 175 | 3 | 178 | 5.3% |
| West\tVirginia | 143 | 1 | 144 | 4.9% | 166 | 1 | 167 | 5.0% |
| Total\t-\tTop\tSeven\tStates\t(b) | 2,463 | 118 | 2,581 | 87.3% | 2,690 | 162 | 2,852 | 85.1% |
| Other\tstates\t(c) | 353 | 24 | 377 | 12.7% | 470 | 31 | 501 | 14.9% |
| Total\tRegulated\tBusinesses | $2,816 | $142 | $2,958 | 100.0% | 3,160 | 193 | 3,353 | 100.0% |

(a) Includes	Other	operating	revenues,	consisting	primarily	of	fees,	miscellaneous	service	charges	and	rents.

(b) Our	"Top	Seven	States"	are	determined	based	upon	operating	revenues.

(c) Includes	our	utilities	in	the	following	states:	Georgia,	Hawaii,	Iowa,	Kentucky,	Maryland,	Michigan,	New	York,	Tennessee	and	Virginia.

See	Item	7—Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations and	Note	19—Segment	Information	in	the	Notes	to Consolidated	Financial	Statements	for	additional	information.

# Customers

Our	Regulated	Businesses	have	a	large	and	geographically	diverse	customer	base.	A	customer	is	defined	as	a	person,	business,	municipality	or	any	other	entity that	purchases	our	water	or	wastewater	services	as	of	the	last	business	day	of	a	reporting	period.	One	single	customer	may	purchase	our	services	for	use	by	multiple individuals	or	businesses,	as	is	the	case	in	many	homes,	apartment	complexes,	businesses	and	governmental	entities.

The	vast	majority	of	our	regulated	water	customers	are	metered,	which	allows	us	to	measure	and	bill	for	our	customers'	water	usage,	typically	on	a	monthly	basis. We	employ	a	variety	of	methods	of	customer	meter	reading	to	monitor	consumption.	These	methods	range	from	meters	with	mechanical	registers	where	consumption	is manually	recorded	by	meter	readers,	to	meters	with	electronic	registers	capable	of	transmitting	consumption	data	to	proximity	devices	(touch	read)	or	via	radio	frequency to	mobile	or	fixed	network	data	collectors.	Our	wastewater	customers	are	billed	either	a	flat	rate	or	based	upon	their	water	consumption.

Residential	customers	make	up	a	substantial	portion	of	our	customer	base	in	all	of	the	states	in	which	we	operate.	We	also	serve:	(i)	commercial	customers,	such as	hospitals,	food	and	beverage	providers	and	energy	suppliers;	(ii)	industrial	customers,	such	as	large-scale	manufacturers,	mining	and	production	operations;	and	(iii) public	authorities,	such	as	government	buildings	and	other	public	sector	facilities,	including	schools.	In	addition,	we	supply	water	through	our	distribution	systems	to public	fire	hydrants	for	firefighting	purposes,	to	private	fire	customers	for	use	in	fire	suppression	systems	in	office	buildings	and	other	facilities,	and	to	other	water utilities	and	community	water	systems	in	the	form	of	bulk	water	supplies	for	distribution	to	their	own	customers.

The	following	chart	depicts	the	allocation	of	our	Regulated	Businesses'	operating	revenue	by	type,	including	a	breakout	of	the	total	water	services	revenues	by class	of	customer,	for	the	year	ended	December	31,	2017:

# The	following	table	summarizes	the	number	of	water	and	wastewater	customers	we	served	by	class	as	of	December	31:

|  |  | 2017 |  | 2016 |  | 2015 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| (In\tthousands) | Water | Wastewater\t(a) | Water | Wastewater | Water | Wastewater |
| Residential | 2,872 | 182 | 2,846 | 171 | 2,829 | 133 |
| Commercial | 221 | 11 | 220 | 10 | 219 | 8 |
| Industrial | 4 | — | 4 | — | 4 | — |
| Public\t&\tother | 63 | — | 61 | — | 60 | — |
| Total | 3,160 | 193 | 3,131 | 181 | 3,112 | 141 |

(a) In	2017,	we	acquired	substantially	all	of	the	wastewater	collection	and	treatment	system	assets	of	the	Municipal	Authority	of	the	City	of	McKeesport,	Pennsylvania	(the	"McKeesport system").	This	acquisition	included	approximately	22,000	customer	equivalents	in	total;	comprised	of	 11,000	customer	connections,	which	are	reflected	in	the	2017	residential	customer	count in	the	table	above,	as	well	as	service	to	an	additional	11,000	customers	under	bulk	contracts	to	 13	municipalities	in	Allegheny	County,	Pennsylvania.

Customer	 growth	 in	 our	Regulated	Businesses	is	primarily	driven	by:	(i)	adding	new	customers	to	our	customer	base	through	acquisitions	of	water	and/or wastewater	utility	systems;	(ii)	organic	population	growth	(or	decline)	in	our	authorized	service	areas;	and	(iii)	sale	of	water	to	other	water	utilities	and	community	water systems.

# Capital	Investment

On	an	annual	basis,	approximately	2	trillion	gallons	of	treated	water	are	lost	in	the	United	States	through	more	than	240,000	main	breaks	at	an	estimated	cost	of $2.6	billion.	This	represents	approximately	20%	of	all	treated	water	in	the	country.	In	addition,	every	year	approximately	900	billion	gallons	of	untreated	sewage	is discharged	into	the	country's	rivers	and	streams.	The	aging	water	and	wastewater	infrastructure	in	the	United	States	is	in	need	of	replacement	and	modernization.	In 2017,	the	American	Society	of	Civil	Engineers	published	its	Report	Card	for	America's	Infrastructure,	in	which	it	gave	the	drinking	water	industry	a	grade	of	"D"	and the	wastewater	infrastructure	a	grade	of	"D+,"	primarily	because	much	of	the	infrastructure	is	nearing	the	end	of	its	useful	life.	As	documented	in	the	American	Water Works	Association's	(the	"AWWA") Buried	No	Longer:	Confronting	America's	Water	Infrastructure	Challenge,	restoring	the	country's	existing	water	systems	as	they reach	the	end	of	their	useful	lives	and	expanding	them	to	serve	a	growing	population	will	cost	at	least	$1	trillion	between	2011	and	2035,	if	we	are	to	maintain	current levels	of	water	service.	In	addition,	increased	regulation	related	to	water	quality	and	the	management	of	water	and	wastewater	residuals'	discharges,	which	began	with the	passage	of	the	Clean	Water	Act	in	1972	and	the	Safe	Drinking	Water	Act	in	1974,	is	also	a	primary	driver	for	the	need	to	modernize.

To	address	the	growing	infrastructure	needs	in	the	areas	we	serve,	we	plan	to	invest	$7.2	billion	over	the	next	five	years,	including	a	range	of	$1.4	billion	to	$1.5 billion	in	2018,	for	capital	improvements	to	our	Regulated	Businesses'	water	and	wastewater	infrastructure,	largely	aimed	for	pipe	replacement	and	upgrading	aging water	and	wastewater	treatment	facilities.	We	have	proactively	doubled	our	pipe	renewal	rate	over	a	five	year	period,	from	2011	to	2016,	from	a	250	year	replacement cycle	to	a	120	year	replacement	cycle,	which	we	anticipate	will	enable	us	to	replace	nearly	2,000	miles	of	mains	and	collection	pipes	over	the	next	five	years.	In addition,	during	this	same	five	year	period,	capital	investment	in	treatment	plants,	storage	tanks	and	other	key,	above-ground	facilities	has	increased	over	10%,	further addressing	aging	infrastructure	and	emerging	regulatory	compliance	needs.

# Economic	Regulation	and	Rate	Making

Our	Regulated	Businesses	operate	under	a	regulatory	compact	whereby,	in	exchange	for	exclusive	rights	to	provide	water	and	wastewater	services	in	defined service	territories,	we	have	an	obligation	to	serve	customers	within	those	territories	requesting	service,	within	reasonable	limits.	In	return	for	agreeing	to	invest	capital into	our	water	and	wastewater	systems,	we	are	given	the	opportunity	to	recover	our	costs	of	doing	business	and	earn	a	reasonable	rate	of	return	on	our	investments.

The	 operations	 of	 our	Regulated	Businesses	 are	 generally	 subject	 to	 economic	 regulation	 by	 PUCs	 in	 the	 state	 in	 which	 they	 operate,	 with	 the	 primary responsibility	of	the	PUCs	to	promote	the	overall	public	interest	by	balancing	the	interest	of	customers	and	utility	investors.	Specific	authority	might	differ	from	state	to state,	but	in	most	states	PUCs	approve	rates	charged	to	customers,	accounting	treatments,	long-term	financing	programs	and	cost	of	capital,	capital	expenditures,	O&M expenses,	taxes,	transactions	and	affiliate	relationships,	reorganizations	and	mergers	and	acquisitions.	Regulatory	policies	vary	from	state	to	state	and	could	potentially change	over	time.	These	policies	will	affect	the	timing,	as	well	as	the	extent,	of	recovery	of	expenses	and	the	realized	return	on	invested	capital.

The	process	to	obtain	approval	for	a	change	in	rates	generally	occurs	by	way	of	a	rate	case	filed	by	the	utility	with	the	PUC	on	a	periodic	basis.	The	timing	of	rate case	filings	is	typically	determined	by	either	periodic	requirements	in	the	regulatory	jurisdiction	or	by	the	utility's	need	to	increase	its	revenue	to	recover	capital investment	costs,	changes	in	operating	revenues,	operating	costs	or	other	market	conditions.	Our	rate	case	management	program	is	guided	by	the	principles	of	obtaining timely	recovery	of	capital	 investment	costs,	recognition	of	declining	sales	resulting	from	reduced	consumption	and	appropriate	recovery	of	utility	operating	and maintenance	costs,	including	costs	incurred	for	compliance	with	environmental	regulations.	The	program	attempts	to	minimize	"regulatory	lag,"	the	time	between	the occurrence	of	an	event	that	triggers	a	change	in	the	utility's	revenue	requirement	and	its	recognition	in	rates.	It	is,	for	example,	the	time	between	when	an	investment	in plant	is	placed	into	service	for	the	benefit	of	the	customer	and	when	the	Company	can	begin	earning	a	return	of	and	on	the	investment	through	the	ratemaking	process.	It also	applies	to	the	lag	in	the	recognition	in	rate	recovery	of	changes	in	expenses	and	revenues.

Our	Regulated	Businesses	support	regulatory	practices	at the	PUCs	and	state legislatures that	mitigate the	adverse impact	of	regulatory lag.	Examples	of approved	regulatory	practices	include:

Expense	mechanisms Allows	changes	in	certain	operating	expenses,	which	may	fluctuate	based	on	conditions	beyond	the	utility's	control,	to	be recovered	outside	of	a	general	rate	proceeding	or	deferred	until	the	next	general	rate	proceeding. CA,	IL,	MD,	MO,	NJ, NY,	PA,	TN,	VA,	WV

Revenue	stability mechanisms Separates	 a	 water	 utility's	 cost	 recovery	 from	 the	 amount	 of	 water	 it	 sells	 to	 recover	 its	 fixed	 costs	 and	 on-going infrastructure	investment	needs.	Such	a	mechanism	adjusts	rates	periodically	to	ensure	that	a	utility's	revenue	will	be sufficient	to	cover	its	costs	regardless	of	sales	volume,	including	recognition	of	declining	sales	resulting	from	reduced consumption,	while	providing	an	incentive	for	customers	to	use	water	more	efficiently. CA,	IL,	NY

Consolidated	tariffs Use	of	a	unified	rate	structure	for	water	systems	owned	and	operated	by	a	single	utility,	which	may	or	may	not	be physically	 interconnected.	 The	 consolidated	 tariff	 pricing	 structure	 may	 be	 used	 fully	 or	 partially	 in	 a	 state	 and	 is generally	used	to	prioritize	capital	investments	and	moderate	the	impact	of	periodic	fluctuations	in	local	costs	while lowering	administrative	costs	for	customers.	Pennsylvania	also	permits	a	blending	of	water	and	wastewater	revenue requirements. IA,	IL,	IN,	KY,	MD, MO,	NJ,	PA,	VA,	WV

We	pursue	or	seek	enhancement	to	these	regulatory	practices	to	facilitate	efficient	recovery	of	our	costs	and	investments	in	order	to	continue	to	provide	safe, reliable	and	affordable	services	to	our	customers.	The	ability	to	seek	regulatory	treatment	as	described	above	does	not	guarantee	that	the	state	PUCs	will	accept	our proposal	in	the	context	of	a	particular	rate	case,	and	these	practices	may	reduce,	but	not	eliminate,	regulatory	lag	associated	with	traditional	rate	making	processes.	It	is also	our	strategy	to	expand	their	use	in	areas	where	they	may	not	currently	apply.

# Acquisitions	and	Strategic	Growth

The	U.S.	water	and	wastewater	industries	include	investor-owned	systems	as	well	as	municipal	systems	that	are	owned	and	operated	by	local	governments	or governmental	subdivisions.	Both	industries	are	highly	fragmented.	According	to	the	Environmental	Protection	Agency	("EPA"),	approximately	84%	of	the	United	States water	market	is	served	by	municipal	systems	and	approximately	98%	of	the	country's	wastewater	systems	are	government	owned.	The	EPA	also	estimates	that	there	are approximately	50,000	community	water	systems	and	approximately	20,000	community	wastewater	systems	in	the	United	States,	with	over	half	of	the	community	water systems	 serving	 a	 population	 of	500	or	less.	This	large	number	of	relatively	small,	fragmented	water	and	wastewater	systems	may	result	in	inefficiencies	in	the marketplace,	since	such	utilities	may	not	have	the	operating	expertise,	financial	and	technological	capability	or	economies	of	scale	to	provide	services	or	raise	capital	as efficiently	as	larger	utilities.	Larger	utilities	that	have	greater	access	to	capital	are	generally	more	capable	of	making	mandated	and	other	necessary	infrastructure upgrades	to	their	water	and	wastewater	systems.	In	addition,	water	and	wastewater	utilities	with	large	customer	bases,	spread	across	broad	geographic	regions,	may more	easily	absorb	the	impact	of	significant	variations	in	precipitation	and	temperatures,	such	as	droughts,	excessive	rain	and	cool	or	warm	temperatures	in	specific areas.	Larger	utilities	generally	are	able	 to	spread	support	services	over	a	 larger	customer	base,	 thereby	reducing	 the	costs	 to	serve	each	customer.	Since	many administrative	and	support	activities	can	be	efficiently	centralized	to	gain	economies	of	scale,	companies	that	participate	in	industry	consolidation	have	the	potential	to improve	operating	efficiencies,	lower	costs	per	unit	and	improve	service	at	the	same	time.

A	fundamental	aspect	of	our	growth	strategy	is	to	pursue	acquisitions	of	small	and	medium	water	and/or	wastewater	systems	of	between	1,000	and	30,000 customer	connections,	in	close	geographic	proximity	to	areas	where	we	operate	our	Regulated	Businesses.	The	close	proximity	of	acquisition	opportunities	to	our regulated	 footprint	 allows	 us	 to	 integrate	 and	 manage	 the	 acquired	 systems	 and	 operations	 primarily	 using	 our	 existing	 management	 and	 to	 achieve	 operational efficiencies	and	prioritize	capital	investment	needs.	Our	current	customer	mix	of	94%	water	and	6%	wastewater	also	presents	strategic	opportunities	for	wastewater growth	and	systems	consolidation,	adding	wastewater	customers	where	we	already	serve	water	customers.	We	intend	to	continue	to	expand	our	regulated	footprint geographically	by	acquiring	water	and	wastewater	systems	in	our	existing	markets	and,	if	appropriate,	pursue	acquisition	opportunities	in	certain	domestic	markets	where we	do	not	currently	operate	our	Regulated	Businesses.	Before	entering	new	regulated	markets,	we	will	evaluate	the	business	and	regulatory	climates	to	ensure	that	we will	have	the	opportunity	to	achieve	an	appropriate	rate	of	return	on	our	investment	while	maintaining	our	high	standards	for	providing	safe,	reliable	and	affordable services	to	our	customers,	as	well	as	a	line	of	sight	to	grow	our	base	customers	to	a	significant	level	to	attain	efficiencies	after	entering	the	new	market.

More	stringent	environmental,	health	and	safety,	and	water	quality	regulations,	the	amount	of	infrastructure	in	need	of	significant	capital	investment	and	financial challenges	are	driving	more	municipalities	to	consider	selling	their	water	and	wastewater	assets.	For	example,	in	2015,	New	Jersey	enacted	the	Water	Infrastructure Protection	Act,	which	allows	municipalities	with	a	water	or	wastewater	system	that	meets	certain	emergent	conditions,	to	allow	it	to	sell	the	system	on	an	expedited	basis without	a	referendum.	Also,	in	2017,	New	Jersey	enacted	the	Water	Quality	Accountability	Act,	which	sets	new	operational	standards	for	all	water	utilities	in	New Jersey,	including	municipal	and	investor-owned	utilities.	This	law	imposes	new	requirements	in	areas	such	as	cybersecurity,	asset	management,	water	quality	reporting, remediation	of	notices	of	violation,	and	hydrant	and	valve	maintenance.

We	also	support	full	optionality	for	municipalities,	including	state	legislation	that	enables	the	consolidation	of	the	largely	fragmented	water	and	wastewater industries	through	fair	market	valuations	of	purchased	property	and	the	consolidation	of	water	and	wastewater	rates.	Our	Regulated	Businesses	in	California,	Illinois, Indiana,	Missouri,	New	Jersey	and	Pennsylvania	have	access	to	fair	market	value	legislation	for	private	sector	investment	in	public	sector	systems.	Fair	market	value assessment	of	water	and	wastewater	systems	is	an	alternative	to	the	traditional	depreciated	original	cost	method	of	valuation,	providing	municipalities	with	a	fair	and objective	 purchase	 price	 that	 is	 more	 reflective	 of	 the	 assets'	 value,	 while	 the	 utility	 has	 increased	 assurance	 of	 recovering	 investment	 over	 the	 life	 of	 the assets.	Ultimately,	we	believe	that	many	communities	could	benefit	from	receiving	safe	and	reliable	water	and	wastewater	service	from	an	experienced	utility	with proven	access	to	capital	and	financial,	technical,	and	managerial	resources.

Consolidated	 tariffs	use	a	unified	rate	structure	for	systems	owned	and	operated	by	a	single	utility,	which	may	or	may	not	be	physically	 interconnected. Consolidated	tariff	pricing	moderates	the	impact	of	periodic	fluctuations	in	local	costs	and	promotes	a	more	universal	water	infrastructure	investment	in	the	state.	As	a result,	consolidated	tariffs	can	make	it	easier	to	incorporate	new	systems	into	an	existing	utility	and	can	ensure	economies	of	scale	for	even	the	smallest	of	systems	and prioritize	capital	needs	across	the	state.	Overall,	this	brings	cost-effective,	higher	quality	services	to	a	larger	number	of	citizens.	Ten	of	our	regulated	subsidiaries currently	have	some	form	of	consolidated	tariff	pricing,	including	Illinois,	Indiana,	Iowa,	Kentucky,	Maryland,	Missouri,	New	Jersey,	Pennsylvania,	Virginia,	and	West Virginia.

# Competition

In	our	Regulated	Businesses,	we	generally	do	not	face	direct	competition	in	our	existing	markets	because:	(i)	we	operate	in	those	markets	pursuant	to	certificates of	public	convenience	and	necessity	(or	similar	authorizations)	issued	by	state	PUCs;	and	(ii)	the	high	cost	of	constructing	a	new	water	and	wastewater	system	in	an existing	market	creates	a	high	barrier	to	market	entry.	However,	our	Regulated	Businesses	do	face	competition	from	governmental	agencies,	other	investor-owned utilities,	large	industrial	customers	with	the	ability	to	provide	their	own	water	supply/treatment	process	and	strategic	buyers	that	are	entering	new	markets	and/or	making strategic	acquisitions.	When	pursuing	acquisitions,	our	largest	investor-owned	competitors,	based	on	a	comparison	of	operating	revenues	and	population	served,	are Aqua	America,	Inc.,	Suez	North	America,	American	States	Water	Company	and	California	Water	Service	Group.	From	time	to	time,	we	also	face	competition	from infrastructure	funds,	multi-utility	companies	and	others,	such	as	Algonquin	Power	and	Utilities	Corp.	and	Corix.

# Condemnation	and	Eminent	Domain

All	 or	 portions	 of	 our	Regulated	Businesses'	utility	assets	could	be	acquired	by	state,	municipal	or	other	government	entities	through	one	or	more	of	the following	methods:	(i)	eminent	domain	(also	known	as	condemnation);	(ii)	the	right	of	purchase	given	or	reserved	by	a	municipality	or	political	subdivision	when	the original	certificate	of	public	convenience	and	necessity	was	granted;	and	(iii)	the	right	of	purchase	given	or	reserved	under	the	law	of	the	state	in	which	the	utility subsidiary	was	incorporated	or	from	which	it	received	its	certificate.	The	acquisition	consideration	related	to	such	a	proceeding	initiated	by	a	local	government	may	be determined	consistent	with	applicable	eminent	domain	law,	or	may	be	negotiated	or	fixed	by	appraisers	as	prescribed	by	the	law	of	the	state	or	in	the	particular	franchise or	charter.

Furthermore,	the	law	in	certain	jurisdictions	in	which	our	Regulated	Businesses	operate,	including,	for	example,	California,	provides	for	eminent	domain	rights allowing	private	property	owners	to	seek	just	compensation	against	a	public	utility,	if	a	public	utility's	infrastructure	has	been	determined	to	be	a	substantial	cause	of damage	to	that	property.	In	these	actions,	the	plaintiff	would	not	have	to	prove	that	the	public	utility	acted	negligently.	These	actions	have	occurred	in	connection	with events	such	as	floods,	mudslides	and	debris	flow,	broken	water	mains,	landslides	and	wild	and	brush	fires.

# Water	Supply	and	Wastewater	Services

Our	Regulated	Businesses	generally	own	the	physical	assets	used	to	store,	pump,	treat	and	deliver	water	to	our	customers	and	collect,	treat,	transport	and	recycle wastewater.	Typically,	we	do	not	own	the	water	itself,	which	is	held	in	public	trust	and	is	allocated	to	us	through	contracts,	permits	and	allocation	rights	granted	by federal	and	state	agencies	or	through	the	ownership	of	water	rights	pursuant	to	local	law.	We	are	dependent	on	defined	sources	of	water	supply	and	obtain	our	water supply	from	surface	water	sources	such	as	reservoirs,	lakes,	rivers	and	streams;	from	groundwater	sources,	such	as	wells	and	aquifers;	and	water	purchased	from	third party	water	suppliers.	The	level	of	treatment	we	apply	to	the	water	varies	significantly	depending	upon	the	quality	of	the	water	source	and	customer	stipulations.	Surface water	sources	typically	generally	require	significant	treatment,	while	groundwater	sources	require	chemical	treatment	only.

# The	following	chart	depicts	our	sources	of	water	supply	as	of	December	31,	2017:

The	percentages	of	water	supply	by	source	type	for	our	top	seven	states	for	2017	were	as	follows:

|  | Surface	Water | Ground	Water | Purchased	Water |
| :--- | :--- | :--- | :--- |
| New\tJersey | 72% | 24% | 4% |
| Pennsylvania | 91% | 7% | 2% |
| Illinois | 53% | 36% | 11% |
| Missouri | 80% | 19% | 1% |
| Indiana | 44% | 56% | — |
| California | — | 65% | 35% |
| West\tVirginia | 100% | — | — |

Our	ability	to	meet	the	existing	and	future	water	demands	of	our	customers	depends	on	an	adequate	water	supply.	Drought,	governmental	restrictions,	overuse	of sources	of	water,	the	protection	of	threatened	species	or	habitats,	contamination	or	other	factors	may	limit	the	availability	of	ground	and	surface	water.	We	employ	a variety	of	measures	in	an	effort	to	obtain	adequate	sources	of	water	supply,	both	in	the	short-term	and	over	the	long-term.	The	geographic	diversity	of	our	service	areas may	mitigate	some	of	the	economic	effects	on	the	water	supply	associated	with	weather	extremes	we	might	encounter	in	any	particular	service	territory.	For	example,	in any	given	summer,	some	areas	may	experience	drier	than	average	weather,	which	may	reduce	the	amount	of	source	water	available,	while	other	areas	we	serve	may experience	wetter	than	average	weather.

In	our	long-term	planning,	we	evaluate	quality,	quantity,	growth	needs	and	alternate	sources	of	water	supply	as	well	as	transmission	and	distribution	capacity. Water	supply	is	seasonal	in	nature	and	weather	conditions	can	have	a	pronounced	effect	on	supply.	In	order	to	ensure	that	we	have	adequate	water	supply,	we	use	long- term	planning	processes	and	maintain	contingency	plans	 to	minimize	 the	potential	 impact	on	service	caused	by	climate	variability	and	a	wide	range	of	weather fluctuations.	In	connection	with	supply	planning	for	most	surface	or	groundwater	sources,	we	employ	models	to	determine	safe	yields	under	different	rainfall	and drought	conditions.	Surface	and	ground	water	levels	are	routinely	monitored	so	that	supply	capacity	deficits	may,	to	the	extent	possible,	be	predicted	and	mitigated through	demand	management	and	additional	supply	development.	An	example	of	our	use	of	long-term	planning	to	ensure	that	we	have	adequate	water	supply	is	our involvement	in	the	Monterey	Peninsula	Water	Supply	Project	(the	"Water	Supply	Project")	in	California.	The	Water	Supply	Project	includes	the	construction	of	a desalination	plant,	owned	by	California-American	Water	Company	("Cal	Am"),	our	wholly	owned	subsidiary,	and	the	construction	of	wells	that	would	supply	water	to the	desalination	plant.	In	addition,	the	Water	Supply	Project	also	includes	Cal	Am's	purchase	of	water	from	a	groundwater	replenishment	project	between	the	Monterey Regional	Water	Pollution	Control	Agency	and	the	Monterey	Peninsula	Water	Management	District	(the	"MPWMD").	The	Water	Supply	Project	is	intended,	among other	things,	to	fulfill	obligations	of	Cal	Am	to	eliminate	unauthorized	diversions	from	the	Carmel	River	as	required	under	orders	of	the	California	State	Water Resources	Control	Board	(the	"SWRCB").

Wastewater	services	involve	the	collection	of	wastewater	from	customers'	premises	through	sewer	lines.	The	wastewater	is	then	transported	through	a	sewer network	to	a	treatment	facility,	where	it	is	treated	to	meet	required	regulatory	standards	for	wastewater	before	being	returned	to	the	environment.	The	solid	waste	by- product	of	the	treatment	process	is	disposed	of	or	recycled	in	accordance	with	applicable	standards	and	regulations.

# Seasonality

Customer	demand	for	our	water	service	is	affected	by	weather	and	tends	to	vary	with	temperature,	rainfall	levels	and	the	frequency	of	rainfall.	Customer	demand is	generally	greater	during	the	warmer	months,	primarily	due	to	increased	water	usage	for	irrigation	systems	and	other	outdoor	water	use.	As	such,	we	typically	expect our	operating	revenues	to	be	the	highest	in	the	third	quarter	of	each	year.	Weather	that	is	hotter	and	drier	than	average	generally	increases	operating	revenues	whereas, weather	 that	 is	 cooler	 and/or	 wetter	 than	 average	 generally	 serves	 to	 suppress	 customer	 water	 demand	 and	 can	 reduce	 water	 operating	 revenues.	 Three	 of	 our jurisdictions,	California,	Illinois	and	New	York,	have	adopted	revenue	stability	mechanisms	which	permit	us	to	collect	state	PUC-authorized	revenue	for	a	given	period which	is	not	tied	to	the	volume	of	water	sold	during	that	period,	thereby	lessening	the	impact	of	weather	variability.	See	"Economic	Regulation	and	Rate	Making"	for additional	information	regarding	revenue	stability	mechanisms.

# Market-Based	Businesses

Through	our	Market-Based	Businesses,	we	provide	a	broad	range	of	related	and	complementary	water	and	wastewater	services	to	military	bases,	municipalities, gas	exploration	and	production	companies,	as	well	as	commercial,	industrial	and	residential	customers.	These	businesses	are	not	subject	to	economic	regulation	by	state PUCs	and	the	services	provided	do	not	require	significant	capital	investment.	Operating	revenues	for	our	Market-Based	Businesses	were	$422	million	for	2017,	$451 million	for	2016	and	$434	million	for	2015,	accounting	for	13%,	14%	and	14%,	respectively,	of	the	Company's	total	operating	revenues	for	the	same	periods.	Included within	 our	Market-Based	Businesses'	results	is	operating	revenues	attributed	to	Canadian	operations	of	$5	million	 for	2017	 and	$6	million	for	both	2016	 and	2015, respectively.

Our	Market-Based	Businesses	are	comprised	of	four	operating	segments:

•Military	Services	Group,	which	enters	into	long-term	contracts	with	the	U.S.	government	to	provide	water	and	wastewater	services	on	various	military bases;

•Homeowner	Services	Group,	which	provides	warranty-type	services	to	homeowners	and	smaller	commercial	customers	to	protect	against	the	cost	of repairing	broken	or	leaking	water	pipes	and	clogged	or	blocked	sewer	pipes	on	their	premises,	and	other	services;

•Contract	Operations	Group,	which	enters	into	contracts	with	municipal,	commercial	and	industrial	customers,	primarily	to	operate	and	manage	water	and wastewater	facilities	and	other	related	services;	and

•Keystone	Clearwater	Solutions,	LLC	("Keystone"),	which	provides	customized	water	service	and	management	solutions	for	natural	gas	exploration	and production	companies	and	customers	in	the	municipal	water	services	market.

# Military	Services	Group

Our	Military	Services	Group	has	been	granted	contracts	to	operate	on	13	military	bases	under	50-year	contracts	with	the	U.S.	government	as	part	of	its	Utility Privatization	Program.	See	Item	7—Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations—Strategic	Focus	and	2017	Achievements —Growth	for	additional	information.	The	scope	of	these	contracts	generally	includes	the	O&M	of	the	bases'	water	and	wastewater	systems	and	a	capital	program focused	on	asset	replacement	and,	in	certain	instances,	systems	expansion.	The	replacement	of	assets	assumed	when	a	contract	is	awarded	to	the	Company	is	funded from	the	contract	fee.	At	times,	new	assets	are	required	to	support	the	base's	mission	and	the	construction	of	these	assets	are	funded	by	the	U.S.	government	as	additional work	under	the	contract.	The	current	capital	program	does	not	use	the	Company's	equity	or	debt	borrowings;	however,	we	may	make	limited	short-term	working	capital investments	under	these	contracts	and	some	working	capital	is	used	to	fund	work-in-process	until	paid	by	the	U.S.	government.

The	contract	price	for	nine	of	our	contracts	with	the	U.S.	government	is	subject	to	redetermination	two	years	after	commencement	of	operations,	and	every	three years	thereafter.	Price	redetermination	is	a	contract	mechanism	to	periodically	adjust	the	service	fee	in	the	next	period	to	reflect	changes	in	contract	obligations	and anticipated	market	conditions.	The	remaining	four	contracts	with	the	U.S.	government	are	subject	to	annual	price	adjustments	under	a	mechanism	similar	to	price redetermination,	called	"Economic	Price	Adjustment."	All	of	these	contracts	may	be	terminated,	in	whole	or	in	part,	prior	to	the	end	of	the	50-year	term	for	convenience of	the	U.S.	government	or	as	a	result	of	default	or	non-performance	by	the	subsidiary	performing	the	contract.	In	either	event,	pursuant	to	termination	provisions applicable	to	these	contracts,	we	would	be	entitled	to	recover	allowable	costs	that	we	may	have	incurred	under	the	contract,	plus	the	contract	profit	margin	on	incurred costs.	Our	backlog	of	revenue	associated	with	our	contracts	with	the	U.S.	government	is	approximately	$3.6	billion,	with	an	average	remaining	contract	term	of	42	years.

# Homeowner	Services	Group

Our	Homeowner	Services	Group,	through	our	various	protection	programs,	provides	services	to	domestic	homeowners	and	smaller	commercial	customers	to protect	against	repair	costs	for	interior	and	external	water	and	sewer	lines,	interior	electric	lines,	heating	and	cooling	systems	and	water	heaters,	as	well	as	power	surge protection	and	other	related	services.	Our	LineSaver™	program	involves	partnering	with	utilities,	municipalities	and	other	organizations	to	offer	our	protection	programs to	customers	serviced	by	or	affiliated	with	those	municipalities	and	organizations.	Terms	of	these	partnership	agreements	are	typically	three	to	five	years	in	length,	with optional	 renewals.	As	 of	December	31,	2017,	 our	 Homeowner	 Services	 Group	 had	 approximately	1.7	million	 customer	 contracts	 in	43	 states	 and	 the	 District	 of Columbia,	and	10	LineSaver™	partnership	agreements	with	municipalities	and	other	organizations.

# Contract	Operations	Group

Our	Contract	Operations	Group	enters	into	contracts	to	provide	O&M	services,	including	the	delivery	of	design-build-operate	projects	and	the	provision	of	water and	wastewater	operations,	maintenance	and	management	services,	to	municipal	and	regional	governmental	entities	through	public-private	partnerships,	as	well	as industrial	customers	who	possess	a	wide	range	of	water	quality	and	regulatory	compliance	needs.	Historically,	we	have	made	minimal	long-term	capital	investment under	these	contracts;	instead	we	perform	our	services	for	a	fee.	Occasionally,	we	provide	our	customers	with	financing	for	capital	projects	as	part	of	a	long-term	O&M partnership.	As	of	December	31,	2017,	our	Contract	Operations	Group	had	33	contracts	across	the	United	States	and	Canada,	varying	in	size	and	scope,	with	an	average remaining	contract	term	of	3	years.	In	the	course	of	pursuing	our	long-term	strategy	and	growth	initiatives	for	our	Market-Based	Businesses,	we	will	concentrate	on optimizing	the	portfolio	of	contracts	in	our	Contract	Operations	Group,	which	will	involve	strategic	decisions	around	the	pursuit	of	renewals	of	our	current	contracts approaching	expiration,	as	well	as	the	sale	of	certain	contracts	that	fall	outside	of	our	strategic	focus.

# Keystone

In	July	2015,	we	acquired	a	95%	interest	in	Water	Solutions	Holdings,	LLC,	including	its	wholly	owned	subsidiary,	Keystone.	Keystone	is	a	water	service	and management	solutions	company	that	serves	natural	gas	exploration	and	production	customers	in	the	Appalachian	Basin,	as	well	as	customers	in	the	municipal	water services	market.	Keystone	is	primarily	focused	on	customized	water	transfer,	sourcing,	recycling	and	storage	services,	along	with	pipeline	construction	and	related	O&M services.	Keystone	operates	under	master	service	agreements	that	are	generally	shorter	term	in	nature.	When	the	initial	term	of	these	agreements	expire,	they	typically renew	automatically	on	an	annual	basis	and	generally	are	cancelable	by	either	party	with	30	days	prior	notice.	As	of	December	31,	2017,	Keystone	serves	approximately 35	customers.

We	face	competition	in	our	Market-Based	Businesses	from	a	number	of	service	providers,	including	American	States	Water	Company,	Suez	North	America,	and Veolia	Environnement	S.A.	in	our	Military	Services	Group,	and	Pivotal	Home	Solutions	(owned	by	Southern	Company	Gas)	and	HomeServe	USA	in	our	Homeowner Services	Group.	Our	Contract	Operations	Group	competes	in	a	highly	competitive	market	in	order	to	secure	new	O&M	contracts,	as	these	contracts	are	awarded	based	on a	combination	of	customer	relationships,	service	levels,	competitive	pricing,	references	and	technical	expertise.	We	also	face	competition	in	maintaining	existing	O&M contracts	to	which	we	are	a	party,	as	the	municipal	and	industrial	fixed	term	contracts	frequently	come	up	for	renegotiation	and	are	subject	to	an	open	bidding	process. Competitors	of	our	Contract	Operations	Group	include	Suez	North	America,	Veolia	Environnement	S.A.,	Inframark,	LLC	and	Woodard	&	Curran.	Keystone	currently faces	competition	from	water	service	providers	that	typically	provide	particular	segments	of	the	water	management	cycle,	such	as	Select	Energy	Services,	Inc.,	TETRA Technologies,	Inc.	and	Fluid	Delivery	Solutions,	LLC.

# Environmental,	Health	and	Safety,	and	Water	Quality	Regulation

Our	water	and	wastewater	operations,	including	the	services	provided	by	both	our	Regulated	Businesses	and	Market-Based	Businesses,	are	subject	to	extensive federal,	state	and	local	laws	and	regulations,	and	in	the	case	of	our	Canadian	operations,	Canadian	laws	and	regulations	governing	the	protection	of	the	environment, health	and	safety,	the	provision	of	water	and	wastewater	services,	particularly	with	respect	to	the	quality	of	water	we	deliver	to	our	customers,	and	the	manner	in	which we	collect,	treat,	discharge,	recycle	and	dispose	of	wastewater.	These	regulations	include	the	Safe	Drinking	Water	Act,	the	Lead	and	Copper	Rule	("LCR"),	the Reduction	of	Lead	in	Drinking	Water	Act	and	the	Clean	Water	Act.	We	are	subject	to	various	federal,	state,	local	and	Canadian	laws	and	regulations	governing	the storage	of	hazardous	materials,	the	management	and	disposal	of	hazardous	and	solid	wastes,	discharges	to	air	and	water,	the	cleanup	of	contaminated	sites,	dam	safety and	other	matters	relating	to	the	protection	of	the	environment	and	health	and	safety.	State	PUCs	also	set	conditions	and	standards	for	the	water	and	wastewater	services we	deliver.

Environmental,	health	and	safety,	and	water	quality	regulations	are	complex	and	change	frequently.	For	example,	in	2017,	the	New	Jersey	Department	of Environmental	 Protection	 announced	 that	 it	 would	 seek	 to	 adopt	 more	 stringent	 maximum	 contaminant	 levels	 for	 perfluorooctoanic	 acid,	 or	 PFOA,	 and perfluorononanoic	acid,	or	PFNA.	The	overall	trend	has	been	that	they	have	become	increasingly	stringent	over	time.	As	newer	or	stricter	standards	are	introduced,	our capital	and	operating	costs	could	increase.	We	incur	substantial	costs	associated	with	compliance	with	the	environmental,	health	and	safety,	and	water	quality	standards to	which	our	operations	are	subject.	In	the	past,	our	Regulated	Businesses	have	generally	been	able	to	recover	the	costs	associated	with	compliance;	however,	this recovery	is	affected	by	regulatory	lag	and	the	corresponding	uncertainties	surrounding	rate	recovery.	We	estimate	that	we	will	make	capital	expenditures	of	$96	million during	2018	and	$138	million	during	2019	for	environmental	control	facilities,	which	we	define	for	this	purpose	as	any	project	(or	portion	thereof)	that	involves	the preservation	of	air,	water	or	land.	We	also	maintain	an	environmental	program	that	includes	responsible	business	practices,	compliance	with	environmental	laws	and regulations,	and	effective	use	of	natural	resources.	We	believe	that	our	operations	are	materially	in	compliance	with,	and	in	many	cases	surpass,	minimum	standards required	by	applicable	environmental	laws	and	regulations.

Our	operations	also	involve	the	use,	storage	and	disposal	of	hazardous	substances	and	wastes.	For	example,	our	water	and	wastewater	treatment	facilities	store and	use	chlorine	and	other	chemicals	that	generate	wastes	that	require	proper	handling	and	disposal	under	applicable	environmental	requirements.	We	also	could	incur remedial	costs	in	connection	with	any	contamination	relating	to	our	operations	or	facilities	or	our	off-site	disposal	of	wastes.	The	Comprehensive	Environmental Response,	Compensation,	and	Liability	Act	of	1980	("CERCLA"),	authorizes	the	EPA,	and	comparable	state	laws	authorize	state	environmental	authorities,	to	issue orders	and	bring	enforcement	actions	to	compel	responsible	parties	to	investigate	and	take	remedial	actions	at	any	site	that	is	determined	to	present	an	actual	or	potential threat	to	human	health	or	the	environment	because	of	an	actual	or	threatened	release	of	one	or	more	hazardous	substances.	Parties	that	generated	or	transported hazardous	substances	to	such	sites,	as	well	as	the	owners	and	operators	of	such	sites,	may	be	deemed	liable,	without	regard	to	fault,	under	CERCLA	or	comparable	state laws.	Although	we	are	not	aware	of	any	material	cleanup	or	decontamination	obligations,	the	discovery	of	contamination	or	the	imposition	of	such	obligations	in	the future	could	result	in	additional	costs.	Our	facilities	and	operations	are	also	subject	to	requirements	under	the	U.S.	Occupational	Safety	and	Health	Act	and	inspections thereunder.	Certain	of	our	subsidiaries	are	involved	in	pending	legal	proceedings	relating	to	environmental	matters.	See	Item	3—Legal	Proceedings	for	additional information.

# Safe	Drinking	Water	Act

The	Safe	Drinking	Water	Act	and	related	regulations	establish	national	quality	standards	for	drinking	water.	The	EPA	has	issued	rules	governing	the	levels	of numerous,	naturally	occurring	and	man-made	chemical	and	microbial	contaminants	and	radionuclides	allowable	in	drinking	water,	and	continues	to	propose	new	rules. These	rules	also	prescribe	testing	requirements	for	detecting	regulated	contaminants,	the	treatment	systems	that	may	be	used	for	removing	those	contaminants,	and	other requirements.	To	date,	the	EPA	has	set	standards	for	approximately	90	contaminants	and	indicators	for	drinking	water,	and	there	is	a	process	in	place	to	make	a regulatory	determination	on	at	least	five	additional	compounds	every	five	years.

To	help	formulate	the	basis	for	future	regulations,	the	EPA	has	the	authority	to	require	monitoring	for	additional,	unregulated	contaminants	under	the	Unregulated Contaminant	Monitoring	Rule	(the	"Rule").	Our	laboratory	and	many	of	our	treatment	systems	are	preparing	for	the	fourth	round	of	testing	under	the	Rule,	which	will begin	in	2018.	There	are	thousands	of	other	chemical	compounds	that	are	not	regulated,	many	of	which	are	lacking	a	testing	methodology,	occurrence	data,	health effects	information	and/or	treatment	technology.	The	process	of	developing	new	drinking	water	standards	is	long	and	complex,	but	we	actively	participate	with	the	EPA and	 other	 water	 industry	 groups	 by	 sharing	 research	 and	 water	 quality	 operational	 knowledge.	 See	 Item	 1—Business—Research	 and	 Development—Emerging Containments	for	further	discussion.

To	effect	the	removal	or	inactivation	of	microbial	organisms,	the	EPA	has	established	various	rules	to	improve	the	disinfection	and	filtration	of	drinking	water and	to	reduce	consumers'	exposure	to	disinfectants	and	by-products	of	the	disinfection	process.	In	2006,	the	EPA	issued	the	Long-Term	2	Enhanced	Surface	Water Treatment	Rule	and	the	Stage	2	Disinfectants	and	Disinfection	Byproduct	Rule	and,	later	in	2006,	finalized	the	Ground	Water	Rule,	applicable	to	systems	providing water	from	underground	sources.	In	2016,	the	revised	Total	Coliform	Rule	implemented	a	"find	and	fix"	process	where	exceeding	bacterial	trigger	levels	requires	an assessment	to	correct	any	sanitary	defects.	We	are	within	the	EPA's	time	frame	for	compliance	of	these	standards,	which	includes	sample	collection,	data	analysis, engineering	planning	and	system	implementation.	Recent	monitoring	under	the	Long-Term	2	Rule	has	resulted	in	the	need	for	more	than	30	of	our	surface	water	systems to	provide	additional	protection	against	cryptosporidium.	In	most	cases,	this	will	involve	installing	UV	disinfection	at	an	estimated	cost	ranging	from	$150	million	to $250	million.	Further,	the	EPA	is	actively	considering	regulations	for	a	number	of	contaminants,	including	strontium,	hexavalent	chromium,	fluoride,	nitrosamines, perchlorate,	some	pharmaceuticals	and	certain	volatile	organic	compounds.	We	do	not	anticipate	that	any	such	regulations,	if	enacted,	will	require	implementation	in 2018.

Across	the	Company,	we	conduct	over	one	million	water	quality	tests	each	year	at	our	laboratory	facilities	and	plant	operations,	including	continuous	on-line instrumentations	such	as	monitoring	turbidity	levels,	disinfectant	residuals	and	adjustments	to	chemical	treatment	based	on	changes	in	incoming	water.	We	participate	in the	Partnership	for	Safe	Water,	the	EPA's	voluntary	program	to	meet	more	stringent	goals	for	reducing	microbial	contaminants.	With	 68	 of	 our	72	surface	water treatment	plants	receiving	the	EPA	program's	"Director"	award,	which	recognizes	utilities	that:	(i)	have	completed	a	comprehensive	self-assessment	report;	(ii)	created an	action	plan	for	continuous	improvement;	and	(iii)	produced	high	quality	drinking	water,	we	account	for	approximately	one-third	of	the	plants	receiving	such	awards nationwide.	In	addition,	66	of	our	surface	water	treatment	plants	have	received	the	"Five-Year	Phase	III"	award,	61	plants	have	received	the	"Ten-Year	Phase	III"	award and	54	plants	have	received	the	"Fifteen-Year	Phase	III"	award;	these	awards	recognize	plants	that	have	met	the	Director	award	status	for	five,	10	and	15	years, respectively.	Further,	nine	of	our	surface	water	plants	have	received	the	"Presidents"	award,	which	recognizes	treatment	plants	that	achieve	the	Partnership's	rigorous individual	filter	effluent	turbidity	standards.

Although	it	is	difficult	to	project	the	ultimate	costs	of	complying	with	the	above	or	other	pending	or	future	requirements,	we	expect	current	requirements	under	the Safe	Drinking	Water	Act	and	other	similar	laws	to	be	recoverable	through	the	regulatory	process	and	therefore	compliance	costs	are	not	expected	to	have	a	material impact	on	our	operations	or	financial	condition.	In	addition,	capital	expenditures	and	operating	costs	to	comply	with	environmental	mandates	have	been	traditionally recognized	by	the	state	PUCs	as	appropriate	for	inclusion	in	establishing	rates.	As	a	result,	we	expect	to	recover	the	operating	and	capital	costs	resulting	from	these pending	or	future	requirements.

# Lead	and	Copper	Rule	and	Lead	in	Drinking	Water	Act

Across	the	country,	there	is	a	renewed	focus	on	the	potential	risk	of	lead	in	drinking	water.	In	1991,	the	EPA	published	the	LCR	to	control	lead	and	copper	in drinking	water	and,	since	that	time,	has	issued	minor	revisions	in	2000,	2004	and	2007,	enhancing	monitoring,	reporting	and	public	education	requirements.	In	2011, Congress	enacted	the	Reduction	of	Lead	in	Drinking	Water	Act	regarding	the	use	and	introduction	into	commerce	of	lead	pipes,	plumbing	fittings	for	fixtures,	solder	and flux.	While	these	advances	have	made	an	impact	in	reducing	lead	exposure	in	drinking	water,	legacy	lead	plumbing	materials,	primarily	in	building	plumbing,	still remain	in	many	communities.	The	EPA	is	currently	working	to	develop	long-term	revisions	to	the	LCR,	with	a	revised	draft	likely	in	2018.	It	is	currently	estimated	that approximately	5%	of	our	service	lines	contain	lead.	We	have	reviewed	our	related	practices	and	are	working	with	stakeholders	to	develop	feasible	solutions	to	remove legacy	lead	from	service	lines	in	older	neighborhoods.	A	fundamental	step	in	this	effort	is	the	ongoing	project	to	inventory	lead	service	lines	across	our	footprint.	Our goal	is	to	replace	our	lead	service	lines	in	most	areas	over	an	approximate	10	year	time	frame,	at	an	estimated	cost	ranging	from	$600	million	to	$1.2	billion.	In	cases where	we	are	replacing	an	American	Water	owned	lead	service	line,	our	standard	approach	will	be	to	replace	the	company-owned	portion	of	the	service	line,	and	work with	the	customer	to	replace	the	customer-owned	portion	of	the	service	line.	Replacing	the	full	service	line	is	considered	a	best	practice	as	advised	by	the	Lead	Service Line	Replacement	Collaborative,	an	association	of	leading	water	industry	organizations.	The	prioritization	of	this	work	will	depend	on	several	factors,	including	our planned	water	main	and	service	line	renewal	projects,	adjacent	projects	by	municipalities	or	other	utilities,	LCR	compliance	monitoring	results	and	cooperation	with	our customers	with	respect	to	the	customer-owned	portion	of	the	service	line.

# Clean	Water	Act

The	Clean	Water	Act	regulates	discharges	from	drinking	water	and	wastewater	treatment	facilities	into	lakes,	rivers,	streams	and	groundwater.	In	addition	to requirements	applicable	to	our	wastewater	collection	systems,	our	operations	require	discharge	permits	under	the	National	Pollutant	Discharge	Elimination	System ("NPDES")	permit	program	established	under	the	Clean	Water	Act,	which	must	be	renewed	every	five	years.	Pursuant	to	the	NPDES	permit	program,	the	EPA	and implementing	states	set	maximum	discharge	limits	for	wastewater	effluents	and	overflows	from	wastewater	collection	systems.	Discharges	that	exceed	the	limits specified	under	NPDES	permits	can	lead	to	the	imposition	of	penalties,	and	persistent	non-compliance	could	lead	to	significant	penalties	and	compliance	costs.	In addition,	the	difficulty	of	obtaining	and	complying	with	NPDES	permits,	and	renewing	expiring	permits,	may	impose	time	and	cost	burdens	on	our	operations.	From time	to	time,	discharge	violations	occur	at	our	facilities,	some	of	which	result	in	fines.	We	do	not	expect	any	such	violations	or	fines	to	have	a	material	impact	on	our results	of	operations	or	financial	condition.

# Environmental,	Social	Responsibility	and	Governance

Integrating	environmental,	social	responsibility	and	governance	("ESG")	policies	and	practices	into	our	daily	operations	emphasizes	our	belief	that	the	only	way to	do	business	is	to	do	it	responsibly,	by	delivering	value	to	our	customers,	building	strong	communities,	leveraging	innovation	to	develop	our	industry	and	supporting the	expertise	and	dedication	of	our	people.	This	focus	is	derived	from	our	vision	statement,	"clean	water	for	life",	and	our	core	values:	(i)	safety;	(ii)	trust;	(iii) environmental	leadership;	(iv)	teamwork;	and	(v)	high	performance,	the	principles	by	which	we	work	and	live.	Our	vision	and	values	drive	our	company	strategy,	which is	centered	on	five	central	themes:

•Customers—Our	customers	are	at	the	center	of	everything	we	do,	helping	us	to	shape	our	strategic	priorities.	We	challenge	ourselves	so	that	if	our regulated	utility	customers	had	a	choice	of	providers,	we	would	want	them	to	choose	us.

•Safety—The	safety	of	our	employees	and	our	customers is the	number	one	focus	for	American Water.

•People—Maintaining	an	environment	which	is	open,	diverse	and	inclusive,	and	where	our	people	feel	valued,	included	and	accountable	is	critical	to	our ability	to	serve	our	customers	every	day.

•Technology	and	Operational	Efficiency—Our	technology	and	operational	efficiency	strategy	helps	us	to	continually	find	better	and	more	efficient	ways	to do	business	and	provide	the	best	services	at	affordable	costs	for	our	customers.

•Growth—We	believe	that	when	companies	grow,	they	can	invest	more	in	creating	stable	jobs,	training,	benefits,	infrastructure	and	our	communities. Growth,	in	turn,	benefits	all	stakeholders.

In	2017,	we	issued	our	fourth	biennial	Corporate	Responsibility	Report,	covering	our	performance	in	2015	to	2016.	Our	first	report	was	issued	in	2011,	making	us the	first	large	water	services	company	to	measure	its	performance	against	the	Global	Reporting	Index.	In	addition,	our	sustainability	practices	have	supported	our inclusion	in	the	Dow	Jones	Sustainability	North	America	Index	in	2012,	2013	and	2015,	and	we	have	also	maintained	our	position	in	the	Euronext	Vigeo ®	U.S.	50 index,	which	includes	the	50	most	advanced	companies	in	the	nation	with	respect	to	their	environmental,	social	and	governance	performance,	based	on	a	review	of hundreds	of	indicators.

Highlights	of	our	commitment	to	our	ESG	policies	and	practices,	many	of	which	are	detailed	in	our	most	recent	Corporate	Responsibility	Report,	are	summarized below:

# Environmental

•$7.2	billion	for	regulated	capital	expenditures	to	address	aging	infrastructure,	reduce/eliminate	leaks,	improve	cyber/physical	security,	and	increase resiliency	of	critical	assets	to	climate	variability;

•$600	million	to	$1.2	billion	to	acquire	financially	distressed	municipal	water	and	wastewater	systems	which	tend	to	have	a	strong	need	for	capital investment;	and

•$200	million	 for	 strategic	 capital	 investments	 with	 approximately	$164	million	focused	on	construction	of	our	new	corporate	headquarters in Camden,	New	Jersey,	as	part	of	the	revitalization	effort	in	this	community.

•Lowered	our	greenhouse	gas	emissions	by	approximately	26%	since	our	base	year	of 2007.

•Reduced	 water	 use	 by	 3.5	 billion	 gallons	 year	 over	 year, through	 our	 conservation	 efforts	 and programs.

•Recycled	 over	 2	 billion	 gallons	 of	 water	 annually	 and	 produced reuse	 water	 at	 30	 of	 our facilities.

# Social	Responsibility

•On	average,	more	than	60,000	hours	of	safety	training	given	annually	to	our employees.

•Achieved top quartile in the water industry for customer satisfaction.

•Increased	 our annual spend	 with	 Tier	 1	 diverse suppliers to	 over	 $385 million.

•More	 than 4,000 hours of	 Company-sponsored community service performed annually by our employees.

•Company-sponsored	workplace	giving	campaigns	with	the	United	Way	and	Water	For	People,	as	well	annual	contributions	 from	the	American	Water Charitable	Foundation,	focused	on	supporting	employees	in	their	own	charitable	endeavors,	providing	support	for	disaster	relief	efforts,	and	providing funding	for	initiatives	related	to	clean	water,	conservation,	education	and	community	sustainability.

•Over	85%	of	our	job	requisitions	had	a	diverse	candidate	pool,	with	more	than	50%	of	transfers	or	promotions	filled	by	minority,	female,	veteran	or disabled	individuals.

# Governance

•Our	Board	of	Directors is led	by	an independent,	non-executive	chairman,	and	has	an	average	director tenure, including	our two	new	directors,	of approximately	6	years.

•Including	 our two	 new	 directors,	 we	 have	 achieved	 gender	 parity	 among the	 members	 of the	 Board	 of Directors.

•Stock	 ownership	 guidelines	 and retention requirements that	 align	 equity	 ownership	 of	 executives	 and	 directors	 with the long-term interests	 of	 our stockholders.

