American Water Works (AWK) 10-K risk factor changes: FY2016 vs FY2015

| | [removed: ·] [added: •] | cover our expenses, including purchased water and costs of chemicals, fuel and other commodities used in our operations; |

| | [removed: ·] [added: •] | enable us to recover our investment; and |

| | [removed: ·] [added: •] | provide us with an opportunity to earn an appropriate rate of return on our investment. |

Our utilities are also required to have numerous permits, approvals and certificates from the PUCs that regulate their [removed: businesses.][added: businesses and authorize acquisitions.]

Compliance with increasingly stringent laws and regulations could impact our operating costs; and violations of such laws and regulations could subject us to substantial liabilities and [removed: costs.][added: costs, as well as damage to our reputation.]

Our water and wastewater [removed: operations, as well as] [added: operations and] the operations of our Market-Based [removed: Businesses,] [added: Businesses] are subject to extensive federal, state and local laws and regulations and, in the case of our Canadian operations, Canadian laws and regulations that govern the protection of the environment, health and safety, the quality of the water we deliver to our customers, water allocation rights, and the manner in which we collect, treat, discharge and dispose of wastewater.

For example, in our Monterey County, California operations, we are seeking to augment our sources of water supply, principally to comply with an October 20, 2009 cease and desist order (the “2009 [removed: Order”)] [added: Order”), as amended by an order in July 2016 (the “2016 Order”),] of the [removed: California State Water Resources Control Board] [added: SWRCB] that requires Cal Am to significantly decrease its diversions from the Carmel River in accordance with a reduction schedule [removed: presently running through] [added: which was extended to] December 31, [removed: 2016] [added: 2021] (the [removed: “2016] [added: “2021] Deadline”).

We cannot predict whether Cal Am will be able to [removed: extend the 2016 Deadline or] secure alternative sources of water, or if Cal Am will be exposed to liabilities if it is unable to meet the [removed: 2016] [added: 2021] Deadline under the 2009 [added: Order and the 2016] Order.

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

We endeavor to reduce regulatory lag by pursuing [removed: positive] [added: constructive] regulatory policies.

For example, [removed: seven] [added: eight] state PUCs permit rates to be adjusted outside of the rate case application process through surcharges that address certain capital investments, such as replacement of aging infrastructure.

Other examples of such programs include states that allow us to increase rates for certain cost increases that are beyond our control, such as purchased water [removed: costs or] [added: costs,] property or other taxes, or power, conservation, chemical or other expenditures.

While these programs have [removed: been a positive development and] [added: reduced regulatory lag in several of our regulated states,] we continue to seek expansion of programs to [removed: mitigate] [added: reduce] regulatory [removed: lag, some state PUCs which govern our regulated operations] [added: lag in those jurisdictions that] have not approved such programs.

Changes in laws and regulations [removed: over which we do not control] and changes in certain agreements can significantly affect our business, financial condition, results of operations, cash flows and liquidity.

The individuals who serve as regulators are elected or [removed: are] political appointees.

| | [removed: ·] [added: •] | making it more difficult for us to raise our rates and, as a consequence, to recover our costs or earn our expected rates of return; |

| | [removed: ·] [added: •] | changing the determination of the costs, or the amount of costs, that would be considered recoverable in rate cases; |

| | [removed: ·] [added: •] | restricting our ability to terminate our services to customers who owe us money for services previously provided or limiting our bill collection efforts; |

| | [removed: ·] [added: •] | requiring us to provide water [added: or wastewater] services at reduced rates to certain customers; |

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

| | [removed: ·] [added: •] | changing regulations that affect the benefits we expected to receive when we began offering services in a particular area; |

| | [removed: ·] [added: •] | changing or placing additional limitations on change in control requirements relating to any concentration of ownership of our common stock; |

| | [removed: ·] [added: •] | making it easier for governmental entities to convert our assets to public ownership via eminent domain; |

| | [removed: ·] [added: •] | placing limitations, prohibitions or other requirements with respect to the sharing of information and participation in transactions by or between a regulated subsidiary and us or our other affiliates, including [removed: our service company] [added: Service Company] and any of our other subsidiaries; |

| | [removed: ·] [added: •] | restricting or prohibiting our extraction of water from rivers, streams, reservoirs or aquifers; and |

| | [removed: ·] [added: •] | revoking or altering the terms of the certificates of public convenience and necessity (or similar authorizations) issued to us by state PUCs. |

Service interruptions due to severe weather [added: and other natural] events are possible across all our [removed: service areas.][added: businesses.]

These include [removed: winter storms and] [added: storms,] freezing conditions, high wind conditions, hurricanes, [removed: tornados,] [added: tornadoes,] earthquakes, landslides, coastal and intercoastal floods or high water conditions, including those in or near designated flood plains, [removed: and] severe electrical [removed: storms.][added: storms and solar flares.]

Weather [added: and other natural] events such as these may affect the condition or operability of our facilities, limiting or preventing us from delivering water or wastewater services to our customers, or requiring us to make substantial capital expenditures to repair any damage.

Seasonal drought conditions that [removed: would] [added: may] impact our water services are possible across all of our service areas.

[removed: If] [added: Governmental restrictions imposed in response to] a [removed: regional] drought [removed: were to occur, governmental restrictions] may [removed: be imposed on] [added: apply to] all systems within a region independent of the supply adequacy of any individual system.

While expenses incurred in implementing water conservation and rationing plans [removed: in Cal Am’s districts are] [added: may] generally [added: be] recoverable provided the [removed: California Public Utilities Commission (the “CPUC”)] [added: relevant PUC] determines they were [removed: reasonable, Cal Am] [added: reasonable and prudent, we] cannot assure that [added: any] such expenses [added: incurred] will, in fact, be fully recovered.

In [removed: 2015,] [added: 2016,] we invested [removed: $1.2] [added: $1.3] billion in net Company-funded capital improvements.

Demand for our water during the warmer [removed: months] [added: months, typically in the summer,] is generally greater than during [removed: cooler months] [added: other months,] due primarily to increased water usage for irrigation systems, swimming pools, cooling systems and other applications.

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

The water supplies that flow into our treatment plants [removed: and] [added: or] are [removed: then] delivered [removed: into] [added: through] our distribution [removed: system] [added: system, or the water service that is provided to our customers,] are subject to contamination, [removed: including] [added: including, by among other items,] contamination from naturally-occurring compounds, chemicals in groundwater systems, pollution resulting from man-made [removed: sources, such] [added: sources (such] as [removed: perchlorate and] [added: perchlorate,] methyl tertiary butyl ether, [added: lead and other materials,] chemical spills or other accidents that result in contaminants entering the water [removed: source,] [added: source),] and possible terrorist attacks.

If one of our water supplies [added: or the water service provided to our customers] is contaminated, depending on the nature of the contamination, we may have to take responsive actions that could include, among other things (1) continuing limited use of the water supply under a “Do Not Use” protective order that enables continuation of basic sanitation and essential fire protection, or (2) interrupting the use of that water supply.

We may be unable to recover costs associated with treating or decontaminating water supplies through [added: insurance, customer] rates, [added: tariffs] or [removed: recovery of these costs may not occur in a timely manner.][added: contract terms.]

Moreover, we could be subject to claims for damages arising from government enforcement actions or toxic tort or other lawsuits arising out of [added: an] interruption of service or human exposure to hazardous substances in our drinking water [added: and water] supplies.

In this regard, on January 9, 2014, a chemical storage tank owned by Freedom Industries, Inc. leaked two substances into the Elk River near the [removed: WVAWC] [added: West Virginia-American Water Company (“WVAWC”)] treatment plant intake in Charleston, West Virginia.

Attention is being given to emerging contaminants, including, without limitation, chemicals and other substances that currently do not have any regulatory standard in drinking water or have been recently created or discovered (including by means of scientific achievements in the analysis and detection of trace amounts of substances).

Examples of sources of emerging contaminants include, but are not limited to, newly created chemical compounds (including, for example, perfluorinated compounds and manufactured nanomaterials); human and veterinary products; microbes, viruses, amoebae and other pathogens; and residual by-products of disinfection.

We rely upon governmental agencies to set appropriate regulatory standards to protect the public from these and other contaminants.

Our role is to meet or surpass those standards, when established.

In some of our states, PUCs may disapprove of cost recovery, in whole or in part, for implementation of treatment infrastructure for an emerging contaminant in the absence of a regulatory standard.

Furthermore, while we seek to protect our drinking water from these contaminants by implementing multi-step treatment processes, reviewing research on these contaminants, and developing appropriate mitigation techniques for new contaminants where feasible or appropriate, given the rapid pace at which emerging contaminants are being created and/or discovered, we may not be able to detect and/or mitigate all such substances in our drinking water system, which could have a material adverse impact on our financial condition, results of operations and reputation.

In addition, we believe emerging contaminants may form the basis for additional or increased federal or state regulatory initiatives and requirements in the future, which could significantly increase the cost of our operations.

Furthermore, in setting rates, a number of state PUCs allow us to use future test years, which extend beyond the date a rate request is filed to allow for current or projected revenues, expenses and investments to be reflected in rates on a more timely basis.

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

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

Furthermore, the results of the November 2016 Federal, state and local elections have generated some uncertainty as to certain future new or changes in existing laws, rules or regulations, or administrative interpretations thereof.

At this time, we are unable to determine or predict the potential impacts, if any, of such new or amended laws, rules or regulations, or interpretations thereof, to the extent they may be ultimately enacted, adopted or issued, on us or our businesses, financial condition and results of operations.

As examples, drought conditions have persisted in California over a five-year period, and, more recently, have been declared in New Jersey.

In May 2016, the Governor of California issued an executive order that retained existing water use restrictions, but required state agencies to adjust, among other things, water conservation regulations through the end of January 2017 to account for differentiation in water supply conditions throughout the state, to adopt new water use targets as part of a permanent framework for urban water usage and conservation, to prohibit permanently practices that waste potable water and to direct actions that minimize significant water system leaks.

Moreover, in October 2016, a drought warning was declared in 14 northern and central New Jersey counties by the New Jersey Department of Environmental Protection, and while mandatory use restrictions have not presently been adopted, residents, business and other institutions in the affected areas have been urged to use water sparingly.

In addition, new categories of these substances continue to emerge in the water treatment industry.

Any recovery of these costs that we are able to obtain through regulatory proceedings or otherwise may not occur in a timely manner.

On October 31, 2016, the U.S. District Court for the Southern District of West Virginia approved the preliminary principles, terms and conditions of a binding global agreement in principle to settle claims arising out the Freedom Industries chemical spill (the “Settlement”).

Under the terms of the Settlement, WVAWC has agreed that it will not seek rate recovery from the Public Service Commission of West Virginia for the amounts paid by WVAWC, net of insurance recoveries, under the Settlement.

Negative impacts to our reputation may occur even if we are not liable for any contamination or other environmental damage or the consequences arising out of human exposure to contamination or hazardous substances in the water or water supplies.

In addition, insurance coverage may not cover all or a portion of these losses, and are subject to deductibles and other limitations.

While we continue to implement, upgrade and replace our operational technology and IT systems, a number of our mission- and business-critical IT systems are older, such as our SCADA (supervisory control and data acquisition) system.

While we have instituted certain safeguards to protect our operational technology and IT systems, those safeguards may not always be effective due to the evolving nature of cyber attacks and cyber vulnerabilities.

We cannot guarantee that such protections will be completely successful in the event of a cyber attack.

These types of events, either impacting our facilities or the industry in general, could also cause us to incur additional security and insurance related costs.

In addition, in the ordinary course of business, we collect and retain sensitive information, including personally identifiable information, about our customers and employees.

In many cases, we outsource administration of certain functions to vendors that could be targets of cyber attacks.

Any theft, loss and/or fraudulent use of customer, employee or proprietary data as a result of a cyber attack could subject us to significant litigation, liability and costs, as well as adversely impact our reputation with customers and regulators, among others.

Upgrades and improvements to computer systems and networks, or the implementation of new systems, may require substantial amounts of management’s time and financial resources to complete, and may also result in system or network defects or operational errors due to multiple factors, including employees’ ability to effectively use the new or upgraded system.

Over the past several years,

We may also experience difficulties consolidating our current systems and implementing new or upgraded systems together with existing systems, which may impact our ability to serve our customers effectively or efficiently.

| --- | --- | --- |

In an attempt to manage our exposure to interest rate risk associated with our issuance of variable and fixed-rate debt, we have entered into, and in the future may enter into, financial derivative instruments, including without limitation, interest rate swaps, forward starting swaps, swaptions and U.S. Treasury lock agreements.

See Item 7A—Quantitative and Qualitative Disclosures About Market Risk.

However, these efforts may not be effective to fully mitigate interest rate risk, and may expose us to other risks and uncertainties, including quarterly “mark to market” valuation risk associated with these instruments, that could negatively and materially affect our financial condition, results of operations and cash flows.

Under the terms of our revolving credit facility, our consolidated debt cannot exceed 70% of our consolidated capitalization, as determined under the terms of the credit facility.

If our equity were to decline or debt were to increase to a level that caused our debt to exceed this limit, lenders under the credit facility would be entitled to refuse any further extension of credit and to declare all of the outstanding debt under the credit facility immediately due and payable.

To avoid such a default, a waiver or renegotiation of this covenant would be required, which would likely increase funding costs and could result in additional covenants that would restrict our operational and financing flexibility.

Our ability to comply with this and other covenants contained in the revolving credit facility and our other consolidated indebtedness is subject to various risks and uncertainties, including events beyond our control.

For example, events that could cause a reduction in equity include, without limitation, a significant write-down of our goodwill.

In November 2015, Cal Am filed an application with the State Water Resources Control Board to modify the 2009 Order to extend the deadline for compliance to December 31, 2020.

Furthermore, no state has adopted surcharge programs that include all elements of cost that may change between general rate proceedings.

| | · | restricting our ability to buy or sell assets or issue securities; |

For example, in October 2012, our east coast subsidiaries were affected by Hurricane Sandy.

