Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page Number
Audited Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm		61
Consolidated Balance Sheets as of December 31, 2015 and 2014		62
Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013		64
Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014, and 2013		65
Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013		66
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2015, 2014 and 2013		67
Notes to Consolidated Financial Statements		68

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

American Water Works Company, Inc.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of comprehensive income, of cash flows, and of changes in stockholders’ equity present fairly, in all material respects, the financial position of American Water Works Company, Inc. and Subsidiary Companies at December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 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, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these 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 these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. 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.

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 24, 2016

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Balance Sheets

(In millions, except share and per share data)

	December 31,				December 31,
	2015				2014
ASSETS
Property, plant and equipment	$	18,504			$	17,269
Accumulated depreciation		(4,571	)			(4,240	)
Property, plant and equipment, net		13,933				13,029
Current assets:
Cash and cash equivalents		45				23
Restricted funds		21				14
Accounts receivable, net		255				232
Unbilled revenues		267				221
Materials and supplies		38				37
Other		31				48
Total current assets		657				575
Regulatory and other long-term assets:
Regulatory assets		1,271				1,153
Goodwill		1,302				1,208
Other		78				73
Total regulatory and other long-term assets		2,651				2,434
TOTAL ASSETS	$	17,241			$	16,038

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

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Balance Sheets

(In millions, except share and per share data)

	December 31,				December 31,
	2015				2014
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock ($0.01 par value, 500,000,000 shares authorized, 180,907,483 and 179,461,606 shares issued as of December 31, 2015 and 2014, respectively)	$	2			$	2
Paid-in-capital		6,351				6,302
Accumulated deficit		(1,073	)			(1,296	)
Accumulated other comprehensive loss		(88	)			(82	)
Treasury stock, at cost (2,625,112 and 260,243 shares as of December 31, 2015 and 2014, respectively)		(143	)			(11	)
Total common stockholders' equity		5,049				4,915
Long-term debt
Long-term debt		5,862				5,427
Redeemable preferred stock at redemption value		12				15
Total capitalization		10,923				10,357
Current liabilities:
Short-term debt		628				450
Current portion of long-term debt		54				61
Accounts payable		126				100
Accrued liabilities		493				395
Taxes accrued		26				25
Interest accrued		62				57
Other		144				153
Total current liabilities		1,533				1,241
Regulatory and other long-term liabilities:
Advances for construction		349				368
Deferred income taxes, net		2,310				2,034
Deferred investment tax credits		24				25
Regulatory liabilities		402				392
Accrued pension		342				316
Accrued postretirement benefit		169				193
Other		68				37
Total regulatory and other long-term liabilities		3,664				3,365
Contributions in aid of construction		1,121				1,075
Commitments and contingencies (See Note 15)	—				—
TOTAL CAPITALIZATION AND LIABILITIES	$	17,241			$	16,038

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

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Operations

(In millions, except per share data)

	For the Years Ended December 31,
	2015				2014				2013
Operating revenues	$	3,159			$	3,011			$	2,879
Operating expenses:
Operation and maintenance		1,404				1,350				1,289
Depreciation and amortization		440				424				407
General taxes		243				236				234
(Gain) loss on asset dispositions and purchases		(3	)			(2	)			1
Total operating expenses, net		2,084				2,008				1,931
Operating income		1,075				1,003				948
Other income (expenses):
Interest, net		(308	)			(299	)			(308	)
Loss on extinguishment of debt	—				—					(41	)
Other, net		15				6				9
Total other income (expenses)		(293	)			(293	)			(340	)
Income from continuing operations before income taxes		782				710				608
Provision for income taxes		306				280				237
Income from continuing operations		476				430				371
Loss from discontinued operations, net of tax	—					(7	)			(2	)
Net income attributable to common stockholders	$	476			$	423			$	369
Basic earnings per share: (a)
Income from continuing operations	$	2.66			$	2.40			$	2.08
Loss from discontinued operations, net of tax	$	—			$	(0.04	)		$	(0.01	)
Net income attributable to common stockholders	$	2.66			$	2.36			$	2.08
Diluted earnings per share: (a)
Income from continuing operations	$	2.64			$	2.39			$	2.07
Loss from discontinued operations, net of tax	$	—			$	(0.04	)		$	(0.01	)
Net income attributable to common stockholders	$	2.64			$	2.35			$	2.06
Weighted average common shares outstanding
Basic		179				179				178
Diluted		180				180				179
Dividends declared per common share	$	1.36			$	1.24			$	1.12
(a) Amounts may not sum due to rounding.

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

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Comprehensive Income

(In millions)

	For the Years Ended December 31,
	2015				2014				2013
Net income attributable to common stockholders	$	476			$	423			$	369
Other comprehensive (loss) income, net of tax:
Change in employee benefit plan funded status, net of tax of $(6), $(29) and $47 in 2015, 2014 and 2013, respectively		(10	)			(46	)			73
Pension amortized to periodic benefit cost:
Actuarial loss, net of tax of $3 and $6 in 2015 and 2013, respectively		5				—				9
Foreign currency translation adjustment		(1	)			—				(1	)
Unrealized loss on cash flow hedge, net of tax of $(1)	—					(1	)			—
Other comprehensive (loss) income		(6	)			(47	)			81
Comprehensive income attributable to common stockholders	$	470			$	376			$	450

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

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Cash Flows

(In millions)

	For the Years Ended December 31,
	2015				2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	476			$	423			$	369
Adjustments to reconcile to net cash flows provided by operating activities:
Depreciation and amortization		440				424				407
Deferred income taxes and amortization of investment tax credits		296				254				250
Provision for losses on accounts receivable		32				37				27
(Gain) loss on asset dispositions and purchases		(3	)			(2	)			1
Pension and non-pension postretirement benefits		61				24				78
Other non-cash, net		(53	)			(14	)			(1	)
Changes in assets and liabilities:
Receivables and unbilled revenues		(84	)			(62	)			(79	)
Pension and non-pension postretirement benefit contributions		(57	)			(52	)			(98	)
Accounts payable and accrued liabilities		80				27				15
Other current assets and liabilities, net		(9	)			38				(73	)
Net cash provided by operating activities		1,179				1,097				896
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(1,160	)			(956	)			(980	)
Acquisitions		(197	)			(9	)			(24	)
Proceeds from sale of assets and securities		5				14				1
Removal costs from property, plant and equipment retirements, net		(107	)			(78	)			(65	)
Net funds (restricted) released		(6	)			15				15
Net cash used in investing activities		(1,465	)			(1,014	)			(1,053	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt		565				501				404
Repayments of long-term debt		(130	)			(240	)			(496	)
Proceeds from short-term borrowings with maturities greater than three months		60				35				221
Repayments of short-term borrowings with maturities greater than three months		(60	)			(256	)			—
Net short-term borrowings with maturities less than three months		180				41				139
Proceeds from issuances of employee stock plans and DRIP		39				21				26
Advances and contributions for construction, net of refunds of $23, $21 and $23 in 2015, 2014 and 2013, respectively		26				26				19
Debt issuance costs		(7	)			(5	)			(4	)
Dividends paid		(239	)			(216	)			(149	)
Anti-dilutive share repurchases		(126	)			—				—
Tax benefit realized from equity compensation		—				6				—
Net cash provided by (used in) financing activities		308				(87	)			160
Net increase (decrease) in cash and cash equivalents		22				(4	)			3
Cash and cash equivalents at beginning of period		23				27				24
Cash and cash equivalents at end of period	$	45			$	23			$	27
Cash paid during the year for:
Interest, net of capitalized amount	$	309			$	301			$	318
Income taxes, net of refunds of $1 and $4 in 2015 and 2014, respectively	$	12			$	16			$	8
Non-cash investing activity:
Capital expenditures acquired on account but unpaid as of year end	$	224			$	186			$	129

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

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Changes in Stockholders’ Equity

(In millions)

	Common Stock																												Accumulated Other							Treasury Stock														Preferred Stock of Subsidiary Companies Without Mandatory							Total
	Shares						Par Value						Paid-in Capital								Accumulated Deficit								Comprehensive Loss							Shares							At Cost							Redemption Requirements							Stockholders' Equity
Balance as of December 31, 2012		177.0						$	2							$	6,223						$		(1,665			)			$	(116			)				—						$	—						$	1						$	4,445
Net income		—							—								—								369							—							—							—							—							369
Direct stock reinvestment and purchase plan		0.1							—								2								—							—							—							—							—							2
Employee stock purchase plan		0.1							—								5								—							—							—							—							—							5
Stock-based compensation activity		1.2							—								32								(1			)				—							(0.1			)				(5			)				—							26
Subsidiary preferred stock redemption		—							—								—								—							—							—							—							(1			)				(1			)
Other comprehensive income, net of tax of $53		—							—								—								—							81							—							—							—							81
Dividends		—							—								—								(199			)				—							—							—							—							(199			)
Balance as of December 31, 2013		178.4						$	2							$	6,262						$		(1,496			)			$	(35			)				(0.1			)			$	(5			)			$	—						$	4,728
Net income		—							—								—								423							—							—							—							—							423
Direct stock reinvestment and purchase plan		0.1							—								2								—							—							—							—							—							2
Employee stock purchase plan		0.1							—								5								—							—							—							—							—							5
Stock-based compensation activity		0.9							—								33								(1			)				—							(0.1			)				(6			)				—							26
Other comprehensive loss, net of tax of $(30)		—							—								—								—							(47			)				—							—							—							(47			)
Dividends		—							—								—								(222			)				—							—							—							—							(222			)
Balance as of December 31, 2014		179.5						$	2							$	6,302						$		(1,296			)			$	(82			)				(0.2			)			$	(11			)			$	—						$	4,915
Cumulative effect of change in accounting principle		—							—								—								(8			)				—							—							—							—							(8			)
Net income attributable to common stockholders		—							—								—								476							—							—							—							—							476
Direct stock reinvestment and purchase plan		0.1							—								4								—							—							—							—							—							4
Employee stock purchase plan		0.1							—								5								—							—							—							—							—							5
Stock-based compensation activity		1.2							—								40								(1			)				—							(0.1			)				(6			)				—							33
Repurchases of common stock		—							—								—								—							—							(2.3			)				(126			)				—							(126			)
Other comprehensive income, net of tax of $(3)		—							—								—								—							(6			)				—							—							—							(6			)
Dividends		—							—								—								(244			)				—							—							—							—							(244			)
Balance as of December 31, 2015		180.9						$	2							$	6,351						$		(1,073			)			$	(88			)				(2.6			)			$	(143			)			$	—						$	5,049

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

American Water Works Company, Inc. and Subsidiary Companies

Notes to Consolidated Financial Statements

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

Note 1: Organization and Operation

American Water Works Company, Inc. (the “Company” or “American Water”) is the holding company for regulated and market-based subsidiaries throughout the United States of America and Ontario, Canada. The Regulated Businesses provide water and wastewater services as public utilities in 16 states in the United States. The Market-Based Businesses is comprised of four non-reportable operating segments including Military Services Group, which conducts operation and maintenance (“O&M”) of water and wastewater systems for military bases; Contract Operations Group, which conducts operation and maintenance of water and wastewater facilities for municipalities and the food and beverage industry; Homeowner Services Group, which primarily provides water and sewer line protection plans for homeowners; and Keystone Operations, which provides water services for natural gas exploration and production companies.