# Research	and	Development

# Our	Research	and	Development	Program

We	maintain	an	industry-leading	Research	and	Development	("R&D")	program	that	is	designed	to	enhance	our	services,	help	ensure	compliance,	and	improve quality	and	operational	effectiveness.	Our	R&D	personnel	are	located	in	New	Jersey	and	Illinois,	the	latter	housing	our	quality	control	and	testing	laboratory,	which supports	our	R&D	activities	through	testing	and	analysis.	Approximately	one-third	of	our	research	budget	is	funded	by	competitively	awarded	outside	research	grants. Such	grants	reduce	the	cost	of	research	and	allow	collaboration	with	leading	national	and	international	researchers.	In	2017,	we	spent	$3	million	on	research	in	total, including	$1	million	funded	by	grants.	Spending	on	research	amounted	to	$4	million,	including	$1	million	funded	by	grants,	in	each	of	2016	and	2015.

We	continue	to	leverage	the	Company's	expertise	and	collaborate	with	the	EPA	to	help	establish	effective	environmental,	health	and	safety,	and	water	quality standards	and	regulation.	This	relationship	includes	the	sharing	of	our	research,	such	as	our	treatment	and	distribution	system	optimization	research	and	our	and	national water	quality	monitoring	data.	Our	engagement	with	the	EPA	provides	us	with	early	insight	into	emerging	regulatory	issues	and	initiatives,	thereby	allowing	us	to anticipate	and	to	accommodate	our	future	compliance	requirements.	We	also	frequently	engage	with	the	Centers	for	Disease	Control	and	other	state	environmental agencies.	We	believe	that	continued	R&D	activities	are	critical	for	providing	safe,	reliable	and	affordable	services,	as	well	as	maintaining	our	leadership	position	in	the industry,	which	provides	us	with	a	competitive	advantage	as	we	seek	additional	business	with	new	and	existing	customers.

# Emerging	Contaminants

Emerging	contaminants	include	chemicals	such	as	pharmaceuticals,	personal	care	products,	pesticides,	herbicides	and	endocrine	disrupting	compounds,	which have	been	detected	in	drinking	water	supplies,	for	which	the	risk	to	the	public's	health	is	not	fully	understood	and/or	has	not	been	quantified.	While	these	contaminants have	been	present	in	our	drinking	water	for	as	long	as	they	have	been	in	use,	technological	advances	have	only	recently	made	it	possible	to	detect	many	of	them.	The ability	to	detect	contaminants,	even	at	trace	levels,	has	raised	questions	among	regulators	and	government	agencies,	further	affecting	the	public's	perception	of	drinking water	quality.

The	Chemicals	Abstract	Service	Registry	contains	over	130	million	registered	chemicals,	with	a	new	substance	being	produced	approximately	every	3	seconds from	chemical	breakdown	and	reformation.	We	are	continually	investigating	new	substances	and	contaminants,	employing	a	team	of	scientists,	engineers	and	public health	professionals	to	identify	threats	to	our	water	supply,	to	act	on	emerging	regulations	and	new	health	advisories,	and	to	research	the	influx	of	advanced	treatment technologies.	We	maintain	state-of-the-art	water	quality	testing	equipment	and	implement	new	and	emerging	technologies	to	help	predict	and	manage	potential	water supply	contamination	issues.	Examples	of	our	efforts	include:

•using	our	research	findings	to	communicate	information	to	our	customers	(via	a	web	site)	on	the	actions	they	can	take	to	manage	Legionella	(the	Centers for	Disease	Control	statistics	indicate	that	water-associated	disease	from	Legionella	is	on	the	rise,	with	exposure	typically	associated	with	plumbing systems	in	large	buildings);

•aerial	drone	testing	to	detect	harmful	algal	blooms	and	ultrasonic	technology	testing	to	help	prevent	taste	and	odor	events	and	to	eliminate	cyanotoxins before	they	get	to	the	water	treatment	plant;

•the	 implementation	 of	water	 source	 assessment	 tools, including	 sensors	 and	 analytics,	to	evaluate	and track	chemical	storage	and transport through watersheds	and	to	detect	source	water	contamination	events;	and

•the	 implementation of activated carbon and biofiltration for the control of emerging contaminants.

# Support	Services

American	Water	Works	Service	Company,	Inc.	(the	"Service	Company")	is	our	wholly	owned	subsidiary	that	provides	support	and	operational	services	to	the Company's	operating	subsidiaries.	These	services	are	predominantly	provided	to	our	Regulated	Businesses	under	contracts	that	have	been	approved	by	PUCs,	where necessary,	and	are	also	provided	to	(i)	our	three	Market-Based	Businesses	organized	under	American	Water	Enterprises,	Inc.,	our	wholly	owned	subsidiary	("AWE"), and	 (ii)	 Keystone	 as	 requested	 or	 may	 be	 necessary.	 Services	 provided	 by	 the	 Service	 Company	 may	 include	 accounting	 and	 finance,	 administration,	 business development,	communications,	compliance,	education	and	 training,	engineering,	health	and	safety,	human	resources,	 information	systems,	 internal	audit,	 investor relations,	 legal	and	governance,	operations,	procurement,	rates	and	regulatory	support,	security,	risk	management,	 treasury,	water	quality	and	R&D.	The	Service Company	also	operates	two	national	customer	service	centers	located	in	Alton,	Illinois	and	Pensacola,	Florida,	which	provide	customer	relations,	field	service	and operational	support	to	our	Regulated	Businesses.	Services	are	provided	by	the	Service	Company	at	cost,	enabling	our	operating	subsidiaries	to	fulfill	their	responsibilities in	a	cost-effective	manner,	while	providing	them	access	to	in-depth,	functional	expertise.

Our	security	team	provides	oversight	and	policy	guidance	on	physical,	cyber	and	information	security,	as	well	as	business	continuity,	throughout	our	operations. It	is	responsible	for	designing,	implementing,	monitoring	and	supporting	effective	physical	and	technical	security	controls	for	our	physical	assets,	business	systems	and operational	technologies.	Risk	assessments	are	conducted	periodically	to	evaluate	the	effectiveness	of	existing	security	controls	and	serve	as	the	basis	for	additional safeguards,	security	controls	and	measures.	Operational	and	technical	security	controls	are	deployed	and	integrated	as	safeguards	against	unauthorized	access	to	the Company's	information	systems.	These	controls:	(i)	are	aimed	at	assuring	the	continuity	of	business	processes	that	are	dependent	upon	automation;	(ii)	seek	to	maintain the	integrity	of	our	data;	(iii)	support	regulatory	and	legislative	compliance	requirements;	and	(iv)	are	aimed	at	maintaining	safe	and	reliable	service	to	our	customers. We	engage	in	partnerships	with	U.S.	federal,	state	and	local	law	enforcement	agencies	to	coordinate	and	improve	the	security	of	our	water	delivery	systems	and	to safeguard	our	water	supply	and	operations.

# Employee	Matters

As	of	December	31,	2017,	approximately	46%	of	our	workforce	was	represented	by	unions,	which	include	76	collective	bargaining	agreements	with	19	different unions.	Additionally,	as	of	December	31,	2017	we	had	one	collective	bargaining	agreement	beyond	expiration,	affecting	approximately	180	employees,	all	of	which	are actively	working	under	the	terms	of	the	existing	agreement,	and	another	collective	bargaining	agreement	in	the	process	of	being	implemented,	affecting	approximately 20	employees.	During	2018,	20	of	our	collective	bargaining	agreements,	and	our	national	benefits	agreement	with	most	of	the	labor	unions	representing	employees	in our	Regulated	Businesses,	will	be	expiring	in	accordance	with	their	terms.

# Executive	Officers

The	following	table	summarizes	the	name,	age,	offices	held	and	business	experience	for	each	of	our	executive	officers,	as	of	February	20,	2018:

Each	executive	officer	is	elected	annually	by	the	Board	of	Directors	and	serves	until	his	or	her	respective	successor	has	been	elected	and	qualified	or	his	or	her earlier	death,	resignation	or	removal.

# Available	Information

We	 are	 subject	 to	 the	 reporting	 requirements	 of	 the	 Exchange	Act.	We	 file	 or	 furnish	 annual,	 quarterly	 and	 current	 reports,	 proxy	 statements	 and	 other information	with	the	SEC.	You	may	obtain	a	copy	of	our	annual	reports	on	Form	10-K,	our	quarterly	reports	on	Form	10-Q	or	our	current	reports	on	Form	8-K,	or	any amendments	to	them,	that	are	filed	with	or	furnished	to	the	SEC,	free	of	charge,	from	the	Investor	Relations	section	of	our	website,	http://ir.amwater.com,	as	soon	as reasonably	practicable	after	we	file	or	furnish	the	information	to	the	SEC.	Information	contained	on	our	website	shall	not	be	deemed	incorporated	into,	or	to	be	a	part	of, this	report,	and	any	website	references	included	herein	are	not	intended	to	be	made	through	active	hyperlinks.	We	recognize	our	website	as	a	key	channel	of	distribution to	reach	public	investors	and	as	a	means	of	disclosing	material	non-public	information	to	comply	with	our	disclosure	obligations	under	SEC	Regulation	FD.

The	American	Water	corporate	governance	guidelines	and	the	charters	for	each	of	the	standing	committees	of	the	Board	of	Directors,	together	with	the	American Water	Code	of	Ethics	and	additional	information	regarding	our	corporate	governance,	are	available	on	our	Investor	Relations	website,	http://ir.amwater.com,	and	will	be made	available,	without	charge,	in	print	to	any	stockholder	who	requests	such	documents	from	our	Investor	Relations	Department,	American	Water	Works	Company, Inc.,	1025	Laurel	Oak	Road,	Voorhees,	NJ,	08043.

# ITEM	1A. RISK	FACTORS

We	operate	in	a	market	and	regulatory	environment	that	involves	significant	risks,	many	of	which	are	beyond	our	control.	In	addition	to	the	other	information included	or	incorporated	by	reference	in	this	Form	10-K,	the	following	factors	should	be	considered	in	evaluating	our	business	and	future	prospects.	Any	of	the following	risks,	either	alone	or	taken	together,	could	materially	and	adversely	affect	our	business,	financial	position,	results	of	operations,	cash	flows	and	liquidity.

# Risks	Related	to	Our	Industry	and	Business	Operations

Our	utility	operations	are	subject	to	extensive	economic	regulation	by	state	PUCs	and	other	regulatory	agencies,	which	significantly	affects	our	business,	financial condition,	results	of	operations	and	cash	flows.	Our	utility	operations	also	may	be	subject	to	fines,	penalties	and	other	sanctions	for	the	inability	to	meet	these regulatory	requirements.

Our	Regulated	Businesses	provide	water	and	wastewater	services	to	our	customers	through	subsidiaries	that	are	subject	to	economic	regulation	by	state	PUCs. Economic	regulation	affects	the	rates	we	charge	our	customers	and	has	a	significant	impact	on	our	business	and	results	of	operations.	Generally,	the	state	PUCs authorize	us	 to	charge	rates	 that	 they	determine	are	sufficient	 to	recover	our	prudently	 incurred	operating	expenses,	 including,	but	not	 limited	 to,	operating	and maintenance	costs,	depreciation,	financing	costs	and	taxes,	and	provide	us	the	opportunity	to	earn	an	appropriate	rate	of	return	on	invested	capital.

Our	ability	to	successfully	implement	our	business	plan	and	strategy	depends	on	the	rates	authorized	by	the	various	state	PUCs.	We	periodically	file	rate	increase applications	with	state	PUCs.	The	ensuing	administrative	process	may	be	lengthy	and	costly.	Our	rate	increase	requests	may	or	may	not	be	approved,	or	may	be partially	approved,	and	any	approval	may	not	occur	in	a	timely	manner.	Moreover,	a	PUC	may	not	approve	a	rate	request	to	an	extent	that	is	sufficient	to:

•cover	 our	 expenses, including	 purchased	 water	 and	 costs	 of	 chemicals, fuel	 and	 other	 commodities	 used in	 our operations;

•enable us to recover our investment; and

•provide	 us	 with an opportunity to earn an appropriate rate of return on our investment.

Approval	of	the	PUCs	is	also	required	in	connection	with	other	aspects	of	our	utilities'	operations.	Some	state	PUCs	are	empowered	 to	 impose	financial penalties,	fines	and	other	sanctions	for	non-compliance	with	applicable	rules	and	regulations.	Our	utilities	are	also	required	to	have	numerous	permits,	approvals	and certificates	from	the	PUCs	that	regulate	their	businesses	and	authorize	acquisitions.	Although	we	believe	that	each	utility	subsidiary	has	obtained	or	sought	renewal	of the	material	permits,	approvals	and	certificates	necessary	for	its	existing	operations,	we	are	unable	to	predict	the	impact	that	future	regulatory	activities	may	have	on	our business.

In	any	of	these	cases,	our	business,	financial	condition,	results	of	operations,	cash	flows	and	liquidity	may	be	adversely	affected.	Even	if	rates	are	sufficient,	we face	the	risk	that	we	will	not	achieve	the	rates	of	return	on	our	invested	capital	to	the	extent	permitted	by	state	PUCs.	This	could	occur	if	certain	conditions	exist, including	but	not	limited	to,	if	water	usage	is	less	than	the	level	anticipated	in	establishing	rates,	or	if	our	investments	or	expenses	prove	to	be	higher	than	the	level estimated	in	establishing	rates.

# Our	operations	and	the	quality	of	water	we	supply	are	subject	to	extensive	and	increasingly	stringent	environmental,	water	quality	and	health	and	safety	laws	and regulations,	including	with	respect	to	emerging	contaminants,	compliance	with	which	could	impact	our	operating	costs,	and	violations	of	which	could	subject	us	to substantial	liabilities	and	costs,	as	well	as	damage	to	our	reputation.

Our	water	and	wastewater	operations	and	the	operations	of	our	Market-Based	Businesses	are	subject	to	extensive	federal,	state	and	local	laws	and	regulations	and, in	the	case	of	our	Canadian	operations,	Canadian	laws	and	regulations	that	govern	the	protection	of	the	environment,	health	and	safety,	the	quality	of	the	water	we deliver	to	our	customers,	water	allocation	rights,	and	the	manner	in	which	we	collect,	treat,	discharge	and	dispose	of	wastewater.	These	requirements	include	CERCLA, the	Clean	Water	Act	and	the	Safe	Drinking	Water	Act,	and	similar	state	and	Canadian	laws	and	regulations.	For	example,	CERCLA	authorizes	the	EPA	to	issue	orders and	 bring	 enforcement	 actions	 to	 compel	 responsible	 parties	 to	 investigate	 and	 take	 remedial	 actions	 with	 respect	 to	 actual	 or	 threatened	 releases	 of	 hazardous substances,	and	can	impose	joint	and	several	liability,	without	regard	to	fault,	on	responsible	parties	for	the	costs	thereof.	We	are	also	required	to	obtain	various environmental	permits	from	regulatory	agencies	for	our	operations.

In	addition,	state	PUCs	also	set	conditions	and	standards	for	the	water	and	wastewater	services	we	deliver.	If	we	deliver	water	or	wastewater	services	to	our customers	that	do	not	comply	with	regulatory	standards,	or	otherwise	violate	environmental	laws,	regulations	or	permits,	or	other	health	and	safety	and	water	quality regulations,	we	could	incur	substantial	fines,	penalties	or	other	sanctions	or	costs,	as	well	as	damage	to	our	reputation.	In	the	most	serious	cases,	regulators	could	reduce requested	rate	increases	or	force	us	to	discontinue	operations	and	sell	our	operating	assets	to	another	utility	or	to	a	municipality.	Given	the	nature	of	our	business	which, in	part,	involves	supplying	water	for	human	consumption,	any	potential	non-compliance	with,	or	violation	of,	environmental,	water	quality	and	health	and	safety	laws	or regulations	would	likely	pose	a	more	significant	risk	to	us	than	to	a	company	not	similarly	involved	in	the	water	and	wastewater	industry.

We	incur	substantial	operating	and	capital	costs	on	an	ongoing	basis	to	comply	with	environmental,	water	quality	and	health	and	safety	laws	and	regulations. These	laws	and	regulations,	and	their	enforcement,	generally	have	become	more	stringent	over	time,	and	new	or	stricter	requirements	could	increase	our	costs.	Although we	may	seek	to	recover	ongoing	compliance	costs	in	our	Regulated	Businesses	through	customer	rates,	there	can	be	no	guarantee	that	the	various	state	PUCs	or	similar regulatory	bodies	that	govern	our	Regulated	Businesses	would	approve	rate	increases	that	would	enable	us	to	recover	such	costs	or	that	such	costs	will	not	materially	and adversely	affect	our	financial	condition,	results	of	operations,	cash	flows	and	liquidity.

We	may	also	incur	liabilities	if,	under	environmental	laws	and	regulations,	we	are	required	to	investigate	and	clean	up	environmental	contamination	at	our properties,	including	potential	spills	of	hazardous	chemicals,	such	as	chlorine,	which	we	use	to	treat	water,	or	at	off-site	locations	where	we	have	disposed	of	waste	or caused	an	adverse	environmental	impact.	The	discovery	of	previously	unknown	conditions,	or	the	imposition	of	cleanup	obligations	in	the	future,	could	result	in significant	costs	and	could	adversely	affect	our	financial	condition,	results	of	operations,	cash	flows	and	liquidity.	Such	remediation	costs	may	not	be	covered	by insurance	and	may	make	it	difficult	for	us	to	secure	insurance	at	acceptable	rates	in	the	future.

Attention	is	being	given	to	emerging	contaminants,	including,	without	limitation,	chemicals	and	other	substances	that	currently	do	not	have	any	regulatory standard	in	drinking	water	or	have	been	recently	created	or	discovered	(including	by	means	of	scientific	achievements	in	the	analysis	and	detection	of	trace	amounts	of substances).	Examples	of	sources	of	emerging	contaminants	include,	but	are	not	limited	to,	newly	created	chemical	compounds	(including,	for	example,	perfluorinated compounds	 and	 manufactured	 nanomaterials);	 human	 and	 veterinary	 products;	 microbes,	 viruses,	 amoebae	 and	 other	 pathogens;	 and	 residual	 by-products	 of disinfection.	We	rely	upon	governmental	agencies	to	set	appropriate	regulatory	standards	to	protect	the	public	from	these	and	other	contaminants.	Our	role	is	to	meet	or surpass	 those	 standards,	 when	 established.	 In	 some	 of	 our	 states,	 PUCs	 may	 disapprove	 of	 cost	 recovery,	 in	 whole	 or	 in	 part,	 for	 implementation	 of	 treatment infrastructure	for	an	emerging	contaminant	in	the	absence	of	a	regulatory	standard.	Furthermore,	given	the	rapid	pace	at	which	emerging	contaminants	are	being	created and/or	discovered,	we	may	not	be	able	to	detect	and/or	mitigate	all	such	substances	in	our	drinking	water	system	or	supplies,	which	could	have	a	material	adverse	impact on	our	financial	condition,	results	of	operations	and	reputation.	In	addition,	we	believe	emerging	contaminants	may	form	the	basis	for	additional	or	increased	federal	or state	regulatory	initiatives	and	requirements	in	the	future,	which	could	significantly	increase	the	cost	of	our	operations.

# Limitations	on	availability	of	water	supplies	or	restrictions	on	our	use	of	water	supplies	as	a	result	of	government	regulation	or	action	may	adversely	affect	our access	to	sources	of	water,	our	ability	to	supply	water	to	customers	or	the	demand	for	our	water	services.

Our	ability	to	meet	the	existing	and	future	demand	of	our	customers	depends	on	the	availability	of	an	adequate	supply	of	water.	As	a	general	rule,	sources	of public	water	supply,	including	rivers,	lakes,	streams	and	groundwater	aquifers,	are	held	in	the	public	trust	and	are	not	owned	by	private	interests.	As	a	result,	we	typically do	not	own	the	water	that	we	use	in	our	operations,	and	the	availability	of	our	water	supply	is	established	through	allocation	rights	(determined	by	legislation	or	court decisions)	and	passing-flow	requirements	set	by	governmental	entities.	Passing-flow	requirements	set	minimum	volumes	of	water	that	must	pass	through	specified water	sources,	such	as	rivers	and	streams,	in	order	to	maintain	environmental	habitats	and	meet	water	allocation	rights	of	downstream	users.	Allocation	rights	are imposed	to	ensure	sustainability	of	major	water	sources	and	passing-flow	requirements	are	most	often	imposed	on	source	waters	from	smaller	rivers,	lakes	and	streams. These	requirements,	which	can	change	from	time	to	time,	may	adversely	impact	our	water	supply.	Supply	issues,	such	as	drought,	overuse	of	sources	of	water,	the protection	of	threatened	species	or	habitats,	contamination	or	other	factors	may	limit	the	availability	of	ground	and	surface	water.

For	example,	in	our	Monterey	County,	California	operations,	we	are	seeking	to	augment	our	sources	of	water	supply,	principally	to	comply	with	an	October	20, 2009	cease	and	desist	order	(the	"2009	Order"),	as	amended	by	an	order	in	July	2016	(the	"2016	Order"),	of	the	SWRCB	that	requires	Cal	Am	to	significantly	decrease its	diversions	from	the	Carmel	River	in	accordance	with	a	reduction	schedule	that	terminates	on	December	31,	2021	(the	"2021	Deadline").	We	are	also	required	to augment	our	Monterey	County	sources	of	water	supply	to	comply	with	the	requirements	of	the	Endangered	Species	Act.	We	cannot	predict	whether	Cal	Am	will	be	able to	secure	alternative	sources	of	water,	or	if	Cal	Am	will	be	exposed	to	liabilities	if	it	is	unable	to	meet	the	2021	Deadline	under	the	2009	Order	and	the	2016	Order.	If	Cal Am	or	any	of	our	other	subsidiaries	are	unable	to	secure	an	alternative	source	of	water,	or	if	other	adverse	consequences	result	from	the	events	described	above,	our business,	financial	condition,	results	of	operations	and	cash	flows	could	be	adversely	affected.	See	Item	3—Legal	Proceedings—Alternative	Water	Supply	in	Lieu	of Carmel	River	Diversions,	which	includes	additional	information	regarding	this	matter.

The	current	regulatory	rate	setting	process	may	result	 in	a	significant	delay,	also	known	as	"regulatory	 lag,"	from	 the	 time	 that	we	 invest	 in	 infrastructure improvements,	incur	increased	operating	expenses	or	experience	declining	water	usage,	to	the	time	at	which	we	can	seek	to	address	these	events	in	rate	case applications;	our	inability	to	minimize	regulatory	lag	could	adversely	affect	our	business.

There	is	typically	a	delay,	known	as	"regulatory	lag,"	between	the	time	one	of	our	regulated	subsidiaries	makes	a	capital	investment	or	incurs	an	operating expense	increase	and	the	time	when	those	costs	are	reflected	in	rates.	In	addition,	billings	permitted	by	state	PUCs	typically	are,	to	a	considerable	extent,	based	on	the volume	of	water	usage	in	addition	to	a	minimum	base	rate.	Thus,	we	may	experience	regulatory	lag	between	the	time	our	revenues	are	affected	by	declining	usage	and the	time	we	are	able	to	adjust	the	rate	per	gallon	of	usage	to	address	declining	usage.	Our	inability	to	reduce	this	regulatory	lag	could	have	an	adverse	effect	on	our financial	condition,	results	of	operations,	cash	flows	and	liquidity.

We	endeavor	to	reduce	regulatory	lag	by	pursuing	constructive	regulatory	policies.	For	example,	ten	of	our	state	PUCs	permit	rates	to	be	adjusted	outside	of	the rate	case	application	process	through	surcharges	that	address	certain	capital	investments,	such	as	replacement	of	aging	infrastructure.	These	surcharges	are	adjusted periodically	based	on	factors	such	as	project	completion	or	future	budgeted	expenditures,	and	specific	surcharges	are	eliminated	once	the	related	capital	investment	is incorporated	in	new	PUC	approved	rates.	Furthermore,	in	setting	rates,	nine	of	our	state	PUCs	allow	us	to	use	future	test	years,	which	extend	beyond	the	date	a	rate request	is	filed	to	allow	for	current	or	projected	revenues,	expenses	and	investments	to	be	reflected	in	rates	on	a	more	timely	basis.	Other	examples	of	such	programs include	states	that	allow	us	to	increase	rates	for	certain	cost	increases	that	are	beyond	our	control,	such	as	purchased	water	costs,	property	or	other	taxes,	or	power, conservation,	chemical	or	other	expenditures.	These	surcharge	mechanisms	enable	us	to	adjust	rates	in	less	time	after	costs	have	been	incurred	than	would	be	the	case under	the	rate	case	application	process.

While	these	programs	have	reduced	regulatory	lag	in	several	of	our	regulated	states,	we	continue	to	seek	expansion	of	programs	to	reduce	regulatory	lag	in	those jurisdictions	that	have	not	approved	such	programs.	Furthermore,	PUCs	may	fail	to	adopt	new	surcharge	programs	and	existing	programs	may	not	continue	in	their current	form,	or	at	all.	Although	we	intend	to	continue	our	efforts	to	expand	state	PUC	approval	of	surcharges	to	address	issues	of	regulatory	lag,	our	efforts	may	not	be successful,	or	even	if	successful	they	may	not	completely	address	our	regulatory	lag,	in	which	case	our	business,	financial	condition,	results	of	operations,	cash	flows and	liquidity	may	be	materially	and	adversely	affected.

# Changes	in	laws	and	regulations	and	changes	in	certain	agreements	can	significantly	affect	our	business,	financial	condition,	results	of	operations,	cash	flows	and liquidity.

New	legislation,	regulations,	government	policies	or	court	decisions,	including	without	limitation	with	respect	to	federal	and	state	income	and	other	tax	laws,	can materially	affect	our	operations,	results	of	operations	and	cash	flows.	The	individuals	who	serve	as	regulators	are	elected	or	political	appointees.	Therefore,	elections which	result	in	a	change	of	political	administration	or	new	appointments	may	also	result	in	changes	in	the	individuals	who	serve	as	regulators	and	the	policies	of	the regulatory	agencies	that	they	serve.	New	laws	or	regulations,	new	interpretations	of	existing	laws	or	regulations,	changes	in	agency	policy,	including	those	made	in response	to	shifts	in	public	opinion,	or	conditions	imposed	during	the	regulatory	hearing	process	could	have	the	following	consequences,	among	others:

•making	it	more	difficult	for	us	to	raise	our	rates	and,	as	a	consequence,	to	recover	our	costs	or	earn	our	expected	rates	of return;

•changing	the	determination	of	the	costs,	or	the	amount	of	costs,	that	would	be	considered	recoverable	in	rate

cases;

•restricting	our	ability	to	terminate	our	services	to	customers	who	owe	us	money	for	services	previously	provided	or	limiting	our	bill	collection efforts;

•requiring us to provide	 water or	 wastewater services at reduced rates to certain customers;

•limiting	or	restricting	our	ability	to	acquire	water	or	wastewater	systems,	purchase	or	dispose	of	assets	or	issue	securities,	or	making	it	less	cost-effective for	us	to	do	so;

•negatively	impacting	the	deductibility	of	expenses	under	federal	or	state	tax	laws,	the	amount	of	tax	credits	or	tax	abatement	benefits	that	may	be	available, the	amount	of	taxes	owed,	or	the	ability	to	utilize	our	net	operating	loss	carryforwards;

•changing	regulations	that	affect	the	benefits	we	expected	to	receive	when	we	began	offering	services	in	a	particular

area;

•increasing	the	costs	associated	with	complying	with	environmental,	health,	safety	and	water	quality	regulations	to	which	our	operations	are subject;

•changing	or	placing	additional	limitations	on	change	in	control	requirements	relating	to	any	concentration	of	ownership	of	our	common stock;

•making	it	easier	for	governmental	entities	to	convert	our	assets	to	public	ownership	via	condemnation,	eminent	domain	or	other	similar	process,	or	for governmental	agencies	or	private	plaintiffs	to	assess	liability	against	us	for	damages	under	these	or	similar	processes;

•placing	limitations,	prohibitions	or	other	requirements	with	respect	to	the	sharing	of	information	and	participation	in	transactions	by	or	between	a	regulated subsidiary	and	us	or	our	other	affiliates,	including	Service	Company	and	any	of	our	other	subsidiaries;

•restricting	or	prohibiting	our	extraction	of	water	from	rivers,	streams,	reservoirs	or	aquifers;

•revoking	or	altering	the	terms	of	the	certificates	of	public	convenience	and	necessity	(or	similar	authorizations)	issued	to	us	by	state PUCs.

Any	of	the	foregoing	consequences	could	have	an	adverse	effect	on	our	business,	financial	condition,	results	of	operations,	cash	flows	and	liquidity.

In	addition,	new	Federal,	state	and	local	laws,	changes	in	existing	laws,	rules	or	regulations,	or	administrative	interpretations	thereof,	could	impact	us.	On December	22,	2017,	the	TCJA	was	signed	into	law,	which,	among	other	things,	enacted	significant	and	complex	changes	to	the	Internal	Revenue	Code	of	1986, including	a	reduction	in	the	maximum	U.S.	federal	corporate	income	tax	rate	from	35%	to	21%	as	of	January	1,	2018,	and	certain	other	provisions	related	specifically	to the	public	utility	industry,	including	continuation	of	interest	expense	deductibility,	the	exclusion	from	utilizing	bonus	depreciation	and	the	normalization	of	deferred income	taxes.	The	enactment	of	the	TCJA	required	a	re-measurement	of	our	deferred	income	taxes	that	materially	impacted	our	2017	results	of	operations	and	financial position.	We	have	assumed	that	the	predominant	majority	of	our	deferred	tax	assets	and	liabilities	at	our	utility	subsidiaries	will	remain	subject	to	a	normalization method	of	accounting	pursuant	to	the	U.S.	tax	code	or	applicable	PUC	regulations	and	that	we	will	be	able	to	deduct	for	U.S.	federal	corporate	income	tax	purposes substantially	all	of	our	interest	expense,	based	upon	our	interpretation	of	U.S.	tax	law	debt	allocation	methodologies	,	at	the	TCJA's	21%	corporate	tax	rate.	The adoption	or	issuance	of	any	Related	Interpretations	that	impact	these	assumptions	or	with	respect	to	provisions	related	specifically	to	the	public	utility	industry	or	to corporate	taxpayers	in	general	may	also	impact	our	future	financial	performance,	including	our	results	of	operations,	cash	flows	and	liquidity,	which	impacts	will	largely be	determined	through	future	regulatory	proceedings.	All	of	our	14	jurisdictions	subject	to	economic	regulation	have	opened	formal	proceedings	related	to	the	TCJA, and	we	have	open	rate	cases	in	three	of	them.	At	this	time,	we	cannot	predict	the	impacts	of	any	Related	Interpretations,	if	and	when	issued,	on	us,	or	the	regulatory treatment	of	the	TCJA	in	each	of	our	regulatory	jurisdictions.	Moreover,	we	are	unable	to	determine	or	predict	the	potential	impacts,	if	any,	of	any	other	new	or	amended laws,	rules	or	regulations,	or	interpretations	thereof,	to	the	extent	they	may	be	ultimately	enacted,	adopted	or	issued,	on	us	or	our	businesses,	financial	condition,	results of	operations,	cash	flows	and	liquidity.

# Service	disruptions	caused	by	severe	weather	conditions,	climate	variability	patterns	or	natural	disasters	may	disrupt	our	operations	or	reduce	the	demand	for	our water	services,	which	could	adversely	affect	our	financial	condition,	results	of	operations,	cash	flows	and	liquidity.

Service	interruptions	due	to	severe	weather,	climate	variability	patterns	and	other	natural	events	are	possible	across	all	our	businesses.	These	include,	among other	things,	storms,	freezing	conditions,	high	wind	conditions,	hurricanes,	tornadoes,	earthquakes,	landslides,	wildfires,	coastal	and	intercoastal	floods	or	high	water conditions,	including	those	in	or	near	designated	flood	plains,	severe	electrical	storms	and	solar	flares.	Weather	and	other	natural	events	such	as	these	may	affect	the condition	or	operability	of	our	facilities,	limiting	or	preventing	us	from	delivering	water	or	wastewater	services	to	our	customers,	or	requiring	us	to	make	substantial capital	expenditures	to	repair	any	damage.	Tariffs	in	place	or	cost	recovery	proceedings	with	respect	to	our	Regulated	Businesses	may	not	provide	reimbursement	to	us, in	whole	or	in	part,	for	any	of	these	impacts.

Government	restrictions	on	water	use	may	also	result	in	decreased	use	of	water	services,	even	if	our	water	supplies	are	sufficient	to	serve	our	customers,	which may	adversely	affect	our	financial	condition,	results	of	operations	and	cash	flows.	Seasonal	drought	conditions	that	may	impact	our	water	services	are	possible	across	all of	our	service	areas.	Governmental	restrictions	imposed	in	response	to	a	drought	may	apply	to	all	systems	within	a	region	independent	of	the	supply	adequacy	of	any individual	system.	As	examples,	drought	conditions	had	persisted	in	California	over	a	five-year	period,	and	had	been	declared	in	New	Jersey	in	2016.	In	2017,	these droughts	were	declared	concluded,	but	other	droughts	that	may	occur	from	time	to	time	may	result	in	the	imposition	of	voluntary	or	mandatory	water	use	targets, rationing	restrictions,	water	conservation	regulations,	and	requirements	to	minimize	water	system	leaks.	While	expenses	incurred	in	implementing	water	conservation and	rationing	plans	may	generally	be	recoverable	provided	the	relevant	PUC	determines	they	were	reasonable	and	prudent,	we	cannot	assure	that	any	such	expenses incurred	will,	in	fact,	be	fully	recovered.	Moreover,	reductions	in	water	consumption,	including	those	resulting	from	installation	of	equipment	or	changed	consumer behavior,	may	persist	even	after	drought	restrictions	are	repealed	and	the	drought	has	ended,	which	could	adversely	affect	our	business,	financial	condition,	results	of operations	and	cash	flows.

# Climate	variability	may	cause	increased	volatility	in	weather	and	may	impact	water	usage	and	related	revenue	or	require	additional	expenditures,	all	of	which	may not	be	fully	recoverable	in	rates	or	otherwise.

The	issue	of	climate	variability	is	receiving	increasing	attention	worldwide.	Some	scientific	experts	are	predicting	a	worsening	of	weather	volatility	in	the	future associated	with	climate	variability.	Many	climate	variability	predictions,	if	true,	present	several	potential	challenges	to	water	and	wastewater	utilities,	such	as:

•increased frequency and duration of droughts;

•increased	precipitation	and	flooding;

•challenges associated	 with changes in temperature	 or increases in	 ocean levels;

•potential degradation of water quality;

•decreases	in	available	water	supply	and	changes	in	water	usage	patterns;

•increases in disruptions in service;

•increased	costs to	repair	damaged	facilities; or

•increased	costs	to	reduce	risks	associated	with	the	increasing	frequency	of	natural	events,	including	to	improve	the	resiliency	and	reliability	of	our	water production	and	delivery	facilities	and	systems.

Because	of	the	uncertainty	of	weather	volatility	related	to	climate	variability,	we	cannot	predict	its	potential	impact	on	our	business,	financial	condition,	results	of operations,	cash	flows	and	liquidity.	Although	some	or	all	potential	expenditures	and	costs	with	respect	to	our	Regulated	Businesses	could	be	recovered	through	rates, infrastructure	replacement	surcharges	or	other	regulatory	mechanisms,	there	can	be	no	assurance	that	state	PUCs	would	authorize	rate	increases	to	enable	us	to	recover such	expenditures	and	costs,	in	whole	or	in	part.

# A	loss	of	one	or	more	large	industrial	customers	could	have	a	material	adverse	impact	upon	the	results	of	operations	of	one	or	more	of	our	Regulated	Businesses.

Adverse	economic	conditions	or	other	factors	can	cause	our	customers,	particularly	industrial	customers,	to	curtail	operations.	A	curtailment	of	operations	by	an industrial	customer	would	typically	result	in	reduced	water	usage	by	that	customer.	In	more	severe	circumstances,	the	decline	in	usage	could	be	permanent.	Any decrease	in	demand	resulting	from	difficult	economic	conditions	affecting	these	industrial	customers	could	adversely	affect	our	financial	condition	and	results	of operations.	Tariffs	in	place	with	respect	to	our	Regulated	Businesses	may	not	reimburse	us,	in	whole	or	in	part,	for	any	of	these	impacts.

# Our	Regulated	Businesses	require	significant	capital	expenditures	and	may	suffer	if	we	fail	to	secure	appropriate	funding	to	make	investments,	or	if	we	experience delays	in	completing	major	capital	expenditure	projects.

The	 water	 and	 wastewater	 utility	 business	 is	 capital	 intensive.	We	 invest	 significant	 amounts	 of	 capital	 to	 add,	 replace	 and	 maintain	 property,	 plant	 and equipment,	and	to	improve	aging	infrastructure.	In	2017,	we	 invested	$1.4	billion	in	net	Company-funded	capital	improvements.	The	level	of	capital	expenditures necessary	 to	maintain	 the	 integrity	of	our	systems	will	 likely	 increase	 in	 the	future.	We	expect	 to	fund	capital	 improvement	projects	using	cash	generated	from operations,	borrowings	under	our	revolving	credit	facility	and	commercial	paper	programs	and	issuances	of	long-term	debt.	We	may	not	be	able	to	access	our	revolving credit	facility	or	the	commercial	paper,	long-term	debt	and	equity	capital	markets,	when	necessary	or	desirable	to	fund	capital	improvements	on	favorable	terms	or	at	all. If	we	are	not	able	to	obtain	sufficient	financing,	we	could	be	unable	to	maintain	our	existing	property,	plant	and	equipment,	fund	our	capital	investment	strategies,	meet our	growth	targets	and	expand	our	rate	base	to	enable	us	to	earn	satisfactory	future	returns	on	our	investments.	Even	with	adequate	financial	resources	to	make	required capital	expenditures,	we	face	the	additional	risk	that	we	will	not	complete	our	major	capital	projects	on	time,	as	a	result	of	construction	delays,	permitting	delays,	labor shortages	or	other	disruptions,	environmental	restrictions,	or	other	obstacles.	Each	of	these	outcomes	could	adversely	affect	our	financial	condition,	results	of	operations and	cash	flows.

# Seasonality	could	adversely	affect	the	volume	of	water	sold	and	our	revenues.

The	volume	of	water	we	sell	during	the	warmer	months,	typically	in	the	summer,	is	generally	greater	than	during	other	months,	due	primarily	to	increased	water usage	for	irrigation	systems,	swimming	pools,	cooling	systems	and	other	applications.	Throughout	the	year,	and	particularly	during	typically	warmer	months,	the volume	of	water	sold	tends	to	vary	with	temperature,	rainfall	levels	and	rainfall	frequency.	In	the	event	that	temperatures	during	the	typically	warmer	months	are	cooler than	normal,	or	if	there	is	more	rainfall	than	normal,	the	amount	of	water	we	sell	may	decrease	and	adversely	affect	our	revenues.

Three	of	our	jurisdictions,	California,	Illinois	and	New	York,	have	adopted	revenue	stability	mechanisms,	which	permit	us	to	collect	state	PUC-authorized revenue	for	a	given	period	which	is	not	tied	to	the	volume	of	water	sold	during	that	period.	Revenue	stability	mechanisms	are	designed	to	allow	utilities	to	recover	the fixed	cost	of	operations	while	supporting	water	conservation	goals.	In	those	jurisdictions	that	have	not	adopted	a	revenue	stability	mechanism,	operating	results	could continue	to	be	affected	by	seasonality.

# Regulatory	and	environmental	risks	associated	with	the	collection,	treatment	and	disposal	of	wastewater	may	impose	significant	costs.

The	 wastewater	 collection,	 treatment	 and	 disposal	 operations	 of	 our	 subsidiaries	 are	 subject	 to	 substantial	 regulation	 and	 involve	 environmental	 risks.	 If collection,	treatment	or	disposal	systems	fail,	overflow,	or	do	not	operate	properly,	untreated	wastewater	or	other	contaminants	could	spill	onto	nearby	properties	or	into nearby	streams	and	rivers,	causing	damage	to	persons	or	property,	injury	to	aquatic	life	and	economic	damages.	This	risk	is	most	acute	during	periods	of	substantial rainfall	or	flooding,	which	are	the	main	causes	of	sewer	overflow	and	system	failure.	Liabilities	resulting	from	such	damage	could	adversely	and	materially	affect	our business,	financial	condition,	results	of	operations	and	cash	flows.

# Contamination	of	water	supplies	or	our	water	service	provided	to	our	customers	could	result	in	service	limitations	and	interruptions	and	exposure	to	substances	not typically	 found	 in	 potable	 water	 supplies,	 and	 could	 subject	 us	 and	 our	 subsidiaries	 to	 reductions	 in	 usage	 and	 other	 responsive	 obligations,	 government enforcement	actions,	damage	to	our	reputation	and	private	litigation.

The	water	supplies	that	flow	into	our	treatment	plants	or	are	delivered	through	our	distribution	system,	or	the	water	service	that	is	provided	to	our	customers,	may be	subject	to	contamination,	including,	among	other	items,	contamination	from	naturally-occurring	compounds,	chemicals	in	groundwater	systems,	pollution	resulting from	man-made	sources	(such	as	perchlorate,	methyl	tertiary	butyl	ether,	lead	and	other	materials,	chemical	spills	or	other	accidents	that	result	in	contaminants	entering the	water	source),	and	possible	terrorist	attacks.	In	addition,	new	categories	of	these	substances	continue	to	emerge	in	the	water	treatment	industry.	If	one	of	our	water supplies	or	the	water	service	provided	to	our	customers	is	contaminated,	depending	on	the	nature	of	the	contamination,	we	may	have	to	take	responsive	actions	that could	include,	among	other	things	(1)	continuing	limited	use	of	the	water	supply	under	a	"Do	Not	Use"	protective	order	that	enables	continuation	of	basic	sanitation	and essential	fire	protection,	or	(2)	interrupting	the	use	of	that	water	supply.	If	service	is	disrupted,	our	financial	condition,	results	of	operations,	cash	flows,	liquidity	and reputation	may	be	adversely	affected.	In	addition,	we	may	incur	significant	costs	in	order	to	treat	the	contaminated	source	through	the	expansion	of	our	current	treatment facilities	or	 the	development	of	new	 treatment	methods.	We	may	be	unable	 to	recover	costs	associated	with	 treating	or	decontaminating	water	supplies	 through insurance,	customer	rates,	tariffs	or	contract	terms.	Any	recovery	of	these	costs	that	we	are	able	to	obtain	through	regulatory	proceedings	or	otherwise	may	not	occur	in	a timely	manner.	Moreover,	we	could	be	subject	to	claims	for	damages	arising	from	government	enforcement	actions	or	toxic	tort	or	other	lawsuits	arising	out	of	an interruption	of	service	or	human	exposure	to	hazardous	substances	in	our	drinking	water	and	water	supplies.

In	this	regard,	on	January	9,	2014,	a	chemical	storage	tank	owned	by	Freedom	Industries,	Inc.	leaked	two	substances	into	the	Elk	River	near	the	West	Virginia- American	Water	Company	("WVAWC")	treatment	plant	intake	in	Charleston,	West	Virginia.	On	September	21,	2017,	the	U.S.	District	Court	for	the	Southern	District of	West	Virginia	granted	preliminary	approval	of	a	settlement	class	and	proposed	global	class	action	settlement	(the	"Settlement")	of	claims	involving	WVAWC	and	its affiliates	arising	out	of	the	Freedom	Industries	chemical	spill.	Under	the	terms	of	the	Settlement,	WVAWC	has	agreed	that	it	will	not	seek	rate	recovery	from	the	Public Service	 Commission	 of	 West	 Virginia	 (the	 "PSC")	 for	 the	 amounts	 paid	 by	 WVAWC,	 net	 of	 insurance	 recoveries,	 under	 the	 Settlement.	 See	 Item	 3—Legal Proceedings—West	Virginia	Elk	River	Freedom	Industries	Chemical	Spill,	which	includes	additional	information	regarding	this	matter.

Since	we	engage	in	the	business	of	providing	water	service	to	our	customers,	contamination	of	the	water	supply,	or	the	water	service	provided	to	our	customers, could	result	in	substantial	injury	or	damage	to	our	customers,	employees	or	others	and	we	could	be	exposed	to	substantial	claims	and	litigation.	Such	claims	could	relate to,	among	other	things,	personal	injury,	loss	of	life,	business	interruption,	property	damage,	pollution,	and	environmental	damage	and	may	be	brought	by	our	customers or	third	parties.	Litigation	and	regulatory	proceedings	are	subject	to	inherent	uncertainties	and	unfavorable	rulings	can	and	do	occur,	and	we	may	not	be	protected	from these	claims	or	negative	impacts	therefrom	in	whole	or	in	part	by	tariffs	or	other	contract	terms.	Negative	impacts	to	our	reputation	may	occur	even	if	we	are	not	liable for	any	contamination	or	other	environmental	damage	or	the	consequences	arising	out	of	human	exposure	to	contamination	or	hazardous	substances	in	the	water	or water	supplies.	In	addition,	insurance	coverage	may	not	cover	all	or	a	portion	of	these	losses,	and	are	subject	to	deductibles	and	other	limitations.	Pending	or	future claims	against	us	could	have	a	material	adverse	impact	on	our	business,	financial	condition,	results	of	operations	and	cash	flows.

# We	may	sustain	losses	that	exceed	or	are	excluded	from	our	insurance	coverage	or	for	which	we	are	self-insured.

We	maintain	insurance	coverage	as	part	of	our	overall	legal	and	risk	management	strategy	to	minimize	potential	liabilities	arising	from	our	utility	operations,	as well	as	the	operations	of	our	Market-Based	Businesses.	Our	insurance	programs	have	varying	coverage	limits,	exclusions	and	maximums,	and	insurance	companies	may seek	to	deny	claims	we	might	make.	Generally,	our	insurance	policies	cover	property	damage,	worker's	compensation,	employer's	liability,	general	liability,	terrorism risks	and	automobile	liability.	Each	policy	includes	deductibles	or	self-insured	retentions	and	policy	limits	for	covered	claims.	As	a	result,	we	may	sustain	losses	that exceed	or	that	are	excluded	from	our	insurance	coverage	or	for	which	we	are	self-insured.

Although	in	the	past	we	have	been	generally	able	to	cover	our	insurance	needs,	there	can	be	no	assurance	that	we	can	secure	all	necessary	or	appropriate insurance	in	the	future,	or	that	such	insurance	can	be	economically	secured.	For	example,	catastrophic	events	can	result	in	decreased	coverage	limits,	more	limited coverage,	increased	premium	costs	or	deductibles.

# We	are	subject	to	adverse	publicity	and	reputational	risks,	which	make	us	vulnerable	to	negative	customer	perception	and	could	lead	to	increased	regulatory oversight	or	other	sanctions.

Water	and	wastewater	utilities,	including	our	regulated	subsidiaries	and	our	Market-Based	Businesses,	have	a	large	direct	and	indirect	customer	base	and	as	a result	are	exposed	to	public	criticism	regarding,	among	other	things,	the	reliability	of	their	water,	wastewater	and	related	or	ancillary	services,	the	quality	of	water provided,	and	the	amount,	timeliness,	accuracy	and	format	of	bills	that	are	provided	for	such	services.	Adverse	publicity	and	negative	consumer	sentiment	may	render legislatures	and	other	governing	bodies,	state	PUCs	and	other	regulatory	authorities,	and	government	officials	less	likely	to	view	us	in	a	favorable	light,	and	may	cause us	to	be	susceptible	to	less	favorable	legislative,	regulatory	and	economic	outcomes,	as	well	as	increased	regulatory	or	other	oversight	and	more	stringent	regulatory	or economic	requirements.	Unfavorable	regulatory	and	economic	outcomes	may	include	the	enactment	of	more	stringent	laws	and	regulations	governing	our	operations and	less	favorable	economic	terms	in	our	agreements	related	to	our	Market-Based	Businesses,	as	well	as	fines,	penalties	or	other	sanctions	or	requirements.	The imposition	of	any	of	the	foregoing	could	have	a	material	negative	impact	on	us	and	our	financial	condition,	results	of	operations	and	cash	flows.

# The	failure	of,	or	the	requirement	to	repair,	upgrade	or	dismantle,	any	of	our	dams	may	adversely	affect	our	financial	condition,	results	of	operations,	cash	flows and	liquidity.

The	properties	of	our	Regulated	Businesses	segment	include	80	dams,	a	failure	of	any	of	which	could	result	in	personal	injury	and	downstream	property	damage for	which	we	may	be	liable.	The	failure	of	a	dam	would	also	adversely	affect	our	ability	to	supply	water	in	sufficient	quantities	to	our	customers	and	could	adversely affect	our	financial	condition	and	results	of	operations.	Any	losses	or	liabilities	incurred	due	to	a	failure	of	one	of	our	dams	might	not	be	covered	by	insurance	policies or	be	recoverable	in	rates,	and	such	losses	may	make	it	difficult	for	us	to	secure	insurance	at	acceptable	rates	in	the	future.

We	also	are	required	from	time	to	time	to	decommission,	repair	or	upgrade	the	dams	that	we	own.	The	cost	of	such	repairs	or	upgrades	can	be	and	has	been material.	The	federal	and	state	agencies	that	regulate	our	operations	may	adopt	rules	and	regulations	requiring	us	to	dismantle	our	dams,	which	also	could	entail	material costs.	Although	in	most	cases,	the	PUC	has	permitted	recovery	of	expenses	and	capital	investment	related	to	dam	rehabilitation,	we	might	not	be	able	to	recover	costs	of repairs,	upgrades	or	dismantling	through	rates	in	the	future.	The	inability	to	recover	these	costs	or	delayed	recovery	of	the	costs	as	a	result	of	regulatory	lag	can	affect our	financial	condition,	results	of	operations,	cash	flows	and	liquidity.

# Any	failure	of	our	network	of	water	and	wastewater	pipes	and	water	reservoirs	could	result	in	losses	and	damages	that	may	affect	our	financial	condition	and reputation.

Our	operating	subsidiaries	distribute	water	and	collect	wastewater	through	an	extensive	network	of	pipes	and	storage	systems	located	across	the	United	States.	A failure	of	major	pipes	or	reservoirs	could	result	in	injuries	and	property	damage	for	which	we	may	be	liable.	The	failure	of	major	pipes	and	reservoirs	may	also	result	in the	need	to	shut	down	some	facilities	or	parts	of	our	network	in	order	to	conduct	repairs.	Such	failures	and	shutdowns	may	limit	our	ability	to	supply	water	in	sufficient quantities	to	our	customers	and	to	meet	the	water	and	wastewater	delivery	requirements	prescribed	by	government	regulators,	including	state	PUCs	with	jurisdiction	over our	operations,	and	adversely	affect	our	financial	condition,	results	of	operations,	cash	flows,	liquidity	and	reputation.	Any	business	interruption	or	other	losses	might not	be	covered	by	insurance	policies	or	be	recoverable	in	rates,	and	such	losses	may	make	it	difficult	for	us	to	secure	insurance	at	acceptable	rates	in	the	future. Moreover,	to	the	extent	such	business	interruptions	or	other	losses	are	not	covered	by	insurance,	they	may	not	be	recovered	through	rate	adjustments.

An	 important	 part	 of	 our	 growth	 strategy	 is	 the	 acquisition	 of	 water	 and	 wastewater	 systems,	 which	 involves	 risks,	 including	 competition for	 acquisition opportunities	from	other	regulated	utilities,	governmental	entities	and	other	buyers,	that	may	hinder	or	limit	our	ability	to	grow	our	business.

An	important	element	of	our	growth	strategy	is	the	acquisition	of	water	and	wastewater	systems	in	order	to	broaden	our	current,	and	move	into	new,	service	areas. We	may	not	be	able	to	acquire	other	businesses	if	we	cannot	identify	suitable	acquisition	opportunities	or	reach	mutually	agreeable	terms	with	acquisition	candidates. Further,	competition	for	acquisition	opportunities	from	other	regulated	utilities,	governmental	entities,	and	other	buyers	may	hinder	our	ability	to	expand	our	business.

The	negotiation	of	potential	acquisitions	as	well	as	the	integration	of	acquired	businesses	with	our	existing	operations	could	require	us	to	incur	significant	costs and	cause	diversion	of	our	management's	time	and	resources.	Future	acquisitions	by	us	could	result	in,	among	other	things:

•incurrence	or	assumption	of	debt,	contingent	liabilities	and	environmental	liabilities	of	or	with	respect	to	an	acquired	business,	including	liabilities	that were	unknown	at	the	time	of	acquisition;

•failure	to	recover	acquisition	premiums;

•unanticipated	capital	expenditures;

•failure	 to maintain effective internal control over financial reporting;

•recording	 goodwill	 and	 other intangible	 assets	 at	 values that	 ultimately	 may	 be	 subject to impairment charges;

# •fluctuations	in	quarterly	results;

•unanticipated acquisition-related expenses;

•failure	to	realize	anticipated	benefits,	such	as	cost	savings	and	revenue	enhancements; and

•difficulties in assimilating personnel, benefits, services and systems.

Some	or	all	of	these	items	could	have	a	material	adverse	effect	on	our	business.	The	businesses	we	acquire	in	the	future	may	not	achieve	anticipated	sales	and profitability,	and	any	difficulties	we	encounter	in	the	integration	process	could	interfere	with	our	operations,	reduce	our	operating	margins	and	adversely	affect	our internal	control	over	financial	reporting.

We	compete	with	governmental	entities,	other	regulated	utilities,	and	strategic	and	financial	buyers	for	acquisition	opportunities.	If	consolidation	becomes	more prevalent	in	the	water	and	wastewater	industries	and	competition	for	acquisitions	increases,	the	prices	for	suitable	acquisition	candidates	may	increase	and	limit	our ability	to	expand	through	acquisitions.

# Our	Regulated	Businesses	are	subject	to	condemnation	and	other	proceedings	through	eminent	domain	or	other	similar	authorized	process,	which	could	materially and	adversely	affect	their	results	of	operations	and	financial	condition.

Municipalities	and	other	government	subdivisions	have	historically	been	involved	in	the	provision	of	water	and	wastewater	services	in	the	United	States,	and organized	efforts	may	arise	from	time	to	time	in	one	or	more	of	the	service	areas	in	which	our	Regulated	Businesses	operate	to	convert	our	assets	to	public	ownership and	operation	through	exercise	of	the	governmental	power	of	eminent	domain,	or	another	similar	authorized	process.	Should	a	municipality	or	other	government subdivision	or	a	citizen	group	seek	to	acquire	our	assets	through	eminent	domain	or	such	other	process,	either	directly	or	indirectly	as	a	result	of	a	citizen	petition,	we may	resist	the	acquisition.

Furthermore,	the	law	in	certain	jurisdictions	in	which	our	Regulated	Businesses	operate,	including,	for	example,	California,	provide	for	eminent	domain	rights allowing	private	property	owners	to	seek	just	compensation	against	a	public	utility	if	the	public	utility's	infrastructure	has	been	determined	to	be	a	substantial	cause	of damage	to	that	property.	In	these	actions,	the	plaintiff	would	not	have	to	prove	that	the	public	utility	acted	negligently.	These	actions	have	occurred	in	connection	with events	such	as	floods,	mudslides	and	debris	flow,	broken	water	mains,	landslides	and	wild	and	brush	fires.