The most significant impact to our business was caused by the widespread power outages caused by the storm’s heavy winds, rain and snow.

For example, as a result of a four-year period of reduced rainfall and overall dry conditions throughout the State of California, Cal Am has been closely monitoring its owned and purchased water supplies.

In April 2015, the Governor of California mandated water usage restrictions to reduce overall water usage by 25% in the state compared to 2013 usage levels.

Although such restrictions are scheduled to expire in February 2016, the Governor of California issued an executive order in November 2015 extending the restrictions through October 31, 2016 if drought conditions persist through January 2016.

WVAWC has and may continue to incur significant costs in responding to this incident and may not be able to recover such costs through rates or from insurers.

Even if recovery is possible, it may not occur in a timely manner.

Government investigations relating to the Freedom Industries spill have been initiated, state laws have been enacted, state and federal legislatures are considering changes to existing laws or rules associated with new laws, and there are 68 currently pending lawsuits against WVAWC and, in a few cases, against us or our affiliates.

While American Water and WVAWC believe that WVAWC has responded appropriately to, and has no responsibility for, the Freedom Industries spill, and American Water and WVAWC believe they and other affiliates have valid, meritorious defenses to the lawsuits, WVAWC will incur defense costs that may not be recoverable.

Moreover, an adverse outcome in one or more of the lawsuits could have a material adverse effect on our financial condition, results of operations, cash flows, liquidity and reputation.

WVAWC and American Water are unable to predict the outcome of the ongoing government investigations or any legislative initiatives that might affect water utility operations.

Competing governmental entities, utilities, environmental or social

While we completed in the fourth quarter of 2013 the business transformation implementation for our Enterprise Resource Planning, Enterprise Asset Management (“EAM”) and Customer Information (“CIS”) systems, and we are in the process of implementing a similar system for our American Water Enterprises business, a number of our mission and business critical IT systems are older, such as our SCADA (supervisory control and data acquisition) system.

As we make adjustments to our operations, we may incur incremental expenses prior to realizing the benefits of a more efficient workforce and operating structure.

Further, we may not realize anticipated cost improvements and greater efficiencies from the project.

We operate numerous IT systems that are in various stages of integration, sometimes leading to inefficiencies.

Therefore, delays in stabilization and optimization of these systems will also delay cost savings and efficiencies expected to result from the project.

We may also experience difficulties consolidating our current systems, moving to a common set of operational processes and implementing a successful change management process.

These difficulties may impact our ability to meet customer needs efficiently.

Any such delays or difficulties may have a material and adverse impact on our business, client relationships and financial results.

Our management believes the federal NOL carryforwards are more likely than not to be recovered and therefore currently require no valuation allowance.

At December 31, 2015, $60 million of the state NOL carryforwards have been offset by a valuation allowance because we do not believe these NOLs will more likely than not be realized in the future, and we have, in the past, been unable to utilize certain of our NOLs.

American Water Enterprises’ long-term contracts with the Department of Defense may be terminated for the convenience of the U.S. Government and are subject to periodic contract price redetermination.

[added: Through its subsidiaries,] American Water is the largest and most geographically diverse investor-owned publicly-traded water and wastewater utility company in the United States, as measured [removed: both] by [added: both] operating revenues and population served.

We employ approximately [removed: 6,700] [added: 6,800] professionals who provide drinking water, wastewater and other related services to an estimated 15 million people in 47 states, the District of Columbia and Ontario, Canada.

Our primary business involves the ownership of utilities that provide water and wastewater services to residential, commercial, [removed: industrial, public] [added: industrial] and other [added: customers, including sale for resale and public authority] customers.

Our Regulated Businesses that provide these services are generally subject to economic regulation by [added: certain] state [removed: regulatory agencies in the states] [added: utility commissions or other entities engaged] in [removed: which they operate.][added: utility regulation.]

[removed: The] [added: Certain] federal [removed: government] and [removed: the states] [added: state governments] also regulate environmental, health and [removed: safety] [added: safety,] and water quality matters.

We also operate several businesses that provide a broad range of related and complementary water and wastewater services in [removed: non-regulated markets, which includes] four operating segments that individually do not meet the criteria of a reportable segment in accordance with GAAP.

[removed: 2015] [added: 2016] Strategic Focus & Achievements

For [removed: 2015,] [added: 2016,] our focus was anchored on five central strategic themes:

| | [removed: ·] [added: •] | [removed: Customers] [added: Customer] – [removed: Our] [added: One of our core values is putting our] customers [removed: are] at the center of everything we do. |

| | [removed: ·] [added: •] | [removed: In 2015, we achieved customer satisfaction ratings of 91% and service quality ratings of 85%. In addition, we] [added: We] continued to make needed infrastructure investment while implementing operational efficiency improvements to keep customer rates [removed: affordable.] [added: affordable; and] |

| | [removed: ·] [added: •] | Safety – The health and safety of our employees, customers and the public is both a strategy and a value. |

| | [removed: ·] [added: •] | People – Our employees and culture are paramount to our success. |

| | [removed: ·] [added: •] | Growth – We invested [removed: $1.4] [added: $1.5] billion in [removed: 2015;] [added: 2016;] a record level of annual [removed: investment,] [added: investment since the Company went public in 2008] including: |

| | [removed: ·] [added: •] | [removed: $1.2] [added: $1.3] billion [removed: to improve infrastructure] [added: of which the majority was] in our Regulated [removed: Businesses;] [added: Businesses primarily to improve infrastructure; and] |

| | [removed: ·] [added: •] | [added: Paid] $64 million for [removed: regulated acquisitions, adding approximately 24,000] [added: 14] water and wastewater [removed: customers; and] [added: systems representing approximately 24,000 customers.] |

| | [removed: ·] [added: •] | Technology and Operational Efficiency – We drove continued cost savings [removed: in] [added: into] our [removed: regulated] businesses. |

| | [removed: ·] [added: •] | [removed: We] [added: Our Regulated Businesses] achieved an adjusted O&M efficiency ratio (a non-GAAP measure) of [removed: 35.9%] [added: 34.9%] in [removed: 2015.] [added: 2016;] |

[removed: 2015] [added: 2016] Financial Results

| | [removed: 2015] | [added: 2016] | | | [removed: 2014] | [added: 2015] | | | [removed: 2013] | [added: 2014] | | [added: |]

| Income from continuing operations | [added: |] $ | [removed: 2.64] [added: 2.62] | | | $ | [removed: 2.39] [added: 2.64] | | | $ | [removed: 2.07] [added: 2.39] | |

| Loss from discontinued operations, net of tax [added: (a)] | [removed: $] | [added: |] — | | | [removed: $] | [removed: (0.04] [added: —] | [removed: )] | | [removed: $] | [removed: (0.01] [added: (0.04] | ) |

| Diluted earnings per share | [added: |] $ | [removed: 2.64] [added: 2.62] | | | $ | [removed: 2.35] [added: 2.64] | | | $ | [removed: 2.06] [added: 2.35] | |

Income from continuing operations [removed: increased 25] [added: decreased 2] cents per diluted [removed: share] [added: share, or 0.8%,] for [added: the] year ended December 31, [removed: 2015] [added: 2016] compared to the prior year.

[removed: The] [added: This] increase was mainly due to continued [added: strong] growth in [removed: both] our Regulated [removed: Businesses segment and Market-Based] Businesses.

[added: | | (a) | Discontinued operations represents the 2014 sale of our Terratec line of business, which was part of our Market-Based Businesses.] The loss from discontinued operations, net of tax, reflected in the 2014 financial results includes the loss on the sale, an income tax valuation allowance and the 2014 operating results of the entity prior to the sale. [added: See Note 3—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for further details on our discontinued operations. |]

[removed: See “Comparison of Consolidated Results of Operations” and “Segment Results” below for] [added: For] further detailed discussion of the consolidated results of operations, as well as [added: the financial results of] our business [removed: segments.][added: segments, see “Comparison of Consolidated Results of Operations” and “Segment Results of Operations”.]

[removed: See] [added: For further information, see] Note [removed: 3—Acquisitions] [added: 7—Goodwill] and [removed: Divestitures] [added: Other Intangible Assets] in the Notes to [added: the] Consolidated Financial [removed: Statements for further details on our discontinued operations.][added: Statements.]

The table below provides rate authorizations effective from [removed: 2013] [added: 2014] through [removed: 2015.][added: 2016.]

| | For the [added: For the] Years Ended December 31, | | | | | | | | | | |

| | [added: |] (In millions) | | | | | | | | | | |

| Pennsylvania (a) | $ | [removed: —] [added: 28] | | | $ | [removed: —] [added: 14] | | | $ | [removed: 26] [added: —] | |

| New Jersey [removed: (b)] [added: (e)] | | [removed: 22] [added: —] | | | | [removed: —] [added: 22] | | | | — | |

| Kentucky [removed: (c)] [added: (d)] | | [removed: —] [added: 7] | | | | — | | | | [removed: 7] [added: —] | |

| Indiana [removed: (d)] [added: (a)] | [added: $] | [removed: 5] [added: 2] | | | [added: $] | [removed: —] [added: 5] | | | [added: $] | — | |

| California [removed: (e)] [added: (f)] | | [removed: 5] [added: 2] | | | | [removed: 2] [added: 5] | | | | [removed: 3] [added: 2] | |

| West Virginia [removed: (f)] [added: (b)] | | [removed: —] [added: 18] | | | | — | | | | [removed: 9] [added: —] | |

| Iowa (g) | | — | | | | [removed: 4] [added: —] | | | | [removed: —] [added: 4] | |

| Other | | [removed: 1] [added: —] | | | | [removed: —] [added: 1] | | | | — | |

| Total General rate cases | $ | [removed: 33] [added: 34] | | | $ | [removed: 6] [added: 33] | | | $ | [removed: 45] [added: 6] | |

| | [removed: (b)] [added: (e)] | [removed: Final order was received on September 11, 2015 with new] [added: New] rates effective September 21, 2015. |

| | • | In 2016, we achieved a customer satisfaction rating in the top quartile among our water industry peers and achieved a service quality rating of 85%, which also placed us in the top quartile compared to our water industry peers; |

| | • | We launched a comprehensive customer experience initiative designed to enhance our quality of service and make it easier for customers to do business with us; |

| | • | Our drinking water system quality was 21 times better than the industry average. |

| | • | In 2016, our focus continued on putting safety first. We finished 2016 with fewer employee injuries than in the prior year, we enhanced accident prevention and risk mitigation through our “near miss” reporting program and we achieved a stronger safety culture as measured by employee responses in the Company’s culture survey. Our safety council, consisting of management and labor employees from across the Company, continued their mission of developing and implementing recommendations to reinforce the Company’s commitment to safety. In addition, we hold our vendors accountable to the same safety standards as our Company. |

| | • | In 2016, we continued to demonstrate our commitment to employees by providing safety and technical training throughout the Company and expanding training and development offerings for supervisors and individual employees. We enhanced and developed robust succession plans for key leadership roles across the company and we continued to provide competitive compensation and benefits to retain and attract a highly skilled and diverse workforce. |

| | • | $199 million for completed regulated acquisitions, adding approximately 42,000 water and wastewater customers. Included was the purchase of substantially all of the wastewater collection and treatment assets of the Sewer Authority of the City of Scranton by Pennsylvania-American Water Company (“PAWC”) on December 29, 2016. This acquisition alone added approximately 31,000 wastewater customers in the City of Scranton and Dunmore Borough, Pennsylvania. |

| | • | In addition to the acquisitions that closed in 2016 adding approximately 42,000 water and wastewater customers discussed above, we also entered into a number of agreements for which the closing of the transactions remain pending. These pending transactions represent the potential addition of approximately 40,000 new water and wastewater customers. The largest of the pending acquisitions include: |

| | ▪ | Shorelands Water Company, New Jersey: Shorelands currently provides water service to approximately 11,000 customers in Monmouth County, New Jersey. On August 2, 2016, we agreed to acquire all of the capital stock of Shorelands Water Company (“Shorelands”) in exchange for an equivalent value of our common stock. The maximum number of shares of our common stock to be exchanged upon closing of this acquisition will be less than 500,000 and will be based upon the average price of our common stock. The closing of this acquisition is subject to the satisfaction of various conditions and compliance by the parties with certain covenants, including obtaining the approval of the New Jersey Board of Public Utilities. The Company is seeking to close the acquisition in the first half of 2017. |

| | ▪ | Municipal Authority of the City of McKeesport, Pennsylvania: The system currently represents approximately 22,000 wastewater customers. On September 9, 2016, PAWC signed an asset purchase agreement to acquire substantially all of the wastewater collection and treatment system assets of the Municipal Authority of the City of McKeesport, Pennsylvania for approximately $156 million, subject to certain adjustments provided in the agreement. In connection with the execution of this agreement, a $5 million non-escrowed deposit was also paid. The closing of this acquisition is subject to the satisfaction of various conditions and covenants, including obtaining the approval of the Pennsylvania Public Utility Commission. We are seeking to close this acquisition in the second half of 2017. |

The improvement in the 2016 adjusted O&M efficiency ratio over the 2015 ratio was primarily attributable to an increase in revenue.

In addition to the standard adjustments to the O&M efficiency ratio for the year ended December 31, 2016, we have also excluded from operating revenues and O&M expenses the impact from the binding global agreement in principle related to the Freedom Industries chemical spill in West Virginia.

| Impact of binding global agreement in principle | | | 65 | | | — | | | | — | | |

| Less: | | | | | | | | | | | | |

| Less: | | | | | | | | | | | | |

| | • | We implemented an enterprise resource planning system in our Market-Based Businesses to integrate and enhance operations, customer service and support services; and |

| | • | We initiated a strategic technology program designed to leverage technological advancements to enhance customer experience, drive operational efficiency, provide data integration and analytics, and enhance security. In addition, we implemented improved technology tools to enhance communication, collaboration and mobility, including a new comprehensive technology roadmap that will help our operations and support employees in providing even better customer experiences in the future. |

Highlights of our diluted earnings per share and adjusted diluted earnings per share for the years ended December 31, 2016, 2015 and 2014 are as follows:

| Add back: Non-GAAP adjustment: | | | | | | | | | | | | |

| Impact of the binding global agreement in principle (b) | | | 0.36 | | | | — | | | | — | |

| Tax impact | | | (0.14 | ) | | | — | | | | — | |

| Non-GAAP adjustment impact on diluted earnings per share | | | 0.22 | | | | — | | | | — | |

| Adjusted diluted earnings per share | | $ | 2.84 | | | $ | 2.64 | | | $ | 2.35 | |

| | (b) | See Item 3—Legal Proceedings and Note 15—Commitments and Contingencies in the Notes to Consolidated Financial Statements included in Item 8—Consolidated Financial Statements in this Form 10-K. |

Included in the 2016 amount was the after-tax charge of $39 million, or $0.22 per diluted share, resulting from the binding global agreement in principle related to the Freedom Industries chemical spill.

