Table	of	Contents

# UNITED	STATES

# SECURITIES	AND	EXCHANGE	COMMISSION

# (Mark	One)

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

# For	the	fiscal	year	ended	December	31,	2018

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)

1	Water	Street,	Camden,	NJ (Address	of	principal	executive	offices)

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

(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

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	every	Interactive	Data	File	required	to	be	submitted	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	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 ☐

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—$13,802,100,000	as	of	June	29,	2018	(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	29,	2018,	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	29,	2018,	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— 180,751,697	shares as	of	February	14,	2019.

# DOCUMENTS	INCORPORATED	BY	REFERENCE

Portions	of	the	American	Water	Works	Company,	Inc.	definitive	proxy	statement	for	the 2019	Annual	Meeting	of	Shareholders	to	be	filed	with	the	Securities	and	Exchange Commission	within	120	days	after	December	31,	2018	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 | 34 |
| Item\t2. | Properties | 34 |
| 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 | 76 |
| Item\t8. | Financial\tStatements\tand\tSupplementary\tData | 78 |
| Item\t9. | Changes\tin\tand\tDisagreements\twith\tAccountants\ton\tAccounting\tand\tFinancial\tDisclosure | 133 |
| Item\t9A. | Controls\tand\tProcedures | 133 |
| Item\t9B. | Other\tInformation | 134 |
|  | Part\tIII |  |
| Item\t10. | Directors,\tExecutive\tOfficers\tof\tthe\tRegistrant\tand\tCorporate\tGovernance | 135 |
| Item\t11. | Executive\tCompensation | 135 |
| Item\t12. | Security\tOwnership\tof\tCertain\tBeneficial\tOwners\tand\tManagement\tand\tRelated\tStockholder\tMatters | 135 |
| Item\t13. | Certain\tRelationships\tand\tRelated\tTransactions\tand\tDirector\tIndependence | 135 |
| Item\t14. | Principal\tAccountant\tFees\tand\tServices | 135 |
|  | Part\tIV |  |
| Item\t15. | Exhibits\tand\tFinancial\tStatement\tSchedules | 136 |
| Item\t16. | Form\t10-K\tSummary | 136 |
| Exhibit\tIndex |  | 137 |
| Signatures |  | 141 |

# 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,"	 "propose,"	 "assume,"	 "forecast,"	 "likely,"	 "uncertain,"	 "outlook,"	 "future," "pending,"	"goal,"	"objective,"	"potential,"	"continue,"	"seek	to,"	"may,"	"can,"	"should,"	"will"	and	"could"	or	the	negative	of	such	terms	or	other	variations	or	similar expressions.	Forward-looking	statements	may	relate	to,	among	other	things:	our	future	financial	performance,	including	our	operation	and	maintenance	("O&M") efficiency	 ratio;	 our	 liquidity	 and	 future	 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,	technology	improvement	and	other	strategic	initiatives;	trends	in	our	industry;	regulatory,	legislative,	tax	policy	or	legal	developments;	rate adjustments,	including	through	general	rate	case	filings,	filings	for	infrastructure	surcharges	and	filings	to	address	regulatory	lag;	and	impacts	that	the	Tax	Cuts	and	Jobs Act	(the	"TCJA")	may	have	on	us	and	on	our	business,	results	of	operations,	cash	flows	and	liquidity.

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

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

•exposure	or	infiltration	of	our	critical	infrastructure	and	our	technology	systems,	including	the	disclosure	of	sensitive,	personal	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	regulated	and	market-based	businesses,	either	individually	or	in	the	aggregate,	and	capitalize	on growth	opportunities,	including	our	ability	to,	among	other	things:

•acquire,	 close and successfully integrate regulated operations and market-based businesses;

•enter	into	contracts	and	other	agreements	with,	or	otherwise	obtain,	new	customers	in	our	market-based	businesses; and

•realize anticipated benefits and synergies from new acquisitions;

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

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

•our ability to	 maintain safe	 work sites;

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

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

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

•fluctuations	in	interest	rates;

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

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

•changes	in	federal	or	state	general,	income	and	other	tax	laws,	including	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	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;

•our	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;

•our 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	U.S.	Securities	and	Exchange	Commission ("SEC").	Except	as	required	by	the	federal	securities	laws,	we	do	not	have	any	obligation,	and	we	specifically	disclaim	any	undertaking	or	intention,	to	publicly	update or	revise	any	forward-looking	statements,	whether	as	a	result	of	new	information,	future	events,	changed	circumstances	or	otherwise.	New	factors	emerge	from	time	to time,	and	it	is	not	possible	for	us	to	predict	all	such	factors.	Furthermore,	it	may	not	be	possible	to	assess	the	impact	of	any	such	factor	on	our	businesses,	either	viewed independently	or	together,	or	the	extent	to	which	any	factor,	or	combination	of	factors,	may	cause	results	to	differ	materially	from	those	contained	in	any	forward- looking	statement.	The	foregoing	factors	should	not	be	construed	as	exhaustive.

# PART	I

# 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	7,100	professionals	who	provide	drinking	water,	wastewater	and	other	related	services	to	more	than	14	million	people	in	46	states	and	Ontario,	Canada. We	conduct	the	majority	of	our	business	through	regulated	utilities	that	provide	water	and	wastewater	services,	collectively	presented	as	our	"Regulated	Businesses." We	also	operate	market-based	businesses	that	provide	a	broad	range	of	related	and	complementary	water,	wastewater	and	other	services.	Individually,	these	businesses 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.

Throughout	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 customers	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	$2,984	million	for	2018,	$2,958	million	for	2017	and	$2,871	million	for	2016,	accounting	for	87%,	88% and	87%,	respectively,	of	the	Company's	total	operating	revenues	for	the	same	periods.

The	following	table	provides	a	geographic	summary	of	our	Regulated	Businesses'	operating	revenues	and	the	number	of	customers	we	serve,	by	type	of	service, for	and	as	of	the	year	ended	December	31,	2018:

|  |  | 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 | $682 | $41 | $723 | 24.2% | 648 | 49 | 697 | 20.6% |
| Pennsylvania | 627 | 62 | 689 | 23.1% | 660 | 65 | 725 | 21.4% |
| Missouri | 309 | 10 | 319 | 10.7% | 469 | 14 | 483 | 14.3% |
| Illinois | 277 | 20 | 297 | 10.0% | 286 | 35 | 321 | 9.5% |
| California | 218 | 3 | 221 | 7.4% | 176 | 3 | 179 | 5.3% |
| Indiana | 219 | — | 219 | 7.3% | 305 | 2 | 307 | 9.1% |
| West\tVirginia | 143 | 1 | 144 | 4.8% | 166 | 1 | 167 | 4.9% |
| Total—Top\tSeven\tStates\t(b) | 2,475 | 137 | 2,612 | 87.5% | 2,710 | 169 | 2,879 | 85.1% |
| Other\tstates\t(c) | 348 | 24 | 372 | 12.5% | 472 | 31 | 503 | 14.9% |
| Total\tRegulated\tBusinesses | $2,823 | $161 | $2,984 | 100.0% | 3,182 | 200 | 3,382 | 100.0% |

(a) Includes	other	operating	revenues	consisting	primarily	of	miscellaneous	utility	charges,	fees	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	20—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	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	food	and	beverage	providers,	commercial	property	developers	and	proprietors,	and	energy	suppliers,	(ii)	fire	service	customers,	where	we	supply	water	through	our distribution	systems	to	public	fire	hydrants	for	firefighting	purposes	and	to	private	fire	customers	for	use	in	fire	suppression	systems	in	office	buildings	and	other facilities,	(iii)	industrial	customers,	such	as	large-scale	manufacturers,	mining	and	production	operations,	(iv)	public	authorities,	such	as	government	buildings	and	other public	sector	facilities,	including	schools	and	universities,	and	(v)	other	utilities	and	community	water	and	wastewater	systems	in	the	form	of	bulk	contracts	for	the supply	of	water	or	the	treatment	of	wastewater,	for	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,	2018:

(a) Includes	water	revenues	from	public	authorities	and	other	utilities	and	community	water	systems	under	bulk	contracts.

(b) Includes	other	operating	revenues	consisting	primarily	of	miscellaneous	utility	charges,	fees	and	rents.

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

|  |  | 2018 |  | 2017 |  | 2016 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| (In\tthousands) | Water | Wastewater | Water | Wastewater | Water | Wastewater |
| Residential | 2,892 | 188 | 2,872 | 182 | 2,846 | 171 |
| Commercial | 222 | 11 | 221 | 11 | 220 | 10 |
| Fire\tservice | 48 | — | 47 | — | 45 | — |
| Industrial | 4 | — | 4 | — | 4 | — |
| Public\tand\tother\t(a) | 16 | 1 | 16 | — | 16 | — |
| Total | 3,182 | 200 | 3,160 | 193 | 3,131 | 181 |

(a) Includes	public	authorities	and	other	utilities	and	community	water	and	wastewater	systems	under	bulk	contracts.	Bulk	contracts,	which	are	accounted	for	as	a	single	customer	in	the	table above,	generally	result	in	service	to	multiple	customers.

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

# Capital	Investment

The	aging	water	and	wastewater	infrastructure	in	the	United	States	is	in	need	of	replacement	and	modernization.	The	American	Society	of	Civil	Engineers published	its	Report	Card	for	America's	Infrastructure	in	2017	and	gave	the	drinking	water	industry	a	grade	of	"D,"	and	the	wastewater	infrastructure	a	grade	of	"D+," primarily	because	much	of	the	country's	infrastructure	is	nearing	the	end	of	its	useful	life.	The	report	also	stated	that,	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,	approximately	900	billion	gallons	of	untreated	sewage	is	discharged	into	the	country's	rivers	and	streams	every	year.	As documented	in	the	American	Water	Works	Association's 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,	just	to maintain	the	current	levels	of	water	service.	In	addition,	increased	regulation	related	to	water	quality	and	the	management	of	water	and	wastewater	residual	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	the	country's water	and	wastewater	infrastructure.

To	address	the	growing	infrastructure	needs	in	the	areas	we	serve,	we	plan	to	invest	$7.3	billion	over	the	next	five	years,	including	$1.6	billion	in	2019,	for	capital improvements	to	our	Regulated	Businesses'	water	and	wastewater	infrastructure,	largely	for	pipe	replacement	and	upgrading	aging	water	and	wastewater	treatment facilities.	We	have	proactively	improved	our	pipe	renewal	rate	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	between	2019	and	2023.	In	addition,	during	this	same	five-year	period,	our	capital	investment	in	treatment plants,	storage	tanks	and	other	key,	above-ground	facilities	has	increased	over	10%,	further	addressing	infrastructure	renewal,	resiliency,	water	quality,	operational efficiency,	technology	and	innovation,	and	emerging	regulatory	compliance	needs.	Additionally,	we	are	investing	significantly	in	resiliency	projects	to	address	the impacts	of	climate	and	weather	variability	by	hardening	our	assets.

# 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	review	and	approve	rates	charged	to	customers,	accounting	treatments,	long-term	financing	programs	and	cost	of	capital,	O&M	expenses, capital	expenditures,	taxes,	affiliated	transactions	and	relationships,	reorganizations	and	mergers	and	acquisitions,	along	with	imposing	certain	penalties	or	granting certain	incentives.	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	requirement	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	(i) obtaining	timely	recovery	of	capital	investment	costs,	(ii)	recognizing	declining	sales	resulting	from	reduced	consumption,	and	(iii)	obtaining	appropriate	recovery	of utility	O&M	costs,	including	costs	incurred	for	compliance	with	environmental	regulations.	The	program	attempts	to	minimize	"regulatory	lag,"	which	is	the	time between	the	occurrence	of	an	event	that	triggers	a	change	in	the	utility's	revenue	requirement	and	its	recognition	in	rates.	For	example,	regulatory	lag	describes	the	time between	when	a	capital	investment	is	placed	into	service	for	the	benefit	of	the	customer	and	when	the	Company	can	begin	earning	a	return	of	and	on	that	capital 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.	The	following	table provides	examples	of	approved	regulatory	practices:

Future	test	year A	test	period	used	for	setting	rates,	which	begins	with	the	date	new	rates	are	effective.	This	allows	current	or	projected	revenues, expenses	and	capital	investments	to	be	collected	on	a	timelier	basis.

Hybrid	test	year Allows	an	update	to	historical	data	for	"known	and	measurable"	changes	that	occur	subsequent	to	the	historical	test	year.

Utility	plant	recovery mechanisms Allows	recovery	of	the	full	return	on	utility	plant	costs	during	the	construction	period,	instead	of	capitalizing	an	allowance	for	funds used	during	construction.	In	addition,	some	states	allow	the	utility	to	seek	pre-approval	of	certain	capital	projects	and	associated costs.	In	this	pre-approval	process,	the	PUC	may	assess	the	prudency	of	such	projects.

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	case	proceeding	or	deferred	until	the	next	general	rate	case	proceeding.

Revenue	stability	mechanisms Separates	a	utility's	cost	recovery	from	the	amount	of	water	it	sells	to	recover	its	fixed	costs	and	ongoing	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.

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.

TN,	VA

We	pursue	or	seek	enhancement	to	these	regulatory	practices	to	facilitate	efficient	recovery	of	our	costs	and	capital	investments	in	order	to	continue	to	provide safe,	clean,	reliable	and	affordable	services	to	our	customers.	The	ability	to	seek	regulatory	treatment	as	described	above	does	not	guarantee	that	the	PUCs	will	accept our	proposal	in	the	context	of	a	particular	rate	case,	and	these	regulatory	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	U.S.	Environmental	Protection	Agency	("EPA"),	approximately	 84%	of	the	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	15,000	community	wastewater	systems	 in	 the	United	States,	with	approximately	80%	of	 the community	 water	 systems	 serving	 a	 population	 of	3,000	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.	Larger	utilities	also	typically	have	the	expertise	to operate	systems	more	efficiently	and	can	attract	and	retain	employees	needed	to	operate	the	utility	over	time.

A	fundamental	aspect	of	our	growth	strategy	is	to	pursue	acquisitions	of	small	and	medium	water	and/or	wastewater	systems	of	between	3,000	and	30,000 customers,	in	geographic	proximity	to	areas	where	we	operate	our	Regulated	Businesses.	The	proximity	of	acquisition	opportunities	to	our	regulated	footprint	allows	us to	integrate	and	manage	the	acquired	systems	and	operations	primarily	using	our	existing	management,	although	we	typically	retain	the	majority	of	employees,	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,	allowing	us	to	add	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,	pursuing	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	attain	efficiencies	after	entering	the	new domestic	market.

Increasingly	stringent	environmental,	health	and	safety,	and	water	quality	regulations,	the	amount	of	infrastructure	in	need	of	significant	capital	investment, financial	challenges	and	industry	legislation	are	several	elements	that	may	drive	more	municipalities	to	consider	selling	their	water	and	wastewater	assets.

We	are	an	experienced	utility	with	proven	access	to	capital	and	financial,	technical,	and	managerial	resources	with	public	service	commission	oversight.	We	are	a solution	provider	and	believe	that	many	communities	could	benefit	from	receiving	safe	and	reliable	water	and	wastewater	service.

# Industry	Legislation

In	2017,	New	Jersey	enacted	the	Water	Quality	Accountability	Act	(the	"WQAA"),	which	sets	new	operational	standards	for	all	water	utilities	in	New	Jersey, including	municipal	and	investor-owned	utilities	with	more	than	500	service	connections.	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.	The	WQAA	requires	the	most	senior	water	manager,	or either	the	executive	director	for	municipal	utility	authorities	or	the	mayor	or	chief	executive	officer	for	municipally	owned	public	water	systems,	to	certify	that	the system	meets	the	requirements	under	the	WQAA.	On	October	19,	2018,	our	New	Jersey	American	Water	subsidiary	certified	that	it	was	in	compliance	with	all	aspects of	the	Act.

In	2018,	similar	legislation	was	passed	in	Indiana,	which	sets	new	operational	standards	and	requirements	for	water	and	wastewater	treatment	plants	in	areas	such as	capital	asset	management,	cost-benefit	analysis	and	cybersecurity.

Also,	in	2018,	President	Trump	signed	America's	Water	Infrastructure	Act	of	2018.	The	legislation	includes	policies	intended	to	improve	water	and	wastewater system	management	and	authorization	for	states	to	assess	options	for	consolidation	for	systems	that	do	not	comply	with	the	federal	Safe	Drinking	Water	Act	and	its	rules and	regulations.	The	legislation	increases	funding	to	water	system	funding	programs,	including	the	State	Revolving	Loan	Fund	program	and	the	Water	Infrastructure Finance	and	Innovation	Act.

Our	regulated	subsidiaries	in	California,	Illinois,	Indiana,	Iowa,	Maryland,	Missouri,	New	Jersey	and	Pennsylvania	have	access	to	fair	market	value	legislation	for private	sector	investment	in	public	sector	systems.	We	support	full	optionality	for	municipalities,	including	state	legislation	that	enables	the	consolidation	of	the	largely fragmented	water	and	wastewater	industries	through	third-party	fair	market	valuations	of	purchased	property.	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	purchase	price	that	is	reflective	of	the	assets' value,	while	the	utility	has	increased	assurance	of	recovering	the	purchase	price	over	the	life	of	the	assets,	subject	to	state	regulatory	commission	approval.

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.	Eleven	of	our	regulated	subsidiaries currently	have	some	form	of	consolidated	 tariff	pricing,	 including	Illinois,	Indiana,	Iowa,	Kentucky,	Maryland,	Missouri,	New	Jersey,	New	York,	Pennsylvania, Virginia,	and	West	Virginia.

In	2018,	legislation	was	passed	in	our	Missouri	and	California	subsidiaries	changing	the	public	vote	requirement	for	the	sale	of	water	or	wastewater	systems.	In Missouri,	the	public	vote	requirement	for	the	sale	of	a	municipal	water	or	wastewater	system	changed	to	a	simple	majority	for	more	than	500	small	towns.	Historically, only	larger	communities	required	a	simple	majority,	while	smaller	communities	needed	a	two-thirds	majority.	This	legislation	increases	the	options	for	small	towns, should	they	decide	to	address	their	water	and	sewer	challenges	through	an	asset	sale.	In	California,	the	vote	required	to	allow	cities	to	sell	sewer	systems	changed	to	a simple	majority	as	compared	to	a	two-thirds	majority.

# 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	franchises, charters,	certificates	of	public	convenience	and	necessity	or	similar	authorizations	(collectively,	"CPCNs")	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.,	Eversource	Energy 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	CPCN	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	CPCN.	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	CPCN.

As	such,	we	are	periodically	subject	to	condemnation	proceedings	in	the	ordinary	course	of	business.	For	example,	a	citizens	group	in	Monterey,	California successfully	added	"Measure	J"	to	the	November	6,	2018	election	ballot	asking	voters	to	decide	whether	the	Monterey	Peninsula	Water	Management	District	(the "MPWMD")	should	conduct	a	feasibility	study	concerning	the	potential	purchase	of	our	California	subsidiary's	Monterey	water	service	assets,	and,	if	feasible,	to proceed	with	a	purchase	of	those	assets	without	an	additional	public	vote.	This	service	territory	represents	approximately	40,000	customers.	On	November	27,	2018, Measure	J	was	certified	to	have	passed.	The	MPWMD	has	until	August	27,	2019	to	complete	a	feasibility	study	and	submit	to	its	board	a	written	plan	for	acquiring	the system	assets.	If	the	MPWMD	were	to	determine	that	such	an	acquisition	is	feasible,	then	the	MPWMD	would	commence	a	multi-year	eminent	domain	proceeding against	our	California	subsidiary	 to	first	establish	 the	MPWMD's	right	 to	 take	 the	system	assets	and,	 if	such	right	 is	established,	determine	 the	amount	of	 just compensation	to	be	paid	for	the	system	assets.

Also,	five	municipalities	in	the	Chicago,	Illinois	area	(approximately	30,300	customers	in	total)	formed	a	water	agency	and	filed	an	eminent	domain	lawsuit against	our	Illinois	subsidiary	in	January	2013,	seeking	to	condemn	the	water	pipeline	that	serves	those	five	municipalities.	Before	filing	its	eminent	domain	lawsuit,	the water	agency	made	an	offer	of	$38	million	for	the	pipeline.	A	jury	trial	will	take	place	to	establish	the	value	of	the	pipeline.	Although	the	date	of	this	trial	has	not currently	been	scheduled,	it	is	likely	to	commence	in	the	fourth	quarter	of	2019.

Furthermore,	the	law	in	certain	jurisdictions	in	which	our	Regulated	Businesses	operate	provides	for	eminent	domain	rights	allowing	private	property	owners	to file	a	lawsuit	to	seek	just	compensation	against	a	public	utility,	if	a	public	utility's	infrastructure	has	been	determined	to	be	a	substantial	cause	of	damage	to	that property.	In	these	actions,	the	plaintiff	would	not	have	to	prove	that	the	public	utility	acted	negligently.	In	California,	most	recently,	lawsuits	have	been	filed	in connection	with	large-scale	natural	events	such	as	wildfires.	Some	have	included	allegations	that	infrastructure	of	certain	utilities	triggered	the	natural	event	that	resulted in	damage	to	the	property.	In	some	cases,	the	PUC	has	allowed	certain	costs	or	losses	incurred	by	the	utility	to	be	recovered	from	customers	in	rates,	but	in	other	cases such	recovery	in	rates	has	been	disallowed.	Also,	the	utility	may	have	obtained	insurance	that	could	respond	to	some	or	all	of	such	losses,	although	the	utility	would	be at	risk	for	any	losses	not	ultimately	subject	to	rate	or	insurance	recovery	or	losses	that	exceed	the	limits	of	such	insurance.

# 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	or	multi-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	water	treatment	we	apply	varies	significantly	depending	upon	the	quality	of	the	water	source	and	customer	stipulations. Surface	water	sources	typically	generally	require	significant	treatment,	while	groundwater	sources	often	require	chemical	treatment	only.

The	following	chart	depicts	our	sources	of	water	supply	as	of	December	31,	2018:

The	following	table	provides	percentages	of	water	supply	by	source	type	for	our	top	seven	states	for	2018	were	as	follows:

|  | Surface	Water | Ground	Water | Purchased	Water |
| :--- | :--- | :--- | :--- |
| New\tJersey | 71% | 24% | 5% |
| Pennsylvania | 91% | 7% | 2% |
| Missouri | 79% | 20% | 1% |
| Illinois | 53% | 36% | 11% |
| California | — | 64% | 36% |
| Indiana | 44% | 56% | — |
| West\tVirginia | 99% | — | 1% |

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	our	California	subsidiary,	and	the	construction	of	wells	that	would	supply	water	to	the	desalination	plant.	In	addition,	the	Water	Supply Project	also	includes	our	California	subsidiary's	purchase	of	water	from	a	groundwater	replenishment	project	between	the	Monterey	Regional	Water	Pollution	Control Agency	(now	known	as	Monterey	One	Water)	and	the	MPWMD.	The	Water	Supply	Project	is	intended,	among	other	things,	to	fulfill	obligations	of	our	California subsidiary	to	eliminate	unauthorized	diversions	from	the	Carmel	River	as	required	under	orders	of	the	California	State	Water	Resources	Control	Board	(the	"SWRCB"). For	more	information,	see	Item	3—Legal	Proceedings—Alternative	Water	Supply	in	Lieu	of	Carmel	River	Diversions.

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	primarily	to	residential	and smaller	commercial	customers,	the	U.S.	government	on	military	installations	and	shale	natural	gas	exploration	and	production	companies,	as	well	as	municipalities, utilities	and	industrial	customers.	These	businesses	are	not	subject	to	economic	regulation	by	state	PUCs	and	the	services	provided	generally	do	not	require	significant capital	investment.	Operating	revenues	for	our	Market-Based	Businesses	were	$476	million	for	2018,	$422	million	for	2017	and	$451	million	for	2016,	accounting	for 14%,	13%	and	14%,	respectively,	of	the	Company's	total	operating	revenues	for	the	same	periods.

Our	primary	Market-Based	Businesses	include	the	following	operating	segments:

•Homeowner	 Services	 Group,	 which provides various	 warranty protection programs to residential and smaller commercial customers;

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

•Keystone	Clearwater	Solutions,	LLC	("Keystone"),	which	provides	customized	water	transfer	services	for	shale	natural	gas	exploration	and	production companies.

We	also	enter	into	contracts	with	municipal,	commercial	and	industrial	customers	to	operate	and	manage	water	and	wastewater	facilities	and	provide	other related	 services	 through	 our	Contract	Services	Group.	 During	 2018,	 we	 closed	 on	 the	 sale	 of	 the	 majority	 of	 our	Contract	Services	Group's	 O&M	 contracts	 to subsidiaries	of	Veolia	Environnement	S.A.	See	Note	4—Acquisitions	and	Divestitures	in	the	Notes	to	Consolidated	Financial	Statements	for	additional	information.	We will	retain	four	of	our	Contract	Services	Group's	O&M	contracts	due	to	their	proximity	to	our	existing	service	areas,	and	expect	the	majority	of	the	remaining	contracts to	be	sold	to	other	parties,	or	expire	within	the	next	twelve	months.

# Homeowner	Services	Group

Our	Homeowner	Services	Group,	which	includes	our	June	4,	2018	acquisition	of	Pivotal	Home	Solutions	("Pivotal"),	provides	warranty	protection	programs	to residential	and	smaller	commercial	customers	to	protect	against	repair	costs	for	interior	and	exterior	water	and	sewer	lines,	interior	gas	and	electric	lines,	heating	and cooling	 systems,	 water	 heaters	 and	 other	 home	 appliances,	 as	 well	 as	 power	 surge	 protection	 and	 other	 related	 services.	 We	 also	 develop	 partnerships	 with municipalities,	 utilities	 and	 other	 organizations	 to	 offer	 our	 protection	 programs	 to	 customers	 serviced	 by,	 or	 affiliated	 with,	 those	 municipalities,	 utilities	 and organizations.	The	term	of	these	partnership	agreements	is	typically	three	to	five	years,	with	mutual	optional	renewals.	As	of	December	31,	2018,	 our	Homeowner Services	Group	had	approximately	3	million	customer	contracts	in	43	states,	and	26	partnership	agreements	with	utilities,	municipalities	and	other	organizations.

# Military	Services	Group

Our	Military	Services	Group	operates	on	14	military	installations	under	50-year	contracts	with	the	U.S.	government	as	part	of	its	Utility	Privatization	Program. The	scope	of	these	contracts	generally	includes	the	operation	and	maintenance	of	the	installation's	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	installation's	mission	and	the	construction	of	these	assets	are	funded	by	the	U.S.	government	as	separate	modifications	or amendments	to	the	contract.	The	capital	program	historically	has	not	used	the	Company's	equity	or	debt	borrowings;	rather,	we	have	used	limited	working	capital	for short-term	needs	under	these	contracts.	In	April	2018,	the	U.S.	Army	instituted	a	requirement	that	a	bidder	must	offer	financing	in	its	proposal	for	a	new	capital	project. The	Company	is	currently	exploring	strategies	to	address	the	U.S.	Army's	revised	requirements	for	new	projects	on	which	it	may	seek	to	bid,	including	partnering	with third	parties	for	off-balance	sheet	financing.

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	five	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	$4.3	billion,	with	an	average	remaining	contract	term	of	42	years.

# Keystone

In	July	2015,	we	acquired	a	95%	interest	in	Water	Solutions	Holdings,	LLC,	including	its	wholly	owned	subsidiary,	Keystone.	During	2018,	pursuant	to	the exercise	of	put	options	by	the	minority	owners,	we	acquired	the	remaining	5%	interest	in	Keystone,	bringing	our	ownership	interest	to	100%.	Keystone	is	a	water	service and	management	solutions	company	that	serves	shale	natural	gas	exploration	and	production	customers	in	the	Appalachian	Basin.	During	2018,	Keystone	exited	its construction	and	water	trucking	business	lines,	narrowing	the	scope	of	its	business	going	forward	to	customized	water	transfer	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 are	generally	cancelable	by	either	party	with	30	days	prior	notice.	As	of	December	31,	2018,	Keystone	serves	approximately	47	customers.

We	face	competition	in	our	Market-Based	Businesses	from	a	number	of	service	providers,	including	HomeServe	USA	in	our	Homeowner	Services	Group,	and American	States	Water	Company,	Suez	North	America,	and	Veolia	Environnement	S.A.	in	our	 Military	Services	Group.	Keystone	currently	faces	competition	from water	 service	 providers	 that	 typically	 provide	 services	 to	 particular	 segments	 of	 the	 water	 management	 cycle,	 such	 as	 Select	 Energy	 Services,	 Inc.,	 TETRA Technologies,	Inc.	and	Baker	Corp.

# 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.	In	the	United	States,	these	regulations	are	developed	under	legislation	including	the	Safe	Drinking	Water Act,	the	Reduction	of	Lead	in	Drinking	Water	Act	and	the	Clean	Water	Act.	States	also	have	the	authority	to	develop	their	standards	and	requirements	in	these	areas.	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.	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,	while	the	EPA	has	issued	a	non-enforceable Health	Advisory	for	the	combined	level	of	two	perfluorinated	compounds,	the	New	Jersey	Department	of	Environmental	Protection	has	adopted	a	more	stringent maximum	contaminant	level	for	a	third	compound,	perfluorononanoic	acid,	or	PFNA,	and	perfluorooctanoic	acid,	or	PFOA,	and	will	be	seeking	to	adopt	similar standards	for	other	perfluoroalkyl	and	polyfluoroalkyl	substances,	or	PFAS.	The	overall	trend	has	been	that	drinking	water	standards	have	become	increasingly	more 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	and	we	invest	in	technology	solutions	for	enhanced	detection and	monitoring.	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	$133	million	 and	$120	million during	2019	and	2020,	respectively,	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	current	and	former	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	"Monitoring	Rule").	Our	facilities	have	participated	in	the	data	gathering	effort	for	the	Monitoring	Rule	in	previous	rounds,	which occurs	every	five	years,	and	are	also	a	participant	in	the	ongoing	fourth	round,	which	is	scheduled	for	completion	by	the	end	of	2020.	There	are	millions	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	additional	information.

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	finalized	the	Ground	Water	Rule,	which	is	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	with	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 2019.

Across	the	Company,	we	conduct	over	one	million	water	quality	tests	each	year	at	our	laboratory	facilities	and	plant	operations,	including	continuous	online 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	 69	 of	 our	81	surface	water treatment	plants	receiving	the	EPA	program's	prestigious	"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,	67	of	our	surface	water	treatment	plants	have	received	the	"Five-Year	Phase	III"	award,	62	plants	have	received	the	"Ten-Year Phase	III"	award,	58	plants	have	received	the	"Fifteen-Year	Phase	III"	award,	and	3	plants	have	received	the	"Twenty-Year	Phase	III"	award;	these	awards	recognize plants	that	have	met	the	Director	award	status	for	five,	10,	15	and	20	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	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	Reduction	of	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	Lead	and	Copper	Rule	("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	2019.	It	is currently	estimated	that	approximately	5%	of	our	service	lines	contain	lead	("LSLs").	We	have	reviewed	our	inventories	of	company	owned	service	lines,	our	related practices	and	are	working	with	stakeholders	to	develop	feasible	solutions	to	remove	legacy	lead	from	service	lines	in	older	neighborhoods.	Our	goal	is	to	replace	our LSLs	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	LSL,	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	at	 the	same	 time.	Replacing	 the	full	service	 line	 is	considered	a	best	practice	as	advised	by	 the	Lead	Service	Line Replacement	Collaborative	and	the	American	Water	Works	Association.	The	Lead	Service	Line	Replacement	Collaborative	is	a	diverse	group	of	public	health,	water utility,	environmental,	labor,	consumer,	and	housing	organizations	from	across	the	country	working	together	to	encourage	communities	to	accelerate	the	full	replacement of	LSLs	through	collaborative	efforts	at	the	local	level.	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.	There	is	also	a	special	focus	placed	on	low-income	neighborhoods.

# 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	fines	and	penalties,	and	persistent	non-compliance	could	lead	to	significant	fines	and	penalties	and	other 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,	and	that	the	"how"	is	just	as	important	as	the	"what"	for	long-term	financial	sustainability.	Being	committed	to	ESG	principles means	striving	to:

•keep	 employees safe and injury-free, and	 develop each	 person to	 his	 or	 her full potential;

•be	a	leader	in	environmental	sustainability,	caring	for	the	planet,	and	leading	the	nation	in	outstanding	water	safety	and quality;

•deliver	personalized	customer	service	with	empathy	and	care;

•make	communities	better	because	we	are	there;	and

•be	 transparent, accessible and well-governed for our shareholders and investors.

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:

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

•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.

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

•Operational	Excellence—Our	operational	excellence	strategy	helps	us	to	find	better	and	more	efficient	ways	to	do	business,	and	to	provide	safe,	clean	and affordable	water	services	for	our	customers.

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

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	Euronext	Vigeo®	U.S.	50	index,	FTSE4Good	index	series,	2018	Constituent	MSCI	ESG	Leaders	Indexes,	NAACP	Equity	Inclusion	and	Empowerment Index	and	the	most	recent	2019	Bloomberg	Gender-Equality	Index.	Highlights	of	our	commitment	to	our	ESG	policies	and	practices	are	summarized	below:

# Environmental	and	Sustainability	Practices

# •Energy	Use

•Lowered	our	greenhouse	gas	emissions	through	December	31,	2017	by	approximately	31%	since	our	base	year	of	2007	with	a	goal	of	reducing	40% by	2025.

•Design, construct, operate and	 maintain our systems for efficiency and best practices.

# •Water	Supply

•Deconstructed	the	San	Clemente	Dam	in	California	to	restore	the	"run	of	the	river"	and	we	are	building	the	Water	Supply	Project	using	marine	life friendly	slant	wells.

# •Water	Policy	Leadership

•Expect	to	spend	between	$8.0	billion	and	$8.6	billion	on	capital	investments	from	2019	to	2023	to	address	aging	infrastructure,	reduce	or	eliminate leaks,	improve	cyber	and	physical	security,	and	increase	resiliency	of	critical	assets	from	the	impacts	of	climate	variability.

•Scientists	 dedicated to research and	 partnering	 with	 water research foundations,	 on	 water	 quality and technology-water source monitoring.

•Collaboration	and	partnerships	with	federal	and	state	agencies	to	support	effective	environmental,	health	and	safety	and	water	quality	standards	and regulations.

# Social	Responsibility

People

•During	2018,	nearly	80,000	hours	of	safety	training	were	completed	by	our employees.

•During	2018,	over	86%	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.

# •Our	Customers

•Achieved	 a	 customer	 satisfaction rating in the top	 quartile	 among	 our industry	 peer group.

# •Our	Communities

•More	 than 5,000 hours of	 Company-sponsored community service performed during 2018 by our employees.

•Company-sponsored	 workplace	 giving campaigns	 with the	 United	 Way and	 Water	 For People.

•Through	annual	contributions	from	the	American	Water	Charitable	Foundation,	we	focused	on	supporting	our	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.

# Governance

# •Board	and	Committee

•The	 Board of	 Directors and each of its committees are led by an independent, non-executive chairperson.

•Established the Safety,	 Environmental,	 Technology and	 Operations committee of the	 Board of Directors.

# •Diversity

•We	 have achieved gender parity among the	 members of the	 Board of Directors.

•Our average director tenure is approximately seven years.

# •Demonstrated	&	Representative	Expertise

•Our	Board	of	Directors	has	demonstrated	expertise,	including	experience	in	utilities,	cybersecurity,	financial	services,	serving	as	a	public	company CEO,	operational	and	manufacturing,	and	global	entity	management.

# 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.

We	continue	to	leverage	the	Company's	expertise	and	collaborate	with	the	EPA	and	state	agencies	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	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,	as	well	as some	naturally	occurring	microbes,	such	as	bacteria,	viruses	and	parasites,	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	140	million	registered	chemicals,	with	a	new	substance	being	produced	approximately	every	3	seconds from	chemical	breakdown	and	reformation.	There	are	over	1,400	microbes	which	can	affect	drinking	water.	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	evaluate	the	benefits	of	alternative	or	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	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	customer-owned	plumbing systems	in	large	buildings);

•aerial	drone	testing	to	detect	harmful	algal	blooms	and	testing	ultrasonic	technology	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.

# Service	Company	and	Security

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	our	Market-Based	Businesses	organized	under	American	Water	Enterprises,	LLC,	our	wholly	owned	subsidiary	("AWE"),	and Keystone	as	requested	or	may	otherwise	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	and	insurance,	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,	2018,	approximately	49%	of	our	workforce	was	represented	by	unions,	which	include	70	collective	bargaining	agreements	with	15	different unions.	Additionally,	as	of	December	31,	2018	we	had	two	collective	bargaining	agreement	beyond	expiration,	affecting	approximately	220	employees,	all	of	which	are actively	working	under	the	terms	of	the	existing	agreement,	and	another	collective	bargaining	agreement	in	its	initial	stage	of	renegotiation,	affecting	approximately	140 employees.	During	2019,	18	of	our	collective	bargaining	agreements	will	be	expiring	in	accordance	with	their	terms.

Every	five	years,	we	negotiate	national	health	and	welfare	benefits	with	our	union-represented	employees.	On	July	31,	2018,	a	new,	five-year	national	benefits agreement	was	ratified,	covering	approximately	3,200	of	our	union-represented	employees.	Highlights	of	the	new	agreement	include	union-represented	employees' participation	in	the	Company's	cash-based	annual	performance	plan,	changes	to	certain	retiree	medical	benefits	and	additional	medical	plan	options	for	our	employees and	their	families.

# Executive	Officers

The	following	table	provides	the	name,	age,	offices	held	and	business	experience	for	each	of	our	executive	officers,	as	of	February	19,	2019:

Name Age Office	and	Experience Radhakrishnan Swaminathan 57 Executive	Vice	President,	Chief	Customer,	Strategy	and	Technology	Officer.	 Mr.	Swaminathan	has	served	as	our	Executive	Vice President,	Chief	Customer,	Strategy	and	Technology	Officer	since	November	1,	2018.	Prior	to	that,	he	served	as	Senior	Vice	President, Chief	Technology	and	Innovation	Officer	of	the	Company	from	November	1,	2017	to	October	31,	2018.	Mr.	Swaminathan	joined	the Company	in	March	2016	as	our	Chief	Technology	and	Innovation	Officer.	Prior	to	that,	from	October	2012	through	February	2016,	he served	as	Vice	President	and	Chief	Technology	Officer,	Energy,	Natural	Resources	and	Utilities,	of	WIPRO	Technologies.	Prior	to	that, he	served	as	the	Director	of	Smart	Grid	Technologies	at	NextEra	Energy,	Inc.	from	January	2009	through	September	2012. Loyd	"Aldie"	Warnock 59 Senior	 Vice	 President	 of	 External	Affairs	 and	 Business	 Development.	Mr.	Warnock	 has	 served	 as the	 Company's	 Senior	Vice President	of	External	Affairs	and	Business	Development	since	August	1,	2017.	From	April	2014	to	July	31,	2017,	Mr.	Warnock	served	as the	Company's	Senior	Vice	President	of	External	Affairs,	Communications	and	Public	Policy.	Prior	to	joining	the	Company,	he	served	as Senior	Vice	President	of	External	Affairs	at	Midwest	Independent	System	Operator,	Inc.,	a	non-profit,	self-governing	organization,	from March	2011	to	April	2014.	Prior	to	that,	he	served	as	Vice	President	of	External	Affairs	for	Allegheny	Energy,	Inc.	from	December	2005 to	February	2011	and	Senior	Vice	President	of	Governmental	and	Regulatory	Affairs	at	Mirant	Corporation	from	July	2004	to	November 2005.	Mr.	Warnock	serves	on	the	Board	of	Directors	of	the	National	Association	of	Water	Companies	and	on	the	Executive	Advisory Board	of	the	Mississippi	State	University	College	of	Business. Melissa	K.	Wikle 53 Vice	President	and	Controller.	Ms.	Wikle	joined	the	Company	in	July	2016	as	its	Vice	President	and	Controller,	and	assumed	the	duties of	the	Company's	principal	accounting	officer	in	August	2016.	Prior	to	joining	the	Company,	Ms.	Wikle	served	as	Corporate	Controller and	Chief	Accounting	Officer	of	Columbus	McKinnon	Corporation,	a	publicly-traded	worldwide	designer,	manufacturer	and	marketer	of material	handling	products,	systems	and	services,	since	April	2011.	Ms.	Wikle	is	a	Certified	Public	Accountant.