Contesting	an	exercise	of	condemnation,	eminent	domain	or	other	similar	process,	or	responding	to	a	citizen	petition,	may	result	in	costly	legal	proceedings	and may	divert	the	attention	of	management	of	affected	Regulated	Businesses	from	the	operation	of	those	businesses.	Moreover,	our	efforts	to	resist	the	condemnation, eminent	domain	or	other	process	may	not	be	successful,	which	may	require	us	to	sell	the	operations	at	issue	in	a	condemnation	proceeding	or	to	pay	a	private	property owner	compensation	for	the	property	damage	suffered.	If	a	municipality	or	other	government	subdivision	succeeds	in	acquiring	the	assets	of	one	or	more	of	our Regulated	Businesses	through	eminent	domain	or	other	process,	there	is	a	risk	that	we	will	not	receive	adequate	compensation	for	the	business,	that	we	will	not	be	able to	keep	the	compensation,	or	that	we	will	not	be	able	to	divest	the	business	without	incurring	significant	charges.	Any	of	these	outcomes	may	have	a	material	adverse effect	on	our	business,	results	of	operations,	financial	condition,	cash	flows	and	liquidity.

# We	rely	on	technology	systems	to	facilitate	the	management	of	our	business	and	customer	and	supplier	relationships,	and	a	disruption	of	these	systems	could adversely	affect	our	business.

Our	technology	systems,	particularly	our	operational	technology	and	IT	systems,	are	an	integral	part	of	our	business,	and	any	disruption	of	these	systems	could significantly	limit	our	ability	to	manage	and	operate	our	business	efficiently,	which,	in	turn,	could	cause	our	business	and	competitive	position	to	suffer	and	adversely affect	our	results	of	operations.	For	example,	we	depend	on	these	systems	to	bill	customers,	process	orders,	provide	customer	service,	manage	certain	plant	operations and	construction	projects,	manage	our	financial	records,	track	assets,	remotely	monitor	certain	of	our	plants	and	facilities	and	manage	human	resources,	inventory	and accounts	receivable	collections.	These	systems	also	enable	us	to	purchase	products	from	our	suppliers	and	bill	customers	on	a	timely	basis,	maintain	cost-effective operations	and	provide	service	to	our	customers.

Although	we	do	not	believe	that	these	systems	are	at	a	materially	greater	risk	of	failure	or	cybersecurity	incidents	than	other	similar	organizations,	our	operational technology	and	IT	systems	remain	vulnerable	to	damage	or	interruption	from:

•power loss, computer systems failures, and internet, telecommunications or data network failures;

•operator	 error or improper operation by, or the negligent or improper supervision of, employees and contractors;

•physical	and	electronic	loss	of	customer	or	employee	data	due	to	security	breaches,	cyber	attacks,	misappropriation	and	similar events;

# •computer

viruses;

•intentional	security	breaches,	hacking,	denial	of	services	actions,	misappropriation	of	data	and	similar	events; and

•severe	 weather	 and	 other	 events, including	 without limitation,	 hurricanes, tornadoes, fires, floods,	 earthquakes	 and	 other disasters.

These	 events	 may	 result	 in	 physical	 and	 electronic	 loss	 of	 customer,	 employee	 or	 financial	 data,	 security	 breaches,	 misappropriation	 and	 other	 adverse consequences.	In	addition,	a	lack	of	or	inadequate	levels	of	redundancy	for	certain	of	these	systems,	including	billing	systems,	could	exacerbate	the	impact	of	any	of these	events	on	us.	We	may	not	be	successful	in	developing	or	acquiring	technology	that	is	competitive	and	responsive	to	the	needs	of	our	business,	and	we	might	lack sufficient	resources	to	make	the	necessary	upgrades	or	replacements	of	outdated	existing	technology	to	enable	us	to	continue	to	operate	at	our	current	level	of	efficiency.

# We	may	be	subject	to	physical	and/or	cyber	attacks.

As	operators	of	critical	infrastructure,	we	may	face	a	heightened	risk	of	physical	and/or	cyber	attacks.	Our	water	and	wastewater	systems	may	be	vulnerable	to disability	or	failures	as	a	result	of	physical	or	cyber	acts	of	war	or	terrorism,	vandalism	or	other	causes.	Our	operational	technology	and	IT	systems	throughout	our businesses	may	be	vulnerable	to	unauthorized	access	due	to	hacking,	viruses,	acts	of	war	or	terrorism,	and	other	causes.	Unauthorized	access	to	confidential	information located	or	stored	on	these	systems	could	negatively	and	materially	impact	our	customers,	employees,	suppliers	and	other	third	parties.	While	we	have	instituted	certain safeguards	to	protect	our	operational	technology	and	IT	systems,	those	safeguards	may	not	always	be	effective	due	to	the	evolving	nature	of	cyber	attacks	and	cyber vulnerabilities.	We	cannot	guarantee	that	such	protections	will	be	completely	successful	in	the	event	of	a	cyber	attack.

If,	despite	our	security	measures,	a	significant	physical	attack	or	cyber	breach	occurred,	our	operations	could	be	disrupted,	property	damaged,	and	customer	and other	confidential	information	lost	or	stolen;	experience	substantial	loss	of	revenues,	response	costs	and	other	financial	loss;	suffer	a	loss	of	management	time,	attention and	resources	from	our	regular	business	operations;	and	be	subject	to	increased	regulation,	litigation,	and	damage	to	our	reputation,	any	of	which	could	have	a	negative impact	on	our	business,	results	of	operations	and	cash	flows.	These	types	of	events,	either	impacting	our	facilities	or	the	industry	in	general,	could	also	cause	us	to	incur additional	security	and	insurance	related	costs.	Losses	resulting	from	a	physical	or	cyber	attack	against	us	or	our	operations	or	assets	may	not	be	covered	by,	or	may exceed	the	coverage	provided	by,	applicable	insurance	policies.

In	addition,	in	the	ordinary	course	of	business,	we	collect	and	retain	sensitive	information,	including	personally	identifiable	information,	about	our	customers	and employees.	In	many	cases,	we	outsource	administration	of	certain	functions	to	vendors	that	could	be	targets	of	cyber	attacks.	Any	theft,	loss	and/or	fraudulent	use	of customer,	employee	or	proprietary	data	as	a	result	of	a	cyber	attack	could	subject	us	to	significant	litigation,	liability	and	costs,	as	well	as	adversely	impact	our reputation	with	customers	and	regulators,	among	others.

# Our	inability	to	efficiently	upgrade	and	improve	our	operational	technology	and	IT	systems,	or	implement	new	systems,	could	result	in	higher	than	expected	costs	or otherwise	adversely	impact	our	internal	controls	environment,	operations	and	profitability.

Upgrades	and	improvements	to	computer	systems	and	networks,	or	the	implementation	of	new	systems,	may	require	substantial	amounts	of	management's	time and	financial	resources	to	complete,	and	may	also	result	in	system	or	network	defects	or	operational	errors	due	to	multiple	factors,	including	employees'	ability	to effectively	use	the	new	or	upgraded	system.	We	continue	to	implement	technology	to	improve	our	business	processes	and	customer	interactions,	and	have	installed	new, and	upgraded	existing,	technology	systems.	These	efforts	support	our	broader	strategic	initiatives	and	are	intended	to	improve	our	operations	and	enhance	our	customer service	capabilities.	Any	technical	or	other	difficulties	in	upgrading	and	improving	existing	or	implementing	new	technology	systems	may	increase	costs	beyond	those anticipated	and	have	an	adverse	or	disruptive	effect	on	our	operations	and	reporting	processes,	including	our	internal	control	over	financial	reporting.	We	may	also experience	difficulties	integrating	current	systems	with	new	or	upgraded	systems,	which	may	impact	our	ability	to	serve	our	customers	effectively	or	efficiently. Although	we	make	efforts	to	minimize	any	adverse	impact	on	our	controls,	business	and	operations,	we	cannot	assure	that	all	such	impacts	have	been	or	will	be mitigated,	and	any	such	impacts	could	harm	our	business	(individually	or	collectively)	and	have	a	material	adverse	effect	on	our	results	of	operations,	financial	condition and	cash	flows.

Our	business	has	inherently	dangerous	workplaces.	If	we	fail	to	maintain	safe	work	sites,	we	may	experience	workforce	injuries	or	loss	of	life,	and	be	exposed	to financial	losses,	including	penalties	and	other	liabilities.

Our	safety	record	is	critical	to	our	reputation.	We	maintain	health	and	safety	standards	to	protect	our	employees,	customers,	contractors,	vendors	and	the	public. Although	we	intend	to	adhere	to	such	health	and	safety	standards	and	aim	for	zero	injuries,	it	is	extremely	difficult	to	avoid	accidents	at	all	times.

Our	business	sites,	 including	construction	and	maintenance	sites,	often	put	our	employees,	contractors	and	others	 in	close	proximity	with	 large	pieces	of equipment,	moving	vehicles,	pressurized	water,	underground	trenches	and	vaults,	chemicals	and	other	regulated	materials.	On	many	sites	we	are	responsible	for	safety and,	accordingly,	must	implement	safety	procedures.	If	we	fail	to	implement	such	procedures	or	if	the	procedures	we	implement	are	ineffective	or	are	not	followed	by our	employees	or	others,	our	employees,	contractors	and	others	may	be	injured	or	die.	Unsafe	work	sites	also	have	the	potential	to	increase	employee	turnover,	expose us	to	litigation	and	raise	our	operating	costs.	Any	of	the	foregoing	could	result	in	financial	losses,	which	could	have	a	material	adverse	impact	on	our	business,	financial condition,	results	of	operations	and	cash	flows.

In	addition,	our	operations	can	involve	the	handling	and	storage	of	hazardous	chemicals,	which,	if	improperly	handled,	stored	or	disposed	of,	could	subject	us	to penalties	or	other	liabilities.	We	are	also	subject	to	regulations	dealing	with	occupational	health	and	safety.	Although	we	maintain	functional	employee	groups	whose primary	purpose	is	to	ensure	we	implement	effective	health,	safety,	and	environmental	work	procedures	throughout	our	organization,	including	construction	sites	and maintenance	sites,	the	failure	to	comply	with	such	regulations	or	procedures	could	subject	us	to	liability.

# Work	stoppages	and	other	labor	relations	matters	could	adversely	affect	our	results	of	operations.

As	of	December	31,	2017,	approximately	46%	of	our	workforce	was	represented	by	unions,	and	we	had	76	collective	bargaining	agreements	in	place	with	19 different	unions	representing	our	unionized	employees.	These	collective	bargaining	agreements,	including	35	which	expired	in	2017,	and	20	which	will	expire	during 2018,	are	subject	to	periodic	renewal	and	renegotiation.	Moreover,	our	national	benefits	agreement	with	most	of	the	labor	unions	that	represent	employees	in	our Regulated	Businesses	expires	on	July	31,	2018	and	will	be	renegotiated	during	2018.	We	may	not	be	able	to	successfully	renew	or	renegotiate	these	labor	contracts	on terms	that	are	fair	to	us.	Any	negotiations	or	dispute	resolution	processes	undertaken	in	connection	with	our	labor	contracts	could	be	delayed	or	affected	by	labor	actions or	work	stoppages.	Labor	actions,	work	stoppages	or	the	threat	of	work	stoppages,	and	our	failure	to	obtain	favorable	labor	contract	terms	during	renegotiations,	may disrupt	our	operations	and	result	in	higher	labor	costs,	which	could	adversely	affect	our	financial	condition,	results	of	operations,	cash	flows	and	liquidity.	While	we have	developed	contingency	plans	to	be	implemented	as	necessary	if	a	work	stoppage	or	strike	does	occur,	a	strike	or	work	stoppage	may	have	a	material	adverse	impact on	our	financial	position,	results	of	operations	and	cash	flows.

# Our	continued	success	is	dependent	upon	our	ability	to	hire,	retain,	and	utilize	qualified	personnel.

The	success	of	our	business	is	dependent	upon	our	ability	to	hire,	retain,	and	utilize	qualified	personnel,	including	engineers,	licensed	operators,	water	quality	and other	operating	and	craft	personnel,	and	management	professionals	who	have	the	required	experience	and	expertise.	From	time	to	time,	it	may	be	difficult	to	attract	and retain	qualified	individuals	with	the	expertise	and	in	the	timeframe	demanded	for	our	business	needs.	In	certain	geographic	areas,	for	example,	we	may	not	be	able	to satisfy	the	demand	for	our	services	because	of	our	inability	to	successfully	hire	and	retain	qualified	personnel.

In	addition,	as	some	of	our	key	personnel	approach	retirement	age,	we	need	to	have	appropriate	succession	plans	in	place	and	to	successfully	implement	such plans.	If	we	cannot	attract	and	retain	qualified	personnel	or	effectively	implement	appropriate	succession	plans,	it	could	have	a	material	adverse	impact	on	our	business, financial	condition,	results	of	operations	and	cash	flows.

# Financial	and	Market-Related	Risks

Our	indebtedness	could	affect	our	business	adversely	and	limit	our	ability	to	plan	for	or	respond	to	changes	in	our	business,	and	we	may	be	unable	to	generate sufficient	cash	flows	to	satisfy	our	liquidity	needs.

As	of	December	31,	2017,	our	aggregate	long-term	and	short-term	debt	balance	(including	preferred	stock	with	mandatory	redemption	requirements)	was	$7.7 billion,	and	our	working	capital	(defined	as	current	assets	less	current	liabilities)	was	in	a	deficit	position.	Our	indebtedness	could	have	important	consequences, including:

•limiting	 our ability to obtain additional financing to fund future	 working capital requirements or capital expenditures;

•exposing	us	to	interest	rate	risk	with	respect	to	the	portion	of	our	indebtedness	that	bears	interest	at	variable rates;

•limiting	 our	 ability to	 pay	 dividends	 on	 our	 common stock	 or	 make	 payments in	 connection	 with	 our	 other obligations;

•impairing	 our access to the capital	 markets for	 debt and equity;

•requiring	that	an	increasing	portion	of	our	cash	flows	from	operations	be	dedicated	to	the	payment	of	the	principal	and	interest	on	our	debt,	thereby reducing	funds	available	for	future	operations,	dividends	on	our	common	stock	or	capital	expenditures;

•limiting	our	ability	to	take	advantage	of	significant	business	opportunities,	such	as	acquisition	opportunities,	and	to	react	to	changes	in	market	or	industry conditions;	and

•placing	us	at	a	competitive	disadvantage	compared	to	those	of	our	competitors	that	have	less debt.

In	order	to	meet	our	capital	expenditure	needs,	we	may	be	required	to	make	additional	borrowings	under	our	revolving	credit	facility	or	issue	new	short-term	and long-term	debt	securities.	Moreover,	additional	borrowings	may	be	required	to	refinance	outstanding	indebtedness.	Debt	maturities	and	sinking	fund	payments	in	2018, 2019	and	2020	will	be	$322	million,	$170	million	and	$51	million,	respectively.	We	can	provide	no	assurance	that	we	will	be	able	to	access	the	debt	capital	markets	on favorable	terms,	if	at	all.	Moreover,	if	new	debt	is	added	to	our	current	debt	levels,	the	related	risks	we	now	face	could	intensify,	limiting	our	ability	to	refinance	existing debt	on	favorable	terms.

In	an	attempt	to	manage	our	exposure	to	interest	rate	risk	associated	with	our	issuance	of	variable	and	fixed-rate	debt,	we	have	entered	into,	and	in	the	future	may enter	into,	financial	derivative	instruments,	including	without	limitation,	interest	rate	swaps,	forward	starting	swaps,	swaptions	and	U.S.	Treasury	lock	agreements.	See Item	7A—Quantitative	and	Qualitative	Disclosures	About	Market	Risk.	However,	these	efforts	may	not	be	effective	to	fully	mitigate	interest	rate	risk,	and	may	expose us	to	other	risks	and	uncertainties,	including	quarterly	"mark	to	market"	valuation	risk	associated	with	these	instruments,	that	could	negatively	and	materially	affect	our financial	condition,	results	of	operations	and	cash	flows.

We	will	depend	primarily	on	cash	flows	from	operations	to	fund	our	expenses	and	to	pay	the	principal	and	interest	on	our	outstanding	debt.	Therefore,	our	ability to	pay	our	expenses	and	satisfy	our	debt	service	obligations	depends	on	our	future	performance,	which	will	be	affected	by	financial,	business,	economic,	competitive, legislative	(including	tax	initiatives	and	reforms,	and	other	similar	legislation	or	regulation),	regulatory	and	other	factors	largely	beyond	our	control.	If	we	do	not	have sufficient	cash	flows	 to	pay	 the	principal	and	 interest	on	our	outstanding	debt,	we	may	be	required	 to	refinance	all	or	part	of	our	existing	debt,	reduce	capital investments,	sell	assets,	borrow	additional	funds	or	sell	additional	equity.	In	addition,	if	our	business	does	not	generate	sufficient	cash	flows	from	operations,	or	if	we	are unable	to	incur	indebtedness	sufficient	to	enable	us	to	fund	our	liquidity	needs,	we	may	be	unable	to	plan	for	or	respond	to	changes	in	our	business,	which	could	cause our	financial	condition,	operating	results	and	prospects	to	be	affected	adversely.

# Our	inability	to	access	the	capital	or	financial	markets	or	other	events	could	affect	our	ability	to	meet	our	liquidity	needs	at	reasonable	cost	and	our	ability	to	meet long-term	commitments,	which	could	adversely	affect	our	financial	condition	and	results	of	operations.

In	addition	to	cash	from	operations,	we	rely	primarily	on	our	revolving	credit	facility,	commercial	paper	programs,	and	the	capital	markets	to	satisfy	our	liquidity needs.	In	this	regard,	our	principal	external	sources	of	short-term	liquidity	are	our	$1.6	billion	commercial	paper	program	and	our	$1.75	billion	revolving	credit	facility. Our	revolving	credit	facility	expires	in	accordance	with	its	terms	in	June	2020.	We	regularly	use	our	commercial	paper	program	under	this	revolving	credit	facility	as	a principal	source	of	short-term	borrowing	due	to	the	generally	more	attractive	rates	we	generally	can	obtain	in	the	commercial	paper	market.	As	of	December	31,	2017, American	Water	Capital	Corp.	("AWCC"),	our	wholly	owned	financing	subsidiary,	had	no	outstanding	borrowings	under	the	revolving	credit	facility,	and	had	 $905 million	of	commercial	paper	outstanding	and	$84	million	in	outstanding	letters	of	credit.	There	can	be	no	assurance	that	AWCC	will	be	able	to	continue	to	access	its commercial	paper	program	or	its	revolving	credit	facility,	when,	as	and	if	desired,	or	that	the	amount	of	capital	available	thereunder	will	be	sufficient	to	meet	all	of	our liquidity	needs	at	a	reasonable,	or	any,	cost.

Under	the	terms	of	our	revolving	credit	facility,	our	consolidated	debt	cannot	exceed	70%	of	our	consolidated	capitalization,	as	determined	under	the	terms	of	the credit	facility.	If	our	equity	were	to	decline	or	debt	were	to	increase	to	a	level	that	caused	our	debt	to	exceed	this	limit,	lenders	under	the	credit	facility	would	be	entitled to	refuse	any	further	extension	of	credit	and	to	declare	all	of	the	outstanding	debt	under	the	credit	facility	immediately	due	and	payable.	To	avoid	such	a	default,	a waiver	or	renegotiation	of	this	covenant	would	be	required,	which	would	likely	increase	funding	costs	and	could	result	in	additional	covenants	that	would	restrict	our operational	and	financing	flexibility.

Our	ability	to	comply	with	this	and	other	covenants	contained	in	the	revolving	credit	facility	and	our	other	consolidated	indebtedness	is	subject	to	various	risks and	uncertainties,	including	events	beyond	our	control.	For	example,	events	that	could	cause	a	reduction	in	equity	include,	without	limitation,	a	significant	write-down	of our	goodwill.	Even	if	we	are	able	to	comply	with	this	or	other	covenants,	the	limitations	on	our	operational	and	financial	flexibility	could	harm	our	business	by,	among other	things,	limiting	our	ability	to	incur	indebtedness	or	reduce	equity	in	connection	with	financings	or	other	corporate	opportunities	that	we	may	believe	would	be	in our	best	interests	or	the	interests	of	our	stockholders	to	complete.

Disruptions	in	the	capital	markets	or	changes	in	our	credit	ratings	could	also	limit	our	ability	to	access	capital	on	terms	favorable	to	us	or	at	all.	While	the	lending banks	that	participate	in	our	revolving	credit	facility	have	met	all	of	their	obligations,	disruptions	in	the	credit	markets,	changes	in	our	credit	ratings,	or	deterioration	of the	 banking	 industry's	 financial	 condition	 could	 discourage	 or	 prevent	 lenders	 from	 meeting	 their	 existing	 lending	 commitments,	 extending	 the	 terms	 of	 such commitments,	or	agreeing	to	new	commitments.	These	or	other	occurrences	may	cause	our	lenders	to	not	meet	their	existing	commitments,	and	we	may	not	be	able	to access	 the	commercial	paper	or	 loan	or	debt	markets	 in	 the	future	on	 terms	acceptable	 to	us	or	at	all.	Furthermore,	our	 inability	 to	maintain,	renew	or	replace commitments	under	this	facility	could	materially	increase	our	cost	of	capital	and	adversely	affect	our	financial	condition,	results	of	operations	and	liquidity.	Longer	term disruptions	in	the	capital	and	credit	markets	as	a	result	of	uncertainty,	including	as	a	result	of	changes	in	U.S.	tax	and	other	laws,	reduced	financing	alternatives,	or failures	of	significant	financial	institutions	could	adversely	affect	our	access	to	the	liquidity	needed	for	our	business.	Any	significant	disruption	in	the	capital,	debt	or credit	markets,	or	financial	institution	failures	could	require	us	to	take	measures	to	conserve	cash	until	the	market	stabilizes	or	until	alternative	financing	can	be arranged.	Such	measures	could	include	deferring	capital	expenditures,	reducing	or	suspending	dividend	payments,	and	reducing	other	discretionary	expenditures.

Any	of	the	foregoing	events	that	impede	our	access	to	the	capital	markets,	or	the	failure	of	any	of	our	lenders	to	meet	their	commitments	that	result	from	financial market	disruptions,	could	expose	us	to	increased	interest	expense,	require	us	to	institute	cash	conservation	measures	or	otherwise	adversely	and	materially	affect	our business,	financial	condition,	results	of	operations,	cash	flows	and	liquidity.

# American	Water	may	be	unable	to	meet	its	ongoing	and	future	financial	obligations	and	to	pay	dividends	on	its	common	stock	if	its	subsidiaries	are	unable	to	pay upstream	dividends	or	repay	funds	to	American	Water.

American	Water	is	a	holding	company	and,	as	such,	American	Water	has	no	operations	of	its	own.	Substantially	all	of	our	consolidated	assets	are	held	by subsidiaries.	American	Water's	ability	to	meet	its	financial	obligations	and	to	pay	dividends	on	its	common	stock	is	primarily	dependent	on	the	net	income	and	cash flows	of	its	subsidiaries	and	their	ability	to	pay	upstream	dividends	to	American	Water	or	repay	indebtedness	to	American	Water.	Prior	to	paying	dividends	to	American Water,	American	Water's	regulated	subsidiaries	must	comply	with	applicable	regulatory	restrictions	and	financial	obligations,	including,	for	example,	debt	service	and preferred	and	preference	stock	dividends,	as	well	as	applicable	corporate,	tax	and	other	laws	and	regulations	and	agreements,	and	covenants	and	other	agreements	made or	entered	into	by	American	Water	and	its	subsidiaries.	American	Water's	subsidiaries	are	separate	legal	entities	and	have	no	obligation	to	pay	dividends	to	American Water.	A	failure	or	inability	of	any	of	these	subsidiaries	to	pay	such	dividends	or	repay	intercompany	obligations	could	have	a	material	adverse	impact	on	American Water's	liquidity	and	its	ability	to	pay	dividends	on	its	common	stock	and	meet	its	other	obligations.

# We	may	not	be	able	to	fully	utilize	our	U.S.	and	state	net	operating	loss	carryforwards.

As	of	December	31,	2017,	we	had	U.S.	federal	and	state	NOL	carryforwards	of	approximately	$1.05	billion	 and	$322	million,	respectively,	and	management believes	it	is	more	likely	than	not	that	these	NOL	carryforwards	will	be	recovered	in	the	future.	With	the	enactment	of	the	TCJA,	the	Company	analyzed	the	impacts	of the	reduction	in	the	U.S.	federal	corporate	income	tax	rate	from	35%	to	21%	on	the	Company's	deferred	tax	assets	and	liabilities,	including	its	NOL	carryforwards,	and as	a	result,	remeasured	those	NOL	carryforwards	as	of	the	date	of	enactment	of	the	TCJA	based	on	this	tax	rate	change.

Our	federal	NOL	carryforwards	will	begin	to	expire	in	2028,	and	our	state	NOL	carryforwards	will	begin	to	expire	in	2018	through	2037.	Our	ability	to	utilize	our NOL	carryforwards	is	primarily	dependent	upon	our	ability	to	generate	sufficient	taxable	income.	We	have,	in	the	past,	been	unable	to	utilize	certain	of	our	state	NOL carryforwards,	and	the	establishment	or	increase	of	a	valuation	allowance	in	the	future	would	reduce	our	deferred	income	tax	assets	and	our	net	income.

Our	actual	results	may	differ	from	those	estimated	by	management	in	making	its	assessment	as	to	our	ability	to	use	the	NOL	carryforwards.	Moreover,	adoption of	Related	Interpretations	with	respect	to	the	TCJA	and	other	changes	in	income	tax	laws,	the	economy	and	the	general	business	environment	could	affect	the	future utilization	of	our	NOL	carryforwards.	If	we	are	unable	to	fully	utilize	our	NOL	carryforwards	to	offset	taxable	income	generated	in	the	future,	our	financial	position, results	of	operations	and	cash	flows	could	be	materially	adversely	affected.

# We	have	recorded	a	significant	amount	of	goodwill,	and	we	may	never	realize	the	full	value	of	our	intangible	assets,	causing	us	to	record	impairments	that	may negatively	affect	our	results	of	operations.

Our	 total	assets	 include	$1.4	billion	of	goodwill	at	December	31,	2017.	The	goodwill	is	primarily	associated	with	the	acquisition	of	American	Water	by	an affiliate	of	our	previous	owner	in	2003	and	the	acquisition	of	E'town	Corporation	by	a	predecessor	to	our	previous	owner	in	2001,	and,	to	a	lesser	extent,	the	acquisition of	Keystone	in	2015.	Goodwill	represents	the	excess	of	the	purchase	price	the	purchaser	paid	over	the	fair	value	of	the	net	tangible	and	other	intangible	assets	acquired. Goodwill	is	recorded	at	fair	value	on	the	date	of	an	acquisition	and	is	reviewed	annually	or	more	frequently	if	changes	in	circumstances	indicate	the	carrying	value	may not	be	recoverable.	As	required	by	the	applicable	accounting	rules,	we	have	taken	significant	non-cash	charges	to	operating	results	for	goodwill	impairments	in	the	past.

We	may	be	required	to	recognize	an	impairment	of	goodwill	in	the	future	due	to	market	conditions	or	other	factors	related	to	our	performance	or	the	performance of	an	acquired	business.	These	market	conditions	could	include	a	decline	over	a	period	of	time	of	our	stock	price,	a	decline	over	a	period	of	time	in	valuation	multiples of	comparable	water	utilities,	market	price	performance	of	our	common	stock	that	compares	unfavorably	to	our	peer	companies,	decreases	in	control	premiums,	or,	with respect	 to	Keystone,	fluctuations	 in	 the	 level	of	exploration	and	production	activities	 in	 the	Marcellus	and	Utica	shale	regions	served	by	Keystone,	a	prolonged depression	of	natural	gas	prices	or	other	factors	that	negatively	impact	our	current	or	future	forecasts	of	operating	results,	cash	flows	or	key	assumptions.	A	decline	in the	results	forecasted	in	our	business	plan	due	to	events	such	as	changes	in	rate	case	results,	capital	investment	budgets	or	interest	rates,	could	also	result	in	an impairment	charge.	Recognition	of	impairments	of	goodwill	would	result	in	a	charge	to	income	in	the	period	in	which	the	impairment	occurred,	which	may	negatively affect	our	financial	condition,	results	of	operations	and	total	capitalization.	The	effects	of	any	such	impairment	could	be	material	and	could	make	it	more	difficult	to maintain	our	credit	ratings,	secure	financing	on	attractive	terms,	maintain	compliance	with	debt	covenants	and	meet	the	expectations	of	our	regulators.

# Market	conditions	may	impact	the	value	of	benefit	plan	assets	and	liabilities,	as	well	as	assumptions	related	to	the	benefit	plans,	which	may	require	us	to	provide significant	additional	funding.

The	performance	of	the	capital	markets	affects	the	values	of	the	assets	that	are	held	in	trust	to	satisfy	significant	future	obligations	under	our	pension	and postretirement	benefit	plans.	The	value	of	these	assets	is	subject	to	market	fluctuations,	which	may	cause	investment	returns	to	fall	below	our	projected	return	rates.	A decline	in	the	market	value	of	the	pension	and	postretirement	benefit	plan	assets	can	increase	the	funding	requirements	under	our	pension	and	postretirement	benefit plans.	Additionally,	our	pension	and	postretirement	benefit	plan	liabilities	are	sensitive	to	changes	in	interest	rates.	If	interest	rates	decrease,	our	liabilities	would increase,	potentially	increasing	benefit	expense	and	funding	requirements.	Further,	changes	in	demographics,	such	as	increases	in	life	expectancy	assumptions	and increasing	trends	in	health	care	costs	may	also	increase	our	funding	requirements.	Future	increases	in	pension	and	other	postretirement	costs	as	a	result	of	reduced	plan assets	may	not	be	fully	recoverable	in	rates,	in	which	case	our	results	of	operations	and	financial	position	could	be	negatively	affected.

In	addition,	market	factors	can	affect	assumptions	we	use	in	determining	funding	requirements	with	respect	to	our	pension	and	postretirement	plans.	For	example, a	relatively	modest	change	in	our	assumptions	regarding	discount	rates	can	materially	affect	our	calculation	of	funding	requirements.	To	the	extent	that	market	data compels	us	to	reduce	the	discount	rate	used	in	our	assumptions,	our	benefit	obligations	could	be	materially	increased,	which	could	adversely	affect	our	financial position,	results	of	operations	and	cash	flows.

# New	accounting	standards	or	changes	to	existing	accounting	standards	could	materially	impact	how	we	report	our	results	of	operations,	cash	flow	and	financial condition.

Our	Consolidated	Financial	Statements	are	prepared	in	accordance	with	GAAP.	The	SEC,	the	Financial	Accounting	Standards	Board	or	other	authoritative	bodies or	governmental	entities	may	issue	new	pronouncements	or	new	interpretations	of	existing	accounting	standards	that	may	require	us	to	change	our	accounting	policies. These	changes	are	beyond	our	control,	can	be	difficult	to	predict	and	could	materially	impact	how	we	report	our	results	of	operations,	cash	flow	and	financial	condition. We	could	be	required	to	apply	a	new	or	revised	standard	retroactively,	which	could	adversely	affect	our	results	of	operations,	cash	flow	and	financial	condition.

# Undetected	errors	in	internal	controls	and	information	reporting	could	result	in	the	disallowance	of	cost	recovery	and	noncompliant	disclosure.

Our	internal	controls,	accounting	policies	and	practices	and	internal	information	systems	are	designed	to	enable	us	to	capture	and	process	transactions	and information	in	a	timely	and	accurate	manner	in	compliance	with	GAAP,	taxation	requirements,	federal	securities	laws	and	regulations	and	other	laws	and	regulations applicable	to	us.	Such	compliance	permits	us	to,	among	other	things,	disclose	and	report	financial	and	other	information	in	connection	with	the	recovery	of	our	costs	and with	the	reporting	requirements	under	federal	securities,	tax	and	other	laws	and	regulations.

We	have	implemented	corporate	governance,	internal	control	and	accounting	policies	and	procedures	in	connection	with	the	Sarbanes-Oxley	Act	of	2002	(the "Sarbanes-Oxley	Act")	and	relevant	SEC	rules,	as	well	as	other	applicable	regulations.	Such	internal	controls	and	policies	have	been	and	continue	to	be	closely monitored	by	our	management	and	Board	of	Directors	to	ensure	continued	compliance	with	these	laws,	rules	and	regulations.	Management	is	also	responsible	for establishing	and	maintaining	internal	control	over	financial	reporting	and	is	required	to	assess	annually	the	effectiveness	of	these	controls.	While	we	believe	these controls,	policies,	practices	and	systems	are	adequate	to	verify	data	integrity,	unanticipated	and	unauthorized	actions	of	employees	or	temporary	lapses	in	internal controls	due	to	shortfalls	in	oversight	or	resource	constraints	could	lead	to	undetected	errors	that	could	result	in	the	disallowance	of	cost	recovery	and	noncompliant disclosure	 and	 reporting.	The	 consequences	 of	 these	 events	 could	 have	 a	 negative	 impact	 on	 our	 results	 of	 operations	 and	 financial	 condition.	The	 inability	 of management	to	certify	as	to	the	effectiveness	of	these	controls	due	to	the	identification	of	one	or	more	material	weaknesses	in	these	controls	could	also	increase financing	costs	or	could	also	adversely	affect	our	or	AWCC's	ability	to	access	the	capital	markets.

# Additional	Risks	Related	to	Our	Market-Based	Businesses

We	(excluding	our	regulated	subsidiaries)	provide	performance	guarantees	with	respect	to	certain	obligations	of	our	Market-Based	Businesses,	including	financial guarantees	or	deposits,	to	our	public-sector	and	public	clients,	and	these	clients	may	seek	to	enforce	the	guarantees	if	our	Market-Based	Businesses	do	not	satisfy these	obligations.

Under	the	terms	of	some	of	our	agreements	for	the	provision	of	services	to	water	and	wastewater	facilities	with	municipalities,	other	governmental	entities	and other	customers,	American	Water	(excluding	our	regulated	subsidiaries)	provides	guarantees	of	specified	performance	obligations	of	our	Market-Based	Businesses, including	financial	guarantees	or	deposits.	In	the	event	our	Market-Based	Businesses	fail	to	perform	these	obligations,	the	entity	holding	the	guarantees	may	seek	to enforce	the	performance	commitments	against	us	or	proceed	against	the	deposit.	In	that	event,	our	financial	condition,	results	of	operations,	cash	flows,	and	liquidity could	be	adversely	affected.

At	December	31,	2017,	we	had	remaining	performance	commitments	as	measured	by	remaining	contract	revenue	totaling	approximately	$3.6	billion,	and	this amount	is	likely	to	increase	if	our	Market-Based	Businesses	expand.	The	presence	of	these	commitments	may	adversely	affect	our	financial	condition	and	make	it	more difficult	for	us	to	secure	financing	on	attractive	terms.

# AWE's	operations	are	subject	to	various	risks	associated	with	doing	business	with	the	U.S.	government.

We	enter	into	contracts	with	the	U.S.	government	for	the	operation	and	maintenance	of	water	and	wastewater	systems,	which	contracts	may	be	terminated,	in whole	or	in	part,	prior	to	the	end	of	the	50-year	term	for	convenience	of	the	U.S.	government	or	as	a	result	of	default	or	non-performance	by	the	subsidiary	performing the	contract.	In	addition,	the	contract	price	for	each	of	these	military	contracts	is	typically	subject	to	redetermination	two	years	after	commencement	of	operations	and every	three	years	thereafter.	Price	redetermination	is	a	contract	mechanism	to	periodically	adjust	the	service	fee	in	the	next	period	to	reflect	changes	in	contract obligations	and	anticipated	market	conditions.	Any	early	contract	termination	or	unfavorable	price	redetermination	could	adversely	affect	our	financial	condition,	results of	operations	and	cash	flows.

Moreover,	entering	into	contracts	with	the	U.S.	government	subjects	us	to	a	number	of	operational	and	compliance	risks,	including	dependence	on	the	level	of government	spending	and	compliance	with	and	changes	in	governmental	procurement	and	security	regulations.	We	are	subject	to	potential	government	investigations	of our	business	practices	and	compliance	with	government	procurement	and	security	regulations,	which	are	complex,	and	compliance	with	these	regulations	can	be expensive	and	burdensome.	If	we	were	charged	with	wrongdoing	as	a	result	of	an	investigation,	we	could	be	suspended	or	barred	from	bidding	on	or	receiving	awards	of new	contracts	with	the	U.S.	government,	which	could	have	a	material	adverse	effect	on	our	results	of	operations	and	cash	flows.

# AWE	operates	a	number	of	water	and	wastewater	systems	under	O&M	contracts	and	faces	the	risk	that	the	owners	of	those	systems	may	fail	to	provide	capital	to properly	maintain	those	systems,	which	may	negatively	affect	AWE	as	the	operator	of	the	systems.

AWE	operates	a	number	of	water	and	wastewater	systems	under	O&M	contracts.	Pursuant	to	these	contracts,	AWE	operates	the	system	according	to	the standards	set	forth	in	the	applicable	contract,	and	it	is	generally	the	responsibility	of	the	owner	of	the	system	to	undertake	capital	improvements.	In	some	cases,	AWE may	not	be	able	to	convince	the	owner	to	make	needed	improvements	in	order	to	maintain	compliance	with	applicable	regulations.	Although	violations	and	fines incurred	by	water	and	wastewater	systems	may	be	the	responsibility	of	the	owner	of	the	system	under	these	contracts,	those	non-compliance	events	may	reflect	poorly	on AWE	as	the	operator	of	the	system	and	us,	and	damage	our	reputation,	and	in	some	cases,	may	result	in	liability	to	us	to	the	same	extent	as	if	we	were	the	owner.

# AWE's	Market-Based	Businesses	are	party	to	long-term	contracts	to	operate	and	maintain	water	and	wastewater	systems	under	which	we	may	incur	costs	in	excess of	payments	received.

Some	of	AWE's	Market-Based	Businesses	enter	into	long-term	contracts	under	which	they	agree	to	operate	and	maintain	a	municipality's,	federal	government's or	other	party's	water	or	wastewater	treatment	and	delivery	facilities,	which	includes	specified	major	maintenance	for	some	of	those	facilities,	in	exchange	for	an	annual fee.	These	Market-Based	Businesses	are	generally	subject	to	the	risk	that	costs	associated	with	operating	and	maintaining	the	facilities,	including	production	costs	such as	purchased	water,	electricity,	fuel	and	chemicals	used	in	water	treatment,	may	exceed	the	fees	received	from	the	municipality	or	other	contracting	party.	Losses	under these	contracts	or	guarantees	may	adversely	affect	our	financial	condition,	results	of	operations,	cash	flows	and	liquidity.

# Keystone's	operations	may	expose	us	to	substantial	costs	and	liabilities	with	respect	to	environmental	laws	and	matters.

Keystone's	operations,	and	the	operation	generally	of	natural	gas	and	oil	exploration	and	production	facilities	by	Keystone's	customers,	are	subject	to	stringent federal,	state	and	local	laws,	rules,	regulations	and	ordinances	governing	the	release	of	materials	into	the	environment	or	otherwise	relating	to	environmental	protection. These	provisions	may	require	the	acquisition	by	Keystone	of	permits	or	licenses	before	providing	its	services	to	customers,	prohibit	the	release	of	substances	defined thereunder	as	hazardous	in	connection	with	these	activities,	and	impose	substantial	liabilities	for	the	violation	thereof	that	may	result	from	these	operations.	Failure	to comply	 with	 these	 laws,	 rules,	 regulations	 and	 ordinances	 may	 result	 in	 substantial	 environmental	 remediation	 and	 other	 costs	 to	 Keystone,	 the	 assessment	 of administrative,	civil	and	criminal	penalties	or	the	issuance	of	injunctions	restricting	or	prohibiting	certain	activities.	Under	existing	environmental	laws	and	regulations, Keystone	could	be	held	strictly	liable	for	the	removal	or	remediation	of	previously	released	materials	or	property	contamination	regardless	of	whether	the	release resulted	from	its	operations,	or	whether	its	operations	were	in	compliance	with	all	applicable	laws	at	the	time	they	were	performed.	While	we	have	structured	and maintained	our	ownership	and	control	of	Keystone's	operations	in	such	a	way	that	we	believe	should	insulate	the	Company,	its	regulated	subsidiaries	and	its	other Market-Based	Businesses	from	any	liabilities	associated	with	Keystone's	operations,	including	liabilities	for	environmental	matters,	there	can	be	no	assurance	that	such efforts	will	be	sufficient	to	prevent	the	Company	from	incurring	liability	for	the	operations	of	Keystone.

Changes	in	environmental	laws	and	regulations	occur	frequently,	and	any	changes	to	these	or	other	laws	governing	the	natural	gas	and	oil	exploration	industry that	result	in	more	stringent	or	costly	water	or	wastewater	handling,	storage,	transport,	disposal	or	cleanup	requirements	could	require	Keystone	to	make	significant expenditures	to	maintain	compliance	with	such	requirements,	may	harm	Keystone's	business	and	results	of	operations	by	reducing	the	demand	for	Keystone's	water	and related	services,	and	may	otherwise	have	a	material	adverse	effect	on	Keystone's	competitive	position,	financial	condition,	results	of	operations	and	cash	flows.

# ITEM	1B. UNRESOLVED	STAFF	COMMENTS

# ITEM	2. PROPERTIES

Our	properties	consist	primarily	of:	(i)	water	and	wastewater	treatment	plants;	(ii)	mains	and	pipes	used	for	transmission,	distribution	and	collection	of	water	and wastewater;	(iii)	wells	and	other	sources	of	water	supply,	such	as	reservoirs;	(iv)	water	and	wastewater	pumping	stations;	(v)	meters	and	fire	hydrants;	(vi)	general structures,	including	buildings,	dams	and	treated	water	storage	facilities;	(vii)	land	and	easements;	(viii)	vehicles;	(ix)	software	rights	and;	(x)	other	equipment	and facilities,	the	majority	of	which	are	used	directly	in	the	operation	of	our	systems.	Substantially	all	of	our	properties	are	owned	by	our	subsidiaries,	with	a	large percentage	subject	to	liens	of	our	mortgage	bonds.	We	lease	our	corporate	offices,	located	in	Voorhees,	New	Jersey,	equipment	and	furniture	from	certain	of	our	wholly owned	subsidiaries.	These	properties	are	utilized	by	our	directors,	officers	and	staff	in	the	conduct	of	the	business.

# The	properties	of	our	Regulated	Businesses	consist	mainly	of:

# •72	surface	water	treatment	plants;

•527	groundwater	treatment	plants;

•8 combined (surface water and groundwater) treatment plants;

•127 wastewater treatment plants;

•50,382	miles	of	transmission,	distribution	and	collection	mains	and	pipes;

•1,428 water and wastewater pumping stations;

•1,313 treated	 water storage facilities;

We	have	ongoing	infrastructure	renewal	programs	in	all	states	in	which	our	Regulated	Businesses	operate.	These	programs	consist	of	both	the	rehabilitation	of existing	mains	and	equipment,	and	the	replacement	of	mains	and	equipment	that	have	been	damaged	or	have	reached,	or	are	near,	the	end	of	their	useful	service	lives. The	properties	of	our	Market-Based	Businesses	consist	mainly	of	office	furniture	and	IT	equipment,	and	are	primarily	located	in	New	Jersey.	Approximately	52%	of	all properties	that	we	own	are	located	in	New	Jersey	and	Pennsylvania.

We	maintain	property	insurance	against	loss	or	damage	to	our	properties	by	fire	or	other	perils,	subject	to	certain	exceptions.	For	insured	losses,	we	are	self- insured	to	the	extent	that	any	losses	are	within	the	policy	deductible	or	exceed	the	amount	of	insurance	maintained.

We	believe	that	our	properties	are	generally	maintained	in	good	operating	condition	and	in	accordance	with	current	standards	of	good	water	and	wastewater industry	practice.

# ITEM	3. LEGAL	PROCEEDINGS

# Alternative	Water	Supply	in	Lieu	of	Carmel	River	Diversions

Under	the	2009	Order,	Cal	Am	is	required,	among	other	things,	to	decrease	significantly	its	yearly	diversions	of	water	from	the	Carmel	River	according	to	a	set reduction	schedule.	The	2009	Order	responded	to	claims	that	Cal	Am	had	not	sufficiently	implemented	actions	to	terminate	its	unpermitted	diversions	of	water	from	the Carmel	River	as	required	by	a	1995	SWRCB	order.	In	July	2016,	at	the	request	of	Cal	Am	and	several	Monterey	County	government	agencies,	the	SWRCB	issued	the 2016	 Order	 approving	 a	 five-year	 extension	 of	 the	 deadline	 to	 comply	 with	 the	 2009	 Order,	 to	 December	 31,	 2021.	 In	 November	 2016,	 the	Water	 Ratepayers Association	of	the	Monterey	Peninsula,	a	citizens'	advocacy	group,	filed	an	action	in	Sacramento	County	Superior	Court	against	the	SWRCB	and	its	board	members, and	naming	Cal	Am	as	the	real	party	in	interest,	seeking	to	reverse	the	extension	of	the	2009	Order,	to	rescind	the	designation	by	the	California	Public	Utilities Commission	(the	"CPUC")	of	Cal	Am	as	the	public	utility	water	provider	to	the	Monterey	Peninsula,	and	to	appoint	a	receiver	to	oversee	Cal	Am's	compliance	with	the 2009	Order,	with	ultimate	transfer	to	a	public	entity.	In	May	2017,	Cal	Am	and	the	SWRCB	filed	demurrers	to	the	action,	and	on	June	12,	2017,	the	court	entered	an order	sustaining	those	demurrers	and	dismissing	the	action	with	prejudice.

# Regional	Desalination	Project	Litigation

The	Regional	Desalination	Project	(the	"RDP")	involved	the	construction	of	a	desalination	facility	in	the	City	of	Marina,	north	of	Monterey.	The	RDP	was intended	to,	among	other	things,	eliminate	unauthorized	diversions	from	the	Carmel	River	as	required	under	the	2009	Order.	In	December	2010,	the	CPUC	approved	the RDP,	which	was	to	be	implemented	through	a	Water	Purchase	Agreement	and	ancillary	agreements	(collectively,	the	"Agreements")	among	the	Marina	Coast	Water District	("MCWD"),	the	Monterey	County	Water	Resources	Agency	("MCWRA")	and	Cal	Am.	In	2011,	due	to	a	conflict	of	interest	concerning	a	former	member	of MCWRA's	Board	of	Directors,	MCWRA	stated	that	the	Agreements	were	void,	and,	as	a	result,	Cal	Am	terminated	the	Agreements.	In	April	2015,	the	CPUC	approved a	settlement	agreement	among	Cal	Am,	MCWRA	and	the	County	of	Monterey	to	resolve	these	matters	among	the	parties	signing	the	agreement.	In	March	2016,	the Supreme	Court	of	California	granted	MCWD's	petition	for	review	of	the	CPUC	approval,	and	following	the	court's	disposition	of	a	related	issue	in	another	case, MCWD's	petition	for	review	of	the	CPUC-approved	settlement	agreement	was	remanded	to	the	CPUC,	and	remains	pending.

In	October	2012,	Cal	Am	filed	a	Complaint	for	Declaratory	Relief	against	MCWRA	and	MCWD,	which	was	ultimately	transferred	to	the	San	Francisco	County Superior	Court,	seeking	a	determination	as	to	whether	the	Agreements	are	void	as	a	result	of	the	alleged	conflict	of	interest.	In	June	2015,	the	court	entered	a	final judgment	agreeing	with	Cal	Am's	position	that	four	of	the	five	Agreements	are	void,	and	one,	the	credit	line	agreement,	is	not	void.	In	November	2016,	the	Supreme Court	of	California	denied	MCWD's	final	appeal	of	this	judgment,	which	allows	further	proceedings	to	determine	the	amount	of	damages	that	may	be	awarded	in	the proceeding.

In	July	2015,	Cal	Am	and	MCWRA	filed	a	Complaint	in	San	Francisco	County	Superior	Court	against	MCWD	and	RMC	Water	and	Environment	("RMC"),	a private	engineering	consulting	firm,	seeking	to	recover	compensatory	damages	in	excess	of	$10	million	associated	with	the	failure	of	the	RDP,	as	well	as	punitive	and treble	damages,	statutory	penalties	and	attorneys'	fees.	Shortly	thereafter,	complaints	seeking	similar	damages	were	filed	in	the	same	court	by	MCWD	and	RMC	against Cal	Am	and	MCWRA	in	excess	of	$19	million	in	the	aggregate.	In	December	2015,	the	court	consolidated	all	of	these	complaints	into	a	single	action,	and	trial	in	this matter	has	been	scheduled	for	June	18,	2018.	On	December	21,	2017,	RMC	filed	a	Motion	for	Summary	Judgment	and	a	hearing	on	such	motion	is	scheduled	for	March 15,	2018.	On	December	6,	2017,	MCWD	filed	a	Motion	for	Judgment	on	the	Pleadings	and	a	hearing	on	such	motion	took	place	on	February	2,	2018.	On	February	5, 2018,	the	court	dismissed	Cal	Am's	and	MCWRA's	tort	law	claims	against	MCWD,	and	allowed	Cal	Am	leave	to	amend	its	breach	of	contract	claims	against	MCWD. The	court's	decision	does	not	impact	Cal	Am's	and	MCWRA's	tort	claims	against	RMC.	Cal	Am	and	MCWRA	were	given	until	February	19,	2018	to	amend	their breach	of	contract	claims.	Cal	Am	and	MCWRA	are	considering	their	responses	to	the	order,	including	an	appeal	to	the	California	Court	of	Appeal.

# Monterey	Peninsula	Water	Supply	Project

The	Water	Supply	Project	is	intended	to	reduce	water	diversions	from	the	Carmel	River	and	involves	construction	of	a	desalination	plant,	owned	by	Cal	Am,	and purchase	of	water	by	Cal	Am	from	a	groundwater	replenishment	project	(the	"GWR	Project")	between	the	Monterey	Regional	Water	Pollution	Control	Agency	and	the MPWMD.	Cal	Am's	ability	to	move	forward	on	the	Water	Supply	Project	is	subject	to	extensive	administrative	review	by	the	CPUC	and	other	government	agencies, obtaining	necessary	permits,	and	intervention	from	other	parties.	On	January	12,	2017,	the	CPUC	issued	a	Draft	Environmental	Impact	Report/Environmental	Impact Statement.	A	final	report	is	expected	at	the	end	of	the	first	quarter	of	2018.

On	September	15,	2016,	the	CPUC	unanimously	approved	a	decision	to	authorize	Cal	Am	to	enter	into	a	water	purchase	agreement	for	the	GWR	Project	and	to construct	a	pipeline	and	pump	station	facilities	and	recover	up	to	$50	million	in	associated	costs,	subject	to	meeting	certain	criteria.	If	construction	costs	exceed	$50 million,	Cal	Am	would	be	allowed	to	seek	additional	cost	recovery.

A	preliminary	step	to	building	the	Water	Supply	Project	desalination	plant	is	the	construction	and	operation	of	a	test	slant	well	to	confirm	the	suitability	of	the property	 on	 which	 intake	 wells	 will	 be	 located	 to	 draw	 water	 from	 under	 Monterey	 Bay.	 In	 November	 2014,	 the	 California	 Coastal	 Commission	 (the	 "Coastal Commission")	approved	coastal	development	permits	for	the	test	slant	well,	enabling	Cal	Am	to	construct	and	operate	the	test	slant	well.	The	permits	would	have expired	on	February	28,	2018,	at	which	time	Cal	Am	would	have	been	required	to	decommission	the	test	slant	well,	but	because	Cal	Am	could	use	the	test	slant	well as	one	of	the	slant	wells	for	the	Water	Supply	Project,	it	sought	an	amendment	of	its	coastal	development	permits	to	allow	the	test	slant	well	to	remain	in	place	and	be maintained	on	site	until	February	28,	2019.	The	Coastal	Commission	approved	the	permit	amendment	on	December	13,	2017.	The	required	lease	obtained	from	the California	State	Lands	Commission	(the	"State	Lands	Commission"),	as	amended,	after	a	two-year	extension	granted	on	November	29,	2017,	is	to	expire	on	December 16,	2019.

On	July	13,	2017,	the	Coastal	Commission	adopted	a	consent	agreement	and	cease	and	desist	order	requiring	sand	mining	operations	on	the	property	on	which intake	wells	will	be	located	to	cease	by	the	end	of	2020	and	the	property	to	be	sold	to	either	a	non-profit	or	governmental	entity.	The	consent	agreement	strictly	limits future	use	of	the	property	but	preserves	Cal	Am's	existing	property	rights	and	allows	uses	consistent	with	existing	easements	and	other	rights	of	record.

The	CPUC	held	hearings	from	October	25	through	November	3,	2017	on	Cal	Am's	request	for	a	certificate	of	public	convenience	and	necessity	for	the	Water Supply	Project.	This	request	remains	pending.

In	December	2014,	the	MCWD	and	the	Ag	Land	Trust,	an	agricultural	land	conservancy,	filed	petitions	against	the	Coastal	Commission	and	Cal	Am,	which	were ultimately	 transferred	 to	 the	Santa	Cruz	County	Superior	Court,	seeking	 to	vacate	 the	Coastal	Commission's	approval	of	 the	coastal	development	permit	and	 to permanently	restrain	Cal	Am	and	the	Coastal	Commission	from	constructing	the	test	slant	well	pending	full	compliance	with	the	California	Environmental	Quality	Act and	the	California	Coastal	Act.	The	court	denied	these	petitions,	and	on	January	11,	2017,	the	Supreme	Court	of	California	denied	MCWD's	petition	for	review	of	this decision.	MCWD	filed	a	similar	petition	in	January	2015	against	the	State	Lands	Commission	and	Cal	Am,	which	remains	pending.

In	November	2015,	MCWD	filed	a	Petition	for	Writ	of	Mandate	and	Complaint	for	Declaratory	and	Injunctive	Relief	in	Santa	Cruz	County	Superior	Court against	the	Coastal	Commission	and	Cal	Am	challenging	the	amendment	of	the	coastal	development	permits	and	seeking	an	injunction	against	further	test	well	pumping. In	September	2016,	the	court	denied	MCWD's	petition	with	respect	to	all	claims,	except	claims	related	to	those	raised	in	the	December	2014	petitions	discussed	above. On	October	3,	2017,	after	conducting	a	trial	for	all	matters	raised	in	MCWD's	November	2015	challenge,	other	than	claims	that	had	been	denied	by	the	court	in September	2016,	the	court	denied	MCWD's	claims	with	respect	to	these	matters.	On	January	12,	2018,	MCWD	filed	a	notice	of	appeal	of	the	court's	judgment.

Based	on	the	foregoing,	Cal	Am	estimates	that	the	earliest	date	by	which	the	Water	Supply	Project	desalination	plant	could	be	completed	is	sometime	in	2021. There	can	be	no	assurance	that	Cal	Am's	application	for	the	Water	Supply	Project	will	be	approved	or	that	the	Water	Supply	Project	will	be	completed	on	a	timely	basis, if	ever.	Furthermore,	there	can	be	no	assurance	that	Cal	Am	will	be	able	to	comply	with	the	diversion	reduction	requirements	and	other	remaining	requirements	under the	2009	Order	and	the	2016	Order,	or	that	any	such	compliance	will	not	result	in	material	additional	costs	or	obligations	to	Cal	Am	or	the	Company.