Excluding this charge, income from continuing operations increased $0.20 per diluted share, or approximately 7.6%.

Adjusted diluted earnings per share represents a non-GAAP financial measure and excludes the impact of the Settlement.

We believe that this non-GAAP measure provides useful information by excluding such matters that may not be indicative of our on-going operating results.

We believe this non-GAAP measure will allow for better evaluation of the operating performance of the business and facilitate a meaningful comparison of our results in the current year to those in prior years.

The non-GAAP financial information should be considered in addition to, not as a substitute for, measures of financial performance prepared in accordance with U.S. GAAP.

In addition, our non-GAAP measure may not be comparable to similarly titled non-GAAP measures of other companies.

| | 2016 | | | | 2015 | | | | 2014 | | |

| | (a) | New rates effective January 29 of each year. |

| | (b) | New rates effective February 25, 2016. |

| | (c) | New rates effective July 20 and 22, 2016. |

| | (d) | New rates effective August 28, 2016. |

Subsequently, Cal Am has requested to extend its current authorized cost of capital which is scheduled to expire on December 31, 2017 for an additional year.

If no extension is received by March 31, 2017, Cal Am will file its cost of capital application as scheduled.

During the first quarter of 2017, Cal Am received approval from the CPUC for step rates authorizing additional annualized revenues of $5 million effective on various dates between January 13, 2017 and February 2, 2017.

| | 2016 | | | | 2015 | | | | 2014 | | |

| Missouri (c) | | — | | | | 2 | | | | 13 | |

| | · | In 2015, we continued to move our safety culture forward. We implemented a “near miss” reporting program designed for accident prevention and risk education. In addition, our vendors joined us in numerous safety fairs demonstrating options available for protective equipment used across our business. |

| | · | In 2015, we demonstrated our commitment to employees by providing safety and technical training throughout our organization. We also provided business leadership training to virtually all of our front line supervisors across the company. |

| | · | $133 million for the Keystone acquisition. |

For the year ended December 31, 2015, we grew income from continuing operations more than 10%, while making capital investment in our infrastructure and implementing operational efficiency improvements to keep customer rates affordable.

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

Excluding the 2014 costs related to the Freedom Industries chemical spill in West Virginia of 4 cents per diluted share, income from continuing operations increased 21 cents per diluted share, or about 8.8%.

Discontinued operations represents the 2014 sale of our Terratec line of business, which was part of our Market-Based Businesses.

All financial information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations reflects continuing operations, unless otherwise noted.

| | (a) | On December 19, 2013, a rate case settlement was approved with an effective date of January 1, 2014. |

| | (c) | Final order was received on October 25, 2013 with rates effective July 27, 2013. |

| | (d) | Final order issued on January 28, 2015 with new rates effective January 29, 2015. |

| | (f) | Final order issued on September 26, 2013 by the West Virginia Public Service Commission. New rates were put into effect October 11, 2013. |

Lastly, on October 30, 2015 our Virginia subsidiary filed a general rate case requesting $9 of additional annualized revenue.

On November 4, 2015, Cal Am received an Assigned Commissioner’s Scoping Memo and Ruling (“Memo”) related to our WRAM filing.

The Memo called for the suspension of the WRAM surcharges related to 2013 and 2014 under-collections and required Cal Am to retain an independent accounting firm to verify the actual customer water usage and billed revenue for the Monterey County service district for years ended December 31, 2013 and 2014.

The results of the auditors verification was filed with the CPUC in January 2016.

On February 1, 2016, Cal Am filed a motion with the CPUC to restart the surcharge collections for 2013 and 2014.

On February 16, 2016, the Commission’s Office of Ratepayer Advocates (“ORA”) issued a report on Cal Am’s requests to address Monterey rate design and the historical WRAM balances.

The ORA recommends a disallowance of $17 million of the Monterey WRAM balance and also recommends that the amortization occur over five years with no interest.

Additionally, the ORA recommends the CPUC deny Cal Am's request for annual consumption true up pilot program.

We are in the process of reviewing the ORA proposal and will submit our response on March 4, 2016; however, we do not believe that the ORA proposals have merit.

We expect a CPUC decision in mid to late 2016.

On December 30, 2015, our Indiana subsidiary filed a rate case true-up for additional annualized revenues in the amount of $2 million which were authorized and effective on January 29, 2016.

On January 29, 2016, our Kentucky subsidiary filed a general rate case requesting an additional $14 million in annualized water revenues.

As such Cal Am’s current cost of capital will remain in place through 2017.

replace aging infrastructure.

| Pennsylvania (a) | $ | 14 | | | $ | — | | | $ | 20 | |

| | (d) | Effective December 18, 2013. |

| | (g) | For 2015, $2 million effective June 29, 2015. For 2014, $1 million effective April 15, 2014. |

As of February 24, 2016, we are awaiting final general rate case orders in five states, requesting additional annualized revenue of $123 million.

We are also awaiting approval of $5 million in additional annualized revenues for infrastructure charges.

Technology and Operational Efficiency – Continuing Improvement in O&M Efficiency Ratio for our Regulated Businesses

We continued to improve on our O&M efficiency ratio.

| | · | Safety. Our focus continues on driving safety in everything that we do. Our safety focus includes safety and health of our employees, customers and the public. |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| Loss on extinguishment of debt | — | | | | — | | | | | (41 | ) | | — | | | | — | | | | | 41 | | | | (100.0 | ) |

| | · | $49 million increase in our Market-Based Businesses primarily due to incremental costs in our Military Services Group and Homeowner Services Group corresponding with the increases in operating revenues discussed above; and |

In 2014, other expenses decreased by $47 million, or 13.8%, primarily due to the recognition of a pre-tax loss on debt extinguishment in 2013 of $41 million in connection with the cash tender offer for our 6.085% Senior Notes due 2017.

Also, contributing to the decrease was a reduction in interest expense resulting from interest savings as a result of our 2014 and 2013 refinancings.

Partially offsetting these decreases was a reduction in allowance for funds used during construction, which was mainly attributable to our Customer Information and Enterprise Asset Management systems being placed into service in 2013.

As of December 31, [removed: 2015,] [added: 2016,] a hypothetical increase of interest rates by 1% associated with our short-term borrowings would result in a [removed: $6] [added: $9] million [removed: decrease] [added: increase] in [removed: our pre-tax earnings.][added: short-term interest expense.]

The interest rate swap reduced interest expense by $2 million for the years ended December 31, [added: 2016,] 2015 and 2014.

[added: As the swap interest rates are fixed through] April [removed: 2016,] [added: 2017,] a hypothetical 1% increase in the interest rates associated with the interest [added: rate] swap agreement would result in a $1 million [removed: decrease on our pre-tax earnings] [added: increase in interest expense] for the year ended December 31, [removed: 2015.][added: 2016.]

Our risks associated with price increases for chemicals, electricity and other commodities are reduced through contractual arrangements and the expected ability to recover price increases through [removed: rates.][added: rates, in the next general rate case proceeding or other regulatory mechanism, as authorized by each regulatory jurisdiction.]

We are also exposed to a potential national economic recession or [removed: further] deterioration in local economic conditions in the markets in which we operate.

[removed: Therefore] [added: Therefore,] our ability to fully recover operating expense, recover our investment and provide an appropriate return on invested capital made in our Regulated Businesses may be adversely impacted.

The Company has four forward starting swap agreements with an aggregate notional amount of $300 million to reduce interest rate exposure on debt expected to be issued in 2017.

The forward starting swap agreements terminate in December 2017 and have an average fixed rate of 2.20%.

When entering into forward starting interest rate swaps, the Company is subject to market risk with respect to changes in the underlying benchmark interest rate that impacts the fair value of the forward starting interest rate swaps.

We manage market risk by matching terms of the swaps with the critical terms of the expected debt issuance.

The fair value of the forward starting swaps at December 31, 2016 was $27 million.

A hypothetical 1.00% adverse change in interest rates would result in a decrease in the fair value of our forward starting swaps of approximately $65 million at December 31, 2016.

As the swap interest rates are fixed through

[removed: Founded in] [added: With a history dating back to] 1886, American Water Works Company, Inc. [removed: (the “Company” or “American Water”)] is a holding company [added: originally] incorporated in [removed: Delaware.][added: Delaware in 1936.]

[added: Through its subsidiaries,] American Water is the largest and most geographically diverse [removed: investor owned] [added: investor-owned] publicly-traded [removed: United States] water and wastewater utility [removed: company,] [added: company in the United States,] as measured by both operating revenues and population served.

We employ approximately [removed: 6,700] [added: 6,800] professionals who provide drinking water, wastewater and other related services to an estimated 15 million people in 47 states, the District of Columbia and Ontario, Canada.

We conduct [added: the majority of] our business [removed: primarily] through [removed: our] [added: the] Regulated Businesses segment.

We also operate [removed: several] market-based businesses [removed: that provide a broad range of related and complementary water and wastewater services, which include] [added: within] four operating segments that individually do not meet the criteria of a reportable segment in accordance with generally accepted accounting principles in the United States (“GAAP”).

Our primary business involves the ownership of [removed: subsidiaries] [added: utilities] that provide water and wastewater [removed: utility] services to residential, commercial, industrial and other customers, including sale for resale and public authority customers.

Our [removed: subsidiaries] [added: Regulated Businesses] that provide these services operate in approximately 1,600 communities in 16 states in the United States and are generally subject to [added: economic] regulation by certain state [added: utility] commissions or other entities engaged in utility regulation, referred to as Public Utility Commissions [removed: or] (“PUCs”).

[removed: The] [added: Certain] federal and state governments also regulate environmental, health and safety, and water quality matters.

Our Regulated Businesses segment’s operating revenues were [removed: $2,743] [added: $2,871] million for [removed: 2015, $2,674] [added: 2016, $2,743] million for [removed: 2014] [added: 2015] and [removed: $2,594] [added: $2,674] million for [removed: 2013,] [added: 2014,] accounting for [removed: 86.8%, 88.8%] [added: 86.9%, 86.8%] and [removed: 90.1%,] [added: 88.8%,] respectively, of total operating revenues for the same periods.

The following table summarizes our Regulated Businesses’ operating revenues, number of customers and estimated population served by state, each as of [added: and for the year ended] December 31, [removed: 2015:][added: 2016:]

| | Operating Revenues (In millions) | | | | % of Total | | | | Number of Customers [added: (In thousands)] | | | | % of Total | | | | Estimated Population Served (In millions) | | | | % of Total | | |

| | [removed: (c)] [added: (a)] | Includes data from our utilities in the following states: Georgia, Hawaii, Iowa, Kentucky, Maryland, Michigan, New York, Tennessee and Virginia. |

We are dependent on [removed: a] defined [removed: source] [added: sources] of water supply and obtain our water supply from surface water sources such as reservoirs, lakes, rivers and streams; from ground water sources, such as [removed: wells;] [added: wells] and [added: aquifers; and] water purchased from third party water suppliers.

The following chart depicts the sources of water supply as of December 31, [removed: 2015:][added: 2016:]

[removed: ][added: ]

The percentages of [removed: finished] water supply by source type for our top seven states based on our Regulated Businesses operating revenues for [removed: 2015] [added: 2016] were as follows:

| Pennsylvania | | [removed: 92] [added: 91] | % | | | 7 | % | | | [removed: 1] [added: 2] | % |

| Illinois | | [removed: 52] [added: 53] | % | | | [removed: 37] [added: 36] | % | | | 11 | % |

| Indiana | | [removed: 43] [added: 44] | % | | | [removed: 56] [added: 55] | % | | | 1 | % |

| California | — | | | | | [removed: 65] [added: 66] | % | | | [removed: 35] [added: 34] | % |

| West Virginia | | [removed: 100] [added: 99] | % | | — | | | | [removed: —] | [added: 1] | [added: %] |

The Water Supply Project [removed: involves] [added: includes] the construction of a desalination plant, owned by California-American Water Company, our wholly owned subsidiary (“Cal Am”), which includes the construction of wells that would supply water to the desalination plant.

The Water Supply Project is intended, among other things, to fulfill obligations of Cal Am to eliminate unauthorized diversions from the Carmel River as required under orders of the California State Water Resources Control [removed: Board.][added: Board (the “SWRCB”).]

The solid waste by-product of the treatment process is disposed [removed: of,] [added: of] or [removed: recycled,] [added: recycled] in accordance with applicable standards and regulations.

The operations of our Regulated Businesses are generally subject to regulation and oversight by [removed: the PUCs in each of the states served by our utilities,] [added: their respective state PUCs,] with the primary responsibility of the PUCs to promote the overall public interest by balancing the interest of customers and utility investors.

The timing of rate case filings [removed: are] [added: is] typically determined by either periodic requirements in the regulatory jurisdiction or by the utility’s need to increase its revenue requirement to recover capital investment costs, changes in operating revenues, operating costs or other market conditions.

The program attempts to minimize the delay, or “regulatory lag” between the time our Regulated Businesses make a capital investment or incur an operating expense [removed: increase] [added: increase,] and the time when those costs are reflected in rates.