Note 2: Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of American Water and all of its subsidiaries in which a controlling interest is maintained after the elimination of intercompany accounts and transactions. Intercompany balances and transactions between subsidiaries have been eliminated. The Company uses the equity method to report its investments in joint ventures in which the Company 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 earnings or losses.

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

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The Company considers its critical accounting estimates to include: the application of regulatory accounting principles and the related determination and estimates of regulatory assets and liabilities; estimates used in impairment testing of goodwill and other long-lived assets, including regulatory assets; revenue recognition; accounting for income taxes; benefit plan assumptions; and contingent liabilities. The Company’s critical accounting estimates that are particularly sensitive to change in the near term are amounts reported for regulatory assets and liabilities, benefit plans assumptions, contingency-related obligations and goodwill.

Regulation

The Company’s regulated utilities are subject to economic regulation by the public utility commissions and the local governments of the states in which they operate (the “PUCs”). These 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 impose certain penalties or grant certain incentives. Due to timing and other differences in the collection of utility revenue, an incurred cost that would otherwise be charged to expense by a non-regulated entity is to be deferred as a regulatory asset if it is probable that the cost is recoverable in future rates. Conversely, GAAP requires recording 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 refundable to customers. See Note 6—Regulatory Assets and Liabilities.

Property, Plant and Equipment

Property, plant and equipment consist primarily of utility plant. Additions to utility plant and replacements of retirement units of property are capitalized. Costs include material, direct labor and such indirect items as engineering and supervision, payroll taxes and benefits, transportation and an allowance for funds used during construction (“AFUDC”). The cost of repairs, maintenance, including planned major maintenance activities, and minor replacements is charged to maintenance expense as 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 $311 and $320 as of December 31, 2015 and 2014, respectively.

When units of property are replaced, retired or abandoned, the recorded value is credited to the asset account 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 cost of property, plant and equipment is depreciated using the straight-line average remaining life method. The Company’s regulated utility subsidiaries record depreciation in conformity with amounts approved by state regulators after regulatory review of 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 for internal operations. This property is stated at cost, net of accumulated depreciation calculated using the straight-line method over the useful lives of the assets.

Cash and Cash Equivalents

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

Restricted funds primarily represent proceeds from financings for the construction and capital improvement of facilities and deposits for future services under operation and maintenance projects. The proceeds from these financings are held in escrow until the designated expenditures are incurred. Classification of restricted funds in the Consolidated Balance Sheets as either current or long-term is based upon the intended use of the funds.

Accounts Receivable and Unbilled Revenues

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

Allowance for Uncollectible Accounts

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

Materials and Supplies

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

Goodwill

Goodwill represents the excess of the purchase price paid over the estimated fair value of the assets acquired and liabilities assumed in the acquisition of a business. Goodwill is not amortized, but is tested for impairment at least annually or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Goodwill is primarily associated with the acquisitions of E’town Corporation in 2001, American Water in 2003 and Keystone in 2015 (the “Acquisitions”) and has been assigned to reporting units based on the fair values at the date of the Acquisitions. The reporting units in the Regulated Businesses segment are aggregated into a single reporting unit. The Market-Based Businesses is comprised of four non-reportable operating segments. The Company’s annual impairment test is performed as of November 30 of each year, in conjunction with the completion of the Company’s annual business plan. The Company assesses qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. If based on qualitative factors, the fair value of the reporting unit is more likely than not greater than the carrying amount, no further testing is required. If the Company bypasses the qualitative assessment or performs the qualitative assessment, but determines that it is more likely than not that its fair value is less than its carrying amount, a quantitative two-step, fair value-based test is performed.

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

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

The Company believes the assumptions and other considerations used to value goodwill to be appropriate. However, if experience differs from the assumptions and considerations used in its analysis, the resulting change could have a material adverse impact on the consolidated financial statements.

Long-Lived Assets

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

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

The key variables to determine fair value include assumptions regarding sales volume, rates, operating costs, labor and other benefit costs, capital additions, assumed discount rates and other economic factors. These variables require significant management judgment and include inherent uncertainties, since they are forecasting future events. If such assets are considered impaired, an impairment loss is recognized equal to the amount by which the asset’s carrying value exceeds its fair value.

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

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

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

Advances for Construction and Contributions in Aid of Construction

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

Advances are refundable for limited periods of time as new customers begin to receive service or other contractual obligations are fulfilled. Included in other current liabilities as of December 31, 2015 and 2014 in the accompanying Consolidated Balance Sheets are estimated refunds of $19 and $18, 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 $26, $24 and $22 for the years ended December 31, 2015, 2014 and 2013, respectively.

Recognition of Revenues

Revenues of the regulated utility subsidiaries are recognized as water and wastewater services are provided, and include amounts billed to customers on a cycle basis and unbilled amounts based on estimated usage from the date of the meter reading associated with the latest customer bill to the end of the accounting period.

The Company has agreements with the U.S. Department of Defense to operate and maintain water and wastewater systems at various military bases pursuant to 50-year contracts (“military agreements”). These contracts also include construction components that are accounted for separately from the O&M components. Nine of the military agreements are subject to periodic price redetermination adjustments and modifications for changes in circumstance. The remaining three agreements are subject to annual price adjustments under a mechanism similar to price redeterminations. Additionally, the Company has agreements ranging in length from two to 40 years with municipalities and businesses in various industries to operate and maintain water and wastewater systems (“O&M agreements”). Revenues from operations and management services are recognized as services are provided. See Note 15—Commitments and Contingencies.

Revenues from construction projects are recognized over the contract term based on the costs incurred to date during the period compared to the total estimated costs over the entire contract. Losses on contracts are recognized during the period in which the loss first becomes probable and estimable. Revenues recognized during the period in excess of billings on construction contracts are recorded as unbilled revenue. Billings in excess of revenues recognized on construction contracts are recorded as other current liabilities until the recognition criteria are met. Changes in contract performance and related estimated contract profitability may result in revisions to costs and revenues and are recognized in the period in which revisions are determined.

Income Taxes

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

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

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

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

Allowance for Funds Used During Construction

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

		2015				2014				2013
Allowance for other funds used during construction		$	13			$	9			$	13
Allowance for borrowed funds used during construction			8				6				6

Environmental Costs

The Company’s water and wastewater operations 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. Remediation costs accrued amounted to $1 and $2 as of December 31, 2015 and 2014, respectively. The accrual relates entirely to a conservation agreement entered into by a subsidiary of the Company with the National Oceanic and Atmospheric Administration (“NOAA”) requiring the Company to, among other provisions, implement certain measures to protect the steelhead trout and its habitat in the Carmel River watershed in the State of California. The Company has agreed to pay $1 annually from 2010 to 2016. The Company’s inception-to-date costs related to the NOAA agreement were recorded in regulatory assets in the accompanying Consolidated Balance Sheets as of December 31, 2015 and 2014 and are expected to be fully recovered from customers in future rates.

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 effective portion of gains and losses on cash-flow hedges are recorded in other comprehensive income, until earnings are affected by the variability of cash flows. Any ineffective portion of designated hedges is recognized in current-period earnings.

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

New Accounting Standards

The following recently issued accounting standards have been adopted by the Company as of December 31, 2015:

Standard		Description		Date of Adoption		Application		Effect on the Consolidated Financial Statements (or Other Significant Matters)
Service Concession Arrangements		Clarified that an operating entity should not account for a services concession arrangement with a public-sector grantor as a lease if: (1) the grantor controls or has the ability to modify or approve the services the operating entity must provide, to whom it must provide them, and at what price; and (2) the grantor controls any residual interest in the infrastructure at the end of the arrangement. In addition, the infrastructure used in a service concession arrangement would not be recognized as property, plant and equipment of the operating entity.		January 1, 2015		Modified retrospective basis		The Company reduced nonutility property and other long-term assets for infrastructure related to service concession arrangements and recognized a cumulative effect adjustment of $8 net of tax, to the opening balance of accumulated deficit at January 1, 2015.
Reporting Discontinued Operations		Amended the criteria for determining which disposals can be presented as discontinued operations and modified related disclosure requirements. Now, a discontinued operation is defined as a component or group of components that is disposed of or is classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results. In addition, the update no longer precludes presentation as a discontinued operation if there are operations and cash flows of the component that have not been eliminated from the reporting entity’s ongoing operations or if there is significant continuing involvement with a component after its disposal.		January 1, 2015		Prospective basis		The adoption of this standard did not impact the Company’s results of operations, financial position or cash flows.
Presentation of Debt Issuance Costs		Updated guidance on the imputation of interest and simplified the presentation of debt issuance costs. The updated guidance requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related liability. Such treatment is consistent with the current presentation of debt discounts or premiums.		October 1, 2015		Retrospective basis		The December 31, 2014 Consolidated Balance Sheet was revised, which resulted in decreases of $7 to other assets and long-term debt, respectively. Unamortized debt issuance costs of $7 were included in long-term debt as of December 31, 2015.
Presentation of Deferred Income Taxes		Simplified the presentation of deferred income taxes and requires that deferred income tax assets and liabilities be classified as noncurrent in the balance sheet.		October 1, 2015		Retrospective basis		The December 31, 2014 Consolidated Balance Sheet was revised, which resulted in decreases of $87 to the current deferred income tax asset and long-term deferred income tax liability.

The following recently issued accounting standards have not yet been adopted by the Company as of December 31, 2015:

Standard		Description		Effective Date		Application		Effect on the Consolidated Financial Statements (or Other Significant Matters)
Revenue from Contracts with Customers		Provided new revenue recognition guidance that will replace most existing revenue recognition guidance in GAAP, including industry-specific guidance. Upon adoption, a company will recognize revenue for the transfer of goods or services to customers equal to the amount that it expects to be entitled to receive for those goods or services. The guidance also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments.		January 1, 2018		The Company is currently evaluating the alternative methods available and has not yet selected a transition method.		The Company is currently evaluating the effect on the financial statements and related disclosures.
Accounting for Fees Paid in a Cloud Computing Arrangement		Clarified guidance on how customers should account for fees paid in a cloud computing arrangement. Under the new guidance, if a cloud computing arrangement contains a software license, the customer would account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the cloud computing arrangement does not include a software license, the customer would account for the arrangement as a service contract.		January 1, 2016		Prospective basis		The effect on the financial statements upon adoption will be dependent on the software license arrangements entered into by the Company subsequent adoption.

