Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Audited Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm	79
Consolidated Balance Sheets as of December 31, 2018 and 2017	81
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016	83
Consolidated Statements of Comprehensive Income for the years ended December 31, 2018, 2017, and 2016	84
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016	85
Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2018, 2017 and 2016	86
Notes to Consolidated Financial Statements	87

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

American Water Works Company, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of American Water Works Company, Inc. and its subsidiaries (the “Company”) as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income, cash flows, and changes in shareholders’ equity for each of the three years in the period ended December 31, 2018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Basis for Opinions

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

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

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

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

Definition and Limitations of Internal Control over Financial Reporting

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

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

/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
February 19, 2019

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

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Balance Sheets

(In millions, except share and per share data)

	December 31, 2018				December 31, 2017
ASSETS
Property, plant and equipment	$	23,204			$	21,716
Accumulated depreciation	(5,795		)		(5,470		)
Property, plant and equipment, net	17,409				16,246
Current assets:
Cash and cash equivalents	130				55
Restricted funds	28				27
Accounts receivable, net	301				272
Unbilled revenues	186				212
Materials and supplies	41				41
Other	95				113
Total current assets	781				720
Regulatory and other long-term assets:
Regulatory assets	1,156				1,061
Goodwill	1,575				1,379
Intangible assets	84				9
Postretirement benefit asset	155				—
Other	63				67
Total regulatory and other long-term assets	3,033				2,516
Total assets	$	21,223			$	19,482

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

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Balance Sheets

(In millions, except share and per share data)

	December 31, 2018				December 31, 2017
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock ($0.01 par value, 500,000,000 shares authorized, 185,367,158 and 182,508,564 shares issued, respectively)	$	2			$	2
Paid-in-capital	6,657				6,432
Accumulated deficit	(464		)		(723		)
Accumulated other comprehensive loss	(34		)		(79		)
Treasury stock, at cost (4,683,156 and 4,064,010 shares, respectively)	(297		)		(247		)
Total common shareholders' equity	5,864				5,385
Long-term debt	7,569				6,490
Redeemable preferred stock at redemption value	7				8
Total long-term debt	7,576				6,498
Total capitalization	13,440				11,883
Current liabilities:
Short-term debt	964				905
Current portion of long-term debt	71				322
Accounts payable	175				195
Accrued liabilities	556				630
Taxes accrued	45				33
Interest accrued	87				73
Other	196				167
Total current liabilities	2,094				2,325
Regulatory and other long-term liabilities:
Advances for construction	252				271
Deferred income taxes, net	1,718				1,551
Deferred investment tax credits	22				22
Regulatory liabilities	1,907				1,664
Accrued pension expense	390				384
Accrued postretirement benefit expense	—				40
Other	78				66
Total regulatory and other long-term liabilities	4,367				3,998
Contributions in aid of construction	1,322				1,276
Commitments and contingencies (See Note 16)
Total capitalization and liabilities	$	21,223			$	19,482

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

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Operations

(In millions, except per share data)

	For the Years Ended December 31,
	2018				2017				2016
Operating revenues	$	3,440			$	3,357			$	3,302
Operating expenses:
Operation and maintenance	1,479				1,369				1,499
Depreciation and amortization	545				492				470
General taxes	277				259				258
(Gain) on asset dispositions and purchases	(20		)		(16		)		(10		)
Impairment charge	57				—				—
Total operating expenses, net	2,338				2,104				2,217
Operating income	1,102				1,253				1,085
Other income (expense):
Interest, net	(350		)		(342		)		(325		)
Non-operating benefit costs, net	20				(9		)		(5		)
Loss on early extinguishment of debt	(4		)		(7		)		—
Other, net	19				17				15
Total other income (expense)	(315		)		(341		)		(315		)
Income before income taxes	787				912				770
Provision for income taxes	222				486				302
Consolidated net income	565				426				468
Net loss attributable to noncontrolling interest	(2		)		—				—
Net income attributable to common shareholders	$	567			$	426			$	468
Basic earnings per share: (a)
Net income attributable to common shareholders	$	3.16			$	2.39			$	2.63
Diluted earnings per share: (a)
Net income attributable to common shareholders	$	3.15			$	2.38			$	2.62
Weighted average common shares outstanding:
Basic	180				178				178
Diluted	180				179				179

(a)	Amounts may not calculate due to rounding.

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

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Comprehensive Income

(In millions)

	For the Years Ended December 31,
	2018				2017				2016
Net income attributable to common shareholders	$	567			$	426			$	468
Other comprehensive income (loss), net of tax:
Change in employee benefit plan funded status, net of tax of $20, $2 and $(14) in 2018, 2017 and 2016, respectively	60				7				(21		)
Pension amortized to periodic benefit cost:
Actuarial loss, net of tax of $3, $5 and $4 in 2018, 2017 and 2016, respectively	7				7				6
Pension reclassification from accumulated other comprehensive loss of tax effects resulting from the Tax Cuts and Jobs Act	(22		)		—				—
Foreign currency translation adjustment	—				(1		)		—
Unrealized (loss) gain on cash flow hedges, net of tax of $0, $(4) and $10 in 2018, 2017 and 2016, respectively	(2		)		(6		)		17
Cash flow hedges reclassification from accumulated other comprehensive loss of tax effects resulting from the Tax Cuts and Jobs Act	2				—				—
Net other comprehensive income	45				7				2
Comprehensive income attributable to common shareholders	$	612			$	433			$	470

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

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Cash Flows

(In millions)

	For the Years Ended December 31,
	2018				2017				2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	565			$	426			$	468
Adjustments to reconcile to net cash flows provided by operating activities:
Depreciation and amortization	545				492				470
Deferred income taxes and amortization of investment tax credits	195				462				295
Provision for losses on accounts receivable	33				29				27
Gain on asset dispositions and purchases	(20		)		(16		)		(10		)
Impairment charge	57				—				—
Pension and non-pension postretirement benefits	23				57				54
Other non-cash, net	20				(54		)		(36		)
Changes in assets and liabilities:
Receivables and unbilled revenues	(17		)		21				(31		)
Pension and non-pension postretirement benefit contributions	(22		)		(48		)		(53		)
Accounts payable and accrued liabilities	25				38				60
Other assets and liabilities, net	22				64				(20		)
Impact of Freedom Industries settlement activities	(40		)		(22		)		65
Net cash provided by operating activities	1,386				1,449				1,289
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	(1,586		)		(1,434		)		(1,311		)
Acquisitions, net of cash acquired	(398		)		(177		)		(204		)
Proceeds from sale of assets	35				15				9
Removal costs from property, plant and equipment retirements, net	(87		)		(76		)		(84		)
Net cash used in investing activities	(2,036		)		(1,672		)		(1,590		)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt	1,358				1,395				553
Repayments of long-term debt	(526		)		(896		)		(144		)
Net short-term borrowings with maturities less than three months	60				55				221
Issuance of common stock	183				—				—
Proceeds from issuances of employee stock plans and direct stock purchase plan, net of taxes paid of $8, $11 and $13 in 2018, 2017 and 2016, respectively	16				15				13
Advances and contributions for construction, net of refunds of $22, $22 and $31 in 2018, 2017 and 2016, respectively	21				28				16
Debt issuance costs and make-whole premium on early debt redemption	(22		)		(47		)		(5		)
Dividends paid	(319		)		(289		)		(261		)
Anti-dilutive share repurchases	(45		)		(54		)		(65		)
Net cash provided by financing activities	726				207				328
Net increase (decrease) in cash and cash equivalents and restricted funds	76				(16		)		27
Cash and cash equivalents and restricted funds at beginning of period	83				99				72
Cash and cash equivalents and restricted funds at end of period	$	159			$	83			$	99
Cash paid during the year for:
Interest, net of capitalized amount	$	332			$	338			$	327
Income taxes, net of refunds of $0 in 2018, 2017 and 2016	$	38			$	30			$	16
Non-cash investing activity:
Capital expenditures acquired on account but unpaid as of year end	$	181			$	204			$	171
Acquisition financed by treasury stock	$	—			$	33			$	—

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

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Changes in Shareholders’ Equity

(In millions, except per share data)