The management team at each of our utilities [removed: understands] [added: accounts for] the time required for the regulatory [removed: process] [added: process,] and files rate cases with the goal of obtaining rates that reflect as closely as possible the cost of providing service at the time the rates become effective.

| Infrastructure replacement surcharges | | Allows rates to change periodically, outside a general rate proceeding, to reflect recovery of investments made to replace infrastructure necessary to sustain safe, reliable and affordable services for our customer. [added: These mechanisms typically involve an upfront review of overall multi-year investment plans as well as periodic filings and reviews to ensure transparency.] | | IL, IN, MO, NJ, NY, PA, [removed: TN] [added: TN, WV] |

| Future test year | | A test period used for setting rates, [removed: which extends beyond] [added: that begins with] the date [removed: a rate request is filed.] [added: new rates are effective.] This allows current or projected revenues, expenses and investments to be collected on a more timely basis. | | CA, HI, IL, IN, KY, NY, PA, TN, VA |

| Hybrid test year | | Allows an update to historical data for “known and measurable” changes that occur subsequent to the historical test year. | | [added: IA, MD,] MO, [removed: NJ] [added: NJ, WV] |

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

We pursue or seek enhancement to these regulatory practices [removed: as part of our rate case management program] to facilitate efficient recovery of our costs and investments, in order to provide safe, reliable and affordable services to our customers.

A customer is a person, corporation, municipality or any other entity that purchases our water or wastewater [removed: system] [added: services] as of the last business day of a reporting period.

In [removed: 2015,] [added: 2016,] residential customers accounted for 91.1% of our customer base, [removed: 59.2%] [added: 59.0%] of the billed water sales and [removed: 56.0%] [added: 55.5%] of the operating revenues of our Regulated Businesses.

| | [removed: 2015] [added: 2016] | | | | | | | | [removed: 2014] [added: 2015] | | | | | | | | [removed: 2013] [added: 2014] | | | | | | |

| [added: (In thousands)] | Water | | | | Wastewater | | | | Water | | | | Wastewater | | | | Water | | | | Wastewater | | |

| | [removed: ·] [added: •] | adding new customers to our regulated customer base by acquiring water and/or wastewater utility systems; |

| | [removed: ·] [added: •] | organic population growth or decline in our authorized service areas; and |

| | [removed: ·] [added: •] | the sale of water to other community water systems. |

We also operate several market-based businesses that provide a broad range of related and complementary water and wastewater services.

Throughout this Annual Report on Form 10-K, unless the context otherwise requires, references to “we,” “us,” “our,” the “Company,” and “American Water” mean American Water Works Company, Inc. and its subsidiaries, taken together as a whole.

The largest component of the Company’s business includes rate regulated subsidiaries that provide water and wastewater services to customers in 16 states, collectively presented as our “Regulated Businesses”.

| New Jersey | $ | 730 | | | | 25.4 | % | | | 671 | | | | 20.3 | % | | | 2.7 | | | | 22.1 | % |

| Pennsylvania | | 639 | | | | 22.3 | % | | | 709 | | | | 21.4 | % | | | 2.3 | | | | 18.8 | % |

| Missouri | | 288 | | | | 10.0 | % | | | 476 | | | | 14.4 | % | | | 1.5 | | | | 12.3 | % |

| Illinois | | 275 | | | | 9.6 | % | | | 315 | | | | 9.5 | % | | | 1.3 | | | | 10.7 | % |

| Indiana | | 212 | | | | 7.4 | % | | | 300 | | | | 9.1 | % | | | 1.3 | | | | 10.7 | % |

| California | | 211 | | | | 7.4 | % | | | 176 | | | | 5.3 | % | | | 0.7 | | | | 5.7 | % |

| West Virginia | | 142 | | | | 4.9 | % | | | 169 | | | | 5.1 | % | | | 0.5 | | | | 4.1 | % |

| Subtotal (Top Seven States) | | 2,497 | | | | 87.0 | % | | | 2,816 | | | | 85.0 | % | | | 10.3 | | | | 84.4 | % |

| Other (a) | | 374 | | | | 13.0 | % | | | 496 | | | | 15.0 | % | | | 1.9 | | | | 15.6 | % |

| Total Regulated Businesses | $ | 2,871 | | | | 100.0 | % | | | 3,312 | | | | 100.0 | % | | | 12.2 | | | | 100.0 | % |

The level of treatment we apply to the water varies significantly depending upon the quality of the water source and customer stipulations.

Surface water sources typically generally require significant treatment, while groundwater sources require chemical treatment only.

In

addition, the Water Supply Project also includes Cal Am’s purchase of water from a groundwater replenishment project (the “GWR Project”) between the Monterey Regional Water Pollution Control Agency (“MRWPCA”) and the Monterey Peninsula Water Management District (“MPWMD”).

Our Regulated Businesses operate under a regulatory compact whereby, in exchange for exclusive rights to provide water and wastewater services in defined service territories, we have an obligation to serve customers within those territories requesting service, within reasonable limits.

In return for agreeing to invest capital into our water and wastewater systems, we are given the opportunity to recover our costs of doing business and earn a reasonable rate of return on our investments.

| Residential | | 2,846 | | | | 171 | | | | 2,829 | | | | 133 | | | | 2,814 | | | | 118 | |

| Commercial | | 220 | | | | 10 | | | | 219 | | | | 8 | | | | 218 | | | | 6 | |

| Industrial | | 4 | | | — | | | | | 4 | | | — | | | | | 4 | | | — | | |

| Public & other | | 61 | | | — | | | | | 60 | | | — | | | | | 59 | | | — | | |

| Total | | 3,131 | | | | 181 | | | | 3,112 | | | | 141 | | | | 3,095 | | | | 124 | |

For more information, see Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—2016 Strategic Focus & Achievements—Growth.

These customers are not subject to economic regulation by state PUCs and do not require significant capital investment.

Included within the Market-Based Businesses segment results is operating revenues attributed to Canadian operations of $6 million, $6 million, and $7 million for the years ended December 31, 2016, 2015 and 2014, respectively.

The scope of the contracts includes O&M of the water and wastewater systems on the bases and a capital program.

The replacement of assets assumed when a contract is awarded to the Company is funded from the contract fee.

At times, new assets are required to support the base’s mission.

Construction of new assets are funded by the U.S. DoD as additional work under the contract.

The capital program does not use the Company’s equity or debt borrowings; however, some working capital is used to fund work-in-process until paid by the U.S. DoD.

Terms of these partnership agreements are typically three to five years in length, with optional renewals.

Keystone operates under master service agreements that generally range from two to five years.

When the initial term of these agreements expire, they typically renew automatically on an annual basis and generally are cancelable by either party with 30 days prior notice.

The United States water and wastewater industries include investor-owned systems as well as municipal systems that are owned and operated by local governments or governmental subdivisions.

Both industries are highly fragmented.

The U.S. Environmental Protection Agency (the “EPA”) estimates that approximately 84% of the United States water market is served by municipal systems and approximately 98% of the country’s wastewater systems are government owned.

According to the EPA, there are approximately 50,000 community water systems and approximately 20,000 community wastewater systems in the United States.

Over half of the community water systems are very small, serving a population of 500 or less.

| New Jersey | $ | 704 | | | | 25.7 | % | | | 660,580 | | | | 20.3 | % | | | 2.7 | | | | 22.3 | % |

| Pennsylvania | | 614 | | | | 22.4 | % | | | 672,407 | | | | 20.7 | % | | | 2.3 | | | | 19.0 | % |

| Illinois (a) | | 270 | | | | 9.8 | % | | | 313,058 | | | | 9.6 | % | | | 1.3 | | | | 10.7 | % |

| Missouri | | 269 | | | | 9.8 | % | | | 473,245 | | | | 14.5 | % | | | 1.5 | | | | 12.4 | % |

| Indiana | | 206 | | | | 7.5 | % | | | 295,994 | | | | 9.1 | % | | | 1.3 | | | | 10.7 | % |

| California | | 198 | | | | 7.2 | % | | | 174,942 | | | | 5.4 | % | | | 0.6 | | | | 5.0 | % |

| West Virginia (b) | | 129 | | | | 4.7 | % | | | 169,037 | | | | 5.2 | % | | | 0.6 | | | | 5.0 | % |

| Subtotal (Top Seven States) | | 2,390 | | | | 87.1 | % | | | 2,759,263 | | | | 84.8 | % | | | 10.3 | | | | 85.1 | % |

| Other (c) | | 353 | | | | 12.9 | % | | | 493,428 | | | | 15.2 | % | | | 1.8 | | | | 14.9 | % |

| Total Regulated Businesses | $ | 2,743 | | | | 100.0 | % | | | 3,252,691 | | | | 100.0 | % | | | 12.1 | | | | 100.0 | % |

| | (a) | Includes Illinois-American Water Company and American Lake Water Company. |

| --- | --- | --- |

| | (b) | Includes West Virginia-American Water Company and its subsidiary Bluefield Valley Water Works Company. |

| Residential | | 2,829,170 | | | | 132,870 | | | | 2,813,715 | | | | 117,602 | | | | 2,813,601 | | | | 117,584 | |

| Commercial | | 218,798 | | | | 7,308 | | | | 218,314 | | | | 6,221 | | | | 219,510 | | | | 6,287 | |

| Industrial | | 3,765 | | | | 17 | | | | 3,793 | | | | 17 | | | | 3,822 | | | | 16 | |

| Public & other | | 60,421 | | | | 342 | | | | 59,249 | | | | 281 | | | | 58,420 | | | | 259 | |

| Total | | 3,112,154 | | | | 140,537 | | | | 3,095,071 | | | | 124,121 | | | | 3,095,353 | | | | 124,146 | |

We will also selectively seek acquisitions that allow us to acquire multiple water and wastewater utility systems in our existing and new markets.

In November 2014, we disposed of our Class B Biosolids operating segment by selling our subsidiary, Terratec Environmental Ltd (“Terratec”), which provided biosolids management, transport and disposal services to municipal and industrial customers in Ontario, Canada.

The results of Terratec are presented as discontinued operations and, as such, have been excluded from continuing operations and operating segment results for all periods presented.

See Note 3—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional details on our discontinued operations.

In 2007, the U.S. Environmental Protection Agency (the “EPA”) estimated that approximately $390.0 billion of capital spending would be necessary over the then next 20 years to replace aging infrastructure and ensure quality wastewater systems across the United States.

Further, certain of our water systems have recently completed the process of monitoring for 28 additional contaminants that are not currently regulated to help the EPA determine if any of them occur at high enough levels to warrant being regulated.

In 2012, the EPA finalized revisions to the Total Coliform Rule that were part of the mandate of a Federal Advisory Committee appointed to negotiate the changes.

Most of the anticipated changes to the rule will be effective in April 2016.

We are in compliance with this new standard.

We have complied with EPA regulations concerning vulnerability assessments and have made filings to the EPA as required.

During 2016, 32 of our local union contracts will expire.

On October 13, 2014, we entered into a settlement agreement with the Utility Workers Union of America (“UWUA”) designed to resolve a dispute between our company and the labor unions representing employees in the Regulated Businesses (the “Unions”).

Among other things, the settlement agreement provides for a new 2014-2018 National Benefits Agreement that will be in effect generally until July 31, 2018.

In addition, we agreed to make a $10 million lump-sum payment, to be distributed in accordance with procedures set forth in the settlement agreement.

The Unions approved the settlement agreement on October 30, 2014, and the National Labor Relations Board (the “NLRB”) approved the settlement agreement on October 31, 2014.

We, the NLRB and the UWUA filed a joint stipulation to dismiss the petition for review.

The Seventh Circuit voluntarily dismissed all the parties' appeals on December 16, 2014.

In 2015, the NLRB dismissed the unfair labor practice charge pending on the national benefits dispute upon receipt of our $10 million lump-sum payment.

The majority of the distributions were used to reimburse active employees for medical claims, which were incurred during the relevant period and were funded by the Group Insurance Plan for Active Employees of American Water Works Company, Inc. and Its Designated Subsidiaries and Affiliates, to which we previously made contributions.

| Sharon Cameron | | 59 | | President of American Water Enterprises. Ms. Cameron has been President of American Water Enterprises since September 2010 and served as President of Homeowner Services since 2002. Prior to joining American Water, Ms. Cameron was Principal of Marketing Solutions, a marketing consulting firm she launched in 1998. |

| Mark Chesla | | 56 | | Vice President and Controller. Mr. Chesla has been our Vice President and Controller since November 2007. From 2001 to November 2007, Mr. Chesla was Vice President and Controller of Oglethorpe Power Corporation, in Atlanta, Georgia, where he served as that company’s chief accounting officer. In this capacity, he was responsible for all aspects of the accounting, internal financial management, regulatory and SEC reporting functions. Mr. Chesla was Vice President, Administration/Controller of SouthStar Energy Services LLC, in Atlanta, Georgia, from 1998 to 2001. Earlier, he held management positions with several other companies, including Piedmont Natural Gas Co., Inc., Aegis Technologies, Inc., Deloitte & Touche LLP and Carolina Power & Light Company. |

You may also obtain a copy of any of these reports directly from the SEC.

[removed: In response] [added: The 2009 Order responded] to claims that Cal Am had not [removed: diligently pursued establishing an alternative water supply as required by the 1995 Order, the State Water Resources Control Board adopted the 2009 Order, finding that Cal Am had not] sufficiently implemented actions to terminate its unpermitted diversions [added: of water] from the Carmel River as required by [removed: the] [added: a] 1995 [removed: Order.][added: SWRCB order.]

[removed: The] [added: Under the] 2009 [removed: Order requires,] [added: Order, Cal Am is required,] among other things, [removed: that Cal Am significantly] [added: to] decrease [added: significantly] its yearly diversions [added: of water] from the Carmel River according to a set reduction [removed: schedule through December 31, 2016, at which point all unpermitted diversions must end.][added: schedule.]

[removed: In December 2010, the CPUC approved the] [added: The] Regional Desalination Project (the [removed: “RDP”), involving] [added: “RDP”) involved] the construction of a desalination facility in the City of Marina, north of Monterey.