Reclassifications

Certain reclassifications have been made to prior periods in the accompanying consolidated financial statements and notes to conform to the current presentation

Note 3: Acquisitions and Divestitures

Acquisitions

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

The Company also closed on the Keystone acquisition, which is included as part of the Market-Based Businesses, for a total purchase price of $133, net of cash received. The fair value of identifiable assets acquired and liabilities assumed was $56 and $7, respectively, and principally included the acquisition of nonutility property of $25, accounts receivable and unbilled revenues of $18 and intangible assets of $12. The purchase price allocation, which is based on the estimated fair value of net assets acquired, resulted in the Company recording redeemable noncontrolling interest of $7 and additional goodwill of $91. Goodwill is expected to be fully deductible for tax purposes. The pro forma impact of this acquisition would not have been material to the Company’s results of operations for the years ended December 31, 2015 and 2014 respectively.

During 2014, the Company closed on thirteen acquisitions of various regulated water and wastewater systems for a total aggregate purchase price of $9. Assets acquired, principally plant, totaled $17. Liabilities assumed totaled $8, including $5 of contributions in aid of construction and assumed debt of $2.

During 2013, the Company closed on fifteen acquisitions of various regulated water and wastewater systems for a total aggregate net purchase price of $24. Assets acquired, primarily utility plant, totaled $67. Liabilities assumed totaled $43, including $26 of contributions in aid of construction and assumed debt of $13. Included in these totals was the Company’s November 14, 2013 acquisition of all of the capital stock of Dale Service Corporation (“Dale”), a regulated wastewater utility company, for a total cash purchase price of $5 (net of cash acquired of $7), plus assumed liabilities. The Dale acquisition was accounted for as a business combination; accordingly, operating results from November 14, 2013 were included in the Company’s results of operations. The purchase price was allocated to the net tangible and intangible assets based upon their estimated fair values at the date of acquisition. The Company’s regulatory practice was followed whereby property, plant and equipment (rate base) was considered fair value for business combination purposes. Similarly, regulatory assets and liabilities acquired were recorded at book value and are subject to regulatory approval where applicable. The acquired debt was valued in a manner consistent with the Company’s Level 3 debt. See Note 17—Fair Value of Financial Instruments. Non-cash assets acquired in the Dale acquisition, primarily utility plant, totaled $41; liabilities assumed totaled $36, including debt assumed of $13 and contributions of $19.

Divestitures

In November 2014, the Company completed the sale of Terratec, previously included in the Market-Based Businesses. After post-close adjustments, net proceeds from the sale totaled $1, and the Company recorded a pretax loss on sale of $1.

The following table summarizes the operating results of discontinued operations presented in the accompanying Consolidated Statements of Operations for the years ended December 31:

	2014				2013
Operating revenues	$	13			$	23
Total operating expenses, net		19				26
Loss from discontinued operations before income taxes		(6	)			(3	)
Provision (benefit) for income taxes		1				(1	)
Loss from discontinued operations, net of tax	$	(7	)		$	(2	)

The provision for income taxes of discontinued operations includes the recognition of tax expense related to the difference between the tax basis and book basis of assets upon the sales of Terratec that resulted in taxable gains, since an election was made under Section 338(h)(10) of the Internal Revenue Code to treat the sales as asset sales.

There were no assets or liabilities of discontinued operations in the accompanying Consolidated Balance Sheets as of December 31, 2015 and 2014.

Note 4: Property, Plant and Equipment

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

										Range of Remaining		Weighted Average
		2015				2014				Useful Lives		Useful Life
Utility plant:
Land and other non-depreciable assets		$	141			$	137
Sources of supply			705				681			12 to 127 Years		51 Years
Treatment and pumping facilities			3,070				2,969			3 to 101 Years		39 Years
Transmission and distribution facilities			8,516				7,963			9 to 156 Years		83 Years
Services, meters and fire hydrants			3,250				3,062			8 to 93 Years		35 Years
General structures and equipment			1,227				1,096			1 to 154 Years		39 Years
Waste treatment, pumping and disposal			313				281			2 to 115 Years		46 Years
Waste collection			473				399			5 to 109 Years		56 Years
Construction work in progress			404				303
Total utility plant			18,099				16,891
Nonutility property			405				378			3 to 50 years		6 Years
Total property, plant and equipment		$	18,504			$	17,269

Property, plant and equipment depreciation expense amounted to $405, $392, and $374 for the years ended December 31, 2015, 2014 and 2013, respectively and was included in depreciation and amortization expense in the accompanying Consolidated Statements of Operations. The provision for depreciation expressed as a percentage of the aggregate average depreciable asset balances was 3.13% for the year ended December 31, 2015 and 3.20% for years December 31, 2014 and 2013.

Note 5: Allowance for Uncollectible Accounts

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

	2015				2014				2013
Balance as of January 1	$	(35	)		$	(34	)		$	(27	)
Amounts charged to expense		(32	)			(37	)			(27	)
Amounts written off		38				43				24
Recoveries of amounts written off		(10	)			(7	)			(4	)
Balance as of December 31	$	(39	)		$	(35	)		$	(34	)

Note 6: Regulatory Assets and Liabilities

Regulatory Assets

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

	2015				2014
Deferred pension expense	$	269			$	263
Income taxes recoverable through rates		236				229
Removal costs recoverable through rates		225				163
Deferred other postretirement benefit expense		90				107
San Clemente Dam project costs		95				72
Regulatory balancing accounts		88				60
Debt expense		68				71
Purchase premium recoverable through rates		60				60
Deferred tank painting costs		37				37
Other		103				91
Total Regulatory Assets	$	1,271			$	1,153

The Company’s deferred pension expense includes a portion of the underfunded status that is probable of recovery through rates in future periods of $258 and $248 as of December 31, 2015 and 2014, respectively. The remaining portion is the pension expense in excess of the amount contributed to the pension plans which is deferred by certain subsidiaries and will be recovered in future service rates as contributions are made to the pension plan.

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

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

The Company’s deferred other postretirement benefit expense includes a portion of the underfunded status that is probable of recovery through rates in future periods of $87 and $107 as of December 31, 2015 and 2014, respectively. The remaining portion is postretirement benefit expense in excess of the amount recovered in rates through 1997 has been deferred by certain subsidiaries. These costs are recognized in the rates charged for water service and will be recovered as authorized by the Company’s regulatory authorities.

San Clemente Dam project costs represent costs incurred and deferred by the Company’s California subsidiary pursuant to its efforts to investigate alternatives to strengthen or remove the dam due to potential earthquake and flood safety concerns. In June 2012, the California Public Utility Commission (“CPUC”) issued a decision authorizing implementation of a project to reroute the Carmel River and remove the San Clemente Dam. The project includes the Company’s California subsidiary, the California State Conservancy and the National Marine Fisheries Services. Under the order’s terms, the CPUC has authorized recovery of $24 for pre-construction costs, $3 for interim dam safety measures and environmental costs and $49 for construction costs. The authorized costs of $76 are to be recovered via a surcharge over a twenty-year period beginning October 2012. Surcharges collected as of December 31, 2015 and 2014 were $4 and $5, respectively. In addition to the authorized costs, the Company expects to incur additional costs totaling $34, which will be recovered from contributions made by the California State Coastal Conservancy. Contributions collected as of December 31, 2015 and 2014 were $8 and $5, respectively.

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

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

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

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

Other regulatory assets include certain deferred business transformation costs, construction costs for treatment facilities, property tax stabilization, employee-related costs, 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

The regulatory liabilities generally represent probable future reductions in revenues associated with amounts that are to be credited or refunded to customers through the rate-making process. The following table summarizes the composition of regulatory liabilities as of December 31:

	2015				2014
Removal costs recovered through rates	$	311			$	301
Pension and other postretirement benefit balancing accounts		59				54
Other		32				37
Total Regulatory Liabilities	$	402			$	392

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 subsidiary in New Jersey, at the direction of the New Jersey PUC, began to depreciate $48 of the total balance into depreciation and amortization expense in the Consolidated Statements of Operations via straight line amortization through November 2048.

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

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

Note 7: Goodwill and Other Intangible Assets

Goodwill

The following table summarizes changes in the carrying amount of goodwill for the years ended December 31, 2015 and 2014:

	Regulated Businesses								Market-Based Businesses								Consolidated
	Cost				Accumulated Impairment				Cost				Accumulated Impairment				Cost				Accumulated Impairment				Total Net
Balance as of January 1, 2014	$	3,412			$	(2,332	)		$	236			$	(108	)		$	3,648			$	(2,440	)		$	1,208
Goodwill from acquisitions		3				—				91				—				94				—				94
Balance as of December 31, 2015	$	3,415			$	(2,332	)		$	327			$	(108	)		$	3,742			$	(2,440	)		$	1,302

The Company recorded goodwill of $91 as part of the Keystone acquisition. The Keystone business is an operating segment comprised of one reporting unit to which all of the goodwill arising from the acquisition was assigned and which is included in the Market-Based Business information. The Company also acquired aggregate goodwill of $3 associated with four of its acquisitions in its Regulated Businesses segment.

Excluding goodwill acquired in 2015 related to the Keystone acquisition, the Company determined that no qualitative factors were present that would indicate the estimated fair values of its reporting units were less than the respective carrying values. As such, the Company determined that the two-step goodwill impairment test was not necessary at November 30, 2015 or 2014.

A step one test was completed for the Keystone goodwill. We used an income approach valuation technique which estimates the discounted future cash flows of operations. The discounted cash flow analysis relies on a single scenario reflecting best estimate projected cash flows. Significant assumptions were used in estimating the fair value, including the discount rate, growth rate and terminal value. The estimated fair value of the Keystone reporting unit exceeded its carrying value by less than 3% and as such the Company does not believe the goodwill is impaired. If a further decline in the fair value were to occur the Keystone reporting unit could be at risk of failing step one of the goodwill impairment test.

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

Other Intangible Assets

Included in other long-term assets as of December 31, 2015, is a $12 customer relationship intangible resulting from the Keystone acquisition. This intangible is being amortized on a straight-line basis over a period of eight years.

Note 8: Stockholders’ Equity

Common Stock

Under the dividend reinvestment and direct stock purchase plan (the “DRIP”), stockholders may reinvest cash dividends and purchase additional Company common stock, up to certain limits, through the plan administrator without commission fees. Shares purchased by participants through the DRIP may be newly-issued shares, treasury shares, or at the Company’s election, shares purchased by the plan administrator in the open market or in privately negotiated transactions. Purchases generally will be made and credited to DRIP accounts once each week. As of December 31, 2015, there were approximately 4.5 shares available for future issuance under the DRIP.

Antidilutive Stock Repurchase Program

In February 2015, the Company’s Board of Directors authorized an anti-dilutive common stock repurchase program to mitigate the dilutive effect of shares issued through the Company’s dividend reinvestment, employee stock purchase and executive compensation activities. This program allows the Company to purchase up to 10 shares of its outstanding common stock over an unrestricted period of time in the open market or through privately negotiated transactions in order to minimize dilution.