# California	Public	Utilities	Commission	Residential	Rate	Design	Proceeding

In	December	2016,	the	CPUC	issued	a	final	decision	in	a	proceeding	involving	Cal	Am	adopting	a	new	residential	rate	design	for	Cal	Am's	Monterey	District. The	decision	allowed	for	recovery	by	Cal	Am	of	$32	million	 in	under-collections	 in	 the	water	revenue	adjustment	mechanism/modified	cost	balancing	account ("WRAM/MCBA")	over	a	five-year	period,	plus	interest,	and	modified	existing	conservation	and	rationing	plans.	In	its	decision,	the	CPUC	noted	concern	regarding	Cal Am's	residential	tariff	administration,	specifically	regarding	the	lack	of	verification	of	customer-provided	information	about	the	number	of	residents	per	household.	This information	was	used	for	generating	billing	determinants	under	the	tiered	rate	system.	As	a	result,	the	CPUC	kept	this	proceeding	open	to	address	several	issues, including	whether	Cal	Am's	residential	tariff	administration	violated	a	statute,	rule	or	CPUC	decision,	and	if	so,	whether	a	penalty	should	be	imposed.

On	February	24,	2017,	Cal	Am,	the	MPWMD,	the	CPUC's	Office	of	Ratepayer	Advocates,	and	the	Coalition	of	Peninsula	Businesses	filed	for	CPUC	approval	of a	joint	settlement	agreement	(the	"Joint	Settlement	Agreement"),	which	among	other	things,	proposed	to	resolve	the	CPUC's	residential	tariff	administration	concerns	by providing	for	a	waiver	by	Cal	Am	of	$0.5	million	of	cost	recovery	for	residential	customers	through	the	WRAM/MCBA	in	lieu	of	a	penalty.	Approval	of	the	Joint Settlement	Agreement,	which	is	required	for	it	to	take	effect,	remains	pending	before	the	CPUC.

On	March	28,	2017,	the	administrative	law	judge	assigned	to	the	proceeding	issued	a	ruling	stating	there	was	sufficient	evidence	to	conclude,	on	a	preliminary basis,	that	Cal	Am's	administration	of	the	residential	tariff	violated	certain	provisions	of	the	California	Public	Utilities	Code	and	a	CPUC	decision.	The	ruling	ordered Cal	Am	to	show	cause	why	it	should	not	be	penalized	for	these	administrative	violations	and	directed	the	settling	parties	to	address	whether	the	cost	recovery	waiver	in the	Joint	Settlement	Agreement	was	reasonable	compared	to	a	potential	penalty	range	described	by	the	administrative	law	judge.	During	hearings	held	on	April	13-14, 2017,	the	administrative	law	judge	clarified	that	this	potential	penalty	range	is	$3	million	to	$179	million	(calculated	as	a	continuing	violation	dating	back	to	2000	and applying	penalties	of	up	to	$20,000	per	day	until	January	1,	2012	and	penalties	of	up	to	$50,000	per	day	thereafter,	reflecting	a	2012	change	to	the	relevant	statute).	The administrative	law	judge	also	noted	that	a	per	diem	penalty	may	not	be	appropriate,	as	Cal	Am's	monthly	billing	practices	did	not	allow	Cal	Am	to	update	customer- provided	information	for	billing	purposes	on	a	daily	basis.	Hearings	before	the	administrative	law	judge	in	this	matter	were	held	in	August,	September	and	November 2017.	Cal	Am	also	submitted	additional	testimony	on	the	issue	of	whether	Cal	Am	should	be	penalized,	and	if	so,	the	reasonable	amount	of	any	such	penalty.	This proceeding	remains	pending,	and	the	CPUC	has	set	a	statutory	deadline	of	September	30,	2018	for	the	completion	of	the	proceeding.

# West	Virginia	Elk	River	Freedom	Industries	Chemical	Spill

# Background

On	 January	 9,	 2014,	 a	 chemical	 storage	 tank	 owned	 by	 Freedom	 Industries,	 Inc.	 leaked	 two	 substances,	 4-methylcyclohexane	 methanol	 ("MCHM"),	 and PPH/DiPPH,	a	mix	of	polyglycol	ethers,	into	the	Elk	River	near	the	WVAWC	treatment	plant	intake	in	Charleston,	West	Virginia.	After	having	been	alerted	to	the	leak of	MCHM	by	the	West	Virginia	Department	of	Environmental	Protection,	WVAWC	took	immediate	steps	to	gather	more	information	about	MCHM,	augment	its treatment	process	as	a	precaution,	and	begin	consultations	with	federal,	state	and	local	public	health	officials.	As	soon	as	possible	after	it	was	determined	that	the augmented	treatment	process	would	not	fully	remove	the	MCHM,	a	joint	decision	was	reached	in	consultation	with	the	West	Virginia	Bureau	for	Public	Health	to	issue	a "Do	Not	Use"	order	for	all	of	its	approximately	93,000	customer	accounts	in	parts	of	nine	West	Virginia	counties	served	by	the	Charleston	treatment	plant.	By	January 18,	2014,	none	of	WVAWC's	customers	were	subject	to	the	Do	Not	Use	order.

Following	the	Freedom	Industries	chemical	spill,	numerous	lawsuits	were	filed	against	WVAWC	and	certain	other	Company-affiliated	entities	(collectively,	the "American	Water	Defendants")	with	respect	to	this	matter	in	the	U.S.	District	Court	for	the	Southern	District	of	West	Virginia	or	West	Virginia	Circuit	Courts	in Kanawha,	Boone	and	Putnam	counties,	and	to	date,	more	than	70	cases	remain	pending.	Four	of	the	cases	pending	before	the	U.S.	district	court	were	consolidated	for purposes	of	discovery,	and	an	amended	consolidated	class	action	complaint	for	those	cases	(the	"Federal	action")	was	filed	in	December	2014	by	several	plaintiffs.	In January	2016,	all	of	the	then-filed	state	court	cases	were	referred	to	West	Virginia's	Mass	Litigation	Panel	for	further	proceedings,	which	have	been	stayed	until	April 22,	2018	pending	the	approval	by	the	court	in	the	Federal	action	of	a	global	agreement	to	settle	all	of	such	cases,	as	described	below.	The	court	in	the	Federal	action	has continued	the	start	of	the	trial	indefinitely	pending	ongoing	settlement	approval	activities.

# Proposed	Global	Class	Action	Settlement

In	October	2016,	the	court	in	the	Federal	action	approved	the	preliminary	principles,	terms	and	conditions	of	a	binding	global	agreement	in	principle	to	settle claims	among	the	American	Water	Defendants,	and	all	class	members,	putative	class	members,	claimants	and	potential	claimants,	arising	out	of	the	Freedom	Industries chemical	spill.	On	April	27,	2017,	the	parties	filed	with	the	court	in	the	Federal	action	a	proposed	settlement	agreement	providing	details	of	the	terms	of	the	settlement of	these	matters	and	requesting	that	the	court	in	the	Federal	action	grant	preliminary	approval	of	such	settlement.	On	July	6,	2017,	the	court	in	the	Federal	action	issued an	opinion	denying	without	prejudice	the	joint	motion	for	preliminary	approval	of	the	Settlement.	On	August	25,	2017,	the	parties	filed	a	proposed	amended	settlement agreement	and	related	materials	addressing	the	matters	set	forth	in	the	July	6,	2017	order.

On	September	21,	2017,	the	court	in	the	Federal	action	issued	an	order	granting	preliminary	approval	of	a	settlement	class	and	proposed	class	action	settlement (the	"Settlement")	with	respect	to	claims	against	the	American	Water	Defendants	by	all	putative	class	members	(collectively,	the	"Plaintiffs")	for	all	claims	and	potential claims	arising	out	of	the	Freedom	Industries	chemical	spill.	The	Settlement	proposes	a	global	resolution	of	all	federal	and	state	litigation	and	potential	claims	against	the American	Water	Defendants	and	their	insurers.	Under	the	terms	and	conditions	of	the	Settlement	and	the	proposed	amended	settlement	agreement,	the	American	Water Defendants	have	not	admitted,	and	will	not	admit,	any	fault	or	liability	for	any	of	the	allegations	made	by	the	Plaintiffs	in	any	of	the	actions	to	be	resolved.	Under	federal class	action	rules,	claimants	had	the	right,	until	December	8,	2017,	to	elect	to	opt	out	of	the	final	Settlement,	in	which	case	such	claimant	would	not	receive	any	benefit from	or	be	bound	by	the	terms	of	the	Settlement.	As	of	January	31,	2018,	less	than	100	of	the	225,000	estimated	putative	Plaintiffs	have	submitted	opt-out	notices.	The deadline	to	file	a	claim	in	the	Settlement	is	February	21,	2018.

The	proposed	aggregate	pre-tax	amount	of	the	Settlement	with	respect	to	the	Company	is	$126	million.	The	aggregate	portion	of	the	Settlement	to	be	contributed by	WVAWC,	net	of	insurance	recoveries,	is	$ 43	million	(approximately	$26	million	after-tax),	taking	into	account	the	September	2017	settlement	with	one	of	the Company's	general	liability	insurance	carriers	discussed	below.	Another	defendant	to	the	Settlement	is	to	contribute	up	to	$25	million	to	the	Settlement.	Two	of	the Company's	general	liability	insurance	carriers,	which	provide	an	aggregate	of	$50	million	in	insurance	coverage	to	the	Company	under	these	policies,	had	been originally	requested	to	participate	in	the	Settlement	at	the	time	of	the	initial	filing	of	the	binding	agreement	in	principle	with	the	court	in	the	Federal	action,	but	did	not agree	to	do	so	at	that	time.	WVAWC	filed	a	lawsuit	against	one	of	these	carriers	alleging	that	the	carrier's	failure	to	agree	to	participate	in	the	Settlement	constituted	a breach	of	contract.	On	September	19,	2017,	the	Company	and	the	insurance	carrier	settled	this	lawsuit	for	$22	million,	out	of	a	maximum	of	$25	million	in	potential coverage	under	the	terms	of	the	relevant	policy,	in	exchange	for	a	full	release	by	the	Company	and	WVAWC	of	all	claims	against	the	insurance	carrier	related	to	the Freedom	Industries	chemical	spill.	WVAWC	and	the	settling	insurer	have	agreed	to	stay	this	litigation	pending	final	approval	of	the	Settlement.	The	Company	and WVAWC	continue	to	pursue	vigorously	their	rights	to	insurance	coverage	for	contributions	by	WVAWC	to	the	Settlement	in	mandatory	arbitration	with	the	remaining non-participating	carrier.	This	arbitration	proceeding	remains	pending.	Despite	these	efforts,	the	Company	may	not	ultimately	be	successful	in	obtaining	full	or	further reimbursement	under	this	insurance	policy	for	amounts	that	WVAWC	may	be	required	to	contribute	to	the	Settlement.

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

As	a	result	of	these	events,	in	the	third	quarter	of	2016,	the	Company	recorded	a	charge	to	earnings,	net	of	insurance	receivables,	of	$65	million	($39	million after-tax).	Additionally,	in	the	third	quarter	of	2017,	the	Company	recorded	a	benefit	of	$22	million	($13	million	after-tax)	as	an	additional	insurance	receivable reflecting	the	settlement	with	the	insurance	carrier	described	above.	The	Company	intends	to	fund	WVAWC's	contributions	to	the	Settlement	through	existing	sources of	liquidity,	although	no	contribution	by	WVAWC	will	be	required	unless	and	until	the	terms	of	the	Settlement	are	finally	approved	by	the	court	in	the	Federal	action. Furthermore,	under	the	terms	of	the	Settlement,	WVAWC	has	agreed	that	it	will	not	seek	rate	recovery	from	the	PSC	for	approximately	$ 4	million	in	direct	response costs	expensed	in	2014	by	WVAWC	relating	to	the	Freedom	Industries	chemical	spill	as	well	as	for	amounts	paid	by	WVAWC	under	the	Settlement.

The	Company's	insurance	policies	operate	under	a	layered	structure	where	coverage	is	generally	provided	in	the	upper	layers	after	claims	have	exhausted	lower layers	of	coverage.	The	$36	million	to	be	contributed	by	a	number	of	the	Company's	general	liability	insurance	carriers	to	the	individual	review	claim	fund,	as	noted above,	is	from	higher	layers	of	the	insurance	structure	than	the	insurance	carrier	that	was	requested,	but	presently	has	not	agreed,	to	participate	in	the	Settlement.	Any recovery	by	WVAWC	or	the	Company	from	the	remaining	non-participating	carrier	would	reimburse	WVAWC	for	its	contributions	to	the	guaranteed	fund.

Notice	of	the	terms	of	the	Settlement	to	members	of	the	settlement	class	commenced	on	October	11,	2017.	Following	the	notice	period,	on	January	9,	2018,	the court	in	the	Federal	action	held	a	fairness	hearing	to	consider	final	approval	of	the	Settlement,	which	was	continued	on	February	1,	2018	to	address	certain	open	matters. At	this	hearing,	the	court	in	the	Federal	action	indicated	that	it	intended	to	enter	an	order	approving	the	Settlement,	and	the	parties	submitted	a	proposed	order	to	the court	on	February	2,	2018.

There	can	be	no	assurance	that	the	Settlement	will	not	be	amended	further	or	that	the	court	will	provide	its	final	approval	as	to	any	agreement	negotiated	between the	parties	reflecting	the	terms	of	the	Settlement.

The	American	Water	Defendants	believe	that	WVAWC	has	responded	appropriately	to,	and,	other	than	through	the	Settlement,	has	no	responsibility	for,	the Freedom	Industries	chemical	spill,	and	that	the	American	Water	Defendants	have	valid,	meritorious	defenses	to	the	lawsuits.	Nevertheless,	WVAWC	and	the	Company are	unable	to	predict	the	outcome	of	any	lawsuit	against	the	American	Water	Defendants	brought	or	maintained	by	a	claimant	that	has	elected	to	opt	out	of	the Settlement,	and	any	such	outcome	or	outcomes	could	have	a	material	adverse	effect	on	the	Company's	financial	condition,	results	of	operations,	cash	flows,	liquidity and	reputation.

# Other	Related	Proceedings

Additionally,	 investigations	were	 initiated	with	respect	 to	 the	matter	by	 the	 U.S.	 Chemical	 Safety	 and	 Hazard	 Investigation	 Board	 (the	 "CSB"),	 the	 U.S. Attorney's	Office	for	the	Southern	District	of	West	Virginia,	the	West	Virginia	Attorney	General,	and	the	PSC.	As	a	result	of	the	U.S.	Attorney's	Office	investigation, Freedom	Industries	and	six	former	Freedom	Industries	employees	(three	of	whom	also	were	former	owners	of	Freedom	Industries),	pled	guilty	to	violations	of	the federal	Clean	Water	Act.	The	PSC	issued	an	order	on	June	15,	2017	concluding	its	investigation	without	requiring	WVAWC	to	take	any	further	action	with	respect	to the	matters	covered	by	the	general	investigation.

The	CSB	is	an	independent	investigatory	agency	with	no	regulatory	mandate	or	ability	to	issue	fines	or	citations;	rather,	the	CSB	can	only	issue	recommendations for	further	action.	In	response	to	the	Freedom	Industries	chemical	spill,	the	CSB	commenced	an	investigation	shortly	thereafter.	In	September	2016,	the	CSB	issued	and adopted	its	investigation	report	in	which	it	recommended	that	the	Company	conduct	additional	source	water	protection	activities.	On	April	4,	2017,	the	CSB	indicated that	the	implementation	by	the	Company	of	source	water	protection	activities	resolved	the	first	two	parts	of	the	CSB's	recommendation.	The	CSB	also	noted	that compliance	by	the	Company	with	the	third	part	of	its	recommendation	is	ongoing	and	that	closure	of	this	part	is	contingent	upon	completion	of	updated	contingency planning	for	the	Company's	water	utilities	outside	of	West	Virginia.	In	light	of	public	response	to	its	original	September	2016	investigation	report,	on	May	11,	2017,	the CSB	issued	a	new	version	of	this	report.	The	primary	substantive	change	addressed	CSB's	factual	evaluation	of	the	duration	and	volume	of	contamination	from	the leaking	 tank,	 decreasing	 its	 estimate	 of	 the	 leak	 time	 but	 increasing	 the	 volume	 estimate	 by	 10%.	 No	 substantive	 changes	 were	 made	 to	 the	 conclusions	 and recommendations	in	the	original	report.

On	March	16,	2017,	the	Lincoln	County	(West	Virginia)	Commission	(the	"LCC")	passed	a	county	ordinance	entitled	the	"Lincoln	County,	WV	Comprehensive Public	Nuisance	Investigation	and	Abatement	Ordinance."	The	ordinance	establishes	a	mechanism	that	Lincoln	County	believes	will	allow	it	to	pursue	criminal	or	civil proceedings	for	the	"public	nuisance"	it	alleges	was	caused	by	the	Freedom	Industries	chemical	spill.	On	April	20,	2017,	the	LCC	filed	a	complaint	in	Lincoln	County state	court	against	WVAWC	and	certain	other	defendants	not	affiliated	with	the	Company,	alleging	that	the	Freedom	Industries	chemical	spill	caused	a	public	nuisance in	Lincoln	County.	The	complaint	seeks	an	injunction	against	WVAWC	that	would	require	the	creation	of	various	databases	and	public	repositories	of	documents related	to	the	Freedom	Industries	chemical	spill,	as	well	as	further	study	and	risk	assessments	regarding	the	alleged	exposure	of	Lincoln	County	residents	to	the	released chemicals.	On	June	12,	2017,	the	Mass	Litigation	Panel	entered	an	order	granting	a	motion	to	transfer	this	case	to	its	jurisdiction	and	stayed	the	case	consistent	with	the existing	stay	order.	The	LCC	has	elected	to	opt	out	of	the	Settlement.	On	January	26,	2018,	the	LCC	filed	a	motion	seeking	to	lift	the	stay	imposed	by	the	Mass Litigation	Panel.	This	motion	is	pending.	WVAWC	believes	that	this	lawsuit	is	without	merit	and	intends	to	vigorously	contest	the	claims	and	allegations	raised	in	the complaint.

WVAWC	and	the	Company	are	unable	to	predict	the	outcome	of	the	ongoing	government	investigations	or	actions	or	any	legislative	initiatives	that	might	affect WVAWC's	water	utility	operations.

# Dunbar,	West	Virginia	Water	Main	Break	Class	Action	Litigation

On	the	evening	of	June	23,	2015,	a	36-inch	pre-stressed	concrete	transmission	water	main,	installed	in	the	early	1970s,	failed.	The	water	main	is	part	of WVAWC's	West	Relay	pumping	station	located	in	the	City	of	Dunbar.	The	failure	of	the	main	caused	water	outages	and	low	pressure	to	up	to	approximately	25,000 WVAWC	customers.	In	the	early	morning	hours	of	June	25,	2015,	crews	completed	a	repair,	but	that	same	day,	the	repair	developed	a	leak.	On	June	26,	2015,	a	second repair	was	completed	and	service	was	restored	that	day	to	approximately	80%	of	the	impacted	customers,	and	to	the	remaining	approximately	20%	by	the	next	morning. The	second	repair	showed	signs	of	leaking	but	the	water	main	was	usable	until	June	29,	2015	to	allow	tanks	to	refill.	The	system	was	reconfigured	to	maintain	service	to all	but	approximately	3,000	customers	while	a	final	repair	was	completed	safely	on	June	30,	2015.	Water	service	was	fully	restored	on	July	1,	2015	to	all	customers affected	by	this	event.

On	June	2,	2017,	a	class	action	complaint	was	filed	in	West	Virginia	Circuit	Court	in	Kanawha	County	against	WVAWC	on	behalf	of	a	purported	class	of residents	and	business	owners	who	lost	water	service	or	pressure	as	a	result	of	the	Dunbar	main	break.	The	complaint	alleges	breach	of	contract	by	WVAWC	for	failure to	supply	water,	violation	of	West	Virginia	law	regarding	the	sufficiency	of	WVAWC's	facilities	and	negligence	by	WVAWC	in	the	design,	maintenance	and	operation of	the	water	system.	The	plaintiffs	seek	unspecified	alleged	damages	on	behalf	of	the	class	for	lost	profits,	annoyance	and	inconvenience,	and	loss	of	use,	as	well	as punitive	damages	for	willful,	reckless	and	wanton	behavior	in	not	addressing	the	risk	of	pipe	failure	and	a	large	outage.

The	Company	and	WVAWC	believe	that	WVAWC	has	valid,	meritorious	defenses	to	the	claims	raised	in	this	class	action	complaint.	On	October	12,	2017, WVAWC	filed	with	the	court	a	motion	seeking	to	dismiss	all	of	the	plaintiffs'	counts	alleging	statutory	and	common	law	tort	claims.	Furthermore,	WVAWC	asserts	that the	PSC,	and	not	the	court,	has	primary	jurisdiction	over	allegations	involving	violations	of	the	applicable	tariff,	the	public	utility	code	and	related	rules.	This	motion remains	pending.

# Contract	Operations	Group	--	East	Palo	Alto	Water	System	Voluntary	Report

On	April	10,	2017,	AWE,	the	parent	entity	of	the	Company's	Contract	Operations	Group,	voluntarily	reported	to	the	Division	of	Drinking	Water	of	the	SWRCB potential	violations	of	the	California	Safe	Drinking	Water	Act	(the	"CSDWA")	in	connection	with	AWE's	operation	of	the	City	of	East	Palo	Alto's	water	distribution system.	Upon	the	resignation	of	the	system's	general	manager	in	March	2017,	AWE	discovered	that	it	may	have	operated	the	system	without	a	properly	certified operator	for	two	years,	the	triennial	LCR	sampling	was	not	completed,	and	the	2015	Consumer	Confidence	Report	improperly	reported	data	for	lead	and	copper	samples from	the	system's	upstream	water	provider.	Promptly	after	discovering	these	issues,	AWE	engaged	an	outside	law	firm	to	conduct	an	internal	investigation	and	has reported	the	results	of	that	investigation	to	the	SWRCB.

On	 June	 15,	 2017,	 the	 SWRCB	 issued	 to	AWE	 a	 citation	 that	 required	AWE	 to,	 among	 other	 things:	 comply	 with	 regulations	 related	 to	 water	 operator certifications,	lead	and	copper	tap	sampling	requirements	and	the	publishing	of	a	Consumer	Confidence	Report;	provide	public	notification	of	the	LCR	violation;	and prepare	a	corrective	action	plan	to	evaluate	the	causes	leading	to	these	incidents	and	measures	to	be	taken	to	prevent	recurrence	of	future	incidents.	The	citation	did	not impose	on	AWE	any	monetary	penalties,	but	the	SWRCB	reserved	the	right	to	take	additional	enforcement	action.

By	letter	dated	October	4,	2017,	the	SWRCB	advised	AWE	that	it	is	in	compliance	with	all	of	the	directives	and	relevant	statutory	and	administrative	provisions specified	in	the	SWRCB's	June	15,	2017	citation.	While	AWE	has	completed	all	required	compliance	activities	with	respect	to	the	citation,	the	SWRCB	has	previously reserved	the	right	to	take	additional	enforcement	action.	In	February	2018,	the	SWRCB	referred	this	matter	to	the	San	Mateo	County,	California	District	Attorney's office	for	further	investigation.	AWE	continues	to	cooperate	with	the	SWRCB,	the	City	of	East	Palo	Alto	and	the	San	Mateo	County	District	Attorney	regarding	this matter.	Proven	violations	of	the	CSDWA	may	result	in	civil	and	criminal	penalties.

# General

Periodically,	the	Company	is	involved	in	other	proceedings	or	litigation	arising	in	the	ordinary	course	of	business.	Other	than	those	proceedings	described	in	this Item	3—Legal	Proceedings,	 the	Company	does	not	believe	 that	 the	ultimate	resolution	of	 these	matters	will	materially	affect	 its	financial	position	or	results	of operations.	However,	litigation	and	other	proceedings	are	subject	to	many	uncertainties,	and	the	outcome	of	individual	matters	is	not	predictable	with	assurance.	It	is possible	that	some	litigation	and	other	proceedings	could	be	decided	unfavorably	to	the	Company,	and	that	any	such	unfavorable	decisions	could	have	a	material adverse	effect	on	its	business,	financial	condition,	results	of	operations	and	cash	flows.

# ITEM	4. MINE	SAFETY	DISCLOSURES

Not	applicable

# PART	II

# ITEM	 5. 	 MARKET	 FOR	 REGISTRANT'S	 COMMON	 EQUITY,	 RELATED	 STOCKHOLDER	 MATTERS	AND	 ISSUER	 PURCHASES	 OF EQUITY	SECURITIES

Since	April	23,	2008,	our	common	stock	has	traded	on	the	New	York	Stock	Exchange	("NYSE")	under	the	symbol	"AWK."	The	following	table	summarizes	the per	share	range	of	the	high	and	low	intraday	sales	prices	of	our	common	stock	as	reported	on	the	NYSE	and	the	per	share	cash	dividends	paid	and	declared:

(a) Dividends	declared	during	the	three	months	ended	December	31,	2017	and	2016,	include	quarterly	dividends	payable	December	1	and	March	1.

As	of	February	15,	2018,	there	were	178,551,923	shares	of	common	stock	outstanding	held	by	approximately	2,644	record	holders.	Holders	of	our	common	stock are	entitled	to	receive	dividends	when	they	are	declared	by	our	Board	of	Directors.	When	dividends	on	common	stock	are	declared,	they	are	typically	paid	in	March, June,	September	and	December.	Future	dividends	are	not	guaranteed	by	the	Company	and	will	be	dependent	on	future	earnings,	financial	requirements,	contractual provisions	of	debt	agreements	and	other	relevant	factors.	For	more	information	regarding	restrictions	on	the	payment	of	dividends	on	our	common	stock,	see	Item	7— Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations—Liquidity	and	Capital	Resources—Dividends.

In	February	2015,	our	Board	of	Directors	authorized	an	anti-dilutive	common	stock	repurchase	program	to	mitigate	the	dilutive	effect	of	shares	issued	through our	 dividend	 reinvestment,	 employee	 stock	 purchase	 and	 executive	 compensation	 activities.	 The	 program	 allows	 us	 to	 purchase	 up	 to	10	 million	 shares	 of	 our outstanding	common	stock	over	an	unrestricted	period	of	time	in	the	open	market	or	through	privately	negotiated	transactions.	The	program	is	conducted	in	accordance with	Rule	10b-18	of	the	Exchange	Act,	and	to	facilitate	these	repurchases,	we	enter	into	Rule	10b5-1	share	repurchase	plans	with	a	third	party	broker,	which	allow	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	the	program	or	share	repurchase	parameters	at	our	discretion	to	manage	dilution.

From	April	1,	2015,	the	date	repurchases	under	the	anti-dilutive	stock	repurchase	program	commenced,	through	December	31,	2017,	the	Company	repurchased an	aggregate	of	3,950,000	shares	of	common	stock	under	the	program,	including	700,000	shares	repurchased	during	the	first	half	of	2017.	There	were	no	repurchases	of common	stock	in	the	last	half	of	2017.

# ITEM	6. SELECTED	FINANCIAL	DATA

| (In	millions,	except	per	share	data) | 2017 | 2016 | 2015 | 2014 | 2013 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Statement\tof\tOperations\tdata: |  |  |  |  |  |
| Operating\trevenues | $3,357 | $3,302 | $3,159 | $3,011 | $2,879 |
| Income\tfrom\tcontinuing\toperations\t(a) | 426 | 468 | 476 | 430 | 371 |
| Income\tfrom\tcontinuing\toperations\tper\tbasic\tcommon\tshare\t(a) | $2.39 | $2.63 | $2.66 | $2.40 | $2.08 |
| Income\tfrom\tcontinuing\toperations\tper\tdiluted\tcommon\tshare\t(a) | 2.38 | 2.62 | 2.64 | 2.39 | 2.07 |
| Balance\tSheet\tdata: |  |  |  |  |  |
| Total\tassets\t(b)\t(c) | $19,482 | $18,482 | $17,241 | $16,038 | $15,064 |
| Long-term\tdebt\tand\tredeemable\tpreferred\tstock\tat\tredemption\nvalue\t(b) | 6,498 | 5,759 | 5,874 | 5,442 | 5,225 |
| Other\tdata: |  |  |  |  |  |
| Cash\tdividends\tdeclared\tper\tcommon\tshare | $1.66 | $1.50 | $1.36 | $1.24 | $1.12 |
| Net\tcash\tprovided\tby\toperating\tactivities\t(d)\t(e)\t(f) | 1,449 | 1,289 | 1,195 | 1,122 | 956 |
| Net\tcash\tused\tin\tinvesting\tactivities\t(f) | (1,672) | (1,590) | (1,459) | (1,029) | (1,068) |
| Net\tcash\tprovided\tby\t(used\tin)\tfinancing\tactivities\t(d)\t(e)\t(f) | 207 | 328 | 290 | (104) | 104 |
| Capital\texpenditures\tincluded\tin\tnet\tcash\tused\tin\tinvesting\nactivities | (1,434) | (1,311) | (1,160) | (956) | (980) |

(a) In	November	2014,	we	disposed	of	our	Class	B	Biosolids	operating	segment	by	selling	our	subsidiary,	Terratec	Environmental	Ltd	("Terratec")	in	Ontario,	Canada.	The	results	of	Terratec	are presented	as	discontinued	operations	and,	as	such,	have	been	excluded	from	Income	from	continuing	operations	for	the	years	ended	December	31,	2014	and	2013.

(b) The	information	for	the	years	ended	December	31,	2014	and	2013,	has	been	revised	to	reflect	the	retrospective	application	of	Accounting	Standard	Update	2015-15,	Presentation	of	Debt Issuance	Costs,	which	was	adopted	by	the	Company	as	of	December	31,	2015.

(c) The	information	for	the	years	ended	December	31,	2014	and	2013,	has	been	revised	to	reflect	the	retrospective	application	of	Accounting	Standard	Update	2015-17,	Income	Taxes,	which	was adopted	by	the	Company	as	of	December	31,	2015.

(d) The	 information	 for	 the	 years	 ended	 December	 31,	 2016,	 2015,	 2014	 and	 2013,	 has	 been	 revised	 to	 reflect	 the retrospective application	 of	 Accounting	 Standard	 Update	 2016- 09,	Improvements	to	Employee	Share-Based	Payment	Accounting,	which	was	adopted	by	the	Company	as	of	January	1,	2017.

(e) The	information	for	the	year	ended	December	31,	2013,	has	been	revised	to	reflect	the	retrospective	application	of	Accounting	Standard	Update	2016-15,	Classification	of	Certain	Cash Receipts	and	Cash	Payments,	which	was	adopted	by	the	Company	as	of	December	31,	2017.

(f) The	information	for	the	years	ended	December	31,	2016,	2015,	2014	and	2013,	has	been	revised	to	reflect	the	retrospective	application	of	Accounting	Standard	Update	2016-18,	Statement	of Cash	Flows	(Topic	230)	-	Restricted	Cash,	which	was	adopted	by	the	Company	as	of	December	31,	2017.

# 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):

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Diluted\tearnings\tper\tshare\t(GAAP): |  |  |  |
| Net\tincome\tattributable\tto\tcommon\tstockholders | $2.38 | $2.62 | $2.64 |
| Non-GAAP\tadjustments: |  |  |  |
| Impact\tof\tFreedom\tIndustries\tsettlement\tactivities | (0.12) | 0.36 | — |
| Income\ttax\timpact | 0.05 | (0.14) | — |
| Net\tnon-GAAP\tadjustment | (0.07) | 0.22 | — |
| Early\textinguishment\tof\tdebt\tat\tthe\tparent\tcompany | 0.03 | — | — |
| Income\ttax\timpact | (0.01) | — | — |
| Net\tnon-GAAP\tadjustment | 0.02 | — | — |
| Impact\tof\tre-measurement\tfrom\tthe\tTax\tCuts\tand\tJobs\tAct | 0.70 | — | — |
| Total\tnet\tnon-GAAP\tadjustments | 0.65 | 0.22 | — |
| Adjusted\tdiluted\tearnings\tper\tshare\t(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.

•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

•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.

•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.

•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

•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:

| (Dollars	in	millions) | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Total\toperation\tand\tmaintenance\texpenses | $1,378 | $1,504 | $1,404 |
| Less: |  |  |  |
| Operation\tand\tmaintenance\texpenses—Market-Based\tBusinesses | 337 | 372 | 358 |
| Operation\tand\tmaintenance\texpenses—Other | (50) | (44) | (49) |
| Total\toperation\tand\tmaintenance\texpenses—Regulated\tBusinesses | 1,091 | 1,176 | 1,095 |
| Less: |  |  |  |
| Regulated\tpurchased\twater\texpenses | 128 | 122 | 117 |
| Allocation\tof\tnon-operation\tand\tmaintenance\texpenses | 29 | 30 | 35 |
| Impact\tof\tFreedom\tIndustries\tsettlement\tactivities\t(a) | (22) | 65 | — |
| Adjusted\toperation\tand\tmaintenance\texpenses—Regulated\tBusinesses\t(i) | $956 | $959 | $943 |
| Total\toperating\trevenues | $3,357 | $3,302 | $3,159 |
| Less: |  |  |  |
| Operating\trevenues—Market-Based\tBusinesses | 422 | 451 | 434 |
| Operating\trevenues—Other | (23) | (20) | (18) |
| Total\toperating\trevenues—Regulated\tBusinesses | 2,958 | 2,871 | 2,743 |
| Less: |  |  |  |
| Regulated\tpurchased\twater\trevenues\t(b) | 128 | 122 | 117 |
|  | $2,830 | $2,749 | $2,626 |
| Adjusted\toperating\trevenues—Regulated\tBusinesses\t(ii) |  |  |  |
| Adjusted\tO&M\tefficiency\tratio—Regulated\tBusinesses\t(i)\t/\t(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\trate\tcase\tauthorizations\tby\tstate: |  |  |  |
| New\tYork\t(effective\tJune\t1,\t2017) | $4 | $— | $— |
| Virginia\t(a) | 5 | — | — |
| Iowa\t(effective\tMarch\t27,\t2017) | 4 | — | — |
| California\t(b) | 5 | 2 | 5 |
| Illinois\t(effective\tJanuary\t1,\t2017) | 25 | — | — |
| Kentucky\t(effective\tAugust\t28,\t2016) | — | 7 | — |
| Missouri\t(effective\tJuly\t20,\t2016\tand\tJuly\t22,\t2016) | — | 5 | — |
| West\tVirginia\t(effective\tFebruary\t25,\t2016) | — | 18 | — |
| Indiana\t(effective\tJanuary\t29,\t2016\tand\tJanuary\t29,\t2015) | — | 2 | 5 |
| New\tJersey\t(effective\tSeptember\t21,\t2015) | — | — | 22 |
| Other | — | — | 1 |
| Total\tgeneral\trate\tcase\tauthorizations | $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.

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\tsurcharge\tauthorizations\tby\tstate: |  |  |  |
| Missouri\t(effective\tDecember\t15,\t2017\tand\tJune\t27,\t2015) | $6 | $— | $2 |
| New\tJersey\t(a) | 14 | 19 | 9 |
| Indiana\t(effective\tMarch\t22,\t2017\tand\tMay\t4,\t2016) | 8 | 3 | — |
| Tennessee\t(effective\tMarch\t14,\t2017,\tMarch\t15,\t2016\tand\tJune\t29,\t2015) | 2 | 2 | 2 |
| Pennsylvania\t(b) | 1 | 28 | 14 |
| West\tVirginia\t(effective\tJanuary\t1,\t2017) | 2 | — | — |
| Illinois\t(c) | — | 7 | 6 |
| New\tYork\t(effective\tDecember\t1,\t2015) | — | — | 1 |
| Total\tinfrastructure\tsurcharge\tauthorizations | $33 | $59 | $34 |

(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\tinfrastructure\tsurcharge\tfilings\tby\tstate: |  |  |
| Indiana | January\t18,\t2018 | $7 |
| Tennessee | November\t7,\t2017 | 2 |
| Virginia | October\t31,\t2017 | 1 |
| Total\tpending\tinfrastructure\tsurcharge\tfilings |  | $10 |

# 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, | For	the	Years	Ended	December	31, |  | Increase<br>(Decrease) | Increase<br>(Decrease) | Increase<br>(Decrease) | Increase<br>(Decrease) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | 2015 | 2017\tvs.\t2016 | 2017\tvs.\t2016 | 2016\tvs.\t2015 |  |
| (Dollars\tin\tmillions) |  |  |  | $% | $% | $% |  |
| Operating\trevenues | $3,357 | $3,302 | $3,159 | $55 | 1.7 | $143 | 4.5 |
| Operating\texpenses: |  |  |  |  |  |  |  |
| Operation\tand\tmaintenance | 1,378 | 1,504 | 1,404 | (126) | (8.4) | 100 | 7.1 |
| Depreciation\tand\tamortization | 492 | 470 | 440 | 22 | 4.7 | 30 | 6.8 |
| General\ttaxes | 259 | 258 | 243 | 1 | 0.4 | 15 | 6.2 |
| Gain\ton\tasset\tdispositions\tand\tpurchases | (16) | (10) | (3) | (6) | 60.0 | (7) | 233.3 |
| Total\toperating\texpenses,\tnet | 2,113 | 2,222 | 2,084 | (109) | (4.9) | 138 | 6.6 |
| Operating\tincome | 1,244 | 1,080 | 1,075 | 164 | 15.2 | 5 | 0.5 |
| Other\tincome\t(expense): |  |  |  |  |  |  |  |
| Interest,\tnet | (342) | (325) | (308) | (17) | 5.2 | (17) | 5.5 |
| Loss\ton\tearly\textinguishment\tof\tdebt | (7) | — | — | (7) | 100.0 | — | — |
| Other,\tnet | 17 | 15 | 15 | 2 | 13.3 | — | — |
| Total\tother\tincome\t(expense) | (332) | (310) | (293) | (22) | 7.1 | (17) | 5.8 |
| Income\tbefore\tincome\ttaxes | 912 | 770 | 782 | 142 | 18.4 | (12) | (1.5) |
| Provision\tfor\tincome\ttaxes | 486 | 302 | 306 | 184 | 60.9 | (4) | (1.3) |
| Net\tincome\tattributable\tto\tcommon\tstockholders | $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.

•$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, | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | Increase<br>(Decrease) | Increase<br>(Decrease) | Increase<br>(Decrease) | Increase<br>(Decrease) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | 2015 | 2017\tvs.\t2016 | 2017\tvs.\t2016 | 2016\tvs.\t2015 | 2016\tvs.\t2015 |
| (Dollars\tin\tmillions) |  |  |  | $% | $% | $% | $% |
| Operating\trevenues | $2,958 | $2,871 | $2,743 | $87 | 3.0 | $128 | 4.7 |
| Operation\tand\tmaintenance | 1,091 | 1,176 | 1,095 | (85) | (7.2) | 81 | 7.4 |
| Operating\texpenses,\tnet | 1,781 | 1,852 | 1,732 | (71) | (3.8) | 120 | 6.9 |
| Net\tincome\tattributable\tto\tcommon\tstockholders | 559 | 472 | 473 | 87 | 18.4 | (1) | (0.2) |

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, | For	the	Years	Ended	December	31, |  | Increase<br>(Decrease) | Increase<br>(Decrease) | Increase<br>(Decrease) | Increase<br>(Decrease) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | 2015 | 2017\tvs.\t2016 | 2017\tvs.\t2016 | 2016\tvs.\t2015 | 2016\tvs.\t2015 |
| (Dollars\tin\tmillions) |  |  |  | $% | $% | $% | $% |
| Billed\twater\tservices\trevenues: |  |  |  |  |  |  |  |
| 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\tand\tother | 351 | 338 | 331 | 13 | 3.8 | 7 | 2.1 |
| Other | 31 | 53 | 39 | (22) | (41.5) | 14 | 35.9 |
| Total\tbilled\twater\tservices\trevenues | 2,776 | 2,697 | 2,595 | 79 | 2.9 | 102 | 3.9 |
| Unbilled\twater\tservices\trevenues | (11) | 13 | (3) | (24) | (184.6) | 16 | (533.3) |
| Total\twater\tservices\trevenues | 2,765 | 2,710 | 2,592 | 55 | 2.0 | 118 | 4.6 |
| Wastewater\tservices\trevenues | 142 | 112 | 97 | 30 | 26.8 | 15 | 15.5 |
| Other\trevenues | 51 | 49 | 54 | 2 | 4.1 | (5) | (9.3) |
| Total\toperating\trevenues | $2,958 | $2,871 | $2,743 | $87 | 3.0 | $128 | 4.7 |

|  | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | Increase<br>(Decrease) | Increase<br>(Decrease) | Increase<br>(Decrease) | Increase<br>(Decrease) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | 2015 | 2017\tvs.\t2016 |  | 2016\tvs.\t2015 | 2016\tvs.\t2015 |
| (Gallons\tin\tmillions) |  |  |  | Gallons | % | Gallons | % |
| Billed\twater\tservices\tvolumes: |  |  |  |  |  |  |  |
| 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\tand\tother | 51,341 | 50,678 | 51,324 | 663 | 1.3 | (646) | (1.3) |
| Total\tbilled\twater\tservices\tvolumes | 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

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

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

•$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.

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, | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | Increase<br>(Decrease) | Increase<br>(Decrease) | Increase<br>(Decrease) | Increase<br>(Decrease) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | 2015 | 2017\tvs.\t2016 | 2017\tvs.\t2016 | 2016\tvs.\t2015 | 2016\tvs.\t2015 |
| (Dollars\tin\tmillions) |  |  |  | $% | $% | $% | $% |
| Production\tcosts | $298 | $288 | $282 | $10 | 3.5 | $6 | 2.1 |
| Employee-related\tcosts | 446 | 443 | 430 | 3 | 0.7 | 13 | 3.0 |
| Operating\tsupplies\tand\tservices | 209 | 212 | 194 | (3) | (1.4) | 18 | 9.3 |
| Maintenance\tmaterials\tand\tsupplies | 70 | 73 | 70 | (3) | (4.1) | 3 | 4.3 |
| Customer\tbilling\tand\taccounting | 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, | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | Increase<br>(Decrease) | Increase<br>(Decrease) | Increase<br>(Decrease) | Increase<br>(Decrease) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | 2015 | 2017\tvs.\t2016 |  | 2016\tvs.\t2015 | 2016\tvs.\t2015 |
| (Dollars\tin\tmillions) |  |  |  | $% |  | $% | $% |
| Purchased\twater | $128 | $122 | $117 | $6 | 4.9 | $5 | 4.3 |
| Fuel\tand\tpower | 89 | 87 | 89 | 2 | 2.3 | (2) | (2.2) |
| Chemicals | 47 | 47 | 48 | — | — | (1) | (2.1) |
| Waste\tdisposal | 34 | 32 | 28 | 2 | 6.3 | 4 | 14.3 |
| Total | $298 | $288 | $282 | $10 | 3.5 | $6 | 2.1 |

•$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

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

|  | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | Increase<br>(Decrease) | Increase<br>(Decrease) | Increase<br>(Decrease) | Increase<br>(Decrease) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | 2015 | 2017\tvs.\t2016 | 2017\tvs.\t2016 | 2016\tvs.\t2015 | 2016\tvs.\t2015 |
| (Dollars\tin\tmillions) |  |  |  | $% | $% | $% | $% |
| Salaries\tand\twages | $334 | $336 | $321 | $(2) | (0.6) | $15 | 4.7 |
| Pensions | 32 | 28 | 30 | 4 | 14.3 | (2) | (6.7) |
| Group\tinsurance | 54 | 58 | 60 | (4) | (6.9) | (2) | (3.3) |
| Other\tbenefits | 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

•$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.

•$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, | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | Increase<br>(Decrease) | Increase<br>(Decrease) | Increase<br>(Decrease) | Increase<br>(Decrease) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | 2015 | 2017\tvs.\t2016 |  | 2016\tvs.\t2015 | 2016\tvs.\t2015 |
| (Dollars\tin\tmillions) |  |  |  | $% |  | $% | $% |
| Contracted\tservices | $84 | $84 | $81 | $— | — | $3 | 3.7 |
| Office\tsupplies\tand\tservices | 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

# 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

•$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.

•$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.

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, | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | Increase<br>(Decrease) | Increase<br>(Decrease) | Increase<br>(Decrease) | Increase<br>(Decrease) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | 2015 | 2017\tvs.\t2016 |  | 2016\tvs.\t2015 | 2016\tvs.\t2015 |
| (Dollars\tin\tmillions) |  |  |  | $% |  | $% | $% |
| Operating\trevenues | $422 | $451 | $434 | $(29) | (6.4) | $17 | 3.9 |
| Operation\tand\tmaintenance | 337 | 372 | 358 | (35) | (9.4) | 14 | 3.9 |
| Operating\texpenses,\tnet | 360 | 391 | 370 | (31) | (7.9) | 21 | 5.7 |
| Net\tincome\tattributable\tto\tcommon\tstockholders | 38 | 39 | 42 | (1) | (2.6) | (3) | (7.1) |

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

•$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.

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

•$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.

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, | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | Increase<br>(Decrease) | Increase<br>(Decrease) | Increase<br>(Decrease) | Increase<br>(Decrease) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | 2015 | 2017\tvs.\t2016 | 2017\tvs.\t2016 | 2016\tvs.\t2015 | 2016\tvs.\t2015 |
| (Dollars\tin\tmillions) |  |  |  | $% | $% | $% | $% |
| Production\tcosts | $37 | $35 | $36 | $2 | 5.7 | $(1) | (2.8) |
| Employee-related\tcosts | 97 | 94 | 76 | 3 | 3.2 | 18 | 23.7 |
| Operating\tsupplies\tand\tservices | 121 | 165 | 182 | (44) | (26.7) | (17) | (9.3) |
| Maintenance\tmaterials\tand\tsupplies | 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 |

•$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:

| (In	millions) | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Net\tincome | $426 | $468 | $476 |
| Add\t(less): |  |  |  |
| Depreciation\tand\tamortization | 492 | 470 | 440 |
| Deferred\tincome\ttaxes\tand\tamortization\tof\tinvestment\ttax\tcredits | 462 | 295 | 312 |
| Other\tnon-cash\tactivities\t(a) | 16 | 35 | 37 |
| Impact\tof\tFreedom\tIndustries\tsettlement\tactivities | (22) | 65 | — |
| Changes\tin\tworking\tcapital\t(b) | 123 | 9 | (13) |
| Pension\tand\tpostretirement\tbenefit\tcontributions | (48) | (53) | (57) |
| Net\tcash\tflows\tprovided\tby\toperating\tactivities | $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:

| (In	millions) | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Capital\texpenditures | $(1,434) | $(1,311) | $(1,160) |
| Acquisitions | (177) | (204) | (197) |
| Other\tinvesting\tactivities,\tnet\t(a) | (61) | (75) | (102) |
| Net\tcash\tflows\tused\tin\tinvesting\tactivities | $(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:

| (In	millions) | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Transmission\tand\tdistribution | $551 | $568 | $527 |
| Treatment\tand\tpumping | 171 | 151 | 136 |
| Services,\tmeter\tand\tfire\thydrants | 281 | 297 | 214 |
| General\tstructure\tand\tequipment | 281 | 202 | 174 |
| Sources\tof\tsupply | 54 | 59 | 53 |
| Wastewater | 96 | 34 | 56 |
| Total\tcapital\texpenditures | $1,434 | $1,311 | $1,160 |

I n	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:

•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.

•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.

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

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<br>(In	millions) |
| :--- | :--- | :--- | :--- | :--- |
| AWCC | Senior\tnotes—fixed\trate | 2.95%-3.75% | 2027-2047 | $1,350 |
|  | Private\tactivity\tbonds\tand\tgovernment\tfunded\tdebt |  |  |  |
| Other\tAmerican\tWater\tsubsidiaries | —fixed\trate | 0.00%-1.44% | 2020-2037 | 31 |
| Other\tAmerican\tWater\tsubsidiaries | Mortgage\tbonds—fixed\trate | 3.92% | 2020 | $3 |
| Other\tAmerican\tWater\tsubsidiaries | Term\tloan | 4.62%-5.12% | 2021 | $11 |
| Total\tissuances |  |  |  | $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 | (In	millions) |
| :--- | :--- | :--- | :--- | :--- |
| AWCC | Senior\tnotes—fixed\trate | 5.62%-6.09% | 2017-2021 | $844 |
|  | Private\tactivity\tbonds\tand\tgovernment\tfunded\tdebt |  |  |  |
| AWCC | —fixed\trate | 1.79%-2.90% | 2021-2031 | 1 |
|  | Private\tactivity\tbonds\tand\tgovernment\tfunded\tdebt |  |  |  |
| Other\tAmerican\tWater\tsubsidiaries | —fixed\trate | 0.00%-5.38% | 2017-2041 | 15 |
| Other\tAmerican\tWater\tsubsidiaries | Mortgage\tbonds—fixed\trate | 7.08% | 2017 | 33 |
| Other\tAmerican\tWater\tsubsidiaries | Mandatorily\tredeemable\tpreferred\tstock | 8.49%-9.18% | 2031-2036 | 2 |
| Other\tAmerican\tWater\tsubsidiaries | Term\tloan | 4.31%-5.31% | 2021 | 1 |
| Total\tretirements\tand\tredemptions |  |  |  | $896 |

| Company | Type | Rate | Maturity | (In	millions) |
| :--- | :--- | :--- | :--- | :--- |
| AWCC\t(a) | Senior\tnotes—fixed\trate | 3.00%-4.00% | 2026-2046 | $550 |
|  | Private\tactivity\tbonds\tand\tgovernment\tfunded\tdebt |  |  |  |
| Other\tAmerican\tWater\tsubsidiaries | —fixed\trate | 1.00%-1.36% | 2026-2037 | 3 |
| Total\tissuances |  |  |  | $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.

| Company | Type | Rate | Maturity | Amount<br>(In	millions) |
| :--- | :--- | :--- | :--- | :--- |
| AWCC | Senior\tnotes—fixed\trate | 5.52% | 2016 | $37 |
|  | Private\tactivity\tbonds\tand\tgovernment\tfunded\tdebt |  |  |  |
| AWCC | —fixed\trate | 1.79%-2.90% | 2021-2031 | 1 |
|  | Private\tactivity\tbonds\tand\tgovernment\tfunded\tdebt |  |  |  |
| Other\tAmerican\tWater\tsubsidiaries | —fixed\trate | 0.00%-5.30% | 2016-2041 | 104 |
| Other\tAmerican\tWater\tsubsidiaries | Mandatorily\tredeemable\tpreferred\tstock | 8.49%-9.18% | 2031-2036 | 2 |
| Total\tretirements\tand\tredemptions |  |  |  | $144 |

| Company | Type | Rate | Maturity | Amount<br>(In	millions) |
| :--- | :--- | :--- | :--- | :--- |
| AWCC\t(a) | Senior\tnotes—fixed\trate | 3.40%-4.30% | 2025-2045 | $550 |
|  | Private\tactivity\tbonds\tand\tgovernment\tfunded\tdebt |  |  |  |
| Other\tAmerican\tWater\tsubsidiaries | —fixed\trate | 1.00%-1.56% | 2032 | 15 |
| Total\tissuances |  |  |  | $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.

| Company | Type | Rate | Maturity | (In	millions) |
| :--- | :--- | :--- | :--- | :--- |
| AWCC | Senior\tnotes—fixed\trate | 6.00% | 2015 | 30 |
|  | Private\tactivity\tbonds\tand\tgovernment\tfunded\tdebt |  |  |  |
| AWCC | —fixed\trate | 1.79%-5.25% | 2015-2031 | $36 |
|  | Private\tactivity\tbonds\tand\tgovernment\tfunded\tdebt |  |  |  |
| Other\tAmerican\tWater\tsubsidiaries\t(a) | —fixed\trate | 0.00%-5.40% | 2015-2041 | 61 |
| Other\tAmerican\tWater\tsubsidiaries | Mandatorily\tredeemable\tpreferred\tstock | 8.49%-9.18% | 2031-2036 | 4 |
| Total\tretirements\tand\tredemptions |  |  |  | $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<br>Commitment | Available	Credit<br>Facility	Capacity | Letter	of	Credit<br>Sublimit | Available	Letter	of<br>Credit	Capacity | Commercial<br>Paper	Limit | Available<br>Commercial<br>Paper	Capacity |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| December\t31,\t2017 | $1,762 | $1,673 | $150 | $66 | $1,600 | $695 |
| December\t31,\t2016 | 1,766 | 1,668 | 150 | 62 | 1,600 | 751 |

# 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\tcommon\tstockholders'\tequity | 41.0% | 42.1% | 43.5% |
| Long-term\tdebt\tand\tredeemable\tpreferred\tstock\tat\tredemption\tvalue | 49.6% | 46.4% | 50.6% |
| Short-term\tdebt\tand\tcurrent\tportion\tof\tlong-term\tdebt | 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:

|  | Moody's	Investors | Standard	&amp;	Poor's |
| :--- | :--- | :--- |
| Securities | Service | Ratings\tService |
| Rating\tOutlook | Negative | Stable |
| Senior\tunsecured\tdebt | A3 | A |
| Commercial\tpaper | 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.

|  | 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:

|  |  |  |  |  | More	Than |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Contractual\tobligation\t(In\tmillions) | Total | 1\tyear\tor\tLess | 2-3\tYears | 4-5\tyears | 5\tyears |
| Long-term\tdebt\tobligations\t(a) | $6,814 | $320 | $218 | $420 | $5,856 |
| Interest\ton\tlong-term\tdebt\t(b) | 5,047 | 324 | 600 | 571 | 3,552 |
| Operating\tlease\tobligations\t(c) | 123 | 15 | 26 | 17 | 65 |
| Purchase\twater\tobligations\t(d) | 979 | 59 | 130 | 129 | 661 |
| Other\tpurchase\tobligations\t(e) | 235 | 235 | — | — | — |
| Postretirement\tbenefit\tplans'\tobligations\t(f) | 3 | — | 3 | — | — |
| Pension\tplan\tobligations\t(f) | 239 | 39 | 91 | 109 | — |
| Preferred\tstocks\twith\tmandatory\tredemption\trequirements | 10 | 2 | 3 | 2 | 3 |
| Interest\ton\tpreferred\tstock\twith\tmandatory\tredemption\nrequirements | 5 | 1 | 1 | 1 | 2 |
| Other\tobligations\t(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<br>Allocation | Percentage	of	Plan	Assets<br>as	of	December	31, |  |
| :--- | :--- | :--- | :--- |
| Asset\tCategory | 2018 | 2017 | 2016 |
| Equity\tsecurities | 43% | 44% | 49% |
| Fixed\tincome | 50% | 49% | 42% |
| Real\tEstate | 5% | 5% | 7% |
| Real\testate\tinvestment\ttrusts\t("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<br>Allocation | Percentage	of	Plan	Assets<br>as	of	December	31, |  |
| :--- | :--- | :--- | :--- |
| Asset\tCategory | 2018 | 2017 | 2016 |
| Equity\tsecurities | 38% | 35% | 33% |
| Fixed\tincome | 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<br>Postretirement<br>Benefit	Obligation	as	of<br>December	31,	2017 | Total	Service<br>and<br>Interest	Cost<br>Components |
| :--- | :--- | :--- |
| Increase\tassumed\thealth\tcare\tcost\ttrend\tby\t1% | $73 | $5 |
| Decrease\tassumed\thealth\tcare\tcost\ttrend\tby\t1% | $(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.