	Common Stock															Accumulated Other Comprehensive Loss				Treasury Stock							Total Shareholders' Equity
	Shares			Par Value				Paid-in Capital				Accumulated Deficit					Shares			At Cost
Balance as of December 31, 2015	180.9			$	2			$	6,351			$	(1,073	)		$	(88	)		(2.6	)		$	(143	)		$	5,049
Net income attributable to common shareholders	—			—				—				468				—				—			—				468
Direct stock reinvestment and purchase plan	0.1			—				5				—				—				—			—				5
Employee stock purchase plan	0.1			—				7				—				—				—			—				7
Stock-based compensation activity	0.7			—				25				(1		)		—				(0.1	)		(5		)		19
Repurchases of common stock	—			—				—				—				—				(1.0	)		(65		)		(65		)
Net other comprehensive income	—			—				—				—				2				—			—				2
Dividends ($1.50 declared per common share)	—			—				—				(267		)		—				—			—				(267		)
Balance as of December 31, 2016	181.8			$	2			$	6,388			$	(873	)		$	(86	)		(3.7	)		$	(213	)		$	5,218
Cumulative effect of change in accounting principle	—			—				—				21				—				—			—				21
Net income attributable to common shareholders	—			—				—				426				—				—			—				426
Direct stock reinvestment and purchase plan	0.1			—				8				—				—				—			—				8
Employee stock purchase plan	0.1			—				7				—				—				—			—				7
Stock-based compensation activity	0.5			—				22				—				—				(0.1	)		(7		)		15
Acquisitions via treasury stock	—			—				7				—				—				0.4			27				34
Repurchases of common stock	—			—				—				—				—				(0.7	)		(54		)		(54		)
Net other comprehensive income	—			—				—				—				7				—			—				7
Dividends ($1.66 declared per common share)	—			—				—				(297		)		—				—			—				(297		)
Balance as of December 31, 2017	182.5			$	2			$	6,432			$	(723	)		$	(79	)		(4.1	)		$	(247	)		$	5,385
Cumulative effect of change in accounting principle	—			—				—				20				—				—			—				20
Net income attributable to common shareholders	—			—				—				567				—				—			—				567
Direct stock reinvestment and purchase plan	0.1			—				8				—				—				—			—				8
Employee stock purchase plan	0.1			—				8				—				—				—			—				8
Stock-based compensation activity	0.4			—				26				(1		)		—				(0.1	)		(5		)		20
Issuance of common stock	2.3			—				183				—				—				—			—				183
Repurchases of common stock	—			—				—				—				—				(0.5	)		(45		)		(45		)
Net other comprehensive income	—			—				—				—				45				—			—				45
Dividends ($1.82 declared per common share)	—			—				—				(327		)		—				—			—				(327		)
Balance as of December 31, 2018	185.4			$	2			$	6,657			$	(464	)		$	(34	)		(4.7	)		$	(297	)		$	5,864

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

American Water Works Company, Inc. and Subsidiary Companies

Notes to Consolidated Financial Statements

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

Note 1: Organization and Operation

American Water Works Company, Inc. (the “Company” or “American Water”) is a holding company for regulated and market-based subsidiaries throughout the United States and Ontario, Canada. The Company’s primary business involves the ownership of regulated utilities that provide water and wastewater services in 16 states in the United States, collectively referred to as the “Regulated Businesses.” The Company also operates market-based businesses that provide a broad range of related and complementary water and wastewater services within non-reportable operating segments, collectively referred to as the “Market-Based Businesses.” The Company’s primary Market-Based Businesses include the Homeowner Services Group, which provides warranty protection programs to residential and smaller commercial customers; the Military Services Group, which provides water and wastewater services to the U.S. government on military installations; and Keystone Clearwater Solutions, LLC, which provides water transfer services for shale natural gas exploration and production companies.

Note 2: Significant Accounting Policies

Principles of Consolidation

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

In July 2015, the Company acquired a 95% interest in Water Solutions Holdings, LLC, including its wholly owned subsidiary, Keystone Clearwater Solutions, LLC (collectively referred to as “Keystone”). During the fourth quarter of 2018, pursuant to the exercise of put options by the minority owners, the Company acquired the remaining 5% interest in Keystone, bringing its ownership interest to 100%. The former minority owners’ interest was recognized as redeemable noncontrolling interest and was included in Other long-term liabilities on the Consolidated Balance Sheets. There was no remaining redeemable noncontrolling interest as of December 31, 2018, and $7 million of redeemable noncontrolling interest as of December 31, 2017.

Use of Estimates

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

Regulation

The Company’s regulated utilities are generally subject to economic regulation by certain state utility commissions or other entities engaged in utility regulation, collectively referred to as Public Utility Commissions (“PUCs” or “Regulators”). As such, the Company follows authoritative accounting principles required for rate regulated utilities, which requires the effects of rate regulation to be reflected in the Company’s Consolidated Financial Statements. PUCs generally authorize revenue at levels intended to recover the estimated costs of providing service, plus a return on net investments, or rate base. Regulators may also approve accounting treatments, long-term financing programs and cost of capital, operation and maintenance (“O&M”) expenses, capital expenditures, taxes, affiliated transactions and relationships, reorganizations, mergers, and acquisitions, along with imposing certain penalties or granting certain incentives. Due to timing and other differences in the collection of a regulated utility’s revenues, these authoritative accounting principles allow a cost that would otherwise be charged as an expense by a non-regulated entity, to be deferred as a regulatory asset if it is probable that such cost is recoverable through future rates. Conversely, these principles also require the creation of a regulatory liability for amounts collected in rates to recover costs expected to be incurred in the future, or amounts collected in excess of costs incurred and are refundable to customers. See Note 7—Regulatory Assets and Liabilities for additional information.

Property, Plant and Equipment

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

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

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

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

The costs incurred to acquire and internally develop computer software for internal use are capitalized as a unit of property. The carrying value of these costs amounted to $336 million and $346 million as of December 31, 2018 and 2017, respectively.

Cash and Cash Equivalents, and Restricted Funds

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

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

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

	2018				2017
Cash and cash equivalents	$	130			$	55
Restricted funds	28				27
Restricted funds included in other long-term assets	1				1
Cash and cash equivalents and restricted funds as presented on the Consolidated Statements of Cash Flows	$	159			$	83

Accounts Receivable and Unbilled Revenues

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

Allowance for Uncollectible Accounts

Allowances for uncollectible accounts are maintained for estimated probable losses resulting from the Company’s inability to collect receivables from customers. Accounts that are outstanding longer than the payment terms are considered past due. A number of factors are considered in determining the allowance for uncollectible accounts, including the length of time receivables are past due and previous loss history. The Company generally writes off accounts when they become uncollectible or are over a certain number of days outstanding. See Note 6—Allowance for Uncollectible Accounts for additional information.

Materials and Supplies

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

Goodwill

Goodwill represents the excess of the purchase price paid over the estimated fair value of the assets acquired and liabilities assumed in the acquisition of a business. Goodwill is not amortized and must be allocated at the reporting unit level, which is defined as an operating segment or one level below, and tested for impairment at least annually, or more frequently if an event occurs or circumstances change that would more likely than not, reduce the fair value of a reporting unit below its carrying value.

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

The Company’s annual impairment testing is performed as of November 30 of each year, in conjunction with the completion of the Company’s annual business plan. The Company assesses qualitative factors to determine whether quantitative testing is necessary. If it is determined, based upon qualitative factors, that the estimated fair value of a reporting unit is more likely than not, greater than its carrying value, no further testing is required. If the Company bypasses the qualitative assessment, or performs the qualitative assessment and determines that the estimated fair value of a reporting unit is more likely than not, less than its carrying value, a quantitative, fair value-based test is performed. This quantitative testing compares the estimated fair value of the reporting unit to its respective net carrying value, including goodwill, on the measurement date. An impairment loss will be recognized in the amount equal to the excess of the reporting unit’s carrying value compared to its estimated fair value, limited to the total amount of goodwill allocated to that reporting unit.

Application of goodwill impairment testing requires management judgment, including the identification of reporting units and determining the fair value of reporting units. Management estimates fair value using a combination of a discounted cash flow analysis and a market multiples analysis. Significant assumptions used in these fair value estimations include, but are not limited to, forecasts of future operating results, discount and growth rates, capital expenditures, tax rates, working capital, weighted average cost of capital and projected terminal values.

The Company believes the assumptions and other considerations used to value goodwill to be appropriate, however, if actual experience differs from the assumptions and considerations used in its analysis, the resulting change could have a material adverse impact on the Consolidated Financial Statements. See Note 8—Goodwill and Other Intangible Assets for additional information.

Intangible Assets

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

Impairment of Long-Lived Assets

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

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

The Company holds other long-term investments in privately held companies and joint ventures accounted for using the equity method, and are classified as other Long-term assets on the Consolidated Balance Sheets. The estimated fair value of the long-term investments are dependent on the financial performance and solvency of the entities in which the Company invests, as well as volatility inherent in the external markets. If such long-term investments are considered impaired, an impairment loss will be recognized in the amount equal to the excess of the investment’s carrying value compared to its estimated fair value.

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

Advances for Construction and Contributions in Aid of Construction

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

Advances are refundable for limited periods of time as new customers begin to receive service or other contractual obligations are fulfilled. Included in Other current liabilities as of December 31, 2018 and 2017 on the Consolidated Balance Sheets are estimated refunds of $23 million and $23 million, respectively. Those amounts represent expected refunds during the next 12-month period.

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

Generally, the Company depreciates utility plant funded by contributions and amortizes its contributions balance as a reduction to depreciation expense, producing a result which is functionally equivalent to reducing the original cost of the utility plant for the contributions. In accordance with applicable regulatory guidelines, some of the Company’s utility subsidiaries do not amortize contributions, and any contribution received remains on the balance sheet indefinitely. Amortization of contributions in aid of construction was $28 million, $27 million and $27 million for the years ended December 31, 2018, 2017 and 2016, respectively.

Revenue Recognition

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

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

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

Regulated Businesses Revenue

Revenue from the Company’s Regulated Businesses is generated primarily from water and wastewater services delivered to customers. These contracts contain a single performance obligation, the delivery of water and/or wastewater services, as the promise to transfer the individual good or service is not separately identifiable from other promises within the contracts and, therefore, is not distinct. Revenues are recognized over time, as services are provided. There are generally no significant financing components or variable consideration. Revenues include amounts billed to customers on a cycle basis and unbilled amounts calculated based on estimated usage from the date of the meter reading associated with the latest customer bill, to the end of the accounting period. The amounts that the Company has a right to invoice are determined by each customer’s actual usage, an indicator that the invoice amount corresponds directly to the value transferred to the customer. The Company also recognizes revenue when it is probable that future recovery of previously incurred costs or future refunds that are to be credited to customers will occur through the ratemaking process.