The shares repurchased are held as treasury shares, at cost, until cancelled or reissued at the discretion of the Company’s management. As of December 31, 2015, the Company purchased 2.3 shares of common stock in the open market at an aggregate cost of $126 under this program.

Accumulated Other Comprehensive Loss

The following table presents changes in accumulated other comprehensive loss by component, net of tax, for the years ended December 31, 2015 and 2014:

	Defined Benefit Plans																				Accumulated
	Employee Benefit Plan Funded Status				Amortization of Prior Service Cost				Amortization of Actuarial Loss				Foreign Currency Translation				Loss on Cash Flow Hedge				Other Comprehensive Loss
Beginning balance as of January 1, 2014	$	(70	)		$	1			$	31			$	3			$	—			$	(35	)
Other comprehensive loss (income)		(46	)		—				—				—					(1	)			(47	)
Ending balance as of December 31, 2014	$	(116	)		$	1			$	31			$	3			$	(1	)		$	(82	)
Other comprehensive loss (income)		(10	)		—					5				(1	)		—					(6	)
Ending balance as of December 31, 2015	$	(126	)		$	1			$	36			$	2			$	(1	)		$	(88	)

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

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

Note 9: Stock Based Compensation

The Company has granted stock option and restricted stock unit (“RSUs”) awards to non-employee directors, officers and other key employees of the Company pursuant to the terms of its 2007 Omnibus Equity Compensation Plan (the “2007 Plan”). The total aggregate number of shares of common stock that may be issued under the 2007 Plan is 15.5. As of December 31, 2015, 8.4 shares were available for grant under the 2007 Plan. Shares issued under the 2007 Plan may be authorized-but-unissued shares of Company stock or reacquired shares of Company stock, including shares purchased by the Company on the open market.

The Company recognizes compensation expense for stock awards over the vesting period of the award. The following table presents stock-based compensation expense recorded in operation and maintenance expense in the accompanying Consolidated Statements of Operations for the years ended December 31:

	2015				2014				2013
Stock options	$	2			$	2			$	3
RSUs		8				10				9
ESPP		1				1				1
Stock-based compensation		11				13				13
Income tax benefit		(4	)			(5	)			(5	)
Stock-based compensation expense, net of tax	$	7			$	8			$	8

There were no significant stock-based compensation costs capitalized during the years ended December 31, 2015, 2014 and 2013.

The cost of services received from employees in exchange for the issuance of stock options and restricted stock awards is measured based on the grant date fair value of the awards issued. The value of stock options and RSUs awards at the date of the grant is amortized through expense over the three-year service period. All awards granted in 2015, 2014 and 2013 are classified as equity.

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

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.

Stock Options

In 2015, 2014 and 2013, 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. These awards have no performance vesting conditions and the grant date fair value is amortized through expense over the requisite service period using the straight-line method and is included in operations and maintenance expense in the accompanying Consolidated Statements of Operations.

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

	2015				2014				2013
Dividend yield		2.35	%			2.55	%			2.52	%
Expected volatility		17.64	%			17.75	%			23.50	%
Risk-free interest rate		1.48	%			1.06	%			0.70	%
Expected life (years)		4.4				3.6				4.3
Exercise price	$	52.75			$	44.29			$	39.60
Grant date fair value per share	$	6.21			$	4.57			$	5.78

The Company utilized the “simplified method” to determine the expected stock option life due to insufficient historical experience to estimate the exercise patterns of the stock options granted. 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.

As of December 31, 2015, $2 of total unrecognized compensation cost related to nonvested stock options is expected to be recognized over the remaining weighted-average period of 1.6 years. The total grant date fair value of stock options vested was $3 for the years ended December 31, 2015 and 2014 and $4 for the year ended December 31, 2013.

The table below summarizes stock option activity for the year ended December 31, 2015:

	Shares (in thousands)				Weighted-Average Exercise Price (per share)				Weighted-Average Remaining Life (years)				Aggregate Intrinsic Value
Options outstanding as January 1, 2015		1,910			$	33.47				3.9			$	38
Granted		301				52.75
Forfeited or expired		(51	)			44.36
Exercised		(973	)			31.26
Options outstanding as of December 31, 2015		1,187			$	39.70				3.9			$	24
Exercisable as of December 31, 2015		666			$	32.92				2.6			$	18

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

	2015				2014				2013
Intrinsic value	$	22			$	13			$	15
Exercise proceeds		30				15				20
Income tax benefit		7				4				4

RSUs

During 2012, the Company granted selected employees an aggregate of 139 thousand RSUs with internal performance measures and, separately, certain market thresholds. These awards vested in January 2015. The terms of the grants specified that to the extent certain performance goals, comprised of internal measures and, separately, market thresholds were achieved, the RSUs would vest; if performance goals were surpassed, up to 175% of the target awards would be distributed; and if performance goals were not met, the awards would be forfeited. In January 2015, an additional 93 thousand RSUs were granted and distributed because performance thresholds were exceeded.

In 2015, 2014 and 2013, the Company granted RSUs, both with and without performance conditions, to certain employees under the 2007 Plan. The RSUs without performance conditions vest ratably over the three-year service period beginning January 1 of the year of the grant and the RSUs with performance conditions vest ratably over the three-year performance period beginning January 1 of the year of the grant (the “Performance Period”). Distribution of the performance shares is contingent upon the achievement of internal performance measures and, separately, certain market thresholds over the Performance Period.

During 2015, 2014 and 2013, the Company granted RSUs to non-employee directors under the 2007 Plan. The RSUs vested on the date of grant; however, distribution of the shares will be made within 30 days of the earlier of: (i) 15 months after grant date, subject to any deferral election by the director; or (ii) the participant’s separation from service. Because these RSUs vested on the grant date, the total grant date fair value was recorded in operation and maintenance expense included in the expense table above on the grant date.

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

	2015				2014				2013
Expected volatility		14.93	%			17.78	%			19.37	%
Risk-free interest rate		1.07	%			0.75	%			0.40	%
Expected life (years)		3.0				3.0				3.0
Grant date fair value per share	$	62.10			$	45.45			$	40.13

The grant date fair value of restricted stock awards that vest ratably and have market and/or performance and service conditions are amortized through expense over the requisite service period using the graded-vesting method. RSUs that have no performance conditions are amortized through expense over the requisite service period using the straight-line method and are included in operations expense in the accompanying Consolidated Statements of Operations. As of December 31, 2015, $4 of total unrecognized compensation cost related to the nonvested restricted stock units is expected to be recognized over the weighted-average remaining life of 1.4 years. The total grant date fair value of RSUs vested was $12, $11 and $9 for the years ended December 31, 2015, 2014 and 2013.

The table below summarizes restricted stock unit activity for the year ended December 31, 2015:

	Shares (in thousands)				Weighted-Average Grant Date Fair Value (per share)
Non-vested total as of January 1, 2015		516			$	41.46
Granted		156				55.67
Performance share adjustment		93				38.11
Vested		(304	)			39.46
Forfeited		(25	)			45.84
Non-vested total as of December 31, 2015		436			$	46.97

The following table summarizes additional information regarding RSUs distributed during the years ended December 31:

	2015				2014				2013
Intrinsic value	$	17			$	16			$	14
Income tax benefit		2				2				2

If dividends are paid with respect to shares of the Company’s common stock before the RSUs are distributed, the Company credits a liability for the value of the dividends that would have been paid if the RSUs were shares of Company common stock. When the RSUs are distributed, the Company pays the participant a lump sum cash payment equal to the value of the dividend equivalents accrued. The Company accrued dividend equivalents totaling $1 to accumulated deficit in the accompanying Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2015, 2014 and 2013, respectively.

Employee Stock Purchase Plan

Under the Nonqualified Employee Stock Purchase Plan (“ESPP”), employees can use payroll deductions to acquire Company stock at the lesser of 90% of the fair market value of common stock at either the beginning or the end of a three-month purchase period. As of December 31, 2015, there were 1.2 shares of common stock reserved for issuance under the ESPP. The Company’s

ESPP is considered compensatory. During the years ended December 31, 2015, 2014 and 2013, the Company issued 98, 102 and 111 thousand shares, respectively, under the ESPP.

Note 10: Long-Term Debt

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

	Rate				Weighted Average Rate				Maturity			2015				2014
Long-term debt of American Water Capital Corp. (a)
Senior notes—fixed rate	3.40%-8.27%					5.23%			2016-2045		$	4,273			$	3,753
Private activity bonds and government funded debt—fixed rate	1.79%-6.25%					5.41%			2021-2040			195				231
Long-term debt of other American Water subsidiaries
Private activity bonds and government funded debt—fixed rate (b)	0.00%-6.20%					4.70%			2016-2041			790				795
Mortgage bonds—fixed rate	4.29%-9.71%					7.41%			2017-2039			637				677
Mandatorily redeemable preferred stock	8.47%-9.75%					8.61%			2019-2036			13				17
Capital lease obligations		12.23%				12.23%			2026			1				1
Long-term debt												5,909				5,474
Unamortized debt premium, net (c)												23				31
Unamortized debt issuance costs												(7	)			(6	)
Interest rate swap fair value adjustment												3				4
Total long-term debt											$	5,928			$	5,503

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

	(b)	Includes $8 and $10 of variable rate debt with variable-to-fixed interest rate swaps ranging between 4.65% and 3.93%, as of December 31, 2015 and 2014, respectively. This debt was assumed via an acquisition in 2013.

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

All mortgage bonds and $716 of the private activity bonds and government funded debt held by the subsidiaries were collateralized by utility plant as of December 31, 2015.

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, 2015 was 0.56 to 1.00. In addition, the Company has $985 of notes which include the right to redeem the notes at par in whole or in part from time to time subject to certain restrictions.

The future sinking fund payments and maturities were as follows:

Year		Amount
2016		$	54
2017			573
2018			457
2019			166
2020			22
Thereafter			4,637

The following long-term debt was issued in 2015:

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

The Company also assumed debt of $1 as a result of an acquisition during 2015, which has a fixed interest rate of 1.00% and matures in 2040. The Company incurred debt issuance costs of $5 related to the above issuances.

The following long-term debt was retired through optional redemption or payment at maturity during 2015:

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

	(a)	Includes $2 of non-cash defeasance via the use of restricted funds.

Interest, net includes interest income of approximately $13, $11 and $12 in 2015, 2014 and 2013, 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 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. The Company minimizes the counterparty credit risk on these transactions by dealing only with leading, credit-worthy financial institutions having long-term credit ratings of “A” or better.