[removed: The RDP] [added: In December 2010, the CPUC approved the RDP, which] was to be implemented through a Water Purchase Agreement and ancillary agreements (collectively, the “Agreements”) among the Marina Coast Water District (“MCWD”), the [removed: Monterey County Water Resources Agency (“MCWRA”)] [added: MCWRA] and Cal Am.

The RDP was intended [removed: to] [added: to, among other things,] eliminate unauthorized diversions from the Carmel River as required under the [removed: 1995 Order and the] 2009 [removed: Order, in addition to other obligations.][added: Order.]

In [removed: July] 2011, [added: due to a conflict of interest concerning a former member of the MCWRA’s Board of Directors,] MCWRA [removed: advised MCWD and Cal Am] [added: stated] that the Agreements were [removed: void] [added: void, and,] as a [removed: result of the conduct of] [added: result, Cal Am terminated] the [removed: Former Director.][added: Agreements.]

In October 2012, Cal Am filed a Complaint for Declaratory Relief [removed: (the “2012 Complaint for Declaratory Relief”) in the Monterey County Superior Court (subsequently] [added: against MCWRA and MCWD which was ultimately] transferred to the San Francisco County Superior [removed: Court) against MCWRA and MCWD,] [added: Court,] seeking a determination [removed: by the court] as to whether the Agreements are void as a result of the [removed: Former Director’s] alleged conflict of [removed: interest, or remained valid.][added: interest.]

[removed: On] [added: In] June [removed: 1,] 2015, the court entered [removed: its] [added: a] final judgment [removed: declaring] [added: agreeing with Cal Am’s position] that four of the five Agreements are [removed: void] [added: void,] and one, the credit line agreement, is not [removed: void (the “Void Judgment”).][added: void.]

[removed: On] [added: In] July [removed: 1,] 2015, Cal Am and MCWRA filed a [removed: Complaint, subsequently amended on July 17, 2015 (the “Cal Am Complaint”)] [added: Complaint] in San Francisco County Superior [removed: Court,] [added: Court] against MCWD and RMC Water and Environment, a private engineering consulting firm (“RMC”), seeking to recover [removed: compensatory, consequential and incidental] [added: compensatory] damages [added: in excess of $10 million] associated with the failure of the RDP, [removed: which have been alleged in the Cal Am Complaint to be in excess of $10.0 million,] as well as punitive and treble damages, statutory penalties and attorneys’ fees.

The Water Supply Project [added: is intended to reduce water diversions from the Carmel River and] involves construction of a desalination plant, owned by Cal Am, [removed: intended to reduce] [added: and purchase of] water [removed: diversions] [added: by Cal Am] from the [removed: Carmel River.][added: GWR Project.]

A preliminary step to building the Water Supply Project desalination plant is the construction and operation of a test slant [removed: well, as] well [removed: as monitoring well clusters,] to confirm the suitability of the property on which [removed: permanent] intake wells will be located to draw water from under Monterey Bay.

In November 2014, the [added: California] Coastal Commission [added: (the “Coastal Commission”)] approved [removed: a] coastal development [removed: permit] [added: permits] for the test slant [removed: well on the Cemex property and a second coastal development permit,] [added: well,] enabling Cal Am to construct the portion [removed: of the test slant well] that will be under state lands (beneath the ocean [removed: floor), provided that Cal Am acquires a lease from the California State Lands Commission (the “State Lands Commission”), which owns the state lands.][added: floor).]

[removed: The] [added: In January 2015, Cal Am obtained from the California] State Lands Commission [removed: executed the] [added: (the “State Lands Commission”) a] required lease [removed: on January 22, 2015.][added: as to the state lands.]

[removed: On] [added: In] October [removed: 6,] 2015, the Coastal Commission approved an amendment to Cal Am’s [removed: permits to operate the test slant well on the Cemex property.][added: coastal development permits.]

In December 2014, [removed: each of] [added: the] MCWD and the Ag Land Trust, an agricultural land conservancy, filed petitions [removed: (collectively, the “Test Slant Well Petitions”)] against the Coastal Commission and Cal Am, which were ultimately transferred to the [removed: jurisdiction of the] Santa Cruz County Superior [removed: Court.][added: Court, seeking to vacate the Coastal Commission’s approval of the coastal development permit and to permanently restrain Cal Am and the Coastal Commission from constructing the test slant well pending full compliance with the California Environmental Quality Act and the California Coastal Act.]

[removed: On January 15,] [added: In November] 2015, MCWD filed a Petition for Writ of Mandate and Complaint for Declaratory and Injunctive Relief in Santa Cruz County Superior Court against the [removed: State Lands] [added: Coastal] Commission and Cal Am [removed: (the “January 2015 Petition”),] [added: challenging the amendment of the coastal development permits and] seeking [removed: relief similar to that sought in its Test Slant Well Petition.][added: an injunction against further test well pumping.]

This [removed: proceeding remains] [added: lawsuit is] pending.

[removed: In addition to the foregoing matters,] Cal Am’s ability to move forward on the Water Supply Project is subject to extensive administrative review by the [removed: CPUC, review by] [added: CPUC and] other government [removed: agencies of] [added: agencies, obtaining] necessary [removed: permit applications,] [added: permits,] and intervention from other [removed: parties, including some that are not participants in the WSP Settlement.][added: parties.]

Based on the foregoing, Cal Am estimates that the earliest date by which the Water Supply Project desalination plant could be completed is sometime in [removed: 2018.][added: 2019.]

[removed: There] [added: Furthermore, there] can be no assurance that [removed: the deadline will be extended or that] Cal Am will be able to comply with the diversion reduction requirements and other remaining requirements under the 2009 Order [added: and the 2016 Order,] or that any such compliance will not result in material additional costs or obligations to [removed: us.][added: Cal Am or the Company.]

After having been alerted to the leak of MCHM by the West Virginia Department of Environmental [removed: Protection (“DEP”),] [added: Protection,] WVAWC took immediate steps to gather more information about MCHM, augment its treatment process as a precaution, and begin consultations with federal, state and local public health officials.

[removed: To date, there are 68 pending cases] [added: Following the Freedom Industries chemical spill, numerous lawsuits were filed] against WVAWC [added: and certain other Company-affiliated entities (collectively, the “American Water Defendants”)] with respect to this matter in the [removed: United States] [added: U.S.] District Court for the Southern District of West Virginia or West Virginia Circuit Courts in Kanawha, Boone and Putnam [removed: counties.][added: counties, and to date, 73 cases remain pending.]

On January 28, 2016, all of the [added: then-filed] state court cases were referred to West Virginia’s Mass Litigation Panel for further [removed: proceedings.][added: proceedings, which have been stayed pending the negotiation by the parties and approval by the court in the Federal action of a global agreement to settle all of such cases, as described below.]

Additionally, investigations with respect to the matter have been initiated by the [added: U.S.] Chemical Safety [removed: Board,] [added: and Hazard Investigation Board (the “CSB”),] the U.S. Attorney’s Office for the Southern District of West Virginia, the West Virginia Attorney General, and the Public Service Commission of West Virginia (the “PSC”).

[removed: On] [added: In] May [removed: 21,] 2014, the PSC issued an Order initiating a General Investigation into certain matters relating to WVAWC's response to the Freedom Industries [added: chemical] spill.

Three parties [removed: 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.

The [removed: Company, WVAWC and the other Company-affiliated entities named in any of the lawsuits] [added: American Water Defendants] believe that WVAWC has responded appropriately to, [removed: and] [added: and, other than through the Settlement,] has no responsibility for, the Freedom Industries [removed: spill and the Company, WVAWC] [added: chemical spill,] and [removed: other Company-affiliated entities named in any of] [added: that] the [removed: lawsuits] [added: American Water Defendants] have valid, meritorious defenses to the lawsuits.

Nevertheless, [removed: an adverse] [added: WVAWC and the Company are unable to predict the] outcome [removed: in one] [added: of any lawsuit against the American Water Defendants brought] or [removed: more] [added: maintained by a claimant that elects to opt out] of the [removed: lawsuits] [added: Settlement, and any such outcome or outcomes] could have a material adverse effect on the Company's financial condition, results of operations, cash flows, liquidity and reputation.

[removed: Moreover,] WVAWC and the Company are unable to predict the outcome of [removed: these lawsuits,] the ongoing government investigations or any legislative initiatives that might affect [added: WVAWC’s] water utility operations.

[removed: We do] [added: Other than those proceedings described in this Item 3—Legal Proceedings, the Company does] not believe that the ultimate resolution of these matters will materially affect [removed: the Company’s] [added: its] financial position or results of operations.

It is possible that some litigation and other proceedings could be decided unfavorably to [removed: us,] [added: the Company,] and that any such unfavorable decisions could have a material adverse effect on [removed: the Company’s] [added: its] business, financial condition, results of operations, and cash flows.

On July 19, 2016, at the request of Cal Am and several Monterey County government agencies, the SWRCB issued an order (the “2016 Order”) approving a five-year extension of the deadline to comply with the 2009 Order, to December 31, 2021.

On November 29, 2016, the Water Ratepayers Association of the Monterey Peninsula, a citizens’ advocacy group, filed an action in Sacramento County Superior Court against the SWRCB and its board members, and naming Cal Am as the real party in interest, seeking to reverse the extension of the 2009 Order, to rescind the designation by the California Public Utilities Commission (the “CPUC”) of Cal Am as the public utility water provider to the Monterey Peninsula, and to appoint a receiver to oversee Cal Am’s compliance with the 2009 Order, with ultimate transfer to a public entity.

Regional Desalination Project Litigation

In April 2015, the CPUC approved a settlement agreement among Cal Am, MCWRA and the County of Monterey to resolve these matters among the parties signing the agreement.

On March 23, 2016, the Supreme Court of California granted MCWD’s petition for review of the CPUC approval.

Action on the petition has been deferred pending consideration and disposition of a related issue in another case.

On November 10, 2016, the Supreme Court of California denied MCWD’s final appeal of this judgment, which allows further proceedings to determine the amount of damages that may be awarded in the proceeding.

Shortly thereafter, complaints seeking similar damages were filed in the same court by MCWD and RMC against Cal Am and MCWRA in excess of $19 million in the aggregate.

In December 2015, the court consolidated all of these complaints into a single action, which remains pending.

Monterey Peninsula Water Supply Project

On March 17, 2016, the CPUC’s Energy Division issued a notice of further schedule delays for the Water Supply Project’s environmental review, with environmental certification currently scheduled for completion in November 2017.

On January 12, 2017, the CPUC issued a Draft Environmental Impact Report/Environmental Impact Statement.

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

If construction costs exceed $50 million, Cal Am would be allowed to seek additional cost recovery.

The court denied these petitions, and on January 11, 2017, the Supreme Court of California denied MCWD’s petition for review of this decision.

MCWD filed a similar petition in January 2015 against the State Lands Commission and Cal Am, which remains pending.

On September 15, 2016, the court denied MCWD’s petition with respect to all claims, except claims related to those raised in the December 2014 petitions discussed above.

Background

By January 18, 2014, none of WVAWC’s customers were subject to the Do Not Use order.

Four of the cases pending before the U.S. district court were consolidated for purposes of discovery, and an amended consolidated class action complaint for those cases (the “Federal action”) was filed in December 2014 by several plaintiffs.

On July 7, 2016, the court in the Federal action scheduled trial to begin on October 25, 2016, but the court delayed the start of the trial pending ongoing settlement negotiations between the parties and has since granted a continuance of the trial until March 21, 2017.

The Mass Litigation Panel has also stayed its proceedings until May 1, 2017.

WVAWC Binding Global Agreement in Principle to Settle Claims

On October 31, 2016, the court in the Federal action approved the preliminary binding principles, terms and conditions of the Settlement among the American Water Defendants, and all class members, putative class members, claimants and potential claimants (collectively, the “Plaintiffs”), arising out of the Freedom Industries chemical spill.

The terms of the Settlement propose a global federal and state resolution of all litigation and potential claims against the American Water Defendants and their insurers.

A claimant may elect to opt out of any final settlement agreement, in which case such claimant will not receive any benefit from or be bound by the terms of the Settlement.

Under the terms and conditions of the Settlement and any subsequent final settlement agreement, the American Water Defendants have not admitted, and will not admit, any fault or liability for any of the allegations made by the Plaintiffs in any of the actions to be resolved.

The proposed aggregate pre-tax amount of the Settlement is $126 million, of which $65 million would be contributed by WVAWC, and the remainder would be contributed by certain of the Company’s general liability insurance carriers.

The Company has general liability insurance under a series of policies underwritten by a number of individual carriers.

Two of these insurance carriers, which provide an aggregate of $50 million in insurance coverage to the Company under these policies, were requested, but presently have not agreed, to participate in the Settlement.

The Company and WVAWC are vigorously pursuing their rights to insurance coverage from these non-participating carriers for any contributions by WVAWC to the Settlement.

In this regard, WVAWC filed a lawsuit against one of these carriers alleging that the carrier’s failure to agree to participate in the Settlement constitutes a breach of contract, and the Company is pursuing mandatory arbitration against the other non-participating carrier.

Despite these efforts, the Company may not ultimately be successful in obtaining full or further reimbursement under these insurance policies for amounts that WVAWC may be required to contribute to the Settlement.

The preliminary terms of the Settlement intend to establish a two-tier settlement fund for the payment of claims, comprised of (i) a simple claim fund, which is also referred to as the “guaranteed fund,” of $76 million, of which $51 million will be contributed by WVAWC, including insurance deductibles, and $25 million would be contributed by one of the Company’s general liability insurance carriers, and (ii) an individual review claim fund of up to $50 million, of which up to $14 million would be contributed by WVAWC and $36 million would be contributed by a number of the Company’s general liability insurance carriers.

Separately, up to $25 million would be contributed to the guaranteed fund by another defendant to the Settlement.

As a result of these events, the Company recorded a charge to earnings, net of insurance receivables, of $65 million ($39 million after-tax) in the third quarter of 2016.

The Company intends to fund WVAWC’s contributions to the Settlement through existing sources of liquidity, although no contribution by WVAWC will be required unless and until the terms of the Settlement are finally approved by the court in the Federal action.