Market-Based Businesses Revenue

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

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

Income Taxes

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

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

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

The Company recognizes accrued interest and penalties related to tax positions as a component of income tax expense and accounts for sales tax collected from customers and remitted to taxing authorities on a net basis. See Note 14—Income Taxes for additional information.

Allowance for Funds Used During Construction

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

	2018				2017				2016
Allowance for other funds used during construction	$	24			$	19			$	15
Allowance for borrowed funds used during construction	13				8				6

Environmental Costs

The Company’s water and wastewater operations and the operations of its Market-Based Businesses are subject to U.S. federal, state, local and foreign requirements relating to environmental protection, and as such, the Company periodically becomes subject to environmental claims in the normal course of business. Environmental expenditures that relate to current operations or provide a future benefit are expensed or capitalized as appropriate. Remediation costs that relate to an existing condition caused by past operations are accrued, on an undiscounted basis, when it is probable that these costs will be incurred and can be reasonably estimated. A conservation agreement entered into by a subsidiary of the Company with the National Oceanic and Atmospheric Administration in 2010 and amended in 2017 required the subsidiary to, among other provisions, implement certain measures to protect the steelhead trout and its habitat in the Carmel River watershed in the State of California. The subsidiary agreed to pay $1 million annually commencing in 2010 with the final payment being made in 2021. Remediation costs accrued amounted to $4 million and $6 million as of December 31, 2018 and 2017, respectively.

Derivative Financial Instruments

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

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

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

Cash flows from derivative contracts are included in Net cash provided by operating activities on the Consolidated Statements of Cash Flows. See Note 11—Long-Term Debt for additional information.

New Accounting Standards

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

Standard		Description		Date of Adoption		Application		Effect on the Consolidated Financial Statements
Revenue from Contracts with Customers		Changes the criteria for recognizing revenue from a contract with a customer. Replaces existing guidance on revenue recognition, including most industry-specific guidance. The objective 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		Modified retrospective		The adoption had no material impact on the Consolidated Financial Statements. Additional disclosures were added in the Notes to Consolidated Financial Statements. See Note 3—Revenue Recognition for additional information.
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		Prospective		The adoption had no material impact on the Consolidated Financial Statements.
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost		Updated authoritative guidance to require the service cost component of net periodic benefit cost to be presented in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. The remaining components of net periodic benefit cost are required to be presented separately from the service cost component, in an income statement line item outside of operating income. Also, the guidance only allows for the service cost component to be eligible for capitalization. The updated guidance does not impact the accounting for net periodic benefit costs as regulatory assets or liabilities.		January 1, 2018		Retrospective for the presentation of the service cost component and the other components of net periodic benefit costs on the Consolidated Statements of Operations; prospective for the limitation of capitalization to only the service cost component of net periodic benefit costs in total assets.		The Company presented in the current period, and reclassified in the prior periods, net periodic benefit costs, other than the service cost component, in non-operating benefit costs, net on the Consolidated Statements of Operations.
Simplifying the Test for Goodwill Impairment		Updated authoritative guidance to simplify 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.		August 31, 2018		Prospective		See Note 8—Goodwill and Other Intangible Assets for additional information.
Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract		Updated the accounting and disclosure guidance for cloud computing arrangements that are service contracts. Under this guidance, implementation costs incurred in cloud computing arrangements and in developing or obtaining internal-use software follow the same capitalization requirements. The accounting for the service element of the arrangement remains unchanged.		September 30, 2018		Prospective		The adoption had no material impact on the Consolidated Financial Statements.
Changes to the Disclosure Requirements for Defined Benefit Plans		Updated the disclosure requirements for defined benefit plans. The guidance removes the requirement to disclose the amounts in accumulated other comprehensive income to be recognized as net periodic benefit cost, the effects of a one percent change in assumed healthcare costs and a number of other disclosures. The guidance clarifies that projected benefit obligations and accumulated benefit obligations should be disclosed, and adds disclosure requirements for the weighted average interest crediting rates for promised interest crediting rates and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation.		December 31, 2018		Retrospective		The adoption had no material impact on the Consolidated Financial Statements.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income		Permits an entity to reclassify tax effects in accumulated other comprehensive income (“AOCI”) as a result of the TCJA, to retained earnings.		December 31, 2018		In the period of adoption.		See Note 14—Income Taxes for additional information.

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

Standard		Description		Date of Adoption		Application		Estimated Effect on the Consolidated Financial Statements
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. A package of optional transition practical expedients allows an entity not to reassess under the new guidance (i) whether any existing contracts are or contain leases (ii) lease classification, and (iii) initial direct costs. Additional optional transition practical expedients are available which allow an entity not to evaluate existing land easements if the easements were not previously accounted for as leases, and to apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment in the opening balance of retained earnings in the period of adoption.		January 1, 2019; early adoption permitted		Modified retrospective		The adoption will result in recording operating lease right-of-use assets of approximately $118 million and operating lease liabilities of approximately $116 million on the Consolidated Balance Sheets. The immaterial difference between the operating lease right-of-use assets and operating lease liabilities will be recorded as an adjustment to retained earnings. The Company has defined a process and implemented internal controls and software to meet the accounting and reporting requirements of the guidance and did not elect early adoption for the standard. The Company will elect all practical expedients available under the new lease accounting and disclosure guidance. The practical expedient related to land easements allowed the Company to carry forward accounting treatment for existing land easements, which is to record easements as land and land rights in utility plant.
Targeted Improvements to Accounting for Hedging Activities		Updated the accounting and disclosure guidance for hedging activities, which allows for more financial and nonfinancial hedging strategies to be eligible for hedge accounting. Under this guidance, a qualitative effectiveness assessment is permitted for certain hedges if an entity can reasonably support an expectation of high effectiveness throughout the term of the hedge, provided that an initial quantitative test establishes that the hedge relationship is highly effective. Also, for cash flow hedges determined to be highly effective, all changes in the fair value of the hedging instrument will be recorded in other comprehensive income, with a subsequent reclassification to earnings when the hedged item impacts earnings.		January 1, 2019; early adoption permitted		Modified retrospective for adjustments related to the measurement of ineffectiveness for cash flow hedges; prospective for the updated presentation and disclosure requirements.		The adoption will not have a material impact on the Consolidated Financial Statements based upon the Company’s hedging activities as of the most recent balance sheet date.
Inclusion of the Secured Overnight Financing Rate (“SOFR”) Overnight Index Swap (“OIS”) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes		Designates the OIS rate based on SOFR as an eligible U.S. benchmark interest rate for the purposes of applying hedge accounting.		January 1, 2019; early adoption permitted		Prospective		The adoption will not have a material impact on the Consolidated Financial Statements based upon the Company’s hedging activities as of the most recent balance sheet date.
Measurement of Credit Losses on Financial Instruments		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 any impact on its Consolidated Financial Statements, as well as the timing of adoption.
Changes to the Disclosure Requirements for Fair Value Measurement		Updated the disclosure requirements for fair value measurement. The guidance removes the requirements to disclose transfers between Level 1 and Level 2 measurements, the timing of transfers between levels, and the valuation processes for Level 3 measurements. Disclosure of transfers into and out of Level 3 measurements will be required. The guidance adds disclosure requirements for the change in unrealized gains and losses in other comprehensive income for recurring Level 3 measurements, as well as the range and weighted average of significant unobservable inputs used to develop Level 3 measurements.		January 1, 2020; early adoption permitted		Prospective for added disclosures and for the narrative description of measurement uncertainty; retrospective for all other amendments.		The Company does not expect the adoption to have a material impact on its Consolidated Financial Statements, and the Company is evaluating the timing of adoption.

Reclassifications

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

Note 3: Revenue Recognition

Disaggregated Revenues

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

	Revenues from Contracts with Customers				Other Revenues Not from Contracts with Customers (a)				Total Operating Revenues
Regulated Businesses:
Water services:
Residential	$	1,663			$	—			$	1,663
Commercial	616				—				616
Fire service	137				—				137
Industrial	136				—				136
Public and other	197				—				197
Total water services	2,749				—				2,749
Wastewater services:
Residential	115				—				115
Commercial	30				—				30
Industrial	2				—				2
Public and other	14				—				14
Total wastewater services	161				—				161
Miscellaneous utility charges	48				—				48
Alternative revenue programs	—				19				19
Lease contract revenue	—				7				7
Total Regulated Businesses	2,958				26				2,984
Market-Based Businesses	476				—				476
Other	(17		)		(3		)		(20		)
Total operating revenues	$	3,417			$	23			$	3,440

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

Contract Balances

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

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

	Amount
Contract assets:
Balance at January 1, 2018	$	35
Additions	18
Transfers to accounts receivable, net	(39		)
Balance at December 31, 2018	$	14
Contract liabilities:
Balance at January 1, 2018	$	25
Additions	52
Transfers to operating revenues	(57		)
Balance at December 31, 2018	$	20

Remaining Performance Obligations

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

Note 4: Acquisitions and Divestitures

Regulated Businesses

Acquisitions

During 2018, the Company closed on 15 various regulated water and wastewater systems for a total aggregate purchase price of $33 million. Assets acquired in these acquisitions, principally utility plant, totaled $32 million. Liabilities assumed, primarily contributions in aid of construction, totaled $1 million. The Company recorded additional goodwill of $2 million associated with one of its acquisitions, which is reported in its Regulated Businesses segment. Of this total goodwill, none is expected to be deductible for tax purposes. The preliminary purchase price allocations related to these acquisitions will be finalized once the valuation of assets acquired has been completed, no later than one year after their acquisition date.