The Company has an interest-rate swap to hedge $100 of its 6.085% fixed-rate debt maturing 2017. The Company pays variable interest of six-month LIBOR plus 3.422%. The swap is accounted for as a fair-value hedge and matures with the fixed-rate debt in 2017. The following table provides a summary of the derivative and fixed rate debt fair value balances recorded by the Company as of December 31, 2015 and 2014, and the line items in the Consolidated Balance Sheets in which such amounts are recorded:

Balance Sheet Classification		2015				2014
Regulatory and other long-term assets
Other		$	2			$	4
Long-term debt
Long-term debt			2				4

For derivative instruments that are designated and qualify as fair-value hedges, the gain or loss on the hedge instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in current net income. The Company includes the gain or loss on the derivative instrument and the offsetting gain or loss on the hedged item in interest expense for the years ended December 31 were as follows:

Income Statement Classification		2015				2014				2013
Interest, net
Loss on swap		$	(1	)		$	(1	)		$	(3	)
Gain on borrowing			1				1				3

Note 11: Short-Term Debt

Short-term debt consists of commercial paper and credit facility borrowings totaling $628 and $450 as of December 31, 2015 and 2014, respectively. As of December 31, 2015 there were no borrowings outstanding with maturities greater than three months.

AWCC has a revolving credit facility with $1,250 in aggregate total commitments from a diversified group of financial institutions. The agreement includes a $150 sublimit for letters of credit and a $100 sublimit for swing loans. On June 30, 2015, AWCC and its lenders extended the termination date of revolving credit facility from October 2018 to June 2020. The amended and restated agreement also allows AWCC to request to further extend the term of the credit facility for up to two one-year periods.

Interest on borrowings are based on a LIBOR-based rate, plus an applicable margin. The Company incurred $2 of issuance costs in connection with the extended terms of the credit facility, which will be amortized over the remaining extended life and is included in interest, net in the accompanying Consolidated Statements of Operations.

Also, the Company acquired an additional revolving credit facility as part of its Keystone acquisition. The total commitment under this credit facility was $16, of which $14 was available as of December 31, 2015.Interest accrues each day at a rate per annum equal to 2.75% above the greater of the one month or one day LIBOR.

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

						Available								Available								Available
		Credit Facility				Credit Facility				Letter of Credit				Letter of Credit				Commercial Paper				Commercial Paper
		Commitment				Capacity				Sublimit (a)				Capacity				Limit				Capacity
December 31, 2015		$	1,266			$	1,182			$	150			$	68			$	1,000			$	374
December 31, 2014			1,250				1,212				150				112				1,000				550

	(a)	Letters of credit are non-debt instruments maintained to provide credit support for certain transactions as requested by third parties. The Company had $82 and $38 of outstanding letters of credit as of December 31, 2015 and 2014, respectively, all of which were issued under the revolving credit facility noted above.

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

	2015				2014
Average borrowings	$	553			$	549
Maximum borrowings outstanding		871				745
Weighted average interest rates, computed on daily basis		0.49	%			0.31	%
Weighted average interest rates, as of December 31		0.66	%			0.42	%

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, 2015 was 0.56 to 1.00.

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

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

Note 12: General Taxes

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

	2015				2014				2013
Gross receipts and franchise	$	99			$	96			$	96
Property and capital stock		98				96				94
Payroll		31				31				31
Other general		15				13				13
Total general taxes	$	243			$	236			$	234

Note 13: Income Taxes

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

	2015				2014				2013
Current income taxes
State	$	10			$	11			$	7
Federal	—					15				(20	)
Total current income taxes	$	10			$	26			$	(13	)
Deferred income taxes
State	$	32			$	31			$	27
Federal		265				224				225
Amortization of deferred investment tax credits		(1	)			(1	)			(2	)
Total deferred income taxes		296				254				250
Provision for income taxes	$	306			$	280			$	237

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

	2015				2014				2013
Income tax at statutory rate		35.0	%			35.0	%			35.0	%
Increases (decreases) resulting from:
State taxes, net of federal taxes		3.6				3.8				3.6
Flow through differences		0.5				0.4				0.5
Amortization of deferred investment tax credits		(0.1	)			(0.1	)			(0.3	)
Subsidiary preferred dividends	—					0.1				0.2
Other, net		0.1				0.2			—
Provision for income taxes		39.1	%			39.4	%			39.0	%

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

	2015				2014
Deferred tax assets
Advances and contributions	$	513			$	502
Other postretirement benefits		76				105
Tax losses and credits		173				197
Pension benefits		105				125
Unamortized debt discount, net		20				20
Other		12				42
Total deferred tax assets		899				991
Valuation allowance		(8	)			(10	)
Total deferred tax assets, net of allowance	$	891			$	981
Deferred tax liabilities
Property, plant and equipment, principally due to depreciation differences	$	2,913			$	2,677
Income taxes recoverable through rates		76				76
Deferred other postretirement benefits		35				65
Deferred pension benefits		104				121
Other		73				76
Total deferred tax liabilities		3,201				3,015
Total deferred tax liabilities, net of deferred tax assets	$	(2,310	)		$	(2,034	)

As of December 31, 2015 and 2014, the Company recognized federal net operating loss (“NOL”) carryforwards of $1,080 and $1,005, respectively. The 2015 NOL carryforward includes $37 of windfall tax benefits on stock-based compensation that will not be recorded to equity until the benefit is realized. 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, 2015 and 2014, the Company had state NOLs of $534 and $543, respectively, a portion of which are offset by a valuation allowance because the Company does not believe these NOLs are more likely than not to be realized. The state NOL carryforwards will begin to expire in 2016 through 2034.

As of December 31, 2015 and 2014, the Company had Canadian NOL carryforwards of $2 and $6, respectively. The majority of these carryforwards are offset by a valuation allowance because the Company does not believe these NOLs are more likely than not to be realized. The Canadian NOL carryforwards will expire between 2026 through 2034.

The Company had capital loss carryforwards for federal income tax purposes of $4 as of December 31, 2015 and 2014. The Company has recognized a full valuation allowance for the capital loss carryforwards because the Company does not believe these losses are more likely than not to be recovered.

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 before 2010. For U.S. federal, tax year 2011 is also closed. The Company has state income tax examinations in progress and does not expect material adjustments to result.

The Patient Protection and Affordable Care Act (the “PPACA”) became law on March 23, 2010, and the Health Care and Education Reconciliation Act of 2010 became law on March 30, 2010, which makes various amendments to certain aspects of the PPACA (together, the “Acts”). The PPACA effectively changes the tax treatment of federal subsidies paid to sponsors of retiree health benefit plans that provide a benefit that is at least actuarially equivalent to the benefits under Medicare Part D. The Acts effectively make the subsidy payments taxable in tax years beginning after December 31, 2012 and as a result, the Company followed its original accounting for the underfunded status of the other postretirement benefits for the Medicare Part D adjustment and recorded a reduction in deferred tax assets and an increase in its regulatory assets amounting to $6 as of December 31, 2015 and 2014.

In connection with the filing of our consolidated 2014 tax return in September 2015, we deducted bonus depreciation, of which approximately $89 of deferred tax liabilities is related to the Regulated Businesses segment.

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

Balance as of January 1, 2014	$	178
Increases in current period tax positions		54
Decreases in prior period measurement of tax positions		(37	)
Balance as of December 31, 2014	$	195
Increases in current period tax positions		39
Decreases in prior period measurement of tax positions		(1	)
Balance as of December 31, 2015	$	233

The increase in 2015 current period tax positions related primarily to the Company’s change in tax accounting method filed in 2008 for repair and maintenance costs on its utility plant. The Company does not anticipate material changes to its unrecognized tax benefits within the next year. If the Company sustains all of its positions as of December 31, 2015 and 2014, an unrecognized tax benefit of $9, 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, 2015 and 2014.

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

Balance as of January 1, 2013	$	19
Decreases in current period tax positions		(6	)
Balance as of December 31, 2013	$	13
Decreases in current period tax positions		(3	)
Balance as of December 31, 2014	$	10
Decreases in current period tax positions		(2	)
Balance as of December 31, 2015	$	8

Note 14: Employee Benefits

Pension and Other Postretirement Benefits

The Company maintains noncontributory defined benefit pension plans covering eligible employees of its regulated utility and shared services operations. Benefits under the plans are based on the employee’s years of service and compensation. The pension plans have been closed for all new employees. The pension plans were closed for most employees hired on or after January 1, 2006. Union employees hired on or after January 1, 2001 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 multiemployer plan.

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. The Company may also consider increased contributions, based on other financial requirements and the plans’ funded position. Pension plan assets are invested in a number of actively managed and commingled funds including equities, fixed income securities, guaranteed interest contracts with insurance companies, real estate funds and real estate investment trusts (“REITs”).

Pension expense in excess of the amount contributed to the pension plans is deferred by certain regulated subsidiaries pending future recovery in rates charged for utility services as contributions are made to the plans. See Note 6—Regulatory Assets and Liabilities.

The Company also has unfunded noncontributory supplemental non-qualified pension plans that provide additional retirement benefits to certain employees.

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 obligations of the pension and postretirement benefit plans are dominated by obligations for active employees. Because the timing of expected benefit payments is so far in the future, the investment strategy is to allocate a significant percentage of assets to equities, which the Company believes will provide the highest return over the long-term period. The fixed income assets are invested in intermediate and long duration debt securities and may be invested in fixed income instruments, such as futures and options, in order to better match the duration of the plan liability.

The Company periodically conducts asset liability studies to ensure the investment strategies are aligned with the profile of the plans’ obligations.

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.

The investment policy guidelines of the pension plan require that the fixed income portfolio has an overall weighted-average credit rating of A or better by Standard & Poor’s.

The investment policies’ objectives are focused on reducing the volatility of the plans’ funding status over a long term horizon.