# ITEM	7A. QUANTITATIVE	 AND QUALITATIVE DISCLOSURES	 ABOUT	 MARKET RISK

We	are	exposed	to	market	risk	associated	with	changes	in	commodity	prices,	equity	prices	and	interest	rates.	We	are	exposed	to	risks	from	changes	in	interest rates	as	a	result	of	our	issuance	of	variable	and	fixed	rate	debt	and	commercial	paper.	We	manage	our	interest	rate	exposure	by	limiting	our	variable	rate	exposure	and by	monitoring	the	effects	of	market	changes	in	interest	rates.	We	also	have	the	ability	to	enter	into	financial	derivative	instruments,	which	could	include	instruments	such as,	but	not	limited	to,	interest	rate	swaps,	forward	starting	swaps,	swaptions	and	U.S.	Treasury	lock	agreements	to	manage	and	mitigate	interest	rate	risk	exposure.	As	of December	31,	2017,	a	hypothetical	increase	of	interest	rates	by	1%	associated	with	our	short-term	borrowings	would	result	in	an	$8	million	increase	in	short-term interest	expense.

The	Company	has	two	forward	starting	swap	agreements	with	an	aggregate	notional	amount	of	$200	million	to	reduce	interest	rate	exposure	on	debt	expected	to be	issued	in	2018.	The	forward	starting	swap	agreements	terminate	in	November	2018	and	have	an	average	fixed	rate	of	2.59%.	When	entering	into	forward	starting interest	rate	swaps,	the	Company	is	subject	to	market	risk	with	respect	to	changes	in	the	underlying	benchmark	interest	rate	that	impacts	the	fair	value	of	the	forward starting	interest	rate	swaps.	We	manage	market	risk	by	matching	terms	of	the	swaps	with	the	critical	terms	of	the	expected	debt	issuance.	The	fair	value	of	the	forward starting	swaps	at	December	31,	2017	was	in	a	loss	position	of	$3	million.	A	hypothetical	1%	adverse	change	in	interest	rates	would	result	in	a	decrease	in	the	fair	value of	our	forward	starting	swaps	of	approximately	$32	million	at	December	31,	2017.

Our	risks	associated	with	price	increases	for	chemicals,	electricity	and	other	commodities	are	reduced	through	contractual	arrangements	and	the	expected	ability to	recover	price	increases	through	rates,	in	the	next	general	rate	case	proceeding	or	other	regulatory	mechanism,	as	authorized	by	each	regulatory	jurisdiction.	Non- performance	by	these	commodity	suppliers	could	have	a	material	adverse	impact	on	our	results	of	operations,	financial	position	and	cash	flows.

The	market	price	of	our	common	stock	may	experience	fluctuations,	which	may	be	unrelated	to	our	operating	performance.	In	particular,	our	stock	price	may	be affected	by	general	market	movements	as	well	as	developments	specifically	related	to	the	water	and	wastewater	industry.	These	could	include,	among	other	things, interest	rate	movements,	quarterly	variations	or	changes	in	financial	estimates	by	securities	analysts	and	governmental	or	regulatory	actions.	This	volatility	may	make	it difficult	for	us	to	access	the	capital	markets	in	the	future	through	additional	offerings	of	our	common	stock,	regardless	of	our	financial	performance,	and	such	difficulty may	preclude	us	from	being	able	to	take	advantage	of	certain	business	opportunities	or	meet	business	obligations.

We	 are	 exposed	 to	 credit	 risk	 through	 our	 water,	 wastewater	 and	 other	 water-related	 services	 provided	 by	 our	Regulated	 Businesses	 and	Market-Based Businesses.	Our	Regulated	Businesses	serve	residential,	commercial,	industrial	and	other	customers	while	our	Market-Based	Businesses	engage	in	business	activities with	developers,	government	entities	and	other	customers.	Our	primary	credit	risk	is	exposure	to	customer	default	on	contractual	obligations	and	the	associated	loss	that may	be	incurred	due	to	the	non-payment	of	customer	accounts	receivable	balances.	Our	credit	risk	is	managed	through	established	credit	and	collection	policies	which are	in	compliance	with	applicable	regulatory	requirements	and	involve	monitoring	of	customer	exposure	and	the	use	of	credit	risk	mitigation	measures	such	as	letters	of credit	or	prepayment	arrangements.	Our	credit	portfolio	is	diversified	with	no	significant	customer	or	industry	concentrations.	In	addition,	our	Regulated	Businesses	are generally	able	to	recover	all	prudently	incurred	costs	including	uncollectible	customer	accounts	receivable	expenses	and	collection	costs	through	rates.

The	Company's	retirement	trust	assets	are	exposed	to	the	market	prices	of	debt	and	equity	securities.	Changes	to	the	retirement	trust	asset	values	can	impact	the Company's	pension	and	other	benefits	expense,	funded	status	and	future	minimum	funding	requirements.	Changes	in	interest	rates	can	impact	retirement	liabilities.	We aim	to	reduce	risk	through	asset	diversification	and	by	investing	in	long	duration	fixed-income	securities	that	have	a	duration	similar	to	that	of	our	pension	liabilities, seeking	to	hedge	some	of	the	interest	rate	sensitivity	of	our	liabilities.	That	way,	if	interest	rates	fall	and	liabilities	increase,	we	expect	that	the	fixed-income	assets	in	our retirement	trust	will	also	increase	in	value.	We	also	expect	our	risk	to	be	reduced	through	our	ability	to	recover	pension	and	other	benefit	costs	through	rates.

We	are	also	exposed	to	a	potential	national	economic	recession	or	deterioration	in	local	economic	conditions	in	the	markets	in	which	we	operate.	The	credit quality	of	our	customer	accounts	receivable	is	dependent	on	the	economy	and	the	ability	of	our	customers	to	manage	through	unfavorable	economic	cycles	and	other market	changes.	In	addition,	there	can	be	no	assurances	that	regulators	will	grant	sufficient	rate	authorizations.	Therefore,	our	ability	to	fully	recover	operating	expense, recover	our	investment	and	provide	an	appropriate	return	on	invested	capital	made	in	our	Regulated	Businesses	may	be	adversely	impacted.

# ITEM	8. FINANCIAL	STATEMENTS	AND	SUPPLEMENTARY	DATA

# INDEX	TO	CONSOLIDATED	FINANCIAL	STATEMENTS

|  | Page |
| :--- | :--- |
| Audited\tConsolidated\tFinancial\tStatements |  |
| Report\tof\tIndependent\tRegistered\tPublic\tAccounting\tFirm | 77 |
| Consolidated\tBalance\tSheets\tas\tof\tDecember\t31,\t2017\tand\t2016 | 79 |
| Consolidated\tStatements\tof\tOperations\tfor\tthe\tyears\tended\tDecember\t31,\t2017,\t2016\tand\t2015 | 81 |
| Consolidated\tStatements\tof\tComprehensive\tIncome\tfor\tthe\tyears\tended\tDecember\t31,\t2017,\t2016,\tand\t2015 | 82 |
| Consolidated\tStatements\tof\tCash\tFlows\tfor\tthe\tyears\tended\tDecember\t31,\t2017,\t2016\tand\t2015 | 83 |
| Consolidated\tStatements\tof\tChanges\tin\tStockholders'\tEquity\tfor\tthe\tyears\tended\tDecember\t31,\t2017,\t2016\tand\t2015 | 84 |
| Notes\tto\tConsolidated\tFinancial\tStatements | 85 |

# Report	of	Independent	Registered	Public	Accounting	Firm

# To	the	Board	of	Directors	and	Stockholders	of

# Opinions	on	the	Financial	Statements	and	Internal	Control	over	Financial	Reporting

We	have	audited	the	accompanying	consolidated	balance	sheets	of	American	Water	Works	Company,	Inc.	and	its	subsidiaries	as	of	 December	31,	2017	and 2016,	and	the	related	consolidated	statements	of	operations,	of	comprehensive	income,	of	cash	flows,	and	of	changes	in	stockholders'	equity	for	each	of	the	three	years in	 the	 period	 ended	December	31,	2017,	including	the	related	notes	(collectively	referred	to	as	the	"consolidated	financial	statements").	We	also	have	audited	the Company's	internal	control	over	financial	reporting	as	of	December	31,	2017,	based	on	criteria	established	in	Internal	Control	-	Integrated	Framework	(2013)	issued	by the	Committee	of	Sponsoring	Organizations	of	the	Treadway	Commission	(COSO).

In	our	opinion,	the	consolidated	financial	statements	referred	to	above	present	fairly,	in	all	material	respects,	the	financial	position	of	the	Company	as	of December	31,	2017	and	2016,	and	the	results	of	their	operations	and	their	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2017	in	conformity with	accounting	principles	generally	accepted	in	the	United	States	of	America.	Also	in	our	opinion,	the	Company	maintained,	in	all	material	respects,	effective	internal control	over	financial	reporting	as	of	December	31,	2017,	based	on	criteria	established	in	Internal	Control	-	Integrated	Framework	(2013)	issued	by	the	COSO.

# Basis	for	Opinions

The	Company's	management	is	responsible	for	these	consolidated	financial	statements,	for	maintaining	effective	internal	control	over	financial	reporting,	and	for its	assessment	of	the	effectiveness	of	internal	control	over	financial	reporting,	included	in	Management's	Report	on	Internal	Control	over	Financial	Reporting	appearing under	Item	9A.	Our	responsibility	is	to	express	opinions	on	the	Company's	consolidated	financial	statements	and	on	the	Company's	internal	control	over	financial reporting	based	on	our	audits.	We	are	a	public	accounting	firm	registered	with	the	Public	Company	Accounting	Oversight	Board	(United	States)	("PCAOB")	and	are required	to	be	independent	with	respect	to	the	Company	in	accordance	with	the	U.S.	federal	securities	laws	and	the	applicable	rules	and	regulations	of	the	Securities	and Exchange	Commission	and	the	PCAOB.

We	conducted	our	audits	in	accordance	with	the	standards	of	the	PCAOB.	Those	standards	require	that	we	plan	and	perform	the	audits	to	obtain	reasonable assurance	about	whether	the	consolidated	financial	statements	are	free	of	material	misstatement,	whether	due	to	error	or	fraud,	and	whether	effective	internal	control over	financial	reporting	was	maintained	in	all	material	respects.

Our	audits	of	the	consolidated	financial	statements	included	performing	procedures	to	assess	the	risks	of	material	misstatement	of	the	consolidated	financial statements,	whether	due	to	error	or	fraud,	and	performing	procedures	that	respond	to	those	risks.	Such	procedures	included	examining,	on	a	test	basis,	evidence	regarding the	amounts	and	disclosures	in	the	consolidated	financial	statements.	Our	audits	also	included	evaluating	the	accounting	principles	used	and	significant	estimates	made by	management,	as	well	as	evaluating	the	overall	presentation	of	the	consolidated	financial	statements.	Our	audit	of	internal	control	over	financial	reporting	included obtaining	an	understanding	of	internal	control	over	financial	reporting,	assessing	the	risk	that	a	material	weakness	exists,	and	testing	and	evaluating	the	design	and operating	effectiveness	of	internal	control	based	on	the	assessed	risk.	Our	audits	also	included	performing	such	other	procedures	as	we	considered	necessary	in	the circumstances.	We	believe	that	our	audits	provide	a	reasonable	basis	for	our	opinions.

# Definition	and	Limitations	of	Internal	Control	over	Financial	Reporting

A	company's	internal	control	over	financial	reporting	is	a	process	designed	to	provide	reasonable	assurance	regarding	the	reliability	of	financial	reporting	and	the preparation	of	financial	statements	for	external	purposes	in	accordance	with	generally	accepted	accounting	principles.	A	company's	internal	control	over	financial reporting	includes	those	policies	and	procedures	that	(i)	pertain	to	the	maintenance	of	records	that,	in	reasonable	detail,	accurately	and	fairly	reflect	the	transactions	and dispositions	of	the	assets	of	the	company;	(ii)	provide	reasonable	assurance	that	transactions	are	recorded	as	necessary	to	permit	preparation	of	financial	statements	in accordance	with	generally	accepted	accounting	principles,	and	that	receipts	and	expenditures	of	the	company	are	being	made	only	in	accordance	with	authorizations	of management	 and	 directors	 of	 the	 company;	 and	 (iii)	 provide	 reasonable	 assurance	 regarding	 prevention	 or	 timely	 detection	 of	 unauthorized	 acquisition,	 use,	 or disposition	of	the	company's	assets	that	could	have	a	material	effect	on	the	financial	statements.

Because	of	its	inherent	limitations,	internal	control	over	financial	reporting	may	not	prevent	or	detect	misstatements.	Also,	projections	of	any	evaluation	of effectiveness	to	future	periods	are	subject	to	the	risk	that	controls	may	become	inadequate	because	of	changes	in	conditions,	or	that	the	degree	of	compliance	with	the policies	or	procedures	may	deteriorate.

/s/	PricewaterhouseCoopers	LLP

Philadelphia,	Pennsylvania February	20,	2018

We	have	served	as	the	Company's	auditor	since	1948.

# American	Water	Works	Company,	Inc.	and	Subsidiary	Companies

# Consolidated	Balance	Sheets

(In	millions,	except	share	and	per	share	data)

|  | December	31,	2017 | December	31,	2016 |
| :--- | :--- | :--- |
| ASSETS |  |  |
| Property,\tplant\tand\tequipment | $21,716 | $19,954 |
| Accumulated\tdepreciation | (5,470) | (4,962) |
| Property,\tplant\tand\tequipment,\tnet | 16,246 | 14,992 |
| Current\tassets: |  |  |
| Cash\tand\tcash\tequivalents | 55 | 75 |
| Restricted\tfunds | 27 | 20 |
| Accounts\treceivable,\tnet | 272 | 269 |
| Unbilled\trevenues | 212 | 263 |
| Materials\tand\tsupplies | 41 | 39 |
| Other | 113 | 118 |
| Total\tcurrent\tassets | 720 | 784 |
| Regulatory\tand\tother\tlong-term\tassets: |  |  |
| Regulatory\tassets | 1,061 | 1,289 |
| Goodwill | 1,379 | 1,345 |
| Other | 76 | 72 |
| Total\tregulatory\tand\tother\tlong-term\tassets | 2,516 | 2,706 |
| TOTAL\tASSETS | $19,482 | $18,482 |

		The	accompanying	notes	are	an	integral	part	of	these	Consolidated	Financial	Statements.

|  | December	31,	2017 | December	31,	2016 |
| :--- | :--- | :--- |
| CAPITALIZATION\tAND\tLIABILITIES |  |  |
| Capitalization: |  |  |
|  | $2 | $2 |
| respectively) |  |  |
| Paid-in-capital | 6,432 | 6,388 |
| Accumulated\tdeficit | (723) | (873) |
| Accumulated\tother\tcomprehensive\tloss | (79) | (86) |
| Treasury\tstock,\tat\tcost\t(4,064,010\tand\t3,701,867\tshares,\trespectively) | (247) | (213) |
| Total\tcommon\tstockholders'\tequity | 5,385 | 5,218 |
| Long-term\tdebt | 6,490 | 5,749 |
| Redeemable\tpreferred\tstock\tat\tredemption\tvalue | 8 | 10 |
| Total\tlong-term\tdebt | 6,498 | 5,759 |
| Total\tcapitalization | 11,883 | 10,977 |
| Current\tliabilities: |  |  |
| Short-term\tdebt | 905 | 849 |
| Current\tportion\tof\tlong-term\tdebt | 322 | 574 |
| Accounts\tpayable | 195 | 154 |
| Accrued\tliabilities | 630 | 609 |
| Taxes\taccrued | 33 | 31 |
| Interest\taccrued | 73 | 63 |
| Other | 167 | 112 |
| Total\tcurrent\tliabilities | 2,325 | 2,392 |
| Regulatory\tand\tother\tlong-term\tliabilities: |  |  |
| Advances\tfor\tconstruction | 271 | 300 |
| Deferred\tincome\ttaxes,\tnet | 1,551 | 2,596 |
| Deferred\tinvestment\ttax\tcredits | 22 | 23 |
| Regulatory\tliabilities | 1,664 | 403 |
| Accrued\tpension\texpense | 384 | 419 |
| Accrued\tpostretirement\tbenefit\texpense | 40 | 87 |
| Other | 66 | 67 |
| Total\tregulatory\tand\tother\tlong-term\tliabilities | 3,998 | 3,895 |
| Contributions\tin\taid\tof\tconstruction | 1,276 | 1,218 |
| Commitments\tand\tcontingencies\t(See\tNote\t15) |  |  |
| TOTAL\tCAPITALIZATION\tAND\tLIABILITIES | $19,482 | $18,482 |

# Consolidated	Statements	of	Operations

(In	millions,	except	per	share	data)

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Operating\trevenues | $3,357 | $3,302 | $3,159 |
| Operating\texpenses: |  |  |  |
| Operation\tand\tmaintenance | 1,378 | 1,504 | 1,404 |
| Depreciation\tand\tamortization | 492 | 470 | 440 |
| General\ttaxes | 259 | 258 | 243 |
| Gain\ton\tasset\tdispositions\tand\tpurchases | (16) | (10) | (3) |
| Total\toperating\texpenses,\tnet | 2,113 | 2,222 | 2,084 |
| Operating\tincome | 1,244 | 1,080 | 1,075 |
| Other\tincome\t(expense): |  |  |  |
| Interest,\tnet | (342) | (325) | (308) |
| Loss\ton\tearly\textinguishment\tof\tdebt | (7) | — | — |
| Other,\tnet | 17 | 15 | 15 |
| Total\tother\tincome\t(expense) | (332) | (310) | (293) |
| Income\tbefore\tincome\ttaxes | 912 | 770 | 782 |
| Provision\tfor\tincome\ttaxes | 486 | 302 | 306 |
| Net\tincome\tattributable\tto\tcommon\tstockholders | $426 | $468 | $476 |
| Basic\tearnings\tper\tshare:\t(a) |  |  |  |
| Net\tincome\tattributable\tto\tcommon\tstockholders | $2.39 | $2.63 | $2.66 |
| Diluted\tearnings\tper\tshare:\t(a) |  |  |  |
| Net\tincome\tattributable\tto\tcommon\tstockholders | $2.38 | $2.62 | $2.64 |
| Weighted-average\tcommon\tshares\toutstanding: |  |  |  |
| Basic | 178 | 178 | 179 |
| Diluted | 179 | 179 | 180 |
| Dividends\tdeclared\tper\tcommon\tshare | $1.66 | $1.50 | $1.36 |

(a)	Amounts	may	not	calculate	due	to	rounding.

# Consolidated	Statements	of	Comprehensive	Income

# (In	millions)

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Net\tincome\tattributable\tto\tcommon\tstockholders | $426 | $468 | $476 |
| Other\tcomprehensive\tincome\t(loss),\tnet\tof\ttax: |  |  |  |
| Change\tin\temployee\tbenefit\tplan\tfunded\tstatus,\tnet\tof\ttax\tof\t$2,\t$(14)\tand\t$(6)\tin\t2017,\t2016\tand\t2015, |  |  |  |
| respectively | 7 | (21) | (10) |
| Pension\tamortized\tto\tperiodic\tbenefit\tcost: |  |  |  |
| Actuarial\tloss,\tnet\tof\ttax\tof\t$5,\t$4\tand\t$3\tin\t2017,\t2016\tand\t2015,\trespectively | 7 | 6 | 5 |
| Foreign\tcurrency\ttranslation\tadjustment | (1) | — | (1) |
| Unrealized\t(loss)\tgain\ton\tcash\tflow\thedges,\tnet\tof\ttax\tof\t$(4),\t$10\tand\t$0\tin\t2017,\t2016\tand\t2015,\trespectively | (6) | 17 | — |
| Net\tother\tcomprehensive\tincome\t(loss) | 7 | 2 | (6) |
| Comprehensive\tincome\tattributable\tto\tcommon\tstockholders | $433 | $470 | $470 |

# Consolidated	Statements	of	Cash	Flows

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| CASH\tFLOWS\tFROM\tOPERATING\tACTIVITIES |  |  |  |
| Net\tincome | $426 | $468 | $476 |
| Adjustments\tto\treconcile\tto\tnet\tcash\tflows\tprovided\tby\toperating\tactivities: |  |  |  |
| Depreciation\tand\tamortization | 492 | 470 | 440 |
| Deferred\tincome\ttaxes\tand\tamortization\tof\tinvestment\ttax\tcredits | 462 | 295 | 312 |
| Provision\tfor\tlosses\ton\taccounts\treceivable | 29 | 27 | 32 |
| Gain\ton\tasset\tdispositions\tand\tpurchases | (16) | (10) | (3) |
| Pension\tand\tnon-pension\tpostretirement\tbenefits | 57 | 54 | 61 |
| Other\tnon-cash,\tnet | (54) | (36) | (53) |
| Changes\tin\tassets\tand\tliabilities: |  |  |  |
| Receivables\tand\tunbilled\trevenues | 21 | (31) | (84) |
| Pension\tand\tnon-pension\tpostretirement\tbenefit\tcontributions | (48) | (53) | (57) |
| Accounts\tpayable\tand\taccrued\tliabilities | 38 | 60 | 80 |
| Other\tassets\tand\tliabilities,\tnet | 64 | (20) | (9) |
| Impact\tof\tFreedom\tIndustries\tsettlement\tactivities | (22) | 65 | — |
| Net\tcash\tprovided\tby\toperating\tactivities | 1,449 | 1,289 | 1,195 |
| CASH\tFLOWS\tFROM\tINVESTING\tACTIVITIES |  |  |  |
| Capital\texpenditures | (1,434) | (1,311) | (1,160) |
| Acquisitions,\tnet\tof\tcash\tacquired | (177) | (204) | (197) |
| Proceeds\tfrom\tsale\tof\tassets\tand\tsecurities | 15 | 9 | 5 |
| Removal\tcosts\tfrom\tproperty,\tplant\tand\tequipment\tretirements,\tnet | (76) | (84) | (107) |
| Net\tcash\tused\tin\tinvesting\tactivities | (1,672) | (1,590) | (1,459) |
| CASH\tFLOWS\tFROM\tFINANCING\tACTIVITIES |  |  |  |
| Proceeds\tfrom\tlong-term\tdebt | 1,395 | 553 | 565 |
| Repayments\tof\tlong-term\tdebt | (896) | (144) | (132) |
| Proceeds\tfrom\tshort-term\tborrowings\twith\tmaturities\tgreater\tthan\tthree\tmonths | — | — | 60 |
| Repayments\tof\tshort-term\tborrowings\twith\tmaturities\tgreater\tthan\tthree\tmonths | — | — | (60) |
| Net\tshort-term\tborrowings\twith\tmaturities\tless\tthan\tthree\tmonths | 55 | 221 | 180 |
| Proceeds\tfrom\tissuances\tof\temployee\tstock\tplans\tand\tdirect\tstock\tpurchase\tplan | 26 | 26 | 39 |
| Advances\tand\tcontributions\tfor\tconstruction,\tnet\tof\trefunds\tof\t$22,\t$31\tand\t$23\tin\t2017,\t2016\tand\t2015,\trespectively | 28 | 16 | 26 |
| Debt\tissuance\tcosts | (13) | (5) | (7) |
| Make-whole\tpremium\ton\tearly\tdebt\tredemption | (34) | — | — |
| Dividends\tpaid | (289) | (261) | (239) |
| Anti-dilutive\tshare\trepurchases | (54) | (65) | (126) |
| Taxes\tpaid\trelated\tto\temployee\tstock\tplans | (11) | (13) | (16) |
| Net\tcash\tprovided\tby\t(used\tin)\tfinancing\tactivities | 207 | 328 | 290 |
| Net\t(decrease)\tincrease\tin\tcash\tand\tcash\tequivalents\tand\trestricted\tfunds | (16) | 27 | 26 |
| Cash\tand\tcash\tequivalents\tand\trestricted\tfunds\tat\tbeginning\tof\tperiod | 99 | 72 | 46 |
| Cash\tand\tcash\tequivalents\tand\trestricted\tfunds\tat\tend\tof\tperiod | $83 | $99 | $72 |
| Cash\tpaid\tduring\tthe\tyear\tfor: |  |  |  |
| Interest,\tnet\tof\tcapitalized\tamount | $338 | $327 | $309 |
| Income\ttaxes,\tnet\tof\trefunds\tof\t$0,\t$0\tand\t$1\tin\t2017,\t2016\tand\t2015,\trespectively | $30 | $16 | $12 |
| Non-cash\tinvesting\tactivity: |  |  |  |
| Capital\texpenditures\tacquired\ton\taccount\tbut\tunpaid\tas\tof\tyear\tend | $204 | $171 | $224 |
| Acquisition\tfinanced\tby\ttreasury\tstock | $33 | $— | $— |

# Consolidated	Statements	of	Changes	in	Stockholders'	Equity

|  | Common	Stock | Common	Stock |  |  |  | Treasury	Stock | Treasury	Stock | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Shares | Par\tValue | Paid-in\nCapital | Accumulated\nDeficit | Accumulated\tOther\nComprehensive\tLoss | Shares | At\tCost | Stockholders'\nEquity |
| Balance\tas\tof\tDecember\t31,\t2014 | 179.5 | $2 | $6,302 | $(1,296) | $(82) | (0.2) | $(11) | $4,915 |
| Cumulative\teffect\tof\tchange\tin\taccounting\nprinciple | — | — | — | (8) | — | — | — | (8) |
| Net\tincome\tattributable\tto\tcommon\tstockholders | — | — | — | 476 | — | — | — | 476 |
| Direct\tstock\treinvestment\tand\tpurchase\tplan | 0.1 | — | 4 | — | — | — | — | 4 |
| Employee\tstock\tpurchase\tplan | 0.1 | — | 5 | — | — | — | — | 5 |
| Stock-based\tcompensation\tactivity | 1.2 | — | 40 | (1) | — | (0.1) | (6) | 33 |
| Repurchases\tof\tcommon\tstock | — | — | — | — | — | (2.3) | (126) | (126) |
| Net\tother\tcomprehensive\tincome\t(loss) | — | — | — | — | (6) | — | — | (6) |
| Dividends | — | — | — | (244) | — | — | — | (244) |
| Balance\tas\tof\tDecember\t31,\t2015 | 180.9 | $2 | $6,351 | $(1,073) | $(88) | (2.6) | $(143) | $5,049 |
| Net\tincome\tattributable\tto\tcommon\tstockholders | — | — | — | 468 | — | — | — | 468 |
| Direct\tstock\treinvestment\tand\tpurchase\tplan | 0.1 | — | 5 | — | — | — | — | 5 |
| Employee\tstock\tpurchase\tplan | 0.1 | — | 7 | — | — | — | — | 7 |
| Stock-based\tcompensation\tactivity | 0.7 | — | 25 | (1) | — | (0.1) | (5) | 19 |
| Repurchases\tof\tcommon\tstock | — | — | — | — | — | (1.0) | (65) | (65) |
| Net\tother\tcomprehensive\tincome\t(loss) | — | — | — | — | 2 | — | — | 2 |
| Dividends | — | — | — | (267) | — | — | — | (267) |
| Balance\tas\tof\tDecember\t31,\t2016 | 181.8 | $2 | $6,388 | $(873) | $(86) | (3.7) | $(213) | $5,218 |
| Cumulative\teffect\tof\tchange\tin\taccounting |  |  |  |  |  |  |  |  |
| principle | — | — | — | 21 | — | — | — | 21 |
| Net\tincome\tattributable\tto\tcommon\tstockholders | — | — | — | 426 | — | — | — | 426 |
| Direct\tstock\treinvestment\tand\tpurchase\tplan | 0.1 | — | 8 | — | — | — | — | 8 |
| Employee\tstock\tpurchase\tplan | 0.1 | — | 7 | — | — | — | — | 7 |
| Stock-based\tcompensation\tactivity | 0.5 | — | 22 | — | — | (0.1) | (7) | 15 |
| Acquisitions\tvia\ttreasury\tstock | — | — | 7 | — | — | 0.4 | 27 | 34 |
| Repurchases\tof\tcommon\tstock | — | — | — | — | — | (0.7) | (54) | (54) |
| Net\tother\tcomprehensive\tincome\t(loss) | — | — | — | — | 7 | — | — | 7 |
| Dividends | — | — | — | (297) | — | — | — | (297) |
| Balance\tas\tof\tDecember\t31,\t2017 | 182.5 | $2 | $6,432 | $(723) | $(79) | (4.1) | $(247) | $5,385 |

# Notes	to	Consolidated	Financial	Statements

(Unless	otherwise	noted,	in	millions,	except	per	share	data)

# Note	1:	Organization	and	Operation

American	Water	Works	Company,	Inc.	(the	"Company"	or	"American	Water")	is	the	holding	company	for	regulated	and	market-based	subsidiaries	throughout the	United	States	and	Ontario,	Canada.	The	Company's	primary	business	involves	the	ownership	of	utilities	that	provide	water	and	wastewater	services	in	16	states	in	the United	States,	collectively	referred	 to	 as	 the	 "Regulated	Businesses."	 The	 Company	 also	 operates	 market-based	 businesses	 within	four,	 non-reportable	 operating segments,	collectively	referred	to	as	the	"Market-Based	Businesses."	These	businesses	include	the	Military	Services	Group,	which	conducts	operation	and	maintenance ("O&M")	of	water	and	wastewater	systems	on	military	bases;	the	Homeowner	Services	Group,	which	primarily	provides	water	and	sewer	line	protection	plans	for homeowners;	the	Contract	Operations	Group,	which	conducts	O&M	of	water	and	wastewater	facilities	for	municipalities	and	industrial	customers;	and	Keystone Clearwater	Solutions,	LLC	("Keystone"),	which	provides	water	services	for	natural	gas	exploration	and	production	companies.

# Note	2:	Significant	Accounting	Policies

# Principles	of	Consolidation

The	accompanying	Consolidated	Financial	Statements	include	the	accounts	of	American	Water	and	all	of	its	subsidiaries	in	which	a	controlling	interest	is maintained	after	the	elimination	of	intercompany	balances	and	transactions.	The	Company	uses	the	equity	method	to	report	its	investments	in	joint	ventures	where	it holds	up	to	a	50%	voting	interest	and	cannot	exercise	control	over	the	operations	and	policies	of	the	investments.	Under	the	equity	method,	the	Company	records	its interests	as	an	investment	and	its	percentage	share	of	the	investee's	earnings	as	income	or	losses.

In	July	2015,	the	Company	acquired	a	95%	interest	in	Water	Solutions	Holdings,	LLC,	including	its	wholly-owned	subsidiary,	Keystone	Clearwater	Solutions, LLC	(collectively	referred	to	as	"Keystone").	The	outside	stockholders'	interest,	which	is	redeemable	at	the	option	of	the	minority	owners,	is	recognized	as	redeemable noncontrolling	interest.	The	redeemable	noncontrolling	interest	amounted	to	$7	million	as	of	December	31,	2017	and	2016,	and	is	included	in	other	long-term	liabilities in	the	accompanying	Consolidated	Balance	Sheets.	The	net	income	in	2017	and	the	net	loss	in	2016,	respectively,	attributable	to	the	noncontrolling	interest	was	not significant.	The	Company	has	entered	into	an	agreement	whereby	it	has	the	option	to	acquire	from	the	minority	owners,	and	the	minority	owners	have	the	option	to	sell to	the	Company,	the	remaining	five	percent	interest	at	fair	value,	upon	the	occurrence	of	certain	triggering	events,	or	at	the	defined	date	of	December	31,	2018.

# Use	of	Estimates

The	preparation	of	financial	statements	in	conformity	with	accounting	principles	generally	accepted	in	the	United	States	("GAAP")	requires	management	to	make estimates,	assumptions	and	 judgments	 that	affect	 the	Company's	financial	condition,	results	of	operations	and	cash	flows.	Actual	results	could	differ	from	 these estimates,	judgments	and	assumptions.	The	Company	considers	its	critical	accounting	estimates	to	include:	the	application	of	regulatory	accounting	principles	and	the related	determination	and	estimation	of	regulatory	assets	and	liabilities;	assumptions	used	in	impairment	testing	of	goodwill	and	other	long-lived	assets,	including regulatory	assets;	revenue	recognition	and	the	estimates	used	in	the	calculation	of	unbilled	revenue;	accounting	for	income	taxes	and	the	recently	enacted	Tax	Cuts	and Jobs	Act	(the	"TCJA");	benefit	plan	assumptions;	and	the	judgments	and	estimates	used	in	the	determining	loss	contingencies.	The	Company's	critical	accounting estimates	that	are	particularly	sensitive	to	change	in	the	near	term	are	amounts	reported	for	regulatory	assets	and	liabilities,	goodwill,	income	taxes,	benefit	plan assumptions	and	contingency-related	obligations.

# Regulation

The	 Company's	 regulated	 utilities	 are	 subject	 to	 economic	 regulation	 by	 certain	 state	 utility	 commissions	 or	 other	 entities	 engaged	 in	 utility	 regulation, collectively	referred	to	as	Public	Utility	Commissions	("PUCs"	or	"Regulators").	As	such,	the	Company	follows	authoritative	accounting	principles	required	for	rate regulated	utilities,	which	requires	the	effects	of	rate	regulation	to	be	reflected	in	the	Company's	Consolidated	Financial	Statements.	PUCs	generally	authorize	revenue	at levels	intended	to	recover	the	estimated	costs	of	providing	service,	plus	a	return	on	net	investments,	or	rate	base.	Regulators	may	also	approve	accounting	treatments, long-term	financing	programs	and	cost	of	capital,	capital	expenditures,	O&M	expenses,	taxes,	transactions	and	affiliate	relationships,	reorganizations	and	mergers,	and acquisitions,	along	with	imposing	certain	penalties	or	granting	certain	incentives.	Due	to	timing	and	other	differences	in	the	collection	of	a	regulated	utility's	revenue,	an incurred	cost	that	would	otherwise	be	charged	as	an	expense	by	a	non-regulated	entity,	could	be	deferred	as	a	regulatory	asset	if	it	is	probable	that	such	cost	is recoverable	through	future	rates.	Conversely,	the	authoritative	accounting	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.	See	Note	6—Regulatory	Assets	and Liabilities.

# Property,	Plant	and	Equipment

Property,	plant	and	equipment	consists	primarily	of	utility	plant.	Additions	to	utility	plant	and	replacement	of	retirement	units	of	utility	plant	are	capitalized	and include	costs	such	as	materials,	direct	labor,	payroll	taxes	and	benefits,	indirect	items	such	as	engineering	and	supervision,	transportation	and	an	allowance	for	funds used	during	construction	("AFUDC").	Costs	for	repair,	maintenance	and	minor	replacements	are	charged	to	O&M	expense	as	incurred.

The	cost	of	property,	plant	and	equipment	 is	depreciated	using	 the	straight-line	average	remaining	 life	method.	The	Company's	regulated	utilities	record depreciation	in	conformity	with	amounts	approved	by	PUCs,	after	regulatory	review	of	the	information	the	Company	submits	to	support	its	estimates	of	the	assets' remaining	useful	lives.

When	units	of	property,	plant	and	equipment	are	replaced,	retired	or	abandoned,	the	carrying	value	is	credited	against	the	asset	and	charged	to	accumulated depreciation.	To	the	extent	the	Company	recovers	cost	of	removal	or	other	retirement	costs	through	rates	after	the	retirement	costs	are	incurred,	a	regulatory	asset	is recorded.	In	some	cases,	the	Company	recovers	retirement	costs	through	rates	during	the	life	of	the	associated	asset	and	before	the	costs	are	incurred.	These	amounts result	in	a	regulatory	liability	being	reported	based	on	the	amounts	previously	recovered	through	customer	rates,	until	the	costs	to	retire	those	assets	are	incurred.

The	costs	incurred	to	acquire	and	internally	develop	computer	software	for	internal	use	are	capitalized	as	a	unit	of	property.	The	carrying	value	of	these	costs amounted	to	$346	million	and	$345	million	as	of	December	31,	2017	and	2016,	respectively.

Nonutility	property	consists	primarily	of	buildings	and	equipment	utilized	by	 the	Company	for internal	operations.	This	property is	stated	at	cost,	net	of accumulated	depreciation,	which	calculated	using	the	straight-line	method	over	the	useful	lives	of	the	assets.

# Cash	and	Cash	Equivalents,	and	Restricted	Funds

Substantially	 all	 cash	 is invested in interest-bearing	 accounts.	All	 highly liquid investments	 with	 a	 maturity	 of three	 months	 or less	 when	 purchased	 are considered	to	be	cash	equivalents.

Restricted	funds	consists	primarily	of	proceeds	from	financings	for	the	construction	and	capital	improvement	of	facilities,	and	deposits	for	future	services	under O&M	 projects.	 Proceeds	 are	 held	 in	 escrow	 or	 interest-bearing	 accounts	 until	 the	 designated	 expenditures	 are	 incurred.	 Restricted	 funds	 are	 classified	 in	 the Consolidated	Balance	Sheets	as	either	current	or	long-term	based	upon	the	intended	use	of	the	funds.

The	following	table	provides	a	reconciliation	of	the	cash	and	cash	equivalents,	and	restricted	funds	as	presented	in	the	Consolidated	Balance	Sheets,	to	the	sum	of such	amounts	presented	in	the	Consolidated	Statements	of	Cash	Flows	for	the	years	ended	December	31:

|  | 2017 | 2016 |
| :--- | :--- | :--- |
| Cash\tand\tcash\tequivalents | $55 | $75 |
| Restricted\tfunds | 27 | 20 |
| Restricted\tfunds\tincluded\tin\tother\tlong-term\tassets | 1 | 4 |
| Cash\tand\tcash\tequivalents,\tand\trestricted\tfunds\tas\tpresented\tin\tthe\tConsolidated\tStatements\tof\tCash\tFlows | $83 | $99 |

# Accounts	Receivable	and	Unbilled	Revenues

Accounts	receivable	include	regulated	utility	customer	accounts	receivable,	which	represent	amounts	billed	to	water	and	wastewater	customers	on	a	cycle	basis. Credit	is	extended	based	on	the	guidelines	of	the	applicable	PUCs	and	collateral	is	generally	not	required.	Also	included	are	market-based	trade	accounts	receivable	and nonutility	customer	receivables	of	the	regulated	subsidiaries.	Unbilled	revenues	are	accrued	when	service	has	been	provided	but	has	not	been	billed	to	customers	and when	costs	exceed	billings	on	market-based	construction	contracts.

# Allowance	for	Uncollectible	Accounts

Allowances	for	uncollectible	accounts	are	maintained	for	estimated	probable	losses	resulting	from	the	Company's	inability	to	collect	receivables	from	customers. Accounts	that	are	outstanding	longer	than	the	payment	terms	are	considered	past	due.	A	number	of	factors	are	considered	in	determining	the	allowance	for	uncollectible accounts,	including	the	length	of	time	receivables	are	past	due	and	previous	loss	history.	The	Company	generally	writes	off	accounts	when	they	become	uncollectible	or are	over	a	certain	number	of	days	outstanding.	See	Note	5—Allowance	for	Uncollectible	Accounts.

# Materials	and	Supplies

Materials	and	supplies	are	stated	at	the	lower	of	cost	or	net	realizable	value.	Cost	is	determined	using	the	average	cost	method.

Goodwill	represents	the	excess	of	the	purchase	price	paid	over	the	estimated	fair	value	of	the	assets	acquired	and	liabilities	assumed	in	the	acquisition	of	a business.	Goodwill	is	not	amortized,	but	is	tested	for	impairment	at	least	annually	or	on	an	interim	basis	if	an	event	occurs	or	circumstances	change	that	would	more likely	than	not	reduce	the	fair	value	of	a	reporting	unit	below	its	carrying	value.	Goodwill	is	primarily	associated	with	the	acquisition	of	the	Company	by	RWE Aktiengesellschaft	in	2003	and	the	acquisition	of	Keystone	in	2015,	and	has	been	assigned	to	reporting	units	based	on	the	fair	values	at	the	date	of	the	acquisitions.	The reporting	units	 in	 the	Regulated	Businesses	segment	are	aggregated	into	a	single	reporting	unit.	The	Market-Based	Businesses	 is	 comprised	 of	four	non-reportable reporting	units.	The	Company's	annual	impairment	test	is	performed	as	of	November	30	of	each	year,	in	conjunction	with	the	completion	of	the	Company's	annual business	plan.	The	Company	assesses	qualitative	factors	to	determine	whether	it	is	necessary	to	perform	the	two-step	quantitative	goodwill	impairment	test.	If	based	on qualitative	factors,	the	fair	value	of	the	reporting	unit	is	more	likely	than	not	greater	than	the	carrying	amount,	no	further	testing	is	required.	If	the	Company	bypasses	the qualitative	assessment	or	performs	the	qualitative	assessment,	but	determines	that	it	is	more	likely	than	not	that	its	fair	value	is	less	than	its	carrying	amount,	a quantitative	two-step,	fair	value-based	test	is	performed.

The	first	step	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	any	reporting	unit	is	less	than	such	reporting	unit's	carrying	value,	then	the	second	step	is	performed	to	measure	the	amount	of	the	impairment loss	(if	any)	for	such	reporting	unit.

The	second	step	requires	an	allocation	of	fair	value	to	the	individual	assets	and	liabilities	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	amount	for	the	reporting	unit,	an	impairment	loss	is	recorded as	a	reduction	to	goodwill	and	a	charge	to	operating	expense.	Application	of	the	goodwill	impairment	test	requires	management	judgment,	including	the	identification	of reporting	units	and	determining	the	fair	value	of	the	reporting	unit.	Management	estimates	fair	value	using	a	combination	of	a	discounted	cash	flow	analysis	and	market multiples	analysis.	Significant	assumptions	used	in	these	fair	value	analyses	include	discount	and	growth	rates	and	projected	terminal	values.

The	Company	believes	the	assumptions	and	other	considerations	used	to	value	goodwill	to	be	appropriate.	However,	if	experience	differs	from	the	assumptions and	considerations	used	in	its	analysis,	the	resulting	change	could	have	a	material	adverse	impact	on	the	Consolidated	Financial	Statements.	See	Note	7—Goodwill	and Other	Intangible	Assets.

# Long-Lived	Assets

Long-lived	assets	include	land,	buildings,	equipment	and	long-term	investments.	Long-lived	assets,	other	than	investments	and	land,	are	depreciated	over	their estimated	useful	lives,	and	are	reviewed	for	impairment	whenever	changes	in	circumstances	indicate	the	carrying	value	of	the	asset	may	not	be	recoverable.	Such circumstances	would	include	items	such	as	a	significant	decrease	in	the	market	value	of	a	long-lived	asset,	a	significant	adverse	change	in	the	manner	the	asset	is	being used	or	planned	to	be	used	or	in	its	physical	condition,	or	a	history	of	operating	or	cash	flow	losses	associated	with	the	use	of	the	asset.	In	addition,	changes	in	the expected	useful	life	of	these	long-lived	assets	may	also	be	an	impairment	indicator.	When	such	events	or	changes	occur,	the	Company	estimates	the	fair	value	of	the asset	from	future	cash	flows	expected	to	result	from	the	use	and,	if	applicable,	the	eventual	disposition	of	the	asset	and	compares	that	to	the	carrying	value	of	the	asset.	If the	carrying	value	is	greater	than	the	fair	value,	an	impairment	loss	is	recorded.

The	Company	believes	the	assumptions	and	other	considerations	used	to	evaluate	the	carrying	value	of	long-lived	assets	are	appropriate.	However,	if	actual experience	differs	from	the	assumptions	and	considerations	used	in	its	estimates,	the	resulting	change	could	have	a	material	adverse	impact	on	the	Consolidated Financial	Statements.

The	key	variables	to	determine	fair	value	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.	If	such	assets	are	considered	impaired,	an	impairment	loss	is	recognized	equal	to	the	amount	by	which	the	asset's	carrying	value	exceeds	its fair	value.

The	long-lived	assets	of	the	regulated	utility	subsidiaries	are	tested	on	a	separate	entity	basis	for	impairment	testing	as	they	are	integrated	state-wide	operations that	do	not	have	the	option	to	curtail	service	and	generally	have	uniform	tariffs.	A	regulatory	asset	is	charged	to	earnings	if	and	when	future	recovery	in	rates	of	that	asset is	no	longer	probable.

The	Company	holds	other	investments	including	investments	in	privately	held	companies	and	investments	in	joint	ventures	accounted	for	using	the	equity	method. The	Company's	investments	in	privately	held	companies	and	joint	ventures	are	classified	as	other	long-term	assets	in	the	accompanying	Consolidated	Balance	Sheets.

The	fair	values	of	long-term	investments	are	dependent	on	the	financial	performance	and	solvency	of	the	entities	in	which	the	Company	invests,	as	well	as volatility	inherent	in	the	external	markets.	If	such	assets	are	considered	impaired,	an	impairment	loss	is	recognized	equal	to	the	amount	by	which	the	asset's	carrying value	exceeds	its	fair	value.

# Advances	for	Construction	and	Contributions	in	Aid	of	Construction

Regulated	utility	subsidiaries	may	receive	advances	for	construction	and	contributions	in	aid	of	construction	from	customers,	home	builders	and	real	estate developers	to	fund	construction	necessary	to	extend	service	to	new	areas.

Advances	are	refundable	for	limited	periods	of	time	as	new	customers	begin	to	receive	service	or	other	contractual	obligations	are	fulfilled.	Included	in	other current	 liabilities	 as	 of	December	31,	2017	 and	2016	 in	 the	 accompanying	 Consolidated	 Balance	 Sheets	 are	 estimated	 refunds	 of	$23	million	 and	$21	 million, respectively.	Those	amounts	represent	expected	refunds	during	the	next	12-month	period.

Advances	 that	 are	 no	 longer	 refundable	 are	 reclassified	 to	 contributions.	 Contributions	 are	 permanent	 collections	 of	 plant	 assets	 or	 cash	 for	 a	 particular construction	project.	For	ratemaking	purposes,	the	amount	of	such	contributions	generally	serves	as	a	rate	base	reduction	since	the	contributions	represent	non-investor supplied	funds.

Generally,	 the	 Company	 depreciates	 utility	 plant	 funded	 by	 contributions	 and	 amortizes	 its	 contributions	 balance	 as	 a	 reduction	 to	 depreciation	 expense, producing	a	result	which	is	functionally	equivalent	to	reducing	the	original	cost	of	the	utility	plant	for	the	contributions.	In	accordance	with	applicable	regulatory guidelines,	 some	 of	 the	 Company's	 utility	 subsidiaries	 do	 not	 amortize	 contributions,	 and	 any	 contribution	 received	 remains	 on	 the	 balance	 sheet	 indefinitely. Amortization	of	contributions	in	aid	of	construction	was	$27	million,	$27	million	and	$26	million	for	the	years	ended	December	31,	2017,	2016	and	2015,	respectively.

# Recognition	of	Revenues

Revenues	of	the	regulated	utility	subsidiaries	are	recognized	as	water	and	wastewater	services	are	provided,	and	include	amounts	billed	to	customers	on	a	cycle basis	and	unbilled	amounts	based	on	estimated	usage	from	the	date	of	the	meter	reading	associated	with	the	latest	customer	bill	to	the	end	of	the	accounting	period.	The Company	also	recognizes	revenue	when	it	is	probable	that	future	recovery	of	previously	incurred	costs	or	future	refunds	that	are	to	be	credited	to	customers	will	occur through	the	ratemaking	process.

The	Company	has	agreements	with	the	U.S.	government	to	operate	and	maintain	water	and	wastewater	systems	at	various	military	bases	pursuant	to	50-year contracts	("military	agreements").	These	contracts	also	include	construction	components	that	are	accounted	for	separately	from	the	O&M	components.	Nine	of	the military	agreements	are	subject	to	periodic	price	redetermination	adjustments	and	modifications	for	changes	in	circumstance.	The	remaining	four	agreements	are	subject to	annual	price	adjustments	under	a	mechanism	similar	to	price	redeterminations.	Additionally,	the	Company	has	agreements	ranging	in	length	from	one	to	25	years	with municipalities	 and	 businesses	 in	 various	 industries	 to	 operate	 and	 maintain	 water	 and	 wastewater	 systems	 ("O&M	 agreements").	 Revenues	 from	 operations	 and management	services	are	recognized	as	services	are	provided.	See	Note	15—Commitments	and	Contingencies.

Revenues	from	construction	projects	are	recognized	over	the	contract	term	based	on	the	costs	incurred	to	date	during	the	period	compared	to	the	total	estimated costs	over	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	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.

# Income	Taxes

American	Water	and	its	subsidiaries	participate	in	a	consolidated	federal	income	tax	return	for	U.S.	tax	purposes.	Members	of	the	consolidated	group	are	charged with	the	amount	of	federal	income	tax	expense	determined	as	if	they	filed	separate	returns.

Certain	income	and	expense	items	are	accounted	for	in	different	time	periods	for	financial	reporting	than	for	income	tax	reporting	purposes.	The	Company provides	deferred	income	taxes	on	the	difference	between	the	tax	basis	of	assets	and	liabilities	and	the	amounts	at	which	they	are	carried	in	the	financial	statements. These	deferred	income	taxes	are	based	on	the	enacted	tax	rates	expected	to	be	in	effect	when	these	temporary	differences	are	projected	to	reverse.	In	addition,	the regulated	utility	subsidiaries	recognize	regulatory	assets	and	liabilities	for	the	effect	on	revenues	expected	to	be	realized	as	the	tax	effects	of	temporary	differences, previously	flowed	through	to	customers,	reverse.

Investment	tax	credits	have	been	deferred	by	the	regulated	utility	subsidiaries	and	are	being	amortized	to	income	over	the	average	estimated	service	lives	of	the related	assets.

The	Company	recognizes	accrued	interest	and	penalties	related	to	tax	positions	as	a	component	of	income	tax	expense	and	accounts	for	sales	tax	collected	from customers	and	remitted	to	taxing	authorities	on	a	net	basis.	See	Note	13—Income	Taxes.

# Allowance	for	Funds	Used	During	Construction

AFUDC	is	a	non-cash	credit	to	income	with	a	corresponding	charge	to	utility	plant	that	represents	the	cost	of	borrowed	funds	or	a	return	on	equity	funds	devoted to	plant	under	construction.	The	regulated	utility	subsidiaries	record	AFUDC	to	the	extent	permitted	by	the	PUCs.	The	portion	of	AFUDC	attributable	to	borrowed	funds is	shown	as	a	reduction	of	interest,	net	in	the	accompanying	Consolidated	Statements	of	Operations.	Any	portion	of	AFUDC	attributable	to	equity	funds	would	be included	 in	 other	 income	 (expenses)	 in	 the	 accompanying	 Consolidated	 Statements	 of	 Operations.	AFUDC	 is	 summarized	 in	 the	 following	 table	 for	 the	 years ended	December	31:

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Allowance\tfor\tother\tfunds\tused\tduring\tconstruction | $19 | $15 | $13 |
| Allowance\tfor\tborrowed\tfunds\tused\tduring\tconstruction | 8 | 6 | 8 |

# Environmental	Costs

The	 Company's	 water	 and	 wastewater	 operations	 and	 the	 operations	 of	 its	Market-Based	 Businesses	 are	 subject	 to	 U.S.	 federal,	 state,	 local	 and	 foreign requirements	relating	to	environmental	protection,	and	as	such,	the	Company	periodically	becomes	subject	to	environmental	claims	in	the	normal	course	of	business. Environmental	expenditures	that	relate	to	current	operations	or	provide	a	future	benefit	are	expensed	or	capitalized	as	appropriate.	Remediation	costs	that	relate	to	an existing	condition	caused	by	past	operations	are	accrued,	on	an	undiscounted	basis,	when	it	is	probable	that	these	costs	will	be	incurred	and	can	be	reasonably	estimated. A	conservation	agreement	entered	into	by	a	subsidiary	of	the	Company	with	the	National	Oceanic	and	Atmospheric	Administration	in	2010	and	amended	in	2017 required	the	Company	to,	among	other	provisions,	implement	certain	measures	to	protect	the	steelhead	trout	and	its	habitat	in	the	Carmel	River	watershed	in	the	State	of California.	The	Company	agreed	to	pay	$1	million	annually	commencing	in	2010	with	the	final	payment	being	made	in	2021.	Remediation	costs	accrued	amounted	to	$6 million	and	less	than	$1	million	as	of	December	31,	2017	and	2016,	respectively.

# Derivative	Financial	Instruments

The	Company	uses	derivative	financial	instruments	for	purposes	of	hedging	exposures	to	fluctuations	in	interest	rates.	These	derivative	contracts	are	entered	into for	periods	consistent	with	the	related	underlying	exposures	and	do	not	constitute	positions	independent	of	those	exposures.	The	Company	does	not	enter	into	derivative contracts	for	speculative	purposes	and	does	not	use	leveraged	instruments.

All	derivatives	are	recognized	on	the	balance	sheet	at	fair	value.	On	the	date	the	derivative	contract	is	entered	into,	the	Company	may	designate	the	derivative	as	a hedge	of	the	fair	value	of	a	recognized	asset	or	liability	(fair-value	hedge)	or	a	hedge	of	a	forecasted	transaction	or	of	the	variability	of	cash	flows	to	be	received	or	paid related	to	a	recognized	asset	or	liability	(cash-flow	hedge).

Changes	in	the	fair	value	of	a	fair-value	hedge,	along	with	the	gain	or	loss	on	the	underlying	hedged	item,	are	recorded	in	current-period	earnings.	The	gains	and losses	on	the	effective	portion	of	cash-flow	hedges	are	recorded	in	other	comprehensive	income,	until	earnings	are	affected	by	the	variability	of	cash	flows.	Any ineffective	portion	of	designated	cash-flow	hedges	is	recognized	in	current-period	earnings.

Cash	flows	from	derivative	contracts	are	included	in	net	cash	provided	by	operating	activities	in	the	accompanying	Consolidated	Statements	of	Cash	Flows.