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	shareholder	who	requests	such	documents	from	our	Investor	Relations	Department,	American	Water	Works	Company, Inc.,	1	Water	Street,	Camden,	NJ,	08102.

# 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	regulated	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,	EPA	requirements	and	similar	federal,	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	and	environmental	regulators	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,	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,	manufactured nanomaterials);	human	and	veterinary	products;	perfluorinated	and	polyfluorinated	compounds,	including	PFNA,	PFOA	and	other	PFAS;	bacteria,	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,	and	our	role	is	to	provide	service	that	meets	these	standards,	if	any.	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,	and	vary	by	state	or	region,	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	California-American	Water Company,	our	wholly	owned	subsidiary	("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	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,	three	of	our	states	have	approved	revenue	stability	mechanisms that	adjust	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.	In	addition,	ten	of	our	state	PUCs	permit	rates	to	be adjusted	outside	of	the	general	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,	ten	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	general	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	increase	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	 CPCN 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,	as amended	(the	"Code"),	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	re-measurement	of	our	deferred	income	taxes,	which	materially	impacted	our	2017 results	of	operations	and	financial	position	and	had	a	lesser	impact	on	our	2018	results	of	operations	and	financial	position.	During	2018,	all	of	our	14	jurisdictions subject	 to	economic	regulation	opened	formal	proceedings	related	 to	 the	TCJA,	and	proceedings	presently	remain	open	 in	three	of	 them.	Further,	 the	regulatory treatment	of	the	re-measured	deferred	income	taxes	remains	open	in	a	number	of	these	jurisdictions.	At	this	time,	we	cannot	predict	the	impacts	on	us	of	the	regulatory treatment	of	the	TCJA	in	these	open	proceedings	or	matters,	or	of	the	enactment	or	adoption	of	any	Related	Interpretations,	if	and	when	issued.	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,	drought,	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	nationally	and	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;

•increased	frequency	and	severity	of	storms	and	other	weather	events;

•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;

•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	2018,	we	 invested	$1.5	billion	in	net	Company-funded	capital	improvements.	The	level	of	capital	expenditures necessary	to	maintain	the	integrity	of	our	systems	will	continue	into	the	future	and	may	increase.	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	that	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	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	sources	of	supply	or	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.

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, cybersecurity,	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	obtain	insurance	coverage	related	to	our	business,	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	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.

New	York	American	Water	Company,	Inc.	("NYAW")	has	been	the	subject	of	a	New	York	State	Public	Service	Commission	("NYSPSC")	investigation	related to	the	unintentional	provision	of	incorrect	data	to	a	taxing	authority	that	resulted	in	an	over-assessment	of	real	property	taxes.	NYAW	self-reported	this	issue	to	the NYSPSC	promptly	after	NYAW's	senior	leadership	became	aware	of	it.	Neither	NYAW	nor	any	of	its	employees	received	any	financial	benefit	as	a	result	of	this matter,	as	all	customer	overpayments	were	provided	to	the	local	taxing	authorities.	The	NYSPSC	investigation	also	related	to	the	failure	of	a	few	employees	working	on NYAW's	2016	general	rate	case	to	properly	disclose	these	issues	in	that	rate	case.	On	September	11,	2018,	the	Supreme	Court	of	the	State	of	New	York,	Albany County,	approved	a	settlement	of	these	matters,	and	NYAW	is	cooperating	with	the	NYSDPS	to	implement	its	terms.	As	part	of	the	settlement,	NYAW	agreed	that	it would	provide	up	to	$4.5	million	to	benefit	NYAW	customers	through	several	different	mechanisms,	which	amounts	would	not	be	recoverable	in	rates.	NYAW	also agreed	to	accelerate	the	timing	of	the	payment	of	approximately	$6.4	million	in	aggregate	customer	credits.	Finally,	NYAW	agreed	to	engage	and	cooperate	with	an independent	monitor	through	September	30,	2021.	While	the	settlement	resolves	the	NYSPSC's	investigation	involving	NYAW	and	those	matters	set	forth	above,	there can	be	no	assurance	that	NYAW	will	not	be	subject	to	additional	federal,	state	or	local	proceedings	regarding	these	and	other	related	matters,	and	these	proceedings could	result	in	increased	oversight	and	civil,	administrative	and/or	criminal	sanctions,	which	may	have	a	material	adverse	effect	upon	our	reputation	and	perception.

Unfavorable	regulatory	and	economic	outcomes	also	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,	the	majority	of	which	are	earthen	dams,	and	the	failure	of	any	of	which	could	result	in personal	injury	and	property	damage,	including	without	limitation	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,	property	and	other	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	systems	or	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	systems	or	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	systems	and	businesses	we	acquire	in	the	future	may	not	achieve	anticipated sales	and	profitability	or	other	perceived	synergies,	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.	If	a	municipality	or	other	government	subdivision or	a	citizen	group	seeks	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.

For	example,	on	November	27,	2018,	Monterey,	California	ballot	Measure	J	was	certified	as	having	been	approved	by	a	public	vote,	requiring	the	MPWMD to	conduct	a	feasibility	study	and	submit	a	written	plan	concerning	the	feasibility	of	a	potential	purchase	of	our	California	subsidiary's	Monterey	water	service	assets without	an	additional	public	vote.	Also,	five	municipalities	in	the	Chicago,	Illinois	area	formed	a	water	agency	that	filed	an	eminent	domain	lawsuit	against	our	Illinois subsidiary	in	January	2013,	seeking	to	condemn	a	water	pipeline	that	serves	those	five	municipalities.	See	Item	1—Business—Regulated	Businesses—Condemnation and	Eminent	Domain,	which	includes	additional	information	regarding	these	matters.

Furthermore,	the	law	in	certain	jurisdictions	in	which	our	Regulated	Businesses	operate	provides	for	eminent	domain	rights	allowing	private	property	owners	to file	a	lawsuit	to	seek	just	compensation	against	a	public	utility,	if	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.	In	California,	most	recently,	lawsuits	have	been	filed	in connection	with	large-scale	natural	events	such	as	wildfires.	Some	have	included	allegations	that	infrastructure	of	certain	utilities	triggered	the	natural	event	that	resulted in	damage	to	the	property.	In	some	cases,	the	PUC	has	disallowed	recovery	in	rates	of	losses	incurred	by	these	utilities	as	a	result	of	such	lawsuits.

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.	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	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,	supply	chain,	inventory	and	accounts	receivable	collections.

Although	we	do	not	believe	 that these	systems	are	at	a	materially	greater	risk	of	failure than	other	similar	organizations,	our technology	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, the	 negligent	 or improper supervision	 of,	 or the intentional	 acts	 of,	 employees	 and contractors;

•physical	and	electronic	loss	of	customer	or	employee	data	due	to	security	breaches,	cyber	attacks,	hacking,	denial	of	services	action,	misappropriation	of data	or	other	property	and	similar	events;

•computer viruses; 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	of	property	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. Any	or	all	of	these	events	could	have	a	material	adverse	impact	on	our	business,	results	of	operations,	financial	condition	and	cash	flows.

# 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	from	internal	or	external	sources.	Our	water	and	wastewater systems	may	be	vulnerable	to	disability	or	failures	as	a	result	of	physical	or	cyber	attacks,	acts	of	war	or	terrorism,	vandalism	or	other	causes.	Our	operational technology	and	IT	systems	throughout	our	businesses	may	be	vulnerable	to	unauthorized	external	or	internal	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.	Further,	third	parties,	including	vendors,	suppliers	and	contractors,	who	perform	certain	services	for	us	or	administer	and	maintain	our sensitive	information,	could	also	be	targets	of	cyber	attacks	and	unauthorized	access.	While	we	have	instituted	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.	Experiencing	a	cyber	security	incident	could	also	cause	us	to	be	non-compliant	with	applicable	laws	and regulations	or	contracts	that	require	us	to	securely	maintain	confidential	data,	causing	us	to	incur	costs	related	to	legal	claims	or	proceedings	and	regulatory	fines	or penalties.	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.

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.

We	have	obtained	cyber	insurance	to	provide	coverage	for	a	portion	of	the	losses	and	damages	that	may	result	from	a	security	breach	of	our	IT	systems,	but	such insurance	is	subject	to	a	number	of	exclusions	and	may	not	cover	the	total	loss	or	damage	caused	by	a	breach.	The	market	for	cybersecurity	insurance	is	relatively	new and	coverage	available	for	cybersecurity	events	may	evolve	as	the	industry	matures.	In	the	future,	adequate	insurance	may	not	be	available	at	rates	that	we	believe	are reasonable,	and	the	costs	of	responding	to	and	recovering	from	a	cyber	incident	may	not	be	covered	by	insurance	or	recoverable	in	rates.

# 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	all	accidents	or	other	safety	incidents	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	delivery,	handling	and	storage	of	hazardous	chemicals,	which,	if	improperly	delivered,	handled,	stored	or	disposed	of, could	result	in	serious	injury,	death	or	property	damage,	and	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,	2018,	approximately	49%	of	our	workforce	was	represented	by	unions,	and	we	had	70	collective	bargaining	agreements	in	place	with	15 different	unions	representing	our	unionized	employees.	These	collective	bargaining	agreements,	including	20	which	expired	in	2018,	and	18	which	will	expire	during 2019,	are	subject	to	periodic	renewal	and	renegotiation.	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,	2018,	our	aggregate	long-term	and	short-term	debt	balance	(including	preferred	stock	with	mandatory	redemption	requirements)	was	$8.6 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	2019, 2020	and	2021	will	be	$72	million,	$32	million	and	$303	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	$2.10	billion	commercial	paper	program	and	our	$2.25	billion	revolving	credit	facility. Our	revolving	credit	facility	expires	in	accordance	with	its	terms	in	March	2023.	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,	2018, American	Water	Capital	Corp.	("AWCC"),	our	wholly	owned	financing	subsidiary,	had	 no	outstanding	borrowings	under	the	revolving	credit	facility,	and	had	$954 million	of	commercial	paper	outstanding	and	$81	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	shareholders	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.	On	January	2018, Moody's	Investors	Service	changed	its	rating	outlook	from	stable	to	negative	for	24	regulated	utilities	and	utility	holding	companies,	including	us.	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	substantive	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,	2018,	we	had	U.S.	federal	and	state	NOL	carryforwards	of	approximately	$707	million	 and	$547	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	began	to	expire	in	2019	and	will	continue	to	expire	through	2037. We	expect	to	fully	utilize	our	federal	NOL	balance	before	it	expires,	and	our	ability	to	do	so	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	$1.6	billion	of	goodwill	at	December	31,	2018.	The	goodwill	is	primarily	associated	with	the	acquisition	of	American	Water	by	an affiliate	of	our	previous	owner	in	2003,	the	acquisition	of	E'town	Corporation	by	a	predecessor	to	our	previous	owner	in	2001,	the	acquisition	of	Pivotal	in	2018	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.	In	this	regard, in	the	third	quarter	of	2018,	we	strategically	narrowed	the	scope	of	the	Keystone	business	solely	to	water	transfer	services	due	to	operational	and	financial	challenges	in the	other	businesses	of	Keystone.	As	a	result	of	this	strategic	change,	we	recorded	a	non-cash,	pre-tax	impairment	charge	of	$57	million	in	the	third	quarter	of	2018 related	to	Keystone.	See	Note	8—Goodwill	and	Other	Intangible	Assets	in	the	Notes	to	Consolidated	Financial	Statements	for	further	information.

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,	primarily	related	to	Military	Service	Group.	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,	2018,	we	had	remaining	performance	commitments	as	measured	by	remaining	contract	revenue	totaling	approximately	$4.3	billion	related	to our	Military	Services	Group	contracts,	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.

# Our	Market-Based	Businesses'	operations	under	our	Military	Services	Group	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	or	our	existing	contracts	could	be	terminated,	which	could	have	a	material	adverse	effect	on	our	results	of	operations	and	cash flows.

Our	Market-Based	Businesses	under	the	Contract	Services	Group	operate	a	limited	number	of	water	and	wastewater	systems	under	long-term	O&M	contracts	and face	the	risk	that	the	owners	of	those	systems	may	fail	to	provide	capital	to	properly	maintain	those	systems,	which	may	negatively	affect	the	Contract	Services	Group as	the	operator	of	the	systems,	and	we	may	incur	costs	in	excess	of	payments	received.

The	Contract	Services	Group	operates	a	limited	number	of	water	and	wastewater	systems	under	O&M	contracts.	Pursuant	to	these	contracts,	the	Contract	Services Group	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,	 the	 Contract	 Services	 Group	 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	the	Contract	Services	Group	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.

In	addition,	the	Contract	Services	Group	has	entered	into	long-term	contracts	under	which	they	agree	to	operate	and	maintain	a	municipality'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.	The Contract	Services	Group	is	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

# None.

# 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	own	our	corporate	headquarters,	located	in	Camden,	New	Jersey,	and	we	lease	office	space,	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	approximately:

# •81	surface	water	treatment	plants;

•530	groundwater	treatment	plants;

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

•130 wastewater treatment plants;

•51,000	miles	of	transmission,	distribution	and	collection	mains	and	pipes;

•1,400 water and wastewater pumping stations;

•1,300 treated	 water storage facilities; and

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

# Compliance	with	SWRCB	Orders	to	Reduce	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	order	of	the	SWRCB.	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.

The	2009	Order	includes	a	condition	prohibiting	Cal	Am	from	diverting	water	from	the	Carmel	River	for	new	service	connections	or	for	any	increased	use	of water	at	existing	service	addresses	resulting	from	a	change	in	zoning	or	use.	In	2011,	the	California	Public	Utilities	Commission	(the	"CPUC")	issued	a	decision directing	modifications	in	Cal	Am's	tariffs	to	recognize	the	moratorium	mandated	by	the	2009	Order,	and	directing	Cal	Am	to	seek	written	guidance	from	the	SWRCB with	respect	to	any	unresolved	issues	of	interpretation	or	implementation	of	this	condition.	In	2012,	the	Deputy	Director	of	the	SWRCB	sent	a	letter	to	Cal	Am providing	an	interpretation	as	to	the	calculation	of	a	baseline	to	determine	increases	in	use	of	water	at	existing	service	addresses.	On	March	19,	2018,	the	MPWMD adopted	a	resolution	directing	Cal	Am	to	interpret	the	baseline	in	a	manner	that	conflicts	with	the	SWRCB's	written	interpretation.	On	May	4,	2018,	Cal	Am	notified	the MPWMD	and	the	SWRCB	that	it	intends	to	seek	declaratory	relief	concerning	the	conflicting	regulatory	interpretations	under	the	2009	Order.	In	an	attempt	to	resolve these	conflicting	interpretations	prior	to	seeking	judicial	intervention,	Cal	Am	met	with	the	MPWMD	and	the	SWRCB	several	times.	The	SWRCB	has	circulated revisions	to	its	2012	interpretive	letter,	which	are	being	reviewed	and	discussed	by	the	parties.	Any	failure	to	follow	the	MPWMD's	resolution	or	the	SWRCB's	written interpretation,	despite	these	conflicting	interpretations,	could	potentially	result	in	fines,	penalties	and	other	actions	against	Cal	Am.

The	2016	Order	provides	that	if	the	CPUC	authorizes	Cal	Am	to	acquire	more	than	1,000	acre-feet	per	year	of	water	from	a	source	other	than	the	Water	Supply Project,	proponents	of	the	alternative	water	source	could	submit	revised	milestones	to	the	SWRCB	for	consideration.	On	May	8,	2018,	certain	parties	to	the	Water Supply	Project	proceeding	submitted	a	petition	to	the	SWRCB	to	add	parallel	milestones	to	the	2009	Order	for	2019,	2020,	and	2021,	based	on	the	proposed	expansion of	the	Pure	Water	Monterey	project,	another	groundwater	replenishment	project	under	construction	on	the	Monterey	peninsula.	Petitioners	claim	that	compliance	with the	alternate	milestones	would	still	provide	for	cessation	of	Cal	Am's	unauthorized	diversions	from	the	Carmel	River	by	2021.	A	preliminary	report	on	feasibility concluded	that	the	expanded	Pure	Water	Monterey	project	could	provide	an	additional	2,250	acre-feet	of	water	per	year.	Cal	Am	believes	that	(i)	the	petition	is premature,	(ii)	the	expanded	Pure	Water	Monterey	project	is	not	yet	a	sufficiently	certain	or	reliable	water	supply	and,	even	if	construction	is	successfully	completed, would	provide	an	insufficient	quantity	of	water	to	allow	full	compliance	with	the	2009	Order,	and	(iii)	the	imposition	of	parallel	milestones	would	distract	from completion	of	the	Water	Supply	Project.	This	petition	remains	pending.

# Regional	Desalination	Project	Litigation

# Review	of	CPUC-Approved	Settlement	Agreement

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.

# Cal	Am's	Action	for	Damages	Following	RDP	Termination

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,	discussed	below,	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.	Trial	in	the consolidated	action	currently	remains	set	for	March	25,	2019	in	San	Francisco	County	Superior	Court.

# Monterey	Peninsula	Water	Supply	Project

# CPUC	Final	Approval	of	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	and	has	been	subject	to	extensive	administrative	review	by	the	CPUC	and	other	government agencies,	obtaining	necessary	permits,	and	intervention	from	other	parties.	In	September	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.

On	August	13,	2018,	the	CPUC	issued	its	proposed	decision	granting	Cal	Am's	request	for	a	CPCN	for	a	6.4	million	gallons	per	day	desalination	plant, certifying	the	final	Environmental	Impact	Report/Environmental	Impact	Statement	("EIR/EIS")	and	denying	all	other	outstanding	motions.	On	September	13,	2018,	the CPUC	unanimously	adopted	a	final	decision	(i)	finding	that	the	Water	Supply	Project	meets	the	CPUC's	requirements	for	a	CPCN,	and	(ii)	finding	that	(a)	the	issuance of	the	final	decision	should	not	be	delayed,	and	(b)	an	additional	procedural	phase	was	not	necessary	to	consider	alternative	projects.	The	CPUC's	decision	directs	Cal Am	to	enter	into	negotiations	regarding	expansion	of	the	GWR	Project	between	the	Monterey	Regional	Water	Pollution	Control	Agency	and	the	MPWMD	and	to indicate	whether	Cal	Am	plans	to	file	an	application	for	approval	of	an	agreement	to	purchase	additional	water	from	the	GWR	Project.	The	decision	notes,	however,	that the	CPUC	will	only	consider	such	an	application	if	the	Water	Supply	Project	is	delayed	such	that	Cal	Am	would	not	be	able	to	meet	the	December	31,	2021	deadline	to comply	with	the	2009	Order.	The	decision	accepts	Cal	Am's	estimates	of	future	water	demand	in	Monterey	and	concludes	that	the	Water	Supply	Project	is	the	best project	 to	address	 those	needs,	and	adopts	Cal	Am's	most	recent	cost	estimates.	The	decision	also	allows	Cal	Am	 to	earn	an	allowance	for	funds	used	during construction,	or	AFUDC,	at	a	rate	representative	of	its	actual	financing	costs.	The	final	decision	adopted	frameworks	as	to	cost	caps,	O&M	costs,	financing,	ratemaking and	contingency	matters.

In	addition,	the	CPUC	final	decision	imposes	numerous	reporting	and	filing	requirements	to	ensure	the	expenditures	for	the	Water	Supply	Project	are	reasonable, including	that	the	financing	is	the	lowest	cost	and	most	beneficial	for	ratepayers,	and	that	construction	is	progressing	in	a	timely	manner	and	within	the	authorized	cost caps.	The	reasonableness	of	Water	Supply	Project	costs	will	be	reviewed	in	the	first	general	rate	case	filed	by	Cal	Am	after	the	Water	Supply	Project	becomes operational.	Cal	Am	is	also	required	to	implement	mitigation	measures	to	avoid,	minimize	or	offset	significant	environmental	impacts	from	the	construction	and operation	of	the	Water	Supply	Project	and	comply	with	a	mitigation	monitoring	and	reporting	program,	a	reimbursement	agreement	for	CPUC	costs	associated	with	that program,	and	reporting	requirements	on	plant	operations	following	placement	of	the	Water	Supply	Project	in	service.	Consistent	with	that	decision,	on	December	31, 2018,	Cal	Am	sought	adjustments	to	certain	financing	and	ratemaking	provisions,	including	the	timing	and	amount	of	surcharge	recovery,	and	addressed	related implementation	issues.

On	October	19,	2018,	MCWD	and	the	City	of	Marina	filed	applications	for	rehearing	before	the	CPUC.	Cal	Am	filed	its	response	to	the	applications	for	rehearing on	November	5,	2018.	On	January	31,	2019,	the	CPUC	denied	these	applications	for	rehearing.

On	October	12,	2018,	MCWD	and	the	City	of	Marina	filed	petitions	for	writ	of	review	in	the	Supreme	Court	of	California	challenging	the	sufficiency	of	the	final EIR/EIS.	On	December	12,	2018,	the	Supreme	Court	of	California	denied	the	petitions	for	writ	of	review	without	prejudice	to	the	filing	of	renewed	submissions	upon completion	of	the	rehearing	proceedings	pending	before	the	CPUC.	The	City	of	Marina	and	MCWD	filed	their	renewed	petitions	for	writ	of	review	on	January	16,	2019 and	January	17,	2019,	respectively.

# Coastal	Development	Permit	Application

On	June	22,	2018,	Cal	Am	submitted	a	coastal	development	permit	application	to	the	City	of	Marina	for	those	project	components	of	the	Water	Supply	Project located	within	the	City	of	Marina's	coastal	zone.	Members	of	the	City's	Planning	Commission,	as	well	as	City	councilpersons,	have	publicly	expressed	opposition	to	the Water	Supply	Project.	On	August	9,	2018,	the	City	deemed	Cal	Am's	application	incomplete	pending	certification	and	submission	of	the	final	environmental	impact report,	and	stated	that	the	City	could	not	rule	on	the	permit	until	certification.	As	noted	above,	the	CPUC	certified	the	final	EIR/EIS	for	the	Water	Supply	Project	on September	13,	2018.	A	public	hearing	before	the	Planning	Commission	on	Cal	Am's	application	was	held	on	February	14,	2019,	and	the	Planning	Commission	voted	to direct	staff	to	prepare	findings	supporting	a	denial	of	the	application.	The	Planning	Commission	continued	the	hearing	until	March	7,	2019,	at	which	time	it	is	expected to	take	formal	action	on	the	application.

# Proposed	Zoning	Changes	at	Cemex	Site	for	Slant	Wells

On	August	30,	2018,	the	City	circulated	a	public	review	draft	of	proposed	amendments	to	its	local	coastal	program	and	zoning	ordinance,	and	placed	the	matter for	consideration	on	the	Planning	Commission's	agenda	for	its	September	13,	2018	meeting.	The	proposed	amendments	would	change	zoning	at	the	Cemex	site	to	open space	and	restrict	future	uses,	including	with	respect	to	Cal	Am's	planned	use	of	the	site	for	the	slant	wells	for	the	Water	Supply	Project.	Any	change	to	the	City's	local coastal	program	must	ultimately	be	approved	by	the	California	Coastal	Commission	(the	"Coastal	Commission").	Cal	Am,	Cemex	and	the	Coastal	Commission	each submitted	letters	opposing	the	proposed	amendments.	At	its	November	8,	2018	meeting,	the	Planning	Commission	adopted	a	resolution	recommending	that	the	Marina City	Council	consider	approving	the	amendments.

On	December	4,	2018,	the	Marina	City	Council	considered	the	proposed	amendments.	Cal	Am,	Cemex	and	the	Coastal	Commission	again	submitted	letters opposing	the	proposed	changes,	but	the	City	Council	unanimously	adopted	a	resolution	amending	its	local	coastal	plan	and	a	draft	amendment	to	its	zoning	ordinance. Changes	to	the	ordinance	require	a	second	reading	before	becoming	final,	which	occurred	at	the	City's	December	18,	2018	meeting.	The	changes	to	the	local	coastal plan	must	be	submitted	to	the	Coastal	Commission	for	approval	and	are	not	effective	until	such	approval	is	obtained.

# Test	Slant	Well	Permitting

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	Coastal	Commission	approved	coastal	development permits	for	the	test	slant	well,	enabling	Cal	Am	to	construct	and	operate	the	test	slant	well.	The	Coastal	Commission	has	approved	permit	amendments	to	allow	the	test slant	well	to	remain	and	place	and	be	maintained	until	February	28,	2020.	A	required	lease	obtained	from	the	California	State	Lands	Commission,	as	amended,	will expire	on	December	16,	2019.	Effective	February	28,	2018,	test	slant	well	pumping	ceased,	except	for	minimal	maintenance	pumping	activities,	in	accordance	with	Cal Am's	coastal	development	permits.

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	orders	issued	in	September	2016	and	October	2017,	the	court	denied	MCWD's	challenges.	On	January	12,	2018,	MCWD	filed	a	notice	of	appeal	of	the	court's judgment.	On	March	13,	2018,	Cal	Am	filed	a	motion	to	dismiss	MCWD's	appeal,	which	was	denied	on	June	25,	2018.	The	appeal	remains	pending.

In	July	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.

Based	on	all	of	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	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.

# West	Virginia	Elk	River	Freedom	Industries	Chemical	Spill

See	Note	16—Commitments	and	Contingencies—Contingencies—West	Virginia	Elk	River	Freedom	Industries	Chemical	Spill	in	the	Notes	to	Consolidated Financial	Statements	for	information	regarding	the	final	court	approval	of	the	global	settlement	with	respect	to	the	January	2014	Freedom	Industries,	Inc.	chemical	spill, which	is	incorporated	herein	by	reference.

In	April	2017,	the	Lincoln	County	(West	Virginia)	Commission	(the	"LCC")	filed	a	complaint	in	Lincoln	County	state	court	against	West	Virginia-American Water	Company	("WVAWC")	and	certain	other	defendants	not	affiliated	with	the	Company,	which	in	June	2017	was	transferred	to	the	West	Virginia	Mass	Litigation Panel,	alleging	that	the	Freedom	Industries	chemical	spill	caused	a	public	nuisance	in	Lincoln	County	under	an	ordinance	enacted	by	the	LCC	in	March	2017,	more	than three	years	after	the	Freedom	Industries	chemical	spill	occurred.	The	complaint	sought	an	injunction	against	WVAWC	that	would	have	required	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	July	31,	2018,	WVAWC	filed	a	motion	to	dismiss	the	LCC's	complaint.	On	December	12,	2018,	the Mass	Litigation	Panel	granted	WVAWC's	motion	to	dismiss	on	several	grounds,	including	being	barred	by	the	applicable	statute	of	limitations,	failure	to	allege	a nuisance	under	applicable	law,	lack	of	standing,	improper	retroactive	application	of	the	nuisance	ordinance	and	violation	of	WVAWC's	due	process.	The	LCC	declined to	appeal	this	ruling.

# 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.

In	October	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	asserted	that	the	Public	Service	Commission	of	West	Virginia,	and	not	the	court,	has	primary	jurisdiction	over	allegations	involving	violations	of the	applicable	tariff,	the	public	utility	code	and	related	rules.	On	May	30,	2018,	the	court,	at	a	hearing,	denied	WVAWC's	motion	to	apply	the	primary	jurisdiction doctrine,	and	on	October	11,	2018,	the	court	issued	a	written	order	to	that	effect.	The	court	has	not	yet	issued	a	written	order	on	WVAWC's	motion	to	dismiss	plaintiffs' tort	claims.	The	court	has	requested	the	parties	submit	a	scheduling	order	with	a	trial	date	of	August	26,	2019,	and	WVAWC	has	sought	to	prevent	further	discovery while	its	motion	to	dismiss	is	pending.

The	Company	and	WVAWC	believe	that	WVAWC	has	valid,	meritorious	defenses	to	the	claims	raised	in	this	class	action	complaint	and	WVAWC	will	continue to	vigorously	defend	itself	against	these	allegations.

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

In	April	2017,	AWE,	 the	parent	entity	of	 the	Company's	Contract	Services	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	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.

In	October	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	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."	As	of	February	14,	2019,	there	were 180,751,697	shares	of	common	stock	outstanding	held	by	approximately	2,619	record	holders.	Holders	of	our	common	stock	are	entitled	to	receive	dividends	when	they are	declared	by	our	Board	of	Directors.	See	Note	9—Shareholders'	Equity	in	the	Notes	to	Consolidated	Financial	Statements	for	additional	information	regarding	our dividends.

In	February	2015,	our	Board	of	Directors	authorized	an	anti-dilutive	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	stock	repurchase	plans	with	a	third-party	broker,	which	allows	us	to repurchase	shares	of	our	common	stock	at	times	when	we	otherwise	might	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	stock	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,	 2018,	 we	 repurchased	 an aggregate	 of	4,510,000	 shares	 of	 our	 common	 stock	 under	 the	 program,	 including	560,000	 shares	 repurchased	 during	 the	 first	 quarter	 of	2018.	 There	 were	 no repurchases	of	common	stock	in	the	last	three	quarters	of	2018.

# ITEM	6. SELECTED	FINANCIAL	DATA

| (In	millions,	except	per	share	data) | 2018 | 2017 | 2016 | 2015 | 2014 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Statement\tof\tOperations\tdata: |  |  |  |  |  |
| Operating\trevenues | $3,440 | $3,357 | $3,302 | $3,159 | $3,011 |
| Net\tincome\tattributable\tto\tcommon\tshareholders\t(a) | 567 | 426 | 468 | 476 | 430 |
| Net\tincome\tattributable\tto\tcommon\tshareholders\tper\tbasic\ncommon\tshare\t(a) | $3.16 | $2.39 | $2.63 | $2.66 | $2.40 |
| Net\tincome\tattributable\tto\tcommon\tshareholders\tper\ndiluted\tcommon\tshare\t(a) | 3.15 | 2.38 | 2.62 | 2.64 | 2.39 |
| Balance\tSheet\tdata: |  |  |  |  |  |
| Total\tassets\t(b)\t(c) | $21,223 | $19,482 | $18,482 | $17,241 | $16,038 |
| Long-term\tdebt\tand\tredeemable\tpreferred\tstock\tat\nredemption\tvalue\t(b) | 7,576 | 6,498 | 5,759 | 5,874 | 5,442 |
| Other\tdata: |  |  |  |  |  |
| Cash\tdividends\tdeclared\tper\tcommon\tshare | $1.82 | $1.66 | $1.50 | $1.36 | $1.24 |
| Net\tcash\tprovided\tby\toperating\tactivities\t(d)\t(e) | 1,386 | 1,449 | 1,289 | 1,195 | 1,122 |
| Net\tcash\tused\tin\tinvesting\tactivities\t(e) | (2,036) | (1,672) | (1,590) | (1,459) | (1,029) |
| Net\tcash\tprovided\tby\t(used\tin)\tfinancing\tactivities\t(d)\t(e) | 726 | 207 | 328 | 290 | (104) |
| Capital\texpenditures\tincluded\tin\tnet\tcash\tused\tin\ninvesting\tactivities | (1,586) | (1,434) | (1,311) | (1,160) | (956) |

(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	Net	income	attributable	to	common	shareholders	in	the	table	above,	for	the	year	ended	December	31,	2014.

(b) The	information	for	the	year	ended	December	31,	2014,	has	been	revised	to	reflect	the	retrospective	application	of	Accounting	Standards	Update	2015-15, Presentation	and	Subsequent Measurement	of	Debt	Issuance	Costs	Associated	with	Line-of-Credit	Arrangements,	which	was	adopted	by	the	Company	as	of	December	31,	2015.

(c) The	information	for	the	year	ended	December	31,	2014,	has	been	revised	to	reflect	the	retrospective	application	of	Accounting	Standards	Update	2015-17, 	Balance	Sheet	Classification	of Deferred	Taxes,	which	was	adopted	by	the	Company	as	of	December	31,	2015.

(d) The	information	for	the	years	ended	December	31,	2016,	2015	and	2014,	has	been	revised	to	reflect	the	retrospective	application	of	Accounting	Standards	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	years	ended	December	31,	2016,	2015	and	2014,	has	been	revised	to	reflect	the	retrospective	application	of	Accounting	Standards	Update	2016-18, 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	7,100	professionals	who	provide	drinking	water,	wastewater	and	other	related	services	to	more than	14	million	 people	 in	46	states	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	approximately	1,600	communities	in	16	states	in	the	United	States,	with	approximately	3.4	million	active	customers	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.	We	also	operate market-based	businesses	which	provide	a	broad	range	of	related	and	complementary	water,	wastewater	and	other	services	 to	residential	and	smaller	commercial customers,	the	U.S.	government	on	military	installations	and	shale	natural	gas	exploration	and	production	companies,	as	well	as	municipalities,	utilities	and	industrial customers,	collectively	presented	as	our	Market-Based	Businesses.	See	Item	1—Business	for	additional	information.

# Financial	Results

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

|  | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Diluted\tearnings\tper\tshare\t(GAAP): |  |  |  |
| Net\tincome\tattributable\tto\tcommon\tshareholders | $3.15 | $2.38 | $2.62 |
| Adjustments: |  |  |  |
| Gain\ton\tsale\tof\tContract\tServices\tGroup\tcontracts | (0.08) | — | — |
| Income\ttax\timpact | 0.02 | — | — |
| Net\tadjustment | (0.06) | — | — |
| Keystone\timpairment\tcharge | 0.31 | — | — |
| Income\ttax\timpact | (0.08) | — | — |
| Net\tloss\tattributable\tto\tnoncontrolling\tinterest | (0.01) | — | — |
| Net\tadjustment | 0.22 | — | — |
| Freedom\tIndustries\tsettlement\tand\tinsurance\trecoveries | (0.11) | (0.12) | 0.36 |
| Income\ttax\timpact | 0.03 | 0.05 | (0.14) |
| Net\tadjustment | (0.08) | (0.07) | 0.22 |
| Early\textinguishment\tof\tdebt\tat\tthe\tparent\tcompany | — | 0.03 | — |
| Income\ttax\timpact | — | (0.01) | — |
| Net\tadjustment | — | 0.02 | — |
| Impact\tof\tre-measurement\tfrom\tthe\tTCJA | 0.07 | 0.70 | — |
| Total\tnet\tadjustments | 0.15 | 0.65 | 0.22 |
| Adjusted\tdiluted\tearnings\tper\tshare\t(non-GAAP) | $3.30 | $3.03 | $2.84 |

For	the	year	ended	December	31,	2018,	diluted	earnings	per	share	(GAAP)	were	$3.15,	an	increase	of	$0.77	per	diluted	share,	or	32.4%	compared	to	the	prior year,	which	includes	the	net	adjustments	presented	in	the	table	above	and	discussed	in	greater	detail	in	the	"Adjustments	to	GAAP"	section	below.

Excluding	the	net	adjustments	presented	in	the	table	above,	adjusted	diluted	earnings	per	share	(non-GAAP)	were	$3.30	for	the	year	ended	December	31,	2018,	an increase	of	$0.27	per	diluted	share,	or	8.9%	compared	to	the	prior	year.

These	results	were	driven	by	continued	growth	in	our	Regulated	Businesses	from	infrastructure	investment,	acquisitions	and	organic	growth,	combined	with strong	results	in	our	Market-Based	Businesses,	primarily	in	 our	Homeowner	Services	Group	with	 the	mid-year	acquisition	of	Pivotal.	These	increases	were	partially offset	by	higher	O&M	and	depreciation	expenses	from	the	growth	of	the	business	and	a	lower	tax	shield	on	interest	expense	at	the	parent	company	resulting	from	the TCJA.

For	the	year	ended	December	31,	2017,	diluted	earnings	per	share	(GAAP)	were	$2.38	per	diluted	share,	a	decrease	of	$0.24	per	diluted	share,	or	9.2%	compared to	the	prior	year,	which	includes	the	net	adjustments	presented	in	the	table	above	and	discussed	in	greater	detail	in	the	"Adjustments	to	GAAP"	section	below.

These	results	were	driven	by	continued	growth	in	our	Regulated	Businesses	from	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 our	Regulated	Businesses	and	lower	capital	upgrades	in	our	Military	Services	Group.

# Adjustments	to	GAAP

Adjusted	diluted	earnings	per	share	represents	a	non-GAAP	financial	measure	and	is	calculated	as	GAAP	diluted	earnings	per	share,	excluding	the	impact	of	one or	more	of	the	following	events:	(i)	a	gain	in	the	third	quarter	of	2018	on	the	sale	of	the	majority	of	our	Contract	Services	Group's	O&M	contracts;	(ii)	a	goodwill	and intangible	impairment	charge	in	the	third	quarter	of	2018	resulting	from	narrowing	the	scope	of	the	Keystone	business;	(iii)	insurance	settlements	received	in	the	third quarter	of	2017	and	the	second	quarter	of	2018	related	to	the	Freedom	Industries	chemical	spill	in	West	Virginia;	(iv)	non-cash	re-measurement	charges	recorded	in	the fourth	quarters	of	2017	and	2018	resulting	from	the	impact	of	the	change	in	the	federal	corporate	income	tax	rate	on	the	Company's	deferred	income	taxes	from	the enactment	of	the	TCJA;	(v)	an	early	extinguishment	of	debt	charge	at	the	parent	company	in	the	third	quarter	of	2017;	and	(vi)	a	charge	in	the	fourth	quarter	of	2016 related	to	the	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	and	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.

# Achievements	and	Strategic	Focus

We	believe	our	success	has,	and	will	continue	to	be,	guided	by	the	following	strategic	philosophies:

•Purpose	Driven—"We	keep	life	flowing"	is	our	trademark	purpose,	for	our	customers	and	our	communities,	because	we	provide	the	most	precious	of life's	critical	needs.

•People	 Powered—A company is its people.	 People	 who have a safe place to	 work, both physically and emotionally.

•Customer	 Obsessed—Without	 customers,	 we	 don't	 exist.	 They	 are	 why	 we	 are here.