The fair values and asset allocations of pension plan assets as of December 31, 2015 and 2014, respectively, by asset category were as follows:

										Quoted Prices
										in Active				Significant				Significant				Percentage
		Target								Markets for				Observable				Unobservable				of Plan Assets
		Allocation								Identical Assets				Inputs				Inputs				as of
Asset Category		2016				Total				(Level 1)				(Level 2)				(Level 3)				December 31, 2015
Cash			—			$	5			$	5			$	—			$	—				—
Equity Securities:
U.S. large cap			24	%			318				318				—				—				23	%
U.S. small cap			8	%			115				115				—				—				8	%
International			20	%			260				—				260				—				19	%
Fixed Income Securities:			40	%																			41	%
U.S. Treasury and government bonds			—				120				95				25				—				—
Corporate bonds			—				375				—				375				—				—
Mortgage-backed securities			—				9				—				9				—				—
Long duration bond fund			—				7				7				—				—				—
Guarantee annuity contracts			—				49				—				8				41				—
Real Estate			6	%			95				—				—				95				7	%
REITs			2	%			23				—				23				—				2	%
Total			100	%		$	1,376			$	540			$	700			$	136				100	%

										Quoted Prices
										in Active				Significant				Significant				Percentage
		Target								Markets for				Observable				Unobservable				of Plan Assets
		Allocation								Identical Assets				Inputs				Inputs				as of
Asset Category		2015				Total				(Level 1)				(Level 2)				(Level 3)				December 31, 2014
Cash			—			$	8			$	8			$	—			$	—				—
Equity Securities:
U.S. large cap			24	%			342				342				—				—				24	%
U.S. small cap			8	%			117				117				—				—				8	%
International			20	%			274				—				274				—				19	%
Fixed Income Securities:			40	%																			41	%
U.S. Treasury and government bonds			—				140				121				19				—				—
Corporate bonds			—				377				—				377				—				—
Mortgage-backed securities			—				4				—				4				—				—
Long duration bond fund			—				7				7				—				—				—
Guarantee annuity contracts			—				51				—				9				42				—
Real Estate			6	%			85				—				—				85				6	%
REITs			2	%			23				—				23				—				2	%
Total			100	%		$	1,428			$	595			$	706			$	127				100	%

The following tables present a reconciliation of the beginning and ending balances of the fair value measurements using significant unobservable inputs (Level 3) for 2015 and 2014, respectively:

		Level 3
Balance as of January 1, 2015		$	127
Actual return on assets			12
Purchases, issuances and settlements, net			(3	)
Balance as of December 31, 2015		$	136

		Level 3
Balance as of January 1, 2014		$	44
Actual return on assets			7
Purchases, issuances and settlements, net			76
Balance as of December 31, 2014		$	127

The Company’s other postretirement benefit plans are partially funded 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 the risk tolerance of the Company. The Company periodically updates the long-term, strategic asset allocations and uses various analytics to determine the optimal asset allocation. Considerations include plan liability characteristics, liquidity characteristics, funding requirements, expected rates of return and the distribution of returns.

In June 2012, the Company implemented a de-risking strategy for the medical bargaining trust within the plan to minimize volatility. As part of the de-risking strategy, the Company revised the asset allocations to increase the matching characteristics of assets relative to liabilities. The initial de-risking asset allocation for the plan was 60% return-generating assets and 40% liability-driven assets. The investment strategies and policies for the plan reflect a balance of liability driven and return-generating considerations. The objective of minimizing the volatility of assets relative to liabilities is addressed primarily through asset—liability matching, asset diversification and hedging. The fixed income target asset allocation matches the bond-like and long-dated nature of the postretirement liabilities. Assets are broadly diversified within asset classes to achieve risk-adjusted returns that in total lower asset volatility relative to the liabilities. The Company assesses the investment strategy regularly to ensure actual allocations are in line with target allocations as appropriate. Strategies to address the goal of ensuring sufficient assets to pay benefits include target allocations to a broad array of asset classes and, within asset classes strategies are employed to provide adequate returns, diversification and liquidity.

The assets of the Company’s other trusts, within the other postretirement benefit plans, have been primarily invested in equities and fixed income funds. The assets under the various other postretirement benefit trusts are invested differently based on the assets

and liabilities of each trust. The obligations of the other postretirement benefit plans are dominated by obligations for the medical bargaining trust. Thirty-nine percent and four percent of the total postretirement plan benefit obligations are related to the medical non-bargaining and life insurance trusts, respectively. Because expected benefit payments related to the benefit obligations are so far into the future, and the size of the medical non-bargaining and life insurance trusts’ obligations are large compared to each trusts’ assets, the investment strategy is to allocate a significant portion of the assets’ investment to equities, which the Company believes will provide the highest long-term return and improve the funding ratio.

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

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

Actual allocations to each asset class vary from target allocations due to periodic investment strategy updates, market value fluctuations, the length of time it takes to fully implement investment allocation, and the timing of benefit payments and contributions. The asset allocation is rebalanced on a quarterly basis, if necessary.

The fair values and asset allocations of postretirement benefit plan assets as of December 31, 2015 and 2014, respectively, by asset category, were as follows:

										Quoted Prices
										in Active				Significant				Significant				Percentage
		Target								Markets for				Observable				Unobservable				of Plan Assets
		Allocation								Identical Assets				Inputs				Inputs				as of
Asset Category		2016				Total				(Level 1)				(Level 2)				(Level 3)				December 31, 2015
Bargain VEBA:
Equity Securities:
U.S. large cap			9	%		$	32			$	32			$	—			$	—				9	%
International			11	%			38				38				—				—				10	%
Fixed Income Securities:			80	%																			81	%
U.S. Treasury and government bonds			—				118				118				—				—				—
Corporate bonds			—				184				—				184				—				—
Long duration bond fund			—				3				3				—				—				—
Future and option contracts (a)			—				1				1				—				—				—
Total Bargain VEBA			100	%		$	376			$	192			$	184			$	—				100	%
Non-bargain VEBA:
Cash			—			$	2			$	2			$	—			$	—				—
Equity Securities:
U.S. large cap			21	%			24				24				—				—				21	%
U.S. small cap			21	%			26				26				—				—				22	%
International			28	%			33				33				—				—				28	%
Fixed Income Securities:			30	%																			29	%
Core fixed income bond fund			—				33				33				—				—				—
Total Non-bargain VEBA			100	%		$	118			$	118			$	—			$	—				100	%
Life VEBA:
Equity Securities:
U.S. large cap			70	%		$	4			$	4			$	—			$	—				68	%
Fixed Income Securities:			30	%																			32	%
Core fixed income bond fund			—				2				2				—				—				—
Total Life VEBA			100	%		$	6			$	6			$	—			$	—				100	%
Total			100	%		$	500			$	316			$	184			$	—				100	%

	(a)	Includes cash for margin requirements.

										Quoted Prices
										in Active				Significant				Significant				Percentage
		Target								Markets for				Observable				Unobservable				of Plan Assets
		Allocation								Identical Assets				Inputs				Inputs				as of
Asset Category		2015				Total				(Level 1)				(Level 2)				(Level 3)				December 31, 2014
Bargain VEBA:
Equity Securities:
U.S. large cap			9	%		$	34			$	34			$	—			$	—				9	%
International			11	%			41				41				—				—				10	%
Fixed Income Securities:			80	%																			81	%
U.S. Treasury and government bonds			—				155				155				—				—				—
Corporate bonds			—				168				—				168				—				—
Long duration bond fund			—				3				3				—				—				—
Future and option contracts (a)			—				1				1				—				—				—
Total Bargain VEBA			100	%		$	402			$	234			$	168			$	—				100	%
Non-bargain VEBA:
Cash			—			$	1			$	1			$	—			$	—				—
Equity Securities:
U.S. large cap			21	%			22				22				—				—				21	%
U.S. small cap			21	%			21				21				—				—				21	%
International			28	%			28				28				—				—				28	%
Fixed Income Securities:			30	%																			30	%
Core fixed income bond fund			—				31				31				—				—				—
Total Non-bargain VEBA			100	%		$	103			$	103			$	—			$	—				100	%
Life VEBA:
Equity Securities:
U.S. large cap			70	%		$	5			$	5			$	—			$	—				67	%
Fixed Income Securities:			30	%																			33	%
Core fixed income bond fund			—				2				2				—				—				—
Total Life VEBA			100	%		$	7			$	7			$	—			$	—				100	%
Total			100	%		$	512			$	344			$	168			$	—				100	%

	(a)	Includes cash for margin requirements.

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. 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.

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 that the Company can corroborate. The fair values of corporate bonds, mortgage backed securities, certain government bonds and a guaranteed annuity contract are based on evaluated prices that reflect observable market information, such as actual trade information of similar securities, and have been categorized as Level 2 because the valuations are calculated using models which utilize actively traded market data that the Company can corroborate. Certain other guaranteed annuity contracts are categorized as Level 3 because the investments are not publicly quoted. The fund administrator values the fund using the net asset value per fund share, derived from the quoted prices in active markets of the underlying securities. Since these valuation inputs are not highly observable, these contracts have been categorized as Level 3. Exchange-traded future and option positions are reported in accordance with changes in daily variation margins that are settled daily. Exchange-traded options and

futures, for which market quotations are readily available, are valued at the last reported sale price or official closing price on the primary market or exchange on which they are traded and are classified as Level 1.

Real estate fund—Real estate fund is valued using the net asset value based on valuation models of underlying securities which generally include significant unobservable inputs that cannot be corroborated using verifiable observable market data. Real estate fund is categorized as Level 3 as the fund uses significant unobservable inputs for fair value measurement.

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

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

	Pension Benefits								Other Benefits
	2015				2014				2015				2014
Change in benefit obligation
Benefit obligation as of January 1,	$	1,746			$	1,494			$	703			$	562
Service cost		37				32				14				11
Interest cost		74				76				30				29
Plan participants' contributions		—				—				2				2
Actuarial (gain) loss		(76	)			256				(58	)			123
Gross benefits paid		(61	)			(112	)			(26	)			(26	)
Federal subsidy		—				—				2				2
Benefit obligation as of December 31,	$	1,720			$	1,746			$	667			$	703
Change in plan assets
Fair value of plan assets as of January 1,	$	1,428			$	1,384			$	512			$	475
Actual return on plan assets		(21	)			116				(15	)			49
Employer contributions		30				40				27				12
Plan participants' contributions		—				—				2				2
Benefits paid		(61	)			(112	)			(26	)			(26	)
Fair value of plan assets as of December 31,	$	1,376			$	1,428			$	500			$	512
Funded status as of December 31,	$	(344	)		$	(318	)		$	(167	)		$	(191	)
Amounts recognized in the balance sheet consist of:
Noncurrent asset	$	—			$	—			$	2			$	1
Current liability		(2	)			(2	)			—				—
Noncurrent liability		(342	)			(316	)			(169	)			(192	)
Net amount recognized	$	(344	)		$	(318	)		$	(167	)		$	(191	)

Benefits paid in 2014 include $56 from a one-time lump sum window offering to retired vested participants.

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

	Pension Benefits								Other Benefits
	2015				2014				2015				2014
Net actuarial loss	$	397			$	379			$	97			$	119
Prior service cost (credit)		3				4				(10	)			(12	)
Net amount recognized	$	400			$	383			$	87			$	107
Regulatory assets	$	258			$	248			$	87			$	107
Accumulated other comprehensive income		142				135				—				—
Total	$	400			$	383			$	87			$	107

As of December 31, 2015 and 2014, the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with a projected obligation in excess of plan assets were as follows:

		Projected Benefit
		Obligation Exceeds the
		Fair Value of Plans' Assets
		2015				2014
Projected benefit obligation		$	1,721			$	1,746
Fair value of plan assets			1,376				1,428
		Accumulated Benefit
		Obligation Exceeds the
		Fair Value of Plans' Assets
		2015				2014
Accumulated benefit obligation		$	1,584			$	1,616
Fair value of plan assets			1,376				1,428

The accumulated postretirement benefit obligation exceeds plan assets for all of the Company’s other postretirement benefit plans.

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

Minimum funding requirements for the qualified defined benefit pension plan are determined by government regulations and not by accounting pronouncements. The Company plans to contribute amounts at least equal to the greater of the minimum required contributions or the normal cost in 2016 to the qualified pension plans. The Company plans to contribute to its 2016 other postretirement benefit cost for rate-making purposes.