The	following	recently	issued	accounting	standards	have	been	adopted	by	the	Company	as	of	December	31,	2017:

The	following	recently	issued	accounting	standards	have	not	yet	been	adopted	by	the	Company	as	of	December	31,	2017:

| Standard | Description | Date	of<br>Adoption | Application | Financial	Statements<br>(or	Other	Significant	Matters) |
| :--- | :--- | :--- | :--- | :--- |
| Revenue\tfrom | Changes\tthe\tcriteria\tfor\trecognizing\trevenue\tfrom\ta\tcontract\twith\ta | January\t1, | Full\tor\tmodified | The\tadoption\twill\tnot\tresult\tin\tmaterial\timpact\tto |
| Contracts\twith | customer.\tReplaces\texisting\tguidance\ton\trevenue\trecognition,\tincluding | 2018 | retrospective | the\tConsolidated\tFinancial\tStatements\tas\tthere\tare |
| Customers |  |  |  | no\tmaterial\tchanges\tto\tthe\ttiming\tor\trecognition\tof |
|  | comprehensive\trevenue\trecognition\tmodel\tfor\tall\tcontracts\twith\tcustomers |  |  | revenue.\tThe\tCompany\tplans\tto\tadopt\tusing\tthe |
|  | to\timprove\tcomparability\twithin\tindustries,\tacross\tindustries\tand\tacross |  |  | modified\tretrospective\tmethod. |
|  | revenue\tto\tdepict\tthe\ttransfer\tof\tgoods\tand\tservices\tto\tcustomers\tat\tan |  |  |  |
|  | amount\tthe\tentity\texpects\tto\tbe\tentitled\tto\tin\texchange\tfor\tthose\tgoods\tor |  |  |  |
|  | nature,\tamount,\ttiming\tand\tuncertainty\tof\trevenue\tand\tthe\trelated\tcash |  |  |  |
|  | flows. |  |  |  |
| Clarifying\tthe | Updated\tthe\taccounting\tguidance\tto\tclarify\tthe\tdefinition\tof\ta\tbusiness\twith | January\t1, | Prospective | The\tupdate\tcould\tresult\tin\tmore\tacquisitions\tbeing |
| Definition\tof\ta | the\tobjective\tof\tassisting\tentities\twith\tevaluating\twhether\ttransactions | 2018 |  | accounted\tfor\tas\tasset\tacquisitions.\tThe\teffect\ton |
| Business | should\tbe\taccounted\tfor\tas\tacquisitions,\tor\tdisposals,\tof\tassets\tor |  |  | the\tCompany's\tConsolidated\tFinancial\tStatements |
|  | businesses. |  |  | will\tbe\tdependent\ton\tthe\tacquisitions\tthat\tclose |

Standard Description Date	of Adoption Application Estimated	Effect	on	the	Consolidated Financial	Statements (or	Other	Significant	Matters) Presentation	of	Net Periodic	Pension	Cost and	Net Periodic	Postretirement Benefit	Cost Updated	authoritative	guidance	requires	the	service	cost	component	of	net periodic	benefit	cost	to	be	presented	in	the	same	income	statement	line item(s)	as	other	employee	compensation	costs	arising	from	services rendered	during	the	period.	The	remaining	components	of	net	periodic benefit	cost	are	required	to	be	presented	separately	from	the	service	cost component	in	an	income	statement	line	item	outside	of	operating	income. Also,	the	guidance	only	allows	for	the	service	cost	component	to	be eligible	for	capitalization.	The	updated	guidance	does	not	impact	the accounting	for	net	periodic	benefit	costs	as	regulatory	assets	or	liabilities. January	1, 2018 Retrospective	for	the presentation	of	net periodic	benefit	cost components	in	the	income statement;	prospective	for the	capitalization	of	net periodic	benefit	costs components	in	total	assets. The	Company	expects	to	reclassify	net	periodic benefit	costs,	other	than	the	service	cost component	of	approximately	$9	million,	$5 million	and	$5	million	for	the	years	ended December	31,	2017,	2016	and	2015,	respectively, to	Other,	net	in	its	Consolidated	Statements	of Operations.	The	Company	expects	to	record	the non-service	cost	component	probable	of	recovery from	(or	payable	to)	customers	as	a	regulatory asset	(or	regulatory	liability)	accordingly. The	Company	is	evaluating	the	impact	on	the

# Reclassifications

Certain reclassifications	 have	 been	 made to	 prior	 periods in the	 accompanying	 Consolidated	 Financial	 Statements	 and	 notes to	 conform to the	 current presentation.

# Note	3:	Acquisitions

During	2017,	the	Company	closed	on	18	acquisitions	of	various	regulated	water	and	wastewater	systems	for	a	total	aggregate	purchase	price	of	$210	million.	This included	the	acquisition	of	the	wastewater	system	assets	of	the	Municipal	Authority	of	the	City	of	McKeesport,	Pennsylvania,	on	December	18,	2017.	Assets	acquired, principally	utility	plant,	totaled	$207	million.	Liabilities	assumed	totaled	$23	million,	including	$9	million	of	contributions	in	aid	of	construction	and	assumed	debt	of	$7 million.	The	Company	recorded	additional	goodwill	of	$29	million	associated	with	four	of	its	acquisitions,	which	is	reported	in	its	Regulated	Businesses	segment.	Of this	 total	 goodwill,	 approximately	$1	million	 is	expected	 to	be	deductible	for	 tax	purposes.	Additionally,	 the	Company	recognized	a	bargain	purchase	gain	of	$3 million	associated	with	three	of	the	acquisitions.	The	preliminary	purchase	price	allocations	related	to	these	acquisitions	will	be	finalized	once	the	valuation	of	assets acquired	has	been	completed,	no	later	than	one	year	after	their	acquisition	date.

During	2016,	the	Company	closed	on	15	acquisitions	of	various	regulated	water	and	wastewater	systems	for	a	total	aggregate	purchase	price	of	$199	million.	This included	the	acquisition	of	substantially	all	of	the	wastewater	collection	and	treatment	assets	of	the	Sewer	Authority	of	the	City	of	Scranton,	Pennsylvania	("Scranton") in	December	2016.	Assets	acquired,	principally	utility	plant,	totaled	$194	million.	Liabilities	assumed	totaled	$30	million,	including	$14	million	of	contributions	in	aid of	construction	and	assumed	debt	of	$6	million.	During	2016,	the	Company	recorded	additional	goodwill	of	$43	million	associated	with	five	of	its	acquisitions,	which	is reported	in	its	Regulated	Businesses	segment.	Of	this	total	goodwill,	approximately	$31	million	is	expected	to	be	deductible	for	tax	purposes.	Additionally,	during	2017 the	Company	recorded	a	measurement	period	adjustment	of	$5	million,	increasing	the	goodwill	recognized	from	the	Scranton	acquisition.

During	2015,	the	Company	closed	on	14	acquisitions	of	various	regulated	water	and	wastewater	systems	for	a	total	aggregate	purchase	price	of	$64	million. Assets	acquired,	principally	utility	plant,	totaled	$90	million.	Liabilities	assumed	totaled	$26	million,	including	$10	million	of	contributions	in	aid	of	construction	and assumed	 debt	 of	$1	million.	The	 Company	 recorded	 additional	 goodwill	 of	$3	million	associated	with	four	of	 its	acquisitions,	which	 is	reported	 in	 its	Regulated Businesses	segment	and	is	expected	to	be	fully	deductible	for	tax	purposes.	The	Company	also	recognized	a	bargain	purchase	gain	of	$3	million	associated	with	five	of its	acquisitions,	of	which	$1	million	was	deferred	as	a	regulatory	liability.

During	2015,	the	Company	also	closed	on	the	Keystone	acquisition,	which	is	included	as	part	of	the	Market-Based	Businesses,	for	a	total	purchase	price	of	$133 million,	net	of	cash	received.	The	fair	value	of	identifiable	assets	acquired	and	liabilities	assumed	was	$56	million	and	$7	million,	respectively,	and	principally	included the	acquisition	of	nonutility	property	of	$25	million,	accounts	receivable	and	unbilled	revenues	of	$18	million	and	intangible	assets	of	$12	million.	The	purchase	price allocation,	which	is	based	on	the	estimated	fair	value	of	net	assets	acquired,	resulted	in	the	Company	recording	redeemable	noncontrolling	interest	of	$7	million	and additional	goodwill	of	$91	million.	This	goodwill	is	expected	to	be	fully	deductible	for	tax	purposes.

The	pro	forma	impact	of	our	acquisitions	was	not	material	to	our	Consolidated	Statements	of	Operations	for	the	years	ended	December	31,	2017	and	2016.

# Note	4:	Property,	Plant	and	Equipment

The	following	table	summarizes	the	major	classes	of	property,	plant	and	equipment	by	category	as	of	December	31:

Property,	plant	and	equipment	depreciation	expense	amounted	to	$460	million,	$435	million,	and	$405	million	for	the	years	ended	December	31,	2017,	2016	and 2015, respectively	 and	 was included in	 depreciation	 and	 amortization	 expense in the	 accompanying	 Consolidated	 Statements	 of	 Operations.	 The	 provision for depreciation	expressed	as	a	percentage	of	the	aggregate	average	depreciable	asset	balances	was	3.07%,	3.14%	and	3.13%	for	years	December	31,	2017,	2016	and	2015, respectively.

# Note	5:	Allowance	for	Uncollectible	Accounts

The	following	table	summarizes	the	changes	in	the	Company's	allowances	for	uncollectible	accounts	for	the	years	ended	December	31:

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Balance\tas\tof\tJanuary\t1 | $(40) | $(39) | $(35) |
| Amounts\tcharged\tto\texpense | (29) | (27) | (32) |
| Amounts\twritten\toff | 30 | 29 | 31 |
| Recoveries\tof\tamounts\twritten\toff | (3) | (3) | (3) |
| Balance\tas\tof\tDecember\t31 | $(42) | $(40) | $(39) |

# Note	6:	Regulatory	Assets	and	Liabilities

# Regulatory	Assets

Regulatory	assets	represent	costs	that	are	probable	of	recovery	from	customers	in	future	rates.	The	majority	of	the	regulatory	assets	earn	a	return.	The	following table	summarizes	the	composition	of	regulatory	assets	as	of	December	31:

|  | 2017 | 2016 |
| :--- | :--- | :--- |
| Deferred\tpension\texpense | $285 | $310 |
| Income\ttaxes\trecoverable\tthrough\trates | — | 241 |
| Removal\tcosts\trecoverable\tthrough\trates | 269 | 251 |
| San\tClemente\tDam\tproject\tcosts | 89 | 91 |
| Regulatory\tbalancing\taccounts | 113 | 110 |
| Debt\texpense | 67 | 66 |
| Make-whole\tpremium\ton\tearly\textinguishment\tof\tdebt | 27 | — |
| Purchase\tpremium\trecoverable\tthrough\trates | 57 | 58 |
| Deferred\ttank\tpainting\tcosts | 42 | 39 |
| Other | 112 | 123 |
| Total\tRegulatory\tAssets | $1,061 | $1,289 |

The	Company's	deferred	pension	expense	includes	a	portion	of	the	underfunded	status	that	is	probable	of	recovery	through	rates	in	future	periods	of	$270	million and	$300	million	as	of	December	31,	2017	and	2016,	respectively.	The	remaining	portion	is	the	pension	expense	in	excess	of	the	amount	contributed	to	the	pension	plans which	is	deferred	by	certain	subsidiaries	and	will	be	recovered	in	future	service	rates	as	contributions	are	made	to	the	pension	plan.

The	Company	has	recorded	a	regulatory	asset	for	the	additional	revenues	expected	to	be	realized	when	the	tax	effects	of	temporary	differences	previously	flowed through	to	customers,	reverse.	These	temporary	differences	are	primarily	related	to	the	difference	between	book	and	tax	depreciation	on	property	placed	in	service	before the	adoption	by	the	regulatory	authorities	of	full	normalization	for	rate	making	purposes.	Full	normalization	requires	no	flow	through	of	tax	benefits	to	customers.	The regulatory	asset	for	income	taxes	recoverable	through	rates	is	net	of	the	reduction	expected	in	future	revenues	as	deferred	taxes	previously	provided,	attributable	to	the difference	between	the	state	and	federal	income	tax	rates	under	prior	law	and	the	current	statutory	rates,	reverse	over	the	average	remaining	service	lives	of	the	related assets.

Removal	costs	recoverable	through	rates	represent	costs	incurred	for	removal	of	property,	plant	and	equipment	or	other	retirement	costs.

San	Clemente	Dam	project	costs	represent	costs	incurred	and	deferred	by	the	Company's	California	subsidiary	pursuant	to	its	efforts	to	investigate	alternatives	to strengthen	or	remove	the	dam	due	to	potential	earthquake	and	flood	safety	concerns.	In	June	2012,	the	California	Public	Utilities	Commission	("CPUC")	issued	a decision	authorizing	implementation	of	a	project	to	reroute	the	Carmel	River	and	remove	the	San	Clemente	Dam.	The	project	includes	the	Company's	California subsidiary,	 the	 California	 State	 Conservancy	 and	 the	 National	 Marine	 Fisheries	 Services.	 Under	 the	 order's	 terms,	 the	 CPUC	 has	 authorized	 recovery	 for	 pre- construction	costs,	interim	dam	safety	measures	and	environmental	costs	and	construction	costs.	The	authorized	costs	are	to	be	recovered	via	a	surcharge	over	a	twenty- year	period	which	began	in	October	2012.	The	unrecovered	balance	of	project	costs	incurred,	including	cost	of	capital,	net	of	surcharges	totaled	$89	million	and	$91 million	 as	 of	December	31,	2017	 and	2016,	respectively.	Surcharges	collected	were	$7	million	 and	$4	million	for	 the	years	ended	December	31,	2017	 and	2016, respectively.	In	the	current	general	rate	case	in	California,	there	is	a	pending	request	to	reset	the	twenty-year	recovery	period	to	begin	on	January	1,	2018	and	to	set	the annual	recovery	amount.

Regulatory	balancing	accounts	accumulate	differences	between	revenues	recognized	and	authorized	revenue	requirements	until	they	are	collected	from	customers or	are	refunded.	Regulatory	balancing	accounts	include	low	income	programs	and	purchased	power	and	water	accounts.

Debt	expense	is	amortized	over	the	lives	of	the	respective	issues.	Call	premiums	on	the	redemption	of	long-term	debt,	as	well	as	unamortized	debt	expense,	are deferred	and	amortized	to	the	extent	they	will	be	recovered	through	future	service	rates.

As	a	result	of	American	Water	Capital	Corp.'s	prepayment	of	the	5.62%	Series	C	Senior	Notes	due	December	21,	2018	("Series	C	Senior	Notes")	and	5.77% Series	D	Senior	Notes	due	December	21,	2021	("Series	D	Senior	Notes")	and	payment	of	a	make-whole	premium	amount	to	the	holders	thereof	of	$34	million,	the Company	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	Company's	utility	subsidiaries	were	recorded	as	regulatory	assets	that	the	Company	believes	are	probable	of	recovery	in	future	rates.	Approximately	$1 million	of	the	early	debt	extinguishment	costs	allocable	to	the	Company's	utility	subsidiaries	was	amortized	in	2017.

Purchase	premium	recoverable	through	rates	is	primarily	the	recovery	of	the	acquisition	premiums	related	to	an	asset	acquisition	by	the	Company's	California Utility	subsidiary	during	2002,	and	acquisitions	in	2007	by	the	Company's	New	Jersey	Utility	subsidiary.	As	authorized	for	recovery	by	the	California	and	New	Jersey PUCs,	these	costs	are	being	amortized	to	depreciation	and	amortization	in	the	Consolidated	Statements	of	Operations	through	November	2048.

Tank	painting	costs	are	generally	deferred	and	amortized	to	operations	and	maintenance	expense	in	the	Consolidated	Statements	of	Operations	on	a	straight-line basis	over	periods	ranging	from	two	to	fifteen	years,	as	authorized	by	the	regulatory	authorities	in	their	determination	of	rates	charged	for	service.

Other	regulatory	assets	include	certain	construction	costs	for	treatment	facilities,	property	tax	stabilization,	employee-related	costs,	deferred	other	postretirement benefit	expense,	business	services	project	expenses,	coastal	water	project	costs,	rate	case	expenditures	and	environmental	remediation	costs	among	others.	These	costs are	deferred	because	the	amounts	are	being	recovered	in	rates	or	are	probable	of	recovery	through	rates	in	future	periods.

# Regulatory	Liabilities

Regulatory	liabilities	generally	represent	amounts	that	are	probable	of	being	credited	or	refunded	to	customers	through	the	rate-making	process.	Also,	if	costs expected	to	be	incurred	in	the	future	are	currently	being	recovered	through	rates,	the	Company	records	those	expected	future	costs	as	regulatory	liabilities.	The	following table	summarizes	the	composition	of	regulatory	liabilities	as	of	December	31:

|  | 2017 | 2016 |
| :--- | :--- | :--- |
| Income\ttaxes\trecovered\tthrough\trates | $1,242 | $— |
| Removal\tcosts\trecovered\tthrough\trates | 315 | 316 |
| Pension\tand\tother\tpostretirement\tbenefit\tbalancing\taccounts | 48 | 55 |
| Other | 59 | 32 |
| Total\tRegulatory\tLiabilities | $1,664 | $403 |

Income	taxes	recovered	through	rates	relate	to	deferred	taxes	that	will	likely	be	refunded	to	the	Company's	customers.	On	December	22,	2017,	the	TCJA	was signed	into	law,	which,	among	other	things,	enacted	significant	and	complex	changes	to	the	Internal	Revenue	Code	of	1986,	including	a	reduction	in	the	maximum	U.S. federal	corporate	income	tax	rate	from	35%	 to	21%	as	of	January	1,	2018.	The	TCJA	created	significant	excess	deferred	income	taxes	that	the	Company	and	its regulatory	jurisdictions	believe	should	be	refunded	to	customers.	Since	these	are	significant	refundable	amounts,	the	Company	believes	it	is	probable	these	amounts	will be	refunded	to	customers	through	future	rates,	and	as	such	the	amounts	are	recorded	to	a	regulatory	liability.

Removal	costs	recovered	through	rates	are	estimated	costs	to	retire	assets	at	the	end	of	their	expected	useful	life	that	are	recovered	through	customer	rates	over the	life	of	the	associated	assets.	In	December	2008,	the	Company's	utility	subsidiary	in	New	Jersey,	at	the	direction	of	the	New	Jersey	Board	of	Public	Utilities,	began	to depreciate	$48	million	of	the	total	balance	into	depreciation	and	amortization	expense	in	the	Consolidated	Statements	of	Operations	via	straight	line	amortization	through November	2048.

Pension	and	other	postretirement	benefit	balancing	accounts	represent	the	difference	between	costs	incurred	and	costs	authorized	by	the	PUCs	that	are	expected to	be	refunded	to	customers.

Other	regulatory	liabilities	include	legal	settlement	proceeds,	deferred	gains	and	various	regulatory	balancing	accounts.

# Note	7:	Goodwill	and	Other	Intangible	Assets

The	following	table	summarizes	changes	in	the	carrying	amount	of	goodwill	for	the	years	ended	December	31,	2017	and	2016:

|  | Regulated	Businesses |  | Market-Based	Businesses |  |  | Consolidated |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Cost | Accumulated\nImpairment | Cost | Accumulated\nImpairment | Cost | Accumulated\nImpairment | Total\tNet |
| Balance\tas\tof\tJanuary\t1,\t2016 | $3,415 | $(2,332) | $327 | $(108) | $3,742 | $(2,440) | $1,302 |
| Goodwill\tfrom\tacquisitions | 43 | — | — | — | 43 | — | 43 |
| Balance\tas\tof\tDecember\t31,\t2016 | $3,458 | $(2,332) | $327 | $(108) | $3,785 | $(2,440) | $1,345 |
| Goodwill\tfrom\tacquisitions | 29 | — | — | — | 29 | — | 29 |
| Measurement\tperiod\tadjustments | 5 | — | — | — | 5 | — | 5 |
| Balance\tas\tof\tDecember\t31,\t2017 | $3,492 | $(2,332) | $327 | $(108) | $3,819 | $(2,440) | $1,379 |

In	2017,	the	Company	acquired	aggregate	goodwill	of	$29	million	associated	with	four	of	its	acquisitions	in	the	Regulated	Businesses	segment.	Additionally, during	2017	the	Company	recorded	a	measurement	period	adjustment	of	$5	million,	increasing	the	goodwill	recognized	from	the	Scranton	acquisition	completed	in December	2016.

In	2016,	the	Company	acquired	aggregate	goodwill	of	$43	million	associated	with	five	of	its	acquisitions	in	the	Regulated	Businesses	segment.

The	Company	completed	its	annual	impairment	assessment	of	goodwill	as	of	November	30,	2017	 and	2016.	It	elected	to	apply	the	qualitative	assessment	of factors	for	goodwill	in	our	Regulated	Businesses	and	in	Military	Services	Group	and	Contract	Operations	Group	reporting	units	within	the	Market-Based	Businesses	for both	November	30,	2017	 and	2016.	The	Company	also	elected	to	apply	the	qualitative	assessment	of	factors	for	annual	impairment	assessment	of	goodwill	as	of November	30,	2016	to	its	Homeowners	Services	Group.	Based	on	the	work	performed,	the	Company	determined	that	no	qualitative	factors	were	present	that	would indicate	the	estimated	fair	values	of	the	above	stated	reporting	units	were	less	than	the	respective	carrying	values.

At	November	30,	2017,	the	Company	completed	step	one	of	the	two-step	test	for	its	Homeowner	Services	Group	and	Keystone	reporting	units.	The	Company	also completed	a	step	one	test	for	the	Keystone	reporting	unit	at	November	30,	2016.	Based	on	those	valuations,	the	Company	concluded	that	there	were	no	impairments	to	its goodwill.	The	Company	used	an	income	approach	valuation	technique	which	estimates	the	discounted	future	cash	flows	of	operations.	The	discounted	cash	flow analysis	relies	on	a	single	scenario	reflecting	the	best	estimate	of	projected	cash	flows.	Significant	assumptions	were	used	in	estimating	the	fair	values,	including	the discount	rate,	growth	rate	and	terminal	value.	At	November	30,	2017,	the	estimated	fair	value	of	the	Homeowner	Services	Group	reporting	unit	exceeded	its	carrying value	by	more	than	156%,	and	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	goodwill	impairment	test.

There	can	be	no	assurances	that	the	Company	will	not	be	required	to	recognize	an	impairment	of	goodwill	in	the	future	due	to	market	conditions	or	other	factors related	to	the	performance	of	the	Company's	reporting	units.	These	market	events	could	include	a	decline	over	a	period	of	time	of	the	Company's	stock	price,	a	decline over	a	period	of	time	in	valuation	multiples	of	comparable	water	utilities	and	reporting	unit	companies,	the	lack	of	an	increase	in	the	Company's	market	price	consistent with	its	peer	companies,	decreases	in	control	premiums	or	continued	downward	pressure	on	commodity	prices.	A	decline	in	the	forecasted	results	in	our	business	plan, such	as	changes	in	rate	case	results	or	capital	investment	budgets	or	changes	in	our	interest	rates,	could	also	result	in	an	impairment	charge.	In	regards	to	the	Keystone goodwill,	adverse	developments	in	market	conditions,	including	prolonged	depression	of	natural	gas	or	oil	prices	or	other	factors	that	negatively	impact	our	forecast operating	results,	cash	flows	or	key	assumptions	in	the	future	could	result	in	an	impairment	charge	of	a	portion	or	all	of	the	goodwill	balance.

# Other	Intangible	Assets

Included	in	other	long-term	assets	at	December	31,	2017	and	2016,	is	a	$8	million	and	$10	million,	respectively,	customer	relationship	intangible	resulting	from the	Keystone	acquisition.	This	intangible	is	being	amortized	on	a	straight-line	basis	over	a	period	of	eight	years.

# Note	8:	Stockholders'	Equity

# Common	Stock

Under	the	dividend	reinvestment	and	direct	stock	purchase	plan	(the	"DRIP"),	stockholders	may	reinvest	cash	dividends	and	purchase	additional	Company common	stock,	up	to	certain	limits,	through	the	plan	administrator	without	commission	fees.	Shares	purchased	by	participants	through	the	DRIP	may	be	newly-issued shares,	treasury	shares,	or	at	the	Company's	election,	shares	purchased	by	the	plan	administrator	in	the	open	market	or	in	privately	negotiated	transactions.	Purchases generally	will	be	made	and	credited	to	DRIP	accounts	once	each	week.	As	of	December	31,	2017,	there	were	approximately	4.3	million	shares	available	for	future issuance	under	the	DRIP.

# Anti-dilutive	Stock	Repurchase	Program

In	February	2015,	the	Company's	Board	of	Directors	authorized	an	anti-dilutive	stock	repurchase	program,	which	allowed	the	Company	to	purchase	up	to	10 million	shares	of	its	outstanding	common	stock	over	an	unrestricted	period	of	time.	The	Company	repurchased	0.7	million	shares	and	1.0	million	shares	of	common stock	in	the	open	market	at	an	aggregate	cost	of	$54	million	and	$65	million	under	this	program	for	the	years	ended	December	31,	2017	and	2016,	respectively.	As	of December	31,	2017,	there	were	6.1	million	shares	of	common	stock	available	for	purchase	under	the	program.

# Accumulated	Other	Comprehensive	Loss

The	following	table	presents	changes	in	accumulated	other	comprehensive	loss	by	component,	net	of	tax,	for	the	years	ended	December	31,	2017	and	2016:

|  | Employee<br>Benefit	Plan<br>Funded	Status | Amortization<br>of	Prior<br>Service	Cost | Amortization<br>of	Actuarial<br>Loss | Foreign<br>Currency<br>Translation | Gain	(Loss)<br>on	Cash<br>Flow	Hedge | Accumulated	Other<br>Comprehensive<br>Loss |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Beginning\tbalance\tas\tof\tJanuary\t1,\t2016 | $(126) | $1 | $36 | $2 | $(1) | $(88) |
| Other\tcomprehensive\tgain\t(loss)\tbefore\nreclassification | (21) | — | — | — | 17 | (4) |
| Amounts\treclassified\tfrom\taccumulated\tother\ncomprehensive\tincome | — | — | 6 | — | — | 6 |
| Net\tother\tcomprehensive\tincome\t(loss) | (21) | — | 6 | — | 17 | 2 |
| Ending\tbalance\tas\tof\tDecember\t31,\t2016 | $(147) | $1 | $42 | $2 | $16 | $(86) |
| Other\tcomprehensive\tgain\t(loss)\tbefore\nreclassification | 7 | — | — | (1) | (6) | — |
| Amounts\treclassified\tfrom\taccumulated\tother\ncomprehensive\tincome | — | — | 7 | — | — | 7 |
| Net\tother\tcomprehensive\tincome\t(loss) | 7 | — | 7 | (1) | (6) | 7 |
| Ending\tbalance\tas\tof\tDecember\t31,\t2017 | $(140) | $1 | $49 | $1 | $10 | $(79) |

The	Company	does	not	reclassify	the	amortization	of	defined	benefit	pension	cost	components	from	accumulated	other	comprehensive	loss	directly	to	net	income in	its	entirety,	as	a	portion	of	these	costs	have	been	capitalized	as	a	regulatory	asset.	These	accumulated	other	comprehensive	loss	components	are	included	in	the computation	of	net	periodic	pension	cost.	See	Note	14—Employee	Benefits.

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

# Note	9:	Stock	Based	Compensation

The	Company	has	granted	stock	options	and	restricted	stock	unit	("RSU")	awards	to	non-employee	directors,	officers	and	other	key	employees	of	the	Company pursuant	to	the	terms	of	its	2007	Omnibus	Equity	Compensation	Plan	(the	"2007	Plan").	The	total	aggregate	number	of	shares	of	common	stock	that	may	be	issued under	the	2007	Plan	is	15.5	million.	As	of	December	31,	2017,	7.7	million	shares	were	available	for	grant	under	the	2007	Plan.

On	May	12,	2017,	the	Company's	stockholders	approved	the	American	Water	Works	Company,	Inc.	2017	Omnibus	Equity	Compensation	Plan	(the	"2017 Omnibus	Plan").	A	total	of	7.2	million	shares	of	common	stock	may	be	issued	under	the	2017	Omnibus	Plan.	As	of	December	31,	2017,	7.2	million	shares	were available	for	grant	under	the	2017	Omnibus	Plan.	The	2017	Omnibus	Plan	provides	that	grants	of	awards	may	be	in	any	of	the	following	forms:	incentive	stock	options, nonqualified	stock	options,	stock	appreciation	rights,	stock	units,	stock	awards,	other	stock-based	awards	and	dividend	equivalents,	which	may	be	granted	only	on	stock units	or	other	stock-based	awards.	Following	the	approval	of	the	2017	Omnibus	Plan,	no	additional	awards	are	to	be	granted	under	the	2007	Plan.	However,	shares	will still	be	issued	under	the	2007	Plan	pursuant	to	the	terms	of	awards	previously	issued	under	that	plan	prior	to	May	12,	2017.

The	cost	of	services	received	from	employees	in	exchange	for	the	issuance	of	stock	options	and	restricted	stock	awards	is	measured	based	on	the	grant	date	fair value	of	the	awards	issued.	The	value	of	stock	options	and	RSUs	awards	at	the	date	of	the	grant	is	amortized	through	expense	over	the	three-year	service	period.	All awards	granted	in	2017,	2016	and	2015	are	classified	as	equity.	The	Company	recognizes	compensation	expense	for	stock	awards	over	the	vesting	period	of	the	award. The	Company	stratified	its	grant	populations	and	used	historic	employee	turnover	rates	to	estimate	employee	forfeitures.	The	estimated	rate	is	compared	to	the	actual forfeitures	at	the	end	of	the	reporting	period	and	adjusted	as	necessary.	The	following	table	presents	stock-based	compensation	expense	recorded	in	operation	and maintenance	expense	in	the	accompanying	Consolidated	Statements	of	Operations	for	the	years	ended	December	31:

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Stock\toptions | $1 | $2 | $2 |
| RSUs | 9 | 8 | 8 |
| Nonqualified\temployee\tstock\tpurchase\tplan | 1 | 1 | 1 |
| Stock-based\tcompensation | 11 | 11 | 11 |
| Income\ttax\tbenefit | (4) | (4) | (4) |
| Stock-based\tcompensation\texpense,\tnet\tof\ttax | $7 | $7 | $7 |

There	were	no	significant	stock-based	compensation	costs	capitalized	during	the	years	ended	December	31,	2017,	2016	and	2015.

The	Company	receives	a	tax	deduction	based	on	the	intrinsic	value	of	the	award	at	the	exercise	date	for	stock	options	and	the	distribution	date	for	RSUs.	For	each award,	 throughout	 the	 requisite	 service	 period,	 the	 Company	 recognizes	 the	 tax	 benefits,	 which	 have	 been	 included	 in	 deferred	 income	 tax	 assets,	 related	 to compensation	costs.	The	tax	deductions	in	excess	of	the	benefits	recorded	throughout	the	requisite	service	period	are	recorded	to	the	Consolidated	Statements	of Operations	and	are	presented	in	the	financing	section	of	the	Consolidated	Statements	of	Cash	Flows.

# Stock	Options

There	were	no	grants	of	stock	options	to	employees	in	2017.	In	2016	and	2015,	the	Company	granted	non-qualified	stock	options	to	certain	employees	under	the 2007	Plan.	The	stock	options	vest	ratably	over	the	three-year	service	period	beginning	on	January	1	of	the	year	of	the	grant	and	have	no	performance	vesting	conditions. Expense	is	recognized	using	the	straight-line	method	and	is	amortized	over	the	requisite	service	period.

The	following	table	summarizes	the	weighted-average	assumptions	used	in	the	Black-Scholes	option-pricing	model	for	grants	and	the	resulting	weighted-average grant	date	fair	value	per	share	of	stock	options	granted	for	the	years	ended	December	31:

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Dividend\tyield | —% | 2.09% | 2.35% |
| Expected\tvolatility | —% | 15.89% | 17.64% |
| Risk-free\tinterest\trate | —% | 1.15% | 1.48% |
| Expected\tlife\t(years) | 0 | 4.0 | 4.4 |
| Exercise\tprice | $— | $65.25 | $52.75 |
| Grant\tdate\tfair\tvalue\tper\tshare | $— | $6.61 | $6.21 |

The	Company	used	the	actual	historical	experience	of	exercises	or	expirations	of	the	2009	grant	to	determine	the	expected	stock	option	life.	The	Company	began granting	stock	options	at	the	time	of	its	initial	public	offering	in	April	2008.	Expected	volatility	is	based	on	a	weighted	average	of	historic	volatilities	of	traded	common stock	of	peer	companies	(regulated	water	companies)	over	the	expected	term	of	the	stock	options	and	historic	volatilities	of	the	Company's	common	stock	during	the period	it	has	been	publicly	traded.	The	dividend	yield	is	based	on	the	Company's	expected	dividend	payments	and	the	stock	price	on	the	date	of	grant.	The	risk-free interest	rate	is	the	market	yield	on	U.S.	Treasury	strips	with	maturities	similar	to	the	expected	term	of	the	stock	options.	The	exercise	price	of	the	stock	options	is	equal	to the	fair	market	value	of	the	underlying	stock	on	the	date	of	option	grant.	Stock	options	vest	over	periods	ranging	from	one	to	three	years	and	have	a	maximum	term	of seven	years	from	the	effective	date	of	the	grant.

The	table	below	summarizes	stock	option	activity	for	the	year	ended	December	31,	2017:

|  | Shares<br>(In	thousands) | Weighted-<br>Average<br>Exercise<br>Price	(Per	share) | Weighted-<br>Average<br>Remaining	Life<br>(Years) | Aggregate<br>Intrinsic	Value |
| :--- | :--- | :--- | :--- | :--- |
| Options\toutstanding\tas\tof\tDecember\t31,\t2016 | 987 | $50.65 | 4.3 | $21 |
| Granted | — | — |  |  |
| Forfeited\tor\texpired | (14) | 62.10 |  |  |
| Exercised | (262) | 42.29 |  |  |
| Options\toutstanding\tas\tof\tDecember\t31,\t2017 | 711 | $53.51 | 3.67 | $29 |
| Exercisable\tas\tof\tDecember\t31,\t2017 | 452 | $48.83 | 3.15 | $21 |

As	of	December	31,	2017,	$1	million	of	total	unrecognized	compensation	cost	related	to	nonvested	stock	options	is	expected	to	be	recognized	over	the	remaining weighted-average	period	of	1.0	years.	The	total	fair	value	of	stock	options	vested	was	$2	million,	$1	million	and	$3	million	for	the	years	ended	December	31,	2017,	2016 and	2015,	respectively.

The	following	table	summarizes	additional	information	regarding	stock	options	exercised	during	the	years	ended	December	31:

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Intrinsic\tvalue | $10 | $18 | $22 |
| Exercise\tproceeds | 11 | 15 | 30 |
| Income\ttax\tbenefit\trealized | 3 | 6 | 7 |

During	2017,	2016	 and	2015,	the	Company	granted	RSUs,	both	with	and	without	performance	conditions,	to	certain	employees	under	the	2007	Plan.	RSUs generally	vest	over	periods	ranging	from	one	to	three	years.

During	2017,	the	Company	granted	RSUs	to	non-employee	directors	under	the	2017	Omnibus	Plan,	and	during	2016	and	2015,	these	awards	were	granted	under the	2007	Plan.	The	RSUs	vested	on	the	date	of	grant;	however,	distribution	of	the	shares	will	be	made	within	30	days	of	the	earlier	of:	(i)	15	months	after	grant	date, subject	to	any	deferral	election	by	the	director;	or	(ii)	the	participant's	separation	from	service.	Because	these	RSUs	vested	on	the	grant	date,	the	total	grant	date	fair value	was	recorded	in	operation	and	maintenance	expense	on	the	grant	date.

The	RSUs	without	performance	conditions	are	valued	at	the	market	value	of	the	closing	price	of	the	Company's	common	stock	on	the	date	of	the	grant	and	vest ratably	over	the	three-year	service	period	beginning	January	1	of	the	year	of	the	grant.	These	RSUs	are	amortized	through	expense	over	the	requisite	service	period	using the	straight-line	method.

The	table	below	summarizes	activity	of	RSUs	without	performance	conditions	for	the	year	ended	December	31,	2017:

|  | Shares<br>(In	thousands) | Weighted<br>Average	Grant<br>Date	Fair	Value<br>(Per	share) |
| :--- | :--- | :--- |
| Non-vested\ttotal\tas\tof\tDecember\t31,\t2016 | 74 | $56.43 |
| Granted | 61 | 73.43 |
| Vested | (42) | 56.52 |
| Forfeited | (4) | 69.09 |
| Non-vested\ttotal\tas\tof\tDecember\t31,\t2017 | 89 | $67.48 |

RSUs	with	performance	conditions	vest	ratably	over	the	three-year	performance	period	beginning	January	1	of	the	year	of	the	grant	(the	"Performance	Period"). Distribution	of	 the	performance	shares	 is	contingent	upon	 the	achievement	of	 internal	performance	measures	and,	separately,	certain	market	 thresholds	over	 the Performance	Period.

RSUs	granted	with	internal	performance	measures	are	valued	at	the	market	value	of	the	closing	price	of	the	Company's	common	stock	on	the	date	of	grant.	RSUs granted	with	market	conditions	are	valued	using	a	Monte	Carlo	model.	Expected	volatility	is	based	on	historical	volatilities	of	traded	common	stock	of	the	Company	and comparative	companies	using	daily	stock	prices	over	the	past	three	years.	The	expected	term	is	three	years	and	the	risk-free	interest	rate	is	based	on	the	three-year	U.S. Treasury	rate	in	effect	as	of	the	measurement	date.	The	following	table	presents	the	weighted-average	assumptions	used	in	the	Monte	Carlo	simulation	and	the	weighted- average	grant	date	fair	values	of	RSUs	granted	for	the	years	ended	December	31:

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Expected\tvolatility | 17.40% | 15.90% | 14.93% |
| Risk-free\tinterest\trate | 1.53% | 0.91% | 1.07% |
| Expected\tlife\t(years) | 3.0 | 3.0 | 3.0 |
| Grant\tdate\tfair\tvalue\tper\tshare | $72.81 | $77.16 | $62.10 |

The	grant	date	fair	value	of	restricted	stock	awards	that	vest	ratably	and	have	market	and/or	performance	conditions	are	amortized	through	expense	over	the requisite	service	period	using	the	graded-vesting	method.

The	table	below	summarizes	activity	of	RSUs	with	performance	conditions	for	the	year	ended	December	31,	2017:

|  | Shares<br>(In	thousands) | Weighted<br>Average	Grant<br>Date	Fair	Value<br>(Per	share) |
| :--- | :--- | :--- |
| Non-vested\ttotal\tas\tof\tDecember\t31,\t2016 | 309 | $55.94 |
| Granted | 186 | 63.10 |
| Vested | (204) | 46.10 |
| Forfeited | (10) | 70.50 |
| Non-vested\ttotal\tas\tof\tDecember\t31,\t2017 | 281 | $67.33 |

As	 of	December	31,	2017,	$6	million	of	total	unrecognized	compensation	cost	related	to	the	nonvested	RSUs,	with	and	without	performance	conditions,	is expected	to	be	recognized	over	the	weighted-average	remaining	life	of	1.5	years.	The	total	fair	value	of	RSUs,	with	and	without	performance	conditions,	vested	was	$16 million,	$14	million	and	$12	million	for	the	years	ended	December	31,	2017,	2016	and	2015,	respectively.

If	dividends	are	paid	with	respect	to	shares	of	the	Company's	common	stock	before	the	RSUs	are	distributed,	the	Company	credits	a	liability	for	the	value	of	the dividends	that	would	have	been	paid	if	the	RSUs	were	shares	of	Company	common	stock.	When	the	RSUs	are	distributed,	the	Company	pays	the	participant	a	lump sum	cash	payment	equal	to	the	value	of	the	dividend	equivalents	accrued.	The	Company	accrued	dividend	equivalents	totaling	less	than	$1	million,	$1	million	and	$1 million	to	accumulated	deficit	in	the	accompanying	Consolidated	Statements	of	Changes	in	Stockholders'	Equity	for	the	years	ended	December	31,	2017,	2016	and	2015, respectively.

# Employee	Stock	Purchase	Plan

The	Company	maintains	a	nonqualified	employee	stock	purchase	plan	(the	"ESPP")	through	which	employee	participants	may	use	payroll	deductions	to	acquire Company	common	stock	at	the	lesser	of	90%	of	the	fair	market	value	of	the	common	stock	at	either	the	beginning	or	the	end	of	a	three-month	purchase	period.	On February	15,	2017,	the	Board	adopted	the	American	Water	Works	Company,	Inc.	and	its	Designated	Subsidiaries	2017	Nonqualified	Employee	Stock	Purchase	Plan, which	was	approved	by	stockholders	on	May	12,	2017	and	took	effect	on	August	5,	2017.	The	prior	plan	was	terminated	as	to	new	purchases	of	Company	stock effective	August	31,	2017.	As	of	December	31,	2017,	there	were	2.0	million	shares	of	common	stock	reserved	for	issuance	under	the	ESPP.	The	ESPP	is	considered compensatory.	During	the	years	ended	December	31,	2017,	2016	and	2015,	the	Company	issued	93	thousand,	93	thousand	and	98	thousand	shares,	respectively,	under the	ESPP.

# Note	10:	Long-Term	Debt

The	Company	obtains	long-term	debt	primarily	to	fund	capital	expenditures	of	the	Regulated	Businesses	and	to	refinance	debt	of	the	parent	company.	The following	table	summarizes	the	components	of	long-term	debt	as	of	December	31:

|  | Rate | Weighted<br>Average	Rate | Maturity | 2017 | 2016 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Long-term\tdebt\tof\tAmerican\tWater\tCapital\tCorp.\t(a) |  |  |  |  |  |
| Senior\tnotes—fixed\trate | 2.95%-8.27% | 4.47% | 2018-2047 | $5,292 | $4,786 |
| Private\tactivity\tbonds\tand\tgovernment\tfunded\tdebt—fixed\trate | 1.79%-6.25% | 5.44% | 2021-2040 | 193 | 194 |
| Long-term\tdebt\tof\tother\tAmerican\tWater\tsubsidiaries |  |  |  |  |  |
| Private\tactivity\tbonds\tand\tgovernment\tfunded\tdebt—fixed\trate |  |  |  |  |  |
| (b) | 0.00%-6.20% | 4.59% | 2018-2041 | 712 | 695 |
| Mortgage\tbonds—fixed\trate | 3.92%-9.71% | 7.41% | 2019-2039 | 607 | 636 |
| Mandatorily\tredeemable\tpreferred\tstock | 8.47%-9.75% | 8.60% | 2019-2036 | 10 | 12 |
| Capital\tlease\tobligations | 12.66% | 12.66% | 2026 | 1 | 1 |
| Term\tloan | 4.81%-5.31% | 5.15% | 2021 | 9 | — |
| Long-term\tdebt |  |  |  | 6,824 | 6,324 |
| Unamortized\tdebt\tpremium,\tnet\t(c) |  |  |  | 9 | 17 |
| Unamortized\tdebt\tissuance\tcosts |  |  |  | (13) | (9) |
| Interest\trate\tswap\tfair\tvalue\tadjustment |  |  |  | — | 1 |
| Less\tcurrent\tportion\tof\tlong-term\tdebt |  |  |  | (322) | (574) |
| Total\tlong-term\tdebt |  |  |  | $6,498 | $5,759 |

(a) This	indebtedness	is	considered	"debt"	for	purposes	of	a	support	agreement	between	American	Water	and	American	Water	Capital	Corp.	("AWCC"),	the	Company's	wholly	owned	finance subsidiary,	which	serves	as	a	functional	equivalent	of	a	guarantee	by	American	Water	of	AWCC's	payment	obligations	under	such	indebtedness.

(b) Includes	$5	million	and	$6	million	of	variable	rate	debt	as	of	December	31,	2017	and	2016,	respectively,	with	variable-to-fixed	interest	rate	swaps	ranging	between 3.93%	and	4.72%.	This debt	was	assumed	via	an	acquisition	in	2013.

(c) Primarily	fair	value	adjustments	previously	recognized	in	acquisition	purchase	accounting.

All	 mortgage	 bonds,	 term loans	 and	$709	 million	 of the	 private	 activity	 bonds	 and	 government funded	 debt	 held	 by the	Company's subsidiaries	 were collateralized	as	of	December	31,	2017.

Long-term	debt	indentures	contain	a	number	of	covenants	that,	among	other	things,	limit,	subject	to	certain	exceptions,	the	Company	from	issuing	debt	secured by	the	Company's	assets.	Certain	long	term	notes	require	the	Company	to	maintain	a	ratio	of	consolidated	total	indebtedness	to	consolidated	total	capitalization	of	not more	than	0.70	to	1.00.	The	ratio	as	of	December	31,	2017	was	0.59	to	1.00.	In	addition,	the	Company	has	$922	million	of	notes	which	include	the	right	to	redeem	the notes	at	par	value,	in	whole	or	in	part,	from	time	to	time,	subject	to	certain	restrictions.

# The	following	table	presents	future	sinking	fund	payments	and	debt	maturities:

| Year | Amount |
| :--- | :--- |
| 2018 | $322 |
| 2019 | 170 |
| 2020 | 51 |
| 2021 | 299 |
| 2022 | 123 |
| Thereafter | 5,859 |

| Company | Type | Rate | Maturity | Amount |
| :--- | :--- | :--- | :--- | :--- |
| AWCC | Senior\tnotes—fixed\trate | 2.95%-3.75% | 2027-2047 | $1,350 |
|  | Private\tactivity\tbonds\tand\tgovernment\tfunded\tdebt |  |  |  |
| Other\tAmerican\tWater\tsubsidiaries | —fixed\trate | 0.00%-1.44% | 2020-2037 | 31 |
| Other\tAmerican\tWater\tsubsidiaries | Mortgage\tbonds—fixed\trate | 3.92% | 2020 | 3 |
| Other\tAmerican\tWater\tsubsidiaries | Term\tloan | 4.62%-5.12% | 2021 | 11 |
| Total\tissuances |  |  |  | $1,395 |

The	Company	also	assumed	debt	of	$7	million	as	a	result	of	acquisitions	during	2017,	of	which	$1	million	was	paid	subsequent	to	an	acquisition	closing	during 2017.	The	remaining	$6	million	of	assumed	debt	has	fixed	interest	rates	of	0.00%	and	3.92%,	maturing	in	2024	and	2020,	respectively.	The	Company	incurred	debt issuance	costs	of	$17	million	related	to	the	above	issuances.

| Company | Type | Rate | Maturity | Amount |
| :--- | :--- | :--- | :--- | :--- |
| AWCC | Senior\tnotes—fixed\trate | 5.62%-6.09% | 2017-2021 | $844 |
|  | Private\tactivity\tbonds\tand\tgovernment\tfunded\tdebt |  |  |  |
| AWCC | —fixed\trate | 1.79%-2.90% | 2021-2031 | 1 |
|  | Private\tactivity\tbonds\tand\tgovernment\tfunded\tdebt |  |  |  |
| Other\tAmerican\tWater\tsubsidiaries | —fixed\trate | 0.00%-5.38% | 2017-2041 | 15 |
| Other\tAmerican\tWater\tsubsidiaries | Mortgage\tbonds—fixed\trate | 7.08% | 2017 | 33 |
| Other\tAmerican\tWater\tsubsidiaries | Mandatorily\tredeemable\tpreferred\tstock | 8.49%-9.18% | 2031-2036 | 2 |
| Other\tAmerican\tWater\tsubsidiaries | Term\tloan | 4.31%-5.31% | 2021 | 1 |
| Total\tretirements\tand\tredemptions |  |  |  | $896 |

As	a	result	of	AWCC's	prepayment	of	the	Series	C	Senior	Notes	and	Series	D	Senior	Notes,	and	payment	of	a	make-whole	premium	amount	to	the	holders thereof	of	$34	million,	the	Company	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	the	Company	believes	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.

Interest	net,	includes	interest	income	of	approximately	$14	million,	$14	million	and	$13	million	in	2017,	2016	and	2015,	respectively.

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

On	August	7,	2017,	 coinciding	 with	AWCC's	$1.35	billion	debt	offering,	 the	Company	 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,	the	Company	entered	into	forward	starting	swap	agreements,	each	with	a	notional	amount	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%.	The	Company	has	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,	the	Company	terminated	its	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.

The	Company	has	employed	interest	rate	swaps	to	fix	the	interest	cost	on	a	portion	of	its	variable-rate	debt	with	an	aggregate	notional	amount	of	$5	million.	The Company	has	designated	these	instruments	as	economic	hedges,	accounted	for	at	fair	value,	with	gains	or	losses	recognized	in	interest,	net.	The	gain	recognized	by	the Company	was	de	minimis	for	the	years	ended	2017	and	2016.

The	following	table	provides	a	summary	of	the	gross	fair	value	for	the	Company's	derivative	asset	and	liabilities,	as	well	as	the	location	of	the	asset	and	liability balances	in	the	Consolidated	Balance	Sheets	as	of	December	31:

| Derivative	Instruments | Derivative	Designation | Balance	Sheet	Classification | 2017 | 2016 |
| :--- | :--- | :--- | :--- | :--- |
| Asset\tderivative: |  |  |  |  |
| Forward\tstarting\tswaps | Cash\tflow\thedge | Other\tcurrent\tassets | $— | $27 |
| Interest\trate\tswap | Fair\tvalue\thedge | Other\tcurrent\tassets | — | 1 |
| Liability\tderivative: |  |  |  |  |
| Interest\trate\tswap | Fair\tvalue\thedge | Current\tportion\tof\tlong-term\tdebt | — | 1 |
| Forward\tstarting\tswaps | Cash\tflow\thedge | Other\tcurrent\tliabilities | 3 | — |

# Note	11:	Short-Term	Debt

Short-term	 debt	 consists	 of	 commercial	 paper	 and	 credit	 facility	 borrowings	 totaling	$905	million	 and	$849	million as of	December	 31,	 2017 and	2016, respectively.	As	of	December	31,	2017	there	were	no	borrowings	outstanding	with	maturities	greater	than	three	months.

AWCC	has	a	revolving	credit	facility	with	$1.75	billion	in	aggregate	total	commitments	from	a	diversified	group	of	financial	institutions	with	a	termination	date of	June	2020.	On	March	22,	2016,	AWCC	and	its	lenders	agreed	to	increase	total	commitments	under	AWCC's	revolving	credit	facility	to	the	 $1.75	billion,	from	$1.25 billion.	Other	terms	and	conditions	of	the	existing	facility	remained	unchanged.	The	agreement	also	includes	a	$150	million	sublimit	for	letters	of	credit	and	a	$100 million	sublimit	for	swing	loans.	On	June	30,	2015,	AWCC	and	its	lenders	extended	the	termination	date	of	revolving	credit	facility	from	October	2018,	to	June	2020. This	amended	and	restated	agreement	also	allowed	AWCC	to	request	to	further	extend	the	term	of	the	credit	facility	for	up	to	two	one-year	periods.	Issuance	costs related	to	the	increased	lending	commitments	will	be	amortized	over	the	remaining	life	of	the	credit	facility	and	is	included	in	interest,	net	in	the	accompanying Consolidated	Statements	of	Operations.	Interest	on	borrowings	are	based	on	a	LIBOR-based	rate,	plus	an	applicable	margin.

Also,	the	Company	acquired	a	line	of	credit	facility	as	part	of	the	Keystone	acquisition.	This	facility	has	a	maximum	availability	of	up	to	$12	million,	dependent on	a	collateral	base	calculation.	Based	on	the	collateral	assets	at	December	31,	2017,	$7	million	 was	 available	 to	 borrow.	At	December	31,	2017,	 there	 were	no outstanding	borrowings	on	this	line	of	credit	facility.	Borrowings	under	the	facility	are	due	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.

The	 following	 table	 summarizes	 the	 Company's	 aggregate	 credit facility	 commitments, letter	 of	 credit	 sub-limit	 under	 our revolving	 credit facility	 and commercial	paper	limit,	as	well	as	the	available	capacity	for	each	as	of:

|  | Credit	Facility<br>Commitment | Available	Credit<br>Facility	Capacity | Letter	of	Credit<br>Sublimit	(a) | Available	Letter	of<br>Credit	Capacity | Commercial	Paper<br>Limit | Available<br>Commercial	Paper<br>Capacity |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| December\t31,\t2017 | $1,762 | $1,673 | $150 | $66 | $1,600 | $695 |
| December\t31,\t2016 | 1,766 | 1,668 | 150 | 62 | 1,600 | 751 |

(a) Letters	of	credit	are	non-debt	instruments	maintained	to	provide	credit	support	for	certain	transactions	as	requested	by	third	parties.	The	Company	had $84	million	 and	$88	million	of outstanding	letters	of	credit	as	of	December	31,	2017	and	2016,	respectively,	all	of	which	were	issued	under	the	revolving	credit	facility	noted	above.

The	following	table	summarizes	the	short-term	borrowing	activity	for	AWCC	for	the	years	ended	December	31:

|  | 2017 | 2016 |
| :--- | :--- | :--- |
| Average\tborrowings | $779 | $850 |
| Maximum\tborrowings\toutstanding | 1,135 | 1,016 |
| Weighted\taverage\tinterest\trates,\tcomputed\ton\tdaily\tbasis | 1.24% | 0.78% |
| Weighted\taverage\tinterest\trates,\tas\tof\tDecember\t31 | 1.61% | 0.98% |

The	credit	facility	requires	the	Company	to	maintain	a	ratio	of	consolidated	debt	to	consolidated	capitalization	of	not	more	than	0.70 to	1.00.	The	ratio	as	of December	31,	2017	was	0.59	to	1.00.

None	of	the	Company's	borrowings	are	subject	to	default	or	prepayment	as	a	result	of	a	downgrading	of	securities,	although	such	a	downgrading	could	increase fees	and	interest	charges	under	the	Company's	credit	facility.

As	part	of	the	normal	course	of	business,	the	Company	routinely	enters	contracts	for	the	purchase	and	sale	of	water,	energy,	fuels	and	other	services.	These contracts	either	contain	express	provisions	or	otherwise	permit	the	Company	and	its	counterparties	to	demand	adequate	assurance	of	future	performance	when	there	are reasonable	grounds	for	doing	so.	In	accordance	with	the	contracts	and	applicable	contract	law,	if	the	Company	is	downgraded	by	a	credit	rating	agency,	especially	if such	downgrade	is	to	a	level	below	investment	grade,	it	is	possible	that	a	counterparty	would	attempt	to	rely	on	such	a	downgrade	as	a	basis	for	making	a	demand	for adequate	assurance	of	future	performance.	Depending	on	the	Company's	net	position	with	the	counterparty,	the	demand	could	be	for	the	posting	of	collateral.	In	the absence	of	expressly	agreed	provisions	that	specify	the	collateral	that	must	be	provided,	the	obligation	to	supply	the	collateral	requested	will	be	a	function	of	the	facts and	circumstances	of	the	Company's	situation	at	the	time	of	the	demand.	If	the	Company	can	reasonably	claim	that	it	is	willing	and	financially	able	to	perform	its obligations,	it	may	be	possible	that	no	collateral	would	need	to	be	posted	or	that	only	an	amount	equal	to	two	or	three	months	of	future	payments	should	be	sufficient. The	Company	does	not	expect	to	post	any	collateral	which	will	have	a	material	adverse	impact	on	the	Company's	results	of	operations,	financial	position	or	cash	flows.