•Trusted	Source	of	Everything	Water—	Best	in	class,	ensuring	we	have	safe,	reliable	and	affordable water.

Our	strategy,	which	is	driven	by	our	vision	and	values,	will	continue	to	be	anchored	on	our	five	central	themes:

•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,	improving	both	our	Occupational	Safety	and	Health	Administration Recordable	Incident	Rate	("ORIR")	and	Days	Away,	Restricted	or	Transferred	("DART")	injury	severity	rate;

•continued	to	strengthen	our	safety	culture	as	measured	by	employee	responses	to	safety-related	questions	in	the	Company's	culture	survey, and	feedback	from	our	in-person,	labor-management	conferences;

•initiated	a	frontline	safety	leadership	strategic	action	group,	developed	to	provide	recommendations	to	improve	safety	leadership	training, tools,	and	engagement;	and

•championed,	through	our	safety	council	which	consists	of	management	and	labor	employees,	our	annual	Safety	Day,	the	CEO	Safety	Award and	other	recognition	programs.

•Looking forward, we will:

•strive	 toward zero	 workplace incidents and eliminate hazards to reduce the potential for incidents;

•continue	our	focus	on	"near	miss	reporting"	and	promoting	continuous	learning	and	corrective	action	regarding	potential	safety	hazards before	incidents	can	occur;

•improve toward the achievement of our	 ORIR and	 DART targets;

•continue	our	focus	on	requiring	contractors	that	perform	work	for	the	Company	be	held	to	the	same	safety	standards	as	our	employees; and

•continue	to	promote	the	Company's	employee	Stop	Work	Authority,	where	every	employee	is	empowered	to	stop	any	work	he	or	she perceives	as	unsafe,	and	to	initiate	a	review	to	resolve	concerns	and	to	eliminate	safety	hazards.

•Customer—Our	customers	are	at	the	center	of	everything	we	plan	and	do.	Customer	input,	their	ideas	and	experiences	will	drive	how	we	improve	our processes	and	systems.	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	a	customer	satisfaction	rating	in	the	top	quartile	among	our	industry	peer

group;

•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 investments	 while implementing	 operational	 efficiency improvements to	 keep	 customer	 bills affordable.

•aim	to	achieve	customer	satisfaction	and	service	quality	ratings	in	the	top	quartile	of	service	industries	beyond	the	water	and	wastewater industry.	We	are	implementing	a	multi-year	plan	to	enhance	technology	and	innovation	in	our	customer	experience	through	(i)	leveraging secure	artificial	intelligence	to	better	serve	our	customers,	(ii)	using	online	customer	communities	for	immediate	input	and	reactions	before implementing	programs,	and	(iii)	mapping	our	most	frequent	customer	interactions	and	re-working	our	internal	processes	to	how	customers want	services;	and

•aim	 for	 top	 quartile ratings for	 drinking	 water	 quality	 and	 being	 an industry leader in system resiliency	 and	 environmental stewardship.

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

•continued	to	demonstrate	our	commitment	to	employees	by	expanding	training	and	development	across	the	Company,	with	virtually	all employees	completing	at	least	20	hours	of	formal	training	during	2018;

•expanded	the	executive	leadership	team	to	include	key	operational	leaders	across	the	Company	to	enable	a	broader	operational	focus	and stronger	communication	throughout	the	organization;

•reached	 a	 new,	five-year	 national	 benefits	 agreement	 with	 approximately	3,200	 of	 our	 union-represented	 employees,	 including	 their participation	 in	 the	Company's	annual	performance	plan,	which	will	align	Company	goals	across	all	employees,	as	well	as	providing additional	medical	plan	options	for	our	employees	and	their	families;	and

•simplified	 our	 performance	 management	 process to foster	 meaningful feedback conversations and ensure feedback is the focus	 of performance	management.

•implement	a	strategic	workforce	plan	which	will	address	the	changing	requirements	of	our	business	and	our	jobs,	largely	driven	by	our customer's	expectations	and	new	technologies;

•continue	to	improve	inclusion	and	diversity	of	our	overall	employee	population,	ensuring	our	workforce	is	reflective	of	the	customers	and communities	we	serve;

•implement	a	new	and	more	frequent	culture	survey	focused	on	employee	insights	into	how	American	Water	can	become	a	better	company	to work	for,	and	to	implement	recommendations	with	the	goal	of	increasing	employees'	likelihood	to	recommend	American	Water	as	a	place	to work;	and

•leverage	technology	to	ensure	our	employees	have	the	tools	and	resources	they	need	to	keep	the	customer	at	the	center	of	everything	that	we plan	and	do.

•Growth—We	expect	to	continue	to	grow	our	businesses,	with	the	majority	of	our	growth	to	be	achieved	in	our	Regulated	Businesses	through	(i)	continued capital	investment	in	our	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.

•I n	2018,	 we invested	$2.0 billion in our	Regulated Businesses and	Market-Based Businesses.

# Regulated	Businesses	Growth

•$1.5 billion capital investment in our	Regulated	 Businesses, the	 majority for infrastructure improvements and replacements.

•$33	 million to fund acquisitions in our	Regulated	 Businesses,	 which added approximately	14,000	 water and	 wastewater customers.

•Entered	 into agreements as	 of January	 31,	 2019 for	 pending acquisitions to add approximately	61,000 customers including:

•On	May	30,	2018,	our	Pennsylvania	subsidiary	entered	into	an	agreement	to	acquire	the	wastewater	assets	of	Exeter	Township, Pennsylvania,	for	approximately	$96	million.	This	system	currently	serves	approximately	9,000	customers.	We	are	expecting	to close	this	acquisition	during	the	third	quarter	of	2019,	pending	regulatory	approval.

•On	April	13,	2018,	our	Illinois	subsidiary	entered	into	an	agreement	to	acquire	the	City	of	Alton,	Illinois'	regional	wastewater system	 for	 approximately	$54	 million.	 This	 system	 currently	 represents	 approximately	23,000	 customers,	 comprised	 of approximately	11,000	customers	in	Alton	and	an	additional	12,000	customers	under	bulk	contracts	in	the	nearby	communities	of Bethalto	and	Godfrey.	In	connection	with	the	execution	of	the	purchase	agreement,	our	Illinois	subsidiary	made	a	$5	million	non- escrowed	deposit	to	the	seller	during	January	2019.	We	are	expecting	to	close	this	acquisition	during	the	second	quarter	of	2019, pending	regulatory	approval.

# Market-Based	Businesses	Growth	and	Optimization

•We	invested	$365	million	to	acquire	Pivotal,	a	leading	provider	of	home	warranty	protection	products	and	services	for	gas,	electric	and	other service	lines	inside	and	around	a	home,	heating	and	cooling	systems,	and	home	appliances.	Pivotal,	which	joins	our	Homeowner	Services Group,	operates	in	18	states	with	approximately	1.2	million	customer	contracts	at	the	time	of	acquisition.

•Our	Military	Services	Group	was	awarded	a	contract	for	ownership,	operation	and	maintenance	of	the	water	and	wastewater	systems	at	Fort Leonard	Wood	in	Missouri,	effective	October	1,	2018.	Designated	as	the	U.S.	Army's	Maneuver	Support	Center	of	Excellence	and	the	home to	three	U.S.	Army	schools,	Fort	Leonard	Wood	directly	and	indirectly	supports	36,400	jobs	across	the	state	of	Missouri.	The	contract	award includes	estimated	revenues	of	approximately	$591	million	over	a	50-year	period,	subject	to	an	annual	economic	price	adjustment.

•On	July	5,	2018,	we	entered	into	an	agreement	for	the	sale	of	22	of	our	Contract	Services	Group's	33	O&M	contracts	to	subsidiaries	of	Veolia Environnement	S.A.	for	$27	million.	We	closed	on	the	sale	of	20	of	the	22	contracts	during	the	third	quarter	of	2018,	and	expect	to	close	on the	sale	of	the	remaining	two	contracts,	subject	to	customer	consents,	in	the	first	half	of	2019.	We	will	retain	four	of	our	O&M	contracts	due to	their	proximity	to	our	existing	service	areas,	and	expect	the	majority	of	our	remaining	O&M	contracts	to	be	sold	to	other	parties,	or	expire within	the	next	year.

•As	a	result	of	operational	and	financial	challenges	encountered	in	the	construction	business	of	Keystone,	the	Company	decided	to	exit	this business	line	during	the	third	quarter	of	2018.	This	action,	along	with	the	exit	of	the	water	trucking	business	line	during	the	first	half	of	2018, narrowed	the	scope	of	the	Keystone	business	going	forward,	focusing	solely	on	providing	water	transfer	services.	These	factors	prompted	the impairment	testing	of	Keystone's	goodwill	and	customer	relationship	intangible	asset	at	September	30,	2018,	resulting	in	a	non-cash,	after- tax,	impairment	charge	of	$40	million,	net	of	noncontrolling	interest.	See	Note	8—Goodwill	and	Other	Intangible	Assets	in	the	Notes	to	the Consolidated	Financial	Statements	for	additional	information.

•Looking	forward,	we	expect	to	invest	between	$8.0	billion	to	$8.6	billion	from	2019	to	2023,	including	a	range	of	$1.7	billion to	$1.8	billion	in 2019.	Our	expected	future	investment	includes:

•capital	investment	for	infrastructure	improvements	in	our	Regulated	Businesses	of	$7.3	billion	over	the	next	five	years,	including	$1.6	billion expected	in	2019;

•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	2019;	and

•strategic	 capital	 investments	 of	 approximately	$100	million	 over	 the	 next	 five	 years,	 which	 consists	 primarily	 of intellectual	 property development	and	strategic	growth	opportunities	in	our	Market-Based	Businesses.

The	following	chart	depicts	the	estimated	allocation	of	our	expected	capital	investment	for	infrastructure	improvements	in	our	Regulated	Businesses over	the	next	five	years,	by	purpose:

•Operational	Excellence—We	continue	to	strive	for	industry-leading	operational	efficiency,	driven	largely	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	35.6%	for	the	year	ended	December	31, 2018,	compared	 to	35.3%	 and	36.6%	for	the	years	ended	December	31,	2017	 and	2016,	respectively.	The	unfavorability	in	our	adjusted O&M	efficiency	ratio	in	2018,	when	compared	to	2017,	was	primarily	due	to	a	settlement	agreement	in	our	New	York	subsidiary	and	higher expenses	incurred	from	the	colder	weather	experienced	during	the	first	quarter	of	2018.	The	improvement	in	our	adjusted	O&M	efficiency ratio	in	2017,	when	compared	to	2016,	was	attributable	to	both	an	increase	in	operating	revenues	and	a	decrease	in	O&M	expenses;

•we	worked	to	decrease	costs	and	deploy	capital	efficiently,	including	using	trenchless	technologies	for	pipeline	rehabilitation	and	leveraging our	buying	power	and	strategic	sourcing	to	drive	cost	savings;

•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	employees	work	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;	aiding	us	in	serving	our	customers	with	greater	ease,	making	us	safer	and	helping	us	operate more	efficiently;	and

Our	adjusted	O&M	efficiency	ratio	is	defined	as	the	operation	and	maintenance	expenses	from	our	Regulated	Businesses,	divided	by	the	pro	forma operating	revenues	from	our	Regulated	Businesses,	where	both	operation	and	maintenance	expenses	and	pro	forma	operating	revenues	were	adjusted	to eliminate	purchased	water	expense.	Additionally,	from	operation	and	maintenance	expenses,	we	excluded	the	allocable	portion	of	non-operation	and maintenance	support	services	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.

In	addition	to	the	adjustments	discussed	above,	for	period-to-period	comparability	purposes,	we	have	presented	the	estimated	impact	of	the	TCJA	on operating	revenues	for	our	Regulated	Businesses	on	a	pro	forma	basis	for	all	periods	presented	prior	to	January	1,	2018,	as	if	the	lower	federal	corporate income	tax	rate	was	in	effect	for	these	periods	(see	Note	7—Regulatory	Assets	and	Liabilities	in	the	Notes	to	Consolidated	Financial	Statements	for additional	information).	We	also	made	the	following	adjustments	to	our	O&M	efficiency	ratio:	(i)	excluded	from	operation	and	maintenance	expenses,	the impact	of	certain	Freedom	Industries	chemical	spill	settlement	activities	recognized	 in	2016,	2017	and	2018;	and	(ii)	excluded	from	operation	and maintenance	expenses,	the	impact	of	the	Company's	January	1,	2018	adoption	of	Accounting	Standards	Update	2017-07,	Improving	the	Presentation	of Net	 Periodic	 Pension	 Cost	 and	 Net	 Periodic	 Post-Retirement	 Benefit	 Cost ("ASU	 2017-07")	 for	 2016,	 2017	 and	 2018.	 See	Note	 2—Significant Accounting	Policies	in	the	Notes	to	the	Consolidated	Financial	Statements	for	additional	information.	We	excluded	the	items	discussed	above	from	the calculation	as	we	believe	such	items	are	not	reflective	of	management's	ability	to	increase	the	efficiency	of	our	Regulated	Businesses.

We	evaluate	our	operating	performance	using	this	ratio	because	we	believe	it	directly	measures	improvement	in	the	efficiency	of	our	Regulated Businesses.	This	information	is	intended	to	enhance	an	investor's	overall	understanding	of	our	operating	performance.	Our	adjusted	O&M	efficiency	ratio is	not	an	accounting	measure	that	is	based	on	GAAP,	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	2023,	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) | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Total\toperation\tand\tmaintenance\texpenses\t(a) | $1,479 | $1,369 | $1,499 |
| Less: |  |  |  |
| Operation\tand\tmaintenance\texpenses—Market-Based\tBusinesses | 362 | 337 | 372 |
| Operation\tand\tmaintenance\texpenses—Other\t(a) | (42) | (44) | (38) |
| Total\toperation\tand\tmaintenance\texpenses—Regulated\tBusinesses\t(a) | 1,159 | 1,076 | 1,165 |
| Less: |  |  |  |
| Regulated\tpurchased\twater\texpenses | 133 | 128 | 122 |
| Allocation\tof\tnon-operation\tand\tmaintenance\texpenses | 31 | 29 | 30 |
| Impact\tof\tFreedom\tIndustries\tsettlement\tactivities\t(b) | (20) | (22) | 65 |
| Adjusted\toperation\tand\tmaintenance\texpenses—Regulated\tBusinesses\t(i) | $1,015 | $941 | $948 |
| Total\toperating\trevenues | $3,440 | $3,357 | $3,302 |
| Less: |  |  |  |
| Pro\tforma\tadjustment\tfor\timpact\tof\tthe\tTCJA\t(c) | — | 166 | 161 |
| Total\tpro\tforma\toperating\trevenues | 3,440 | 3,191 | 3,141 |
| Less: |  |  |  |
| Operating\trevenues—Market-Based\tBusinesses | 476 | 422 | 451 |
| Operating\trevenues—Other | (20) | (23) | (20) |
| Total\toperating\trevenues—Regulated\tBusinesses | 2,984 | 2,792 | 2,710 |
| Less: |  |  |  |
| Regulated\tpurchased\twater\trevenues\t(d) | 133 | 128 | 122 |
| Adjusted\toperating\trevenues—Regulated\tBusinesses\t(ii) | $2,851 | $2,664 | $2,588 |
| Adjusted\tO&M\tefficiency\tratio—Regulated\tBusinesses\t(i)\t/\t(ii) | 35.6% | 35.3% | 36.6% |

NOTE The	adjusted	O&M	efficiency	ratios	previously	reported	for	the	years	ended	December	31,	2017	and	2016,	were	33.8%	and	34.9%,	respectively,	which	did	not	include	the	adjustments	for	the items	discussed	in	footnotes	(a)	and	(c)	below.

(a) Includes	the	impact	of	the	Company's	adoption	of	ASU	2017-07	on	January	1,	2018.	See	 Note	2—Significant	Accounting	Policies	in	the	Notes	to	Consolidated	Financial	Statements	for additional	information.

(b) Includes	the	impact	of	the	binding	global	agreement	in	principle	to	settle	claims	in	2016,	and	settlements	in	2017	and	2018	with	two	of	our	general	liability	insurance	carriers	in	connection with	the	Freedom	Industries	chemical	spill.

(c) Includes	the	estimated	impact	of	the	TCJA	on	operating	revenues	for	our	Regulated	Businesses	for	all	periods	presented	prior	to	January	1,	2018,	as	if	the	lower	federal	corporate	income	tax rate	was	in	effect	for	these	periods.	See	Note	7—Regulatory	Assets	and	Liabilities 	in	the	Notes	to	Consolidated	Financial	Statements	for	additional	information.

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

# Regulatory	Matters

# General	Rate	Cases

The	following	table	provides	annualized	incremental	revenues	resulting	from	general	rate	case	authorizations	that	became	effective	during	2016 through	2018, assuming	a	constant	water	sales	volume:

| (In	millions) | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| General\trate\tcases\tby\tstate: |  |  |  |
| New\tJersey\t(a) | $40 | $— | $— |
| Missouri\t(effective\tMay\t28,\t2018,\tJuly\t22,\t2016\tand\tJuly\t20,\t2016) | 33 | — | 5 |
| New\tYork\t(effective\tApril\t1,\t2018\tand\tJune\t1,\t2017) | 5 | 4 | — |
| Pennsylvania\t(effective\tJanuary\t1,\t2018) | 62 | — | — |
| California\t(b) | 10 | 5 | 2 |
| Virginia\t(c) | — | 5 | — |
| Iowa\t(effective\tMarch\t27,\t2017) | — | 4 | — |
| Illinois\t(effective\tJanuary\t1,\t2017) | — | 25 | — |
| Kentucky\t(effective\tAugust\t28,\t2016) | — | — | 7 |
| West\tVirginia\t(effective\tFebruary\t25,\t2016) | — | — | 18 |
| Indiana\t(effective\tJanuary\t29,\t2016) | — | — | 2 |
| Total\tgeneral\trate\tcase\tauthorizations | $150 | $43 | $34 |

(a) The	effective	date	was	June	15,	2018.	As	part	of	the	resolution	of	the	general	rate	case,	our	New	Jersey	customers	will	receive	refunds	for	the	amount	of	provisional	rates	implemented	as	of June	15,	2018	and	collected	that	exceeded	the	final	rate	increase,	plus	interest.

(b) On	December	13,	2018,	a	settlement	in	our	California	subsidiary's	general	rate	case	filing	was	approved,	authorizing	rates	effective	January	1,	2018.	In	2017,	step	rates	were	effective	January 13	through	February	2.	In	2016,	step	rates	were	effective	January	1.

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

On	February	8,	2019,	a	settlement	in	our	West	Virginia	subsidiary's	general	rate	case	filing	was	approved	authorizing	additional	annualized	revenues	of	$19 million,	effective	February	25,	2019,	exclusive	of	infrastructure	replacement	surcharges	effective	in	2017	and	2018.

On	February	5,	2019,	a	settlement	in	our	Maryland	subsidiary's	general	rate	case	filing	was	approved	authorizing	additional	annualized	revenues	of	$1	million, effective	February	5,	2019.

# Pending	General	Rate	Case	Filings

On	November	28,	2018,	our	Kentucky	subsidiary	filed	a	general	rate	case	requesting	$20	million	in	additional	annualized	revenues.

On	November	2,	2018,	our	Virginia	subsidiary	filed	a	general	rate	case	requesting	$5	million	in	additional	annualized	revenues.

On	September	14,	2018,	our	Indiana	subsidiary	filed	a	general	rate	case	requesting	$18	million	and	$21	million	in	additional	annualized	revenues	in	2019	and 2020,	respectively.

# Infrastructure	Surcharges

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 annualized	incremental	revenues	resulting	from	infrastructure	surcharge	authorizations	that	became	effective	during	2016	through	2018,	assuming	a	constant	water	sales volume:

| (In	millions) | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Infrastructure\tsurcharges\tby\tstate: |  |  |  |
| Missouri\t(effective\tDecember\t15,\t2018\tand\tDecember\t15,\t2017) | $6 | $6 | $— |
| Tennessee\t(effective\tApril\t10,\t2018,\tMarch\t14,\t2017\tand\tMarch\t15,\t2016) | 1 | 2 | 2 |
| Indiana\t(effective\tMarch\t14,\t2018,\tMarch\t22,\t2017\tand\tMay\t4,\t2016) | 7 | 8 | 3 |
| Virginia\t(effective\tMarch\t1,\t2018) | 1 | — | — |
| Illinois\t(a) | 3 | — | 7 |
| West\tVirginia\t(effective\tJanuary\t1,\t2018\tand\tJanuary\t1,\t2017) | 3 | 2 | — |
| New\tJersey\t(b) | — | 14 | 19 |
| Pennsylvania\t(c) | — | 1 | 28 |
| Total\tinfrastructure\tsurcharge\tauthorizations | $21 | $33 | $59 |

(a) In	2018,	the	effective	date	was	January	1.	In	2016,	$1	million	was	effective	January	1	and	$6	million	was	effective	August	1.

(b) In	2017,	$10	million	was	effective	June	1	and	$4	million	was	effective	December	10.	In	2016,	$9	million	was	effective	June	1	and	$10	million	was	effective	December	1.

On	February	8,	2019,	our	West	Virginia	subsidiary	received	authorization	for	additional	annualized	revenues	of	$2	million	from	an	infrastructure	surcharge filing,	effective	January	1,	2019.

On	December	20,	2018,	our	Illinois	subsidiary	filed	for	an	infrastructure	surcharge	requesting	$8	million	in	additional	annualized	revenues,	which	will	become effective	on	January	1,	2019.

# Pending	Infrastructure	Surcharge	Filings

On	November	16,	2018,	our	Tennessee	subsidiary	filed	for	an	infrastructure	surcharge	requesting	$2	million	in	additional	annualized	revenues.

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

# 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	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	benefit	our	regulated	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	during	the	fourth	quarter	of	2017.	During	2018,	we	continued	to	gather,	assess	and	evaluate	additional guidance	and	regulations	related	to	the	changes	related	to	the	TCJA.	As	a	result	of	this	process,	we	have	recorded	additional	adjustments	to	finalize	our	initial	2017 estimates.	See	Note	14—Income	Taxes	in	the	Notes	to	Consolidated	Financial	Statements	for	additional	information.

During	2018,	the	Company's	14	regulatory	jurisdictions	began	to	consider	the	impacts	of	the	TCJA.	The	Company	has	adjusted	customer	rates	to	reflect	the lower	income	tax	rate	in	10	states.	In	one	of	those	10	states,	a	portion	of	the	tax	savings	is	being	used	to	reduce	certain	regulatory	assets.	In	one	additional	state,	we	are using	the	tax	savings	to	offset	additional	capital	investment	and	to	reduce	a	regulatory	asset.	Proceedings	in	the	other	three	jurisdictions	remain	pending.	With	respect	to excess	accumulated	deferred	income	taxes,	regulators	in	the	eight	states	that	have	considered	the	issue	have	agreed	with	our	overall	timeline	of	passing	the	excess	back to	customers	beginning	no	earlier	than	2019,	when	the	Company	is	able	to	produce	the	normalization	schedule	using	the	average	rate	assumption	method.	In	one	of	those states,	we	will	use	the	amortization	of	the	excess	accumulated	deferred	income	taxes	to	offset	future	infrastructure	investments.

On	March	23,	2018,	President	Trump	signed	the	Consolidated	Appropriations	Act	of	2018	(the	"CAA").	The	CAA	corrects	and	clarifies	some	aspects	of	the TCJA	related	to	bonus	depreciation	eligibility.	Specifically,	property	that	was	acquired,	or	the	construction	began,	prior	to	September	27,	2017,	is	eligible	for	bonus depreciation.	This	clarification	allowed	the	Company	to	benefit	from	additional	bonus	depreciation	deductions	on	the	2017	tax	return,	and	as	a	result,	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	used,	and	expect	to	be	a	full year	cash	taxpayer	by	2020,	although	this	timing	could	be	impacted	by	any	significant	changes	in	our	future	results	of	operations	and	the	outcome	of	pending	regulatory proceedings	regarding	the	TCJA.

On	November	26,	2018,	the	U.S.	Department	of	the	Treasury	released	proposed	regulations	concerning	interest	expense	limitation	rules.	The	TCJA	revised	and broadened	the	existing	interest	expense	limitation	regulations.	The	Company	has	considered	all	the	rules	set	forth	in	the	proposed	regulation	including	allocated	interest expense	and	interest	income	based	on	the	relative	amounts	of	the	Company's	adjusted	basis	in	the	assets	used	in	its	excepted	and	non-excepted	trades	or	business,	or	our Regulated	Businesses	and	Market-Based	Businesses.	Based	on	our	interpretation	of	the	new	guidance,	the	Company	reasonably	believes	the	deductibility	of	its	interest expense	will	not	be	limited	under	the	new	regulations.

# Other	Tax	Matters

On	June	1,	2018,	the	State	of	Missouri	enacted	legislation	that	decreased	the	state	income	tax	rate	on	our	taxable	income	attributable	to	Missouri	from	6.25%	to 4.00%,	beginning	in	the	2020	tax	year.	As	a	result,	we	were	required	to	re-measure	our	cumulative	deferred	income	tax	balances	using	the	lower	state	income	tax	rate	in the	second	quarter	of	2018.	This	resulted	in	a	decrease	to	the	Company's	unitary	deferred	income	tax	liability	of	$12	million,	and	an	increase	to	a	regulatory	liability	of $13	million,	as	we	believe	it	is	probable	of	refund	in	future	rates.

On	May	30,	2018,	the	State	of	Iowa	enacted	legislation	that	decreased	the	state	income	tax	rate	on	our	taxable	income	attributable	to	Iowa	from	12.0%	to	9.8%, beginning	in	the	2021	tax	year.	The	deferred	income	tax	liability	for	our	Iowa	subsidiary	was	reduced	by	$1	million,	and	offset	by	a	regulatory	liability,	as	we	believe this	liability	is	probable	of	refund	in	future	rates.

On	April	13,	2018,	the	State	of	Kentucky	enacted	legislation	that	decreased	the	state	income	tax	rate	on	our	taxable	income	attributable	to	Kentucky	from	6%	to 5%,	beginning	in	the	2018	tax	year.	In	addition,	beginning	in	the	2019	tax	year,	a	consolidated	return,	including	all	affiliated	group	members,	will	be	required.	As	a result,	we	were	required	to	record	a	deferred	income	tax	liability	of	$7	million	for	our	Kentucky	unitary	filing	group,	and	the	existing	deferred	income	tax	liability related	to	our	Kentucky	subsidiary	was	reduced	by	$1	million,	offset	by	a	regulatory	liability,	as	we	believe	this	liability	is	probable	of	refund	in	future	rates.

The	Company	performed	its	annual	review	of	the	apportionment	rates	in	all	of	its	unitary	filing	jurisdictions	and	implemented	changes	to	reflect	considerations	for historical	results	and	future	business	outlooks	in	each	of	the	jurisdictions.	As	of	December	31,	2018,	we	recorded	a	non-cash,	cumulative	charge	to	earnings	of	$12 million,	resulting	from	the	legislative	changes	described	above	and	the	adjustments	made	through	various	state	income	tax	apportionment	rates.

On	July	1,	2018,	the	State	of	New	Jersey	enacted	legislation	that	increased	the	corporate	business	tax	rate	from	9.0%	to	11.5%	for	the	2018	and	2019	tax	years, and	to	10.5%	for	the	2020	and	2021	tax	years.	The	tax	rate	will	revert	back	to	9.0%	for	tax	year	2022	and	beyond.	Additionally,	the	new	legislation	states	that	for	the year	beginning	on	and	after	January	1,	2019,	a	unitary	group	will	be	required	to	file	a	combined	unitary	New	Jersey	tax	return.	The	legislation	allows	a	deduction	over	a 10-year	period,	commencing	five	years	after	the	enactment	of	unitary	combined	reporting,	if	the	combined	reporting	provisions	result	in	an	aggregate	increase	to	the	net deferred	income	tax	liability	or	an	aggregate	decrease	to	the	net	deferred	income	tax	asset.	Thus,	the	deferred	income	tax	liability	resulting	from	the	unitary	filing requirement	would	be	completely	offset	by	the	deferred	income	tax	asset	derived	from	this	deduction.	There	are	no	underlying	impacts	to	the	Company's	earnings	as	a result	of	the	new	filing	requirement.	On	October	4,	2018,	New	Jersey's	governor	signed	a	technical	correction	bill	into	law.	The	correction	bill	provides	an	exclusion	for water	and	wastewater	utility	companies	whose	rates	are	regulated	from	the	combined	reporting	requirement.	The	Company's	tax	credit	granted	by	the	State	of	New Jersey	will	not	be	impacted	by	the	law	changes	mentioned	above.

# Legislative	Updates

During	2018,	our	regulatory	jurisdictions	enacted	legislation	as	follows:

•House	File	2307	in	Iowa	and	House	Bill	1566	in	Maryland	allow	a	fair	market	value	methodology	to	be	included	in	rate	base	with	respect	to	prospective acquisitions.

•Senate	Enrolled	Act	362	in	Indiana,	which,	similar	to	the	Water	Quality	Accountability	Act	enacted	in	New	Jersey	in	2017,	sets	new	operational	standards and	requirements	for	water	and	wastewater	treatment	plants	in	areas	such	as	capital	asset	management,	cost-benefit	analysis	and	cybersecurity.

•Senate	Bill	705	in	Missouri	allows	the	Missouri	Public	Service	Commission	to	approve	a	revenue	stability	mechanism	("RSM")	for	water	utilities.	In	an effort	to	encourage	conservation,	a	RSM	adjusts	rates	periodically	to	ensure	that	a	utility's	revenue	will	be	sufficient	to	cover	its	costs,	and	customers	will not	overpay	for	service.

•Senate	Bill	592	in	Missouri	changes	the	public	vote	requirement	for	the	sale	of	a	municipal	water	or	wastewater	system	to	a	simple	majority	for	more	than 500	 small towns.	 Historically,	 only	 larger	 communities	 required	 a	 simple	 majority,	 while	 smaller	 communities	 needed	 a	 two-thirds	 majority.	 This legislation	increases	the	options	for	small	towns,	should	they	decide	to	address	their	water	and	sewer	challenges	through	an	asset	sale.

•Legislation	was	passed	in	Iowa	that	allows	private	water	utilities	to	use	a	future	test	year	approach	in	rate	cases,	decreasing	potential	regulatory	lag	and helping	to	spread	out	the	time	between	rate	cases.

•In	California,	Assembly	Bill	2179	changed	the	vote	required	to	allow	cities	to	sell	sewer	systems	to	a	simple	majority	as	compared	to	a	two-thirds majority,	and	Assembly	Bill	2339	allowed	certain	cities	to	sell	water	systems	without	an	election.

•Act	58	of	2018	in	Pennsylvania	allows	public	utilities	to	implement	alternative	rates	and	rate	mechanisms	in	rate	base	proceedings.	These	alternative	rates and	rate	mechanisms	include,	but	are	not	limited	to	the	following:	revenue	stability	mechanisms,	performance-based	rates,	formula	rates,	multi-year	rate plans,	or	a	combination	of	those	mechanisms	or	other	mechanisms.	Petitions	to	establish	alternative	rate	mechanisms	are	subject	to	PUC	review	and approval	and	can	only	be	filed	by	a	utility	in	a	rate	base	proceeding.

•On	October	17,	2018,	the	Pennsylvania	General	Assembly	passed	legislation	that	allows	an	investor-owned	water	utility	to	include	the	replacement	costs for	 customer-owned	 LSLs	 and	 customer-owned	 damaged	 wastewater	 laterals	 in	 rate	 base	 when	 replaced	 as	 part	 of	 a	 Pennsylvania	 Public	 Utility Commission	approved	program.	The	law	became	effective	December	23,	2018.	Prior	to	the	new	law,	our	Pennsylvania	subsidiary	sought	the	approval	of the	Pennsylvania	Public	Utility	Commission	 to	revise	 the	Company's	rules	 to	permit	 it	 to	replace	customer-owned	LSLs	and	 to	recover	associated costs.	Our	Pennsylvania	subsidiary's	proposed	replacement	of	customer-owned	LSL	program	is	being	reviewed	under	the	provisions	of	the	new	law.

•On	October	23,	2018,	President	Trump	signed	America's	Water	Infrastructure	Act	of	2018.	The	legislation	includes	policies	intended	to	improve	water and	wastewater	system	management	and	authorization	for	states	to	assess	options	for	consolidation	for	systems	that	do	not	comply	with	the	federal	Safe Drinking	Water	Act	and	its	rules	and	regulations.	The	legislation	increases	funding	to	water	system	funding	programs,	including	the	State	Revolving	Loan Fund	program	and	the	Water	Infrastructure	Finance	and	Innovation	Act.

# Consolidated	Results	of	Operations

The	following	table	provides	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	(Decrease) | Increase	(Decrease) | Increase	(Decrease) | Increase	(Decrease) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2018 | 2017 | 2016 | 2018\tvs.\t2017 | 2018\tvs.\t2017 | 2017\tvs.\t2016 |  |
| (Dollars\tin\tmillions) |  |  |  | $% | $% | $% |  |
| Operating\trevenues | $3,440 | $3,357 | $3,302 | $83 | 2.5 | $55 | 1.7 |
| Operating\texpenses: |  |  |  |  |  |  |  |
| Operation\tand\tmaintenance | 1,479 | 1,369 | 1,499 | 110 | 8.0 | (130) | (8.7) |
| Depreciation\tand\tamortization | 545 | 492 | 470 | 53 | 10.8 | 22 | 4.7 |
| General\ttaxes | 277 | 259 | 258 | 18 | 6.9 | 1 | 0.4 |
| (Gain)\ton\tasset\tdispositions\tand\tpurchases | (20) | (16) | (10) | (4) | 25.0 | (6) | 60.0 |
| Impairment\tcharge | 57 | — | — | 57 | 100.0 | — | — |
| Total\toperating\texpenses,\tnet | 2,338 | 2,104 | 2,217 | 234 | 11.1 | (113) | (5.1) |
| Operating\tincome | 1,102 | 1,253 | 1,085 | (151) | (12.1) | 168 | 15.5 |
| Other\tincome\t(expense): |  |  |  |  |  |  |  |
| Interest,\tnet | (350) | (342) | (325) | (8) | 2.3 | (17) | 5.2 |
| Non-operating\tbenefit\tcosts,\tnet | 20 | (9) | (5) | 29 | 322.2 | (4) | 80.0 |
| Loss\ton\tearly\textinguishment\tof\tdebt | (4) | (7) | — | 3 | (42.9) | (7) | 100.0 |
| Other,\tnet | 19 | 17 | 15 | 2 | 11.8 | 2 | 13.3 |
| Total\tother\tincome\t(expense) | (315) | (341) | (315) | 26 | (7.6) | (26) | 8.3 |
| Income\tbefore\tincome\ttaxes | 787 | 912 | 770 | (125) | (13.7) | 142 | 18.4 |
| Provision\tfor\tincome\ttaxes | 222 | 486 | 302 | (264) | (54.3) | 184 | 60.9 |
| Consolidated\tnet\tincome | 565 | 426 | 468 | 139 | 32.6 | (42) | (9.0) |
| Net\tloss\tattributable\tto\tnoncontrolling\tinterest | (2) | — | — | (2) | (100.0) | — | — |
| Net\tincome\tattributable\tto\tcommon\tshareholders | $567 | $426 | $468 | $141 | 33.1 | $(42) | (9.0) |

In	2018,	net	income	attributable	to	common	shareholders	increased	$141	million,	or	33.1	percent,	compared	to	the	same	period	in	2017.	This	increase	was	due	to	a $125	million	non-cash	charge	in	2017	related	to	the	implementation	of	TCJA,	continued	growth	in	the	Regulated	Businesses,	driven	by	infrastructure	investment, acquisitions	and	organic	growth	and	growth	in	the	Market-Based	Businesses,	mainly	from	our	Homeowner	Services	Group	due	to	the	mid-year	acquisition	of	Pivotal. These	increases	were	partially	offset	by	higher	O&M	and	depreciation	expenses	across	the	Company	due	to	growth	of	the	business	and	the	asset	impairment	charge recorded	for	our	Keystone	subsidiary	during	the	third	quarter	of	2018.

In	2017,	net	income	attributable	to	common	shareholders	decreased	$42	million,	or	9.0	percent,	as	compared	to	the	same	period	in	2016.	This	decrease	was	due	to a	$125	million	non-cash	charge	in	2017	related	to	the	implementation	of	TCJA	resulting	from	the	re-measurement	of	deferred	taxes	primarily	at	the	parent	company from	 the	 reduction	 in	 the	 federal	 corporate	 income	 tax	 rate	 from	35%	 to	21%.	 Partially	 offsetting	 this	 non-cash	 charge	 was	 continued	 growth	 in	 the	Regulated Businesses	 driven	 mainly	 by	 infrastructure	 investment,	 acquisitions	 and	 organic	 growth,	 combined	 with	 growth	 in	 the	Market-Based	Businesses	 mainly	 from	 the Homeowner	Services	Group	and	Keystone.