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

		Pension				Other
		Benefits				Benefits
2016 expected employer contributions
To plan trusts		$	33			$	22
To plan participants			2				—

The Company made 2016 contributions to fund pension benefits and other benefits of $9 and $6, respectively, through February 2016.

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

		Pension Benefits				Other Benefits
		Expected Benefit Payments				Expected Benefit Payments				Expected Federal Subsidy Payments
2016		$	65			$	28			$	2
2017			70				30				2
2018			76				32				2
2019			82				35				3
2020			89				37				3
2021-2025			525				212				18

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

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

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

		Pension Benefits													Other Benefits
		2015				2014				2013					2015				2014				2013
Weighted-average assumptions used to determine December 31 benefit obligations
Discount rate			4.66%				4.24%				5.12%					4.67%				4.24%				5.10%
Rate of compensation increase			3.10%				3.12%				3.15%				N/A				N/A				N/A
Medical trend		N/A				N/A				N/A					graded from				graded from				graded from
															6.50% in 2015				6.75% in 2014				7.00% in 2013
															to 5.00% in 2021+				to 5.00% in 2021+				to 5.00% in 2019+
Weighted-average assumptions used to determine net periodic cost
Discount rate			4.24%				5.12%				4.17%					4.24%				5.10%				4.16%
Expected return on plan assets			6.91%				6.91%				7.49%					4.92%				5.87%				6.99%
Rate of compensation increase			3.12%				3.15%				3.19%				N/A				N/A				N/A
Medical trend		N/A				N/A				N/A					graded from				graded from				graded from
															6.75% in 2015				7.00% in 2014				7.25% in 2013
															to 5.00% in 2021+				to 5.00% in 2019+				to 5.00% in 2019+
N/A—Assumption is not applicable.

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

The expected long-term rate of return on plan assets is based on historical and projected rates of return, prior to administrative and investment management fees, for current and planned asset classes in the plans’ investment portfolios. Assumed projected rates of return for each of the plans’ projected asset classes were selected after analyzing historical experience and future expectations of the returns and volatility of the various asset classes. Based on the target asset allocation for each asset class, the overall expected rate of return for the portfolio was developed, adjusted for historical and expected experience of active portfolio management results compared to the benchmark returns and for the effect of expenses paid from plan assets. The Company’s pension expense increases as the expected return on assets decreases. The Company used an expected return on plan assets of 7.02% and 5.20% to estimate its 2016 pension and other postretirement benefit costs, respectively.

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 RP 2015 mortality table was issued. All of the experience upon which the table is based was considered by the Company in selecting its 2014 assumptions.

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

		One-Percentage-Point Increase				One-Percentage-Point Decrease
Effect on total of service and interest cost components		$	8			$	(6	)
Effect on other postretirement benefit obligation		$	99			$	(81	)

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

	2015				2014				2013
Components of net periodic pension benefit cost
Service cost	$	37			$	32			$	37
Interest cost		74				76				68
Expected return on plan assets		(97	)			(95	)			(88	)
Amortization of:
Prior service cost (credit)		1				1				1
Actuarial (gain) loss		25				—				37
Net periodic pension benefit cost	$	40			$	14			$	55
Other changes in plan assets and benefit obligations recognized in other comprehensive income
Amortization of prior service credit (cost)	$	—			$	—			$	—
Current year actuarial (gain) loss		10				46				(73	)
Amortization of actuarial gain (loss)		(5	)			—				(9	)
Total recognized in other comprehensive income	$	5			$	46			$	(82	)
Total recognized in net periodic benefit cost and comprehensive income	$	45			$	60			$	(27	)
Components of net periodic other postretirement benefit cost
Service cost	$	14			$	11			$	15
Interest cost		30				29				29
Expected return on plan assets		(26	)			(28	)			(30	)
Amortization of:
Prior service cost (credit)		(2	)			(2	)			(2	)
Actuarial (gain) loss		5				—				11
Net periodic other postretirement benefit cost	$	21			$	10			$	23

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

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

The estimated amounts that will be amortized from accumulated other comprehensive income and regulatory assets into net periodic benefit cost in 2016 are as follows:

	Pension Benefits				Other Benefits
Actuarial (gain) loss	$	27			$	3
Prior service cost (credit)		1				(2	)
Total	$	28			$	1

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 $9, $8 and $8 for 2015, 2014 and 2013, respectively. All of the Company’s contributions are invested in one or more funds at the direction of the employees.

Note 15: Commitments and Contingencies

Commitments

Commitments have been made in connection with certain construction programs. The estimated capital expenditures required under legal and binding contractual obligations amounted to $238 as of December 31, 2015.

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

Year		Amount
2016		$	51
2017			45
2018			44
2019			43
2020			44
Thereafter			383

The Company enters into agreements for the provision of services to water and wastewater facilities for the United States military, municipalities and other customers. The Company’s military agreements expire between 2051 and 2065 and have remaining performance commitments as measured by estimated remaining contract revenue of $2,784 as of December 31, 2015. The military agreements are subject to customary termination provisions held by the U.S. Federal Government prior to the agreed upon contract expiration. The Company’s O&M agreements with municipalities and other customers expire between 2016 and 2048 and have remaining performance commitments as measured by estimated remaining contract revenue of $795 as of December 31, 2015. Some of the Company’s long-term contracts to operate and maintain a municipality’s, federal government’s or other party’s water or wastewater treatment and delivery facilities include responsibility for certain maintenance for some of those facilities, in exchange for an annual fee. Unless specifically required to perform certain maintenance activities, the maintenance costs are recognized when the maintenance is performed.

Contingencies

The Company is routinely involved in legal actions incident to the normal conduct of its business. As of December 31, 2015, the Company has accrued approximately $5 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 $36. For certain matters, claims and actions, the Company is unable to estimate possible losses. The Company believes that damages or settlements, if any, recovered by plaintiffs in such matters, claims or actions, other than as described in this Note 15, will not have a material adverse effect on the Company.

West Virginia Elk River Freedom Industries Chemical Spill

On January 9, 2014, a chemical storage tank owned by Freedom Industries, Inc. leaked two substances, 4-methylcyclohexane methanol, or MCHM, and PPH/DiPPH, a mix of polyglycol ethers, into the Elk River near the West Virginia-American Water Company (“WVAWC”) treatment plant intake in Charleston, West Virginia. After having been alerted to the leak of MCHM by the West Virginia Department of Environmental Protection (“DEP”), WVAWC took immediate steps to gather more information about MCHM, augment its treatment process as a precaution, and begin consultations with federal, state and local public health officials. As soon as possible after it was determined that the augmented treatment process would not fully remove the MCHM, a joint decision was reached in consultation with the West Virginia Bureau for Public Health to issue a “Do Not Use” order for all of its approximately 93,000 customer accounts in parts of nine West Virginia counties served by the Charleston treatment plant. The order addressed the

use of water for drinking, cooking, washing and bathing, but did not affect continued use of water for sanitation and fire protection. Over the next several days, WVAWC and an interagency team of state and federal officials engaged in extensive sampling and testing to determine if levels of MCHM were below one part per million (1 ppm), a level that the U.S. Centers for Disease Control and Prevention (“CDC”) and the U.S. Environmental Protection Agency indicated would be protective of public health. Beginning on January 13, 2014, based on the results of the continued testing, the Do Not Use order was lifted in stages to help ensure the water system was not overwhelmed by excessive demand, which could have caused additional water quality and service issues. By January 18, 2014, none of WVAWC’s customers were subject to the Do Not Use order, although CDC guidance suggesting that pregnant women avoid consuming the water until the chemicals were at non-detectable levels remained in place. In addition, based on saved samples taken on or before January 18, 2014, PPH/DiPPH was no longer detected in the water supply as of January 18, 2014. On February 21, 2014, WVAWC announced that all points of testing throughout its water distribution system indicated that levels of MCHM were below 10 parts per billion (10 ppb). The interagency team established 10 ppb as the “non-detect” level of MCHM in the water distribution system based on the measurement capabilities of the multiple laboratories used. WVAWC continued to work with laboratories to test down to below 2 ppb of MCHM and announced on March 3, 2014, that it had cleared the system to below this level.

To date, there are 68 pending cases against WVAWC with respect to this matter in the United States District Court for the Southern District of West Virginia or West Virginia Circuit Courts in Kanawha, Boone and Putnam counties. Fifty-three of the state court cases naming WVAWC, and one case naming both WVAWC and American Water Works Service Company, Inc. (“AWWSC,” and together with WVAWC and the Company, the “American Water Defendants”) were removed to the United States District Court for the Southern District of West Virginia. On December 17, 2015, the federal district court entered orders remanding 52 of the previously removed cases back to the West Virginia Circuit Courts for further proceedings (two of the previously removed cases had been dismissed in the interim). Following that order, seven additional cases were filed against WVAWC in West Virginia Circuit Courts in Kanawha and Putnam counties with respect to this matter. On January 28, 2016, all of the state court cases were referred to West Virginia’s Mass Litigation Panel for further proceedings.

Four of the cases pending before the federal district court were consolidated for purposes of discovery, and an amended consolidated class action complaint for those cases (the “Federal action”) was filed on December 9, 2014 by several plaintiffs who allegedly suffered economic losses, loss of use of property and tap water or other specified adverse consequences as a result of the Freedom Industries spill, on behalf of a purported class of all persons and businesses supplied with, using, or exposed to water contaminated with Crude MCHM and provided by WVAWC in Logan, Clay, Lincoln, Roane, Jackson, Boone, Putnam, and Kanawha Counties and the Culloden area of Cabell County, West Virginia as of January 9, 2014. The amended consolidated complaint names several individuals and corporate entities as defendants, including the American Water Defendants. The plaintiffs seek unspecified damages for alleged business or economic losses; unspecified damages or a mechanism for recovery to address a variety of alleged costs, loss of use of property, personal injury and other consequences allegedly suffered by purported class members; punitive damages and certain additional relief, including the establishment of a medical monitoring program to protect the purported class members from an alleged increased risk of contracting serious latent disease.

On April 9, 2015, the court in the Federal action denied a motion to dismiss all claims against the Company for lack of personal jurisdiction. A separate motion to dismiss filed by AWWSC and WVAWC (and joined by the Company) asserting various legal defenses in the Federal action was resolved by the court on June 3, 2015. The court dismissed three causes of action but denied the motion to dismiss with respect to the remaining causes of actions and allowed the plaintiffs to continue to pursue the various claims for damages alleged in their amended consolidated complaint.

On July 6, 2015, the plaintiffs filed a motion seeking certification of a class defined to include persons who resided in dwellings served by WVAWC’s Kanawha Valley Treatment Plant (“KVTP”) on January 9, 2014, persons who owned businesses served by the KVTP on January 9, 2014, and hourly employees who worked for such businesses. The plaintiffs sought a class-wide determination of liability against the American Water Defendants, among others, and of damages to the three groups of plaintiffs as a result of the “Do Not Use” order issued after the Freedom Industries spill.