Furthermore, under the terms of the Settlement, WVAWC has agreed that it will not seek rate recovery from the Public Service Commission of West Virginia for approximately $4 million in direct response costs expensed in 2014 by WVAWC relating to the Freedom Industries chemical spill as well as for amounts paid by WVAWC under the Settlement.

The Company’s insurance policies operate under a layered structure where coverage is generally provided in the upper layers after claims have exhausted lower layers of coverage.

The $36 million to be contributed by a number of the Company’s general liability insurance carriers to the individual review claim fund, as noted above, is from higher layers of the insurance structure than the two insurance carriers that were requested, but presently have not agreed, to participate in the Settlement.

In 1995, the California State Water Resources Control Board issued an administrative order (the “1995 Order”) requiring Cal Am to implement an alternative water supply in lieu of diversions from the Carmel River.

Failure to effect the decrease in diversions mandated by the 2009 Order could result in substantial penalties.

The RDP was subject to delay due to, among other things, funding delays and investigations and inquiries initiated by public authorities relating to an alleged conflict of interest concerning a former member of the MCWRA Board of Directors (the “Former Director”).

On September 28, 2011, Cal Am terminated the Agreements as a result of MCWRA’s anticipatory repudiation of the Agreements by stating they were void.

Following unsuccessful mediation efforts, Cal Am publicly announced that it had withdrawn support of the RDP.

In July 2012, the CPUC closed the proceedings relating to the RDP and stated that it would examine the recoverability of costs related to the RDP in other proceedings.

In December 2012, Cal Am, MCWRA and the County of Monterey entered into a settlement agreement under which Cal Am will forgive approximately $1.9 million loaned by Cal Am under the Agreements, and Cal Am will make additional payments of up to approximately $1.5 million to MCWRA.

On April 15, 2015, the CPUC issued a final decision approving, in part, the settlement agreement by authorizing Cal Am’s recovery of $1.9 million of costs advanced to MCWRA.

The CPUC denied without prejudice the recovery of approximately $765 thousand due to insufficient information for the CPUC to determine the reasonableness of such amount.

Cal Am may file another application for recovery at a future date.

On April 17, 2015, MCWD filed an application with the CPUC for a rehearing of the settlement approval, which was denied on October 22, 2015.

On November 20, 2015, MCWD filed with the California Supreme Court a petition for writ of review of the CPUC approval and the order denying MCWD’s rehearing application.

On June 30, 2015, MCWD filed its notice of appeal of the Void Judgment.

The court awarded Cal Am approximately $1.4 million in costs and attorneys’ fees in connection with the 2012 Complaint for Declaratory Relief.

Appeals of these awards remain pending.

On July 30, 2015, MCWD filed a Complaint (the “MCWD 2015 Complaint”) in San Francisco County Superior Court against Cal Am, MCWRA and certain unidentified individual defendants.

MCWD is seeking to recover compensatory damages associated with the failure of the RDP in an amount to be proven at trial, which have been alleged in the MCWD 2015 Complaint to be at least $18.0 million, as well as exemplary damages and attorneys’ fees.

On August 12, 2015, RMC filed a Complaint for Damages (the “RMC Complaint,” and, together with the Cal Am Complaint and the MCWD 2015 Complaint, collectively, the “Damages Actions”) in San Francisco County Superior Court against Cal Am and MCWRA seeking to recover damages associated with the failure of the RDP of at least $697 thousand, plus an unspecified amount of punitive damages against Cal Am.

On December 16, 2015, the court issued an order granting a motion by RMC to consolidate the Damages Actions and a motion by MCWD to stay the Damages Actions pending the resolution of the appeal of the Void Judgment.

In April 2012, Cal Am filed an application with the CPUC for approval of the Monterey Peninsula Water Supply Project (the “Water Supply Project”).

In addition, the Water Supply Project may include Cal Am’s purchase of water from a groundwater replenishment project (the “GWR Project”) between the Monterey Regional Water Pollution Control Agency (“MRWPCA”) and the Monterey Peninsula Water Management District (“MPWMD”).

The desalination plant size is expected to vary depending on whether the GWR Project is included.

Without the GWR Project included, a 9.6 million gallon per day (“mgd”) plant size is proposed, and with the GWR Project included, a 6.4 mgd plant size is proposed.

The Water Supply Project also would involve aquifer storage and recovery through an existing aquifer storage and recovery program between Cal Am and the MPWMD.

In July 2013, Cal Am entered into a settlement agreement with 15 other parties that have intervened in the CPUC proceedings with respect to the Water Supply Project, including several Monterey County government entities, the Office of Ratepayer Advocates of the CPUC and several interest groups (the “WSP Settlement”).

Under the WSP Settlement, the parties have agreed on several matters relating to the Water Supply Project.

The WSP Settlement is subject to the pending approval of the CPUC.

The site of the test slant well is on a property owned by one or more affiliates of Cemex, Inc. (collectively, “Cemex”).

Cal Am and Cemex have entered into an agreement under which Cal Am acquired a temporary investigative easement to construct and operate the test slant well and a four year option to purchase a permanent easement for construction and operation of slant wells and related pipelines for the Water Supply Project on portions of the Cemex property when the final configuration of the new wells are approved by the California Coastal Commission (the “Coastal Commission”).

These petitions sought, among other things, a peremptory writ of mandate commanding the Coastal Commission to vacate its decision to approve the coastal development permit relating to the Cemex property, and a permanent injunction restraining Cal Am and the Coastal Commission from taking any action to implement the test slant well project, pending full compliance with the California Environmental Quality Act (“CEQA”) and the California Coastal Act (the “Coastal Act”).

After a trial on the merits, the court denied the Test Slant Well Petitions in their entirety.

MCWD has appealed this decision, which appeal remains pending.

On October 1, 2015, pursuant to a stipulation among the parties, the court entered an order staying a hearing on the January 2015 Petition until the appeal regarding the denial of MCWD’s Test Slant Well Petition is resolved.

On November 5, 2015, MCWD filed a Petition for Writ of Mandate and Complaint for Declaratory and Injunctive Relief against the Coastal Commission and Cal Am challenging the October 6, 2015 amendment by the Coastal Commission of the permits to operate the test slant well and seeking the issuance of an injunction against further test well pumping until this petition is resolved.

On August 19, 2015, the statutory deadline for resolving the application related to the Water Supply Project was extended to December 31, 2016 and a procedural schedule was subsequently approved calling for evidentiary hearings to be held in April 2016, with CPUC action on the GWR Project anticipated to occur as early as August 2016.

On January 22, 2016, Cal Am submitted testimony that it had reached substantial completion of a water purchase agreement with MRWPCA and MPWMD for the GWR Project, which if approved by the CPUC would result in the smaller plant size of 6.4 mgd.

The projected completion date of the Water Supply Project is beyond the December 31, 2016 deadline for Cal Am to terminate unpermitted diversions from the Carmel River, and Cal Am does not expect to have sufficient other alternative sources of water available by the December 31, 2016 deadline.

As a result, on November 20, 2015, Cal Am, along with several Monterey County government agencies, filed an application with the State Water Resources Control Board to modify the 2009 Order to extend the deadline for compliance to December 31, 2020.

While Cal Am believes that its discussions with the State Water Resources Control Board staff have been constructive, there can be no assurance that the deadline will be extended.

Overflow of Diesel Fuel Tank

10-K 1 [removed: awk-10k_20151231.htm 10-K][added: awk-10k_20161231.htm AWK-10K-20161231]

| [removed: x] [added: ☒] | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |

For the fiscal year ended December 31, [removed: 2015][added: 2016]

| [removed: ¨] [added: ☐] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |

Yes [removed: x] [added: ☒] No [removed: ¨][added: ☐]

Yes [removed: ¨] [added: ☐] No [removed: x][added: ☒]

See the definitions of “large accelerated filer,” “accelerated filer” and “small reporting company” in Rule [removed: 12(b)-2] [added: 12b-2] of the Exchange Act.:

| Large accelerated filer | | [removed: x] [added: ☒] | | Accelerated filer | | [removed: ¨] [added: ☐] |

| Non-accelerated filer | | [removed: ¨] [added: ☐] | | Small reporting company | | [removed: ¨] [added: ☐] |

Common Stock, $0.01 par [removed: value—$7,839,400,000] [added: value—$13,463,200,000] as of June 30, [removed: 2015] [added: 2016] (solely for purposes of calculating this aggregate market value, American Water has defined its affiliates to include (i) those persons who were, as of June 30, [removed: 2015,] [added: 2016,] its executive officers, directors or known beneficial owners of more than 10% of its common stock, and (ii) such other persons who were deemed, as of June 30, [removed: 2015,] [added: 2016,] to be controlled by, or under common control with, American Water or any of the persons described in clause (i) above).

Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable [removed: date.][added: date: Common Stock, $0.01 par value per share—178,214,748 shares as of February 16, 2017.]

Portions of the American Water Works Company, Inc. definitive proxy statement for the [removed: 2016] [added: 2017] Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after December 31, [removed: 2015] [added: 2016] are incorporated by reference into Part III of this report.

| Item 1A. | [Risk Factors](#Risk_Factors) | [removed: 14] [added: 15] |

| Item 1B. | [Unresolved Staff Comments](#UNRESOLVED_STAFF_COMMENTS) | [removed: 26] [added: 29] |

| Item 2. | [Properties](#PROPERTIES) | [removed: 27] [added: 29] |

| Item 3. | [Legal Proceedings](#LEGAL_PROCEEDINGS) | [removed: 27] [added: 30] |

| Item 4. | [Mine Safety Disclosures](#Mine_Safety_Disclosures) | [removed: 31] [added: 33] |

| Item 5. | [Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](#MARKET_FOR_REGISTRANT) | [removed: 32] [added: 34] |

| Item 6. | [Selected Financial Data](#Selected_Financial_Data) | [removed: 33] [added: 35] |

| Item 7. | [Management’s Discussion and Analysis of Financial Condition and Results of Operations](#MANAGEMENT_DISCUSSION) | [removed: 33] [added: 35] |

| Item 7A. | [Quantitative and Qualitative Disclosures About Market Risk](#QUANTITATIVE_AND) | [removed: 58] [added: 64] |

| Item 8. | [Financial Statements and Supplementary Data](#FINANCIAL_STATEMENTS) | [removed: 60] [added: 66] |

| Item 9. | [Changes in and Disagreements with Accountants on Accounting and Financial Disclosure](#itemm9) | [removed: 104] [added: 113] |

| Item 9A. | [Controls and Procedures](#CONTROLS_AND_PROCEDURES) | [removed: 104] [added: 113] |

| Item 9B. | [Other Information](#OTHER_INFORMATION) | [removed: 105] [added: 114] |

| Item 10. | [Directors, Executive Officers of the Registrant and Corporate Governance](#DIRECTORS_EXECUTIVE_OFFICERS) | [removed: 106] [added: 115] |

| Item 11. | [Executive Compensation](#EXECUTIVE_COMPENSATION) | [removed: 106] [added: 115] |

| Item 12. | [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](#SECURITY_OWNERSHIP) | [removed: 106] [added: 115] |

| Item 13. | [Certain Relationships and Related Transactions and Director Independence](#CERTAIN_RELATIONSHIPS) | [removed: 106] [added: 115] |

| Item 14. | [Principal Accountant Fees and Services](#PRINCIPAL_ACCOUNTANT_FEES) | [removed: 106] [added: 115] |

| Item 15. | [Exhibits and Financial Statement Schedules](#EXHIBITS_AND_FINANCIAL) | [removed: 106] [added: 115] |

| [Exhibit Index](#Exhibit_Index) | | [removed: 108] [added: 118] |

Forward-looking statements may relate to, among other things, our future financial performance, including our operation and maintenance (“O&M”) efficiency ratio, cash flows, our growth and portfolio optimization strategies, our projected capital expenditures and related funding requirements, our ability to repay debt, our projected strategy to finance current operations and growth initiatives, the impact of legal proceedings and potential fines and penalties, business process and technology improvement initiatives, trends in our industry, [removed: regulatory] [added: regulatory, legislative, tax policy] or legal developments or rate adjustments, including rate case filings, filings for infrastructure surcharges and filings to address regulatory lag.

| | [removed: ·] [added: •] | the decisions of governmental and regulatory bodies, including decisions to raise or lower rates; |

| | [removed: ·] [added: •] | the timeliness [added: and outcome] of regulatory commissions’ actions concerning rates, [added: capital structure, authorized return on equity, capital investment,] permitting and other decisions; |

| | [removed: ·] [added: •] | changes in customer demand for, and patterns of use of, water, such as may result from conservation efforts; |

| | [removed: ·] [added: •] | changes in laws, governmental regulations and policies, including environmental, health and safety, water [removed: quality and] [added: quality,] public utility [added: and tax] regulations and [removed: policies;] [added: policies, and impacts resulting from U.S., state and local elections;] |

| | [removed: ·] [added: •] | weather conditions, patterns, events or natural disasters, including drought or abnormally high rainfall, strong winds, coastal and intercoastal flooding, earthquakes, landslides, [removed: hurricanes] [added: hurricanes, tornadoes, electrical storms] and [removed: tornados;] [added: solar flares;] |

| | [removed: ·] [added: •] | the outcome of litigation and government action related to the Freedom Industries [added: chemical] spill in West [removed: Virginia;] [added: Virginia, including matters pertaining to the binding global agreement in principle to settle claims related to this chemical spill;] |

| | [removed: ·] [added: •] | our ability to appropriately maintain current infrastructure, including our [added: operational and information] technology [added: (IT)] systems, and manage [added: the] expansion of our business; |

Yes ☒ No ☐

Yes ☒ No ☐

Yes ☐ No ☒

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| Item 16. | [Form 10-K Summary](#FORM_10K_SUMMARY) | 116 |

| | | |

| [Signatures](#SIGNATURES) | | 117 |

| | | |

| | • | exposure or infiltration of our critical infrastructure, operational technology and IT systems through physical or cyber attacks or other disruptions; |

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

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

| --- | --- | --- |

Common Stock, $0.01 par value per share—178,008,765 shares as of February 19, 2016.

| [Signatures](#SIGNATURES) | | 107 |

| | · | acquire and integrate water and wastewater systems into our regulated operations; and |

| | · | enter into contracts and other agreements with, or otherwise acquire, new customers in our market-based businesses, including with respect to the provision of water services to customers in the natural gas exploration and production market; |

None

None.