# Segment	Results	of	Operations

Our	operating	segments	are	comprised	of	the	revenue-generating	components	of	the	business	for	which	separate	financial	information	is	internally	produced	and regularly	used	by	management	to	make	operating	decisions,	assess	performance	and	allocate	resources.	The	Company	operates	its	business	primarily	through	one reportable	segment,	the	Regulated	Businesses	segment.	We	also	operate	several	market-based	businesses	within	operating	segments	that	individually	do	not	meet	the criteria	of	a	reportable	segment	in	accordance	with	GAAP.	These	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	provides	financial	information	for	our	Regulated	Businesses:

|  | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, |  | Increase	(Decrease) | Increase	(Decrease) | Increase	(Decrease) | Increase	(Decrease) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2018 | 2017 | 2016 | 2018\tvs.\t2017 | 2018\tvs.\t2017 | 2017\tvs.\t2016 | 2017\tvs.\t2016 |
| (Dollars\tin\tmillions) |  |  |  | $% | $% | $% | $% |
| Operating\trevenues | $2,984 | $2,958 | $2,871 | $26 | 0.9 | $87 | 3.0 |
| Operation\tand\tmaintenance | 1,159 | 1,076 | 1,165 | 83 | 7.7 | (89) | (7.6) |
| Depreciation\tand\tamortization | 500 | 462 | 440 | 38 | 8.2 | 22 | 5.0 |
| General\ttaxes | 261 | 244 | 242 | 17 | 7.0 | 2 | 0.8 |
| (Gain)\ton\tasset\tdispositions\tand\tpurchases | (7) | (16) | (7) | 9 | (56.3) | (9) | 128.6 |
| Interest,\tnet | (280) | (268) | (256) | (12) | 4.5 | (12) | 4.7 |
| Other\tincome\t(expenses) | (247) | (266) | (257) | 19 | (7.1) | (9) | 3.5 |
| Income\tbefore\tincome\ttaxes | 826 | 925 | 775 | (99) | (10.7) | 150 | 19.4 |
| Provision\tfor\tincome\ttaxes | 224 | 367 | 303 | (143) | (39.0) | 64 | 21.1 |
| Net\tincome\tattributable\tto\tcommon\tshareholders | 602 | 559 | 472 | 43 | 7.7 | 87 | 18.4 |

# Operating	Revenues

The	following	tables	provide	provide	information	regarding	the	main	components	of	our	Regulated	Businesses'	operating	revenues	and	the	ensuing	discussions provide	explanation	for	the	material	variances:

|  | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | Increase	(Decrease) | Increase	(Decrease) | Increase	(Decrease) | Increase	(Decrease) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2018 | 2017 | 2016 | 2018\tvs.\t2017 | 2018\tvs.\t2017 | 2017\tvs.\t2016 | 2017\tvs.\t2016 |
| (Dollars\tin\tmillions) |  |  |  | $% | $% | $% | $% |
| Water\tservices: |  |  |  |  |  |  |  |
| Residential | $1,663 | $1,644 | $1,601 | $19 | 1.2 | $43 | 2.7 |
| Commercial | 616 | 601 | 582 | 15 | 2.5 | 19 | 3.3 |
| Fire\tservice | 137 | 139 | 134 | (2) | (1.4) | 5 | 3.7 |
| Industrial | 136 | 137 | 134 | (1) | (0.7) | 3 | 2.2 |
| Public\tand\tother | 216 | 244 | 259 | (28) | (11.5) | (15) | (5.8) |
| Total\twater\tservices | 2,768 | 2,765 | 2,710 | 3 | 0.1 | 55 | 2.0 |
| Wastewater\tservices | 161 | 142 | 112 | 19 | 13.4 | 30 | 26.8 |
| Other\t(a) | 55 | 51 | 49 | 4 | 7.8 | 2 | 4.1 |
| Total\toperating\trevenues | $2,984 | $2,958 | $2,871 | $26 | 0.9 | $87 | 3.0 |

|  | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | Increase	(Decrease) | Increase	(Decrease) | Increase	(Decrease) | Increase	(Decrease) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2018 | 2017 | 2016 | 2018\tvs.\t2017 |  | 2017\tvs.\t2016 | 2017\tvs.\t2016 |
| (Gallons\tin\tmillions) |  |  |  | Gallons | % | Gallons | % |
| Billed\twater\tservices\tvolumes: |  |  |  |  |  |  |  |
| Residential | 172,827 | 174,420 | 174,599 | (1,593) | (0.9) | (179) | (0.1) |
| Commercial | 82,572 | 82,147 | 82,489 | 425 | 0.5 | (342) | (0.4) |
| Industrial | 38,432 | 39,404 | 38,465 | (972) | (2.5) | 939 | 2.4 |
| Fire\tservice,\tpublic\tand\tother | 50,651 | 51,341 | 50,678 | (690) | (1.3) | 663 | 1.3 |
| Total\tbilled\twater\tservices\tvolumes | 344,482 | 347,312 | 346,231 | (2,830) | (0.8) | 1,081 | 0.3 |

In	2018,	operating	revenues	increased	$26	million,	or	0.9%,	primarily	due	to	a:

•$149	million	increase	from	authorized	rate	increases,	including	infrastructure	surcharges,	principally	to	fund	infrastructure	investment	in	various states;

•$22	million	increase	from	water	and	wastewater	acquisitions,	as	well	as	organic	growth	in	existing	systems;

•$148	million	decrease	from	the	impacts	of	the	TCJA	which	have	or	are	expected	to	benefit	customers.	This	decrease	is	made	up	of	two	components:	(i)	a reserve	on	revenue	billed	during	2018,	for	the	estimated	income	tax	savings	expected	to	benefit	customers	in	future	rates;	and	(ii)	rate	adjustments	made	in certain	 subsidiaries	 where	 our	 Regulators	 have	 authorized	 lower	 rates	 or	 offsets	 to	 regulatory	 assets	 or	 capital	 investments	 to	 pass	 the	 benefits	 to customers.

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

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

# Operation	and	Maintenance

The	following	tables	provide	information	regarding	the	main	components	of	our	Regulated	Businesses'	operating	and	maintenance	expense	and	the	ensuing discussions	provide	an	explanation	for	the	material	variances:

|  | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | Increase	(Decrease) | Increase	(Decrease) | Increase	(Decrease) | Increase	(Decrease) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2018 | 2017 | 2016 | 2018\tvs.\t2017 |  | 2017\tvs.\t2016 | 2017\tvs.\t2016 |
| (Dollars\tin\tmillions) |  |  |  | $% |  | $% | $% |
| Production\tcosts | $313 | $298 | $288 | $15 | 5.0 | $10 | 3.5 |
| Employee-related\tcosts | 451 | 431 | 431 | 20 | 4.6 | — | — |
| Operating\tsupplies\tand\tservices | 227 | 209 | 212 | 18 | 8.6 | (3) | (1.4) |
| Maintenance\tmaterials\tand\tsupplies | 81 | 70 | 73 | 11 | 15.7 | (3) | (4.1) |
| Customer\tbilling\tand\taccounting | 60 | 51 | 54 | 9 | 17.6 | (3) | (5.6) |
| Other | 27 | 17 | 107 | 10 | 58.8 | (90) | (84.1) |
| Total | $1,159 | $1,076 | $1,165 | $83 | 7.7 | $(89) | (7.6) |

# Production	Costs

|  | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | Increase	(Decrease) | Increase	(Decrease) | Increase	(Decrease) | Increase	(Decrease) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2018 | 2017 | 2016 | 2018\tvs.\t2017 |  | 2017\tvs.\t2016 |  |
| (Dollars\tin\tmillions) |  |  |  | $% |  | $% |  |
| Purchased\twater | $133 | $128 | $122 | $5 | 3.9 | $6 | 4.9 |
| Fuel\tand\tpower | 91 | 89 | 87 | 2 | 2.2 | 2 | 2.3 |
| Chemicals | 52 | 47 | 47 | 5 | 10.6 | — | — |
| Waste\tdisposal | 37 | 34 | 32 | 3 | 8.8 | 2 | 6.3 |
| Total | $313 | $298 | $288 | $15 | 5.0 | $10 | 3.5 |

•$5	 million increase in purchased	 water from higher prices in our	 California subsidiary;

•$5	million	increase	in	chemicals	from	higher	usage,	the	result	of	wet	weather	conditions	in	2018,	primarily	in	the	Northeast	and	Mid-Atlantic; and

•$3	 million increase in	 waste	 disposal from	 higher sludge removal costs,	 primarily in	 our	 New Jersey subsidiary.

•$6	million	increase	in	purchased	water	from	higher	usage	in	our	California	subsidiary,	the	result	of	the	California	water	usage	restrictions,	which	were mandated	in	2015	due	to	the	state's	extreme	drought,	being	lifted	in	the	second	quarter	of	2017;	and

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

# Employee-Related	Costs

|  | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | Increase	(Decrease) | Increase	(Decrease) | Increase	(Decrease) | Increase	(Decrease) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2018 | 2017 | 2016 | 2018\tvs.\t2017 |  | 2017\tvs.\t2016 |  |
| (Dollars\tin\tmillions) |  |  |  | $% |  | $% |  |
| Salaries\tand\twages | $349 | $334 | $336 | $15 | 4.5 | $(2) | (0.6) |
| Pensions | 19 | 14 | 18 | 5 | 35.7 | (4) | (22.2) |
| Group\tinsurance | 57 | 57 | 56 | — | — | 1 | 1.8 |
| Other\tbenefits | 26 | 26 | 21 | — | — | 5 | 23.8 |
| Total | $451 | $431 | $431 | $20 | 4.6 | $— | — |

In	2018,	employee-related	costs	increased	$20	million,	or	4.6%,	primarily	due	to	a:

•$15	million	increase	in	salaries	and	wages	to	support	growth	of	the	business,	as	well	as	an	increase	in	overtime	related	to	a	higher	volume	of	main	breaks during	the	first	quarter	of	2018,	the	result	of	harshly	frigid	weather	in	the	Midwest,	Northeast	and	parts	of	the	Mid-Atlantic;	and

•$5	 million increase in	 pensions from	 an	 authorized	 change in regulatory recovery	 of	 pension	 expense in	 our	 Pennsylvania subsidiary.

In	2017,	employee-related	costs	remained	consistent	primarily	due	to	a:

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

•$4	 million	 decrease in	 pensions from	 higher	 capitalization rates in 2017.

# Operating	Supplies	and	Services

In	2018,	operating	supplies	and	services	increased	$18	million,	 or	8.6%,	primarily	due	to	a	$17	million	increase	in	contracted	services	from	higher	costs	for various	legal	matters	including	a	settlement	agreement	in	our	New	York	subsidiary	and	costs	associated	with	condemnation	proceedings	in	Monterey,	California,	higher costs	from	temporary	workers	as	a	result	of	restructuring	initiatives	in	our	technology	support	services,	as	well	as	an	increase	in	other	operating	expenses.

In	2017,	operating	supplies	and	services	decreased	$3	million,	or	1.4%,	primarily	due	to	a	decrease	in	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	an	increase	in	office	supplies	and	services	from higher	employee	relocation,	telecommunication	and	office	supplies	costs.

# Maintenance	Materials	and	Supplies

In	2018,	maintenance	materials	and	supplies	increased	$11	million,	 or	15.7%,	from	a	higher	volume	of	main	breaks	and	paving	costs,	driven	by	the	colder weather	experienced	during	the	first	quarter	of	2018,	as	well	as	higher	tank	painting	costs	in	our	New	Jersey	subsidiary	and	various	maintenance	projects	in	our Pennsylvania,	Missouri	and	Indiana	subsidiaries.

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

# Customer	Billing	and	Accounting

In	2018,	customer	billing	and	accounting	increased	$9	million,	 or	17.6%,	from	an	increase	in	customer	uncollectible	expense,	primarily	in	our	Pennsylvania, Missouri	and	New	York	subsidiaries,	and	higher	call	volumes	experienced	at	our	customer	service	centers.

In	2017,	customer	billing	and	accounting	decreased	$3	million	or	5.6%,	from	lower	customer	uncollectible	expense	attributable	to	focused	collection	efforts.

# Other	(Operation	and	Maintenance)

In	2018,	other	(operation	and	maintenance)	increased	$10	million,	or	58.8%,	primarily	due	to	higher	casualty	insurance	claims	in	2018,	and	a	$3	million	charge from	a	regulatory	authorization	allowing	a	portion	of	the	income	tax	savings	resulting	from	the	TCJA	to	be	used	to	reduce	certain	regulatory	assets.	During	2018,	we recorded	a	$20	million	benefit	resulting	from	an	insurance	settlement	with	one	of	our	general	liability	insurance	carriers	associated	with	the	Freedom	Industries	chemical spill	in	West	Virginia.

In	2017,	other	(operation	and	maintenance)	decreased	$90	million,	 or	84.1%,	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,	as	well	as	a	decrease	in	casualty	insurance	expense	attributable	to	a lower	claims	experience	in	2017.

# Depreciation	and	Amortization

In	2018	 and	2017,	depreciation	and	amortization	increased	$38	million	 and	$22	million,	 or	8.2% and	5.0%,	respectively.	The	increase	for	both	periods	was primarily	due	to	additional	utility	plant	placed	in	service.

# General	Taxes

In	2018	and	2017,	general	taxes	increased	$17	million	and	$2	million,	or	7.0%	and	0.8%,	respectively.	The	increase	in	2018	was	primarily	due	to	incremental property	taxes	in	several	of	our	subsidiaries,	including	in	Missouri	and	New	York.

# (Gain)	on	Asset	Dispositions	and	Purchases

In	2018	and	2017,	(gain)	on	asset	dispositions	and	purchases	increased	$9	million,	or	56.3%,	and	decreased	$9	million,	or	128.6%,	respectively.	The	decrease	in 2018	was	primarily	due	to	higher	gains	recognized	in	2017,	including	a	$7	million	gain	on	a	land	sale	in	our	Kentucky	subsidiary,	along	with	acquisition	and	land	sale gains	in	our	Pennsylvania,	Missouri	and	California	subsidiaries,	partially	offset	by	gains	recognized	in	2018	for	the	sale	of	a	treatment	plant	in	our	Illinois	subsidiary	and a	building	in	our	New	Jersey	subsidiary.

# Interest,	net

In	2018	and	2017,	interest,	net	increased	$12	million	and	$12	million,	respectively.	The	increase	in	interest	expense	during	2018	was	driven	by	the	issuance	of incremental	long-term	debt	in	the	third	quarter	of	2018	to	support	growth	of	the	business,	and	higher	levels	of	short-term	borrowings	during	2018,	coupled	with	an increase	in	the	average	short-term	borrowing	rate	in	the	current	year.	For	the	year	ended	December	31,	2017,	the	increase	in	interest	expense	was	driven	by	the	issuance of	incremental	long-term	debt	in	2017	to	support	growth	of	the	business.

# Other	Income	(Expenses)

In	2018,	 other	 income	 (expenses)	increased	$19	million,	 or	7.1%,	 primarily	 due	 to	 a	 reduction	 in	 the	 non-service	 cost	 components	 of	 pension	 and	 other postretirement	benefits	expense	resulting	from	favorable	actuarial	performance,	and	an	increase	in	allowance	for	funds	used	during	construction	attributable	to	higher capital	investment	in	2018,	partially	offset	by	an	increase	in	interest	expense	as	discussed	above.	For	the	year	ended	December	31,	2017,	the	increase	in	other	income (expenses)	was	primarily	due	to	an	increase	in	interest	expense	as	discussed	above.

# Provision	for	Income	Taxes

For	 the	 year	 ended	December	31,	2018,	our	provision	for	 income	 taxes	decreased	primarily	due	 to	 the	reduction	 in	 the	federal	corporate	 income	 tax	rate from	35%	to	21%	as	of	January	1,	2018,	resulting	from	the	enactment	of	the	TCJA.	We	expect	the	reduced	tax	rate	will	benefit	our	customers	through	established ratemaking,	tax	and	regulatory	normalization	provisions.	During	2018,	we	continued	assessing	the	impacts	of	the	TCJA	as	allowed	by	Staff	Accounting	Bulletin	118 ("SAB	118"),	and	as	a	result	we	recorded	adjustments	to	federal	and	state	income	tax	TCJA	estimates.	For	the	year	ended	December	31,	2017,	our	provision	for	income taxes	increased	primarily	due	to	higher	pretax	income	in	2017	compared	to	2016.

The	following	table	provides	financial	information	for	our	Market-Based	Businesses	and	the	ensuing	discussions	provide	explanation	for	the	material	variances:

|  | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, |  | Increase	(Decrease) | Increase	(Decrease) | Increase	(Decrease) | Increase	(Decrease) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2018 | 2017 | 2016 | 2018\tvs.\t2017 | 2018\tvs.\t2017 | 2017\tvs.\t2016 |  |
| (Dollars\tin\tmillions) |  |  |  | $% | $% | $% |  |
| Operating\trevenues | $476 | $422 | $451 | $54 | 12.8 | $(29) | (6.4) |
| Operation\tand\tmaintenance | 362 | 337 | 372 | 25 | 7.4 | (35) | (9.4) |
| Depreciation\tand\tamortization | 29 | 18 | 15 | 11 | 61.1 | 3 | 20.0 |
| (Gain)\ton\tasset\tdispositions\tand\tpurchases | (13) | — | (1) | (13) | (100.0) | 1 | (100.0) |
| Impairment\tcharge | 57 | — | — | 57 | 100.0 | — | — |
| Income\tbefore\tincome\ttaxes | 41 | 66 | 65 | (25) | (37.9) | 1 | 1.5 |
| Provision\tfor\tincome\ttaxes | 11 | 28 | 26 | (17) | (60.7) | 2 | 7.7 |
| Net\tloss\tattributable\tto\tnoncontrolling\tinterest | (2) | — | — | (2) | (100.0) | — | — |
| Net\tincome\tattributable\tto\tcommon\tshareholders | 32 | 38 | 39 | (6) | (15.8) | (1) | (2.6) |

In	2018,	operating	revenues	increased	$54	million,	or	12.8%,	primarily	due	to	a:

•$76	million	increase	in	our	Homeowner	Services	Group	from	contract	growth,	including	$67	million	from	the	acquisition	of	Pivotal	on	June	4,	2018; and

•$6	million	increase	in	Keystone	from	an	increase	in	water	transfer	operations	resulting	from	market	recovery	in	the	shale	natural	gas	industry;	partially offset	by	a

•$16	million	decrease in	our	Military	Services	Group	from	lower	capital	upgrades;

•$14	million	decrease	in	our	Contract	Services	Group	from	the	sale	of	the	majority	of	our	O&M	contracts	to	subsidiaries	of	Veolia	Environnement	S.A. during	the	third	quarter	of	2018.

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

•$56	million	decrease	in	our	Military	Services	Group	from	lower	capital	upgrades,	largely	driven	by	reduced	military	base	budgets	and	the	completion	of	a large	project	in	the	first	half	of	2017	at	Fort	Polk;	and

•$6	million	decrease	in	our	Contract	Services	Group	from	the	completion	of	several	O&M	contracts	during	2017;	partially	offset	by

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

•$16	million increase in	Keystone	due to	an increase in	operations	resulting	from	market	recovery in the	shale	natural	gas industry.

The	following	table	provides	information	regarding	the	main	components	of	our	Market-Based	Businesses'	operating	and	maintenance	expense	and	the	ensuing discussions	provide	an	explanation	for	the	material	variances:

|  | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | For	the	Years	Ended	December	31, | Increase	(Decrease) | Increase	(Decrease) | Increase	(Decrease) | Increase	(Decrease) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | 2018 | 2017 | 2016 | 2018\tvs.\t2017 | 2018\tvs.\t2017 | 2017\tvs.\t2016 | 2017\tvs.\t2016 |
| (Dollars\tin\tmillions) |  |  |  | $% | $% | $% | $% |
| Production\tcosts | $32 | $37 | $35 | $(5) | (13.5) | $2 | 5.7 |
| Employee-related\tcosts | 104 | 97 | 94 | 7 | 7.2 | 3 | 3.2 |
| Operating\tsupplies\tand\tservices | 142 | 121 | 165 | 21 | 17.4 | (44) | (26.7) |
| Maintenance\tmaterials\tand\tsupplies | 69 | 67 | 68 | 2 | 3.0 | (1) | (1.5) |
| Other | 15 | 15 | 10 | — | — | 5 | 50.0 |
| Total | $362 | $337 | $372 | $25 | 7.4 | $(35) | (9.4) |

In	2018,	operation	and	maintenance	expense	increased	$25	million,	or	7.4%,	primarily	due	to	a:

•$7	million	increase	in	employee-related	costs	mainly	in	our	Homeowner	Services	Group	related	to	the	acquisition	of	Pivotal	on	June	4,	2018,	partly	offset by	lower	costs	in	our	Contract	Services	Group	resulting	from	the	sale	of	the	majority	of	our	O&M	contracts	during	the	third	quarter	of	2018;	and

•$21	million	increase	in	operating	supplies	and	services	from	the	acquisition	of	Pivotal	and	higher	advertising	and	marketing	expense	in	our	Homeowner Services	Group,	as	well	as	an	increase	in	water	transfer	operations	in	Keystone,	offset	in	part	by	lower	capital	upgrades	in	our	Military	Services	Group	and the	sale	of	the	majority	of	our	Contract	Services	Group's	O&M	contracts	during	the	third	quarter	of	2018,	as	discussed	above;	partially	offset	by	a

•$5	million	decrease	in	production	costs	from	lower	purchased	water	and	chemical	usage	in	our	Contract	Services	Group	resulting	from	the	sale	of	the majority	of	our	O&M	contracts	during	the	third	quarter	of	2018.

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

•$44	million	decrease	in	operating	supplies	and	services	from	lower	capital	upgrades	in	our	Military	Services	Group,	as	discussed	above,	as	well	as	lower advertising	and	marketing	expense	in	our	Homeowner	Services	Group;	partially	offset	by	a

•$3	million	increase	in	employee-related	costs	from	higher	headcount	in	Keystone	from	an	increase	in	operations,	as	discussed	above,	offset	in	part	in	our Contract	Services	Group	from	the	completion	of	several	O&M	contracts	during	2017;	and

•$5	million	increase	in	other	(operating	and	maintenance	expense)	from	an	increase	in	customer	uncollectible	expense	in	our	Homeowner	Services	Group resulting	from	contract	growth	in	2017.

In	2018	and	2017,	depreciation	and	amortization	increased	$11	million	and	$3	million,	or	61.1%	and	20.0%,	respectively.	The	increase	in	2018	was	primarily	due to	the	addition	of	property,	plant	and	equipment	and	intangible	assets	from	the	acquisition	of	Pivotal	on	June	4,	2018.

In	2018,	(gain)	on	asset	dispositions	and	purchases	increased	$13	million	primarily	due	to	the	(gain)	recognized	on	the	sale	of	the	majority	of	our	Contract Services	Group's	O&M	contracts	to	subsidiaries	of	Veolia	Environnement	S.A.	during	the	third	quarter	of	2018,	partially	offset	by	a	loss	recognized	on	the	sale	of property,	plant	and	equipment	in	Keystone.	See	Note	4—Acquisitions	and	Divestitures	in	the	Notes	to	Consolidated	Financial	Statements	for	additional	information regarding	the	Veolia	Environnement	S.A.	transaction.

# Impairment	Charge

During	the	third	quarter	of	2018,	a	goodwill	and	intangible	asset	impairment	charge	of	$57	million	was	recorded	for	Keystone,	the	result	of	operational	and financial	challenges	encountered	in	the	construction	business,	and	the	Company's	determination	to	narrow	the	scope	of	the	Keystone	business,	to	focus	on	its	core operations	of	providing	water	transfer	services.	See	Note	8—Goodwill	and	Other	Intangible	Assets	in	the	Notes	to	Consolidated	Financial	Statements	for	additional information.

In	2018	 and	2017,	provision	for	 income	 taxes	decreased	$17	million,	 or	60.7%,	 and	increased	$2	million,	 or	7.7%,	respectively.	The	decrease in	2018	was primarily	due	to	the	reduction	in	the	federal	corporate	income	tax	rate	from	35%	to	21%	as	of	January	1,	2018,	resulting	from	the	enactment	of	the	TCJA.

# 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	industry	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	$2.25	billion,	with	an	expiration	date	of	June	2023	(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	$2.10	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"	section	below	for	additional	information.

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,	2018,	AWCC	had	no	outstanding	borrowings	and	$81	million	of	outstanding	letters	of	credit	under	its	revolving	credit facility,	with	$2.25	billion	available	to	fulfill	our	short-term	liquidity	needs	and	to	issue	letters	of	credit,	which	supported	$954	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	to	complete	the	acquisition	or	other	opportunistic	acquisitions.	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	Businesses	 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	are	now	treated	as	taxable	income.	Regulatory	treatment	for	advances and	contributions	under	the	TCJA	has	been	resolved	by	most	of	our	regulatory	jurisdictions	in	a	manner	that	passes	the	tax	consequences	of	the	change	in	law	to	the customer	making	the	advance	or	contribution,	or	allows	the	utility	to	pass	those	consequences	onto	a	larger	base	of	customers.	We	are	working	with	the	remaining 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,	(v)	fund	pension	and	postretirement	benefit	obligations,	and	(vi)	we	estimate	beginning	at	the	end	of	2019,	to	pay	federal	income	taxes. 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	 for	 additional information.	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.

The	Water	Infrastructure	Finance	and	Innovation	Act	of	2014	("WIFIA")	established	the	WIFIA	program,	a	federal	credit	program	administered	by	the	EPA	for eligible	water	and	wastewater	infrastructure	projects.	The	WIFIA	program	accelerates	investment	in	our	nation's	water	infrastructure	by	providing	long-term,	low-cost supplemental	loans	for	regionally	and	nationally	significant	projects.	Our	letters	of	interest	have	been	approved	by	the	EPA,	and	we	have	begun	the	full	application process	for	two	WIFIA	loans	totaling	$187	million	for	two	separate	projects	in	our	Missouri	subsidiary.

# 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;	maintenance	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	lower	tax	shield	on	interest expense	at	the	parent,	as	well	as	increased	debt	levels	from	lower	cash	flows	from	operations	as	we	pass	the	lower	tax	rate	benefits	to	our	regulated	customers.	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	used,	and expect	to	be	a	full	year	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	and	fund	the	majority	of	our capital	investments.	We	expect	to	seek	access	to	debt	capital	markets	to	meet	the	balance	of	our	capital	investment,	if	any,	and	fund	our	dividend	payments,	as	needed. We	also	have	access	to	equity	capital	markets,	if	needed.	We	do	not	foresee	the	need	to	access	equity	markets	over	the	next	five	years	under	normal	operating	conditions. Operating	cash	flows	can	be	negatively	affected	by	changes	in	our	rate	regulated	environments,	changes	in	our	Market-Based	Businesses,	changes	in	the	economy, interest	rates,	the	timing	of	tax	payments,	and	our	customers'	ability	to	pay	for	service	in	a	timely	manner,	among	other	items.	We	can	provide	no	assurance	that	our customers'	historical	payment	pattern	will	continue	in	the	future.	Sometimes	our	current	liabilities	exceed	current	assets	mainly	from	debt	maturities	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,	fund	acquisitions	and	construction	projects,	as well	as	cash	needs	which	can	fluctuate	significantly	due	to	the	seasonality	of	the	business.	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) | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Net\tincome | $565 | $426 | $468 |
| Add\t(less): |  |  |  |
| Depreciation\tand\tamortization | 545 | 492 | 470 |
| Deferred\tincome\ttaxes\tand\tamortization\tof\tinvestment\ttax\tcredits | 195 | 462 | 295 |
| Non-cash\timpairment\tcharge | 57 | — | — |
| Other\tnon-cash\tactivities\t(a) | 56 | 16 | 35 |
| Changes\tin\tworking\tcapital\t(b) | 30 | 123 | 9 |
| Pension\tand\tpostretirement\tbenefit\tcontributions | (22) | (48) | (53) |
| Impact\tof\tFreedom\tIndustries\tsettlement\tactivities | (40) | (22) | 65 |
| Net\tcash\tflows\tprovided\tby\toperating\tactivities | $1,386 | $1,449 | $1,289 |

(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	on	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	2018,	cash	flows	provided	by	operating	activities	decreased	$63	million,	primarily	due	to	lower	revenues	as	a	result	of	the	enactment	of	the	TCJA	and	changes in	working	capital.	These	decreases	are	partially	offset	by	an	increase	in	net	income.	The	main	factors	contributing	to	the	net	income	increase	are	described	in	this section	under	"Consolidated	Results	of	Operations"	and	included	higher	operating	revenue	and	a	lower	provision	for	income	taxes.

In	2017,	cash	flows	provided	by	operations	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.

The	Company	expects	to	make	pension	contributions	to	the	plan	trusts	of	up	to	$31	million	in	2019.	In	addition,	we	estimate	that	contributions	will	amount	to	$32 million,	$29	million,	$29	million	and	$29	million	in	2020,	2021,	2022	and	2023,	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	affecting	our	cash	flows	used	in	investing	activities:

| (In	millions) | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Net\tcapital\texpenditures | $(1,586) | $(1,434) | $(1,311) |
| Acquisitions | (398) | (177) | (204) |
| Other\tinvesting\tactivities,\tnet\t(a) | (52) | (61) | (75) |
| Net\tcash\tflows\tused\tin\tinvesting\tactivities | $(2,036) | $(1,672) | $(1,590) |

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

In	2018	 and	2017,	 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,	 as	 well	 as acquisitions	in	both	our	Regulated	Businesses	and	Market-Based	Businesses,	as	discussed	below.

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) | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Transmission\tand\tdistribution | $572 | $551 | $568 |
| Treatment\tand\tpumping | 231 | 171 | 151 |
| Services,\tmeter\tand\tfire\thydrants | 303 | 281 | 297 |
| General\tstructure\tand\tequipment | 371 | 281 | 202 |
| Sources\tof\tsupply | 26 | 54 | 59 |
| Wastewater | 83 | 96 | 34 |
| Total\tcapital\texpenditures | $1,586 | $1,434 | $1,311 |

In	2018,	our	capital	expenditures	increased	$152	million,	or	10.6%,	primarily	due	to	investment	across	the	majority	of	our	infrastructure	categories.	In	2017,	our capital	expenditures	increased	$123	million,	or	9.4%,	primarily	due	to	investment	in	our	general	structure	and	equipment	and	wastewater	categories.

We	also	grow	our	business	primarily	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	is	a	summary	of	the	acquisitions	and	dispositions	affecting	our	cash	flows	from	investing	activities:

•The	majority	of	cash	paid	for	acquisitions	pertained to the	$365	million	 purchase	 of	 Pivotal	 within	 our	Homeowner	 Services Group.

•Paid	$33	 million for	15 water and wastewater systems, representing approximately	14,000 customers.

•Received	$35	million	for	the	sale	of	assets,	including	$27	million	for	the	sale	of	the	majority	of	the	O&M	contracts	in	our	Contract	Services	Group	during the	third	quarter	of	2018.

•The	majority	of	cash	paid	for	acquisitions	pertained	to	the	$159	million	purchase	of	the	wastewater	collection	and	treatment	system	assets	of	the	Municipal Authority	of	the	City	of	McKeesport,	Pennsylvania	(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-for-stock	transaction),	representing approximately	7,000	customers.

•Received	$15	million	for	the	sale	of	assets.

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

As	previously	noted,	we	expect	to	invest	between	$8.0	billion	to	$8.6	billion	from	2019	to	2023,	with	$7.3	billion	of	this	range	for	infrastructure	improvements	in our	Regulated	Businesses.	In	2019,	we	expect	to	invest	between	a	range	of	$1.7	billion	to	$1.8	billion	in	2019,	with	$1.6	billion	for	infrastructure	improvements	in	our Regulated	Businesses.	Also	in	2019,	we	expect	to	invest	between	$120	million	to	$240	million	for	acquisitions	in	our	Regulated	Businesses.

# Cash	Flows	from	Financing	Activities

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

|  | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| (In\tmillions) |  |  |  |
| Proceeds\tfrom\tlong-term\tdebt | $1,358 | $1,395 | $553 |
| Repayments\tof\tlong-term\tdebt | (526) | (896) | (144) |
| Net\tproceeds\tfrom\tshort-term\tborrowings | 60 | 55 | 221 |
| Proceeds\tfrom\tissuance\tof\tcommon\tstock | 183 | — | — |
| Dividends\tpaid | (319) | (289) | (261) |
| Anti-dilutive\tstock\trepurchases | (45) | (54) | (65) |
| Other\tfinancing\tactivities,\tnet\t(a) | 15 | (4) | 24 |
| Net\tcash\tflows\tprovided\tby\tfinancing\tactivities | $726 | $207 | $328 |

(a) Includes	proceeds	from	issuances	of	common	stock	under	various	employee	stock	plans	and	our	dividend	reinvestment	plan,	net	of	taxes	paid,	advances	and	contributions	for	construction,	net of	refunds,	and	debt	issuance	costs	and	make-whole	premium	on	early	debt	redemption.

In	2018,	cash	flows	provided	by	financing	activities	increased	$519	million,	primarily	due	to	the	issuance	of	common	stock	to	finance	a	portion	of	the	purchase price	of	the	Pivotal	acquisition	and	a	decrease	in	cash	used	for	short-term	borrowings.	Short-term	borrowings	were	used	to	fund	the	growth	of	our	Regulated	Businesses, finance	approximately	50%	of	the	Pivotal	acquisition,	pay	dividends	and	repay	long-term	debt,	offset	by	the	use	of	the	$1.325	billion	long-term	debt	issuance	to	support growth	of	the	business	and	repay	short-term	borrowings.

Our	financing	activities,	primarily	focused	on	funding	regulated	infrastructure	expenditures,	regulated	and	market-based	acquisitions	and	payment	of	dividends. These	activities	included	the	issuance	of	long-term	and	short-term	debt,	primarily	through	AWCC	and	in	2018,	included	an	equity	issuance	for	approximately	50%	of the	Pivotal	acquisition.	In	addition,	new	infrastructure	may	be	funded	with	customer	advances	and	contributions	in	aid	of	construction,	net	of	refunds,	which	amounted to	$21	million,	$28	million	and	$16	million	for	the	years	ended	December	31,	2018,	2017	and	2016,	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,	2018, AWCC	has	made	 long-term	fixed	rate	 loans	and	commercial	paper	 loans	 to	our	Regulated	Businesses	 amounting	 to	$4.4	billion	 and	$392	 million,	 respectively. Additionally,	as	of	December	31,	2018,	AWCC	has	made	long-term	fixed	rate	loans	and	commercial	paper	loans	to	the	parent	company	amounting	$1.7	billion	and	$533 million,	respectively.	As	of	December	31,	2018,	the	parent	company	has	made	long-term	fixed	rate	loans	to	our	Market-Based	Businesses	amounting	to	$183	million related	to	the	acquisition	of	Pivotal	on	June	4,	2018.

O n	August 9, 2018,	 AWCC	 completed	 a	$1.325	 billion	 debt	 offering	 which	 included	 the	 sale	 of	$625	 million	 aggregate	 principal	 amount	 of	 its unsecured	3.75%	Senior	Notes	due	in	2028,	and	$700	million	aggregate	principal	amount	of	its	unsecured	4.20%	Senior	Notes	due	in	2048.	At	the	closing	of	the offering,	AWCC	received,	after	deduction	of	underwriting	discounts	and	before	deduction	of	offering	expenses,	net	proceeds	of	approximately	$1.3	billion.	AWCC	used proceeds	from	the	offering	to	(i)	lend	funds	to	American	Water	and	its	regulated	operating	subsidiaries,	(ii)	repay	$191	million	principal	amount	of	AWCC's	5.62% Senior	Notes	due	2018	upon	maturity	on	December	21,	2018,	(iii)	prepay	$100	million	aggregate	principal	amount	of	AWCC's	outstanding	5.62%	Series	E	Senior Notes	due	March	29,	2019	(the	"Series	E	Notes")	and	$100	million	aggregate	principal	amount	of	AWCC's	outstanding	5.77%	Series	F	Senior	Notes	due	March	29, 2022	(the	"Series	F	Notes,"	and,	together	with	the	Series	E	Notes,	the	"Series	Notes"),	and	(iv)	repay	AWCC's	commercial	paper	obligations	and	for	general	corporate purposes.

As	a	result	of	AWCC's	prepayment	of	 the	Series	Notes,	a	make-whole	premium	of	$10	million	was	paid	 to	 the	holders	 thereof	on	September	11,	2018. Substantially	all	of	the	early	debt	extinguishment	costs	were	allocable	to	our	utility	subsidiaries	and	recorded	as	regulatory	assets,	as	we	believe	they	are	probable	of recovery	in	future	rates.

On	August	6,	2018,	the	Company	terminated	four	forward	starting	swap	agreements	with	an	aggregate	notional	amount	of	$400	million,	realizing	a	net	gain	of	$9 million,	to	be	amortized	through	interest,	net	over	10-	and	30-year	periods,	in	correlation	with	the	terms	of	the	new	debt	issued	on	August	9,	2018.

On	August	17,	2018,	we	entered	into	two	forward	starting	swap	agreements,	each	with	a	notional	amount	of	$80	million,	to	reduce	interest	rate	exposure	on	debt expected	to	be	issued	in	2019.	These	forward	starting	swap	agreements	terminate	in	August	2019	and	have	an	average	fixed	rate	of	2.98%.	On	October	11,	2018,	we entered	into	two	additional	forward	starting	swap	agreements,	each	with	a	notional	amount	of	$100	million,	to	reduce	interest	rate	exposure	on	debt	expected	to	be	issued in	2019.	These	forward	starting	swap	agreements	terminate	in	December	2019,	and	have	an	average	fixed	rate	of	3.31%.	 On	January	8,	2019,	we	entered	into	an additional	forward	starting	swap	agreement,	with	a	notional	amount	of	$150	million,	to	reduce	interest	rate	exposure	on	debt	expected	to	be	issued	in	2019.	This	forward starting	swap	agreement	terminates	in	December	2019,	and	has	an	average	fixed	rate	of	2.76%.	We	have	designated	these	forward	starting	swap	agreements	as	cash	flow hedges,	with	their	fair	value	recorded	in	accumulated	other	comprehensive	gain	or	loss.	Upon	termination,	the	cumulative	gain	or	loss	recorded	in	accumulated	other comprehensive	gain	or	loss	will	be	amortized	through	interest,	net	over	the	term	of	the	new	debt.

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	April	11,	2018,	we	effected	an	equity	forward	transaction	by	entering	into	a	forward	sale	agreement	with	each	of	two	forward	purchasers	in	connection	with	a public	offering	of	2,320,000	shares	of	our	common	stock.	In	the	equity	forward	transaction,	the	forward	purchasers,	or	an	affiliate,	borrowed	an	aggregate	of	2,320,000 shares	of	our	common	stock	from	third	parties	and	sold	them	to	the	underwriters	in	the	public	offering.	On	June	7,	2018,	we	elected	to	fully	and	physically	settle	both forward	sale	agreements,	resulting	in	the	issuance	of	a	total	of	2,320,000	shares	of	our	common	stock	at	a	price	of	$79.01	per	share,	for	aggregate	net	proceeds	of	$183 million.	The	net	proceeds	of	the	transaction	were	used	to	pay	a	portion	of	the	purchase	price	of	the	Pivotal	acquisition	on	June	4,	2018.

In	May	2018,	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	statement	will	expire	in	May	2021.	During	2018,	2017	and	2016,	$1.325	billion,	$1.350	billion	and	$550	million,	respectively,	of	debt	securities	were issued	pursuant	to	this	and	predecessor	registration	statements.	Additionally,	during	2018	under	this	registration	statement,	we	issued	2,320,000	shares	of	our	common stock	at	a	price	of	$79.01	per	share,	for	aggregate	net	proceeds	of	$183	million.

The	following	table	provides	the	issuances	of	long-term	debt	in	2018:

| Company | Type | Rate | Maturity | Amount	(in	millions) |
| :--- | :--- | :--- | :--- | :--- |
| AWCC\t(a) | Senior\tnotes—fixed\trate | 3.75%-4.20% | 2028-2048 | $1,325 |
|  | Private\tactivity\tbonds\tand\tgovernment\tfunded\tdebt |  |  |  |
| Other\tAmerican\tWater\tsubsidiaries | —fixed\trate\t(b) | 0.00%-5.00% | 2021-2048 | 33 |
| Total\tissuances |  |  |  | $1,358 |

(a) This	indebtedness	is	considered	"debt"	for	purposes	of	a	support	agreement	between	American	Water	and	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) Approximately	$29	million	of	this	debt	relates	to	the	New	Jersey	Environmental	Infrastructure	Financing	Program.

The	following	table	provides	the	retirements	and	redemptions	of	long-term	debt	in	2018	through	sinking	fund	provisions,	optional	redemption	or	payment	at maturity:

| Company | Type | Rate | Maturity | Amount	(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 | \t Mortgage\tbonds—fixed\trate | 3.92% | 2020 | 3 |
| Other\tAmerican\tWater\tsubsidiaries | Term\tLoan | 4.48%-4.98% | 2021 | 11 |
| Total\tissuances |  |  |  | $1,395 |

| Company | Type | Rate | Maturity | Amount	(in	millions) |
| :--- | :--- | :--- | :--- | :--- |
| AWCC | 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 |

| Company | Type | Rate | Maturity | Amount	(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 | \t Mandatorily\tredeemable\tpreferred\tstock | 8.49%-9.18% | 2031-2036 | 2 |
| Total\tretirements\tand\tredemptions |  |  |  | $144 |

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,	2018,	we	have	repurchased	an	aggregate	of	4,510,000	shares	of	common	stock	under	this	program.