A court-directed mediation was held at the end of September 2015 with the assistance of private mediators. Representatives of the American Water Defendants, Eastman Chemical, the Federal action plaintiffs, and the plaintiffs in the 53 state court cases as to which removal to Federal court had been sought, as well as insurance carriers for certain of the defendants, participated in the mediation. No resolution was reached and no further mediation discussions have been scheduled to date.

On October 8, 2015, the court in the Federal action granted in part and denied in part the plaintiffs’ class certification motion. The court certified a class addressing the alleged fault of Eastman Chemical for tort claims and the alleged fault of the American Water Defendants for tort and breach of contract claims, as well as the comparative fault of Freedom Industries. However, the court granted the joint motion by defendants to exclude certain expert testimony, disallowing the testimony of plaintiffs’ economic damages experts, and denied class certification as to any damages, including punitive damages. Thus, determination or quantification of damages, if any, would be made in subsequent proceedings on an individual basis.

On December 17, 2015, the court in the Federal action entered a scheduling order that provides for the trial on class issues to begin in July 2016. During the first week of January 2016, three additional cases were filed against one or more of the American Water Defendants, as well as others, in the U.S. District Court for the Southern District of West Virginia with respect to this matter.

Additionally, investigations with respect to the matter have been initiated by the Chemical Safety Board, the U.S. Attorney’s Office for the Southern District of West Virginia, the West Virginia Attorney General, and the Public Service Commission of West Virginia (the “PSC”). As a result of the U.S. Attorney’s Office investigation, Freedom Industries and six former Freedom Industries employees (three of whom also were former owners of Freedom Industries), pled guilty to violations of the federal Clean Water Act.

On May 21, 2014, the PSC issued an Order initiating a General Investigation into certain matters relating to WVAWC's response to the Freedom Industries spill. Three parties have intervened in the proceeding, including the Consumer Advocate Division of the PSC and two attorney-sponsored groups, including one sponsored by some of the plaintiffs’ counsel involved in the civil litigation described above. WVAWC has filed testimony regarding its response to the spill and is subject to discovery from PSC staff and the intervenors as part of the General Investigation. Several disputes have arisen between the WVAWC and the intervenors regarding, among other things, the scope of the discovery and the maintenance of confidentiality with regard to certain WVAWC emergency planning documents. In addition, the intervenors and PSC staff filed expert testimony in support of their assertions that WVAWC did not act reasonably with respect to the Freedom Industries spill, and WVAWC has asserted that some of the testimony is outside the scope of the PSC proceeding. The PSC has deferred setting a revised procedural schedule and has not set a final hearing date on the matter.

The Company believes that the causes of action and other claims asserted against the American Water Defendants in the proceedings described above are without merit and continues to vigorously defend itself in these proceedings. Given the current stage of these proceedings, the Company cannot reasonably estimate the amount of any reasonably possible losses or a range of such losses related to these proceedings.

Note 16: Earnings per Common Share

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

		2015				2014				2013
Numerator
Income from continuing operations		$	476			$	430			$	371
Loss from discontinued operations, net of tax		—					(7	)			(2	)
Net income available to common stockholders		$	476			$	423			$	369
Denominator
Weighted average common shares outstanding—Basic			179				179				178
Effect of dilutive common stock equivalents			1				1				1
Weighted average common shares outstanding—Diluted			180				180				179

The effect of dilutive common stock equivalents is related to the RSUs and stock options granted under the 2007 Plan, and shares purchased under the ESPP. Less than one million share-based awards were excluded from the computation of diluted EPS for the years ended December 31, 2015, 2014 and 2013 because their effect would have been anti-dilutive under the treasury stock method.

Note 17: Fair Values of Financial Instruments

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

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

Preferred stock with mandatory redemption requirements and long-term debt—The fair values of preferred stock with mandatory redemption requirements and long-term debt are categorized within the fair value hierarchy based on the inputs that are used to value each instrument. The fair value of long-term debt classified as Level 1 is calculated using quoted prices in active

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

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

		Carrying				December 31, 2015
		Amount				Level 1				Level 2				Level 3				Total
Preferred stock with mandatory redemption requirements		$	13			$	—			$	—			$	18			$	18
Long-term debt (excluding capital lease obligations)			5,914				3,397				1,419				1,941				6,757

		Carrying				December 31, 2014
		Amount				Level 1				Level 2				Level 3				Total
Preferred stock with mandatory redemption requirements		$	17			$	—			$	—			$	22			$	22
Long-term debt (excluding capital lease obligations)			5,485				2,874				1,475				2,055				6,404

Fair Value Measurements

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

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

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

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

Recurring Fair Value Measurements

The following table presents assets and liabilities measured and recorded at fair value on a recurring basis and their level within the fair value hierarchy as of December 31, 2015 and 2014, respectively:

				December 31, 2015
				Level 1				Level 2				Level 3				Total
Assets
Restricted funds				$	27			$	—			$	—			$	27
Rabbi trust investments					12												12
Deposits					1				—				—				1
Mark-to-market derivative asset					—				2				—				2
Other investments					4				—				—				4
Total assets					44				2				—				46
Liabilities
Deferred compensation obligation					11				—				—				11
Mark-to-market derivative liability					—				1				—				1
Total liabilities					11				1				—				12
Total net assets				$	33			$	1			$	—			$	34

				December 31, 2014
				Level 1				Level 2				Level 3				Total
Assets
Restricted funds				$	23			$	—			$	—			$	23
Rabbi trust investments				—					12			—					12
Deposits					4			—				—					4
Mark-to-market derivative asset				—					4			—					4
Other investments					22			—				—					22
Total assets					49				16			—					65
Liabilities
Deferred compensation obligation				—					12			—					12
Mark-to-market derivative liability				—					1			—					1
Total liabilities				—					13			—					13
Total net assets				$	49			$	3			$	—			$	52

Restricted funds—The Company’s restricted funds primarily represent proceeds received from financings for the construction and capital improvement of facilities and from customers for future services under operations and maintenance projects. The proceeds of these financings are held in escrow until the designated expenditures are incurred. Long-term restricted funds of $6 and $9 were included in other long-term assets as of December 31, 2015 and 2014, respectively.

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

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

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

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

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

Note 18: Leases

The Company has entered into operating leases involving certain facilities and equipment. Rental expenses under operating leases were $21 for 2015, $22 for 2014 and $23 for 2013. The operating leases for facilities will expire over the next 25 years and the operating leases for equipment will expire over the next five years. Certain operating leases have renewal options ranging from one to five years.

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

Year		Amount
2016		$	13
2017			12
2018			11
2019			10
2020			8
Thereafter			74

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 gross cost of the facilities funded by the Company recognized as a capital lease asset was $156 and $157 as of December 31, 2015 and 2014, respectively, which is presented in property, plant and equipment in the accompanying Consolidated Balance Sheets. The future payments under the lease obligations are equal to and offset by the payments receivable under the IDBs.

As of December 31, 2015, 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 in 2016 through 2020, and $69 thereafter.

Note 19: Segment Information

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

The Regulated Businesses segment is the largest component of the Company’s business and includes 18 subsidiaries that provide water and wastewater services to customers in 16 states.

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

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

The chief operating decision maker of the company, who is the President and Chief Executive Officer, uses income from continuing operations before income tax as the primary measure of profit and loss in assessing the results of each operating segment. The following tables include the Company’s summarized segment information as of and for the years ended December 31:

	2015
	Regulated Businesses				Market-Based Businesses				Other				Consolidated
Operating revenues	$	2,743			$	434			$	(18	)		$	3,159
Depreciation and amortization		411				8				21				440
Total operating expenses, net		1,732				370				(18	)			2,084
Interest, net		248				(2	)			62				308
Income from continuing operations before income taxes		776				68				(62	)			782
Provision for income taxes		303				26				(23	)			306
Income from continuing operations		473				42				(39	)			476
Total assets		15,258				496				1,487				17,241
Capital expenditures		1,143				17			—					1,160
	2014
	Regulated Businesses				Market-Based Businesses				Other				Consolidated
Operating revenues	$	2,674			$	355			$	(18	)		$	3,011
Depreciation and amortization		394				6				24				424
Total operating expenses, net		1,726				300				(18	)			2,008
Interest, net		248				(2	)			53				299
Income from continuing operations before income taxes		707				58				(55	)			710
Provision for income taxes		273				18				(11	)			280
Income from continuing operations		434				40				(44	)			430
Total assets (b)		14,343				314				1,381				16,038
Capital expenditures		946				10			—					956
	2013
	Regulated Businesses				Market-Based Businesses				Other				Consolidated
Operating revenues (a)	$	2,594			$	303			$	(18	)		$	2,879
Depreciation and amortization (a)		376				6				25				407
Total operating expenses, net (a)		1,700				252				(21	)			1,931
Interest, net		249				(2	)			61				308
Income from continuing operations before income taxes (a)		655				53				(100	)			608
Provision for income taxes		255				14				(32	)			237
Income from continuing operations		400				39				(68	)			371
Total assets (b)		13,448				286				1,330				15,064
Assets of discontinued operations (included in total assets above)	—					8			—					8
Capital expenditures		973				7			—					980
Capital expenditures of discontinued operations (included in capital expenditures above)	—					1			—					1

	(a)	The information has been revised to reflect the impact of discontinued operations, as applicable. See Note 3—Acquisitions and Divestitures for additional details on the Company’s discontinued operations.

	(b)	The information has been revised to reflect the retrospective application of ASU 2015-15 Presentation of Debt Issuance Costs and ASU 2015-17 Income Taxes. See Note 2–Significant Accounting Policies for additional details.

Note 20: Unaudited Quarterly Data

The following table summarizes certain supplemental unaudited consolidated quarterly financial data for each of the four quarters in the years ended December 31, 2015 and 2014, respectively. The operating results for any quarter are not indicative of results that may be expected for a full year or any future periods.

2015	First Quarter				Second Quarter				Third Quarter				Fourth Quarter
	(In millions, except per share data)
Operating revenues	$	698			$	782			$	896			$	783
Operating income		204				278				361				232
Net income attributable to common stockholders		80				123				174				99
Basic earnings per share:
Net income attributable to common stockholders		0.45				0.69				0.97				0.55
Diluted earnings per share:
Net income attributable to common stockholders		0.44				0.68				0.96				0.55
2014	First Quarter				Second Quarter				Third Quarter				Fourth Quarter
	(In millions, except per share data)
Operating revenues	$	679			$	755			$	846			$	731
Operating income		187				255				337				224
Net income attributable to common stockholders		68				109				152				94
Basic earnings per share:
Net income attributable to common stockholders		0.38				0.61				0.85				0.52
Diluted earnings per share:
Net income attributable to common stockholders		0.38				0.61				0.85				0.52