During 2017, the Company closed on 18 acquisitions of various regulated water and wastewater systems for a total aggregate purchase price of $210 million. This included the acquisition of the wastewater system assets of the Municipal Authority of the City of McKeesport, Pennsylvania, on December 18, 2017. Assets acquired, principally utility plant, totaled $207 million. Liabilities assumed totaled $23 million, including $9 million of contributions in aid of construction and assumed debt of $7 million. The Company recorded additional goodwill of $29 million associated with four of its acquisitions, which is reported in its Regulated Businesses segment. Of this total goodwill, approximately $1 million is expected to be deductible for tax purposes. Additionally, the Company recognized a bargain purchase gain of $3 million associated with three of the acquisitions.

During 2016, the Company closed on 15 acquisitions of various regulated water and wastewater systems for a total aggregate purchase price of $199 million. This included the acquisition of substantially all of the wastewater collection and treatment assets of the Sewer Authority of the City of Scranton, Pennsylvania (“Scranton”) in December 2016. Assets acquired, principally utility plant, totaled $194 million. Liabilities assumed totaled $30 million, including $14 million of contributions in aid of construction and assumed debt of $6 million. During 2017, the Company recorded additional goodwill of $43 million associated with five of its acquisitions, which is reported in its Regulated Businesses segment. Of this total goodwill, approximately $31 million is expected to be deductible for tax purposes. Additionally, during 2018 the Company recorded a measurement period adjustment of $5 million, increasing the goodwill recognized from the Scranton acquisition.

Highlighted Pending Acquisitions

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

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

Market-Based Businesses

Pivotal Acquisition

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

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

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

	June 4, 2018 (as initially reported)				Measurement Period Adjustments				June 4, 2018 (as adjusted)
Identifiable assets acquired:
Accounts receivable	$	23			$	(1	)		$	22
Other current assets	1				1				2
Property, plant and equipment	21				1				22
Intangible assets	96				(6		)		90
Total identifiable assets acquired	141				(5		)		136
Liabilities assumed:
Accounts payable and accrued liabilities	(5		)		—				(5		)
Other current liabilities	(14		)		2				(12		)
Long-term liabilities	(1		)		—				(1		)
Total liabilities assumed	(20		)		2				(18		)
Net identifiable assets acquired	121				(3		)		118
Goodwill	242				5				247
Net assets acquired	$	363			$	2			$	365

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

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

	Amount
Intangible asset class:
Customer relationships	$	78
Other intangible assets	12
Total intangible assets	$	90

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

Equity Forward Transaction and Common Stock Issuance

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

Divestitures

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

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

Note 5: Property, Plant and Equipment

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

	2018				2017				Range of Remaining Useful Lives		Weighted Average Useful Life
Utility plant:
Land and other non-depreciable assets	$	155			$	151
Sources of supply	821				798				2 to 127 Years		47 years
Treatment and pumping facilities	3,607				3,356				3 to 101 Years		40 years
Transmission and distribution facilities	10,164				9,583				9 to 149 Years		70 years
Services, meters and fire hydrants	4,008				3,754				5 to 90 Years		31 years
General structures and equipment	1,625				1,458				3 to 109 Years		15 years
Waste collection	943				904				5 to 114 Years		60 years
Waste treatment, pumping and disposal	570				557				3 to 139 Years		41 years
Construction work in progress	593				585
Total utility plant	22,486				21,146
Nonutility property	718				570				3 to 50 Years		6 years
Total property, plant and equipment	$	23,204			$	21,716

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

Note 6: Allowance for Uncollectible Accounts

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

	2018				2017				2016
Balance as of January 1	$	(42	)		$	(40	)		$	(39	)
Amounts charged to expense	(33		)		(29		)		(27		)
Amounts written off	34				30				29
Recoveries of amounts written off	(4		)		(3		)		(3		)
Balance as of December 31	$	(45	)		$	(42	)		$	(40	)

Note 7: Regulatory Assets and Liabilities

Regulatory Assets

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

	2018				2017
Deferred pension expense	$	362			$	285
Removal costs recoverable through rates	292				269
Regulatory balancing accounts	110				113
San Clemente Dam project costs	85				89
Debt expense	70				67
Purchase premium recoverable through rates	56				57
Deferred tank painting costs	42				42
Make-whole premium on early extinguishment of debt	33				27
Other	106				112
Total regulatory assets	$	1,156			$	1,061

The Company’s deferred pension expense includes a portion of the underfunded status that is probable of recovery through rates in future periods of $352 million and $270 million as of December 31, 2018 and 2017, respectively. The remaining portion is the pension expense in excess of the amount contributed to the pension plans which is deferred by certain subsidiaries and will be recovered in future service rates as contributions are made to the pension plan.

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

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

San Clemente Dam project costs represent costs incurred and deferred by the Company’s utility subsidiary in California pursuant to its efforts to investigate alternatives and remove the dam due to potential earthquake and flood safety concerns. In June 2012, the California Public Utilities Commission (“CPUC”) issued a decision authorizing implementation of a project to reroute the Carmel River and remove the San Clemente Dam. The project includes the Company’s utility subsidiary in California, the California State Conservancy and the National Marine Fisheries Services. Under the order’s terms, the CPUC has authorized recovery for pre-construction costs, interim dam safety measures and environmental costs and construction costs. The authorized costs were being recovered via a surcharge over a twenty-year period which began in October 2012. The unrecovered balance of project costs incurred, including cost of capital, net of surcharges totaled $85 million and $89 million as of December 31, 2018 and 2017, respectively. Surcharges collected were $8 million and $7 million for the years ended December 31, 2018 and 2017, respectively. Pursuant to the general rate case approved in December 2018, approval was granted to reset the twenty-year amortization period to begin January 1, 2018 and to establish an annual revenue requirement of $8 million to be recovered through base rates.

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

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

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

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

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

Regulatory Liabilities

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

	2018				2017
Income taxes recovered through rates	$	1,279			$	1,242
Removal costs recovered through rates	309				315
Postretirement benefit liability	209				33
Pension and other postretirement benefit balancing accounts	46				48
TCJA reserve on revenue	36				—
Other	28				26
Total regulatory liabilities	$	1,907			$	1,664

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

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

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

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

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

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

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

Note 8: Goodwill and Other Intangible Assets

Goodwill

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

	Regulated Businesses								Market-Based Businesses								Consolidated
	Cost				Accumulated Impairment				Cost				Accumulated Impairment				Cost				Accumulated Impairment				Total Net
Balance as of January 1, 2017	$	3,458			$	(2,332	)		$	327			$	(108	)		$	3,785			$	(2,440	)		$	1,345
Goodwill from acquisitions	29				—				—				—				29				—				29
Measurement period adjustments	5				—				—				—				5				—				5
Balance as of December 31, 2017	$	3,492			$	(2,332	)		$	327			$	(108	)		$	3,819			$	(2,440	)		$	1,379
Goodwill from acquisitions	2				—				247				—				249				—				249
Goodwill impairment charge	—				—				—				(53		)		—				(53		)		(53		)
Balance as of December 31, 2018	$	3,494			$	(2,332	)		$	574			$	(161	)		$	4,068			$	(2,493	)		$	1,575

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

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

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

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

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

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

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

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

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

Intangible Assets

The following tables provides the gross carrying value and accumulated amortization of the finite-lived intangible assets held by the Company as of December 31:

	2017				Acquisitions				Impairments				Other				2018
Customer relationships	$	12			$	78			$	(4	)		$	—			$	86
Other intangible assets	2				12				—				(1		)		13
Total gross carrying value	$	14			$	90			$	(4	)		$	(1	)		$	99

	2017				Amortization				Impairments				Other				2018
Customer relationships	$	(4	)		$	(9	)		$	—			$	—			$	(13	)
Other intangible assets	(1		)		(3		)		—				2				(2		)
Total accumulated amortization	$	(5	)		$	(12	)		$	—			$	2			$	(15	)
Total intangible assets, net	$	9															$	84

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

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

	Amount
2019	$	15
2020	13
2021	11
2022	10
2023	7

Note 9: Shareholders' Equity

Common Stock

Under the dividend reinvestment and direct stock purchase plan (the “DRIP”), shareholders may reinvest cash dividends and purchase additional Company common stock, up to certain limits, through the plan administrator without commission fees. Shares purchased by participants through the DRIP may be newly issued shares, treasury shares, or at the Company’s election, shares purchased by the plan administrator in the open market or in privately negotiated transactions. Purchases generally will be made and credited to DRIP accounts once each week. As of December 31, 2018, there were approximately 4.2 million shares available for future issuance under the DRIP.

Anti-dilutive Stock Repurchase Program

In February 2015, the Company’s Board of Directors authorized an anti-dilutive stock repurchase program, which allowed the Company to purchase up to 10 million shares of its outstanding common stock over an unrestricted period of time. The Company repurchased 0.6 million shares and 0.7 million shares of common stock in the open market at an aggregate cost of $45 million and $54 million under this program for the years ended December 31, 2018 and 2017, respectively. As of December 31, 2018, there were 5.5 million shares of common stock available for purchase under the program.