We lease our corporate offices, equipment and furniture, located in Voorhees, New Jersey from certain of our [removed: wholly-owned] [added: wholly owned] subsidiaries.

The properties of our Regulated Businesses segment primarily include [removed: 81] [added: 80] dams and 81 surface water treatment plants along with approximately [removed: 500] [added: 522] groundwater treatment plants, [removed: 1,100] [added: 1,022] groundwater wells, [removed: 100] [added: 121] wastewater treatment facilities, [removed: 1,200] [added: 1,284] treated water storage facilities, [removed: 1,400] [added: 1,433] pumping stations, and [removed: 49,000] [added: 49,635] miles of mains and collection pipes.

Since April 23, 2008, our common stock has traded on the NYSE under the symbol “AWK.” The following table summarizes the per share range of the high and low [removed: closing and] intraday sales prices of our common stock as reported on the NYSE and the per share cash dividends paid and declared for the years ended December 31, [removed: 2015] [added: 2016] and [removed: 2014:][added: 2015:]

| | | [removed: | | | | | | | |] [added: Intraday Market Prices] | | | | | | | | [added: Per Share] | | | | Per Share | | |

| | | [removed: Closing Market Prices | | | | | | | |] Intraday Market Prices | | | | | | | | Per Share | | | | [removed: Dividends] [added: Per Share] | | |

| 2015 | | High | | | | Low | | | | [removed: High | | | | Low | | | |] Dividends Paid | | | | [added: Dividends] Declared | | |

| Fourth Quarter | | $ | [removed: 60.61 | | | $ | 55.27 | | | $ |] 61.20 | | | $ | 54.62 | | | $ | 0.34 | | | $ | 0.68 | |

| Third Quarter | | | [removed: 55.08 | | | | 49.17 | | | |] 55.63 | | | | 48.52 | | | | 0.34 | | | | 0.34 | |

| Second Quarter | | | [removed: 55.45 | | | | 48.63 | | | |] 55.67 | | | | 48.36 | | | | 0.34 | | | | 0.34 | |

| First Quarter | | | [removed: 57.36 | | | | 52.19 | | | |] 57.48 | | | | 51.84 | | | | 0.31 | | | | — | |

| [removed: 2014 | | High | | | | Low | |] [added: 2016] | | High | | | | Low | | | | Dividends Paid | | | | [added: Dividends] Declared | | |

As of February [removed: 19, 2016,] [added: 16, 2017,] there were [removed: 178,008,765] [added: 178,214,748] shares of common stock outstanding [removed: and] [added: held by] approximately [removed: 2,345] [added: 2,608] record [removed: holders of common stock.][added: holders.]

Holders of [removed: the Company’s] [added: our] common stock are entitled to receive dividends when they are declared by the Board of Directors.

The program is conducted in accordance with Rule 10b-18 of the Exchange Act, and to facilitate these repurchases, we [removed: have entered] [added: enter] into [removed: a] Rule 10b5-1 share repurchase [removed: plan] [added: plans] with a third party broker, which [removed: allows] [added: allow] us to repurchase shares at times when we may otherwise be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods.

[removed: | | (a) |] From April 1, 2015, the date [removed: our] repurchases under the [added: anti-dilutive stock repurchase] program commenced, through December 31, [removed: 2015, we purchased] [added: 2016, the Company repurchased] an aggregate of [removed: 2,250,000] [added: 3,250,000] shares [removed: under our anti-dilutive] [added: of] common stock [removed: repurchase program. |][added: under the program, including 1,000,000 shares repurchased during the first half of 2016.]

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| Fourth Quarter | | $ | 76.12 | | | $ | 69.41 | | | $ | 0.375 | | | $ | 0.75 | |

| Third Quarter | | | 85.24 | | | | 72.12 | | | | 0.375 | | | | 0.375 | |

| Second Quarter | | | 84.54 | | | | 68.09 | | | | 0.375 | | | | 0.375 | |

| First Quarter | | | 70.10 | | | | 58.90 | | | | 0.34 | | | | — | |

| | | | | | | | | | | | | | | | | |

For more information regarding restrictions on the payment of dividends on our common stock, see Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Dividends.

There were no repurchases of common stock in the last half of 2016.

On November 17, 2016, 19,629 shares of common stock were issued by the Company in a transaction not involving a public offering of securities, which transaction was exempt from registration under the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof.

The shares were issued to one holder as consideration for assets acquired and liabilities assumed by Cal Am.

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| | | | | | | | | | | | | | | | | | | | | | | | | |

| Fourth Quarter | | $ | 55.86 | | | $ | 47.92 | | | $ | 56.19 | | | $ | 47.58 | | | $ | 0.31 | | | $ | 0.31 | |

| Third Quarter | | | 50.61 | | | | 46.41 | | | | 50.71 | | | | 45.98 | | | | 0.31 | | | | 0.62 | |

| Second Quarter | | | 49.45 | | | | 45.16 | | | | 49.50 | | | | 44.86 | | | | 0.31 | | | | 0.31 | |

| First Quarter | | | 45.56 | | | | 41.16 | | | | 45.86 | | | | 41.07 | | | | 0.28 | | | | — | |

The following table provides a summary of information about the shares of common stock we purchased during the three months ended December 31, 2015:

| | Total Number of Shares Purchased | | | | Average Price Paid per Share | | | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (a) | | | | Maximum Number of Shares that May Yet Be Purchased Under the Plan or Program | | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| October 1 - October 31, 2015 | | 186,500 | | | $ | 57.22 | | | | 186,500 | | | | 9,063,500 | |

| November 1 - November 30, 2015 | | 170,254 | | | | 56.94 | | | | 170,254 | | | | 8,893,246 | |

| December 1 - December 31, 2015 | | 1,143,246 | | | | 58.24 | | | | 1,143,246 | | | | 7,750,000 | |

| Total | | 1,500,000 | | | | 57.45 | | | | 1,500,000 | | | | | |

| --- | --- | --- |

| | [removed: 2015] [added: 2016] | | | | [removed: 2014] [added: 2015] | | | | [removed: 2013] [added: 2014] | | | | [removed: 2012] [added: 2013] | | | | [removed: 2011] [added: 2012] | | |

| Statement of Operations [removed: Data] [added: Data:] | | | | | | | | | | | | | | | | | | | |

| Operating revenues | $ | [removed: 3,159] [added: 3,302] | | | $ | [removed: 3,011] [added: 3,159] | | | $ | [removed: 2,879] [added: 3,011] | | | $ | [removed: 2,854] [added: 2,879] | | | $ | [removed: 2,642] [added: 2,854] | |

| Income from continuing operations | $ | [removed: 476] [added: 468] | | | $ | [removed: 430] [added: 476] | | | $ | [removed: 371] [added: 430] | | | $ | [removed: 374] [added: 371] | | | $ | [removed: 303] [added: 374] | |

| Income from continuing operations per basic common share | $ | [removed: 2.66] [added: 2.63] | | | $ | [removed: 2.40] [added: 2.66] | | | $ | [removed: 2.08] [added: 2.40] | | | $ | [removed: 2.12] [added: 2.08] | | | $ | [removed: 1.73] [added: 2.12] | |

| Income from continuing operations per diluted common share | $ | [removed: 2.64] [added: 2.62] | | | $ | [removed: 2.39] [added: 2.64] | | | $ | [removed: 2.07] [added: 2.39] | | | $ | [removed: 2.10] [added: 2.07] | | | $ | [removed: 1.72] [added: 2.10] | |

| Balance Sheet [removed: Data] [added: Data:] | | | | | | | | | | | | | | | | | | | |

| Total assets (a) (b) | $ | [removed: 17,241] [added: 18,482] | | | $ | [removed: 16,038] [added: 17,241] | | | $ | [removed: 15,064] [added: 16,038] | | | $ | [removed: 14,713] [added: 15,064] | | | $ | [removed: 14,771] [added: 14,713] | |

| Other [removed: Data] [added: Data:] | | | | | | | | | | | | | | | | | | | |

| Aggregate dividends declared per common share [removed: (d)] | $ | [removed: 1.36] [added: 1.50] | | | $ | [removed: 1.24] [added: 1.36] | | | $ | [removed: 1.12] [added: 1.24] | | | $ | [removed: 0.98] [added: 1.12] | | | $ | [removed: 1.13] [added: 0.98] | |

| Cash flows provided by operating activities | $ | [removed: 1,179] [added: 1,276] | | | $ | [removed: 1,097] [added: 1,179] | | | $ | [removed: 896] [added: 1,097] | | | $ | [removed: 956] [added: 896] | | | $ | [removed: 808] [added: 956] | |

| Capital expenditures included in cash flows used in investing activities | $ | [removed: (1,160] [added: (1,311] | ) | | $ | [removed: (956] [added: (1,160] | ) | | $ | [removed: (980] [added: (956] | ) | | $ | [removed: (929] [added: (980] | ) | | $ | [removed: (925] [added: (929] | ) |

| | (a) | [removed: This] [added: The] information [added: for 2014, 2013 and 2012] has been revised to reflect the retrospective application of Accounting Standard Update 2015-15 Presentation of Debt Issuance Costs, which was adopted by the Company as of December 31, 2015. |

| | (b) | [removed: This] [added: The] information [added: for 2014, 2013 and 2012] has been revised to reflect the retrospective application of Accounting Standard Update 2015-17 Income Taxes, which was adopted by the Company as of December 31, 2015. |

| Long-term debt and redeemable preferred stock at redemption value (a) | $ | 5,759 | | | $ | 5,874 | | | $ | 5,442 | | | $ | 5,225 | | | $ | 5,203 | |

NOTE: In November 2014, we disposed of our Class B Biosolids operating segment by selling our subsidiary, Terratec Environmental Ltd (“Terratec”) in Ontario, Canada.

The results of Terratec are presented as discontinued operations and, as such, have been excluded from continuing operations for the years ended December 31, 2014, 2013 and 2012.

See Note 3—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional details on our discontinued operations.

| Short-term and long-term debt (a) | $ | 6,543 | | | $ | 5,936 | | | $ | 5,850 | | | $ | 5,569 | | | $ | 5,877 | |

| Redeemable preferred stock (c) | $ | 13 | | | $ | 17 | | | $ | 19 | | | $ | 21 | | | $ | 22 | |

| --- | --- | --- |

| | (c) | Includes the current portion of redeemable preferred stock, which is included in current portion of long-term debt in the Consolidated Balance Sheets. |

| | (d) | Included in 2011 was a change in the timing of dividend declarations. As a result, five dividend declarations were made during 2011. |

| [Report of Independent Registered Public Accounting Firm](#Report_of_Independent) | | [removed: 61] [added: 67] |

| [Consolidated Balance Sheets as of December 31, [removed: 2015] [added: 2016] and [removed: 2014](#Consolidated_Balance_Sheets)] [added: 2015](#Consolidated_Balance_Sheets)] | | [removed: 62] [added: 68] |

| [Consolidated Statements of Operations for the years ended December 31, [removed: 2015, 2014] [added: 2016, 2015] and [removed: 2013](#Consolidated_Statements_of_Operations)] [added: 2014](#Consolidated_Statements_of_Operations)] | | [removed: 64] [added: 70] |

| [Consolidated Statements of Comprehensive Income for the years ended December 31, [added: 2016,] 2015, [removed: 2014,] and [removed: 2013](#Consolidated_Statements_of_Comprehensive)] [added: 2014](#Consolidated_Statements_of_Comprehensive)] | | [removed: 65] [added: 71] |

| [Consolidated Statements of Cash Flows for the years ended December 31, [removed: 2015, 2014] [added: 2016, 2015] and [removed: 2013](#Consolidated_Statements_of_Cash_Flows)] [added: 2014](#Consolidated_Statements_of_Cash_Flows)] | | [removed: 66] [added: 72] |

| [Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, [removed: 2015, 2014] [added: 2016, 2015] and [removed: 2013](#Changes_in_Stockholders_Equity)] [added: 2014](#Changes_in_Stockholders_Equity)] | | [removed: 67] [added: 73] |

| [Notes to Consolidated Financial Statements](#Notes_to_Consolidated) | | [removed: 68] [added: 74] |

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, [removed: 2015] [added: 2016] and [removed: 2014,] [added: 2015,] and the results of their operations and their cash flows for each of the three years in the period ended December 31, [removed: 2015] [added: 2016] 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, [removed: 2015,] [added: 2016,] based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

[added: |] /s/ PricewaterhouseCoopers LLP [added: |]