# Credit	Facilities	and	Short-Term	Debt

We	have	an	unsecured	revolving	credit	facility	of	$2.25	billion	that	expires	in	June	2023.	In	March	2018,	AWCC	and	its	lenders	amended	and	restated	the	credit agreement	with	respect	to	AWCC's	revolving	credit	facility	to	increase	the	maximum	commitments	under	the	facility	from	$1.75	billion	to	$2.25	billion,	and	to	extend the	 expiration	 date	 of	 the	 facility	 from	 June	 2020	 to	 March	 2023.	 All	 other	 terms,	 conditions	 and	 covenants	 with	 respect	 to	 the	 existing	 facility	 remained unchanged.	Subject	to	satisfying	certain	conditions,	the	credit	agreement	also	permits	AWCC	to	increase	the	maximum	commitment	under	the	facility	by	up	to	an aggregate	of	$500	million,	and	to	request	extensions	of	its	expiration	date	for	up	to	two,	one-year	periods.

Interest	rates	on	advances	under	the	facility	are	based	on	a	credit	spread	to	the	LIBOR	rate	or	base	rate	in	accordance	with	Moody	Investors	Service's	and Standard	&	Poor's	Financial	Services'	then	applicable	credit	rating	on	AWCC's	senior	unsecured,	non-credit	enhanced	debt.	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	in	March	2018,	from	$1.60	billion	to	$2.10	billion.

The	following	table	provides	the	aggregate	credit	facility	commitments,	letter	of	credit	sub-limit	under	the	revolving	credit	facility	and	commercial	paper	limit, as	well	as	the	available	capacity	for	each	as	of	December	31,	2018	and	2017:

| (In	millions) | Credit	Facility<br>Commitment | Available	Credit<br>Facility	Capacity | Letter	of	Credit<br>Sublimit | Available	Letter	of<br>Credit	Capacity | Commercial	Paper<br>Limit | Available	Commercial<br>Paper	Capacity |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| December\t31,\t2018 | $2,262 | $2,177 | $150 | $69 | $2,100 | $1,146 |
| December\t31,\t2017 | 1,762 | 1,673 | 150 | 66 | 1,600 | 695 |

# Capital	Structure

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

|  | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Total\tcommon\tshareholders'\tequity | 40.4% | 41.0% | 42.1% |
| Long-term\tdebt\tand\tredeemable\tpreferred\tstock\tat\tredemption\tvalue | 52.4% | 49.6% | 46.4% |
| Short-term\tdebt\tand\tcurrent\tportion\tof\tlong-term\tdebt | 7.2% | 9.4% | 11.5% |
| Total | 100% | 100% | 100% |

The	changes	in	the	capital	structure	between	periods	were	mainly	attributable	to	an	increase	in	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,	2018,	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	provides	our	long-term	and	short-term	credit	rating	and	rating	outlook	as	of	February	19,	2019:

|  | 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	June	11,	2018,	Standard	&	Poor's	Ratings	Service	affirmed	the	Company's	long-term	'A'	and	short-term	'A-1'	credit	ratings,	with	a	stable	outlook	remaining unchanged.

On	January	19,	2018,	Moody's	Investors	Service	changed	its	rating	outlook	to	negative,	from	stable,	for	24	regulated	utilities	and	utility	holding	companies, including	the	Company,	all	of	which	were	primarily	impacted	by	the	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	and	Regulatory	Restrictions

For	discussion	of	our	dividends,	dividend	restrictions	and	dividend	policy,	see	Note	9—Shareholders'	Equity	in	the	Notes	to	Consolidated	Financial	Statements for	additional	information.

# 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.	The	following	table	provides	information	related	to	our	contractual obligations	as	of	December	31,	2018:

| (In	millions) | Total | 1	year	or	less | 2-3	years | 4-5	years | More	than	5	years |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Long-term\tdebt\tobligations\t(a) | $7,655 | $72 | $335 | $184 | $7,064 |
| Interest\ton\tlong-term\tdebt\t(b) | 5,832 | 352 | 688 | 648 | 4,144 |
| Operating\tlease\tobligations\t(c) | 141 | 17 | 27 | 17 | 80 |
| Purchase\twater\tobligations\t(d) | 957 | 65 | 130 | 121 | 641 |
| Other\tpurchase\tobligations\t(e) | 637 | 637 | — | — | — |
| Pension\tplan\tobligations\t(f) | 156 | 31 | 64 | 61 | — |
| Other\tobligations\t(g) | 924 | 312 | 255 | 62 | 295 |
| Total | $16,302 | $1,486 | $1,499 | $1,093 | $12,224 |

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	$97	million	are	not	reflected	in	this	table	as	we	cannot	predict	when	open	tax	years	will	close	with	completed	examinations.	See	 Note	14—Income	Taxes	in	the Notes	to	Consolidated	Financial	Statements.

(a) Represents	sinking	fund	obligations,	debt	maturities,	capital	lease	obligations	and	preferred	stocks	with	mandatory	redemption	requirements.

(b) Represents	expected	interest	payments	on	outstanding	long-term	debt	and	interest	on	preferred	stock	with	mandatory	redemption	requirements.	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,	2018	for	goods	and	services	purchased	in	the	ordinary	course	of	business.

(f) Represents	contributions	expected	to	be	made	to	pension	for	the	years	 2019	through	2023.

(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	on	the	Consolidated	Financial Statements.	The	carrying	value	of	the	transferred	facilities,	which	is	presented	in	property,	plant	and	equipment	on	the	Consolidated	Balance	Sheets,	was	approximately $147	million	as	of	December	31,	2018.

# 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. For	discussion	of	our	performance	obligations	see	Note	3—Revenue	Recognition	in	the	Notes	to	Consolidated	Financial	Statements	for	additional	information.

# 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	affect	the	Company's	financial	condition,	results	of	operations	and	cash	flows.	Actual	results	could	differ	from	these	estimates,	assumptions	and judgments.	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,	Finance	and	Risk	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	Consolidated	Financial	Statements.

# Regulation	and	Regulatory	Accounting

Our	regulated	utilities	are	generally	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,	2018,	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	a	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	we	and	our	regulatory	jurisdictions	believe	should	be	refunded	to	customers.	As	such,	we	recorded	these	amounts	as	regulatory	liabilities.

As	of	December	31,	2018	and	2017,	our	regulatory	asset	balance	was	$1.2	billion	 and	$1.1	billion,	respectively,	and	our	regulatory	liability	balance	was	$1.9 billion	and	$1.7	billion,	respectively.	See	Note	7—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,	2018	and	2017,	our	goodwill	balances	were	$1.6	billion	and	$1.4	billion,	respectively.	In	accordance	with	GAAP,	goodwill	must	be	allocated at	the	reporting	unit	level,	which	is	defined	as	an	operating	segment	or	one	level	below,	and	tested	for	impairment	at	least	annually.	We	perform	our	annual	impairment testing	of	goodwill	as	of	November	30	of	each	year,	or	more	frequently	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.	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	further	testing	of	a	reporting	unit's	carrying	value.

Entities	testing	goodwill	for	impairment	have	the	option	of	first	performing	a	qualitative	assessment	to	determine	whether	quantitative	testing	is	necessary.	In performing	a	qualitative	assessment,	we	assess	and	make	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	estimated	fair	value	of	a	reporting	unit	is	more	likely	than	not,	greater than	its	carrying	value,	no	further	testing	is	required.	If	we	bypass	the	qualitative	assessment,	or	perform	the	qualitative	assessment	and	determine	that	the	estimated	fair value	of	a	reporting	unit	is	more	likely	than	not	less	than	its	carrying	value,	a	quantitative,	fair	value-based	test	is	performed.	This	quantitative	test	compares	the estimated	fair	value	of	the	reporting	unit	to	its	respective	net	carrying	value,	including	goodwill,	on	the	measurement	date.	An	impairment	loss	will	be	recognized	in	the amount	equal	to	the	excess	of	the	reporting	unit's	carrying	value	compared	to	its	estimated	fair	value,	limited	to	the	total	amount	of	goodwill	allocated	to	that	reporting unit.

Application	of	goodwill	impairment	testing	requires	management	judgment,	including	the	identification	of	reporting	units	and	determining	the	fair	value	of reporting	units.	We	estimate	fair	value	using	a	combination	of	a	discounted	cash	flow	analysis	and	a	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.	See Note	8—Goodwill	and	Other	Intangible	Assets	in	the	Notes	to	Consolidated	Financial	Statements	for	additional	information	regarding	our	goodwill.

# Impairment	of	Long-Lived	Assets

Long-lived	 assets	 include	 property,	 plant	 and	 equipment,	 goodwill,	 intangible	 assets	 and	 long-term	 investments.	 We	 evaluate	 our	 long-lived	 assets	 for impairment	when	circumstances	indicate	the	carrying	value	of	those	assets	may	not	be	recoverable.	Such	circumstances	include,	but	are	not	limited	to,	a	significant decrease	in	the	market	value	of	the	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	indicators	arise,	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	the	estimated value	fair	to	the	carrying	value	of	the	asset.	An	impairment	loss	will	be	recognized	in	the	amount	equal	to	the	excess	of	the	long-lived	asset's	carrying	value	compared	to its	estimated	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	 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	Businesses	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	Company	holds	other	investments	in	privately	held	companies	and	joint	ventures	accounted	for	using	the	equity	method.	The	estimated	fair	value	of	the	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	long-term	investments	are	considered	impaired,	an	impairment	loss	will	be	recognized	in	the	amount	equal	to	the	excess	of	the	investment's	carrying value	compared	to	its	estimated	fair	value.

The	Company	believes	the	assumptions	and	other	considerations	used	to	value	long-lived	assets	to	be	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.

# Revenue	Recognition

Revenue	from	the	Company's	Regulated	Businesses	is	generated	primarily	from	water	and	wastewater	services	delivered	to	customers.	These	contracts	contain	a single	performance	obligation,	the	delivery	of	water	or	wastewater	services,	as	the	promise	to	transfer	the	individual	good	or	service	is	not	separately	identifiable	from other	promises	within	the	contracts	and,	therefore,	is	not	distinct.	Revenues	are	recognized	over	time,	as	services	are	provided.	There	are	generally	no	significant financing	components	or	variable	consideration.	Revenues	include	amounts	billed	to	customers	on	a	cycle	basis,	and	unbilled	amounts	calculated	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	amounts	that	the	Company	has	a	right	to invoice	are	determined	by	each	customer's	actual	usage,	an	indicator	that	the	invoice	amount	corresponds	directly	to	the	value	transferred	to	the	customer.

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,	2018	and	2017	 was	$144 million	and	$152	million,	respectively.

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.

Revenue	from	the	Company's	Homeowner	Services	Group	is	generated	through	various	protection	programs	in	which	the	Company	provides	fixed	fee	services	to domestic	homeowners	and	smaller	commercial	customers	to	protect	against	repair	costs	for	interior	and	external	water	and	sewer	lines,	interior	electric	and	gas	lines, heating	and	cooling	systems,	water	heaters,	power	surge	protection	and	other	related	services.	Most	of	the	contracts	have	a	one-year	term	and	each	service	is	a	separate performance	obligation,	satisfied	over	time,	as	the	customers	simultaneously	receive	and	consume	the	benefits	provided	from	the	service.	Customers	are	obligated	to	pay for	the	protection	programs	ratably	over	12	months	or	via	a	one-time,	annual	fee,	with	revenues	recognized	ratably	over	time	for	these	services.	Advances	from	customers are	deferred	until	the	performance	obligation	is	satisfied.

The	Company	also	has	long-term,	fixed	fee	contracts	to	operate	and	maintain	water	and	wastewater	facilities	with	the	U.S.	government	on	various	military	bases and	facilities	owned	by	municipal	and	industrial	customers,	as	well	as	shorter-term	contracts	that	provide	customized	water	transfer	services	for	shale	natural	gas companies	and	customers.	Billing	and	revenue	recognition	for	the	fixed	fee	revenues	occurs	ratably	over	the	term	of	the	contract,	as	customers	simultaneously	receive and	consume	the	benefits	provided	by	the	Company.	Additionally,	these	contracts	allow	the	Company	to	make	capital	improvements	to	underlying	infrastructure,	which are	initiated	through	separate	modifications	or	amendments	to	the	original	contract,	whereby	stand-alone,	fixed	pricing	is	separately	stated	for	each	improvement.	The Company	has	determined	that	these	capital	improvements	are	separate	performance	obligations,	with	revenue	recognized	over	time	based	on	performance	completed	at the	end	of	each	reporting	period.	Losses	on	contracts	are	recognized	during	the	period	in	which	the	losses	first	become	probable	and	estimable.	Revenues	recognized during	the	period	in	excess	of	billings	on	construction	contracts	are	recorded	as	unbilled	revenues,	with	billings	in	excess	of	revenues	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.	Unbilled	revenue	for	our	Market-Based	Businesses	as	of	December	31,	2018	and	2017	was	$42	million	and $60	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	NOL	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	Topic	740,	Income	Taxes	("ASC	740"),	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	of	the	TCJA,	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	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:	(i)	a	company	is	complete	with	its	accounting	for	certain	effects	of	tax	reform;	(ii)	a	company	is	able	to	determine	a	reasonable	estimate	for	certain	effects	of tax	reform	and	records	that	estimate	as	a	provisional	amount;	or	(iii)	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	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	various jurisdictions	in	which	the	Company	currently	operates;

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

•bonus	depreciation	deductions	for	assets	constructed	and	placed	in	service	during	the	period	from	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	and	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,	2018	and	2017	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	14—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	15— Employee	Benefits	in	the	Notes	to	Consolidated	Financial	Statements	for	additional	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.

•Mortality—Management	retained	the	Society	of	Actuaries	RP-2014	mortality	base	table,	which	provides	rates	of	mortality	in	2006,	but	adopted	the	new MP-2018	mortality	improvement	scale	to	gradually	adjust	future	mortality	rates	downward	due	to	increased	longevity	in	each	year	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.	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	4.38%,	3.75%	and	4.28%	at	December	31,	2018,	2017	and	2016,	respectively.	The	discount	rate	for	determining	other postretirement	benefit	obligations	was	4.32%,	3.73%	and	4.26%	at	December	31,	2018,	2017	and	2016,	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	5.95%	 for	2018,	6.49%	 for	2017,	 and	7.02%	 for	2016.	The	weighted	average	EROA	assumption	used	in calculating	other	postretirement	benefit	costs	was	4.77%	for	2018,	5.09%	for	2017	and	5.37%	for	2016.

The	following	table	provides	the	allocations	of	the	pension	plan	assets	by	asset	category:

| Asset	Category | 2019	Target	Allocation | 2018 | 2017 |
| :--- | :--- | :--- | :--- |
| Equity\tsecurities | 43% | 42% | 44% |
| Fixed\tincome | 50% | 52% | 49% |
| Real\tEstate | 5% | 5% | 5% |
| Real\testate\tinvestment\ttrusts\t("REITs") | 2% | 1% | 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	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.

# Postretirement	Medical	Bargaining	Plan	Changes

On	July	31,	2018,	a	new,	five-year	national	benefits	agreement	was	ratified,	covering	approximately	3,200	of	our	union-represented	employees.	Most	of	the benefits	under	this	new	agreement	will	become	effective	on	January	1,	2019,	and	include,	among	other	things,	union-represented	employees'	participation	in	the Company's	cash-based	annual	performance	plan,	additional	medical	plan	options	and	changes	to	certain	retiree	medical	benefits,	which	required	the	Company	to remeasure	its	other	postretirement	benefit	plan	obligation	during	the	third	quarter	of	2018.

For	those	eligible	union	retirees	and	dependents	over	age	65,	the	current	supplemental	retiree	medical	plan	will	be	replaced	with	a	Health	Reimbursement Arrangement	("HRA")	similar	to	the	cap	currently	in	place	for	non-union	retirees.	The	Company	is	providing	a	subsidy	allowing	the	post-65	retirees	to	purchase	a Medicare	supplemental	plan	on	a	private	exchange	network.	The	pre-65	coverage	plan	was	also	amended	to	provide	a	cap	on	future	employer	costs	designed	to	limit	the employer	costs	to	2018	levels.	For	pre-65	union	members	retiring	early	in	2019-2021	a	supplemental	benefit	will	be	provided	to	alleviate	the	effect	of	the	cap.

On	August	31,	2018,	the	Postretirement	Medical	Benefit	Plan	was	remeasured	to	reflect	this	plan	change.	The	plan	change	resulted	in	a	$175	million	reduction	in future	benefits	payable	to	plan	participants,	and,	in	combination	with	other	experience	reflected	as	of	the	remeasurement	date,	resulted	in	a	$227	million	reduction	to	the net	accumulated	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.

After	 the	remeasurement,	 the	Retirement	and	Benefit	Plans	Investment	Committee	(the	"Investment	Committee"),	which	 is	responsible	for	overseeing	 the investment	of	the	Company's	pension	and	other	postretirement	benefit	plans'	assets,	determined	that	the	funded	status	of	the	Postretirement	Medical	Bargaining	Plan was	in	excess	of	that	needed	to	pay	current	and	future	benefits.

Given	the	change	in	funded	status,	the	Investment	Committee	commissioned	a	new	asset-liability	study	for	the	Postretirement	Medical	Bargaining	Plan.	This study	concluded	that	it	was	prudent	to	decrease	the	risk	in	the	plan	and	to	remove	its	equity	exposure.	The	study	also	recommended	reducing	its	exposure	to	changes	in interest	rates	by	matching	the	assets	of	the	plan	to	the	projected	cash	flows	for	future	benefit	payments	of	the	liability.	The	Investment	Committee	agreed	with	the recommendations	and	approved	the	investment	of	the	Postretirement	Medical	Bargaining	Plan	assets	in	fixed-income	securities.

The	restructuring	of	the	plan	was	initiated	toward	year-end.	Once	fully	completed,	the	plan's	assets	will	be	invested	in	fixed-income	securities.	The	majority	of the	securities	will	be	used	to	match	the	projected	cash	flows	for	future	benefit	payments	of	the	liability.	Plan	assets	in	excess	of	those	securities	designed	to	match	the long-term	liabilities	will	be	invested	in	shorter	duration	securities	with	a	duration	of	about	three	years.

The	following	table	provides	the	allocations	of	the	other	postretirement	benefit	plan	assets	by	asset	category:

| Asset	Category | 2019	Target	Allocation	(a) | 2018 | 2017 |
| :--- | :--- | :--- | :--- |
| Equity\tsecurities | 14% | 17% | 35% |
| Fixed\tincome | 86% | 83% | 65% |
| REITs | — | — | — |
| Total | 100% | 100% | 100% |

(a) Includes	the	American	Water	Postretirement	Medical	Benefits	Bargaining	Plan,	the	New	York	Water	Service	Corporation	Postretirement	Medical	Benefits	Bargaining	Plan,	the	American Water	Postretirement	Medical	Benefits	Non-Bargaining	Plan,	and	the	American	Water	Life	Insurance	Trust.

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	 88%	of	the	assets	are	valued	using	the	quoted	market	price	for	the	assets	in	an active	market	at	the	measurement	date,	while	12%	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%	for 2018,	3.02%	for	2017	and	3.07%	for	2016.

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	2018	gradually	declining	to	4.5%	in	2026	and	thereafter.	As	of	December	31,	2018,	the	Company	is projecting	that	medical	inflation	will	be	6.75%	in	2019	and,	it	will	ultimately	trend	down	to	5%,	but	not	until	2026.

We	will	use	a	discount	rate	and	EROA	of	4.38%	and	6.2%,	respectively,	for	estimating	our	2019	pension	costs.	Additionally,	we	will	use	a	discount	rate	and expected	blended	return	based	on	weighted	assets	of	4.32%	 and	3.56%,	respectively,	for	estimating	our	2019	other	postretirement	benefit	costs.	A	decrease	in	the discount	rate	or	the	EROA	would	increase	our	pension	expense.	Our	2018	 and	2017	pension	and	postretirement	benefit	costs	were	$21	million	 and	$56	 million, respectively.	The	Company	expects	to	make	pension	and	postretirement	benefit	contributions	to	the	plan	trusts	up	to	$31	million	in	2019,	and	$32	million,	$29	million, $29	million	and	$29	million	in	2020,	2021,	2022	and	2023,	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's	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.	See	Note	16—Commitments	and	Contingencies	in	the	Notes	to	Consolidated Financial	Statements	for	additional	information	regarding	contingencies.

# 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,	2018,	a	hypothetical	increase	of	interest	rates	by	1%	associated	with	our	short-term	borrowings	would	result	in	a	$10	million	increase	in	short-term interest	expense.

As	of	December	31,	2018,	the	Company	had	four	forward	starting	swap	agreements	with	an	aggregate	notional	amount	of	$360	million	to	reduce	interest	rate exposure	on	debt	expected	to	be	issued	in	2019.	The	forward	starting	swap	agreements	terminate	in	2019	and	have	an	average	fixed	rate	of	3.16%.	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,	2018	was	in	a	loss	position	of	$14	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	$66	million	at	December	31,	2018.

On	January	8,	2019,	we	entered	into	an	additional	forward	starting	swap	agreement,	with	a	notional	amount	of	$150	million,	to	reduce	interest	rate	exposure	on debt	expected	to	be	issued	in	2019.	This	forward	starting	swap	agreement	terminates	in	December	2019,	and	has	an	average	fixed	rate	of	2.76%.

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 | 79 |
| Consolidated\tBalance\tSheets\tas\tof\tDecember\t31,\t2018\tand\t2017 | 81 |
| Consolidated\tStatements\tof\tOperations\tfor\tthe\tyears\tended\tDecember\t31,\t2018,\t2017\tand\t2016 | 83 |
| Consolidated\tStatements\tof\tComprehensive\tIncome\tfor\tthe\tyears\tended\tDecember\t31,\t2018,\t2017,\tand\t2016 | 84 |
| Consolidated\tStatements\tof\tCash\tFlows\tfor\tthe\tyears\tended\tDecember\t31,\t2018,\t2017\tand\t2016 | 85 |
| Consolidated\tStatements\tof\tChanges\tin\tShareholders'\tEquity\tfor\tthe\tyears\tended\tDecember\t31,\t2018,\t2017\tand\t2016 | 86 |
| Notes\tto\tConsolidated\tFinancial\tStatements | 87 |

# Report	of	Independent	Registered	Public	Accounting	Firm

To	the	Board	of	Directors	and	Shareholders	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 	 (the	 "Company")	 as	 of December	31,	2018	and	2017,	and	the	related	consolidated	statements	of	operations,	comprehensive	income,	cash	flows,	and	changes	in	shareholders'	equity	for	each	of the	three	years	in	the	period	ended	December	31,	2018,	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,	2018,	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,	2018	and	2017,	and	the	results	of	its	operations	and	its	cash	flows	for	each	of	the	three	years	in	the	period	ended	December	31,	2018	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,	2018,	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.

As	described	in	Management's	Report	on	Internal	Control	over	Financial	Reporting,	management	has	excluded	Pivotal	Home	Solutions	from	its	assessment	of internal	control	over	financial	reporting	as	of	December	31,	2018	because	it	was	acquired	by	the	Company	in	a	purchase	business	combination	during	2018.	We	have also	excluded	Pivotal	Home	Solutions	from	our	audit	of	internal	control	over	financial	reporting.	Pivotal	Home	Solutions	is	a	wholly-owned	subsidiary	whose	total assets	and	total	revenues	excluded	from	management's	assessment	and	our	audit	of	internal	control	over	financial	reporting	represent	less	than	1%	and	approximately 2%,	respectively,	of	the	related	consolidated	financial	statement	amounts	as	of	and	for	the	year	ended	December	31,	2018.

# 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	19,	2019

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,	2018 | December	31,	2017 |
| :--- | :--- | :--- |
| ASSETS |  |  |
| Property,\tplant\tand\tequipment | $23,204 | $21,716 |
| Accumulated\tdepreciation | (5,795) | (5,470) |
| Property,\tplant\tand\tequipment,\tnet | 17,409 | 16,246 |
| Current\tassets: |  |  |
| Cash\tand\tcash\tequivalents | 130 | 55 |
| Restricted\tfunds | 28 | 27 |
| Accounts\treceivable,\tnet | 301 | 272 |
| Unbilled\trevenues | 186 | 212 |
| Materials\tand\tsupplies | 41 | 41 |
| Other | 95 | 113 |
| Total\tcurrent\tassets | 781 | 720 |
| Regulatory\tand\tother\tlong-term\tassets: |  |  |
| Regulatory\tassets | 1,156 | 1,061 |
| Goodwill | 1,575 | 1,379 |
| Intangible\tassets | 84 | 9 |
| Postretirement\tbenefit\tasset | 155 | — |
| Other | 63 | 67 |
| Total\tregulatory\tand\tother\tlong-term\tassets | 3,033 | 2,516 |
| Total\tassets | $21,223 | $19,482 |

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

|  | December	31,	2018 | December	31,	2017 |
| :--- | :--- | :--- |
| CAPITALIZATION\tAND\tLIABILITIES |  |  |
| Capitalization: |  |  |
| respectively) | $2 | $2 |
| Paid-in-capital | 6,657 | 6,432 |
| Accumulated\tdeficit | (464) | (723) |
| Accumulated\tother\tcomprehensive\tloss | (34) | (79) |
| Treasury\tstock,\tat\tcost\t(4,683,156\tand\t4,064,010\tshares,\trespectively) | (297) | (247) |
| Total\tcommon\tshareholders'\tequity | 5,864 | 5,385 |
| Long-term\tdebt | 7,569 | 6,490 |
| Redeemable\tpreferred\tstock\tat\tredemption\tvalue | 7 | 8 |
| Total\tlong-term\tdebt | 7,576 | 6,498 |
| Total\tcapitalization | 13,440 | 11,883 |
| Current\tliabilities: |  |  |
| Short-term\tdebt | 964 | 905 |
| Current\tportion\tof\tlong-term\tdebt | 71 | 322 |
| Accounts\tpayable | 175 | 195 |
| Accrued\tliabilities | 556 | 630 |
| Taxes\taccrued | 45 | 33 |
| Interest\taccrued | 87 | 73 |
| Other | 196 | 167 |
| Total\tcurrent\tliabilities | 2,094 | 2,325 |
| Regulatory\tand\tother\tlong-term\tliabilities: |  |  |
| Advances\tfor\tconstruction | 252 | 271 |
| Deferred\tincome\ttaxes,\tnet | 1,718 | 1,551 |
| Deferred\tinvestment\ttax\tcredits | 22 | 22 |
| Regulatory\tliabilities | 1,907 | 1,664 |
| Accrued\tpension\texpense | 390 | 384 |
| Accrued\tpostretirement\tbenefit\texpense | — | 40 |
| Other | 78 | 66 |
| Total\tregulatory\tand\tother\tlong-term\tliabilities | 4,367 | 3,998 |
| Contributions\tin\taid\tof\tconstruction | 1,322 | 1,276 |
| Commitments\tand\tcontingencies\t(See\tNote\t16) |  |  |
| Total\tcapitalization\tand\tliabilities | $21,223 | $19,482 |

# Consolidated	Statements	of	Operations

(In	millions,	except	per	share	data)

|  | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Operating\trevenues | $3,440 | $3,357 | $3,302 |
| Operating\texpenses: |  |  |  |
| Operation\tand\tmaintenance | 1,479 | 1,369 | 1,499 |
| Depreciation\tand\tamortization | 545 | 492 | 470 |
| General\ttaxes | 277 | 259 | 258 |
| (Gain)\ton\tasset\tdispositions\tand\tpurchases | (20) | (16) | (10) |
| Impairment\tcharge | 57 | — | — |
| Total\toperating\texpenses,\tnet | 2,338 | 2,104 | 2,217 |
| Operating\tincome | 1,102 | 1,253 | 1,085 |
| Other\tincome\t(expense): |  |  |  |
| Interest,\tnet | (350) | (342) | (325) |
| Non-operating\tbenefit\tcosts,\tnet | 20 | (9) | (5) |
| Loss\ton\tearly\textinguishment\tof\tdebt | (4) | (7) | — |
| Other,\tnet | 19 | 17 | 15 |
| Total\tother\tincome\t(expense) | (315) | (341) | (315) |
| Income\tbefore\tincome\ttaxes | 787 | 912 | 770 |
| Provision\tfor\tincome\ttaxes | 222 | 486 | 302 |
| Consolidated\tnet\tincome | 565 | 426 | 468 |
| Net\tloss\tattributable\tto\tnoncontrolling\tinterest | (2) | — | — |
| Net\tincome\tattributable\tto\tcommon\tshareholders | $567 | $426 | $468 |
| Basic\tearnings\tper\tshare:\t(a) |  |  |  |
| Net\tincome\tattributable\tto\tcommon\tshareholders | $3.16 | $2.39 | $2.63 |
| Diluted\tearnings\tper\tshare:\t(a) |  |  |  |
| Net\tincome\tattributable\tto\tcommon\tshareholders | $3.15 | $2.38 | $2.62 |
| Weighted\taverage\tcommon\tshares\toutstanding: |  |  |  |
| Basic | 180 | 178 | 178 |
| Diluted | 180 | 179 | 179 |

# Consolidated	Statements	of	Comprehensive	Income

(In	millions)

|  | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Net\tincome\tattributable\tto\tcommon\tshareholders | $567 | $426 | $468 |
| Other\tcomprehensive\tincome\t(loss),\tnet\tof\ttax: |  |  |  |
| Change\tin\temployee\tbenefit\tplan\tfunded\tstatus,\tnet\tof\ttax\tof\t$20,\t$2\tand\t$(14)\tin\n2018,\t2017\tand\t2016,\trespectively | 60 | 7 | (21) |
| Pension\tamortized\tto\tperiodic\tbenefit\tcost: |  |  |  |
| Actuarial\tloss,\tnet\tof\ttax\tof\t$3,\t$5\tand\t$4\tin\t2018,\t2017\tand\t2016,\trespectively | 7 | 7 | 6 |
| Pension\treclassification\tfrom\taccumulated\tother\tcomprehensive\tloss\tof\ttax\teffects\nresulting\tfrom\tthe\tTax\tCuts\tand\tJobs\tAct | (22) | — | — |
| Foreign\tcurrency\ttranslation\tadjustment | — | (1) | — |
| Unrealized\t(loss)\tgain\ton\tcash\tflow\thedges,\tnet\tof\ttax\tof\t$0,\t$(4)\tand\t$10\tin\t2018,\n2017\tand\t2016,\trespectively | (2) | (6) | 17 |
| Cash\tflow\thedges\treclassification\tfrom\taccumulated\tother\tcomprehensive\tloss\tof\ttax\neffects\tresulting\tfrom\tthe\tTax\tCuts\tand\tJobs\tAct | 2 | — | — |
| Net\tother\tcomprehensive\tincome | 45 | 7 | 2 |
| Comprehensive\tincome\tattributable\tto\tcommon\tshareholders | $612 | $433 | $470 |

# Consolidated	Statements	of	Cash	Flows

|  | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| CASH\tFLOWS\tFROM\tOPERATING\tACTIVITIES |  |  |  |
| Net\tincome | $565 | $426 | $468 |
| Adjustments\tto\treconcile\tto\tnet\tcash\tflows\tprovided\tby\toperating\tactivities: |  |  |  |
| Depreciation\tand\tamortization | 545 | 492 | 470 |
| Deferred\tincome\ttaxes\tand\tamortization\tof\tinvestment\ttax\tcredits | 195 | 462 | 295 |
| Provision\tfor\tlosses\ton\taccounts\treceivable | 33 | 29 | 27 |
| Gain\ton\tasset\tdispositions\tand\tpurchases | (20) | (16) | (10) |
| Impairment\tcharge | 57 | — | — |
| Pension\tand\tnon-pension\tpostretirement\tbenefits | 23 | 57 | 54 |
| Other\tnon-cash,\tnet | 20 | (54) | (36) |
| Changes\tin\tassets\tand\tliabilities: |  |  |  |
| Receivables\tand\tunbilled\trevenues | (17) | 21 | (31) |
| Pension\tand\tnon-pension\tpostretirement\tbenefit\tcontributions | (22) | (48) | (53) |
| Accounts\tpayable\tand\taccrued\tliabilities | 25 | 38 | 60 |
| Other\tassets\tand\tliabilities,\tnet | 22 | 64 | (20) |
| Impact\tof\tFreedom\tIndustries\tsettlement\tactivities | (40) | (22) | 65 |
| Net\tcash\tprovided\tby\toperating\tactivities | 1,386 | 1,449 | 1,289 |
| CASH\tFLOWS\tFROM\tINVESTING\tACTIVITIES |  |  |  |
| Capital\texpenditures | (1,586) | (1,434) | (1,311) |
| Acquisitions,\tnet\tof\tcash\tacquired | (398) | (177) | (204) |
| Proceeds\tfrom\tsale\tof\tassets | 35 | 15 | 9 |
| Removal\tcosts\tfrom\tproperty,\tplant\tand\tequipment\tretirements,\tnet | (87) | (76) | (84) |
| Net\tcash\tused\tin\tinvesting\tactivities | (2,036) | (1,672) | (1,590) |
| CASH\tFLOWS\tFROM\tFINANCING\tACTIVITIES |  |  |  |
| Proceeds\tfrom\tlong-term\tdebt | 1,358 | 1,395 | 553 |
| Repayments\tof\tlong-term\tdebt | (526) | (896) | (144) |
| Net\tshort-term\tborrowings\twith\tmaturities\tless\tthan\tthree\tmonths | 60 | 55 | 221 |
| Issuance\tof\tcommon\tstock | 183 | — | — |
| Proceeds\tfrom\tissuances\tof\temployee\tstock\tplans\tand\tdirect\tstock\tpurchase\tplan,\tnet\tof\ttaxes\npaid\tof\t$8,\t$11\tand\t$13\tin\t2018,\t2017\tand\t2016,\trespectively | 16 | 15 | 13 |
| Advances\tand\tcontributions\tfor\tconstruction,\tnet\tof\trefunds\tof\t$22,\t$22\tand\t$31\tin\t2018,\t2017\nand\t2016,\trespectively | 21 | 28 | 16 |
| Debt\tissuance\tcosts\tand\tmake-whole\tpremium\ton\tearly\tdebt\tredemption | (22) | (47) | (5) |
| Dividends\tpaid | (319) | (289) | (261) |
| Anti-dilutive\tshare\trepurchases | (45) | (54) | (65) |
| Net\tcash\tprovided\tby\tfinancing\tactivities | 726 | 207 | 328 |
| Net\tincrease\t(decrease)\tin\tcash\tand\tcash\tequivalents\tand\trestricted\tfunds | 76 | (16) | 27 |
| Cash\tand\tcash\tequivalents\tand\trestricted\tfunds\tat\tbeginning\tof\tperiod | 83 | 99 | 72 |
| Cash\tand\tcash\tequivalents\tand\trestricted\tfunds\tat\tend\tof\tperiod | $159 | $83 | $99 |
| Cash\tpaid\tduring\tthe\tyear\tfor: |  |  |  |
| Interest,\tnet\tof\tcapitalized\tamount | $332 | $338 | $327 |
| Income\ttaxes,\tnet\tof\trefunds\tof\t$0\tin\t2018,\t2017\tand\t2016 | $38 | $30 | $16 |
| Non-cash\tinvesting\tactivity: |  |  |  |
| Capital\texpenditures\tacquired\ton\taccount\tbut\tunpaid\tas\tof\tyear\tend | $181 | $204 | $171 |
| Acquisition\tfinanced\tby\ttreasury\tstock | $— | $33 | $— |

# Consolidated	Statements	of	Changes	in	Shareholders'	Equity

|  | Common	Stock | Common	Stock |  |  |  | Treasury	Stock | Treasury	Stock |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Shares | Par\tValue | Paid-in\tCapital | Accumulated\nDeficit | Accumulated\tOther\nComprehensive\tLoss | Shares | At\tCost | Total\tShareholders'\nEquity |
| Balance\tas\tof\tDecember\t31,\t2015 | 180.9 | $2 | $6,351 | $(1,073) | $(88) | (2.6) | $(143) | $5,049 |
| Net\tincome\tattributable\tto\tcommon\nshareholders | — | — | — | 468 | — | — | — | 468 |
| Direct\tstock\treinvestment\tand\npurchase\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 | — | — | — | — | 2 | — | — | 2 |
| Dividends\t($1.50\tdeclared\tper\ncommon\tshare) | — | — | — | (267) | — | — | — | (267) |
| Balance\tas\tof\tDecember\t31,\t2016 | 181.8 | $2 | $6,388 | $(873) | $(86) | (3.7) | $(213) | $5,218 |
| Cumulative\teffect\tof\tchange\nin\taccounting\tprinciple | — | — | — | 21 | — | — | — | 21 |
| Net\tincome\tattributable\tto\tcommon\nshareholders | — | — | — | 426 | — | — | — | 426 |
| Direct\tstock\treinvestment\tand\npurchase\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 | — | — | — | — | 7 | — | — | 7 |
| Dividends\t($1.66\tdeclared\tper\ncommon\tshare) | — | — | — | (297) | — | — | — | (297) |
| Balance\tas\tof\tDecember\t31,\t2017 | 182.5 | $2 | $6,432 | $(723) | $(79) | (4.1) | $(247) | $5,385 |
| Cumulative\teffect\tof\tchange\nin\taccounting\tprinciple | — | — | — | 20 | — | — | — | 20 |
| Net\tincome\tattributable\tto\tcommon\nshareholders | — | — | — | 567 | — | — | — | 567 |
| Direct\tstock\treinvestment\tand\npurchase\tplan | 0.1 | — | 8 | — | — | — | — | 8 |
| Employee\tstock\tpurchase\tplan | 0.1 | — | 8 | — | — | — | — | 8 |
| Stock-based\tcompensation\tactivity | 0.4 | — | 26 | (1) | — | (0.1) | (5) | 20 |
| Issuance\tof\tcommon\tstock | 2.3 | — | 183 | — | — | — | — | 183 |
| Repurchases\tof\tcommon\tstock | — | — | — | — | — | (0.5) | (45) | (45) |
| Net\tother\tcomprehensive\tincome | — | — | — | — | 45 | — | — | 45 |
| Dividends\t($1.82\tdeclared\tper\ncommon\tshare) | — | — | — | (327) | — | — | — | (327) |
| Balance\tas\tof\tDecember\t31,\t2018 | 185.4 | $2 | $6,657 | $(464) | $(34) | (4.7) | $(297) | $5,864 |

# 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	a	holding	company	for	regulated	and	market-based	subsidiaries	throughout	the United	States	and	Ontario,	Canada.	The	Company's	primary	business	involves	the	ownership	of	regulated	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	that	provide	a	broad	range	of	related and	complementary	water	and	wastewater	services	within	non-reportable	operating	segments,	collectively	referred	to	as	the	"Market-Based	Businesses."	The	Company's primary	Market-Based	Businesses	 include	 the	Homeowner	 Services	 Group,	 which	 provides	 warranty	 protection	 programs	 to	 residential	 and	 smaller	 commercial customers;	 the	Military	Services	Group,	which	provides	water	and	wastewater	services	to	the	U.S.	government	on	military	installations;	and	Keystone	Clearwater Solutions,	LLC,	which	provides	water	transfer	services	for	shale	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").	During	the	fourth	quarter	of	2018,	pursuant	to	the	exercise	of	put	options	by	the	minority	owners,	the	Company	acquired the	 remaining	5%	interest	in	Keystone,	bringing	its	ownership	interest	to	100%.	The	former	minority	owners'	interest	was	recognized	as	redeemable	noncontrolling interest	 and	 was	 included	 in	 Other	 long-term	 liabilities	 on	 the	 Consolidated	 Balance	 Sheets.	 There	 was	 no	 remaining	 redeemable	 noncontrolling	 interest	 as	 of December	31,	2018,	and	$7	million	of	redeemable	noncontrolling	interest	as	of	December	31,	2017.