Accumulated Other Comprehensive Loss

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

	Defined Benefit Plans												Foreign Currency Translation				Gain (Loss) on Cash Flow Hedge				Accumulated Other Comprehensive Loss
	Employee Benefit Plan Funded Status				Amortization of Prior Service Cost				Amortization of Actuarial Loss
Beginning balance as of January 1, 2017	$	(147	)		$	1			$	42			$	2			$	16			$	(86	)
Other comprehensive income (loss) before reclassification	7				—				—				(1		)		(6		)		—
Amounts reclassified from accumulated other comprehensive loss	—				—				7				—				—				7
Net other comprehensive income (loss)	7				—				7				(1		)		(6		)		7
Ending balance as of December 31, 2017	$	(140	)		$	1			$	49			$	1			$	10			$	(79	)
Other comprehensive income (loss) before reclassification	60				—				—				—				(2		)		58
TCJA tax effects reclassified from accumulated other comprehensive loss	(22		)		—				—				—				2				(20		)
Amounts reclassified from accumulated other comprehensive loss	—				—				7				—				—				7
Net other comprehensive income	38				—				7				—				—				45
Ending balance as of December 31, 2018	$	(102	)		$	1			$	56			$	1			$	10			$	(34	)

The Company does not reclassify the amortization of defined benefit pension cost components from accumulated other comprehensive loss directly to net income in its entirety, as a portion of these costs have been capitalized as a regulatory asset. These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 15—Employee Benefits for additional information.

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

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

Dividends

The Company’s Board of Directors authorizes the payment of dividends. The Company’s ability to pay dividends on its common stock is subject to having access to sufficient sources of liquidity, net income and cash flows of the Company’s subsidiaries, the receipt of dividends and repayments of indebtedness from the Company’s subsidiaries, compliance with Delaware corporate and other laws, compliance with the contractual provisions of debt and other agreements, and other factors. The Company’s dividend rate on its common stock is determined by the Board of Directors on a quarterly basis and takes into consideration, among other factors, current and possible future developments that may affect the Company’s income and cash flows. When dividends on common stock are declared, they are typically paid in March, June, September and December. Historically, dividends have been paid quarterly to holders of record less than 30 days prior to the distribution date. Since the dividends on the Company’s common stock are not cumulative, only declared dividends are paid.

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

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

On December 7, 2018, the Company’s Board of Directors declared a quarterly cash dividend payment of $0.455 per share payable on March 1, 2019, to shareholders of record as of February 7, 2019.

Equity Forward Transaction

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

Regulatory Restrictions

The issuance of long-term debt or equity securities by the Company or American Water Capital Corp. (“AWCC”), the Company’s wholly owned financing subsidiary, does not require authorization of any state PUC if no guarantee or pledge of the regulated subsidiaries is utilized. However, state PUC authorization is required to issue long-term debt at most of the Company’s regulated subsidiaries. The Company’s regulated subsidiaries normally obtain the required approvals on a periodic basis to cover their anticipated financing needs for a period of time or in connection with a specific financing.

Under applicable law, the Company’s subsidiaries can pay dividends only from retained, undistributed or current earnings. A significant loss recorded at a subsidiary may limit the dividends that the subsidiary can distribute to American Water. Furthermore, the ability of the Company’s subsidiaries to pay upstream dividends or repay indebtedness to American Water is subject to compliance with applicable regulatory restrictions and financial obligations, including, for example, debt service and preferred and preference stock dividends, as well as applicable corporate, tax and other laws and regulations, and other agreements or covenants made or entered into by the Company and its subsidiaries.

Note 10: Stock Based Compensation

The Company has granted stock options, stock units and dividend equivalents to non-employee directors, officers and other key employees of the Company pursuant to the terms of its 2007 Omnibus Equity Compensation Plan (the “2007 Plan”). Stock units under the 2007 Plan generally vest based on (i) continued employment with the Company (“RSUs”), or (ii) continued employment with the Company where distribution of the shares is subject to the satisfaction in whole or in part of stated performance-based goals (“PSUs”). The total aggregate number of shares of common stock that may be issued under the 2007 Plan is 15.5 million. As of December 31, 2018, 7.5 million shares were available for issuance under the 2007 Plan. The 2007 Plan has been replaced by the 2017 Omnibus Plan, as defined below, and no additional awards may be granted under the 2007 Plan. However, shares may still be issued under the 2007 Plan pursuant to the terms of awards previously issued under that plan prior to May 12, 2017.

In May 2017, the Company’s shareholders approved the American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan (the “2017 Omnibus Plan”). The Company has granted stock units, including RSUs and PSUs, stock awards and dividend equivalents to non-employee directors, officers and employees under the 2017 Omnibus Plan. A total of 7.2 million shares of common stock may be issued under the 2017 Omnibus Plan. As of December 31, 2018, 6.9 million shares were available for grant under the 2017 Omnibus Plan. The 2017 Omnibus Plan provides that grants of awards may be in any of the following forms: incentive stock options, nonqualified stock options, stock appreciation rights, stock units, stock awards, other stock-based awards and dividend equivalents. Dividend equivalents may be granted only on stock units or other stock-based awards.

The cost of services received from employees in exchange for the issuance of stock options and restricted stock awards is measured based on the grant date fair value of the awards issued. The value of stock options and stock unit awards at the date of the grant is amortized through expense over the three-year service period. All awards granted in 2018, 2017 and 2016 are classified as equity. The Company recognizes compensation expense for stock awards over the vesting period of the award. The Company stratified its grant populations and used historic employee turnover rates to estimate employee forfeitures. The estimated rate is compared to the actual forfeitures at the end of the reporting period and adjusted as necessary. The following table provides the stock-based compensation expense recorded in operation and maintenance expense in the accompanying Consolidated Statements of Operations for the years ended December 31:

	2018				2017				2016
Stock options	$	1			$	1			$	2
RSUs and PSUs	15				9				8
Nonqualified employee stock purchase plan	1				1				1
Stock-based compensation	17				11				11
Income tax benefit	(5		)		(4		)		(4		)
Stock-based compensation expense, net of tax	$	12			$	7			$	7

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

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

Stock Options

There were no grants of stock options to employees in 2018 and 2017. In 2016, the Company granted non-qualified stock options to certain employees under the 2007 Plan. The stock options vest ratably over the three-year service period beginning on January 1 of the year of the grant and have no performance vesting conditions. Expense is recognized using the straight-line method and is amortized over the requisite service period.

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

	2018				2017				2016
Dividend yield	—		%		—		%		2.09		%
Expected volatility	—		%		—		%		15.89		%
Risk-free interest rate	—		%		—		%		1.15		%
Expected life (years)	0				0				4.0
Exercise price	$	—			$	—			$	65.25
Grant date fair value per share	$	—			$	—			$	6.61

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

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

	Shares (in thousands)			Weighted Average Exercise Price (per share)				Weighted Average Remaining Life (years)		Aggregate Intrinsic Value
Options outstanding as of December 31, 2017	711			$	53.51			3.67		$	29
Granted	—			—
Forfeited or expired	(7	)		65.15
Exercised	(187	)		49.32
Options outstanding as of December 31, 2018	517			$	54.92			2.96		$	19
Options exercisable as of December 31, 2018	(434	)		$	52.93			2.76		$	16

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

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

	2018				2017				2016
Intrinsic value	$	9			$	10			$	18
Exercise proceeds	7				11				15
Income tax benefit realized	2				3				6

Stock Units

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

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

The RSUs are valued at the market value of the closing price of the Company’s common stock on the date of the grant and the majority vest ratably over the three-year service period beginning January 1 of the year of the grant. These RSUs are amortized through expense over the requisite service period using the straight-line method.

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

	Shares (in thousands)			Weighted Average Grant Date Fair Value (per share)
Non-vested total as of December 31, 2017	89			$	67.48
Granted	107			82.75
Vested	(57	)		72.11
Forfeited	(6	)		74.34
Non-vested total as of December 31, 2018	133			$	77.44

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

During 2018, 2017 and 2016, the Company granted PSUs to certain employees under the 2007 Plan and 2017 Omnibus Plan, as applicable. The majority of PSUs vest ratably based on continued employment with the Company over the three-year performance period beginning January 1 of the year of the grant (the “Performance Period”). Distribution of the performance shares is contingent upon the achievement of one or more internal performance measures and, separately, a relative total shareholder return performance measure, over the Performance Period.

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

	Shares (in thousands)			Weighted Average Grant Date Fair Value (per share)
Non-vested total as of December 31, 2017	281			$	67.33
Granted	165			72.50
Vested	(122	)		58.18
Forfeited	(16	)		73.87
Non-vested total as of December 31, 2018	308			$	73.39

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

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

	2018				2017				2016
Expected volatility	17.23		%		17.40		%		15.90		%
Risk-free interest rate	2.36		%		1.53		%		0.91		%
Expected life (years)	3.0				3.0				3.0
Grant date fair value per share	$	73.62			$	72.81			$	77.16

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

If dividends are paid with respect to shares of the Company’s common stock before the RSUs and PSUs are distributed, the Company credits a liability for the value of the dividends that would have been paid if the RSUs and PSUs were shares of Company common stock. When the RSUs and PSUs are distributed, the Company pays the participant a lump sum cash payment equal to the value of the dividend equivalents accrued. The Company accrued dividend equivalents totaling $1 million, less than $1 million and $1 million to accumulated deficit in the accompanying Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2018, 2017 and 2016, respectively.