[added: |] Philadelphia, Pennsylvania [added: |]

| | [added: 2016 | | | |] 2015 | | | | 2014 | | |

| Property, plant and equipment | $ | [removed: 18,504] [added: 19,954] | | | $ | [removed: 17,269] [added: 18,504] | |

| Accumulated depreciation | | [removed: (4,571] [added: (4,962] | ) | | | [removed: (4,240] [added: (4,571] | ) |

| Property, plant and equipment, net | | [removed: 13,933] [added: 14,992] | | | | [removed: 13,029] [added: 13,933] | |

| Cash and cash equivalents | | [removed: 45] [added: 75] | | | | [removed: 23] [added: 45] | |

| Restricted funds | | [removed: 21] [added: 20] | | | | [removed: 14] [added: 21] | |

| Accounts receivable, net | | [removed: 255] [added: 269] | | | | [removed: 232] [added: 255] | |

| Unbilled revenues | | [removed: 267] [added: 263] | | | | [removed: 221] [added: 267] | |

| Materials and supplies | | [removed: 38] [added: 39] | | | | [removed: 37] [added: 38] | |

| Other | | [removed: 31] [added: 72] | | | | [removed: 48] [added: 78] | |

| Total current assets | | [removed: 657] [added: 784] | | | | [removed: 575] [added: 657] | |

| Regulatory assets | | [removed: 1,271] [added: 1,289] | | | | [removed: 1,153] [added: 1,271] | |

| Goodwill | | [removed: 1,302] [added: 1,345] | | | | [removed: 1,208] [added: 1,302] | |

| Other | | [removed: 78] [added: 67] | | | | [removed: 73] [added: 68] | |

| Total regulatory and other long-term assets | | [removed: 2,651] [added: 2,706] | | | | [removed: 2,434] [added: 2,651] | |

| TOTAL ASSETS | $ | [removed: 17,241] [added: 18,482] | | | $ | [removed: 16,038] [added: 17,241] | |

| Common stock ($0.01 par value, 500,000,000 shares authorized, [removed: 180,907,483] [added: 181,798,555] and [removed: 179,461,606] [added: 180,907,483] shares [removed: issued as of December 31, 2015 and 2014,] [added: issued,] respectively) | $ | 2 | | | $ | 2 | |

| Paid-in-capital | | [removed: 6,351] [added: 6,388] | | | | [removed: 6,302] [added: 6,351] | |

| Accumulated deficit | | [removed: (1,073] [added: (873] | ) | | | [removed: (1,296] [added: (1,073] | ) |

| Accumulated other comprehensive loss | | [removed: (88] [added: (86] | ) | | | [removed: (82] [added: (88] | ) |

| Treasury stock, at cost [removed: (2,625,112] [added: (3,701,867] and [removed: 260,243] [added: 2,625,112] shares [removed: as of December 31, 2015 and 2014,] respectively) | | [removed: (143] [added: (213] | ) | | | [removed: (11] [added: (143] | ) |

| Total common stockholders' equity | | [removed: 5,049] [added: 5,218] | | | | [removed: 4,915] [added: 5,049] | |

| Long-term debt | | [added: 5,749] | | | | [added: 5,862] | |

| Redeemable preferred stock at redemption value | | [removed: 12] [added: 10] | | | | [removed: 15] [added: 12] | |

| Total capitalization | | [removed: 10,923] [added: 10,977] | | | | [removed: 10,357] [added: 10,923] | |

| Short-term debt | | [removed: 628] [added: 849] | | | | [removed: 450] [added: 628] | |

| Current portion of long-term debt | | [removed: 54] [added: 574] | | | | [removed: 61] [added: 54] | |

| Accounts payable | | [removed: 126] [added: 154] | | | | [removed: 100] [added: 126] | |

| Accrued liabilities | | [removed: 493] [added: 609] | | | | [removed: 395] [added: 493] | |

| |

| --- |

| Loss from discontinued operations, net of tax | $ | — | | | $ | — | | | $ | (0.04 | ) |

| Depreciation and amortization | | 470 | | | | 440 | | | | 424 | |

| Gain on asset dispositions and purchases | | (10 | ) | | | (3 | ) | | | (2 | ) |

| Impact of binding global agreement in principle | | 65 | | | | — | | | | — | |

| Acquisitions, net of cash acquired | | (204 | ) | | | (197 | ) | | | (9 | ) |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| Employee stock purchase plan | | 0.1 | | | | — | | | | 5 | | | | — | | | | — | | | | — | | | | — | | | | 5 | |

| Direct stock reinvestment and purchase plan | | 0.1 | | | | — | | | | 5 | | | | — | | | | — | | | | — | | | | — | | | | 5 | |

| Employee stock purchase plan | | 0.1 | | | | — | | | | 7 | | | | — | | | | — | | | | — | | | | — | | | | 7 | |

| Repurchases of common stock | | — | | | | — | | | | — | | | | — | | | | — | | | | (1.0 | ) | | | (65 | ) | | | (65 | ) |

| Dividends | | — | | | | — | | | | — | | | | (267 | ) | | | — | | | | — | | | | — | | | | (267 | ) |

| Balance as of December 31, 2016 | | 181.8 | | | $ | 2 | | | $ | 6,388 | | | $ | (873 | ) | | $ | (86 | ) | | | (3.7 | ) | | $ | (213 | ) | | $ | 5,218 | |

The Company also recognizes revenue when it is probable that future recovery of previously incurred costs or future refunds that are to be credited to customers will occur through the ratemaking process.

| Simplification of Employee Share-Based Payment Accounting | | Simplified accounting and disclosure requirements for share-based payment awards. The updated guidance addresses: (i) the recognition of excess tax benefits and deficiencies; (ii) the classification of excess tax benefits and taxes paid on the Consolidated Statements of Cash Flows; (iii) election of an accounting policy for forfeitures; and (iv) the amount an employer can withhold to cover income taxes and still qualify for equity classification. The new guidance requires all tax related cash flows resulting from share-based payments to be reported as cash provided by operating activities in the Consolidated Statements of Cash Flows. | | January 1, 2017 | | Alternative transition methods available | | The cumulative effect to retained earnings prior to 2017 will be an increase of approximately $21, with an offsetting decrease to deferred income taxes, net. |

| Revenue from Contracts with Customers | | Updated authoritative guidance that changes the criteria for recognizing revenue from a contract with a customer. The new standard replaces existing guidance on revenue recognition, including most industry specific guidance. The objective of the updated standard is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries and across capital markets. The underlying principle is that an entity will recognize revenue to depict the transfer of goods and services to customers at an amount the entity expects to be entitled to in exchange for those goods or services. The guidance also requires a number of disclosures regarding the nature, amount, timing and uncertainty of revenue and the related cash flows. | | January 1, 2018; early adoption permitted | | Retrospectively to each prior reporting period presented (full retrospective method) or retrospectively with a cumulative effect adjustment to retained earnings for initial application of the guidance (modified retrospective method) | | The Company is evaluating the impact on the consolidated financial statements and related disclosures, as well as the transition method to be used to adopt the guidance. The Company is also considering the impacts of the new standard on its accounting for contributions in aid of construction. The Company does not expect to early adopt. |

| Classification of Certain Cash Receipts and Cash Payments on the Statement of Cash Flows | | Provided guidance on the presentation and classification in the statement of cash flows for the following cash receipts and payments: (i) debt prepayment or debt extinguishment costs; (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (iii) contingent consideration payments made after a business combination; (iv) proceeds from the settlement of insurance claims; (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (vi) distributions received from equity method investees; (vii) beneficial interests in securitization transactions; and (viii) separately identifiable cash flows and application of the predominance principle. | | January 1, 2018; early adoption permitted | | Retrospective | | The Company does not anticipate significant impacts on its Statements of Cash Flows based on this standard update. |

| Presentation of Changes in Restricted Cash on the Statement of Cash Flows | | Updated the accounting and disclosure guidance for the classification and presentation of changes in restricted cash on the statement of cash flows. The amended guidance requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts described as restricted cash or restricted cash equivalents. Restricted cash and restricted cash equivalents will now be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows | | January 1, 2018; early adoption permitted | | Retrospective | | The Company does not anticipate significant impacts on its Statements of Cash Flows based on this standard update. |

| Clarifying the Definition of a Business | | Updated the accounting guidance to clarify the definition of a business with the objective of assisting entities with evaluating whether transactions should be accounted for as acquisitions, or disposals, of assets or businesses. | | January 1, 2018; early adoption permitted | | Prospective | | The Company is evaluating the impact on the consolidated financial statements and related disclosures. |

| Accounting for Leases | | Updated the accounting and disclosure guidance for leasing arrangements. Under this guidance, a lessee will be required to recognize the following for all leases, excluding short-term leases, at the commencement date: (i) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Under the guidance, lessor accounting is largely unchanged. | | January 1, 2019; early adoption permitted | | Modified retrospective | | The Company is evaluating the impact on the consolidated financial statements and related disclosures, as well as the timing of adoption. |

| Simplification of Goodwill Impairment Testing | | Updated authoritative guidance which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments in the update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying value exceeds the reporting unit's fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. | | January 1, 2020; early adoption permitted for interim or annual goodwill impairment tests performed after January 1, 2017 | | Prospective | | The Company is evaluating the impact on the consolidated financial statements and related disclosures, as well as the timing of adoption. |

| Measurement of Credit Losses | | Updated the accounting guidance on reporting credit losses for financial assets held at amortized cost basis and available-for-sale debt securities. Under this guidance, expected credit losses are required to be measured based on historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount of financial assets. Also, this guidance requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a direct write-down. | | January 1, 2020; early adoption permitted | | Modified retrospective | | The Company is evaluating the impact on the consolidated financial statements and related disclosures, as well as the timing of adoption. |

The Company recorded additional goodwill of $43 associated with five of its acquisitions, which is reported in its Regulated Businesses segment and is expected to be fully deductible for tax purposes.

The preliminary purchase price allocation related to the Scranton acquisition will be finalized once the valuation of net assets acquired has been completed.

Also, our Regulated Businesses made a non-escrowed deposit of $5 related to the acquisition of the McKeesport, Pennsylvania’s wastewater system which we expect to close in the second half of 2017.

| | | | |

The decrease in deferred other postretirement benefit expense is a result of the plan amendment to the postretirement benefit plan announced on July 31, 2016.

The unrecovered balance of project costs incurred, including cost of capital, net of surcharges totaled $91 and $95 as of December 31, 2016 and 2015, respectively.

Also, if costs expected to be incurred in the future are currently being recovered through rates, the Company records those expected future costs as regulatory liabilities.

| Goodwill from acquisitions | | 43 | | | | — | | | | — | | | | — | | | | 43 | | | | — | | | | 43 | |

| Balance as of December 31, 2016 | $ | 3,458 | | | $ | (2,332 | ) | | $ | 327 | | | $ | (108 | ) | | $ | 3,785 | | | $ | (2,440 | ) | | $ | 1,345 | |

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

As of December 31, 2016, there were 6.8 shares of common stock available for purchase under the program.

| Beginning balance as of January 1, 2015 | $ | (116 | ) | | $ | 1 | | | $ | 31 | | | $ | 3 | | | $ | (1 | ) | | $ | (82 | ) |

| Other comprehensive loss before reclassification | | (10 | ) | | — | | | | — | | | | | (1 | ) | | — | | | | | (11 | ) |

| Amounts reclassified from accumulated other comprehensive income | — | | | | — | | | | | 5 | | | — | | | | — | | | | | 5 | |

| Other comprehensive gain (loss) before reclassification | | (21 | ) | | — | | | | — | | | | — | | | | | 17 | | | | (4 | ) |

| Amounts reclassified from accumulated other comprehensive income | — | | | | — | | | | | 6 | | | — | | | | — | | | | | 6 | |

See Note 14—Employee Benefits.

| --- | --- | --- |

February 24, 2016

| Long-term debt | | 5,862 | | | | 5,427 | |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| Loss on extinguishment of debt | — | | | | — | | | | | (41 | ) |

| | | | | | | | | | | | |

| Acquisitions | | (197 | ) | | | (9 | ) | | | (24 | ) |

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| Balance as of December 31, 2012 | | 177.0 | | | | | | $ | 2 | | | | | | | $ | 6,223 | | | | | | $ | | (1,665 | | | ) | | | $ | (116 | | | ) | | | | — | | | | | | $ | — | | | | | | $ | 1 | | | | | | $ | 4,445 | | | |

| Dividends | | — | | | | | | | — | | | | | | | | — | | | | | | | | (199 | | | ) | | | | — | | | | | | | — | | | | | | | — | | | | | | | — | | | | | | | (199 | | | ) |

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.

| --- | --- | --- | --- | --- | --- | --- | --- | --- |

| 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. |

| 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. |

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.

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.

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.

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.

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.

| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |

| Options outstanding as January 1, 2015 | | 1,910 | | | $ | 33.47 | | | | 3.9 | | | $ | 38 | |

| Granted | | 301 | | | | 52.75 | | | | | | | | | |

| Exercised | | (973 | ) | | | 31.26 | | | | | | | | | |

| Exercisable as of December 31, 2015 | | 666 | | | $ | 32.92 | | | | 2.6 | | | $ | 18 | |

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.

In January 2015, an additional 93 thousand RSUs were granted and distributed because performance thresholds were exceeded.

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.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, [removed: 2015,] [added: 2016,] our disclosure controls and procedures were effective at a reasonable level of assurance.

Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting, as of December 31, [removed: 2015,] [added: 2016,] using the criteria described in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Based on our evaluation under the framework in Internal Control—Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective as of December 31, [removed: 2015.][added: 2016.]

The effectiveness of our internal control over financial reporting as of December 31, [removed: 2015] [added: 2016] has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report appearing in Item 8—Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

The information required by this item and not given [removed: below,] [added: below or in Item 1—Business—Executive Officers of this Form 10-K,] is incorporated by reference from the Company’s Proxy Statement for the [removed: 2016] [added: 2017] Annual Meeting of Stockholders, to be filed with the [removed: Securities and Exchange Commission] [added: SEC] within 120 days following the end of the fiscal year covered by this report, under the captions entitled “Board of Directors and Corporate Governance,” [removed: Proposal 1-Election] [added: “Proposal 1—Election] of Directors” and “Certain [removed: Stockholder] [added: Beneficial Ownership] Matters—Section 16(a) Beneficial Ownership Reporting Compliance.”

The full text of the Code of Ethics is publicly available on our website at [removed: http://www.amwater.com.][added: https://amwater.com.]

We intend to post on our website any amendments to our Code of Ethics and any waivers of such provisions granted to [added: certain] principal officers.

Information required by this item is incorporated by reference in the Company’s Proxy Statement for the [removed: 2016] [added: 2017] Annual Meeting of Stockholders, under the captions entitled “Executive Compensation,” “Compensation Discussion and Analysis,” “Compensation Committee [removed: Report”] [added: Interlocks] and [removed: “Board] [added: Insider Participation,” “Compensation Committee Report,” “Proposal 1—Election] of [removed: Directors] [added: Directors—Director Compensation”] and [removed: Corporate Governance—Director Compensation.”][added: “Proposal 1—Election of Directors—Director Compensation Table.”]