# Use	of	Estimates

The	preparation	of	financial	statements	in	conformity	with	accounting	principles	generally	accepted	in	the	United	States	("GAAP")	requires	that	management make	estimates,	assumptions	and	judgments	that	could	affect	the	Company's	financial	condition,	results	of	operations	and	cash	flows.	Actual	results	could	differ	from these	estimates,	assumptions	and	judgments.	The	Company	considers	its	critical	accounting	estimates	to	include	(i)	the	application	of	regulatory	accounting	principles and	the	related	determination	and	estimation	of	regulatory	assets	and	liabilities,	(ii)	assumptions	used	in	impairment	testing	of	goodwill	and	long-lived	assets,	including regulatory	assets,	(iii)	revenue	recognition	and	the	estimates	used	in	the	calculation	of	unbilled	revenue,	(iv)	accounting	for	income	taxes	and	the	enacted	Tax	Cuts	and Jobs	Act	(the	"TCJA"),	(v)	benefit	plan	assumptions	and	(vi)	the	estimates	and	judgments	used	in	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	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").	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,	operation	and	maintenance	("O&M")	expenses,	capital	expenditures,	taxes,	affiliated	transactions	and	relationships, reorganizations,	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	revenues,	these	authoritative	accounting	principles	allow	a	cost	that	would	otherwise	be	charged	as	an	expense	by	a	non-regulated	entity,	to	be deferred	as	a	regulatory	asset	if	it	is	probable	that	such	cost	is	recoverable	through	future	rates.	Conversely,	these	principles	also	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	7—Regulatory	Assets	and	Liabilities	for	additional	information.

# Property,	Plant	and	Equipment

Property,	plant	and	equipment	consists	primarily	of	utility	plant	utilized	by	the	Company's	regulated	utilities.	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	utility	plant	is	depreciated	using	the	straight-line	average	remaining	life,	group	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.

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

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	$336	million	and	$346	million	as	of	December	31,	2018	and	2017,	respectively.

# 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	 on	 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	amounts	as	presented	on	the	Consolidated	Balance	Sheets,	to the	sum	of	such	amounts	presented	on	the	Consolidated	Statements	of	Cash	Flows	for	the	years	ended	December	31:

|  | 2018 | 2017 |
| :--- | :--- | :--- |
| Cash\tand\tcash\tequivalents | $130 | $55 |
| Restricted\tfunds | 28 | 27 |
| Restricted\tfunds\tincluded\tin\tother\tlong-term\tassets | 1 | 1 |
| Cash\tand\tcash\tequivalents\tand\trestricted\tfunds\tas\tpresented\ton\tthe\tConsolidated\tStatements\tof\tCash\tFlows | $159 | $83 |

# Accounts	Receivable	and	Unbilled	Revenues

Accounts	receivable	include	regulated	utility	customer	accounts	receivable,	which	represent	amounts	billed	to	water	and	wastewater	customers	generally	on	a monthly	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	6—Allowance	for	Uncollectible	Accounts	for	additional	information.

# 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	and	must	be	allocated	at	the	reporting	unit	level,	which	is	defined	as	an	operating	segment	or	one	level	below,	and	tested	for impairment	at	least	annually,	or	more	frequently	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.

The	Company's	goodwill	is	primarily	associated	with	(i)	the	acquisition	of	American	Water	by	an	affiliate	of	the	Company's	previous	owner	in	2003,	(ii)	the acquisition	of	E'town	Corporation	by	a	predecessor	to	the	Company's	previous	owner	in	2001,	(iii)	the	acquisition	of	Pivotal	Home	Solutions	("Pivotal")	in	2018,	and (iv)	the	acquisition	of	Keystone	in	2015;	and	has	been	allocated	to	reporting	units	based	on	the	fair	values	at	the	date	of	the	acquisitions.	For	purposes	of	testing	goodwill for	impairment,	the	reporting	units	in	the	Regulated	Businesses	segment	are	aggregated	into	a	single	reporting	unit.	The	Market-Based	Businesses	is	comprised	of	the Homeowner	Services	Group	reporting	unit,	the	Military	Services	Group	reporting	unit	and	the	Keystone	reporting	unit.

The	Company's	annual	impairment	testing	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	quantitative	testing	is	necessary.	If	it	is	determined,	based	upon	qualitative	factors,	that	the estimated	fair	value	of	a	reporting	unit	is	more	likely	than	not,	greater	than	its	carrying	value,	no	further	testing	is	required.	If	the	Company	bypasses	the	qualitative assessment,	or	performs	the	qualitative	assessment	and	determines	that	the	estimated	fair	value	of	a	reporting	unit	is	more	likely	than	not,	less	than	its	carrying	value,	a quantitative,	fair	value-based	test	is	performed.	This	quantitative	testing	compares	the	estimated	fair	value	of	the	reporting	unit	to	its	respective	net	carrying	value, including	goodwill,	on	the	measurement	date.	An	impairment	loss	will	be	recognized	in	the	amount	equal	to	the	excess	of	the	reporting	unit's	carrying	value	compared	to its	estimated	fair	value,	limited	to	the	total	amount	of	goodwill	allocated	to	that	reporting	unit.

Application	of	goodwill	impairment	testing	requires	management	judgment,	including	the	identification	of	reporting	units	and	determining	the	fair	value	of reporting	units.	Management	estimates	fair	value	using	a	combination	of	a	discounted	cash	flow	analysis	and	a	market	multiples	analysis.	Significant	assumptions	used in	these	fair	value	estimations	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.

The	Company	believes	 the	assumptions	and	other	considerations	used	 to	value	goodwill	 to	be	appropriate,	however,	 if	actual	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	8— Goodwill	and	Other	Intangible	Assets	for	additional	information.

# Intangible	Assets

Intangible	assets	consist	primarily	of	finite-lived	customer	relationships	associated	with	the	acquisition	of	Pivotal	and	Keystone.	Finite-lived	intangible	assets	are initially	measured	at	their	estimated	fair	values,	and	are	amortized	over	their	estimated	useful	lives	based	on	the	pattern	in	which	the	economic	benefits	of	the	intangible assets	are	consumed	or	otherwise	used.	See	Note	8—Goodwill	and	Other	Intangible	Assets	for	additional	information.

Long-lived	assets	include	property,	plant	and	equipment,	goodwill,	intangible	assets	and	long-term	investments.	The	Company	evaluates	long-lived	assets	for impairment	when	circumstances	indicate	the	carrying	value	of	those	assets	may	not	be	recoverable.	When	such	indicators	arise,	the	Company	estimates	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,	comparing	the	estimated	value	fair	to the	carrying	value	of	the	asset.	An	impairment	loss	will	be	recognized	in	the	amount	equal	to	the	excess	of	the	long-lived	asset's	carrying	value	compared	to	its	estimated fair	value.

The	 long-lived	assets	of	 the	Company's	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	Company	holds	other	long-term	investments	in	privately	held	companies	and	joint	ventures	accounted	for	using	the	equity	method,	and	are	classified	as	other Long-term	assets	on	the	Consolidated	Balance	Sheets.	The	estimated	fair	value	of	the	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	long-term	investments	are	considered	impaired,	an	impairment loss	will	be	recognized	in	the	amount	equal	to	the	excess	of	the	investment's	carrying	value	compared	to	its	estimated	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,	2018	and	2017	on	the	Consolidated	Balance	Sheets	are	estimated	refunds	of	$23	million	 and	$23	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	$28	million,	$27	million	and	$27	million	for	the	years	ended	December	31,	2018,	2017	and	2016,	respectively.

On	January	1,	2018,	the	Company	adopted	Accounting	Standards	Codification	Topic	606,	Revenue	From	Contracts	With	Customers,	and	all	related	amendments (collectively,	"ASC	606"),	using	the	modified	retrospective	approach,	applied	to	contracts	which	were	not	completed	as	of	January	1,	2018.	Under	this	approach,	periods prior	to	the	adoption	date	have	not	been	restated	and	continue	to	be	reported	under	the	accounting	standards	in	effect	for	those	periods.

Under	ASC	606,	a	performance	obligation	is	a	promise	within	a	contract	to	transfer	a	distinct	good	or	service,	or	a	series	of	distinct	goods	and	services,	to	a customer.	Revenue	is	recognized	when	performance	obligations	are	satisfied	and	the	customer	obtains	control	of	promised	goods	or	services.	The	amount	of	revenue recognized	reflects	the	consideration	to	which	the	Company	expects	to	be	entitled	to	receive	in	exchange	for	goods	or	services.	Under	ASC	606,	a	contract's	transaction price	is	allocated	to	each	distinct	performance	obligation.	To	determine	revenue	recognition	for	arrangements	that	the	Company	determines	are	within	the	scope	of	ASC 606,	the	Company	performs	the	following	five	steps:	(i)	identifies	the	contracts	with	a	customer;	(ii)	identifies	the	performance	obligations	within	the	contract,	including whether	any	performance	obligations	are	distinct	and	capable	of	being	distinct	in	the	context	of	the	contract;	(iii)	determines	the	transaction	price;	(iv)	allocates	the transaction	price	to	the	performance	obligations	in	the	contract;	and	(v)	recognizes	revenue	when,	or	as,	the	Company	satisfies	each	performance	obligation.

The	Company's	revenues	from	contracts	with	customers	are	discussed	below.	Customer	payments	for	contracts	are	generally	due	within	30	days	of	billing	and none	of	the	contracts	with	customers	have	payment	terms	that	exceed	one	year;	therefore,	the	Company	elected	to	apply	the	significant	financing	component	practical expedient	and	no	amount	of	consideration	has	been	allocated	as	a	financing	component.

# Regulated	Businesses	Revenue

Revenue	from	the	Company's	Regulated	Businesses	is	generated	primarily	from	water	and	wastewater	services	delivered	to	customers.	These	contracts	contain	a single	performance	obligation,	the	delivery	of	water	and/or	wastewater	services,	as	the	promise	to	transfer	the	individual	good	or	service	is	not	separately	identifiable from	other	promises	within	the	contracts	and,	therefore,	is	not	distinct.	Revenues	are	recognized	over	time,	as	services	are	provided.	There	are	generally	no	significant financing	components	or	variable	consideration.	Revenues	include	amounts	billed	to	customers	on	a	cycle	basis	and	unbilled	amounts	calculated	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	amounts	that	the	Company	has	a	right	to invoice	are	determined	by	each	customer's	actual	usage,	an	indicator	that	the	invoice	amount	corresponds	directly	to	the	value	transferred	to	the	customer.	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.

# Market-Based	Businesses	Revenue

Through	various	warranty	protection	programs,	the	Company	provides	fixed	fee	services	to	residential	and	smaller	commercial	customers	to	protect	against	repair costs	for	interior	and	exterior	water	and	sewer	lines,	interior	electric	and	gas	lines,	heating	and	cooling	systems,	water	heaters	and	other	home	appliances,	as	well	as power	surge	protection	and	other	related	services.	Most	of	the	contracts	have	a	one-year	term	and	each	service	is	a	separate	performance	obligation,	satisfied	over	time, as	the	customers	simultaneously	receive	and	consume	the	benefits	provided	from	the	service.	Customers	are	obligated	to	pay	for	the	protection	programs	ratably	over	12 months	or	via	a	one-time,	annual	fee,	with	revenues	recognized	ratably	over	time	for	these	services.	Advances	from	customers	are	deferred	until	the	performance obligation	is	satisfied.

The	Company	also	has	 long-term,	fixed	fee	contracts	 to	operate	and	maintain	water	and	wastewater	systems	for	 the	U.S.	government	on	various	military installations	and	facilities	owned	by	municipal	and	industrial	customers,	as	well	as	shorter-term	contracts	that	provide	customized	water	transfer	services	for	shale natural	gas	companies	and	customers.	Billing	and	revenue	recognition	for	the	fixed	fee	revenues	occurs	ratably	over	the	term	of	the	contract,	as	customers	simultaneously receive	and	consume	the	benefits	provided	by	the	Company.	Additionally,	these	contracts	allow	the	Company	to	make	capital	improvements	to	underlying	infrastructure, which	are	initiated	through	separate	modifications	or	amendments	to	the	original	contract,	whereby	stand-alone,	fixed	pricing	is	separately	stated	for	each	improvement. The	 Company	 has	 determined	 that	 these	 capital	 improvements	 are	 separate	 performance	 obligations,	 with	 revenue	 recognized	 over	 time	 based	 on	 performance completed	at	the	end	of	each	reporting	period.	Losses	on	contracts	are	recognized	during	the	period	in	which	the	losses	first	become	probable	and	estimable.	Revenues recognized	during	the	period	in	excess	of	billings	on	construction	contracts	are	recorded	as	unbilled	revenues,	with	billings	in	excess	of	revenues	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.	See	Note	3—Revenue	Recognition	for	additional	information.

# Income	Taxes

The	Company	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	14—Income	Taxes	for	additional	information.

# 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	on	the	Consolidated	Statements	of	Operations.	Any	portion	of	AFUDC	attributable	to	equity	funds	would	be	included	in	Other, net	on	the	Consolidated	Statements	of	Operations.	AFUDC	is	provided	in	the	following	table	for	the	years	ended	December	31:

|  | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Allowance\tfor\tother\tfunds\tused\tduring\tconstruction | $24 | $19 | $15 |
| Allowance\tfor\tborrowed\tfunds\tused\tduring\tconstruction | 13 | 8 | 6 |

# 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	subsidiary	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	subsidiary	agreed	to	pay	$1	million	annually	commencing	in	2010	with	the	final	payment	being	made	in	2021.	Remediation	costs	accrued	amounted	to $4	million	and	$6	million	as	of	December	31,	2018	and	2017,	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	on	the	Consolidated	Statements	of	Cash	Flows.	See	Note	11— Long-Term	Debt	for	additional	information.

The	following	accounting	standards	were	adopted	by	the	Company	in	2018	:

The	following	recently	issued	accounting	standards	have	not	yet	been	adopted	by	the	Company	as	of	December	31,	2018:

# Reclassifications

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

# Note	3:	Revenue	Recognition

# Disaggregated	Revenues

The	following	table	provides	operating	revenues	disaggregated	for	the	year	ended	December	31,	2018:

|  | Revenues	from<br>Contracts	with<br>Customers | Other	Revenues	Not	from<br>Contracts	with	Customers<br>(a) | Total	Operating<br>Revenues |
| :--- | :--- | :--- | :--- |
| Regulated\tBusinesses: |  |  |  |
| Water\tservices: |  |  |  |
| Residential | $1,663 | $— | $1,663 |
| Commercial | 616 | — | 616 |
| Fire\tservice | 137 | — | 137 |
| Industrial | 136 | — | 136 |
| Public\tand\tother | 197 | — | 197 |
| Total\twater\tservices | 2,749 | — | 2,749 |
| Wastewater\tservices: |  |  |  |
| Residential | 115 | — | 115 |
| Commercial | 30 | — | 30 |
| Industrial | 2 | — | 2 |
| Public\tand\tother | 14 | — | 14 |
| Total\twastewater\tservices | 161 | — | 161 |
| Miscellaneous\tutility\tcharges | 48 | — | 48 |
| Alternative\trevenue\tprograms | — | 19 | 19 |
| Lease\tcontract\trevenue | — | 7 | 7 |
| Total\tRegulated\tBusinesses | 2,958 | 26 | 2,984 |
| Market-Based\tBusinesses | 476 | — | 476 |
| Other | (17) | (3) | (20) |
| Total\toperating\trevenues | $3,417 | $23 | $3,440 |

(a) Includes	revenues	associated	with	alternative	revenue	programs,	lease	contracts	and	intercompany	rent	which	are	outside	the	scope	of	ASC	606	and	accounted	for	under	other	existing	GAAP.

# Contract	Balances

Contract	assets	and	contract	liabilities	are	the	result	of	timing	differences	between	revenue	recognition,	billings	and	cash	collections.	In	the	Company's	Market- Based	Businesses,	certain	contracts	are	billed	as	work	progresses	in	accordance	with	agreed-upon	contractual	terms,	either	at	periodic	intervals	or	upon	achievement	of contractual	milestones.	Contract	assets	are	recorded	when	billing	occurs	subsequent	to	revenue	recognition,	and	are	reclassified	to	accounts	receivable	when	billed	and the	right	to	consideration	becomes	unconditional.	Contract	liabilities	are	recorded	when	the	Company	receives	advances	from	customers	prior	to	satisfying	contractual performance	obligations,	particularly	for	construction	contracts	and	home	warranty	protection	program	contracts,	and	are	recognized	as	revenue	when	the	associated performance	 obligations	 are	 satisfied.	 Contract	 assets	 are	 included	 in	 Unbilled	 revenues	 and	 contract	 liabilities	 are	 included	 in	 Other	 current	 liabilities	 on	 the Consolidated	Balance	Sheets	as	of	December	31,	2018.

The	following	table	provides	the	changes	in	contract	assets	and	liabilities	for	the	year	ended	December	31,	2018:

|  | Amount |
| :--- | :--- |
| Contract\tassets: |  |
| Balance\tat\tJanuary\t1,\t2018 | $35 |
| Additions | 18 |
| Transfers\tto\taccounts\treceivable,\tnet | (39) |
| Balance\tat\tDecember\t31,\t2018 | $14 |
| Contract\tliabilities: |  |
| Balance\tat\tJanuary\t1,\t2018 | $25 |
| Additions | 52 |
| Transfers\tto\toperating\trevenues | (57) |
| Balance\tat\tDecember\t31,\t2018 | $20 |

# Remaining	Performance	Obligations

Remaining	performance	obligations	("RPOs")	represent	revenues	the	Company	expects	to	recognize	in	the	future	from	contracts	that	are	 in	progress.	The Company	enters	into	agreements	for	the	provision	of	services	to	water	and	wastewater	facilities	for	the	United	States	military,	municipalities	and	other	customers.	As	of December	31,	2018,	the	Company's	operation	and	maintenance	and	capital	improvement	contracts	in	the	Market-Based	Businesses	have	RPOs.	Contracts	with	the	U.S. government	for	work	on	various	military	installations	expire	between	2051	and	2069	and	have	RPOs	of	$4.4	billion	as	of	December	31,	2018,	as	measured	by	estimated remaining	contract	revenue.	Such	contracts	are	subject	to	customary	termination	provisions	held	by	the	U.S.	government,	prior	to	the	agreed-upon	contract	expiration. Contracts	with	municipalities	and	commercial	customers	expire	between	2019	 and	2038	and	have	RPOs	of	$596	million	as	of	December	31,	2018,	as	measured	by estimated	remaining	contract	revenue.	Some	of	the	Company's	long-term	contracts	to	operate	and	maintain	a	municipality's,	the	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.	Approximately	$61	million	of RPOs	were	eliminated	 in	conjunction	with	 the	sale	of	20	 of	 the	Contract	Services	Group's	contracts	 to	subsidiaries	of	Veolia	Environnement	S.A.	See	Note	 4— Acquisitions	and	Divestitures	for	further	discussion	of	this	transaction.

# Note	4:	Acquisitions	and	Divestitures

# Acquisitions

During	2018,	the	Company	closed	on	15	various	regulated	water	and	wastewater	systems	for	a	total	aggregate	purchase	price	of	$33	million.	Assets	acquired	in these	acquisitions,	principally	utility	plant,	totaled	$32	million.	Liabilities	assumed,	primarily	contributions	in	aid	of	construction,	totaled	$1	million.	The	Company recorded	additional	goodwill	of	$2	million	associated	with	one	of	its	acquisitions,	which	is	reported	in	its	Regulated	Businesses	segment.	Of	this	total	goodwill,	none	is expected	to	be	deductible	for	tax	purposes.	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	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.

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	2017,	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	2018 the	Company	recorded	a	measurement	period	adjustment	of	$5	million,	increasing	the	goodwill	recognized	from	the	Scranton	acquisition.

# Highlighted	Pending	Acquisitions

O n	April	 13,	 2018,	 the	 Company's	 Illinois	 subsidiary	 entered	 into	 an	 agreement	 to	 acquire	 the	 City	 of	Alton,	 Illinois'	 regional	 wastewater	 system	 for approximately	$54	million.	This	system	currently	serves	approximately	23,000	customers,	comprised	of	approximately	11,000	customers	in	Alton	and	an	additional 12,000	customers	under	bulk	contracts	in	the	nearby	communities	of	Bethalto	and	Godfrey.	In	connection	with	the	execution	of	the	purchase	agreement,	the	Company's Illinois	subsidiary	made	a	$5	million	non-escrowed	deposit	to	the	seller	during	January	2019.	The	Company	expects	to	close	this	acquisition	during	the	second	quarter	of 2019,	pending	regulatory	approval.

On	May	30,	2018,	the	Company's	Pennsylvania	subsidiary	entered	into	an	agreement	to	acquire	the	wastewater	assets	of	Exeter	Township,	Pennsylvania,	for approximately	$96	million.	This	system	currently	serves	approximately	9,000	customers	and	the	Company	expects	to	close	this	acquisition	during	the	third	quarter	of 2019,	pending	regulatory	approval.

# Pivotal	Acquisition

On	June	4,	2018,	the	Company,	through	its	wholly-owned	subsidiary	American	Water	Enterprises,	LLC,	completed	the	acquisition	of	Pivotal	for	a	total	purchase price	 of	$365	million,	net	of	cash	received	and	including	$9	million	in	working	capital.	Pivotal	is	headquartered	in	Naperville,	Illinois,	and	is	a	provider	of	home warranty	protection	products	and	services,	operating	in	18	states,	with	approximately	1.2	million	customer	contracts	at	the	time	of	acquisition.	Pivotal	is	complementary to	the	Company's	Homeowner	Services	Group	product	offerings,	and	enhances	its	presence	in	the	home	warranty	solutions	markets	through	utility	partnerships.	The results	of	Pivotal	have	been	consolidated	into	the	Homeowner	Services	Group	non-reportable	operating	segment.

This	acquisition	was	funded	through	the	issuance	of	common	stock,	as	described	below,	and	from	borrowings	through	the	Company's	commercial	paper	program, which	were	subsequently	refinanced	with	 the	 issuance	of	 long-term	debt	during	 the	 third	quarter	of	2018.	This	acquisition	 is	being	accounted	for	as	a	business combination	which	requires,	among	other	things,	the	assets	acquired	and	the	liabilities	assumed	to	be	recognized	at	their	fair	values	at	the	acquisition	date.	The measurement	period	adjustments	for	Pivotal	were	complete	as	of	December	31,	2018.

The	following	table	provides	the	purchase	price	allocation	for	the	Pivotal	acquisition	as	of	June	4,	2018,	and	the	adjustments	that	were	made	through	December 31,	2018:

|  | June	4,	2018	(as	initially<br>reported) | Measurement	Period<br>Adjustments | June	4,	2018	(as<br>adjusted) |
| :--- | :--- | :--- | :--- |
| Identifiable\tassets\tacquired: |  |  |  |
| Accounts\treceivable | $23 | $(1) | $22 |
| Other\tcurrent\tassets | 1 | 1 | 2 |
| Property,\tplant\tand\tequipment | 21 | 1 | 22 |
| Intangible\tassets | 96 | (6) | 90 |
| Total\tidentifiable\tassets\tacquired | 141 | (5) | 136 |
| Liabilities\tassumed: |  |  |  |
| Accounts\tpayable\tand\taccrued\tliabilities | (5) | — | (5) |
| Other\tcurrent\tliabilities | (14) | 2 | (12) |
| Long-term\tliabilities | (1) | — | (1) |
| Total\tliabilities\tassumed | (20) | 2 | (18) |
| Net\tidentifiable\tassets\tacquired | 121 | (3) | 118 |
| Goodwill | 242 | 5 | 247 |
| Net\tassets\tacquired | $363 | $2 | $365 |

Goodwill	was	calculated	as	the	excess	of	the	consideration	transferred	over	the	net	assets	recognized,	and	represents	the	expected	revenue	and	cost	synergies	of the	combined	business	and	assembled	workforce	of	Pivotal.	The	goodwill	is	included	in	the	Company's	Homeowner	Services	Group	reporting	unit,	within	the	Market- Based	Businesses,	and	is	deductible	for	income	tax	purposes.

Customer	relationships,	which	comprise	the	majority	of	the	intangible	assets	balance,	are	amortized	based	on	historical	attrition	rates	over	their	estimated	useful lives	of	up	to	21	years,	with	a	weighted	average	life	of	approximately	six	years,	as	the	assets	are	expected	to	contribute	to	the	cash	flows	of	the	Company.	The	remaining intangible	assets	are	amortized	over	their	expected	benefit	periods	of	up	to	six	years,	with	a	weighted	average	life	of	approximately	three	years.	The	following	table provides	the	valuation	of	the	intangible	assets	acquired:

Pivotal's	revenue	and	net	income	included	on	the	Company's	Consolidated	Statements	of	Operations	for	the	year	ended	December	31,	2018,	did	not	have	a material	impact	on	the	overall	consolidated	results	of	operations	of	the	Company.

# Equity	Forward	Transaction	and	Common	Stock	Issuance

On	April	11,	2018,	the	Company	effected	an	equity	forward	transaction	by	entering	into	a	forward	sale	agreement	with	each	of	two	forward	purchasers	 in connection	with	a	public	offering	of	2,320,000	shares	of	the	Company's	common	stock.	In	the	equity	forward	transaction,	the	forward	purchasers,	or	an	affiliate, borrowed	an	aggregate	of	2,320,000	shares	of	the	Company's	common	stock	from	third	parties	and	sold	them	to	the	underwriters	in	the	public	offering.	On	June	7,	2018, the	Company	elected	to	fully	and	physically	settle	both	forward	sale	agreements,	resulting	in	the	issuance	of	a	total	of	2,320,000	shares	of	its	common	stock	at	a	price	of $79.01	per	share,	for	aggregate	net	proceeds	of	$183	million.	The	net	proceeds	of	the	transaction	were	used	to	finance	a	portion	of	the	purchase	price	of	the	Pivotal acquisition	described	above.

# Divestitures

On	July	5,	2018,	the	Company	entered	into	an	agreement	for	the	sale	of	the	majority	of	the	O&M	contracts	in	its	Contract	Services	Group	to	subsidiaries	of	Veolia Environnement	S.A.	for	$27	million.	The	Company	closed	on	the	sale	of	20	of	the	22	contracts	associated	with	this	agreement	during	the	third	quarter	of	2018,	and expects	to	close	on	the	remaining	two	contracts,	subject	to	customer	consents,	during	the	first	half	of	2019.	As	part	of	the	sale,	the	Company	recognized	a	pre-tax	gain	of $14	million	during	the	third	quarter	of	2018.

The	pro	forma	impact	of	the	Company's	acquisitions	was	not	material	to	the	Consolidated	Statements	of	Operations	for	the	years	ended	December	31,	2018,	2017 and	2016.

# Note	5:	Property,	Plant	and	Equipment

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

Property,	plant	and	equipment	depreciation	expense	amounted	to	$497	million,	$460	million	and	$435	million	for	the	years	ended	December	31,	2018,	2017	and 2016,	respectively	and	was	included	in	Depreciation	and	amortization	expense	on	the	Consolidated	Statements	of	Operations.	The	provision	for	depreciation	expressed	as a	percentage	of	the	aggregate	average	depreciable	asset	balances	was	3.09%,	3.07%	and	3.14%	for	years	December	31,	2018,	2017	and	2016,	respectively.

# Note	6:	Allowance	for	Uncollectible	Accounts

The	following	table	provides	the	changes	in	the	allowances	for	uncollectible	accounts	for	the	years	ended	December	31:

|  | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Balance\tas\tof\tJanuary\t1 | $(42) | $(40) | $(39) |
| Amounts\tcharged\tto\texpense | (33) | (29) | (27) |
| Amounts\twritten\toff | 34 | 30 | 29 |
| Recoveries\tof\tamounts\twritten\toff | (4) | (3) | (3) |
| Balance\tas\tof\tDecember\t31 | $(45) | $(42) | $(40) |

# Note	7:	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	provides	the	composition	of	regulatory	assets	as	of	December	31:

|  | 2018 | 2017 |
| :--- | :--- | :--- |
| Deferred\tpension\texpense | $362 | $285 |
| Removal\tcosts\trecoverable\tthrough\trates | 292 | 269 |
| Regulatory\tbalancing\taccounts | 110 | 113 |
| San\tClemente\tDam\tproject\tcosts | 85 | 89 |
| Debt\texpense | 70 | 67 |
| Purchase\tpremium\trecoverable\tthrough\trates | 56 | 57 |
| Deferred\ttank\tpainting\tcosts | 42 | 42 |
| Make-whole\tpremium\ton\tearly\textinguishment\tof\tdebt | 33 | 27 |
| Other | 106 | 112 |
| Total\tregulatory\tassets | $1,156 | $1,061 |

The	Company's	deferred	pension	expense	includes	a	portion	of	the	underfunded	status	that	is	probable	of	recovery	through	rates	in	future	periods	of	$352	million and	$270	million	as	of	December	31,	2018	and	2017,	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.

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

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.

San	Clemente	Dam	project	costs	represent	costs	incurred	and	deferred	by	the	Company's	utility	subsidiary	in	California	pursuant	to	its	efforts	to	investigate alternatives	and	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	utility	subsidiary in	California,	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	were	being	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	$85	million	and $89	million	as	of	December	31,	2018	and	2017,	respectively.	Surcharges	collected	were	$8	million	and	$7	million	for	the	years	ended	December	31,	2018	 and	2017, respectively.	Pursuant	to	the	general	rate	case	approved	in	December	2018,	approval	was	granted	to	reset	the	twenty-year	amortization	period	to	begin	January	1,	2018 and	to	establish	an	annual	revenue	requirement	of	$8	million	to	be	recovered	through	base	rates.

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.

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

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

As	a	result	of	the	prepayment	by	American	Water	Capital	Corp.,	the	Company's	wholly	owned	finance	subsidiary	("AWCC"),	of	the	5.62%	Series	C	Senior Notes	due	upon	maturity	on	December	21,	2018	(the	"Series	C	Notes"),	5.62%	Series	E	Senior	Notes	due	March	29,	2019	(the	"Series	E	Notes")	and	5.77%	Series	F Senior	Notes	due	December	21,	2022	(the	"Series	F	Notes,"	and	together	with	the	Series	E	Notes,	the	"Series	Notes"),	a	make-whole	premium	of	$10	million	was	paid to	the	holders	of	the	Series	Notes	on	September	11,	2018.	Substantially	all	of	these	early	debt	extinguishment	costs	were	allocable	to	the	Company's	utility	subsidiaries and	recorded	as	regulatory	assets,	as	the	Company	believes	they	are	probable	of	recovery	in	future	rates.

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	provides	the	composition	of	regulatory	liabilities	as	of	December	31:

|  | 2018 | 2017 |
| :--- | :--- | :--- |
| Income\ttaxes\trecovered\tthrough\trates | $1,279 | $1,242 |
| Removal\tcosts\trecovered\tthrough\trates | 309 | 315 |
| Postretirement\tbenefit\tliability | 209 | 33 |
| Pension\tand\tother\tpostretirement\tbenefit\tbalancing\taccounts | 46 | 48 |
| TCJA\treserve\ton\trevenue | 36 | — |
| Other | 28 | 26 |
| Total\tregulatory\tliabilities | $1,907 | $1,664 |

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	have	been	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	on	the	Consolidated	Statements	of	Operations	via	straight	line	amortization through	November	2048.

On	August	31,	2018,	the	Postretirement	Medical	Benefit	Plan	was	remeasured	to	reflect	an	announced	plan	amendment	which	changed	benefits	for	certain	union and	non-union	plan	participants.	As	a	result	of	the	remeasurement,	the	Company	recorded	a	$227	million	reduction	to	the	net	accumulated	postretirement	benefit obligation,	with	a	corresponding	regulatory	liability.	See	Note	15—Employee	Benefits	for	additional	information.

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.

During	2018,	the	Company's	14	regulatory	jurisdictions	began	to	consider	the	impacts	of	the	TCJA.	The	Company	has	adjusted	customer	rates	to	reflect	the lower	income	tax	rate	in	10	states.	In	one	of	those	10	states,	a	portion	of	the	tax	savings	is	being	used	to	reduce	certain	regulatory	assets.	In	one	additional	state,	the Company	is	using	the	tax	savings	to	offset	additional	capital	investment	and	to	reduce	a	regulatory	asset.	Proceedings	in	the	other	three	jurisdictions	remain	pending. With	respect	to	excess	accumulated	deferred	income	taxes,	regulators	in	the	eight	states	that	have	considered	the	issue	have	agreed	with	the	Company's	overall	timeline of	passing	the	excess	back	to	customers	beginning	no	earlier	than	2019,	when	the	Company	is	able	to	produce	the	normalization	schedule	using	the	average	rate assumption	method.	In	one	of	those	states,	the	Company	will	use	the	amortization	of	the	excess	accumulated	deferred	income	taxes	to	offset	future	infrastructure investments.

The	Company	generally	expects	its	regulated	customers	to	benefit	from	the	tax	savings	resulting	from	the	TCJA.	As	a	result,	the	Company	has	recorded	a	$54 million	reserve	on	revenue	during	the	year	ended	December	31,	2018,	for	the	estimated	tax	savings	resulting	from	the	TCJA,	with	a	corresponding	regulatory	liability,	of which	the	current	portion	is	$18	million	and	is	recorded	in	other	current	liabilities,	and	the	long-term	portion	is	$36	million	and	is	recorded	in	regulatory	liabilities.	The Company	cannot	predict	how	each	jurisdiction	may	calculate	the	amount	of	credits	due	to	customers.	If	any	of	the	Company's	regulatory	jurisdictions	determines	the credits	due	to	customers	are	higher	than	the	expected	reduction	to	income	tax	expense,	this	would	result	in	an	adverse	impact	to	the	Company's	results	of	operations	and cash	flows.

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

# Note	8:	Goodwill	and	Other	Intangible	Assets

The	following	table	provides	the	changes	in	the	carrying	value	of	goodwill	for	the	years	ended	December	31,	2018	and	2017:

|  | Regulated	Businesses |  | Market-Based	Businesses |  |  | Consolidated |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | Cost | Accumulated\nImpairment | Cost | Accumulated\nImpairment | Cost | Accumulated\nImpairment | Total\tNet |
| Balance\tas\tof\tJanuary\t1,\t2017 | $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 |
| Goodwill\tfrom\tacquisitions | 2 | — | 247 | — | 249 | — | 249 |
| Goodwill\timpairment\tcharge | — | — | — | (53) | — | (53) | (53) |
| Balance\tas\tof\tDecember\t31,\t2018 | $3,494 | $(2,332) | $574 | $(161) | $4,068 | $(2,493) | $1,575 |

In	2018,	the	Company	acquired	goodwill	of	$247	million	associated	with	its	acquisition	of	Pivotal,	which	was	allocated	to	the	Homeowner	Services	Group reporting	unit,	within	the	Market-Based	Businesses.	Additionally,	the	Company	acquired	goodwill	of	$2	million	associated	with	one	of	its	acquisitions	in	the	Regulated Businesses	segment.

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

As	a	result	of	operational	and	financial	challenges	encountered	in	the	construction	business	of	Keystone,	the	Company	substantially	exited	this	business	line during	the	third	quarter	of	2018.	This	action,	along	with	the	exit	of	the	water	trucking	business	line	during	the	first	half	of	2018,	narrowed	the	scope	of	the	Keystone business	going	forward,	focusing	solely	on	providing	water	transfer	services.	Based	on	these	factors,	the	Company	concluded	there	were	indicators	that	the	Keystone reporting	unit	may	be	impaired.	Accordingly,	impairment	testing	was	performed	as	part	of	the	preparation	of	the	Company's	Consolidated	Financial	Statements	during the	third	quarter	of	2018.

In	terms	of	the	process	followed,	the	Company	first	completed	an	impairment	test	of	the	Keystone	reporting	unit's	customer	relationship	intangible	asset	as	of September	30,	2018.	The	results	of	this	impairment	test	showed	the	fair	value	of	the	intangible	asset	was	lower	than	its	carrying	value,	resulting	in	a	non-cash,	pre-tax impairment	charge	of	$4	million.

The	Company	then	completed	an	interim	goodwill	impairment	test	of	the	Keystone	reporting	unit	as	of	September	30,	2018.	The	results	of	this	impairment	test showed	the	fair	value	of	the	Keystone	reporting	unit	was	lower	than	its	carrying	value,	resulting	in	a	non-cash,	pre-tax	impairment	charge	of	$53	million.	The	Company estimated	the	fair	value	of	the	Keystone	reporting	unit	using	an	income	approach	valuation	technique	which	estimates	the	amount	and	timing	of	future	discounted	cash flows	from	operations	of	the	Keystone	reporting	unit,	relying	on	multiple	projected	scenarios.	Significant	assumptions	used	in	estimating	the	fair	value	included,	but	was not	limited	to,	forecasts	of	future	operating	results,	including	revenue	and	revenue	growth,	profit	margins,	and	weighted	average	cost	of	capital.

In	aggregate,	a	non-cash,	pre-tax	impairment	charge	of	$57	million	was	recorded	in	Impairment	charge	on	the	Consolidated	Statement	of	Operations	for	the	year ended	December	31,	2018,	of	which,	$54	million	was	attributable	to	the	Company,	after	adjustment	for	noncontrolling	interest.	See	Note	18—Fair	Value	of	Financial Information	for	further	information.

During	2018,	the	Company	adopted	Accounting	Standards	Update	2017-04,	Simplifying	the	Test	for	Goodwill	Impairment.	See	Note	2—Significant	Accounting Policies	for	additional	information.

The	Company	completed	its	annual	impairment	testing	of	goodwill	as	of	November	30,	2018,	which	included	qualitative	assessments	of	its	Regulated	Businesses, Homeowner	Services	Group,	Military	Services	Group	and	Keystone	reporting	units.	Based	on	these	assessments,	the	Company	determined	that	there	were	no	factors present	that	would	indicate	that	the	fair	value	of	these	reporting	units	was	less	than	their	respective	carrying	values	and,	as	such,	quantitative,	fair	value-based	testing was	not	necessary	for	these	reporting	units	as	of	November	30,	2018.