Employee Stock Purchase Plan

The Company maintains a nonqualified employee stock purchase plan (the “ESPP”) through which employee participants may use payroll deductions to acquire Company common stock at a discount. Prior to February 5, 2019, the purchase price of common stock acquired under the ESPP was the lesser of 90% of the fair market value of the common stock at either the beginning or the end of a three-month purchase period. On July 27, 2018, the ESPP was amended, effective February 5, 2019, to permit employee participants to acquire Company common stock at 85% of the fair market value of the common stock at the end of the purchase period. As of December 31, 2018, there were 1.9 million shares of common stock reserved for issuance under the ESPP. The ESPP is considered compensatory. During the years ended December 31, 2018, 2017 and 2016, the Company issued 95 thousand, 93 thousand and 93 thousand shares, respectively, under the ESPP.

Note 11: Long-Term Debt

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

	Rate		Weighted Average Rate		Maturity		2018				2017
Long-term debt of AWCC: (a)
Senior notes—fixed rate	2.95%-8.27%		4.26%		2019-2048		$	6,116			$	5,292
Private activity bonds and government funded debt—fixed rate	1.79%-6.25%		5.45%		2021-2040		192				193
Long-term debt of other American Water subsidiaries:
Private activity bonds and government funded debt—fixed rate (b)	0.00%-6.20%		4.54%		2019-2048		727				712
Mortgage bonds—fixed rate	3.92%-9.71%		7.41%		2019-2039		606				607
Mandatorily redeemable preferred stock	8.47%-9.75%		8.60%		2019-2036		8				10
Capital lease obligations	12.91%		12.91%		2026		1				1
Term loan	5.60%-5.63%		5.62%		2021		6				9
Long-term debt							7,656				6,824
Unamortized debt premium, net (c)							7				9
Unamortized debt issuance costs							(16		)		(13		)
Less current portion of long-term debt							(71		)		(322		)
Total long-term debt							$	7,576			$	6,498

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

(b)	Includes $3 million and $5 million of variable rate debt as of December 31, 2018 and 2017, respectively, with variable-to-fixed interest rate swaps ranging between 3.93% and 4.72%. This debt was assumed via an acquisition in 2013.

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

All mortgage bonds, term loans and $725 million of the private activity bonds and government funded debt held by the Company’s subsidiaries were collateralized as of December 31, 2018.

Long-term debt indentures contain a number of covenants that, among other things, limit, subject to certain exceptions, the Company from issuing debt secured by the Company’s assets. Certain long-term notes require the Company to maintain a ratio of consolidated total indebtedness to consolidated total capitalization of not more than 0.70 to 1.00. The ratio as of December 31, 2018 was 0.59 to 1.00. In addition, the Company has $889 million of notes which include the right to redeem the notes at par value, in whole or in part, from time to time, subject to certain restrictions.

The following table provides future sinking fund payments and debt maturities:

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

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

Company		Type		Rate		Maturity		Amount
AWCC (a)		Senior notes—fixed rate		3.75%-4.20%		2028-2048		$	1,325
Other American Water subsidiaries		Private activity bonds and government funded debt—fixed rate (b)		0.00%-5.00%		2021-2048		33
Total issuances								$	1,358

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

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

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

Company		Type		Rate		Maturity		Amount
AWCC		Senior notes—fixed rate		5.62%-6.25%		2018-2022		$	501
AWCC		Private activity bonds and government funded debt—fixed rate		1.79%-2.90%		2021-2031		1
Other American Water subsidiaries		Private activity bonds and government funded debt—fixed rate		0.00%-5.50%		2018-2047		18
Other American Water subsidiaries		Mortgage bonds—fixed rate		9.13%		2021		1
Other American Water subsidiaries		Mandatorily redeemable preferred stock		8.49%-9.18%		2031-2036		2
Other American Water subsidiaries		Term loan		4.83%-5.69%		2021		3
Total retirements and redemptions								$	526

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

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

Interest, net includes interest income of approximately $11 million, $14 million and $14 million in 2018, 2017 and 2016, respectively.

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

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

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

The Company has employed interest rate swaps to fix the interest cost on a portion of its variable-rate debt with an aggregate notional amount of $3 million. The Company has designated these instruments as economic hedges, accounted for at fair value, with gains or losses recognized in interest, net. The gain recognized by the Company was de minimis for the years ended 2018 and 2017.

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

Derivative Instrument		Derivative Designation		Balance Sheet Classification		2018			2017
Liability derivative:
Forward starting swaps		Cash flow hedge		Other current liabilities		14			3

Note 12: Short-Term Debt

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

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

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

	Credit Facility Commitment (a)				Available Credit Facility Capacity (a)				Letter of Credit Sublimit				Available Letter of Credit Capacity				Commercial Paper Limit				Available Commercial Paper Capacity
December 31, 2018	$	2,262			$	2,177			$	150			$	69			$	2,100			$	1,146
December 31, 2017	1,762				1,673				150				66				1,600				695

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

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

	2018				2017
Average borrowings	$	1,029			$	779
Maximum borrowings outstanding	1,905				1,135
Weighted average interest rates, computed on daily basis	2.28		%		1.24		%
Weighted average interest rates, as of December 31	2.84		%		1.61		%

The credit facility requires the Company to maintain a ratio of consolidated debt to consolidated capitalization of not more than 0.70 to 1.00. The ratio as of December 31, 2018 was 0.59 to 1.00.

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

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

Note 13: General Taxes

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

	2018				2017				2016
Gross receipts and franchise	$	112			$	110			$	106
Property and capital stock	120				105				106
Payroll	33				31				32
Other general	12				13				14
Total general taxes	$	277			$	259			$	258

Note 14: Income Taxes

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

	2018				2017				2016
Current income taxes:
State	$	26			$	25			$	20
Federal	1				(1		)		1
Total current income taxes	$	27			$	24			$	21
Deferred income taxes:
State	$	33			$	50			$	24
Federal	163				413				258
Amortization of deferred investment tax credits	(1		)		(1		)		(1		)
Total deferred income taxes	195				462				281
Provision for income taxes	$	222			$	486			$	302

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

	2018			2017			2016
Income tax at statutory rate	21.0	%		35.0	%		35.0	%
Increases (decreases) resulting from:
State taxes, net of federal taxes	5.5	%		5.4	%		3.8	%
TCJA	1.5	%		13.7	%		—	%
Other, net	0.2	%		(0.8	)%		0.4	%
Effective tax rate	28.2	%		53.3	%		39.2	%

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

Changes in the Code from the TCJA had a material impact on the Company’s financial statements in 2017. Under GAAP, specifically Accounting Standards Codification Topic 740, Income Taxes (“ASC 740”), the tax effects of changes in tax laws must be recognized in the period in which the law is enacted. ASC 740 also requires deferred income tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. Thus, at the date of enactment, the Company’s deferred income taxes were re-measured based upon the new tax rate. For the Company’s regulated entities, substantially all of the change in deferred income taxes are recorded as either an offset to a regulatory asset or liability because changes are expected to be recovered by or refunded to customers. For the Company’s unregulated operations, the change in deferred income taxes is recorded as a non-cash re-measurement adjustment to earnings.

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

As of December 31, 2018, the Company has recorded all its reasonable estimates resulting from the TCJA under SAB 118. These estimates, however, are still subject to changes due to the future impacts of various items, including further changes in income tax laws, forecasted financial conditions and the actual tax return filings with the tax authorities.

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

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

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

	2018				2017
Deferred tax assets:
Advances and contributions	$	402			$	395
Tax losses and credits	131				196
Regulatory income tax assets	339				327
Pension and other postretirement benefits	91				96
Other	44				49
Total deferred tax assets	1,007				1,063
Valuation allowance	(14		)		(13		)
Total deferred tax assets, net of allowance	$	993			$	1,050
Deferred tax liabilities:
Property, plant and equipment	$	2,537			$	2,429
Deferred pension and other postretirement benefits	77				69
Other	97				103
Total deferred tax liabilities	2,711				2,601
Total deferred tax liabilities, net of deferred tax assets	$	(1,718	)		$	(1,551	)

As of December 31, 2018 and 2017, the Company recognized federal NOL carryforwards of $707 million and $1.05 billion, respectively. The Company believes the federal NOL carryforwards are more likely than not to be recovered and require no valuation allowance. The Company’s federal NOL carryforwards will begin to expire in 2028.

As of December 31, 2018 and 2017, the Company had state NOLs of $547 million and $322 million, respectively, a portion of which are offset by a valuation allowance because the Company does not believe these NOLs are more likely than not to be realized. The state NOL carryforwards began to expire in 2018 through 2037.

As of December 31, 2018 and 2017, the Company had an insignificant amount of Canadian NOL carryforwards and capital loss carryforwards for federal income tax purposes.