# Note	12:	General	Taxes

The	following	table	summarizes	the	components	of	general	tax	expense	for	the	years	ended	December	31:

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Gross\treceipts\tand\tfranchise | $110 | $106 | $99 |
| Property\tand\tcapital\tstock | 105 | 106 | 98 |
| Payroll | 31 | 32 | 31 |
| Other\tgeneral | 13 | 14 | 15 |
| Total\tgeneral\ttaxes | $259 | $258 | $243 |

# Note	13:	Income	Taxes

The	following	table	summarizes	the	components	of	income	tax	expense	for	the	years	ended	December	31:

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Current\tincome\ttaxes |  |  |  |
| State | $25 | $20 | $10 |
| Federal | (1) | 1 | — |
| Total\tcurrent\tincome\ttaxes | $24 | $21 | $10 |
| Deferred\tincome\ttaxes |  |  |  |
| State | $50 | $24 | $32 |
| Federal | 413 | 258 | 265 |
| Amortization\tof\tdeferred\tinvestment\ttax\tcredits | (1) | (1) | (1) |
| Total\tdeferred\tincome\ttaxes | 462 | 281 | 296 |
| Provision\tfor\tincome\ttaxes | $486 | $302 | $306 |

The	following	is	a	reconciliation	between	the	statutory	federal	income	tax	rate	and	the	Company's	effective	tax	rate	for	the	years	ended	December	31:

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Income\ttax\tat\tstatutory\trate | 35.0\t% | 35.0% | 35.0% |
| Increases\t(decreases)\tresulting\tfrom: |  |  |  |
| State\ttaxes,\tnet\tof\tfederal\ttaxes | 5.4\t% | 3.8% | 3.6% |
| Tax\tCuts\tand\tJobs\tAct | 13.7\t% | —% | —% |
| Other,\tnet | (0.8)% | 0.4% | 0.5% |
| Effective\ttax\trate | 53.3\t% | 39.2% | 39.1% |

On	December	22,	2017,	President	Trump	signed	into	law	the	TCJA.	Substantially	all	of	the	provisions	of	the	TCJA	are	effective	for	taxable	years	beginning	after December	31,	2017.	The	TCJA	includes	significant	changes	to	the	Internal	Revenue	Code	of	1986,	as	amended	(the	"Code"),	including	amendments	which	significantly change	the	taxation	of	individuals	and	business	entities,	and	includes	specific	provisions	related	to	regulated	public	utilities.	The	more	significant	changes	that	impact the	Company	included	in	the	TCJA	are	reductions	in	the	corporate	federal	income	tax	rate	from	35%	to	21%,	and	several	technical	provisions	including,	among	others, limiting	the	utilization	of	net	operating	losses	("NOLs")	arising	after	December	31,	2017	to	80%	of	taxable	income	with	an	indefinite	carryforward.	The	specific provisions	related	to	regulated	public	utilities	in	the	TCJA	generally	allow	for	the	continued	deductibility	of	interest	expense,	the	elimination	of	full	expensing	for	tax purposes	of	certain	property	acquired	after	September	27,	2017	and	continue	certain	rate	normalization	requirements	for	accelerated	depreciation	benefits.	Non-regulated segments	of	the	Company's	business	will	be	able	to	take	advantage	of	the	full	expensing	provisions	of	the	TCJA.

Changes	in	the	Code	from	the	TCJA	had	a	material	impact	on	our	financial	statements	in	2017.	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 income	tax	assets	and	liabilities	to	be	measured	at	the	enacted	tax	rate	expected	to	apply	when	temporary	differences	are	to	be	realized	or	settled.	Thus,	at	the	date	of enactment,	the	Company's	deferred	income	taxes	were	re-measured	based	upon	the	new	tax	rate.	For	the	Company's	regulated	entities,	substantially	all	of	the	change	in deferred	income	taxes	are	recorded	as	either	an	offset	to	a	regulatory	asset	or	liability	because	changes	are	expected	to	be	recovered	by	or	refunded	to	customers.	For	the Company's	unregulated	operations,	the	change	in	deferred	income	taxes	is	recorded	as	a	non-cash	re-measurement	adjustment	to	earnings.

The	staff	of	the	U.S.	Securities	and	Exchange	Commission	(the	"SEC")	has	recognized	the	complexity	of	reflecting	the	impacts	of	the	TCJA,	and	on	December 22,	2017	issued	guidance	in	Staff	Accounting	Bulletin	118	("SAB	118")	which	clarifies	accounting	for	income	taxes	under	ASC	740	if	information	is	not	yet	available or	complete	and	provides	for	up	to	a	one	year	period	in	which	to	complete	the	required	analyses	and	accounting.	SAB	118	describes	three	scenarios	or	buckets associated	with	a	company's	status	of	accounting	for	income	tax	reform:	(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	Company	has	made	a	reasonable	estimate	for	the	measurement	and	accounting	of	certain	effects	of	the	TCJA	which	have	been	reflected	in	the	December	31,	2017 financial	statements.	The	re-measurement	of	deferred	income	taxes	at	the	new	federal	tax	rate	increased	the	2017	deferred	income	tax	provision	by	$125	million	for	the year	ending	December	31,	2017.	Additionally,	the	accumulated	deferred	income	tax	liability	decreased	by	$1.39	billion	and	regulatory	liabilities	increased	by	$1.51 billion,	respectively,	as	of	December	31,	2017.

As	provided	for	under	SAB	118,	the	Company	has	not	recorded	the	impact	for	certain	items	under	TCJA	for	which	it	has	not	yet	been	able	to	gather,	prepare	and analyze	the	necessary	information	in	reasonable	detail	to	complete	the	ASC	740	accounting.	For	these	items,	which	include	the	impact	of	TCJA	on	state	income	taxes, the	current	and	deferred	income	taxes	were	recognized	and	measured	based	on	the	provisions	of	the	tax	laws	that	were	in	effect	immediately	prior	to	the	TCJA	being enacted.	The	current	and	deferred	state	taxes	are	$25	million	and	$50	million	as	of	December	31,	2017,	respectively.	The	determination	of	the	impact	of	the	income	tax effects	of	these	items	and	the	items	reflected	as	provisional	amounts	will	require	additional	analysis	of	historical	records	and	further	interpretation	of	the	TCJA	from	yet to	be	issued	U.S.	Treasury	regulations	which	will	require	more	time,	information	and	resources	than	currently	available	to	the	Company.

The	following	table	provides	the	components	of	the	net	deferred	tax	liability	as	of	December	31:

|  | 2017 | 2016 |
| :--- | :--- | :--- |
| Deferred\ttax\tassets |  |  |
| Advances\tand\tcontributions | $395 | $540 |
| Tax\tlosses\tand\tcredits | 256 | 301 |
| Regulatory\tincome\ttax\tassets | 327 | — |
| Pension\tand\tother\tpostretirement\tbenefits | 96 | 173 |
| Other | 49 | 90 |
| Total\tdeferred\ttax\tassets | 1,123 | 1,104 |
| Valuation\tallowance | (13) | (6) |
| Total\tdeferred\ttax\tassets,\tnet\tof\tallowance | $1,110 | $1,098 |
| Deferred\ttax\tliabilities |  |  |
| Property,\tplant\tand\tequipment | $2,489 | $3,339 |
| Deferred\tpension\tand\tother\tpostretirement\tbenefits | 69 | 126 |
| Other | 103 | 229 |
| Total\tdeferred\ttax\tliabilities | 2,661 | 3,694 |
| Total\tdeferred\ttax\tliabilities,\tnet\tof\tdeferred\ttax\tassets | $(1,551) | $(2,596) |

As	of	December	31,	2017	and	2016,	the	Company	recognized	federal	NOL	carryforwards	of	$1.05	billion	and	$1.23	billion,	respectively.	The	Company	believes the	federal	NOL	carryforwards	are	more	likely	than	not	to	be	recovered	and	require	no	valuation	allowance.	The	Company's	federal	NOL	carryforwards	will	begin	to expire	in	2028.

As	of	December	31,	2017	and	2016,	the	Company	had	state	NOLs	of	$322	million	and	$625	million,	respectively,	a	portion	of	which	are	offset	by	a	valuation allowance	because	the	Company	does	not	believe	these	NOLs	are	more	likely	than	not	to	be	realized.	The	state	NOL	carryforwards	will	begin	to	expire	in	2018	through 2037.

As	of	December	31,	2017	and	2016,	the	Company	had	an	insignificant	amount	of	Canadian	NOL	carryforwards	and	capital	loss	carryforwards	for	federal	income tax	purposes.

The	Company	files	income	tax	returns	in	the	United	States	federal	jurisdiction	and	various	state	and	foreign	jurisdictions.	With	few	exceptions,	the	Company	is no	longer	subject	to	U.S.	federal,	state	or	local	or	non-U.S.	income	tax	examinations	by	tax	authorities	for	years	on	or	before	2012.	The	Company	has	state	income	tax examinations	in	progress	and	does	not	expect	material	adjustments	to	result.

The	following	table	summarizes	the	changes	in	the	Company's	gross	liability,	excluding	interest	and	penalties,	for	unrecognized	tax	benefits:

| Balance	as	of	January	1,	2016 | $233 |
| :--- | :--- |
| Increases\tin\tcurrent\tperiod\ttax\tpositions | 10 |
| Decreases\tin\tprior\tperiod\tmeasurement\tof\ttax\tpositions | (74) |
| Balance\tas\tof\tDecember\t31,\t2016 | $169 |
| Increases\tin\tcurrent\tperiod\ttax\tpositions | 8 |
| Decreases\tin\tprior\tperiod\tmeasurement\tof\ttax\tpositions | (71) |
| Balance\tas\tof\tDecember\t31,\t2017 | $106 |

The	Company's	tax	positions	relate	primarily	to	the	deductions	claimed	for	repair	and	maintenance	costs	on	its	utility	plant.	The	gross	liability	was	reduced primarily	as	a	result	of	the	Section	481(a)	adjustment	allocated	for	the	current	year	when	the	Company	filed	the	accounting	method	change	with	its	2015	tax	return.	The Company	does	not	anticipate	material	changes	to	its	unrecognized	tax	benefits	within	the	next	year.	If	the	Company	sustains	all	of	its	positions	as	of	December	31,	2017, an	unrecognized	tax	benefit	of	$10	million,	excluding	interest	and	penalties,	would	impact	the	Company's	effective	tax	rate.	The	Company	had	an	insignificant	amount of	interest	and	penalties	related	to	its	tax	positions	as	of	December	31,	2017	and	2016.

The	following	table	summarizes	the	changes	in	the	Company's	valuation	allowance:

| Balance	as	of	January	1,	2015 | $10 |
| :--- | :--- |
| Decreases\tin\tcurrent\tperiod\ttax\tpositions | (2) |
| Balance\tas\tof\tDecember\t31,\t2015 | $8 |
| Decreases\tin\tcurrent\tperiod\ttax\tpositions | (2) |
| Balance\tas\tof\tDecember\t31,\t2016 | $6 |
| Increases\tin\tcurrent\tperiod\ttax\tpositions | 7 |
| Balance\tas\tof\tDecember\t31,\t2017 | $13 |

# Note	14:	Employee	Benefits

# Pension	and	Other	Postretirement	Benefits

The	Company	maintains	noncontributory	defined	benefit	pension	plans	covering	eligible	employees	of	 its	regulated	utility	and	shared	services	operations. Benefits	under	the	plans	are	based	on	the	employee's	years	of	service	and	compensation.	The	pension	plans	have	been	closed	for	all	new	employees.	The	pension	plans were	closed	for	most	employees	hired	on	or	after	January	1,	2006.	Union	employees	hired	on	or	after	January	1,	2001,	except	for	specific	eligible	groups	specified	in	the Plan,	had	their	accrued	benefit	frozen	and	will	be	able	to	receive	this	benefit	as	a	lump	sum	upon	termination	or	retirement.	Union	employees	hired	on	or	after	January	1, 2001	and	non-union	employees	hired	on	or	after	January	1,	2006	are	provided	with	a	5.25%	of	base	pay	defined	contribution	plan.	The	Company	does	not	participate	in a	multi-employer	plan.	The	Company	also	has	unfunded	noncontributory	supplemental	non-qualified	pension	plans	that	provide	additional	retirement	benefits	to	certain employees.

The	Company's	pension	funding	practice	is	to	contribute	at	least	the	greater	of	the	minimum	amount	required	by	the	Employee	Retirement	Income	Security	Act of	1974	or	the	normal	cost.	Further,	the	Company	will	consider	additional	contributions	if	needed	to	avoid	"at	risk"	status	and	benefit	restrictions	under	the	Pension Protection	Act	of	2006	("PPA").	The	Company	may	also	consider	increased	contributions,	based	on	other	financial	requirements	and	the	plans'	funded	position.	Pension expense	in	excess	of	the	amount	contributed	to	the	pension	plans	is	deferred	by	certain	regulated	subsidiaries	pending	future	recovery	in	rates	charged	for	utility	services as	contributions	are	made	to	the	plans.	See	Note	6—Regulatory	Assets	and	Liabilities.	Pension	plan	assets	are	invested	in	a	number	of	actively	managed,	commingled funds,	and	limited	partnerships	including	equities,	fixed	income	securities,	guaranteed	annuity	contracts	with	insurance	companies,	real	estate	funds	and	real	estate investment	trusts	("REITs").

The	Company	maintains	other	postretirement	benefit	plans	providing	varying	levels	of	medical	and	life	insurance	to	eligible	retirees.	The	retiree	welfare	plans	are closed	for	union	employees	hired	on	or	after	January	1,	2006.	The	plans	had	previously	closed	for	non-union	employees	hired	on	or	after	January	1,	2002.	The Company's	policy	is	to	fund	other	postretirement	benefit	costs	up	to	the	amount	recoverable	through	rates.	Assets	of	the	plans	are	invested	in	a	number	of	actively managed	and	commingled	funds	including	equities	and	fixed	income	securities.

The	investment	policy	guidelines	of	the	pension	plan	require	that	the	fixed	income	portfolio	has	an	overall	weighted-average	credit	rating	of	A	or	better	by Standard	&	Poor's.	None	of	the	Company's	securities	are	included	in	pension	or	other	postretirement	benefit	plan	assets.	The	investment	policies'	objectives	are	focused on	reducing	the	volatility	of	the	plans'	funded	status	over	a	long	term	horizon.

The	Company	uses	fair	value	for	all	classes	of	assets	in	the	calculation	of	market-related	value	of	plan	assets.	As	of	2017,	the	fair	values	and	asset	allocations	of the	pension	plan	assets	include	the	American	Water	Pension	Plan,	the	New	York	Water	Service	Corporation	Pension	Plan,	and	the	Shorelands	Water	Company,	Inc. Pension	Plan.

The	fair	values	and	asset	allocations	of	pension	plan	assets	as	of	December	31,	2017	and	2016,	respectively,	by	asset	category	were	as	follows:

|  |  |  |  |  |  | Percentage |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Asset\tCategory | 2018\nTarget\nAllocation | Total | Quoted\tPrices\tin\nActive\tMarkets\tfor\nIdentical\tAssets\n(Level\t1) | Significant\nObservable\tInputs\n(Level\t2) | Significant\nUnobservable\tInputs\n(Level\t3) | of\tPlan\tAssets\nas\tof\nDecember\t31,\t2017 |
| Cash |  | $7 | $7 | $— | $— | — |
| Equity\tsecurities: | 50% |  |  |  |  |  |
| U.S.\tlarge\tcap |  | 344 | 344 | — | — | 21% |
| U.S.\tsmall\tcap |  | 84 | 79 | 5 | — | 5% |
| International |  | 295 | 2 | 149 | 144 | 18% |
| Real\testate\tfund |  | 86 | — | — | 86 | 5% |
| REITs |  | 26 | — | 26 | — | 2% |
| Fixed\tincome\tsecurities: | 50% |  |  |  |  |  |
| U.S.\tTreasury\tsecurities\tand\ngovernment\tbonds |  | 200 | 180 | 20 | — | 12% |
| Corporate\tbonds |  | 519 | — | 519 | — | 31% |
| Mortgage-backed\tsecurities |  | 1 | — | 1 | — | — |
| Municipal\tbonds |  | 31 | — | 31 | — | 2% |
| Long\tduration\tbond\tfund |  | 8 | 8 | — | — | 1% |
| Guarantee\tannuity\tcontracts |  | 48 | — | — | 48 | 3% |
| Total | 100% | $1,649 | $620 | $751 | $278 | 100% |

|  |  |  |  |  |  | Percentage |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Asset\tCategory | 2017\nTarget\nAllocation | Total | Quoted\tPrices\tin\nActive\tMarkets\tfor\nIdentical\tAssets\n(Level\t1) | Significant\nObservable\tInputs\n(Level\t2) | Significant\nUnobservable\tInputs\n(Level\t3) | of\tPlan\tAssets\nas\tof\nDecember\t31,\t2016 |
| Cash |  | $10 | $10 | $— | $— | — |
| Equity\tSecurities: | 60% |  |  |  |  |  |
| U.S.\tlarge\tcap |  | 316 | 316 | — | — | 22% |
| U.S.\tsmall\tcap |  | 134 | 134 | — | — | 9% |
| International |  | 259 | — | 259 | — | 18% |
| Real\testate\tfund |  | 101 | — | — | 101 | 7% |
| REITs |  | 24 | — | 24 | — | 2% |
| Fixed\tincome\tsecurities: | 40% |  |  |  |  |  |
| U.S.\tTreasury\tsecurities\tand\ngovernment\tbonds |  | 150 | 114 | 36 | — | 11% |
| Corporate\tbonds |  | 391 | — | 391 | — | 27% |
| Mortgage-backed\tsecurities |  | 3 | — | 3 | — | — |
| Long\tduration\tbond\tfund |  | 7 | 7 | — | — | 1% |
| Guarantee\tannuity\tcontracts |  | 48 | — | 9 | 39 | 3% |
| Total | 100% | $1,443 | $581 | $722 | $140 | 100% |

The	following	tables	present	a	reconciliation	of	the	beginning	and	ending	balances	of	the	fair	value	measurements	using	significant	unobservable	inputs	(Level	3) for	2017	and	2016,	respectively:

|  | Level	3 |
| :--- | :--- |
| Balance\tas\tof\tJanuary\t1,\t2017 | $140 |
| Actual\treturn\ton\tassets | 2 |
| Purchases,\tissuances\tand\tsettlements,\tnet | 136 |
| Balance\tas\tof\tDecember\t31,\t2017 | $278 |

|  | Level	3 |
| :--- | :--- |
| Balance\tas\tof\tJanuary\t1,\t2016 | $136 |
| Actual\treturn\ton\tassets | 8 |
| Purchases,\tissuances\tand\tsettlements,\tnet | (4) |
| Balance\tas\tof\tDecember\t31,\t2016 | $140 |

The	Company's	postretirement	benefit	plans	have	different	 levels	of	funded	status	and	 the	assets	are	held	under	various	 trusts.	The	 investments	and	risk mitigation	strategies	for	the	plans	are	tailored	specifically	for	each	trust.	In	setting	new	strategic	asset	mixes,	consideration	is	given	to	the	likelihood	that	the	selected asset	allocation	will	effectively	fund	the	projected	plan	liabilities	and	meet	the	risk	tolerance	criteria	of	the	Company.	The	Company	periodically	updates	the	long-term, strategic	asset	allocations	for	these	plans	through	asset	liability	studies	and	uses	various	analytics	to	determine	the	optimal	asset	allocation.	Considerations	include	plan liability	characteristics,	liquidity	needs,	funding	requirements,	expected	rates	of	return	and	the	distribution	of	returns.	Strategies	to	address	the	goal	of	ensuring	sufficient assets	 to	 pay	 benefits	 include	 target	 allocations	 to	 a	 broad	 array	 of	 asset	 classes	 and,	 within	 asset	 classes,	 strategies	 are	 employed	 to	 provide	 adequate	 returns, diversification	and	liquidity.

In	2012,	the	Company	implemented	a	de-risking	strategy	for	the	American	Water	Pension	Plan	after	conducting	an	asset-liability	study	to	reduce	the	volatility	of the	funded	status	of	the	plan.	As	part	of	the	de-risking	strategy,	the	Company	revised	the	asset	allocations	to	increase	the	matching	characteristics	of	fixed-income	assets relative	to	liabilities.	The	fixed	income	portion	of	the	portfolio	was	designed	to	match	the	bond-like	and	long-dated	nature	of	the	postretirement	liabilities.	In	2017,	the Company	further	increased	its	exposure	to	liability-driven	investing	and	increased	its	fixed-income	allocation	to	50%,	up	from	40%,	in	an	effort	to	further	decrease	the funded	status	volatility	of	the	plan	and	hedge	the	portfolio	from	movements	in	interest	rates.

In	2012,	the	Company	also	implemented	a	de-risking	strategy	for	the	medical	bargaining	trust	within	the	plan	to	minimize	volatility.	In	2017,	the	Company conducted	a	new	asset-liability	study	that	indicated	medical	trend	inflation	that	outpaced	the	Consumer	Price	Index	by	more	than	2%	for	the	last	20	years.	Given continuously	rising	medical	costs,	the	Company	decided	to	increase	the	equity	exposure	of	the	portfolio	to	30%,	up	from	20%,	while	reducing	the	fixed-income	portion of	 the	portfolio	from	80%	to	70%.	The	Company	also	conducted	an	asset-liability	study	for	the	Post-Retirement	Non-Bargaining	Medical	Plan.	Its	allocation	was adjusted	to	make	it	more	conservative,	reducing	the	equity	allocation	from	70%	to	60%	and	increasing	the	fixed-income	allocation	from	30%	to	40%.	The	Post- Retirement	Medical	Non-Bargaining	plan's	equity	allocation	was	reduced	due	to	the	cap	on	benefits	for	some	non-union	participants	and	resultant	reduction	in	the	plan's liabilities.	These	changes	will	take	place	in	2018.

The	Company	engages	third	party	investment	managers	for	all	invested	assets.	Managers	are	not	permitted	to	invest	outside	of	the	asset	class	(e.g.	fixed	income, equity,	alternatives)	or	strategy	for	which	they	have	been	appointed.	Investment	management	agreements	and	recurring	performance	and	attribution	analysis	are	used	as tools	to	ensure	investment	managers	invest	solely	within	the	investment	strategy	they	have	been	provided.	Futures	and	options	may	be	used	to	adjust	portfolio	duration to	align	with	a	plan's	targeted	investment	policy.

In	order	to	minimize	asset	volatility	relative	to	the	liabilities,	a	portion	of	plan	assets	is	allocated	to	fixed	income	investments	that	are	exposed	to	interest	rate	risk. Increases	in	interest	rates	generally	will	result	in	a	decline	in	the	value	of	fixed	income	assets	while	reducing	the	present	value	of	the	liabilities.	Conversely,	rate decreases	will	increase	fixed	income	assets,	partially	offsetting	the	related	increase	in	the	liabilities.	Within	equities,	risk	is	mitigated	by	constructing	a	portfolio	that	is broadly	diversified	by	geography,	market	capitalization,	manager	mandate	size,	investment	style	and	process.

Actual	allocations	to	each	asset	class	vary	from	target	allocations	due	to	periodic	investment	strategy	updates,	market	value	fluctuations,	the	length	of	time	it	takes to	fully	implement	investment	allocations,	and	the	timing	of	benefit	payments	and	contributions.	The	asset	allocation	is	rebalanced	on	a	quarterly	basis,	if	necessary. Voluntary	Employees'	Beneficiary	Association	("VEBA")	Trust	assets	include	the	American	Water	Post-Retirement	Medical	Benefits	Bargaining	Plan,	the	New	York Water	Service	Corporation	Post-Retirement	Medical	Benefits	Bargaining	Plan,	the	American	Water	Post-Retirement	Medical	Benefits	Non-Bargaining	Plan,	and	the American	Water	Life	Insurance	Trust.

The	fair	values	and	asset	allocations	of	postretirement	benefit	plan	assets	as	of	December	31,	2017	and	2016,	respectively,	by	asset	category,	were	as	follows:

| Asset	Category | 2018<br>Target	Allocation | Total | Quoted	Prices	in<br>Active	Markets	for<br>Identical	Assets<br>(Level	1) | Significant<br>Observable	Inputs<br>(Level	2) | Significant<br>Unobservable	Inputs<br>(Level	3) | Percentage<br>of	Plan	Assets<br>as	of<br>December	31,	2017 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Bargain\tVEBA: |  |  |  |  |  |  |
| Cash |  | $18 | $18 | $— | $— | — |
| Equity\tsecurities: | 30% |  |  |  |  |  |
| U.S.\tlarge\tcap |  | 44 | 44 | — | — | 10% |
| International |  | 51 | 51 | — | — | 12% |
| Fixed\tincome\tsecurities: | 70% |  |  |  |  |  |
| U.S.\tTreasury\tsecurities\tand\ngovernment\tbonds |  | 48 | 21 | 27 | — | 11% |
| Corporate\tbonds |  | 233 | — | 233 | — | 55% |
| Municipal\tbonds |  | 26 | — | 26 | — | 6% |
| Long\tduration\tbond\tfund |  | 4 | 4 | — | — | 1% |
| Future\tand\toption\tcontracts\t(a) |  | 2 | 2 | — | — | 5% |
| Total\tbargain\tVEBA | 100% | $426 | $140 | $286 | $— | 100% |
| Non-bargain\tVEBA: |  |  |  |  |  |  |
| Cash |  | $1 | $1 | $— | $— | — |
| Equity\tsecurities: | 60% |  |  |  |  |  |
| U.S.\tlarge\tcap |  | 53 | 53 | — | — | 37% |
| U.S.\tsmall\tcap |  | 5 | 5 | — | — | 4% |
| International |  | 47 | 47 | — | — | 33% |
| Fixed\tincome\tsecurities: | 40% |  |  |  |  |  |
| Core\tfixed\tincome\tbond\tfund\t(a) |  | 36 | 36 | — | — | 26% |
| Total\tnon-bargain\tVEBA | 100% | $142 | $142 | $— | $— | 100% |
| Life\tVEBA: |  |  |  |  |  |  |
| Cash |  | $3 | $3 | $— | $— | — |
| Equity\tsecurities: | 70% |  |  |  |  |  |
| U.S.\tlarge\tcap |  | 3 | 3 | — | — | 38% |
| Fixed\tincome\tsecurities: | 30% |  |  |  |  |  |
| Core\tfixed\tincome\tbond\tfund\t(a) |  | 2 | 2 | — | — | 62% |
| Total\tlife\tVEBA | 100% | $8 | $8 | $— | $— | 100% |
| Total | 100% | $576 | $290 | $286 | $— | 100% |

(a) Includes	cash	for	margin	requirements.

| Asset	Category | 2017<br>Target	Allocation | Total | Quoted	Prices	in<br>Active	Markets	for<br>Identical	Assets<br>(Level	1) | Significant<br>Observable	Inputs<br>(Level	2) | Significant<br>Unobservable	Inputs<br>(Level	3) | Percentage<br>of	Plan	Assets<br>as	of<br>December	31,	2016 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Bargain\tVEBA: |  |  |  |  |  |  |
| Equity\tsecurities: | 20% |  |  |  |  |  |
| U.S.\tlarge\tcap |  | $35 | $35 | $— | $— | 9% |
| International |  | 40 | 40 | — | — | 10% |
| Fixed\tincome\tsecurities: | 80% |  |  |  |  |  |
| U.S.\tTreasury\tsecurities\tand\ngovernment\tbonds |  | 84 | 84 | — | — | 22% |
| Corporate\tbonds |  | 223 | — | 223 | — | 58% |
| Long\tduration\tbond\tfund |  | 3 | 3 | — | — | 1% |
| Future\tand\toption\tcontracts\t(a) |  | 1 | 1 | — | — | — |
| Total\tbargain\tVEBA | 100% | $386 | $163 | $223 | $— | 100% |
| Non-bargain\tVEBA: |  |  |  |  |  |  |
| Cash |  | $2 | $2 | $— | $— | — |
| Equity\tsecurities: | 70% |  |  |  |  |  |
| U.S.\tlarge\tcap |  | 29 | 29 | — | — | 22% |
| U.S.\tsmall\tcap |  | 30 | 30 | — | — | 22% |
| International |  | 37 | 37 | — | — | 28% |
| Fixed\tincome\tsecurities: | 30% |  |  |  |  |  |
| Core\tfixed\tincome\tbond\tfund |  | 36 | 36 | — | — | 28% |
| Total\tnon-bargain\tVEBA | 100% | $134 | $134 | $— | $— | 100% |
| Life\tVEBA: |  |  |  |  |  |  |
| Equity\tsecurities: | 70% |  |  |  |  |  |
| U.S.\tlarge\tcap |  | $3 | $3 | $— | $— | 60% |
| Fixed\tincome\tsecurities: | 30% |  |  |  |  |  |
| Core\tfixed\tincome\tbond\tfund |  | 2 | 2 | — | — | 40% |
| Total\tlife\tVEBA | 100% | $5 | $5 | $— | $— | 100% |
| Total | 100% | $525 | $302 | $223 | $— | 100% |

# Valuation	Techniques	Used	to	Determine	Fair	Value

Cash—Cash	and	investments	with	maturities	of	three	months	or	less	when	purchased,	including	certain	short-term	fixed-income	securities,	are	considered	cash and	are	included	in	the	recurring	fair	value	measurements	hierarchy	as	Level	1.

Equity	securities—For	equity	securities,	the	trustees	obtain	prices	from	pricing	services,	whose	prices	are	obtained	from	direct	feeds	from	market	exchanges,	that the	Company	is	able	to	independently	corroborate.	Equity	securities	are	valued	based	on	quoted	prices	in	active	markets	and	categorized	as	Level	1.	Certain	equities, such	as	international	securities	held	in	the	pension	plan	are	invested	in	commingled	funds	and/or	limited	partnerships.	These	funds	are	valued	to	reflect	the	plan	fund's interest	in	the	fund	based	on	the	reported	year-end	net	asset	value.	Since	net	asset	value	is	not	directly	observable	or	not	available	on	a	nationally	recognized	securities exchange	for	the	commingled	funds,	they	are	categorized	as	Level	2.	For	limited	partnerships,	the	assets	as	a	whole	are	categorized	as	level	3	due	to	the	fact	that	the partnership	provides	the	pricing	and	the	pricing	inputs	are	less	readily	observable.	In	addition,	the	limited	partnership	vehicle	cannot	be	readily	traded.

Fixed-income	securities—The	majority	of	U.S.	Treasury	securities	and	government	bonds	have	been	categorized	as	Level	1	because	they	trade	in	highly-liquid and	transparent	markets	and	their	prices	can	be	corroborated.	The	fair	values	of	corporate	bonds,	mortgage	backed	securities,	and	certain	government	bonds	are	based	on prices	that	reflect	observable	market	information,	such	as	actual	trade	information	of	similar	securities.	They	are	categorized	as	Level	2	because	the	valuations	are calculated	using	models	which	utilize	actively	traded	market	data	that	the	Company	can	corroborate.

Guaranteed	annuity	contracts	are	categorized	as	Level	3	because	the	investments	are	not	publicly	quoted.	Since	these	market	values	are	determined	by	the provider,	they	are	not	highly	observable	and	have	been	categorized	as	Level	3.	Exchange-traded	future	and	option	positions	are	reported	in	accordance	with	changes	in variation	margins	that	are	settled	daily.	Exchange-traded	options	and	futures,	for	which	market	quotations	are	readily	available,	are	valued	at	the	last	reported	sale	price or	official	closing	price	on	the	primary	market	or	exchange	on	which	they	are	traded	and	are	classified	as	Level	1.

Real	estate	fund—Real	estate	fund	is	categorized	as	Level	3	as	the	fund	uses	significant	unobservable	inputs	for	fair	value	measurement	and	the	vehicle	is	in	the form	of	a	limited	partnership.

REITs—REITs	are	invested	in	commingled	funds.	Commingled	funds	are	valued	to	reflect	the	plan	fund's	interest	in	the	fund	based	on	the	reported	year-end	net asset	value.	Since	the	net	asset	value	is	not	directly	observable	for	the	commingled	funds,	they	are	categorized	as	Level	2.

The	following	table	provides	a	rollforward	of	the	changes	in	the	benefit	obligation	and	plan	assets	for	the	most	recent	two	years	for	all	plans	combined:

|  | Pension	Benefits<br>2017 | 2016 | Other	Benefits<br>2017 | 2016 |
| :--- | :--- | :--- | :--- | :--- |
| Change\tin\tbenefit\tobligation: |  |  |  |  |
| Benefit\tobligation\tas\tof\tJanuary\t1, | $1,864 | $1,720 | $610 | $667 |
| Service\tcost | 33 | 32 | 10 | 12 |
| Interest\tcost | 80 | 80 | 26 | 28 |
| Plan\tparticipants'\tcontributions | — | — | 2 | 2 |
| Plan\tamendments | — | — | — | (156) |
| Actuarial\t(gain)\tloss | 118 | 100 | (9) | 82 |
| Acquisitions | 9 | — | — | — |
| Settlements | — | (3) | — | — |
| Gross\tbenefits\tpaid | (70) | (65) | (26) | (26) |
| Federal\tsubsidy | — | — | 1 | 1 |
| Benefit\tobligation\tas\tof\tDecember\t31, | $2,034 | $1,864 | $614 | $610 |
| Change\tin\tplan\tassets: |  |  |  |  |
| Fair\tvalue\tof\tplan\tassets\tas\tof\tJanuary\t1, | $1,443 | $1,376 | $525 | $500 |
| Actual\treturn\ton\tplan\tassets | 227 | 99 | 69 | 32 |
| Employer\tcontributions | 42 | 36 | 6 | 17 |
| Plan\tparticipants'\tcontributions | — | — | 2 | 2 |
| Settlements | — | (3) | — | — |
| Acquisitions | 7 | — | — | — |
| Benefits\tpaid | (70) | (65) | (26) | (26) |
| Fair\tvalue\tof\tplan\tassets\tas\tof\tDecember\t31, | $1,649 | $1,443 | $576 | $525 |
| Funded\tvalue\tas\tof\tDecember\t31, | $(385) | $(421) | $(38) | $(85) |
| Amounts\trecognized\tin\tthe\tbalance\tsheet\tconsist\tof: |  |  |  |  |
| Noncurrent\tasset | $— | $— | $2 | $2 |
| Current\tliability | (2) | (2) | — | — |
| Noncurrent\tliability | (383) | (419) | (40) | (87) |
| Net\tamount\trecognized | $(385) | $(421) | $(38) | $(85) |

On	 July	 31,	 2016,	 the	 other	 postretirement	 benefit	 plan	 was	 re-measured	 to	 reflect	 a	 plan	 amendment,	 which	 capped	 benefits	 for	 certain	 non-union	 plan participants.	The	re-measurement	included	an	$156	million	reduction	in	future	benefits	payable	to	plan	participants,	and	resulted	in	an	$89	million	reduction	to	the	net accrued	postretirement	benefit	obligation.	The	plan	amendment	will	be	amortized	over	10.2	years,	the	average	future	working	lifetime	to	full	eligibility	age	for	all	plan participants.

The	following	table	provides	the	components	of	the	Company's	accumulated	other	comprehensive	income	and	regulatory	assets	that	have	not	been	recognized	as components	of	periodic	benefit	costs	as	of	December	31:

|  | Pension	Benefits |  | Other	Benefits |  |
| :--- | :--- | :--- | :--- | :--- |
|  | 2017 | 2016 | 2017 | 2016 |
| Net\tactuarial\tloss | $416 | $466 | $108 | $170 |
| Prior\tservice\tcost\t(credit) | 2 | 2 | (140) | (158) |
| Net\tamount\trecognized | $418 | $468 | $(32) | $12 |
| Regulatory\tassets\t(liabilities) | $270 | $300 | $(32) | $12 |
| Accumulated\tother\tcomprehensive\tincome | 148 | 168 | — | — |
| Total | $418 | $468 | $(32) | $12 |

As	 of	December	31,	2017	 and	2016,	the	projected	benefit	obligation,	accumulated	benefit	obligation	and	fair	value	of	plan	assets	for	pension	plans	with	a projected	obligation	in	excess	of	plan	assets	were	as	follows:

|  | 2017 | 2016 |
| :--- | :--- | :--- |
| Projected\tbenefit\tobligation | $2,034 | $1,864 |
| Fair\tvalue\tof\tplan\tassets | 1,649 | 1,443 |

|  | 2017 | 2016 |
| :--- | :--- | :--- |
| Accumulated\tbenefit\tobligation | $1,888 | $1,722 |
| Fair\tvalue\tof\tplan\tassets | 1,649 | 1,443 |

The	accumulated	postretirement	benefit	obligation	exceeds	plan	assets	for	all	of	the	Company's	other	postretirement	benefit	plans,	except	for	the	New	York Water	Medical	Benefits	Bargaining	Trust.

In	August	2006,	the	PPA	was	signed	into	law	in	the	U.S.	The	PPA	replaces	the	funding	requirements	for	defined	benefit	pension	plans	by	requiring	that	defined benefit	plans	contribute	to	100%	of	the	current	liability	funding	target	over	seven	years.	Defined	benefit	plans	with	a	funding	status	of	less	than	80%	of	the	current liability	are	defined	as	being	"at	risk"	and	additional	funding	requirements	and	benefit	restrictions	may	apply.	The	PPA	was	effective	for	the	2008	plan	year	with	short- term	phase-in	provisions	for	both	the	funding	target	and	at-risk	determination.	The	Company's	qualified	defined	benefit	plan	is	currently	funded	above	the	at-risk threshold,	and	therefore	the	Company	expects	that	the	plans	will	not	be	subject	to	the	"at	risk"	funding	requirements	of	the	PPA.	The	Company	is	proactively	monitoring the	plan's	funded	status	and	projected	contributions	under	the	law	to	appropriately	manage	the	potential	impact	on	cash	requirements.

Minimum	funding	requirements	for	the	qualified	defined	benefit	pension	plan	are	determined	by	government	regulations	and	not	by	accounting	pronouncements. The	Company	plans	to	contribute	amounts	at	least	equal	to	the	greater	of	the	minimum	required	contributions	or	the	normal	cost	in	2018	to	the	qualified	pension	plans. The	Company	plans	to	contribute	to	its	2018	other	postretirement	benefit	cost	for	rate-making	purposes.

Information	about	the	expected	cash	flows	for	the	pension	and	postretirement	benefit	plans	is	as	follows:

|  | Pension<br>Benefits | Other<br>Benefits |
| :--- | :--- | :--- |
| 2018\texpected\temployer\tcontributions: |  |  |
| To\tplan\ttrusts | $39 | $— |
| To\tplan\tparticipants | 2 | — |

The	following	table	reflects	the	net	benefits	expected	to	be	paid	from	the	plan	assets	or	the	Company's	assets:

|  | Pension	Benefits | Other	Benefits | Other	Benefits |
| :--- | :--- | :--- | :--- |
|  | Expected\tBenefit\nPayments | Expected\tBenefit\nPayments | Expected\tFederal\nSubsidy\tPayments |
| 2018 | $77 | $29 | $2 |
| 2019 | 83 | 31 | 2 |
| 2020 | 89 | 32 | 2 |
| 2021 | 94 | 34 | 2 |
| 2022 | 99 | 35 | 2 |
| 2022-2026 | 577 | 192 | 12 |

Because	the	above	amounts	are	net	benefits,	plan	participants'	contributions	have	been	excluded	from	the	expected	benefits.

Accounting	for	pensions	and	other	postretirement	benefits	requires	an	extensive	use	of	assumptions	about	the	discount	rate,	expected	return	on	plan	assets,	the rate	of	future	compensation	 increases	received	by	 the	Company's	employees,	mortality,	 turnover	and	medical	costs.	Each	assumption	 is	reviewed	annually.	The assumptions	are	selected	to	represent	the	average	expected	experience	over	time	and	may	differ	in	any	one	year	from	actual	experience	due	to	changes	in	capital	markets and	the	overall	economy.	These	differences	will	impact	the	amount	of	pension	and	other	postretirement	benefit	expense	that	the	Company	recognizes.

The	significant	assumptions	related	to	the	Company's	pension	and	other	postretirement	benefit	plans	were	as	follows:

|  | 2017 | Pension	Benefits<br>2016 | 2015 | 2017 | Other	Benefits<br>2016 | 2015 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Weighted-average\tassumptions\tused\tto\tdetermine\nDecember\t31\tbenefit\tobligations: |  |  |  |  |  |  |
| Discount\trate | 3.75% | 4.28% | 4.66% | 3.73% | 4.26% | 4.67% |
| Rate\tof\tcompensation\tincrease | 3.02% | 3.07% | 3.10% | N/A | N/A | N/A |
| Medical\ttrend | N/A | N/A | N/A | graded\tfrom | graded\tfrom | graded\tfrom |
|  |  |  |  | 7.00%\tin\t2018 | 7.00%\tin\t2017 | 6.50%\tin\t2016 |
|  |  |  |  | to\t4.50%\tin\t2026+ | to\t5.00%\tin\t2021+ | to\t5.00%\tin\t2021+ |
| Weighted-average\tassumptions\tused\tto\tdetermine\tnet\nperiodic\tcost: |  |  |  |  |  |  |
| Discount\trate | 4.28% | 4.66% | 4.24% | 4.26% | 3.66% | 4.24% |
| Expected\treturn\ton\tplan\tassets | 6.49% | 7.02% | 6.91% | 5.09% | 5.37% | 4.92% |
| Rate\tof\tcompensation\tincrease | 3.07% | 3.10% | 3.12% | N/A | N/A | N/A |
| Medical\ttrend | N/A | N/A | N/A | graded\tfrom | graded\tfrom | graded\tfrom |
|  |  |  |  | 7.00%\t\tin\t2017 | 6.50%\t\tin\t2016 | 6.75%\t\tin\t2015 |
|  |  |  |  | to\t5%\tin\t2021+ | to\t5.00%\tin\t2021+ | to\t5.00%\tin\t2021+ |

Note:	N/A	-	Assumption	is	not	applicable.

The	discount	rate	assumption	was	determined	for	the	pension	and	postretirement	benefit	plans	independently.	At	year-end	2011,	the	Company	began	using	an approach	that	approximates	the	process	of	settlement	of	obligations	tailored	to	the	plans'	expected	cash	flows	by	matching	the	plans'	cash	flows	to	the	coupons	and expected	maturity	values	of	individually	selected	bonds.	The	yield	curve	was	developed	for	a	universe	containing	the	majority	of	U.S.-issued	AA-graded	corporate bonds,	all	of	which	were	non-callable	(or	callable	with	make-whole	provisions).	Historically,	for	each	plan,	the	discount	rate	was	developed	at	the	level	equivalent	rate that	would	produce	the	same	present	value	as	that	using	spot	rates	aligned	with	the	projected	benefit	payments.

The	expected	long-term	rate	of	return	on	plan	assets	is	based	on	historical	and	projected	rates	of	return,	prior	to	administrative	and	investment	management	fees, for	current	and	planned	asset	classes	in	the	plans'	investment	portfolios.	Assumed	projected	rates	of	return	for	each	of	the	plans'	projected	asset	classes	were	selected after	analyzing	historical	experience	and	future	expectations	of	the	returns	and	volatility	of	the	various	asset	classes.	Based	on	the	target	asset	allocation	for	each	asset class,	 the	overall	expected	rate	of	return	for	 the	portfolio	was	developed,	adjusted	for	historical	and	expected	experience	of	active	portfolio	management	results compared	to	the	benchmark	returns	and	for	the	effect	of	expenses	paid	from	plan	assets.	The	Company's	pension	expense	increases	as	the	expected	return	on	assets decreases.	The	Company	used	an	expected	return	on	plan	assets	of	6.49%	to	estimate	its	2017	pension	benefit	costs,	and	an	expected	blended	return	based	on	weighted assets	of	5.09%	to	estimate	its	2017	other	postretirement	benefit	costs.

In	the	determination	of	year	end	2014	projected	benefit	plan	obligations,	the	Company	adopted	a	new	table	based	on	the	Society	of	Actuaries	RP	2014	mortality table	including	a	generational	BB-2D	projection	scale.	The	adoption	resulted	in	a	significant	increase	to	pension	and	other	postretirement	benefit	plans'	projected	benefit obligations.	In	2015	a	new	MP	2015	Projection	Scale	was	issued,	but	not	adopted	by	the	Company	since	all	of	the	experience	upon	which	the	MP	2015	Projection	Scale is	based	was	considered	by	the	Company	in	selecting	its	2014	assumptions.	For	year-end	2017,	the	Company	retained	the	Society	of	Actuaries	RP-2014	mortality	table as	its	base	mortality	table	but	adopted	the	new	MP-2017	generational	projection	scale	to	project	mortality	improvements	after	2006.

|  | One-Percentage-Point<br>Increase | One-Percentage-Point<br>Decrease |
| :--- | :--- | :--- |
| Effect\ton\ttotal\tof\tservice\tand\tinterest\tcost\tcomponents | $5 | $(4) |
| Effect\ton\tother\tpostretirement\tbenefit\tobligation | 73 | (60) |

The	following	table	provides	the	components	of	net	periodic	benefit	costs	for	the	years	ended	December	31:

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Components\tof\tnet\tperiodic\tpension\tbenefit\tcost: |  |  |  |
| Service\tcost | $33 | $32 | $37 |
| Interest\tcost | 80 | 80 | 74 |
| Expected\treturn\ton\tplan\tassets | (93) | (95) | (97) |
| Amortization\tof: |  |  |  |
| Prior\tservice\tcost\t(credit) | 1 | 1 | 1 |
| Actuarial\t(gain)\tloss | 34 | 27 | 25 |
| Net\tperiodic\tpension\tbenefit\tcost | $55 | $45 | $40 |
| Other\tchanges\tin\tplan\tassets\tand\tbenefit\tobligations\trecognized\tin\tother\tcomprehensive\nincome: |  |  |  |
| Amortization\tof\tprior\tservice\tcredit\t(cost) | $— | $— | $— |
| Current\tyear\tactuarial\t(gain)\tloss | (7) | 21 | 10 |
| Amortization\tof\tactuarial\tgain\t(loss) | (7) | (6) | (5) |
| Total\trecognized\tin\tother\tcomprehensive\tincome | $(14) | $15 | $5 |
| Total\trecognized\tin\tnet\tperiodic\tbenefit\tcost\tand\tcomprehensive\tincome | $41 | $60 | $45 |
| Components\tof\tnet\tperiodic\tother\tpostretirement\tbenefit\tcost: |  |  |  |
| Service\tcost | $10 | $12 | $14 |
| Interest\tcost | 26 | 28 | 30 |
| Expected\treturn\ton\tplan\tassets | (26) | (27) | (26) |
| Amortization\tof: |  |  |  |
| Prior\tservice\tcost\t(credit) | (18) | (9) | (2) |
| Actuarial\t(gain)\tloss | 10 | 5 | 5 |
| Net\tperiodic\tother\tpostretirement\tbenefit\tcost | $2 | $9 | $21 |

The	Company's	policy	is	to	recognize	curtailments	when	the	total	expected	future	service	of	plan	participants	is	reduced	by	greater	than	10%	due	to	an	event	that results	in	terminations	and/or	retirements.

Cumulative	gains	and	losses	that	are	in	excess	of	10%	of	the	greater	of	either	the	projected	benefit	obligation	or	the	fair	value	of	plan	assets	are	amortized	over the	expected	average	remaining	future	service	of	the	current	active	membership	for	the	plans.

The	estimated	amounts	that	will	be	amortized	from	accumulated	other	comprehensive	income	and	regulatory	assets	into	net	periodic	benefit	cost	in	2018	are	as

# follows:

|  | Pension	Benefits | Other	Benefits |
| :--- | :--- | :--- |
| Actuarial\t(gain)\tloss | $27 | $4 |
| Prior\tservice\tcost\t(credit) | 1 | (18) |
| Total | $28 | $(14) |

# Savings	Plans	for	Employees

The	Company	maintains	401(k)	savings	plans	that	allow	employees	to	save	for	retirement	on	a	tax-deferred	basis.	Employees	can	make	contributions	that	are invested	at	their	direction	in	one	or	more	funds.	The	Company	makes	matching	contributions	based	on	a	percentage	of	an	employee's	contribution,	subject	to	certain limitations.	Due	to	the	Company's	discontinuing	new	entrants	into	the	defined	benefit	pension	plan,	on	January	1,	2006	the	Company	began	providing	an	additional 5.25%	of	base	pay	defined	contribution	benefit	for	union	employees	hired	on	or	after	January	1,	2001	and	non-union	employees	hired	on	or	after	January	1,	2006.	Plan expenses	totaled	$13	million,	$9	million	and	$9	million	for	2017,	2016	and	2015,	respectively.	All	of	the	Company's	contributions	are	invested	in	one	or	more	funds	at the	direction	of	the	employees.

# Note	15:	Commitments	and	Contingencies

Commitments	have	been	made	in	connection	with	certain	construction	programs.	The	estimated	capital	expenditures	required	under	legal	and	binding	contractual obligations	amounted	to	$475	million	as	of	December	31,	2017.

The	Company's	regulated	subsidiaries	maintain	agreements	with	other	water	purveyors	for	the	purchase	of	water	to	supplement	their	water	supply.	The	future annual	commitments	related	to	minimum	quantities	of	purchased	water	having	non-cancelable	terms	are	as	follows:

| Year | Amount |
| :--- | :--- |
| 2018 | $59 |
| 2019 | 65 |
| 2020 | 65 |
| 2021 | 65 |
| 2022 | 64 |
| Thereafter | 661 |

The	Company	enters	into	agreements	for	the	provision	of	services	to	water	and	wastewater	facilities	for	the	United	States	military,	municipalities	and	other customers.	The	Company's	military	agreements	expire	between	2051	 and	2068	and	have	remaining	performance	commitments	as	measured	by	estimated	remaining contract	revenue	of	$3.6	billion	as	of	December	31,	2017.	The	military	agreements	are	subject	to	customary	termination	provisions	held	by	the	U.S.	government	prior	to the	agreed	upon	contract	expiration.	The	Company's	O&M	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 maintenance	for	some	of	those	facilities,	in	exchange	for	an	annual	fee.	Unless	specifically	required	to	perform	certain	maintenance	activities,	the	maintenance	costs	are recognized	when	the	maintenance	is	performed.

# Contingencies

The	 Company	 is	 routinely	 involved	 in	 legal	 actions	 incident	 to	 the	 normal	 conduct	 of	 its	 business.	As	 of	December	31,	2017,	 the	 Company	 has	 accrued approximately	$135	million	of	probable	loss	contingencies	and	has	estimated	that	the	maximum	amount	of	losses	associated	with	reasonably	possible	loss	contingencies that	can	be	reasonably	estimated	is	$27	million.	For	certain	matters,	claims	and	actions,	the	Company	is	unable	to	estimate	possible	losses.	The	Company	believes	that damages	or	settlements,	if	any,	recovered	by	plaintiffs	in	such	matters,	claims	or	actions,	other	than	as	described	in	this	Note	15—Commitments	and	Contingencies,	will not	have	a	material	adverse	effect	on	the	Company.

On	 January	 9,	 2014,	 a	 chemical	 storage	 tank	 owned	 by	 Freedom	 Industries,	 Inc.	 leaked	 two	 substances,	 4-methylcyclohexane	 methanol	 ("MCHM"),	 and PPH/DiPPH,	a	mix	of	polyglycol	ethers,	into	the	Elk	River	near	the	West	Virginia-American	Water	Company	("WVAWC")	treatment	plant	intake	in	Charleston,	West Virginia.	After	having	been	alerted	to	the	leak	of	MCHM	by	the	West	Virginia	Department	of	Environmental	Protection,	WVAWC	took	immediate	steps	to	gather	more information	about	MCHM,	augment	its	treatment	process	as	a	precaution,	and	begin	consultations	with	federal,	state	and	local	public	health	officials.	As	soon	as possible	after	it	was	determined	that	the	augmented	treatment	process	would	not	fully	remove	the	MCHM,	a	joint	decision	was	reached	in	consultation	with	the	West Virginia	Bureau	for	Public	Health	to	issue	a	"Do	Not	Use"	order	for	all	of	its	approximately	93,000	customer	accounts	in	parts	of	nine	West	Virginia	counties	served	by the	Charleston	treatment	plant.	By	January	18,	2014,	none	of	WVAWC's	customers	were	subject	to	the	Do	Not	Use	order.

The	proposed	aggregate	pre-tax	amount	of	the	Settlement	with	respect	to	the	Company	is	$126	million.	The	aggregate	portion	of	the	Settlement	to	be	contributed by	WVAWC,	net	of	insurance	recoveries,	is	 $43	million	 (approximately	$26	million	after-tax),	taking	into	account	the	September	2017	settlement	with	one	of	the Company's	general	liability	insurance	carriers	discussed	below.	Another	defendant	to	the	Settlement	is	to	contribute	up	to	$25	million	to	the	Settlement.	Two	of	the Company's	general	 liability	 insurance	carriers,	which	provide	an	aggregate	of	$50	million	in	insurance	coverage	to	the	Company	under	these	policies,	had	been originally	requested	to	participate	in	the	Settlement	at	the	time	of	the	initial	filing	of	the	binding	agreement	in	principle	with	the	court	in	the	Federal	action,	but	did	not agree	to	do	so	at	that	time.	WVAWC	filed	a	lawsuit	against	one	of	these	carriers	alleging	that	the	carrier's	failure	to	agree	to	participate	in	the	Settlement	constituted	a breach	of	contract.	On	September	19,	2017,	the	Company	and	the	insurance	carrier	settled	this	lawsuit	for	$22	million,	out	of	a	maximum	of	$25	million	in	potential coverage	under	the	terms	of	the	relevant	policy,	in	exchange	for	a	full	release	by	the	Company	and	WVAWC	of	all	claims	against	the	insurance	carrier	related	to	the Freedom	Industries	chemical	spill.	WVAWC	and	the	settling	insurer	have	agreed	to	stay	this	litigation	pending	final	approval	of	the	Settlement.	The	Company	and WVAWC	continue	to	pursue	vigorously	their	rights	to	insurance	coverage	for	contributions	by	WVAWC	to	the	Settlement	in	mandatory	arbitration	with	the	remaining non-participating	carrier.	This	arbitration	proceeding	remains	pending.

As	a	result	of	these	events,	in	the	third	quarter	of	2016,	the	Company	recorded	a	charge	to	earnings,	net	of	insurance	receivables,	of	$65	million	($39	million after-tax).	Additionally,	in	the	third	quarter	of	2017,	the	Company	recorded	a	benefit	of	$22	million	($13	million	after-tax)	as	an	additional	insurance	receivable reflecting	 the	settlement	with	 the	 insurance	carrier	described	above.	The	settlement	amount	of	$126	million	 is	reflected	 in	Accrued	Liabilities	and	 the	offsetting insurance	receivables	are	reflected	in	Other	Current	Assets	in	the	Consolidated	Balance	Sheet	as	of	December	31,	2017.	The	Company	intends	to	fund	WVAWC's contributions	to	the	Settlement	through	existing	sources	of	liquidity,	although	no	contribution	by	WVAWC	will	be	required	unless	and	until	the	terms	of	the	Settlement are	finally	approved	by	the	court	in	the	Federal	action.	Furthermore,	under	the	terms	of	the	Settlement,	WVAWC	has	agreed	that	it	will	not	seek	rate	recovery	from	the Public	Service	Commission	of	West	Virginia	(the	"PSC")	for	approximately	$4	million	in	direct	response	costs	expensed	in	2014	by	WVAWC	relating	to	the	Freedom Industries	chemical	spill	as	well	as	for	amounts	paid	by	WVAWC	under	the	Settlement.

Additionally,	investigations	with	respect	to	the	matter	have	been	initiated	by	the	U.S.	Chemical	Safety	and	Hazard	Investigation	Board	(the	"CSB"),	the	U.S. Attorney's	Office	for	the	Southern	District	of	West	Virginia,	the	West	Virginia	Attorney	General,	and	the	 PSC.	As	a	result	of	the	U.S.	Attorney's	Office	investigation, Freedom	Industries	and	six	former	Freedom	Industries	employees	(three	of	whom	also	were	former	owners	of	Freedom	Industries),	pled	guilty	to	violations	of	the federal	Clean	Water	Act.	Moreover,	the	PSC	issued	an	order	on	June	15,	2017	concluding	its	investigation	without	requiring	WVAWC	to	take	any	further	action	with respect	to	the	matters	covered	by	the	general	investigation.