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	the	Company's business	plan,	such	as	changes	in	rate	case	results,	capital	investment	budgets	or	interest	rates,	could	also	result	in	an	impairment	of	goodwill.	In	regards	to	the	Keystone reporting	unit's	goodwill,	adverse	developments	in	market	conditions,	including	prolonged	depression	of	natural	gas	or	oil	prices	or	other	factors	that	negatively	impact the	Company's	forecasted	operating	results,	cash	flows	or	key	assumptions,	could	result	in	an	impairment	of	a	portion,	or	all,	of	Keystone's	goodwill.

The	following	tables	provides	the	gross	carrying	value	and	accumulated	amortization	of	the	finite-lived	intangible	assets	held	by	the	Company	as	of	December

|  | 2017 | Acquisitions | Impairments | Other | 2018 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Customer\trelationships | $12 | $78 | $(4) | $— | $86 |
| Other\tintangible\tassets | 2 | 12 | — | (1) | 13 |
| Total\tgross\tcarrying\tvalue | $14 | $90 | $(4) | $(1) | $99 |

|  | 2017 | Amortization | Impairments | Other | 2018 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Customer\trelationships | $(4) | $(9) | $— | $— | $(13) |
| Other\tintangible\tassets | (1) | (3) | — | 2 | (2) |
| Total\taccumulated\tamortization | $(5) | $(12) | $— | $2 | $(15) |
| Total\tintangible\tassets,\tnet | $9 |  |  |  | $84 |

In	2018,	the	Company	acquired	finite-lived	intangibles	of	$90	million	associated	with	its	acquisition	of	Pivotal.	See	Note	4—Acquisitions	and	Divestitures	for additional	information.	Additionally,	the	Company	recorded	a	$4	million	impairment	charge	associated	with	Keystone's	customer	relationships	intangible	asset.	See	the "Goodwill"	section	above	for	additional	information.

Intangible	asset	amortization	expense	amounted	to	$12	million,	$4	million	and	$4	million	for	the	years	ended	December	31,	2018,	2017	and	2016,	respectively. Estimated	amortization	expense	for	the	next	five	years	subsequent	to	December	31,	2018	is	as	follows:

# Note	9:	Shareholders'	Equity

# Common	Stock

Under	the	dividend	reinvestment	and	direct	stock	purchase	plan	(the	"DRIP"),	shareholders	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,	2018,	there	were	approximately	4.2	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	0.6	million	shares	and	0.7	million	shares	of	common stock	in	the	open	market	at	an	aggregate	cost	of	$45	million	and	$54	million	under	this	program	for	the	years	ended	December	31,	2018	and	2017,	respectively.	As	of December	31,	2018,	there	were	5.5	million	shares	of	common	stock	available	for	purchase	under	the	program.

# Accumulated	Other	Comprehensive	Loss

The	following	table	provides	the	changes	in	accumulated	other	comprehensive	loss	by	component,	net	of	tax,	for	the	years	ended	December	31,	2018	and	2017:

|  | Plan	Funded<br>Status | Amortization	of	Prior<br>Service	Cost | Amortization	of<br>Actuarial	Loss | Foreign	Currency<br>Translation | Gain	(Loss)	on<br>Cash	Flow	Hedge | Accumulated	Other<br>Comprehensive	Loss |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Beginning\tbalance\tas\tof\tJanuary\t1,\t2017 | $(147) | $1 | $42 | $2 | $16 | $(86) |
| Other\tcomprehensive\tincome\t(loss)\nbefore\treclassification | 7 | — | — | (1) | (6) | — |
| Amounts\treclassified\tfrom\naccumulated\tother\tcomprehensive\tloss | — | — | 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) |
| Other\tcomprehensive\tincome\t(loss)\nbefore\treclassification | 60 | — | — | — | (2) | 58 |
| TCJA\ttax\teffects\treclassified\tfrom\naccumulated\tother\tcomprehensive\tloss | (22) | — | — | — | 2 | (20) |
| Amounts\treclassified\tfrom\naccumulated\tother\tcomprehensive\tloss | — | — | 7 | — | — | 7 |
| Net\tother\tcomprehensive\tincome | 38 | — | 7 | — | — | 45 |
| Ending\tbalance\tas\tof\tDecember\t31,\t2018 | $(102) | $1 | $56 | $1 | $10 | $(34) |

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	15—Employee	Benefits	for	additional	information.

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.

As	of	December	31,	2018,	 the	Company	adopted	Accounting	Standards	Update	2018-02,	Reclassification	of	Certain	Tax	Effects from	Accumulated	Other Comprehensive	Income,	which	permits	entities	to	reclassify	the	tax	effects	in	AOCI	as	a	result	of	the	TCJA	to	retained	earnings.	See	Note	14—Income	Taxes	for additional	information.

# Dividends

The	Company's	Board	of	Directors	authorizes	the	payment	of	dividends.	The	Company's	ability	to	pay	dividends	on	its	common	stock	is	subject	to	having	access to	sufficient	sources	of	liquidity,	net	income	and	cash	flows	of	the	Company's	subsidiaries,	the	receipt	of	dividends	and	repayments	of	indebtedness	from	the	Company's 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.	When	dividends	on	common	stock	are	declared,	they	are	typically	paid	in March,	June,	September	and	December.	Historically,	dividends	have	been	paid	quarterly	to	holders	of	record	less	than	30	days	prior	to	the	distribution	date.	Since	the dividends	on	the	Company's	common	stock	are	not	cumulative,	only	declared	dividends	are	paid.

During	2018,	2017	and	2016,	the	Company	paid	$319	million,	$289	million	and	$261	million	in	cash	dividends,	respectively.	The	following	table	provides	the per	share	cash	dividends	paid	for	the	years	ended	December	31:

|  | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| December | $0.455 | $0.415 | $0.375 |
| September | $0.455 | $0.415 | $0.375 |
| June | $0.455 | $0.415 | $0.375 |
| March | $0.415 | $0.375 | $0.34 |

# Equity	Forward	Transaction

See	Note	4—Acquisitions	and	Divestitures	for	information	regarding	the	forward	sale	agreements	entered	into	by	the	Company	on	April	11,	2018,	and	the subsequent	settlement	of	these	agreements	on	June	7,	2018.

# Regulatory	Restrictions

The	issuance	of	long-term	debt	or	equity	securities	by	the	Company	or	American	Water	Capital	Corp.	("AWCC"),	the	Company's	wholly	owned	financing subsidiary,	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	the	Company's	regulated	subsidiaries.	The	Company's	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,	the	Company's	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	American	Water.	Furthermore,	the	ability	of	the	Company's	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	the	Company	and	its	subsidiaries.

# Note	10:	Stock	Based	Compensation

The	Company	has	granted	stock	options,	stock	units	and	dividend	equivalents	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").	Stock	units	under	the	2007	Plan	generally	vest	based	on	(i)	continued employment	with	the	Company	("RSUs"),	or	(ii)	continued	employment	with	the	Company	where	distribution	of	the	shares	is	subject	to	the	satisfaction	in	whole	or	in part	of	stated	performance-based	goals	("PSUs").	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,	2018,	7.5	million	shares	were	available	for	issuance	under	the	2007	Plan.	The	2007	Plan	has	been	replaced	by	the	2017	Omnibus	Plan,	as	defined	below, and	no	additional	awards	may	be	granted	under	the	2007	Plan.	However,	shares	may	still	be	issued	under	the	2007	Plan	pursuant	to	the	terms	of	awards	previously issued	under	that	plan	prior	to	May	12,	2017.

In	May	2017,	the	Company's	shareholders	approved	the	American	Water	Works	Company,	Inc.	2017	Omnibus	Equity	Compensation	Plan	(the	"2017	Omnibus Plan").	The	Company	has	granted	stock	units,	including	RSUs	and	PSUs,	stock	awards	and	dividend	equivalents	to	non-employee	directors,	officers	and	employees under	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,	2018,	6.9	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.	Dividend	equivalents	may be	granted	only	on	stock	units	or	other	stock-based	awards.

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	stock	unit	awards	at	the	date	of	the	grant	is	amortized	through	expense	over	the	three-year	service	period.	All awards	granted	in	2018,	2017	and	2016	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	provides	the	stock-based	compensation	expense	recorded	in	operation	and maintenance	expense	in	the	accompanying	Consolidated	Statements	of	Operations	for	the	years	ended	December	31:

|  | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Stock\toptions | $1 | $1 | $2 |
| RSUs\tand\tPSUs | 15 | 9 | 8 |
| Nonqualified\temployee\tstock\tpurchase\tplan | 1 | 1 | 1 |
| Stock-based\tcompensation | 17 | 11 | 11 |
| Income\ttax\tbenefit | (5) | (4) | (4) |
| Stock-based\tcompensation\texpense,\tnet\tof\ttax | $12 | $7 | $7 |

There	were	no	significant	stock-based	compensation	costs	capitalized	during	the	years	ended	December	31,	2018,	2017	and	2016.

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	stock	units.	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	2018	and	2017.	In	2016,	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	provides	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:

|  | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Dividend\tyield | —% | —% | 2.09% |
| Expected\tvolatility | —% | —% | 15.89% |
| Risk-free\tinterest\trate | —% | —% | 1.15% |
| Expected\tlife\t(years) | 0 | 0 | 4.0 |
| Exercise\tprice | $— | $— | $65.25 |
| Grant\tdate\tfair\tvalue\tper\tshare | $— | $— | $6.61 |

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	following	table	provides	stock	option	activity	for	the	year	ended	December	31,	2018:

|  | Shares	(in	thousands) | Weighted	Average<br>Exercise	Price	(per<br>share) | Weighted	Average<br>Remaining	Life	(years) | Aggregate	Intrinsic	Value |
| :--- | :--- | :--- | :--- | :--- |
| Options\toutstanding\tas\tof\tDecember\t31,\t2017 | 711 | $53.51 | 3.67 | $29 |
| Granted | — | — |  |  |
| Forfeited\tor\texpired | (7) | 65.15 |  |  |
| Exercised | (187) | 49.32 |  |  |
| Options\toutstanding\tas\tof\tDecember\t31,\t2018 | 517 | $54.92 | 2.96 | $19 |
| Options\texercisable\tas\tof\tDecember\t31,\t2018 | (434) | $52.93 | 2.76 | $16 |

As	of	December	31,	2018,	less	than	$1	million	of	total	unrecognized	compensation	cost	related	to	nonvested	stock	options	is	expected	to	be	recognized	over	the remaining	weighted	average	period	of	less	than	one	year.	The	total	fair	value	of	stock	options	vested	was	$1	million,	$2	million	 and	$1	million	for	the	years	ended December	31,	2018,	2017	and	2016,	respectively.

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

|  | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Intrinsic\tvalue | $9 | $10 | $18 |
| Exercise\tproceeds | 7 | 11 | 15 |
| Income\ttax\tbenefit\trealized | 2 | 3 | 6 |

# Stock	Units

During	2018,	2017	and	2016,	the	Company	granted	RSUs	to	certain	employees	under	the	2007	Plan	and	2017	Omnibus	Plan,	as	applicable.	RSUs	generally	vest based	on	continued	employment	with	the	Company	over	periods	ranging	from	one	to	three	years.

During	2018	and	2017,	the	Company	granted	stock	units	to	non-employee	directors	under	the	2017	Omnibus	Plan,	and	during	2016,	these	awards	were	granted under	the	2007	Plan.	The	stock	units	were	vested	in	full	on	the	date	of	grant;	however,	distribution	of	the	shares	will	be	made	within	30	days	of	the	earlier	of	(i)	15 months	after	the	grant	date,	subject	to	any	deferral	election	by	the	director,	or	(ii)	the	participant's	separation	from	service.	Because	these	stock	units	vested	on	the	grant date,	the	total	grant	date	fair	value	was	recorded	in	operation	and	maintenance	expense	on	the	grant	date.

The	RSUs	are	valued	at	the	market	value	of	the	closing	price	of	the	Company's	common	stock	on	the	date	of	the	grant	and	the	majority	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	following	table	provides	RSU	activity	for	the	year	ended	December	31,	2018:

|  | Shares	(in	thousands) | Weighted	Average	Grant<br>Date	Fair	Value	(per<br>share) |
| :--- | :--- | :--- |
| Non-vested\ttotal\tas\tof\tDecember\t31,\t2017 | 89 | $67.48 |
| Granted | 107 | 82.75 |
| Vested | (57) | 72.11 |
| Forfeited | (6) | 74.34 |
| Non-vested\ttotal\tas\tof\tDecember\t31,\t2018 | 133 | $77.44 |

As	of	December	31,	2018,	$5	million	of	total	unrecognized	compensation	cost	related	to	the	nonvested	RSUs	is	expected	to	be	recognized	over	the	weighted average	remaining	life	of	2.1	years.	The	total	fair	value	of	stock	units	and	RSUs	vested	was	$4	million,	$3	million	and	$2	million	for	the	years	ended	December	31,	2018, 2017	and	2016,	respectively.

During	2018,	2017	and	2016,	the	Company	granted	PSUs	to	certain	employees	under	the	2007	Plan	and	2017	Omnibus	Plan,	as	applicable.	The	majority	of	PSUs vest	ratably	based	on	continued	employment	with	the	Company	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	one	or	more	internal	performance	measures	and,	separately,	a	relative	total shareholder	return	performance	measure,	over	the	Performance	Period.

The	following	table	provides	PSU	activity	for	the	year	ended	December	31,	2018:

|  | Shares	(in	thousands) | Date	Fair	Value	(per<br>share) |
| :--- | :--- | :--- |
| Non-vested\ttotal\tas\tof\tDecember\t31,\t2017 | 281 | $67.33 |
| Granted | 165 | 72.50 |
| Vested | (122) | 58.18 |
| Forfeited | (16) | 73.87 |
| Non-vested\ttotal\tas\tof\tDecember\t31,\t2018 | 308 | $73.39 |

As	of	December	31,	2018,	$4	million	of	total	unrecognized	compensation	cost	related	to	the	nonvested	PSUs	is	expected	to	be	recognized	over	the	weighted average	remaining	life	of	1.35	years.	The	total	fair	value	of	PSUs	vested	was	$12	million,	$13	million	and	$12	million	for	the	years	ended	December	31,	2018,	2017	and 2016,	respectively.

PSUs	granted	with	one	or	more	internal	performance	measures	are	valued	at	the	market	value	of	the	closing	price	of	the	Company's	common	stock	on	the	date	of grant.	PSUs	granted	with	a	relative	total	shareholder	return	condition	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	provides	the	weighted	average	assumptions	used	in the	Monte	Carlo	simulation	and	the	weighted	average	grant	date	fair	values	of	PSUs	granted	for	the	years	ended	December	31:

|  | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Expected\tvolatility | 17.23% | 17.40% | 15.90% |
| Risk-free\tinterest\trate | 2.36% | 1.53% | 0.91% |
| Expected\tlife\t(years) | 3.0 | 3.0 | 3.0 |
| Grant\tdate\tfair\tvalue\tper\tshare | $73.62 | $72.81 | $77.16 |

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

If	dividends	are	paid	with	respect	to	shares	of	the	Company's	common	stock	before	the	RSUs	and	PSUs	are	distributed,	the	Company	credits	a	liability	for	the value	of	the	dividends	that	would	have	been	paid	if	the	RSUs	and	PSUs	were	shares	of	Company	common	stock.	When	the	RSUs	and	PSUs	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	$1 million,	less	than	$1	million	and	$1	million	to	accumulated	deficit	in	the	accompanying	Consolidated	Statements	of	Changes	in	Shareholders'	Equity	for	the	years	ended December	31,	2018,	2017	and	2016,	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	a	discount.	Prior	to	February	5,	2019,	the	purchase	price	of	common	stock	acquired	under	the	ESPP	was	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	July	27,	2018,	the	ESPP	was	amended,	effective	February	5,	2019,	to permit	employee	participants	to	acquire	Company	common	stock	at	85%	of	the	fair	market	value	of	the	common	stock	at	the	end	of	the	purchase	period.	As	of December	31,	2018,	there	were	1.9	million	shares	of	common	stock	reserved	for	issuance	under	the	ESPP.	The	ESPP	is	considered	compensatory.	During	the	years ended	December	31,	2018,	2017	and	2016,	the	Company	issued	95	thousand,	93	thousand	and	93	thousand	shares,	respectively,	under	the	ESPP.

# Note	11:	Long-Term	Debt

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

|  | Rate | Weighted	Average<br>Rate | Maturity | 2018 | 2017 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Long-term\tdebt\tof\tAWCC:\t(a) |  |  |  |  |  |
| Senior\tnotes—fixed\trate | 2.95%-8.27% | 4.26% | 2019-2048 | $6,116 | $5,292 |
| Private\tactivity\tbonds\tand\tgovernment\tfunded\tdebt\n—fixed\trate | 1.79%-6.25% | 5.45% | 2021-2040 | 192 | 193 |
| Long-term\tdebt\tof\tother\tAmerican\tWater\tsubsidiaries: |  |  |  |  |  |
| Private\tactivity\tbonds\tand\tgovernment\tfunded\tdebt\n—fixed\trate\t(b) | 0.00%-6.20% | 4.54% | 2019-2048 | 727 | 712 |
| Mortgage\tbonds—fixed\trate | 3.92%-9.71% | 7.41% | 2019-2039 | 606 | 607 |
| Mandatorily\tredeemable\tpreferred\tstock | 8.47%-9.75% | 8.60% | 2019-2036 | 8 | 10 |
| Capital\tlease\tobligations | 12.91% | 12.91% | 2026 | 1 | 1 |
| Term\tloan | 5.60%-5.63% | 5.62% | 2021 | 6 | 9 |
| Long-term\tdebt |  |  |  | 7,656 | 6,824 |
| Unamortized\tdebt\tpremium,\tnet\t(c) |  |  |  | 7 | 9 |
| Unamortized\tdebt\tissuance\tcosts |  |  |  | (16) | (13) |
| Less\tcurrent\tportion\tof\tlong-term\tdebt |  |  |  | (71) | (322) |
| Total\tlong-term\tdebt |  |  |  | $7,576 | $6,498 |

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

(b) Includes	$3	million	and	$5	million	of	variable	rate	debt	as	of	December	31,	2018	and	2017,	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	$725	 million	 of the	 private	 activity	 bonds	 and	 government funded	 debt	 held	 by the	 Company's	 subsidiaries	 were collateralized	as	of	December	31,	2018.

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,	2018	was	0.59	to	1.00.	In	addition,	the	Company	has	$889	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	provides	future	sinking	fund	payments	and	debt	maturities:

|  | Amount |
| :--- | :--- |
| 2019 | $72 |
| 2020 | 32 |
| 2021 | 303 |
| 2022 | 26 |
| 2023 | 159 |
| Thereafter | 7,064 |

| Company | Type | Rate | Maturity | Amount |
| :--- | :--- | :--- | :--- | :--- |
| AWCC\t(a) | Senior\tnotes—fixed\trate | 3.75%-4.20% | 2028-2048 | $1,325 |
|  | Private\tactivity\tbonds\tand\tgovernment\tfunded\tdebt |  |  |  |
| Other\tAmerican\tWater\tsubsidiaries | —fixed\trate\t(b) | 0.00%-5.00% | 2021-2048 | 33 |
| Total\tissuances |  |  |  | $1,358 |

(a) Approximately	$29	million	of	this	debt	relates	to	the	New	Jersey	Environmental	Infrastructure	Financing	Program.

The	Company	incurred	debt	issuance	costs	of	$12	million	related	to	the	above	issuances.

| Company | Type | Rate | Maturity | Amount |
| :--- | :--- | :--- | :--- | :--- |
| AWCC | Senior\tnotes—fixed\trate | 5.62%-6.25% | 2018-2022 | $501 |
|  | 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%-5.50% | 2018-2047 | 18 |
| Other\tAmerican\tWater\tsubsidiaries | \t Mortgage\tbonds—fixed\trate | 9.13% | 2021 | 1 |
| Other\tAmerican\tWater\tsubsidiaries | \t Mandatorily\tredeemable\tpreferred\tstock | 8.49%-9.18% | 2031-2036 | 2 |
| Other\tAmerican\tWater\tsubsidiaries | Term\tloan | 4.83%-5.69% | 2021 | 3 |
| Total\tretirements\tand\tredemptions |  |  |  | $526 |

On	August	9,	2018,	AWCC	completed	a	$1.325	billion	debt	offering	which	included	the	sale	of	$625	million	aggregate	principal	amount	of	its	3.75%	Senior Notes	due	in	2028,	and	$700	million	aggregate	principal	amount	of	its	4.20%	Senior	Notes	due	in	2048.	At	the	closing	of	the	offering,	AWCC	received,	after	deduction of	underwriting	discounts	and	before	deduction	of	offering	expenses,	net	proceeds	of	approximately	$1.3	billion.	AWCC	used	proceeds	from	the	offering	to	(i)	lend funds	to	American	Water	and	its	regulated	operating	subsidiaries,	(ii)	repay	$191	million	principal	amount	of	AWCC's	Series	C	Notes	upon	maturity	on	December	21, 2018,	 (iii)	 prepay	$100	 million	 aggregate	 principal	 amount	 of	 AWCC's	 outstanding	 Series	 E	 Notes	 and	$100	 million	 aggregate	 principal	 amount	 of	AWCC's outstanding	Series	F	Notes,	and	(iv)	repay	AWCC's	commercial	paper	obligations	and	for	general	corporate	purposes.

As	a	result	of	AWCC's	prepayment	of	 the	Series	Notes,	a	make-whole	premium	of	$10	million	was	paid	 to	 the	holders	 thereof	on	September	11,	2018. Substantially	all	of	these	early	debt	extinguishment	costs	were	allocable	to	the	Company's	utility	subsidiaries	and	recorded	as	regulatory	assets,	as	the	Company	believes they	are	probable	of	recovery	in	future	rates.

Interest,	net	includes	interest	income	of	approximately	$11	million,	$14	million	and	$14	million	in	2018,	2017	and	2016,	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	17,	2018,	 the	Company	entered	 into	two	forward	starting	swap	agreements,	each	with	a	notional	amount	of	$80	million,	to	reduce	interest	rate exposure	on	debt	expected	to	be	issued	in	2019.	These	forward	starting	swap	agreements	terminate	in	August	2019,	and	have	an	average	fixed	rate	of	2.98%.	On October	11,	2018,	the	Company	entered	into	two	additional	forward	starting	swap	agreements,	each	with	a	notional	amount	of	$100	million,	to	reduce	interest	rate exposure	on	debt	expected	to	be	issued	in	2019.	These	forward	starting	swap	agreements	terminate	in	December	2019,	and	have	an	average	fixed	rate	of	3.31%.	On January	8,	2019,	the	Company	entered	into	an	additional	forward	starting	swap	agreement,	with	a	notional	amount	of	$150	million,	to	reduce	interest	rate	exposure	on debt	expected	to	be	issued	in	2019.	This	forward	starting	swap	agreement	terminates	in	December	2019,	and	has	an	average	fixed	rate	of	2.76%.	The	Company	has designated	 these	 forward	 starting	 swap	 agreements	 as	 cash	 flow	 hedges,	 with	 their	 fair	 value	 recorded	 in	 accumulated	 other	 comprehensive	 gain	 or	 loss.	 Upon termination,	the	cumulative	gain	or	loss	recorded	in	accumulated	other	comprehensive	gain	or	loss	will	be	amortized	through	interest,	net	over	the	term	of	the	new	debt.

The	Company	has	employed	interest	rate	swaps	to	fix	the	interest	cost	on	a	portion	of	its	variable-rate	debt	with	an	aggregate	notional	amount	of	$3	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	2018	and	2017.

The	following	table	provides	the	gross	fair	value	of	the	Company's	derivative	liabilities,	as	well	as	the	location	of	the	liability	balances	on	the	Consolidated Balance	Sheets	as	of	December	31:

# Note	12:	Short-Term	Debt

Short-term	 debt	 consists	 of	 commercial	 paper	 and	 credit	 facility	 borrowings	 totaling	$964	million	 and	$905	million	 as	 of	December	 31,	 2018	 and	2017, respectively.	On	March	21,	2018,	AWCC	increased	the	maximum	aggregate	principal	amount	of	borrowings	authorized	for	issuance	under	its	commercial	paper program	 from	$1.60	billion	 to	$2.10	billion.	The	weighted	average	interest	rate	on	AWCC	short-term	borrowings	was	approximately	2.28%	 and	1.24%	for	the	year ended	December	31,	2018	and	2017,	respectively.	As	of	December	31,	2018	there	were	no	borrowings	outstanding	with	maturities	greater	than	three	months.

On	March	21,	2018,	AWCC	and	certain	lenders	amended	and	restated	the	credit	agreement	with	respect	to	AWCC's	revolving	credit	facility	to	increase	the maximum	commitments	under	the	facility	from	$1.75	billion	to	$2.25	billion,	and	to	extend	the	expiration	date	of	the	facility	from	June	2020	to	March	2023.	The	facility is	used	principally	to	support	AWCC's	commercial	paper	program	and	to	provide	a	sub-limit	of	up	to	 $150	million	for	letters	of	credit.	Subject	to	satisfying	certain conditions,	the	credit	agreement	also	permits	AWCC	to	increase	the	maximum	commitment	under	the	facility	by	up	to	an	aggregate	of	$500	million,	and	to	request extensions	of	its	expiration	date	for	up	to	two	one-year	periods.	As	of	December	31,	2018,	AWCC	had	no	outstanding	borrowings	and	$81	million	of	outstanding	letters of	credit	under	the	revolving	credit	facility,	with	$2.17	billion	available	to	fulfill	the	Company's	short-term	liquidity	needs	and	to	issue	letters	of	credit.	Letters	of	credit are	non-debt	instruments	maintained	to	provide	credit	support	for	certain	transactions	as	requested	by	third	parties.	The	financial	covenants	with	respect	to	the	facility remained	unchanged	from	the	credit	agreement	in	effect	on	December	31,	2017.	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	rates	on	advances	under	the facility	are	based	on	a	credit	spread	to	the	LIBOR	rate	or	base	rate	in	accordance	with	Moody	Investors	Service's	and	Standard	&	Poor's	Financial	Services'	then applicable	credit	rating	on	AWCC's	senior	unsecured,	non-credit	enhanced	debt.

|  | Credit	Facility<br>Commitment	(a) | Available	Credit<br>Facility	Capacity	(a) | Letter	of	Credit<br>Sublimit | Available	Letter	of<br>Credit	Capacity | Commercial	Paper<br>Limit | Available	Commercial<br>Paper	Capacity |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| December\t31,\t2018 | $2,262 | $2,177 | $150 | $69 | $2,100 | $1,146 |
| December\t31,\t2017 | 1,762 | 1,673 | 150 | 66 | 1,600 | 695 |

(a) Includes	amounts	related	to	the	revolving	credit	facility	of	Keystone.	As	of	 December	31,	2018,	the	total	commitment	under	the	Keystone	revolving	credit	facility	was	 $12	million,	of which	$8	million	was	available	for	borrowing,	subject	to	compliance	with	a	collateral	base	calculation.

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

|  | 2018 | 2017 |
| :--- | :--- | :--- |
| Average\tborrowings | $1,029 | $779 |
| Maximum\tborrowings\toutstanding | 1,905 | 1,135 |
| Weighted\taverage\tinterest\trates,\tcomputed\ton\tdaily\tbasis | 2.28% | 1.24% |
| Weighted\taverage\tinterest\trates,\tas\tof\tDecember\t31 | 2.84% | 1.61% |

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,	2018	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	13:	General	Taxes

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

|  | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Gross\treceipts\tand\tfranchise | $112 | $110 | $106 |
| Property\tand\tcapital\tstock | 120 | 105 | 106 |
| Payroll | 33 | 31 | 32 |
| Other\tgeneral | 12 | 13 | 14 |
| Total\tgeneral\ttaxes | $277 | $259 | $258 |

# Note	14:	Income	Taxes

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

|  | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Current\tincome\ttaxes: |  |  |  |
| State | $26 | $25 | $20 |
| Federal | 1 | (1) | 1 |
| Total\tcurrent\tincome\ttaxes | $27 | $24 | $21 |
| Deferred\tincome\ttaxes: |  |  |  |
| State | $33 | $50 | $24 |
| Federal | 163 | 413 | 258 |
| Amortization\tof\tdeferred\tinvestment\ttax\tcredits | (1) | (1) | (1) |
| Total\tdeferred\tincome\ttaxes | 195 | 462 | 281 |
| Provision\tfor\tincome\ttaxes | $222 | $486 | $302 |

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

|  | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Income\ttax\tat\tstatutory\trate | 21.0% | 35.0\t% | 35.0% |
| Increases\t(decreases)\tresulting\tfrom: |  |  |  |
| State\ttaxes,\tnet\tof\tfederal\ttaxes | 5.5% | 5.4\t% | 3.8% |
| TCJA | 1.5% | 13.7\t% | —% |
| Other,\tnet | 0.2% | (0.8)% | 0.4% |
| Effective\ttax\trate | 28.2% | 53.3\t% | 39.2% |

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,	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	may	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	the	Company's	financial	statements	in	2017.	Under	GAAP,	specifically	Accounting	Standards Codification	Topic	740,	Income	Taxes	("ASC	740"),	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	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.	The	Company	made	a	reasonable	estimate	for	the	measurement	and accounting	of	certain	effects	of	the	TCJA	which	were	reflected	in	the	financial	statements	as	of	December	31,	2017.	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	of	December	31,	2018,	the	Company	has	recorded	all	its	reasonable	estimates	resulting	from	the	TCJA	under	SAB	118.	These	estimates,	however,	are	still subject	to	changes	due	to	the	future	impacts	of	various	items,	including	further	changes	in	income	tax	laws,	forecasted	financial	conditions	and	the	actual	tax	return filings	with	the	tax	authorities.

ASC	740	requires	the	re-measurement	of	deferred	income	tax	assets	and	liabilities	as	a	result	of	a	change	in	tax	laws	or	rates	to	be	presented	in	net	income. Adjusting	temporary	differences	originally	recorded	to	AOCI	through	the	income	statement	result	in	disproportionate	tax	effects	remaining	in	AOCI.	As	of	December 31,	2018,	the	Company	adopted	Accounting	Standards	Update	2018-02,	Reclassification	of	Certain	Tax	Effects	from	Accumulated	Other	Comprehensive	Income,	which allows	companies	to	reclassify	the	income	tax	effects	of	TCJA	on	items	within	AOCI	to	retained	earnings.	As	a	result	of	the	TCJA	tax	rate	reduction,	there	were	income tax	 effects	 related	 to	 the	 Company's	 hedge	 and	 pension	 positions	 of	$2	million	 and	$22	 million,	 respectively,	 remaining	 in	 the	 Company's	 accumulated	 other comprehensive	loss	balance.	The	Company	reclassified	these	tax	effects	from	accumulated	other	comprehensive	loss	to	accumulated	deficit	as	of	December	31,	2018.

During	2018,	the	Company	continued	to	assess	the	impacts	of	the	TCJA	and	filed	its	2017	federal	and	state	income	tax	returns.	As	of	December	31,	2018,	the Company	completed	its	analysis	of	the	estimated	impact	of	TCJA	on	its	federal	and	state	income	taxes	based	on	information	available	to	date,	and	recorded	adjustments to	its	provisional	estimates	under	SAB	118	in	the	amount	of	$12	million.	These	estimates	may	be	revised	in	the	future	for	changes	in	income	tax	laws,	additional regulatory	guidance,	changes	to	forecasted	financial	conditions,	and	actual	tax	return	filings	with	the	tax	authorities.

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

|  | 2018 | 2017 |
| :--- | :--- | :--- |
| Deferred\ttax\tassets: |  |  |
| Advances\tand\tcontributions | $402 | $395 |
| Tax\tlosses\tand\tcredits | 131 | 196 |
| Regulatory\tincome\ttax\tassets | 339 | 327 |
| Pension\tand\tother\tpostretirement\tbenefits | 91 | 96 |
| Other | 44 | 49 |
| Total\tdeferred\ttax\tassets | 1,007 | 1,063 |
| Valuation\tallowance | (14) | (13) |
| Total\tdeferred\ttax\tassets,\tnet\tof\tallowance | $993 | $1,050 |
| Deferred\ttax\tliabilities: |  |  |
| Property,\tplant\tand\tequipment | $2,537 | $2,429 |
| Deferred\tpension\tand\tother\tpostretirement\tbenefits | 77 | 69 |
| Other | 97 | 103 |
| Total\tdeferred\ttax\tliabilities | 2,711 | 2,601 |
| Total\tdeferred\ttax\tliabilities,\tnet\tof\tdeferred\ttax\tassets | $(1,718) | $(1,551) |

As	of	December	31,	2018	and	2017,	the	Company	recognized	federal	NOL	carryforwards	of	$707	million	and	$1.05	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,	2018	and	2017,	the	Company	had	state	NOLs	of	$547	million	and	$322	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	began	to	expire	in	2018	through 2037.

As	of	December	31,	2018	and	2017,	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	provides	the	changes	in	gross	liability,	excluding	interest	and	penalties,	for	unrecognized	tax	benefits:

|  | Amount |
| :--- | :--- |
| Balance\tas\tof\tJanuary\t1,\t2017 | $169 |
| Increases\tin\tcurrent\tperiod\ttax\tpositions | 8 |
| Decreases\tin\tprior\tperiod\tmeasurement\tof\ttax\tpositions | (71) |
| Balance\tas\tof\tDecember\t31,\t2017 | $106 |
| Increases\tin\tcurrent\tperiod\ttax\tpositions | 13 |
| Decreases\tin\tprior\tperiod\tmeasurement\tof\ttax\tpositions | (22) |
| Balance\tas\tof\tDecember\t31,\t2018 | $97 |

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	related	to	the	accounting	method	change	the	Company	filed	with	its	2015	tax	return. The	Company	does	not	anticipate	material	changes	to	its	unrecognized	tax	benefits	within	the	next	year.	However,	the	Company	expects	to	utilize	a	significant	portion of	the	remaining	NOLs	in	2019	and	fully	utilize	its	NOLs	in	2020,	as	a	result,	a	balance	sheet	reclassification	between	the	unrecognized	tax	benefits	and	deferred income	tax	asset	is	anticipated	due	to	the	lack	of	available	NOLs	to	offset.	If	the	Company	sustains	all	of	its	positions	as	of	December	31,	2018,	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,	2018	and	2017.

The	following	table	provides	the	changes	in	the	valuation	allowance:

|  | Amount |
| :--- | :--- |
| Balance\tas\tof\tJanuary\t1,\t2016 | $8 |
| Decreases\tin\tcurrent\tperiod\ttax\tpositions | (2) |
| Balance\tas\tof\tDecember\t31,\t2016 | $6 |
| Decreases\tin\tcurrent\tperiod\ttax\tpositions | 7 |
| Balance\tas\tof\tDecember\t31,\t2017 | $13 |
| Increases\tin\tcurrent\tperiod\ttax\tpositions | 1 |
| Balance\tas\tof\tDecember\t31,\t2018 | $14 |

# Note	15:	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	7—Regulatory	Assets	and	Liabilities	for	additional	information.	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	guideline	of	the	pension	plan	is	focused	on	diversification,	improving	returns	and	reducing	the	volatility	of	the	funded	status	over	a	long- term	horizon.	The	investment	policy	guidelines	of	the	postretirement	plans	focus	on	the	appropriate	strategy	given	the	funded	status	of	the	plans.	None	of	the	Company's securities	are	included	in	pension	or	other	postretirement	benefit	plan	assets.

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	following	tables	provide	the	fair	values	and	asset	allocations	of	the	pension	plan	assets	as	of	December	31,	2018	and	2017,	respectively,	by	asset	category:

|  |  |  | Quoted	Prices	in	Active |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | Markets\tfor | Significant | Significant |  |
|  | 2019\tTarget |  | Identical\tAssets\t(Level | Observable\tInputs | Unobservable\tInputs | Percentage\tof\tPlan\tAssets |
| Asset\tCategory | Allocation | Total | 1) | (Level\t2) | (Level\t3) | as\tof\tDecember\t31,\t2018 |
| Cash |  | $24 | $24 | $— | $— | 2% |
| Equity\tsecurities: | 50% |  |  |  |  |  |
| U.S.\tlarge\tcap |  | 297 | 297 | — | — | 20% |
| U.S.\tsmall\tcap |  | 76 | 70 | 6 | — | 5% |
| International |  | 256 | 2 | 132 | 122 | 17% |
| Real\testate\tfund |  | 65 | — | — | 65 | 4% |
| REITs |  | 20 | — | 20 | — | 1% |
| Fixed\tincome\tsecurities: | 50% |  |  |  |  |  |
| U.S.\tTreasury\tsecurities\tand\ngovernment\tbonds |  | 181 | 167 | 14 | — | 12% |
| Corporate\tbonds |  | 491 | — | 491 | — | 33% |
| Mortgage-backed\tsecurities |  | 11 | — | 11 | — | 1% |
| Municipal\tbonds |  | 28 | — | 28 | — | 2% |
| Long\tduration\tbond\tfund |  | 7 | 7 | — | — | — |
| Guarantee\tannuity\tcontracts |  | 43 | — | — | 43 | 3% |
| Total | 100% | $1,499 | $567 | $702 | $230 | 100% |

|  |  |  | Quoted	Prices	in	Active |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | Markets\tfor | Significant | Significant |  |
|  | 2018\tTarget |  | Identical\tAssets\t(Level | Observable\tInputs | Unobservable\tInputs | Percentage\tof\tPlan\tAssets |
| Asset\tCategory | Allocation | Total | 1) | (Level\t2) | (Level\t3) | as\tof\tDecember\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% |

The	following	tables	provide	a	reconciliation	of	the	beginning	and	ending	balances	of	the	fair	value	measurements	using	significant	unobservable	inputs	(Level	3) for	2018	and	2017,	respectively:

|  | Level	3 |
| :--- | :--- |
| Balance\tas\tof\tJanuary\t1,\t2018 | $278 |
| Actual\treturn\ton\tassets | (23) |
| Purchases,\tissuances\tand\tsettlements,\tnet | (25) |
| Balance\tas\tof\tDecember\t31,\t2018 | $230 |

|  | 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 |

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.

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	Postretirement	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	Postretirement	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.

In	2018,	the	Company	announced	plan	design	changes	to	the	medical	bargaining	benefit	plan,	which	resulted	in	a	cap	on	future	benefits	and	an	over	funded postretirement	 medical	 benefits	 bargaining	 plan.	 Given	 the	 change	 in	 funded	 status,	 the	 Retirement	 and	 Benefit	 Plans	 Investment	 Committee	 (the	 "Investment Committee"),	which	is	responsible	for	overseeing	the	investment	of	the	Company's	pension	and	other	postretirement	benefit	plans'	assets,	commissioned	a	new	asset- liability	study	for	the	postretirement	medical	bargaining	plan.	This	study	concluded	that	it	was	prudent	to	decrease	the	risk	in	the	plan	and	to	remove	its	equity	exposure. The	study	also	recommended	reducing	its	exposure	to	changes	in	interest	rates	by	matching	the	assets	of	the	plan	to	the	projected	cash	flows	for	future	benefit	payments of	the	liability.	The	Investment	Committee	agreed	with	the	recommendations	and	voted	to	invest	the	postretirement	medical	bargaining	plan	assets	in	fixed-income securities.