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

The following table provides the changes in gross liability, excluding interest and penalties, for unrecognized tax benefits:

	Amount
Balance as of January 1, 2017	$	169
Increases in current period tax positions	8
Decreases in prior period measurement of tax positions	(71		)
Balance as of December 31, 2017	$	106
Increases in current period tax positions	13
Decreases in prior period measurement of tax positions	(22		)
Balance as of December 31, 2018	$	97

The Company’s tax positions relate primarily to the deductions claimed for repair and maintenance costs on its utility plant. The gross liability was reduced primarily as a result of the Section 481(a) adjustment allocated for the current year related to the accounting method change the Company filed with its 2015 tax return. The Company does not anticipate material changes to its unrecognized tax benefits within the next year. However, the Company expects to utilize a significant portion of the remaining NOLs in 2019 and fully utilize its NOLs in 2020, as a result, a balance sheet reclassification between the unrecognized tax benefits and deferred income tax asset is anticipated due to the lack of available NOLs to offset. If the Company sustains all of its positions as of December 31, 2018, an unrecognized tax benefit of $10 million, excluding interest and penalties, would impact the Company’s effective tax rate. The Company had an insignificant amount of interest and penalties related to its tax positions as of December 31, 2018 and 2017.

The following table provides the changes in the valuation allowance:

	Amount
Balance as of January 1, 2016	$	8
Decreases in current period tax positions	(2		)
Balance as of December 31, 2016	$	6
Decreases in current period tax positions	7
Balance as of December 31, 2017	$	13
Increases in current period tax positions	1
Balance as of December 31, 2018	$	14

Note 15: Employee Benefits

Pension and Other Postretirement Benefits

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

The Company’s pension funding practice is to contribute at least the greater of the minimum amount required by the Employee Retirement Income Security Act of 1974 or the normal cost. Further, the Company will consider additional contributions if needed to avoid “at risk” status and benefit restrictions under the Pension Protection Act of 2006 (“PPA”). The Company may also consider increased contributions, based on other financial requirements and the plans’ funded position. Pension expense in excess of the amount contributed to the pension plans is deferred by certain regulated subsidiaries pending future recovery in rates charged for utility services as contributions are made to the plans. See Note 7—Regulatory Assets and Liabilities for additional information. Pension plan assets are invested in a number of actively managed, commingled funds, and limited partnerships including equities, fixed income securities, guaranteed annuity contracts with insurance companies, real estate funds and real estate investment trusts (“REITs”).

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

The investment policy guideline of the pension plan is focused on diversification, improving returns and reducing the volatility of the funded status over a long-term horizon. The investment policy guidelines of the postretirement plans focus on the appropriate strategy given the funded status of the plans. None of the Company’s securities are included in pension or other postretirement benefit plan assets.

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

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

Asset Category		2019 Target Allocation			Total				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Percentage of Plan Assets as of December 31, 2018
Cash					$	24			$	24			$	—			$	—			2	%
Equity securities:		50	%
U.S. large cap					297				297				—				—				20	%
U.S. small cap					76				70				6				—				5	%
International					256				2				132				122				17	%
Real estate fund					65				—				—				65				4	%
REITs					20				—				20				—				1	%
Fixed income securities:		50	%
U.S. Treasury securities and government bonds					181				167				14				—				12	%
Corporate bonds					491				—				491				—				33	%
Mortgage-backed securities					11				—				11				—				1	%
Municipal bonds					28				—				28				—				2	%
Long duration bond fund					7				7				—				—				—
Guarantee annuity contracts					43				—				—				43				3	%
Total		100	%		$	1,499			$	567			$	702			$	230			100	%

Asset Category		2018 Target Allocation			Total				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Percentage of Plan Assets as of December 31, 2017
Cash					$	7			$	7			$	—			$	—			—
Equity Securities:		50	%
U.S. large cap					344				344				—				—				21	%
U.S. small cap					84				79				5				—				5	%
International					295				2				149				144				18	%
Real estate fund					86				—				—				86				5	%
REITs					26				—				26				—				2	%
Fixed income securities:		50	%
U.S. Treasury securities and government bonds					200				180				20				—				12	%
Corporate bonds					519				—				519				—				31	%
Mortgage-backed securities					1				—				1				—				—
Municipal bonds					31				—				31				—				2	%
Long duration bond fund					8				8				—				—				1	%
Guarantee annuity contracts					48				—				—				48				3	%
Total		100	%		$	1,649			$	620			$	751			$	278			100	%

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

	Level 3
Balance as of January 1, 2018	$	278
Actual return on assets	(23		)
Purchases, issuances and settlements, net	(25		)
Balance as of December 31, 2018	$	230

	Level 3
Balance as of January 1, 2017	$	140
Actual return on assets	2
Purchases, issuances and settlements, net	136
Balance as of December 31, 2017	$	278

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

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

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

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

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

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

In order to minimize asset volatility relative to the liabilities, a portion of plan assets is allocated to fixed income investments that are exposed to interest rate risk. Increases in interest rates generally will result in a decline in the value of fixed income assets while reducing the present value of the liabilities. Conversely, rate decreases will increase fixed income assets, partially offsetting the related increase in the liabilities. Within equities, risk is mitigated by constructing a portfolio that is broadly diversified by geography, market capitalization, manager mandate size, investment style and process. For the postretirement medical bargaining plan, all of its assets are in fixed-income securities and the asset structure is designed to meet the cash flows of the liabilities. This design reduces the plan’s exposure to changes in interest rates.

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

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

Asset Category		2019 Target Allocation			Total				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Percentage of Plan Assets as of December 31, 2018
Bargain VEBA:
Cash					$	31			$	31			$	—			$	—			—
Equity securities:		2	%
U.S. large cap					1				1				—				—				—
International					17				—				—				17				4	%
Fixed income securities:		98	%
U.S. Treasury securities and government bonds					179				178				1				—				47	%
Corporate bonds					141				—				141				—				37	%
Municipal bonds					9				—				9				—				3	%
Long duration bond fund					4				4				—				—				1	%
Future and option contracts (a)					—				—				—				—				8	%
Total bargain VEBA		100	%		$	382			$	214			$	151			$	17			100	%
Non-bargain VEBA:
Cash					$	3			$	3			$	—			$	—			—
Equity securities:		60	%
U.S. large cap					43				43				—				—				35	%
International					24				24				—				—				20	%
Fixed income securities:		40	%
Core fixed income bond fund (a)					52				—				52				—				45	%
Total non-bargain VEBA		100	%		$	122			$	70			$	52			$	—			100	%
Life VEBA:
Equity securities:		70	%
U.S. large cap					2				2				—				—				67	%
Fixed income securities:		30	%
Core fixed income bond fund (a)					1				1				—				—				33	%
Total life VEBA		100	%		$	3			$	3			$	—			$	—			100	%
Total		100	%		$	507			$	287			$	203			$	17			100	%

(a)	Includes cash for margin requirements.

Asset Category		2018 Target Allocation			Total				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Percentage of Plan Assets as of 12/31/2017
Bargain VEBA:
Cash					$	18			$	18			$	—			$	—			—
Equity securities:		30	%
U.S. large cap					44				44				—				—				10	%
International					51				51				—				—				12	%
Fixed income securities:		70	%
U.S. Treasury securities and government bonds					48				21				27				—				11	%
Corporate bonds					233				—				233				—				55	%
Municipal bonds					26				—				26				—				6	%
Long duration bond fund					4				4				—				—				1	%
Future and option contracts (a)					2				2				—				—				5	%
Total bargain VEBA		100	%		$	426			$	140			$	286			$	—			100	%
Non-bargain VEBA:
Cash					$	1			$	1			$	—			$	—			—
Equity securities:		60	%
U.S. large cap					53				53				—				—				37	%
U.S. small cap					5				5				—				—				4	%
International					47				47				—				—				33	%
Fixed income securities:		40	%
Core fixed income bond fund (a)					36				36				—				—				26	%
Total non-bargain VEBA		100	%		$	142			$	142			$	—			$	—			100	%
Life VEBA:
Cash					$	3			$	3			$	—			$	—			—
Equity securities:		70	%
U.S. large cap					3				3				—				—				38	%
Fixed income securities:		30	%
Core fixed income bond fund (a)					2				2				—				—				62	%
Total life VEBA		100	%		$	8			$	8			$	—			$	—			100	%
Total		100	%		$	576			$	290			$	286			$	—			100	%

(a)	Includes cash for margin requirements.

Valuation Techniques Used to Determine Fair Value

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

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

Fixed-income securities—The majority of U.S. Treasury securities and government bonds have been categorized as Level 1 because they trade in highly-liquid and transparent markets and their prices can be corroborated. The fair values of corporate bonds, mortgage backed securities, and certain government bonds are based on prices that reflect observable market information, such as actual trade information of similar securities. They are categorized as Level 2 because the valuations are calculated using models which utilize actively traded market data that the Company can corroborate. Exchange-traded options and futures, for which market quotations are readily available, are valued at the last reported sale price or official closing price on the primary market or exchange on which they are traded and are classified as Level 1.

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

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

Guaranteed annuity contracts—Guaranteed annuity contracts are categorized as Level 3 because the investments are not publicly quoted. Since these market values are determined by the provider, they are not highly observable and have been categorized as Level 3. Exchange-traded future and option positions are reported in accordance with changes in variation margins that are settled daily.