The	CSB	is	an	independent	investigatory	agency	with	no	regulatory	mandate	or	ability	to	issue	fines	or	citations;	rather,	the	CSB	can	only	issue	recommendations for	further	action.	In	response	to	the	Freedom	Industries	chemical	spill,	the	CSB	commenced	an	investigation	shortly	thereafter.	In	September	2016,	the	CSB	issued	and adopted	its	investigation	report	in	which	it	recommended	that	the	Company	conduct	additional	source	water	protection	activities.	On	April	4,	2017,	the	CSB	indicated that	the	implementation	by	the	Company	of	source	water	protection	activities	resolved	the	first	two	parts	of	the	CSB's	recommendation.	The	CSB	also	noted	that compliance	by	the	Company	with	the	third	part	of	its	recommendation	is	ongoing	and	that	closure	of	this	part	is	contingent	upon	completion	of	updated	contingency planning	for	the	Company's	water	utilities	outside	of	West	Virginia.	In	light	of	public	response	to	its	original	September	2016	investigation	report,	on	May	11,	2017,	the CSB	issued	a	new	version	of	this	report.	The	primary	substantive	change	addressed	CSB's	factual	evaluation	of	the	duration	and	volume	of	contamination	from	the leaking	 tank,	 decreasing	 its	 estimate	 of	 the	 leak	 time	 but	 increasing	 the	 volume	 estimate	 by	 10%.	 No	 substantive	 changes	 were	 made	 to	 the	 conclusions	 and recommendations	in	the	original	report.	The	Company	has	submitted	an	updated	report	on	contingency	planning	and	is	awaiting	CSB's	further	review.

In	December	2016,	 the	CPUC	 issued	a	final	decision	 in	a	proceeding	 involving	California-American	Water	Company,	a	wholly	owned	subsidiary	of	 the Company	("Cal	Am"),	adopting	a	new	residential	rate	design	for	Cal	Am's	Monterey	District.	The	decision	allowed	for	recovery	by	Cal	Am	of	 $32	million	in	under- collections	in	the	water	revenue	adjustment	mechanism/modified	cost	balancing	account	("WRAM/MCBA")	over	a	five-year	period,	plus	interest,	and	modified	existing conservation	and	rationing	plans.	In	its	decision,	the	CPUC	noted	concern	regarding	Cal	Am's	residential	tariff	administration,	specifically	regarding	the	lack	of verification	of	customer-provided	information	about	the	number	of	residents	per	household.	This	information	was	used	for	generating	billing	determinants	under	the tiered	rate	system.	As	a	result,	the	CPUC	kept	this	proceeding	open	to	address	several	issues,	including	whether	Cal	Am's	residential	tariff	administration	violated	a statute,	rule	or	CPUC	decision,	and	if	so,	whether	a	penalty	should	be	imposed.

On	February	24,	2017,	Cal	Am,	the	Monterey	Peninsula	Water	Management	District,	the	CPUC's	Office	of	Ratepayer	Advocates,	and	the	Coalition	of	Peninsula Businesses	filed	for	CPUC	approval	of	a	joint	settlement	agreement	(the	"Joint	Settlement	Agreement"),	which	among	other	things,	proposed	to	resolve	the	CPUC's residential	tariff	administration	concerns	by	providing	for	a	waiver	by	Cal	Am	of	$0.5	million	of	cost	recovery	for	residential	customers	through	the	WRAM/MCBA	in lieu	of	a	penalty.	Approval	of	the	Joint	Settlement	Agreement,	which	is	required	for	it	to	take	effect,	remains	pending	before	the	CPUC.

As	 of	December	31,	2017,	the	portions	of	this	loss	contingency	that	are	probable	and/or	reasonably	possible	have	been	determined	to	be	immaterial	to	the Company	and	have	been	included	in	the	aggregate	maximum	amounts	described	above	in	the	paragraph	under	"Contingencies"	in	this	Note	15.

On	October	12,	2017,	WVAWC	filed	with	the	court	a	motion	seeking	to	dismiss	all	of	the	plaintiffs'	counts	alleging	statutory	and	common	law	tort	claims. Furthermore,	WVAWC	asserts	that	the	PSC,	and	not	the	court,	has	primary	jurisdiction	over	allegations	involving	violations	of	the	applicable	tariff,	the	public	utility code	and	related	rules.	This	motion	remains	pending.

The	Company	and	WVAWC	believe	that	WVAWC	has	valid,	meritorious	defenses	to	the	claims	raised	in	this	class	action	complaint.	WVAWC	is	vigorously defending	itself	against	these	allegations.	Given	the	current	stage	of	this	proceeding,	the	Company	cannot	reasonably	estimate	the	amount	of	any	reasonably	possible losses	or	a	range	of	such	losses	related	to	this	proceeding.

# Note	16:	Earnings	per	Common	Share

The	following	is	a	reconciliation	of	the	numerator	and	denominator	for	basic	and	diluted	earnings	per	share	("EPS")	calculations	for	the	years	ended	December

|  | 2017 | 2016 | 2015 |
| :--- | :--- | :--- | :--- |
| Numerator:\nNet\tincome\tattributable\tto\tcommon\tstockholders | $426 | $468 | $476 |
| Denominator: |  |  |  |
| Weighted\taverage\tcommon\tshares\toutstanding—Basic | 178 | 178 | 179 |
| Effect\tof\tdilutive\tcommon\tstock\tequivalents | 1 | 1 | 1 |
| Weighted\taverage\tcommon\tshares\toutstanding—Diluted | 179 | 179 | 180 |

The	effect	of	dilutive	common	stock	equivalents	is	related	to	RSUs	and	performance	stock	units	granted	under	the	2007	and	2017	Omnibus	Equity	Compensation Plans,	as	well	as	shares	purchased	under	the	ESPP.	Less	than	one	million	share-based	awards	were	excluded	from	the	computation	of	diluted	EPS	for	the	years	ended December	31,	2017,	2016	and	2015	because	their	effect	would	have	been	anti-dilutive	under	the	treasury	stock	method.

# Note	17:	Fair	Values	of	Financial	Instruments

The	following	methods	and	assumptions	were	used	by	the	Company	in	estimating	its	fair	value	disclosures	for	financial	instruments:

Current	assets	and	current	liabilities—The	carrying	amounts	reported	in	the	Consolidated	Balance	Sheets	for	current	assets	and	current	liabilities,	including revolving	credit	debt,	due	to	the	short-term	maturities	and	variable	interest	rates,	approximate	their	fair	values.

Preferred	stock	with	mandatory	redemption	requirements	and	long-term	debt—The	fair	values	of	preferred	stock	with	mandatory	redemption	requirements	and long-term	debt	are	categorized	within	the	fair	value	hierarchy	based	on	the	inputs	that	are	used	to	value	each	instrument.	The	fair	value	of	long-term	debt	classified	as Level	1	is	calculated	using	quoted	prices	in	active	markets.	Level	2	instruments	are	valued	using	observable	inputs	and	Level	3	instruments	are	valued	using	observable and	unobservable	inputs.	The	fair	values	of	instruments	classified	as	Level	2	and	3	are	determined	by	a	valuation	model	that	is	based	on	a	conventional	discounted	cash flow	methodology	and	utilizes	assumptions	of	current	market	rates.	As	a	majority	of	the	Company's	debts	do	not	trade	in	active	markets,	the	Company	calculated	a	base yield	curve	using	a	risk-free	rate	(a	U.S.	Treasury	securities	yield	curve)	plus	a	credit	spread	that	is	based	on	the	following	two	factors:	an	average	of	the	Company's own	publicly-traded	debt	securities	and	the	current	market	rates	for	U.S.	Utility	A	debt	securities.	The	Company	used	these	yield	curve	assumptions	to	derive	a	base yield	for	the	Level	2	and	Level	3	securities.	Additionally,	the	Company	adjusted	the	base	yield	for	specific	features	of	the	debt	securities	including	call	features,	coupon tax	treatment	and	collateral	for	the	Level	3	instruments.

The	carrying	amounts,	including	fair	value	adjustments	previously	recognized	in	acquisition	purchase	accounting	and	a	fair	value	adjustment	related	to	the Company's	interest	rate	swap	fair	value	hedge	(which	is	classified	as	Level	2	in	the	fair	value	hierarchy),	and	fair	values	of	the	financial	instruments	were	as	follows:

|  | Carrying	Amount | Level	1 | Level	2 | Level	3 | Total |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Preferred\tstock\twith\tmandatory\tredemption\trequirements | $10 | $— | $— | $14 | $14 |
| Long-term\tdebt\t(excluding\tcapital\tlease\tobligations) | 6,809 | 4,846 | 976 | 1,821 | 7,643 |

|  | Carrying	Amount | Level	1 | Level	2 | Level	3 | Total |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Preferred\tstock\twith\tmandatory\tredemption\trequirements | $12 | $— | $— | $15 | $15 |
| Long-term\tdebt\t(excluding\tcapital\tlease\tobligations) | 6,320 | 3,876 | 1,363 | 1,805 | 7,044 |

# Fair	Value	Measurements

To	increase	consistency	and	comparability	in	fair	value	measurements,	GAAP	establishes	a	fair	value	hierarchy	that	prioritizes	the	inputs	to	valuation	techniques used	to	measure	fair	value	into	three	levels	as	follows:

•Level	1—quoted	prices	(unadjusted)	in	active	markets	for	identical	assets	or	liabilities	that	the	Company	has	the	ability	to	access	as	of	the	reporting	date. Financial	assets	and	liabilities	utilizing	Level	1	inputs	include	active	exchange-traded	equity	securities,	exchange-based	derivatives,	mutual	funds	and money	market	funds.

•Level	2—inputs	other	than	quoted	prices	included	within	Level	1	that	are	directly	observable	for	the	asset	or	liability	or	indirectly	observable	through corroboration	with	observable	market	data.	Financial	assets	and	liabilities	utilizing	Level	2	inputs	include	fixed	income	securities,	non-exchange-based derivatives,	commingled	investment	funds	not	subject	to	purchase	and	sale	restrictions	and	fair-value	hedges.

•Level	3—unobservable	inputs,	such	as	internally-developed	pricing	models	for	the	asset	or	liability	due	to	little	or	no	market	activity	for	the	asset	or liability.	Financial	assets	and	liabilities	utilizing	Level	3	inputs	include	infrequently-traded	non-exchange-based	derivatives	and	commingled	investment funds	subject	to	purchase	and	sale	restrictions.

# Recurring	Fair	Value	Measurements

The	following	table	presents	assets	and	liabilities	measured	and	recorded	at	fair	value	on	a	recurring	basis	and	their	level	within	the	fair	value	hierarchy	as	of December	31,	2017	and	2016,	respectively:

|  | Level	1 | Level	2 | Level	3 | Total |
| :--- | :--- | :--- | :--- | :--- |
| Assets: |  |  |  |  |
| Restricted\tfunds | $28 | $— | $— | $28 |
| Rabbi\ttrust\tinvestments | 15 | — | — | 15 |
| Deposits | 4 | — | — | 4 |
| Other\tinvestments | 3 | — | — | 3 |
| Total\tassets | 50 | — | — | 50 |
| Liabilities: |  |  |  |  |
| Deferred\tcompensation\tobligation | 17 | — | — | 17 |
| Mark-to-market\tderivative\tliability | — | 3 | — | 3 |
| Total\tliabilities | 17 | 3 | — | 20 |
| Total\tnet\tassets\t(liabilities) | $33 | $(3) | $— | $30 |

|  | Level	1 | Level	2 | Level	3 | Total |
| :--- | :--- | :--- | :--- | :--- |
| Assets: |  |  |  |  |
| Restricted\tfunds | $24 | $— | $— | $24 |
| Rabbi\ttrust\tinvestments | 12 | — | — | 12 |
| Deposits | 3 | — | — | 3 |
| Mark-to-market\tderivative\tasset | — | 28 | — | 28 |
| Other\tinvestments | 1 | — | — | 1 |
| Total\tassets | 40 | 28 | — | 68 |
| Liabilities: |  |  |  |  |
| Deferred\tcompensation\tobligation | 13 | — | — | 13 |
| Mark-to-market\tderivative\tliability | — | — | — | — |
| Total\tliabilities | 13 | — | — | 13 |
| Total\tnet\tassets\t(liabilities) | $27 | $28 | $— | $55 |

Restricted	funds—The	Company's	restricted	funds	primarily	represent	proceeds	received	from	financings	for	 the	construction	and	capital	 improvement	of facilities	and	from	customers	for	future	services	under	operations	and	maintenance	projects.	Long-term	restricted	funds	of	$1	million	and	$4	million	were	included	in other	long-term	assets	as	of	December	31,	2017	and	2016,	respectively.

Rabbi	trust	investments—The	Company's	Rabbi	trust	investments	consist	of	equity	and	index	funds	from	which	supplemental	executive	retirement	plan	benefits and	deferred	compensation	obligations	can	be	paid.	The	Company	includes	these	assets	in	other	long-term	assets.

Deposits—Deposits	include	escrow	funds	and	certain	other	deposits	held	in	trust.	The	Company	includes	cash	deposits	in	other	current	assets.

Deferred	compensation	obligations—The	Company's	deferred	compensation	plans	allow	participants	to	defer	certain	cash	compensation	into	notional	investment accounts.	The	Company	includes	such	plans	in	other	long-term	liabilities.	The	value	of	the	Company's	deferred	compensation	obligations	is	based	on	the	market	value of	the	participants'	notional	investment	accounts.	The	notional	investments	are	comprised	primarily	of	mutual	funds,	which	are	based	on	observable	market	prices.

Mark-to-market	derivative	asset	and	liability—The	Company	utilizes	fixed-to-floating	interest-rate	swaps,	typically	designated	as	fair-value	hedges,	to	achieve	a targeted	level	of	variable-rate	debt	as	a	percentage	of	total	debt.	The	Company	also	employs	derivative	financial	instruments	in	the	form	of	variable-to-fixed	interest	rate swaps	and	forward	starting	interest	rate	swaps,	classified	as	economic	hedges	and	cash	flow	hedges,	respectively,	in	order	to	fix	the	interest	cost	on	existing	or	forecasted debt.	The	Company	uses	a	calculation	of	future	cash	inflows	and	estimated	future	outflows,	which	are	discounted,	to	determine	the	current	fair	value.	Additional	inputs to	the	present	value	calculation	include	the	contract	terms,	counterparty	credit	risk,	interest	rates	and	market	volatility.

Other	investments—Other	investments	primarily	represent	money	market	funds	used	for	active	employee	benefits.	The	Company	includes	other	investments	in other	current	assets.

# Note	18:	Leases

The	Company	has	entered	into	operating	leases	involving	certain	facilities	and	equipment.	Rental	expenses	under	operating	leases	were	$29	million,	$24	million and	$21	million	for	the	years	ended	December	31,	2017,	2016	 and	2015,	respectively.	The	operating	leases	for	facilities	will	expire	over	the	next	25	years	and	the operating	leases	for	equipment	will	expire	over	the	next	5	years.	Certain	operating	leases	have	renewal	options	ranging	from	one	to	five	years.

The	minimum	annual	future	rental	commitment	under	operating	leases	that	have	initial	or	remaining	non-cancelable	lease	terms	over	the	next	5	years	and thereafter	are	as	follows:

|  | Amount |
| :--- | :--- |
| 2018 | $15 |
| 2019 | 14 |
| 2020 | 12 |
| 2021 | 9 |
| 2022 | 8 |
| Thereafter | 65 |

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

The	leases	related	to	the	portion	of	the	facilities	funded	by	the	Company	have	required	payments	from	the	Company	to	the	Partners	that	approximate	the payments	required	by	the	terms	of	the	IDBs	from	the	Partners	to	the	Company	(as	the	holder	of	the	IDBs).	As	the	ownership	of	the	portion	of	the	facilities	constructed	by the	Company	will	revert	back	to	the	Company	at	the	end	of	the	lease,	the	Company	has	recorded	these	as	capital	leases.	The	lease	obligation	and	the	receivable	for	the principal	amount	of	the	IDBs	are	presented	by	the	Company	on	a	net	basis.	The	carrying	value	of	the	facilities	funded	by	the	Company	recognized	as	a	capital	lease	asset was	$150	million	 and	$152	million	 as	 of	December	31,	2017	 and	2016,	respectively,	which	 is	presented	 in	property,	plant	and	equipment	 in	 the	accompanying Consolidated	Balance	Sheets.	The	future	payments	under	the	lease	obligations	are	equal	to	and	offset	by	the	payments	receivable	under	the	IDBs.

As	of	December	31,	2017,	the	minimum	annual	future	rental	commitment	under	the	operating	leases	for	the	portion	of	the	facilities	funded	by	the	Partners	that have	initial	or	remaining	non-cancelable	lease	terms	in	excess	of	one	year	included	in	the	preceding	minimum	annual	rental	commitments	are	$4	million	in	2018	through 2022,	and	$63	million	thereafter.

# Note	19:	Segment	Information

The	Company's	operating	segments	are	comprised	of	the	revenue-generating	components	of	its	businesses	for	which	separate	financial	information	is	internally produced	 and	 regularly	 used	 by	 management	 to	 make	 operating	 decisions	 and	 assess	 performance.	 The	 Company	 operates	 its	 businesses	 primarily	 through	one reportable	segment,	the	Regulated	Businesses	segment.	The	Company	also	operates	businesses	that	provide	a	broad	range	of	related	and	complementary	water	and wastewater	services	in	non-regulated	markets,	which	includes	four	operating	segments	that	individually	do	not	meet	the	criteria	of	a	reportable	segment.	These	four	non- reportable	operating	segments	are	collectively	presented	as	our	"Market-Based	Businesses."

The	Regulated	Businesses	segment	is	the	largest	component	of	the	Company's	business	and	includes	20	subsidiaries	that	provide	water	and	wastewater	services to	customers	in	16	states.

The	Market-Based	Businesses'	four	non-reportable	operating	segments	are	Military	Services	Group,	Contract	Operations	Group,	Homeowner	Services	Group	and Keystone	Operations.	Military	Services	Group	performs	50-year	contracts	with	the	U.S.	government	for	the	operation	and	maintenance	of	the	water	and	wastewater systems	on	certain	military	bases.	Homeowner	Services	Group	provides	services	to	domestic	homeowners	and	smaller	commercial	establishments	to	protect	against	the cost	of	repairing	damaged	or	blocked	pipes	inside	and	outside	their	accommodations,	as	well	as	interior	electric	lines.	Contract	Operations	Group	performs	contracts with	 municipalities,	 the	 food	 and	 beverage	 industry	 and	 other	 customers	 to	 operate	 and	 maintain	 water	 and	 wastewater	 facilities.	 Keystone	 Operations	 provides customized	water	sourcing,	transfer	services,	pipeline	construction	and	water	storage	solutions,	for	natural	gas	exploration	and	production	companies.

The	accounting	policies	of	the	segments	are	the	same	as	those	described	in	the	summary	of	significant	accounting	policies.	See	Note	2—Significant	Accounting Policies.	The	Regulated	Businesses	segment	and	Market-Based	Businesses	include	intercompany	costs	that	are	allocated	by	American	Water	Works	Service	Company, Inc.	and	intercompany	interest	that	is	charged	by	American	Water	Capital	Corp.,	which	are	eliminated	to	reconcile	to	the	Consolidated	Statements	of	Operations.	Inter- segment	revenues,	include	the	sale	of	water	from	a	regulated	subsidiary	to	market-based	subsidiaries,	leased	office	space,	furniture	and	equipment	provided	by	the Company's	market-based	subsidiaries	 to	 its	regulated	subsidiaries.	"Other"	 includes	corporate	costs	 that	are	not	allocated	 to	 the	Company's	operating	segments, eliminations	of	inter-segment	transactions,	fair	value	adjustments	and	associated	income	and	deductions	related	to	the	acquisitions	that	have	not	been	allocated	to	the operating	segments	for	evaluation	of	performance	and	allocation	of	resource	purposes.	The	adjustments	related	to	the	acquisitions	are	reported	in	Other	as	they	are excluded	from	segment	performance	measures	evaluated	by	management.

The	following	tables	include	the	Company's	summarized	segment	information	as	of	and	for	the	years	ended	December	31:

|  | Regulated<br>Businesses | Market-Based<br>Businesses | Other | Consolidated |
| :--- | :--- | :--- | :--- | :--- |
| Operating\trevenues | $2,958 | $422 | $(23) | $3,357 |
| Depreciation\tand\tamortization | 462 | 18 | 12 | 492 |
| Total\toperating\texpenses,\tnet | 1,781 | 360 | (28) | 2,113 |
| Interest,\tnet | (268) | 3 | (77) | (342) |
| Income\tbefore\tincome\ttaxes | 925 | 66 | (79) | 912 |
| Provision\tfor\tincome\ttaxes | 366 | 28 | 92 | 486 |
| Net\tincome\tattributable\tto\tcommon\tstockholders | 559 | 38 | (171) | 426 |
| Total\tassets | 17,602 | 599 | 1,281 | 19,482 |
| Capital\texpenditures | 1,316 | 18 | 100 | 1,434 |

|  | Regulated<br>Businesses | Market-Based<br>Businesses | Other | Consolidated |
| :--- | :--- | :--- | :--- | :--- |
| Operating\trevenues | $2,871 | $451 | $(20) | $3,302 |
| Depreciation\tand\tamortization | 440 | 15 | 15 | 470 |
| Total\toperating\texpenses,\tnet | 1,852 | 391 | (21) | 2,222 |
| Interest,\tnet | (256) | 2 | (71) | (325) |
| Income\tbefore\tincome\ttaxes | 775 | 65 | (70) | 770 |
| Provision\tfor\tincome\ttaxes | 303 | 26 | (27) | 302 |
| Net\tincome\tattributable\tto\tcommon\tstockholders | 472 | 39 | (43) | 468 |
| Total\tassets | 16,405 | 637 | 1,440 | 18,482 |
| Capital\texpenditures | 1,274 | 18 | 19 | 1,311 |

|  | Regulated<br>Businesses | Market-Based<br>Businesses | Other | Consolidated |
| :--- | :--- | :--- | :--- | :--- |
| Operating\trevenues | $2,743 | $434 | $(18) | $3,159 |
| Depreciation\tand\tamortization | 411 | 8 | 21 | 440 |
| Total\toperating\texpenses,\tnet | 1,732 | 370 | (18) | 2,084 |
| Interest,\tnet | (248) | 2 | (62) | (308) |
| Income\tbefore\tincome\ttaxes | 776 | 68 | (62) | 782 |
| Provision\tfor\tincome\ttaxes | 303 | 26 | (23) | 306 |
| Net\tincome\tattributable\tto\tcommon\tstockholders | 473 | 42 | (39) | 476 |
| Total\tassets | 15,258 | 496 | 1,487 | 17,241 |
| Capital\texpenditures | 1,143 | 17 | — | 1,160 |

# Note	20:	Unaudited	Quarterly	Data

The following table summarizes	 certain supplemental	 unaudited	 consolidated	 quarterly financial	 data for	 each	 of the four	 quarters in the	 years	 ended December	31,	2017	and	2016,	respectively.	The	operating	results	for	any	quarter	are	not	indicative	of	results	that	may	be	expected	for	a	full	year	or	any	future	periods.

|  | First	Quarter | Second	Quarter | Third	Quarter | Fourth	Quarter |
| :--- | :--- | :--- | :--- | :--- |
| Operating\trevenues | $756 | $844 | $936 | $821 |
| Operating\tincome | 227 | 308 | 430 | 279 |
| Net\tincome\tattributable\tto\tcommon\tstockholders | 93 | 131 | 203 | (1) |
| Basic\tearnings\tper\tshare: |  |  |  |  |
| Net\tincome\tattributable\tto\tcommon\tstockholders | $0.52 | $0.74 | $1.14 | $(0.01) |
| Diluted\tearnings\tper\tshare: |  |  |  |  |
| Net\tincome\tattributable\tto\tcommon\tstockholders | 0.52 | 0.73 | 1.13 | — |

|  | First	Quarter | Second	Quarter | Third	Quarter | Fourth	Quarter |
| :--- | :--- | :--- | :--- | :--- |
| Operating\trevenues | $743 | $827 | $930 | $802 |
| Operating\tincome | 214 | 299 | 319 | 248 |
| Net\tincome\tattributable\tto\tcommon\tstockholders | 82 | 137 | 148 | 101 |
| Basic\tearnings\tper\tshare: |  |  |  |  |
| Net\tincome\tattributable\tto\tcommon\tstockholders | $0.46 | $0.77 | $0.83 | $0.57 |
| Diluted\tearnings\tper\tshare: |  |  |  |  |
| Net\tincome\tattributable\tto\tcommon\tstockholders | 0.46 | 0.77 | 0.83 | 0.57 |

# ITEM	9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

# ITEM	9A. CONTROLS AND PROCEDURES

# Disclosure	Controls	and	Procedures

The	Company,	under	the	supervision	and	with	the	participation	of	its	management,	including	the	Chief	Executive	Officer	and	the	Chief	Financial	Officer, conducted	an	evaluation	of	the	effectiveness	of	the	design	and	operation	of	the	Company's	disclosure	controls	and	procedures	as	such	term	is	defined	in	Rule	13a-15(e) and	Rule	15d-15(e)	under	the	Exchange	Act	as	of	the	end	of	the	period	covered	by	this	report.

Based	on	that	evaluation,	our	Chief	Executive	Officer	and	Chief	Financial	Officer	have	concluded	that,	as	of	December	31,	2017,	our	disclosure	controls	and procedures	were	effective	at	a	reasonable	level	of	assurance.	Our	disclosure	controls	and	procedures	are	designed	to	provide	reasonable	assurance	that	the	information required	to	be	disclosed	by	us	in	the	reports	we	file	or	submit	under	the	Exchange	Act	is	recorded,	processed,	summarized	and	reported	within	the	time	periods	specified in	the	SEC's	rules	and	forms,	and	that	such	information	is	accumulated	and	communicated	to	management,	including	the	Chief	Executive	Officer	and	the	Chief Financial	Officer,	to	allow	timely	decisions	regarding	required	disclosure.

# Management's	Report	on	Internal	Control	over	Financial	Reporting

Our	management	is	responsible	for	establishing	and	maintaining	adequate	internal	control	over	financial	reporting,	as	such	term	is	defined	in	Rule	13a-15(f)	of	the Exchange	Act.	Our	internal	control	over	financial	reporting	is	a	process	designed	by	or	under	the	supervision	of	our	Chief	Executive	Officer	and	Chief	Financial	Officer to	provide	reasonable	assurance	regarding	the	reliability	of	financial	reporting	and	the	preparation	of	financial	statements	for	external	purposes	in	accordance	with generally	accepted	accounting	principles.	Our	internal	control	over	financial	reporting	includes	those	policies	and	procedures	that:	(i)	pertain	to	the	maintenance	of records	that	in	reasonable	detail	accurately	and	fairly	reflect	our	transactions	and	dispositions	of	our	assets;	(ii)	provide	reasonable	assurance	that	transactions	are recorded	 as	 necessary	 to	 permit	 preparation	 of	 the	 financial	 statements	 in	 accordance	 with	 generally	 accepted	 accounting	 principles,	 and	 that	 our	 receipts	 and expenditures	are	being	made	only	in	accordance	with	authorizations	of	our	management	and	our	directors;	and	(iii)	provide	reasonable	assurance	regarding	prevention	or timely	detection	of	unauthorized	acquisition,	use	or	disposition	of	our	assets	that	could	have	a	material	effect	on	the	financial	statements.

Our	management,	including	our	Chief	Executive	Officer	and	Chief	Financial	Officer,	assessed	the	effectiveness	of	our	internal	control	over	financial	reporting,	as of	December	31,	2017,	using	the	criteria	described	in	Internal	Control—Integrated	Framework	(2013)	issued	by	the	Committee	of	Sponsoring	Organizations	of	the Treadway	Commission	(COSO).

Based	on	our	evaluation	under	the	framework	in	Internal	Control—Integrated	Framework	(2013),	our	management	concluded	that	our	internal	control	over financial	reporting	was	effective	as	of	December	31,	2017.

The	effectiveness	of	our	internal	control	over	financial	reporting	as	of	December	31,	2017	has	been	audited	by	PricewaterhouseCoopers	LLP,	an	independent registered	public	accounting	firm,	as	stated	in	their	report	appearing	in	Item	8—Financial	Statements	and	Supplementary	Data	of	this	Annual	Report	on	Form	10-K.

# Changes	in	Internal	Control	over	Financial	Reporting

There	were	no	changes	to	our	internal	control	over	financial	reporting	during	our	last	fiscal	quarter	that	have	materially	affected,	or	are	reasonably	likely	to materially	affect,	our	internal	control	over	financial	reporting.

# ITEM	9B. OTHER	INFORMATION

# Changes	to	Long-Term	Equity	Award	Retirement	Provisions

On	February	14,	2018,	our	Board	of	Directors	and	Executive	Development	and	Compensation	Committee	approved	changes	to	the	retirement	provisions	of equity	awards	granted	under	the	Company's	2017	Omnibus	Equity	Compensation	Plan	(the	"Omnibus	Plan")	to	persons	serving	as	the	Company's	Chief	Executive Officer,	Chief	Financial	Officer	or	Chief	Operating	Officer	(each,	a	"Covered	Executive"),	so	long	as	the	Covered	Executive	has	held	one	or	more	of	those	titles	(or	any other	title	that	contains	such	title)	for	a	period	of	at	least	three	years	of	consecutive	service.

These	changes	acknowledge	that	these	three	positions	consistently	make	and/or	should	make	decisions	that	are	in	both	the	short-term	and	long-term	interests	of the	Company,	and	extend	the	vesting	of	equity	awards	beyond	the	Covered	Executive's	retirement	date	to	reflect	the	desired	accountability.	The	changes	apply	to	awards that	are	granted	or	may	be	granted	to	a	Covered	Executive	under	the	Omnibus	Plan	commencing	on	February	14,	2018.	These	changes	did	not	affect	any	equity	award granted	under	the	Omnibus	Plan	prior	to	February	14,	2018.

Except	as	contemplated	by	the	amended	retirement	provisions,	the	Company	will	not	permit	the	acceleration	of	vesting	of	any	long-term	equity	award	granted under	the	Omnibus	Plan	on	account	of	retirement	of	a	Covered	Executive.	With	respect	to	a	Covered	Executive,	the	amended	retirement	provisions	for	a	long-term equity	award	state	that	such	award	will	continue	to	vest	over	the	normal	vesting	schedule	of	the	award	after	the	Covered	Executive	has	a	separation	from	service	based upon	either	normal	retirement	or	early	retirement.	In	the	event	of	a	normal	retirement	of	a	Covered	Executive,	defined	as	having	attained	age	60	and	five	years	of	service with	the	Company	or	any	subsidiary,	an	award	will	vest	in	full	over	the	normal	vesting	schedule	of	the	award.	In	the	event	of	an	early	retirement	of	a	Covered	Executive, defined	as	having	attained	age	55	and	five	years	of	service	with	the	Company	or	any	subsidiary,	75%	of	each	award	will	vest	over	the	normal	vesting	schedule	of	the award.	Performance	stock	unit	awards	will	continue	to	vest	in	accordance	with	their	normal	vesting	schedule	and	shall	be	paid	at	the	end	of	the	three-year	performance period	based	on	actual	performance.	Any	stock	option	granted	after	February	14,	2018	to	a	Covered	Executive	will	remain	exercisable	for	a	period	of	two	years	after	the retirement	date.

# PART	III

# ITEM	10. DIRECTORS,	EXECUTIVE	OFFICERS	AND	CORPORATE	GOVERNANCE

The	information	required	by	this	item	and	not	given	below	or	in	Item	1—Business—Executive	Officers	of	this	Form	10-K,	is	incorporated	by	reference	from	the Company's	Proxy	Statement	for	the	2018	Annual	Meeting	of	Stockholders,	to	be	filed	with	the	SEC	within	120	days	following	the	end	of	the	fiscal	year	covered	by	this report,	under	the	captions	entitled	"Board	of	Directors	and	Corporate	Governance,"	"Proposal	1—Election	of	Directors"	and	"Certain	Beneficial	Ownership	Matters— Section	16(a)	Beneficial	Ownership	Reporting	Compliance."

We	have	adopted	a	Code	of	Ethics,	which	applies	to	directors,	officers	and	employees.	The	full	text	of	the	Code	of	Ethics	is	publicly	available	on	our	website	at https://amwater.com.	We	intend	to	post	on	our	website	any	amendments	to	our	Code	of	Ethics	and	any	waivers	of	such	provisions	granted	to	certain	principal	officers.

# ITEM	11. EXECUTIVE	COMPENSATION

Information	required	by	this	item	is	incorporated	by	reference	in	the	Company's	Proxy	Statement	for	the	2018	Annual	Meeting	of	Stockholders,	under	the captions	 entitled	 "Proposal 1—Election of	 Directors—Director	 Compensation	 Table,"	 "Compensation	 Discussion	 and	 Analysis,"	 "Executive	 Compensation," "Compensation	Committee	Interlocks	and	Insider	Participation"	and	"Compensation	Committee	Report."

# ITEM	12. SECURITY	OWNERSHIP	OF	CERTAIN	BENEFICIAL	OWNERS	AND	MANAGEMENT	AND	RELATED	STOCKHOLDER	MATTERS

Information	 required	 by	 this	 item	 setting	 forth	 the	 security	 ownership	 of	 certain	 beneficial	 owners	 and	 management	 is	 incorporated	 by	 reference	 in	 the Company's	Proxy	Statement	for	the	2018	Annual	Meeting	of	Stockholders,	under	the	captions	entitled	"Certain	Beneficial	Ownership	Matters—Security	Ownership	of Management,"	"Certain	Beneficial	Ownership	Matters—Security	Ownership	of	Certain	Beneficial	Owners"	and	"Equity	Compensation	Plan	Information."

# ITEM	13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information	required	by	this	item	is	incorporated	by	reference	in	the	Company's	Proxy	Statement	for	the	2018	Annual	Meeting	of	Stockholders,	under	the	caption entitled	 "Board	 of	 Directors	 and	 Corporate	 Governance—Board	 Review	 of	 Related	 Person	 Transactions"	 and	 "Proposal 1—Election of	 Directors—Director Independence."

# ITEM	14. PRINCIPAL	ACCOUNTANT	FEES	AND

# SERVICES

Information	required	by	this	item	is	incorporated	by	reference	in	the	Company's	Proxy	Statement	for	the	2018	Annual	Meeting	of	Stockholders,	under	the	caption entitled	"Fees	Paid	to	Independent	Registered	Public	Accounting	Firm"	and	"Pre-Approval	of	Services	Provided	by	Independent	Registered	Public	Accounting	Firm."

# PART	IV

# ITEM	15. EXHIBITS	AND	FINANCIAL	STATEMENT	SCHEDULES

(a) The	following	documents	have	been	filed	as	a	part	of	this	Form	10-

1. The	financial	statements	listed	in	the	"Index	to	Consolidated	Financial	Statements"	contained	in	Item	8—Financial	Statements	and	Supplementary Data	of	this	Form	10-K	are	hereby	incorporated	by	reference	in	response	to	this	Item	15(a).

2. Financial	statement	schedules	have	been	omitted	since	they	are	either	not	required	or	are	not	applicable	as	the	information	is	otherwise	included	in the	financial	statements	or	notes	thereto.

3. Exhibits.	The	list	of	documents	contained	in	"Exhibit	Index"	to	this	Form	10-K	is	incorporated	by	reference	in	response	to	this	Item	15(a).	The warranties,	representations	and	covenants	contained	in	any	of	the	agreements	included	or	incorporated	by	reference	herein	or	which	appear	as exhibits	hereto	should	not	be	relied	upon	by	buyers,	sellers	or	holders	of	the	Company's	or	its	subsidiaries'	securities	and	are	not	intended	as warranties,	representations	or	covenants	to	any	individual	or	entity	except	as	specifically	set	forth	in	such	agreement.

The	responses	to	Items	15(b)	and	(c)	of	Form	10-K	are	included	above	in	response	to	Item	15(a).

# SUMMARY

# EXHIBIT	INDEX

4.1 Indenture,	dated	as	of	October	22,	2007	between	American	Water	Capital	Corp.	and	Wells	Fargo	Bank,	National	Association	(incorporated	by	reference	to	Exhibit	4.4	to American	Water	Capital	Corp.'s	Registration	Statement	on	Form	S-4,	File	No.	333-148284,	and	American	Water	Works	Company,	Inc.'s	Registration	Statement	on	Form	S-4, File	No.	333-148284-01,	filed	December	21,	2007).

4.2 Indenture,	dated	as	of	December	4,	2009,	between	American	Water	Capital	Corp.	and	Wells	Fargo	Bank,	National	Association	(incorporated	by	reference	to	Exhibit	4.1	to American	Water	Works	Company,	Inc.'s	Current	Report	on	Form	8-K,	File	No.	001-34028,	filed	December	3,	2010).

4.3 Officers'	Certificate,	dated	December	15,	2010,	establishing	the	6.00%	Senior	Monthly	Notes	due	2040	(incorporated	by	reference	to	Exhibit	4.1	to	American	Water	Works Company,	Inc.'s	Current	Report	on	Form	8-K,	File	No.	001-34028,	filed	December	15,	2010).

4.7 Officers'	Certificate,	dated	August	14,	2014,	providing	for	a	further	issuance	of	the	4.300%	Senior	Notes	due	2042	(incorporated	by	reference	to	Exhibit	4.3	to	American	Water Works	Company,	Inc.'s	Current	Report	on	Form	8-K,	File	No.	001-34028,	filed	August	14,	2014).

4.14 Note	Purchase	Agreement,	as	amended,	dated	December	21,	2006,	between	American	Water	Capital	Corp.	and	the	purchasers	party	thereto	(incorporated	by	reference	to	Exhibit 4.2	to	American	Water	Capital	Corp.'s	Registration	Statement	on	Form	S-1,	File	No.	333-145757-01,	and	American	Water	Works	Company,	Inc.'s	Registration	Statement	on Form	S-1,	File	No.	333-145757,	filed	October	11,	2007)	with	respect	to	the	5.52%	Series	B	Senior	Notes	due	December	21,	2016,	5.62%	Series	C	Senior	Notes	due	December	21, 2018	and	5.77%	Series	D	Senior	Notes	due	December	21,	2021.

4.15 Note	Purchase	Agreement,	as	amended,	dated	March	29,	2007,	between	American	Water	Capital	Corp.	and	the	purchasers	party	thereto	(incorporated	by	reference	to	Exhibit	4.3 to	American	Water	Capital	Corp.'s	Registration	Statement	on	Form	S-1,	File	No.	333-145757-01,	and	American	Water	Works	Company,	Inc.'s	Registration	Statement	on	Form S-1,	File	No.	333-145757,	filed	October	11,	2007)	with	respect	to	5.62%	Series	E	Senior	Notes	due	March	29,	2019	and	5.77%	Series	F	Senior	Notes	due	March	29,	2022.

4.16 Note	Purchase	Agreement,	dated	May	15,	2008,	between	American	Water	Capital	Corp.	and	the	purchasers	party	thereto	(incorporated	by	reference	to	Exhibit	10.1	to	American Water	Works	Company,	Inc.'s	Current	Report	on	Form	8-K,	File	No.	001-34028,	filed	May	19,	2008)	with	respect	to	the	6.25%	Series	G	Senior	Notes	due	May	15,	2018	and	the 6.55%	Series	H	Senior	Notes	due	May	15,	2023.

10.1 Amended	and	Restated	Credit	Agreement,	dated	as	of	June	30,	2015,	by	and	among	American	Water	Works	Company,	Inc.,	American	Water	Capital	Corp.,	each	of	the	lenders party	thereto,	Wells	Fargo	Bank,	National	Association,	as	administrative	agent,	JPMorgan	Chase	Bank,	N.A.,	as	syndication	agent,	and	Mizuho	Bank,	Ltd.	and	PNC	Bank, National	Association,	as	co-documentation	agents	(incorporated	by	reference	to	Exhibit	10.1	to	American	Water	Works	Company,	Inc.'s	Current	Report	on	Form	8-K,	File	No. 001-34028,	filed	on	July	7,	2015).

10.2 Support	Agreement,	dated	June	22,	2000,	together	with	First	Amendment	to	Support	Agreement,	dated	July	26,	2000,	by	and	between	American	Water	Works	Company,	Inc.	and American	Water	Capital	Corp.	(incorporated	by	reference	to	Exhibit	10.3	to	American	Water	Capital	Corp.'s	Registration	Statement	on	Form	S-1,	File	No.	333-145757-01,	and American	Water	Works	Company,	Inc.'s	Registration	Statement	on	Form	S-1,	File	No.	333-145757,	filed	October	11,	2007).

10.3* Amended	and	Restated	Letter	Agreement	between	Loyd	Warnock	and	American	Water	Works	Company,	Inc.	dated	May	7,	2014	(incorporated	by	reference	to	Exhibit	10.4	to American	Water	Works	Company,	Inc.'s	Annual	Report	on	Form	10-K,	File	No.	001-34028,	filed	February	25,	2016).

10.4* Amended	and	Restated	American	Water	Works	Company,	Inc.	Deferred	Compensation	Plan,	dated	as	of	January	1,	2001	(incorporated	by	reference	to	Exhibit	10.9	to	American Water	Capital	Corp.'s	Registration	Statement	on	Form	S-1,	File	No.	333-145757-01,	and	American	Water	Works	Company,	Inc.'s	Registration	Statement	on	Form	S-1,	File	No. 333-145757,	filed	October	11,	2007).

10.6* Nonqualified	Deferred	Compensation	Plan	for	Non-Employee	Directors	of	American	Water	Works	Company,	Inc.,	as	amended	and	restated,	effective	as	of	January	1,	2009 (incorporated	by	reference	to	Exhibit	10.38	to	American	Water	Works	Company,	Inc.'s	Registration	Statement	on	Form	S-1,	File	No.	333-155245,	filed	November	18,	2008).

10.7* Amended	and	Restated	American	Water	Works	Company,	Inc.	Executive	Retirement	Plan,	dated	as	of	March	1,	2007	(incorporated	by	reference	to	Exhibit	10.8	to	American Water	Capital	Corp.'s	Registration	Statement	on	Form	S-1,	File	No.	333-145757-01,	and	American	Water	Works	Company,	Inc.'s	Registration	Statement	on	Form	S-1,	File	No. 333-145757,	filed	October	11,	2007).

10.8.1* American	Water	Works	Company,	Inc.	Annual	Incentive	Plan	(incorporated	by	reference	to	Appendix	C	to	American	Water	Works	Company,	Inc.'s	Definitive	Proxy	Statement, File	No.	001-34028,	filed	March	27,	2015).

10.8.2* Amendment	2016-1	to	American	Water	Works	Company,	Inc.	Annual	Incentive	Plan	(now	known	as	the	Annual	Performance	Plan),	effective	January	1,	2016	(incorporated	by reference	to	Exhibit	10.14.2	to	American	Water	Works	Company,	Inc.'s	Annual	Report	on	Form	10-K,	File	No.	001-34028,	filed	February	25,	2016).

10.9* American	Water	Works	Company,	Inc.	and	its	Designated	Subsidiaries	2017	Nonqualified	Employee	Stock	Purchase	Plan	(incorporated	by	reference	to	Exhibit	4.1	to	the Company's	Registration	Statement	on	Form	S-8,	File	No.	333-219682,	filed	August	4,	2017).

10.10.1* American	Water	Works	Company,	Inc.	2007	Omnibus	Equity	Compensation	Plan,	as	amended	(incorporated	by	reference	to	Appendix	B	to	American	Water	Works	Company, Inc.'s	Definitive	Proxy	Statement,	File	No.	001-34028,	filed	March	27,	2015).

10.10.2* American	Water	Works	Company,	Inc.	2007	Omnibus	Equity	Compensation	Plan	2012	Nonqualified	Stock	Option	Grant	for	ML1	–	L5	Employees	(incorporated	by	reference	to Exhibit	10.2	to	American	Water	Works	Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed	May	2,	2012).

10.10.3* American	Water	Works	Company,	Inc.	2007	Omnibus	Equity	Compensation	Plan	2013	Nonqualified	Stock	Option	Grant	Form	for	ML2	–	L5	(incorporated	by	reference	to Exhibit	10.13	to	American	Water	Works	Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed	May	7,	2013).

10.10.5* Amendment	to	the	American	Water	Works	Company,	Inc.	2007	Omnibus	Equity	Compensation	Plan	2014	Nonqualified	Stock	Option	Grant	Form	for	ML2	–	L5	(incorporated	by reference	to	Exhibit	10.6A	to	American	Water	Works	Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed	May	7,	2014).

10.10.6* American	Water	Works	Company,	Inc.	2007	Omnibus	Equity	Compensation	Plan	May	2014	Nonqualified	Stock	Option	Grant	Form	for	Susan	N.	Story	(incorporated	by reference	to	Exhibit	10.1	to	American	Water	Works	Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed	August	6,	2014).

10.10.7* American	Water	Works	Company,	Inc.	2007	Omnibus	Equity	Compensation	Plan	2015	Nonqualified	Stock	Option	Grant	(incorporated	by	reference	to	Exhibit	10.13.10	to American	Water	Works	Company,	Inc.'s	Annual	Report	on	Form	10-K,	File	No.	001-34028,	filed	February	25,	2016).

10.10.8* Amendment	to	American	Water	Works	Company,	Inc.	2007	Omnibus	Equity	Compensation	Plan	2015	Nonqualified	Stock	Option	Grant	(incorporated	by	reference	to	Exhibit 10.13.11	to	American	Water	Works	Company,	Inc.'s	Annual	Report	on	Form	10-K,	File	No.	001-34028,	filed	February	25,	2016).

10.10.9* American	Water	Works	Company,	Inc.	2007	Omnibus	Equity	Compensation	Plan	2015	Nonqualified	Stock	Option	Grant	(for	certain	executives)	(incorporated	by	reference	to Exhibit	10.13.12	to	American	Water	Works	Company,	Inc.'s	Annual	Report	on	Form	10-K,	File	No.	001-34028,	filed	February	25,	2016).

10.10.10* American	Water	Works	Company,	Inc.	2007	Omnibus	Equity	Compensation	Plan	2016	Nonqualified	Stock	Option	Grant	(incorporated	by	reference to	Exhibit	10.1.1 to American	Water	Works	Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed	May	4,	2016).

10.10.11* American	Water	Works	Company,	Inc.	2007	Omnibus	Equity	Compensation	Plan	2016	Nonqualified	Stock	Option	Grant	(for	certain	executives)	(incorporated	by	reference	to Exhibit	10.1.2	to	American	Water	Works	Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed	May	4,	2016).

10.10.13* American	Water	Works	Company,	Inc.	2007	Omnibus	Equity	Compensation	Plan	2016	Restricted	Stock	Unit	Grant	(for	certain	executives)	(incorporated	by	reference	to	Exhibit 10.2.2	to	American	Water	Works	Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed	May	4,	2016).

10.10.14* American	Water	Works	Company,	Inc.	2007	Omnibus	Equity	Compensation	Plan	2017	Restricted	Stock	Unit	Grant	(incorporated	by	reference	to	Exhibit	10.1.1	to	American Water	Works	Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed	May	3,	2017).

10.10.16* American	Water	Works	Company,	Inc.	2007	Omnibus	Equity	Compensation	Plan	2016	Performance	Stock	Unit	Grant	Form	A-1	(incorporated	by	reference	to	Exhibit	10.3.1	to American	Water	Works	Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed	May	4,	2016).

10.10.18* American	Water	Works	Company,	Inc.	2007	Omnibus	Equity	Compensation	Plan	2016	Performance	Stock	Unit	Grant	Form	B-1	(incorporated	by	reference	to	Exhibit	10.3.3	to American	Water	Works	Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed	May	4,	2016).

10.10.20* American	Water	Works	Company,	Inc.	2007	Omnibus	Equity	Compensation	Plan	2017	Performance	Stock	Unit	Grant	Form	A-1	(incorporated	by	reference	to	Exhibit	10.2.1	to American	Water	Works	Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed	May	3,	2017).

10.10.24* American	Water	Works	Company,	Inc.	2007	Omnibus	Equity	Compensation	Plan	2010	Stock	Unit	Grant	Form	for	Non-Employee	Directors	(incorporated	by	reference	to Exhibit	10.3	to	American	Water	Works	Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed	August	4,	2010).

10.10.25* American	Water	Works	Company,	Inc.	2007	Omnibus	Equity	Compensation	Plan	2011	Stock	Unit	Grant	Form	for	Non-Employee	Directors	(incorporated	by	reference	to Exhibit	10.2	to	American	Water	Works	Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed	August	3,	2011).

10.10.30* American	Water	Works	Company,	Inc.	2007	Omnibus	Equity	Compensation	Plan	2016	Stock	Unit	Grant	Form	for	Non-Employee	Directors	(incorporated	by	reference	to Exhibit	10.1	to	American	Water	Works	Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed	August	3,	2016).

10.10.31* American	Water	Works	Company,	Inc.	2017	Omnibus	Equity	Compensation	Plan	(incorporated	by	reference to	Exhibit	10.1 to	American	Water	Works	Company,	Inc's Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed	August	2,	2017).

10.10.32* American	Water	Works	Company,	Inc.	2017	Omnibus	Equity	Compensation	Plan	2017	Restricted	Stock	Unit	Grant	(incorporated	by	reference	to	Exhibit	10.3	to	the	Company's Current	Report	on	Form	8-K,	File	No.	001-34028,	filed	May	12,	2017).

10.10.33* American	Water	Works	Company,	Inc.	2017	Omnibus	Equity	Compensation	Plan	2017	Restricted	Stock	Unit	Grant	(for	certain	executives)	(incorporated	by	reference	to	Exhibit 10.4	to	the	Company's	Current	Report	on	Form	8-K,	File	No.	001-34028,	filed	May	12,	2017).

10.10.34* American	Water	Works	Company,	Inc.	2017	Omnibus	Equity	Compensation	Plan	2017	Performance	Stock	Unit	Grant	Form	A-1	(incorporated	by	reference	to	Exhibit	10.5	to the	Company's	Current	Report	on	Form	8-K,	File	No.	001-34028,	filed	May	12,	2017).

10.10.36* American	Water	Works	Company,	Inc.	2017	Omnibus	Equity	Compensation	Plan	2017	Performance	Stock	Unit	Grant	Form	B-1	(incorporated	by	reference	to	Exhibit	10.7	to the	Company's	Current	Report	on	Form	8-K,	File	No.	001-34028,	filed	May	12,	2017).

10.10.38* American	Water	Works	Company,	Inc.	2017	Omnibus	Equity	Compensation	Plan	2017	Director	Stock	Unit	Agreement	(incorporated	by	reference	to	Exhibit	10.9	to	the Company's	Current	Report	on	Form	8-K,	File	No.	001-34028,	filed	May	12,	2017).

10.12* American	Water	Works	Company,	Inc.	Executive	Severance	Policy,	dated	as	of	December	16,	2008	(incorporated	by	reference	to	Exhibit	10.1	to	American	Water	Works Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed	November	3,	2010).

12.1 Computation	of	Ratio	of	Earnings	to	Fixed	Charges	(filed	herewith).

21.1 Subsidiaries	of	American	Water	Works	Company,	Inc.	(filed	herewith).

23.1 Consent	of	PricewaterhouseCoopers	LLP	(filed	herewith).

31.1 Certification	of	Susan	N.	Story,	President	and	Chief	Executive	Officer,	pursuant	to	Section	302	of	the	Sarbanes-Oxley	Act	(filed	herewith).

31.2 Certification	of	Linda	G.	Sullivan,	Executive	Vice	President	and	Chief	Financial	Officer,	pursuant	to	Section	302	of	the	Sarbanes-Oxley	Act	(filed	herewith).

32.1 Certification	of	Susan	N.	Story,	President	and	Chief	Executive	Officer,	pursuant	to	Section	906	of	the	Sarbanes-Oxley	Act	(furnished	herewith).

32.2 Certification	of	Linda	G.	Sullivan,	Executive	Vice	President	and	Chief	Financial	Officer,	pursuant	to	Section	906	of	the	Sarbanes-Oxley	Act	(furnished	herewith).

101 The	following	financial	statements	from	American	Water	Works	Company,	Inc.'s	Annual	Report	on	Form	10-K	for	the	period	ended	December	31,	2017,	formatted	in	XBRL (eXtensible	 Business	 Reporting	 Language):	 (i)	 the	 Consolidated	 Balance	 Sheets;	 (ii)	 the	 Consolidated	 Statements	 of	 Operations;	 (iii)	 the	 Consolidated	 Statements	 of Comprehensive	Income;	(iv)	the	Consolidated	Statements	of	Cash	Flows;	(v)	the	Consolidated	Statements	of	Changes	in	Stockholders'	Equity;	and	(vi)	the	Notes	to	Consolidated Financial	Statements	(filed	herewith).

* Denotes	a	management	contract	or	compensatory	plan	or	arrangement.

	Instruments	defining	the	rights	of	holders	of	certain	issues	of	long-term	debt	of	the	Company	and	certain	of	its	consolidated	subsidiaries	have	not	been	filed	as exhibits	to	this	report	because	the	authorized	principal	amount	of	any	one	of	such	issues	does	not	exceed	10%	of	the	Company's	consolidated	total	assets.	The	Company agrees	to	furnish	a	copy	of	each	such	instrument	to	the	SEC	upon	request.

# SIGNATURES

Pursuant	to	the	requirements	of	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934,	the	Registrant	has	duly	caused	this	report	to	be	signed	on	its	behalf	by the	undersigned,	thereunto	duly	authorized,	on	the	20th	day	of	February,	2018.

# Susan	N.	Story

# President	and	Chief	Executive	Officer

Pursuant	to	the	requirements	of	the	Securities	Exchange	Act	of	1934,	this	Annual	Report	on	Form	10-K	has	been	signed	on	the	20th	day	of	February,	2018,	by	the following	persons	in	the	capacities	indicated.

/s/	MARTHA	CLARK	GOSS

/s/	SUSAN	N.	STORY

President	and	Chief	Executive	Officer (Principal	Executive	Officer	and	Director)

/s/	LINDA	G.	SULLIVAN

Linda	G.	Sullivan Executive	Vice	President	and	Chief	Financial	Officer (Principal	Financial	Officer)

/s/	MELISSA	K.	WIKLE

Melissa	K.	Wikle Vice	President	and	Controller (Principal	Accounting	Officer)

/s/	GEORGE	MacKENZIE

George	MacKenzie (Director)

Martha	Clark	Goss (Director)

/s/	VERONICA	M.	HAGEN

Veronica	M.	Hagen (Director)

/s/	JULIA	L.	JOHNSON

Julia	L.	Johnson (Director)

Karl	F.	Kurz (Director)


by what percentage did average borrowings decrease from 2016 to 2017?
average_borrowings_2017 = 779
average_borrowings_2016 = 850
change = average_borrowings_2017 - average_borrowings_2016
percent_change = change / average_borrowings_2016
answer = percent_change * 100