The	restructuring	of	the	plan	was	initiated	towards	the	end	of	2018.	Once	fully	completed,	the	plans	assets	will	be	invested	in	fixed-income	securities.	The majority	of	the	securities	will	be	used	to	match	the	projected	cash	flows	for	future	benefit	payments	of	the	liability.	Plan	assets	in	excess	of	those	securities	designed	to match	the	long-term	liabilities	will	be	invested	in	shorter	duration	securities	with	a	duration	of	about	three	years.

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.	For	the	postretirement	medical	bargaining	plan,	all	of	its assets	are	in	fixed-income	securities	and	the	asset	structure	is	designed	to	meet	the	cash	flows	of	the	liabilities.	This	design	reduces	the	plan's	exposure	to	changes	in interest	rates.

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	Postretirement	Medical	Benefits	Bargaining	Plan,	the	New	York Water	Service	Corporation	Postretirement	Medical	Benefits	Bargaining	Plan,	 the	American	Water	Postretirement	Medical	Benefits	Non-Bargaining	Plan,	and	 the American	Water	Life	Insurance	Trust.

The	following	tables	provide	the	fair	values	and	asset	allocations	of	the	postretirement	benefit	plan	assets	as	of	December	31,	2018	and	2017,	respectively,	by asset	category:

|  |  |  | Quoted	Prices	in |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | Active\tMarkets\tfor | Significant | Significant | Percentage\tof\tPlan |
|  | 2019\tTarget |  | Identical\tAssets\t(Level | Observable\tInputs | Unobservable\tInputs | Assets\tas\tof |
| Asset\tCategory | Allocation | Total | 1) | (Level\t2) | (Level\t3) | December\t31,\t2018 |
| Bargain\tVEBA: |  |  |  |  |  |  |
| Cash |  | $31 | $31 | $— | $— | — |
| Equity\tsecurities: | 2% |  |  |  |  |  |
| U.S.\tlarge\tcap |  | 1 | 1 | — | — | — |
| International |  | 17 | — | — | 17 | 4% |
| Fixed\tincome\tsecurities: | 98% |  |  |  |  |  |
| U.S.\tTreasury\tsecurities\tand\ngovernment\tbonds |  | 179 | 178 | 1 | — | 47% |
| Corporate\tbonds |  | 141 | — | 141 | — | 37% |
| Municipal\tbonds |  | 9 | — | 9 | — | 3% |
| Long\tduration\tbond\tfund |  | 4 | 4 | — | — | 1% |
| Future\tand\toption\tcontracts\t(a) |  | — | — | — | — | 8% |
| Total\tbargain\tVEBA | 100% | $382 | $214 | $151 | $17 | 100% |
| Non-bargain\tVEBA: |  |  |  |  |  |  |
| Cash |  | $3 | $3 | $— | $— | — |
| Equity\tsecurities: | 60% |  |  |  |  |  |
| U.S.\tlarge\tcap |  | 43 | 43 | — | — | 35% |
| International |  | 24 | 24 | — | — | 20% |
| Fixed\tincome\tsecurities: | 40% |  |  |  |  |  |
| Core\tfixed\tincome\tbond\tfund\t(a) |  | 52 | — | 52 | — | 45% |
| Total\tnon-bargain\tVEBA | 100% | $122 | $70 | $52 | $— | 100% |
| Life\tVEBA: |  |  |  |  |  |  |
| Equity\tsecurities: | 70% |  |  |  |  |  |
| U.S.\tlarge\tcap |  | 2 | 2 | — | — | 67% |
| Fixed\tincome\tsecurities: | 30% |  |  |  |  |  |
| Core\tfixed\tincome\tbond\tfund\t(a) |  | 1 | 1 | — | — | 33% |
| Total\tlife\tVEBA | 100% | $3 | $3 | $— | $— | 100% |
| Total | 100% | $507 | $287 | $203 | $17 | 100% |

(a) Includes	cash	for	margin	requirements.

|  |  |  | Quoted	Prices	in	Active |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | Markets\tfor | Significant | Significant |  |
|  | 2018\tTarget |  | Identical\tAssets\t(Level | Observable\tInputs | Unobservable\tInputs | Percentage\tof\tPlan |
| Asset\tCategory | Allocation | Total | 1) | (Level\t2) | (Level\t3) | Assets\tas\tof\t12/31/2017 |
| 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% |

# 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.	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.

Guaranteed	annuity	contracts—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.

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

|  | Pension	Benefits<br>2018 | 2017 | Other	Benefits<br>2018 | 2017 |
| :--- | :--- | :--- | :--- | :--- |
| Change\tin\tbenefit\tobligation: |  |  |  |  |
| Benefit\tobligation\tas\tof\tJanuary\t1, | $2,034 | $1,864 | $614 | $610 |
| Service\tcost | 34 | 33 | 8 | 10 |
| Interest\tcost | 76 | 80 | 20 | 26 |
| Plan\tparticipants'\tcontributions | — | — | 2 | 2 |
| Plan\tamendments | (23) | — | (174) | — |
| Actuarial\t(gain)\tloss | (153) | 118 | (89) | (9) |
| Acquisitions | — | 9 | — | — |
| Gross\tbenefits\tpaid | (76) | (70) | (29) | (26) |
| Federal\tsubsidy | — | — | 1 | 1 |
| Benefit\tobligation\tas\tof\tDecember\t31, | $1,892 | $2,034 | $353 | $614 |
| Change\tin\tplan\tassets: |  |  |  |  |
| Fair\tvalue\tof\tplan\tassets\tas\tof\tJanuary\t1, | $1,649 | $1,443 | $576 | $525 |
| Actual\treturn\ton\tplan\tassets | (97) | 227 | (40) | 69 |
| Employer\tcontributions | 24 | 42 | (2) | 6 |
| Plan\tparticipants'\tcontributions | — | — | 2 | 2 |
| Acquisitions | — | 7 | — | — |
| Benefits\tpaid | (77) | (70) | (29) | (26) |
| Fair\tvalue\tof\tplan\tassets\tas\tof\tDecember\t31, | $1,499 | $1,649 | $507 | $576 |
| Funded\tvalue\tas\tof\tDecember\t31, | $(393) | $(385) | $154 | $(38) |
| Amounts\trecognized\ton\tthe\tbalance\tsheet: |  |  |  |  |
| Noncurrent\tasset | $— | $— | $155 | $2 |
| Current\tliability | (3) | (1) | — | — |
| Noncurrent\tliability | (390) | (384) | (1) | (40) |
| Net\tamount\trecognized | $(393) | $(385) | $154 | $(38) |

The	pension	and	postretirement	plans	were	negatively	impacted	from	the	market's	volatile	and	abrupt	fourth	quarter	2018	decline,	that	reversed	all	market	gains in	2018.

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	a	$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.

On	August	31,	2018,	the	Postretirement	Medical	Benefit	Plan	was	remeasured	to	reflect	a	plan	change.	The	plan	change	resulted	in	a	$175	million	reduction	in future	benefits	payable	to	plan	participants,	and,	in	combination	with	other	experience	reflected	as	of	the	remeasurement	date,	resulted	in	a	$227	million	reduction	to	the net	accumulated	postretirement	benefit	obligation.

The	following	table	provides	the	components	of	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 |  |
| :--- | :--- | :--- | :--- | :--- |
|  | 2018 | 2017 | 2018 | 2017 |
| Net\tactuarial\tloss | $431 | $416 | $83 | $108 |
| Prior\tservice\tcost\t(credit) | (22) | 2 | (291) | (140) |
| Net\tamount\trecognized | $409 | $418 | $(208) | $(32) |
| Regulatory\tassets\t(liabilities) | $352 | $270 | $(208) | $(32) |
| Accumulated\tother\tcomprehensive\tincome | 57 | 148 | — | — |
| Total | $409 | $418 | $(208) | $(32) |

The	following	table	provides	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	as	of	December	31,	2018	and	2017:

|  | 2018 | 2017 |
| :--- | :--- | :--- |
| Projected\tbenefit\tobligation | $1,892 | $2,034 |
| Fair\tvalue\tof\tplan\tassets | 1,499 | 1,649 |

|  | 2018 | 2017 |
| :--- | :--- | :--- |
| Accumulated\tbenefit\tobligation | $1,768 | $1,888 |
| Fair\tvalue\tof\tplan\tassets | 1,499 | 1,649 |

The	accumulated	postretirement	plan	assets	exceed	benefit	obligations	for	all	of	the	Company's	other	postretirement	benefit	plans,	except	for	the	Northern	Illinois Retiree	Welfare	Plan.

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	or	greater	than	the	minimum	required	contributions	or	the	normal	cost	in	2019	to	the	qualified	pension	plans. The	Company	plans	to	contribute	to	its	2019	other	postretirement	benefit	cost	for	rate-making	purposes.

The	following	table	provides	information	about	the	expected	cash	flows	for	the	pension	and	postretirement	benefit	plans:

|  | Pension	Benefits | Other	Benefits |
| :--- | :--- | :--- |
| 2019\texpected\temployer\tcontributions: |  |  |
| To\tplan\ttrusts | $31 | $— |
| To\tplan\tparticipants | 2 | — |

The	following	table	provides	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\tSubsidy\nPayments |
| 2019 | $102 | $27 | $1 |
| 2020 | 107 | 27 | 1 |
| 2021 | 111 | 28 | 1 |
| 2022 | 115 | 28 | 1 |
| 2023 | 120 | 28 | 1 |
| 2024-2028 | 634 | 136 | 6 |

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	following	table	provides	the	significant	assumptions	related	to	the	pension	and	other	postretirement	benefit	plans:

|  | 2018 | Pension	Benefits<br>2017 | 2016 | 2018 | Other	Benefits<br>2017 | 2016 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Weighted\taverage\tassumptions\tused\tto\tdetermine\tDecember\n31\tbenefit\tobligations: |  |  |  |  |  |  |
| Discount\trate | 4.38% | 3.75% | 4.28% | 4.32% | 3.73% | 4.26% |
| Rate\tof\tcompensation\tincrease | 3.00% | 3.02% | 3.07% | N/A | N/A | N/A |
| Medical\ttrend | N/A | N/A | N/A | graded\tfrom | graded\tfrom | graded\tfrom |
|  |  |  |  | 6.75%\tin\t2019 | 7.00%\tin\t2018 | 7.00%\tin\t2017 |
|  |  |  |  | to\t5.00%\tin\t2026+ | to\t4.50%\tin\t2026+ | to\t5.00%\tin\t2021+ |
| Weighted\taverage\tassumptions\tused\tto\tdetermine\tnet\tperiodic\ncost: |  |  |  |  |  |  |
| Discount\trate | 3.75% | 4.28% | 4.66% | 4.23% | 4.26% | 3.66% |
| Expected\treturn\ton\tplan\tassets | 5.95% | 6.49% | 7.02% | 4.77% | 5.09% | 5.37% |
| 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+ |

NOTE "N/A"	in	the	table	above	means	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.	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.	The	Company's	pension	expense	increases	as	the	expected	return	on	assets	decreases.	The	Company	used	an	expected	return	on	plan assets	of	5.95%	to	estimate	its	2018	pension	benefit	costs,	and	an	expected	blended	return	based	on	weighted	assets	of	4.77%	to	estimate	its	2018	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.	In	2018,	the	Company	adopted	the new	MP-2018	mortality	improvement	scale	to	gradually	adjust	future	mortality	rates	downward.

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

|  | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Components\tof\tnet\tperiodic\tpension\tbenefit\tcost: |  |  |  |
| Service\tcost | $34 | $33 | $32 |
| Interest\tcost | 76 | 80 | 80 |
| Expected\treturn\ton\tplan\tassets | (97) | (93) | (95) |
| Amortization\tof: |  |  |  |
| Prior\tservice\tcost\t(credit) | 1 | 1 | 1 |
| Actuarial\t(gain)\tloss | 27 | 34 | 27 |
| Net\tperiodic\tpension\tbenefit\tcost | $41 | $55 | $45 |
| Other\tchanges\tin\tplan\tassets\tand\tbenefit\tobligations\trecognized\tin\tother\tcomprehensive\nincome: |  |  |  |
| Current\tyear\tactuarial\t(gain)\tloss | (60) | (7) | 21 |
| Amortization\tof\tactuarial\tgain\t(loss) | (7) | (7) | (6) |
| Total\trecognized\tin\tother\tcomprehensive\tincome | $(67) | $(14) | $15 |
| Total\trecognized\tin\tnet\tperiodic\tbenefit\tcost\tand\tother\tcomprehensive\tincome | $(26) | $41 | $60 |
| Components\tof\tnet\tperiodic\tother\tpostretirement\tbenefit\tcost: |  |  |  |
| Service\tcost | $8 | $10 | $12 |
| Interest\tcost | 20 | 26 | 28 |
| Expected\treturn\ton\tplan\tassets | (26) | (26) | (27) |
| Amortization\tof: |  |  |  |
| Prior\tservice\tcost\t(credit) | (23) | (18) | (9) |
| Actuarial\t(gain)\tloss | 3 | 10 | 5 |
| Net\tperiodic\tother\tpostretirement\tbenefit\tcost | $(18) | $2 | $9 |

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.

# 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	$12	million,	$13	million	and	$9	million	for	2018,	2017	and	2016,	respectively.	All	of	the	Company's	contributions	are	invested	in	one	or	more	funds	at the	direction	of	the	employees.

# Note	16:	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	$419	million	as	of	December	31,	2018.

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

|  | Amount |
| :--- | :--- |
| 2019 | $65 |
| 2020 | 65 |
| 2021 | 65 |
| 2022 | 64 |
| 2023 | 57 |
| Thereafter | 641 |

The	Company	enters	into	agreements	for	the	provision	of	services	to	water	and	wastewater	facilities	for	the	United	States	military,	municipalities	and	other customers.	See	Note	3—Revenue	Recognition	for	additional	information	regarding	the	Company's	performance	obligations.

# Contingencies

The	 Company	 is	 routinely	 involved	 in	 legal	 actions	 incident	 to	 the	 normal	 conduct	 of	 its	 business.	As	 of	December	31,	2018,	 the	 Company	 has	 accrued approximately	$54	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	$26	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	16—Commitments	and	Contingencies,	will not	have	a	material	adverse	effect	on	the	Company.

On	June	8,	2018,	the	U.S.	District	Court	for	the	Southern	District	of	West	Virginia	granted	final	approval	of	a	settlement	class	and	global	class	action	settlement (the	"Settlement")	for	all	claims	and	potential	claims	by	all	putative	class	members	(collectively,	the	"Plaintiffs")	arising	out	of	the	January	2014	Freedom	Industries, Inc.	chemical	spill	in	West	Virginia.	The	effective	date	of	the	Settlement	is	July	16,	2018.

Under	 the	 terms	 and	 conditions	 of	 the	 Settlement,	 West	 Virginia-American	 Water	 Company	 ("WVAWC")	 and	 certain	 other	 Company	 affiliated	 entities (collectively,	the	"American	Water	Defendants")	did	not	admit,	and	will	not	admit,	any	fault	or	liability	for	any	of	the	allegations	made	by	the	Plaintiffs	in	any	of	the actions	that	were	resolved.	Under	federal	class	action	rules,	claimants	had	the	right,	until	December	8,	2017,	to	elect	to	opt	out	of	the	final	Settlement.	Less	than	100	of the	225,000	estimated	putative	class	members	elected	to	opt	out	from	the	Settlement,	and	these	claimants	will	not	receive	any	benefit	from	or	be	bound	by	the	terms	of the	Settlement.

In	June	2018,	the	Company	and	its	remaining	non-participating	general	liability	insurance	carrier	settled	for	a	payment	to	the	Company	of	$20	million,	out	of	a maximum	of	$25	million	in	potential	coverage	under	the	terms	of	the	relevant	policy,	in	exchange	for	a	full	release	by	the	American	Water	Defendants	of	all	claims against	the	insurance	carrier	related	to	the	Freedom	Industries	chemical	spill.

As	a	result,	the	aggregate	pre-tax	amount	to	be	contributed	by	WVAWC	of	the	$126	million	Settlement	with	respect	to	the	Company,	net	of	insurance	recoveries, is	$23	million.	As	of	December	31,	2018,	$40	million	of	the	aggregate	settlement	amount	of	$126	million,	reflecting	payments	made	by	the	Company	under	the	terms	of the	Settlement,	is	reflected	in	Accrued	liabilities,	and	the	offsetting	insurance	receivables	are	reflected	in	Other	current	assets	on	the	Consolidated	Balance	Sheet.	The Company	has	funded	WVAWC's	contributions	to	the	Settlement	through	existing	sources	of	liquidity.

In	April	2017,	the	Lincoln	County	(West	Virginia)	Commission	(the	"LCC")	filed	a	complaint	in	Lincoln	County	state	court	against	WVAWC	and	certain	other defendants	not	affiliated	with	the	Company,	which	in	June	2017	was	transferred	to	the	West	Virginia	Mass	Litigation	Panel,	alleging	that	the	Freedom	Industries chemical	spill	caused	a	public	nuisance	in	Lincoln	County	under	an	ordinance	enacted	by	the	LCC	in	March	2017,	more	than	three	years	after	the	Freedom	Industries chemical	spill	occurred.	The	complaint	sought	an	injunction	against	WVAWC	that	would	have	required	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	July	31,	2018,	WVAWC	filed	a	motion	to	dismiss	the	LCC's	complaint.	On	December	12,	2018,	the	Mass	Litigation	Panel	granted WVAWC's	motion	to	dismiss	on	several	grounds,	including	being	barred	by	the	applicable	statute	of	limitations,	failure	to	allege	a	nuisance	under	applicable	law,	lack of	standing,	improper	retroactive	application	of	the	nuisance	ordinance	and	violation	of	WVAWC's	due	process.	The	LCC	voted	not	to	appeal	this	decision.

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	by	July	1,	2015	to	all	customers affected	by	this	event.

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	17:	Earnings	per	Common	Share

The	following	table	provides	a	reconciliation	of	the	numerator	and	denominator	for	basic	and	diluted	earnings	per	share	("EPS")	calculations	for	the	years	ended December	31:

|  | 2018 | 2017 | 2016 |
| :--- | :--- | :--- | :--- |
| Numerator:\nNet\tincome\tattributable\tto\tcommon\tshareholders | $567 | $426 | $468 |
| Denominator: |  |  |  |
| Weighted\taverage\tcommon\tshares\toutstanding—Basic | 180 | 178 | 178 |
| Effect\tof\tdilutive\tcommon\tstock\tequivalents | — | 1 | 1 |
| Weighted\taverage\tcommon\tshares\toutstanding—Diluted | 180 | 179 | 179 |

The	effect	of	dilutive	common	stock	equivalents	is	related	to	outstanding	stock	options,	RSUs	and	PSUs	granted	under	the	2007	and	2017	Omnibus	Equity Compensation	Plans,	as	well	as	estimated	shares	to	be	purchased	under	the	Company's	2017	Nonqualified	Employee	Stock	Purchase	Plan.	Less	than	one	million	share- based	awards	were	excluded	from	the	computation	of	diluted	EPS	for	the	years	ended	December	31,	2018,	2017	and	2016,	because	their	effect	would	have	been	anti- dilutive	under	the	treasury	stock	method.

See	Note	4—Acquisitions	and	Divestitures	for	information	regarding	the	forward	sale	agreements	entered	into	by	the	Company	on	April	11,	2018,	and	the physical	settlement	of	these	agreements	on	June	7,	2018.

# Note	18:	Fair	Value	of	Financial	Information

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	on	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	Level	3	are	determined	by	a	valuation	model	that	is	based	on	a	conventional	discounted cash	flow	methodology	and	utilizes	assumptions	of	current	market	rates.	As	a	majority	of	the	Company's	debt	is	not	traded	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	following	tables	provide	the	carrying	amounts,	including	fair	value	adjustments	previously	recognized	in	acquisition	purchase	accounting,	and	a	fair	value adjustment	related	to	interest	rate	swap	fair	value	hedges	(classified	as	Level	2	in	the	fair	value	hierarchy),	and	the	fair	values	of	the	financial	instruments:

|  | Carrying	Amount | Level	1 | Level	2 | Level	3 | Total |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Preferred\tstock\twith\tmandatory\tredemption\nrequirements | $8 | $— | $— | $9 | $9 |
| Long-term\tdebt\t(excluding\tcapital\tlease\nobligations) | 7,638 | 5,760 | 433 | 1,728 | 7,921 |

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

# 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	tables	provide	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,	2018	and	2017,	respectively:

|  | Level	1 | Level	2 | Level	3 | Total |
| :--- | :--- | :--- | :--- | :--- |
| Assets: |  |  |  |  |
| Restricted\tfunds | $29 | $— | $— | $29 |
| Rabbi\ttrust\tinvestments | 15 | — | — | 15 |
| Deposits | 3 | — | — | 3 |
| Other\tinvestments | 3 | — | — | 3 |
| Total\tassets | 50 | — | — | 50 |
| Liabilities: |  |  |  |  |
| Deferred\tcompensation\tobligations | 17 | — | — | 17 |
| Mark-to-market\tderivative\tliabilities | — | 14 | — | 14 |
| Total\tliabilities | 17 | 14 | — | 31 |
| Total\tassets\t(liabilities) | $33 | $(14) | $— | $19 |

|  | 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\tobligations | 17 | — | — | 17 |
| Mark-to-market\tderivative\tliabilities | — | 3 | — | 3 |
| Total\tliabilities | 17 | 3 | — | 20 |
| Total\tassets\t(liabilities) | $33 | $(3) | $— | $30 |

Restricted	funds—The	Company's	restricted	funds	primarily	represent	proceeds	received	from	financings	for	 the	construction	and	capital	 improvement	of facilities	and	from	customers	for	future	services	under	operations,	maintenance	and	repair	projects.	Long-term	restricted	funds	of	$1	million	 and	$1	million	 were included	in	Other	long-term	assets	on	the	Consolidated	Balance	Sheets	as	of	December	31,	2018	and	2017,	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	on	the	Consolidated	Balance	Sheets.

Deposits—Deposits include	 escrow funds	 and	 certain	 other	 deposits	 held in trust.	 The	 Company includes	 cash	 deposits in	 Other	 current	 assets	 on the Consolidated	Balance	Sheets.

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

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

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

# Nonrecurring	Fair	Value	Measurements

The	following	table	provides	assets	measured	and	recorded	at	fair	value	on	a	nonrecurring	basis	and	their	level	within	the	fair	value	hierarchy	as	of	December	31,

|  | Level	1 | Level	2 | Level	3 | Total | 2018	Impairment	Charge |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Assets: |  |  |  |  |  |
| Keystone\tgoodwill\t(a) | $— | $— | $38 | $38 | $53 |
| Keystone\tintangible\tasset\t(a) | — | — | 3 | 3 | 4 |
| Total | $— | $— | $41 | $41 | $57 |

(a) As	of	December	31,	2017,	Keystone's	goodwill	balance	was	 $91	million	and	its	intangible	asset	balance	was	$8	million.	Subsequent	to	the	impairment	charge	recorded	in	the	third	quarter	of 2018,	Keystone's	goodwill	and	intangible	asset	balances	were	$38	million	and	$3	million,	respectively,	as	of	December	31,	2018.

The	Company's	estimation	of	the	fair	value	of	the	Keystone	reporting	unit	as	part	of	evaluating	its	goodwill	and	intangible	asset	for	impairment	represents	a	Level 3	fair	value	measurement,	due	to	the	use	of	internal	projections	and	unobservable	measurement	inputs.	See	Note	8—Goodwill	and	Other	Intangible	Assets	for	further discussion.

# Note	19:	Leases

The	Company	has	entered	 into	operating	 leases	 involving	certain	real	property,	vehicles,	and	equipment.	Rental	expenses	under	operating	 leases	were	$35 million,	$29	million	 and	$24	million	 for	 the	 years	 ended	December	31,	2018,	2017	 and	2016,	respectively.	The	operating	 leases	for	real	property,	vehicles,	and equipment	will	expire	over	the	next	40	years,	seven	years	and	five	years,	respectively.	Certain	operating	leases	have	renewal	options	ranging	from	one	to	60	years.

The	following	table	provides	the	minimum	annual	future	rental	commitment	under	operating	leases	that	have	initial	or	remaining	non-cancelable	lease	terms	over the	next	five	years	and	thereafter:

|  | Amount |
| :--- | :--- |
| 2019 | $17 |
| 2020 | 15 |
| 2021 | 12 |
| 2022 | 11 |
| 2023 | 6 |
| Thereafter | 80 |

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	$147	million	and	$150	million	as	of	December	31,	2018	and	2017,	respectively,	which	is	presented	in	Property,	plant	and	equipment	on	the	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,	2018,	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	2019	through 2023,	and	$59	million	thereafter.

# Note	20:	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	market-based	businesses	that	provide	a	broad	range	of	related	and	complementary water	and	wastewater	services	within	non-reportable	operating	segments,	collectively	referred	to	as	the	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	Company's	primary	Market-Based	Businesses	 include	 the	Homeowner	Services	Group,	which	provides	warranty	protection	programs	to	residential	and smaller	 commercial	 customers;	 the	Military	Services	Group,	which	provides	water	and	wastewater	services	to	the	U.S.	government	on	military	installations;	and Keystone,	which	provides	water	transfer	services	for	shale	natural	gas	exploration	and	production	companies.

The	accounting	policies	of	the	segments	are	the	same	as	those	described	in	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 AWCC,	both	of	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,	and	furniture	and	equipment	provided	by	the	market-based	subsidiaries	to	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	provide	summarized	segment	information	as	of	and	for	the	years	ended	December	31:

# Note	21:	Unaudited	Quarterly	Data

The	following	tables	provide	supplemental,	unaudited,	consolidated,	quarterly	financial	data	for	each	of	the	four	quarters	in	the	years	ended	December	31,	2018 and	2017,	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 | $761 | $853 | $976 | $850 |
| Operating\tincome | 217 | 302 | 335 | 248 |
| Net\tincome\tattributable\tto\tcommon\tshareholders | 106 | 162 | 187 | 112 |
| Basic\tearnings\tper\tshare: |  |  |  |  |
| Net\tincome\tattributable\tto\tcommon\tshareholders | $0.60 | $0.90 | $1.04 | $0.62 |
| Diluted\tearnings\tper\tshare:\t(a) |  |  |  |  |
| Net\tincome\tattributable\tto\tcommon\tshareholders | 0.59 | 0.91 | 1.04 | 0.62 |

# (a) Amounts	may	not	sum	due	to	rounding.

|  | First	Quarter | Second	Quarter | Third	Quarter | Fourth	Quarter |
| :--- | :--- | :--- | :--- | :--- |
| Operating\trevenues | $756 | $844 | $936 | $821 |
| Operating\tincome | 230 | 310 | 432 | 281 |
| Net\tincome\tattributable\tto\tcommon\tshareholders | 93 | 131 | 203 | (1) |
| Basic\tearnings\tper\tshare: |  |  |  |  |
| Net\tincome\tattributable\tto\tcommon\tshareholders | $0.52 | $0.74 | $1.14 | $(0.01) |
| Diluted\tearnings\tper\tshare: |  |  |  |  |
| Net\tincome\tattributable\tto\tcommon\tshareholders | 0.52 | 0.73 | 1.13 | — |

# 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,	2018,	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 GAAP.	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	GAAP,	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,	2018,	using	the	criteria	described	in	Internal	Control—Integrated	Framework	(2013)	issued	by	the	Committee	of	Sponsoring	Organizations	of	the Treadway	Commission	(COSO).

Management	has	excluded	Pivotal	from	our	assessment	of	internal	control	over	financial	reporting	as	of	December	31,	2018	since	it	was	acquired	by	the Company	in	a	business	combination	in	June	2018.	Pivotal	is	a	wholly	owned	subsidiary	whose	total	assets	and	total	revenues	excluded	from	our	assessment	of	internal control	over	financial	reporting	represent	less	than	1%	and	approximately	2%,	respectively,	of	the	related	consolidated	financial	statement	amounts	as	of	and	for	the	year ended	December	31,	2018.

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,	2018.

The	effectiveness	of	our	internal	control	over	financial	reporting	as	of	December	31,	2018	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

On	June	4,	2018,	the	Company	completed	the	acquisition	of	Pivotal.	See	Note	4—Acquisitions	and	Divestitures	in	the	Notes	to	Consolidated	Financial	Statements for	additional	information.	We	began	to	integrate	Pivotal	into	our	internal	control	over	financial	reporting	structure	and	expect	to	complete	this	integration	in	2019.	We concluded	that	there	have	been	no	changes	in	internal	control	over	financial	reporting	that	occurred	during	the	three	months	ended	December	31,	2018,	other	than changes	resulting	from	the	acquisition	of	Pivotal,	that	have	materially	affected,	or	are	reasonably	likely	to	materially	affect,	the	Company's	internal	control	over financial	reporting.	As	permitted	by	the	SEC,	management	has	elected	to	exclude	Pivotal	from	its	assessment	of	the	effectiveness	of	its	internal	controls	over	financial reporting	as	of	December	31,	2018.

# ITEM	9B. OTHER	INFORMATION

# 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	2019	Annual	Meeting	of	Shareholders,	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	2019	Annual	Meeting	of	Shareholders,	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	2019	Annual	Meeting	of	Shareholders,	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	2019	Annual	Meeting	of	Shareholders,	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	2019	Annual	Meeting	of	Shareholders,	under	the	caption entitled	"Proposal	3—Ratification	of	Appointment	of	Independent	Registered	Public	Accounting	Firm—Fees	Paid	to	Independent	Registered	Public	Accounting	Firm" and	"Proposal	3—Ratification	of	Appointment	of	Independent	Registered	Public	Accounting	Firm—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"	in	Part	IV	of	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

3.2 Amended	and	Restated	Bylaws	of	American	Water	Works	Company,	Inc.	(incorporated	by	reference	to	Exhibit	3.2	to	American	Water	Works	Company,	Inc.'s	Quarterly Report	on	Form	10-Q,	File	No.	001-34028,	filed	August	5,	2015).

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).

4.16 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	5.77%	Series	D	Senior	Notes	due	December	21,	2021.

4.17 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	6.55%	Series	H	Senior	Notes	due	May	15, 2023.

10.1 Second	Amended	and	Restated	Credit	Agreement,	dated	as	of	March	21,	2018,	by	and	among	American	Water	Works	Company,	Inc.,	American	Water	Capital	Corp.,	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.,	PNC Bank,	National	Association,	and	U.S.	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	March	21,	2018).

10.2 Confirmation	of	Forward	Sale	Transaction,	dated	April	11,	2018,	among	American	Water	Works	Company,	Inc.,	JPMorgan	Chase	Bank,	National	Association,	and	J.P. Morgan	Securities	LLC,	solely	as	agent	(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	April	16,	2018).

10.3 Confirmation	of	Forward	Sale	Transaction,	dated	April	11,	2018,	between	American	Water	Works	Company,	Inc.	and	Wells	Fargo	Bank,	National	Association	(incorporated by	reference	to	Exhibit	10.2	to	American	Water	Works	Company,	Inc.'s	Current	Report	on	Form	8-K,	File	No.	001-34028,	filed	April	16,	2018).

10.4 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).

10.5.1* 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).

10.5.2* Amendment,	dated	April	25,	2018,	 to	Amended	and	Restated	Letter	Agreement	between	Loyd	Warnock	and	American	Water	Works	Company,	Inc.	(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	2,	2018).

Letter	Agreement,	dated	February	17,	2015,	between	Michael	A.	Sgro	and	American	Water	Works	Company,	Inc.	(incorporated	by	reference	to	Exhibit	10.4	to	American Water	Works	Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed	August	5,	2015).

10.6.2* Amendment,	dated	December	6,	2018,	to	Letter	Agreement	between	Michael	A.	Sgro	and	American	Water	Works	Company,	Inc.	(filed	herewith).

10.7* Executive	Employment	Agreement,	dated	November	1,	2018,	between	Radhakrishnan	Swaminathan	and	American	Water	Works	Service	Company,	Inc.	(filed	herewith).

10.8* 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).

10.9.1* Nonqualified	Savings	and	Deferred	Compensation	Plan	for	Employees	of	American	Water	Works	Company,	Inc.	and	Its	Designated	Subsidiaries,	as	amended	and	restated, effective	as	of	January	1,	2009	(incorporated	by	reference	to	Exhibit	10.37	to	American	Water	Works	Company,	Inc.'s	Registration	Statement	on	Form	S-1,	File	No.	333- 155245,	filed	November	18,	2008).

10.9.2* Nonqualified	Savings	and	Deferred	Compensation	Plan	for	Employees	of	American	Water	Works	Company,	Inc.	and	Its	Designated	Subsidiaries,	as	amended	and	restated, effective	as	of	January	1,	2017	(filed	herewith).

10.9.3* Nonqualified	Savings	and	Deferred	Compensation	Plan	for	Employees	of	American	Water	Works	Company,	Inc.	and	Its	Designated	Subsidiaries,	as	amended	and	restated, effective	as	of	June	1,	2018	(filed	herewith).

10.9.4* 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).

10.10* 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).

10.11.1* 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).

10.11.2* 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).

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

10.12.2* First	Amended	and	Restated	American	Water	Works	Company,	Inc.	and	its	Designated	Subsidiaries	2017	Nonqualified	Employee	Stock	Purchase	Plan,	adopted	on	December 7,	2017,	effective	as	of	August	5,	2018	(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	August	9,	2018).

10.12.3* Second	Amended	and	Restated	American	Water	Works	Company,	Inc.	and	its	Designated	Subsidiaries	2017	Nonqualified	Employee	Stock	Purchase	Plan,	adopted	on	July 27,	2018,	effective	as	of	February	5,	2019	(incorporated	by	reference	to	Exhibit	10.2	to	American	Water	Works	Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No. 001-34028,	filed	October	31,	2018).

10.13.1* 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).

10.13.2* 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).

10.13.5* 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).

10.13.6* 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).

10.13.7* 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).

10.13.8* 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).

10.13.9* 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).

10.13.10* 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).

10.13.11* American	Water	Works	Company,	Inc.	2007	Omnibus	Equity	Compensation	Plan	2016	Restricted	Stock	Unit	Grant	(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	4,	2016).

10.13.12* 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).

10.13.15* 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).

10.13.17* 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).

10.13.20* American	Water	Works	Company,	Inc.	2007	Omnibus	Equity	Compensation	Plan	2017	Performance	Stock	Unit	Grant	Form	A-2	(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	3,	2017).

10.13.23* 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).

10.13.29* 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).

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

10.13.31* 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	American	Water	Works	Company,	Inc.'s	Current	Report	on	Form	8-K,	File	No.	001-34028,	filed	May	12,	2017).

10.13.32* American	Water	Works	Company,	Inc.	2017	Omnibus	Equity	Compensation	Plan	2018	Restricted	Stock	Unit	Grant	(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	May	2,	2018).

10.13.33* American	Water	Works	Company,	Inc.	2017	Omnibus	Equity	Compensation	Plan	2018	Restricted	Stock	Unit	Grant	(for	certain	executives)	(incorporated	by	reference	to Exhibit	10.4	to	American	Water	Works	Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed	May	2,	2018).

10.13.34* American	Water	Works	Company,	Inc.	2017	Omnibus	Equity	Compensation	Plan	2018	Restricted	Stock	Unit	Grant	(for	Chief	Executive	Officer,	Chief	Financial	Officer	and Chief	Operating	Officer)	(incorporated	by	reference	to	Exhibit	10.5	to	American	Water	Works	Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed May	2,	2018).

10.13.35* American	Water	Works	Company,	Inc.	2017	Omnibus	Equity	Compensation	Plan	2018	Restricted	Stock	Unit	Grant	(for	Loyd	A.	Warnock)	(incorporated	by	reference	to Exhibit	10.6	to	American	Water	Works	Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed	May	2,	2018).

10.13.36* 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 American	Water	Works	Company,	Inc.'s	Current	Report	on	Form	8-K,	File	No.	001-34028,	filed	May	12,	2017).

10.13.38* 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 American	Water	Works	Company,	Inc.'s	Current	Report	on	Form	8-K,	File	No.	001-34028,	filed	May	12,	2017).

10.13.40* American	Water	Works	Company,	Inc.	2017	Omnibus	Equity	Compensation	Plan	2018	Performance	Stock	Unit	Grant	Form	A-1	(incorporated	by	reference	to	Exhibit	10.7	to American	Water	Works	Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed	May	2,	2018).

10.13.41* American	Water	Works	Company,	Inc.	2017	Omnibus	Equity	Compensation	Plan	2018	Performance	Stock	Unit	Grant	Form	A-2	(incorporated	by	reference	to	Exhibit	10.8	to American	Water	Works	Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed	May	2,	2018).

10.13.44* American	Water	Works	Company,	Inc.	2017	Omnibus	Equity	Compensation	Plan	2018	Performance	Stock	Unit	Grant	Form	B-1	(incorporated	by	reference	to	Exhibit	10.11 to	American	Water	Works	Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed	May	2,	2018).

10.13.47* American	Water	Works	Company,	Inc.	2017	Omnibus	Equity	Compensation	Plan	2018	Performance	Stock	Unit	Grant	Form	B	(for	Loyd	A.	Warnock)	(incorporated	by reference	to	Exhibit	10.14	to	American	Water	Works	Company,	Inc.'s	Quarterly	Report	on	Form	10-Q,	File	No.	001-34028,	filed	May	2,	2018).

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

10.13.49* American	Water	Works	Company,	Inc.	2017	Omnibus	Equity	Compensation	Plan	2018	Non-Employee	Director	Stock	Unit	Grant	(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	1,	2018).

10.14* 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).

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,	2018,	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	Shareholders'	Equity;	and	(vi)	 the	Notes	 to Consolidated	Financial	Statements	(filed	herewith).

* Denotes	a	management	contract	or	compensatory	plan	or	arrangement.

# Certain	schedules	and	exhibits	to	this	agreement	have	been	omitted	pursuant	to	Item	601(b)(2)	of	Regulation	S-K.	The	Company	will	furnish	the	omitted	schedules	and	exhibits	to	the	SEC upon	request.

	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	19th	day	of	February,	2019.

# 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	19th	day	of	February,	2019,	by	the following	persons	in	the	capacities	indicated.

/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/	JULIA	L.	JOHNSON

Julia	L.	Johnson (Director)

/s/	GEORGE	MacKENZIE

George	MacKenzie (Director)

/s/	JEFFREY	N.	EDWARDS

Jeffrey	N.	Edwards (Director)

/s/	MARTHA	CLARK	GOSS

Martha	Clark	Goss (Director)

/s/	VERONICA	M.	HAGEN

Veronica	M.	Hagen (Director)

Karl	F.	Kurz (Director)

/s/	JAMES	G.	STAVRIDIS

James	G.	Stavridis (Director)



Question: what is total intangible asset amortization expense ( millions ) for the years ended december 31 , 2018 , 2017 and 2016?
Calculation:   intangible_amortization_expense = 12 + 4 + 4 
Answer: 20