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

	Pension Benefits								Other Benefits
	2018				2017				2018				2017
Change in benefit obligation:
Benefit obligation as of January 1,	$	2,034			$	1,864			$	614			$	610
Service cost	34				33				8				10
Interest cost	76				80				20				26
Plan participants' contributions	—				—				2				2
Plan amendments	(23		)		—				(174		)		—
Actuarial (gain) loss	(153		)		118				(89		)		(9		)
Acquisitions	—				9				—				—
Gross benefits paid	(76		)		(70		)		(29		)		(26		)
Federal subsidy	—				—				1				1
Benefit obligation as of December 31,	$	1,892			$	2,034			$	353			$	614
Change in plan assets:
Fair value of plan assets as of January 1,	$	1,649			$	1,443			$	576			$	525
Actual return on plan assets	(97		)		227				(40		)		69
Employer contributions	24				42				(2		)		6
Plan participants' contributions	—				—				2				2
Acquisitions	—				7				—				—
Benefits paid	(77		)		(70		)		(29		)		(26		)
Fair value of plan assets as of December 31,	$	1,499			$	1,649			$	507			$	576
Funded value as of December 31,	$	(393	)		$	(385	)		$	154			$	(38	)
Amounts recognized on the balance sheet:
Noncurrent asset	$	—			$	—			$	155			$	2
Current liability	(3		)		(1		)		—				—
Noncurrent liability	(390		)		(384		)		(1		)		(40		)
Net amount recognized	$	(393	)		$	(385	)		$	154			$	(38	)

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

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

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

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

	Pension Benefits								Other Benefits
	2018				2017				2018				2017
Net actuarial loss	$	431			$	416			$	83			$	108
Prior service cost (credit)	(22		)		2				(291		)		(140		)
Net amount recognized	$	409			$	418			$	(208	)		$	(32	)
Regulatory assets (liabilities)	$	352			$	270			$	(208	)		$	(32	)
Accumulated other comprehensive income	57				148				—				—
Total	$	409			$	418			$	(208	)		$	(32	)

The following table provides the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with a projected obligation in excess of plan assets as of December 31, 2018 and 2017:

	Projected Benefit Obligation Exceeds the Fair Value of Plans' Assets
	2018				2017
Projected benefit obligation	$	1,892			$	2,034
Fair value of plan assets	1,499				1,649
	Accumulated Benefit Obligation Exceeds the Fair Value of Plans' Assets
	2018				2017
Accumulated benefit obligation	$	1,768			$	1,888
Fair value of plan assets	1,499				1,649

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

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

Minimum funding requirements for the qualified defined benefit pension plan are determined by government regulations and not by accounting pronouncements. The Company plans to contribute amounts at least equal to or greater than the minimum required contributions or the normal cost in 2019 to the qualified pension plans. The Company plans to contribute to its 2019 other postretirement benefit cost for rate-making purposes.

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

	Pension Benefits				Other Benefits
2019 expected employer contributions:
To plan trusts	$	31			$	—
To plan participants	2				—

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

	Pension Benefits				Other Benefits
	Expected Benefit Payments				Expected Benefit Payments				Expected Federal Subsidy Payments
2019	$	102			$	27			$	1
2020	107				27				1
2021	111				28				1
2022	115				28				1
2023	120				28				1
2024-2028	634				136				6

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

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

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

	Pension Benefits						Other Benefits
	2018		2017		2016		2018		2017		2016
Weighted average assumptions used to determine December 31 benefit obligations:
Discount rate	4.38%		3.75%		4.28%		4.32%		3.73%		4.26%
Rate of compensation increase	3.00%		3.02%		3.07%		N/A		N/A		N/A
Medical trend	N/A		N/A		N/A		graded from		graded from		graded from
							6.75% in 2019		7.00% in 2018		7.00% in 2017
							to 5.00% in 2026+		to 4.50% in 2026+		to 5.00% in 2021+
Weighted average assumptions used to determine net periodic cost:
Discount rate	3.75%		4.28%		4.66%		4.23%		4.26%		3.66%
Expected return on plan assets	5.95%		6.49%		7.02%		4.77%		5.09%		5.37%
Rate of compensation increase	3.02%		3.07%		3.10%		N/A		N/A		N/A
Medical trend	N/A		N/A		N/A		graded from		graded from		graded from
							7.00% in 2018		7.00% in 2017		6.50% in 2016
							to 4.50% in 2026+		to 5.00% in 2021+		to 5.00% in 2021+

NOTE	“N/A” in the table above means assumption is not applicable.

The discount rate assumption was determined for the pension and postretirement benefit plans independently. At year-end 2011, the Company began using an approach that approximates the process of settlement of obligations tailored to the plans’ expected cash flows by matching the plans’ cash flows to the coupons and expected maturity values of individually selected bonds. Historically, for each plan, the discount rate was developed at the level equivalent rate that would produce the same present value as that using spot rates aligned with the projected benefit payments.

The expected long-term rate of return on plan assets is based on historical and projected rates of return, prior to administrative and investment management fees, for current and planned asset classes in the plans’ investment portfolios. Assumed projected rates of return for each of the plans’ projected asset classes were selected after analyzing historical experience and future expectations of the returns and volatility of the various asset classes. Based on the target asset allocation for each asset class, the overall expected rate of return for the portfolio was developed, adjusted for historical and expected experience of active portfolio management results compared to the benchmark returns. The Company’s pension expense increases as the expected return on assets decreases. The Company used an expected return on plan assets of 5.95% to estimate its 2018 pension benefit costs, and an expected blended return based on weighted assets of 4.77% to estimate its 2018 other postretirement benefit costs.

In the determination of year end 2014 projected benefit plan obligations, the Company adopted a new table based on the Society of Actuaries RP 2014 mortality table including a generational BB-2D projection scale. The adoption resulted in a significant increase to pension and other postretirement benefit plans’ projected benefit obligations. In 2015, a new MP 2015 Projection Scale was issued, but not adopted by the Company since all of the experience upon which the MP 2015 Projection Scale is based was considered by the Company in selecting its 2014 assumptions. For year-end 2017, the Company retained the Society of Actuaries RP-2014 mortality table as its base mortality table but adopted the new MP-2017 generational projection scale to project mortality improvements after 2006. In 2018, the Company adopted the new MP-2018 mortality improvement scale to gradually adjust future mortality rates downward.

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

	2018				2017				2016
Components of net periodic pension benefit cost:
Service cost	$	34			$	33			$	32
Interest cost	76				80				80
Expected return on plan assets	(97		)		(93		)		(95		)
Amortization of:
Prior service cost (credit)	1				1				1
Actuarial (gain) loss	27				34				27
Net periodic pension benefit cost	$	41			$	55			$	45
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Current year actuarial (gain) loss	(60		)		(7		)		21
Amortization of actuarial gain (loss)	(7		)		(7		)		(6		)
Total recognized in other comprehensive income	$	(67	)		$	(14	)		$	15
Total recognized in net periodic benefit cost and other comprehensive income	$	(26	)		$	41			$	60
Components of net periodic other postretirement benefit cost:
Service cost	$	8			$	10			$	12
Interest cost	20				26				28
Expected return on plan assets	(26		)		(26		)		(27		)
Amortization of:
Prior service cost (credit)	(23		)		(18		)		(9		)
Actuarial (gain) loss	3				10				5
Net periodic other postretirement benefit cost	$	(18	)		$	2			$	9

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

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

Savings Plans for Employees

The Company maintains 401(k) savings plans that allow employees to save for retirement on a tax-deferred basis. Employees can make contributions that are invested at their direction in one or more funds. The Company makes matching contributions based on a percentage of an employee’s contribution, subject to certain limitations. Due to the Company’s discontinuing new entrants into the defined benefit pension plan, on January 1, 2006, the Company began providing an additional 5.25% of base pay defined contribution benefit for union employees hired on or after January 1, 2001 and non-union employees hired on or after January 1, 2006. Plan expenses totaled $12 million, $13 million and $9 million for 2018, 2017 and 2016, respectively. All of the Company’s contributions are invested in one or more funds at the direction of the employees.

Note 16: Commitments and Contingencies

Commitments have been made in connection with certain construction programs. The estimated capital expenditures required under legal and binding contractual obligations amounted to $419 million as of December 31, 2018.

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

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

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

Contingencies

The Company is routinely involved in legal actions incident to the normal conduct of its business. As of December 31, 2018, the Company has accrued approximately $54 million of probable loss contingencies and has estimated that the maximum amount of losses associated with reasonably possible loss contingencies that can be reasonably estimated is $26 million. For certain matters, claims and actions, the Company is unable to estimate possible losses. The Company believes that damages or settlements, if any, recovered by plaintiffs in such matters, claims or actions, other than as described in this Note 16—Commitments and Contingencies, will not have a material adverse effect on the Company.

West Virginia Elk River Freedom Industries Chemical Spill

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

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

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

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

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

Dunbar, West Virginia Water Main Break Class Action Litigation

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

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

In October 2017, WVAWC filed with the court a motion seeking to dismiss all of the plaintiffs’ counts alleging statutory and common law tort claims. Furthermore, WVAWC asserted that the Public Service Commission of West Virginia, and not the court, has primary jurisdiction over allegations involving violations of the applicable tariff, the public utility code and related rules. On May 30, 2018, the court, at a hearing, denied WVAWC’s motion to apply the primary jurisdiction doctrine, and on October 11, 2018, the court issued a written order to that effect. The court has not yet issued a written order on WVAWC’s motion to dismiss plaintiffs’ tort claims. The court has requested the parties submit a scheduling order with a trial date of August 26, 2019, and WVAWC has sought to prevent further discovery while its motion to dismiss is pending.

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

Note 17: Earnings per Common Share

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

	2018				2017				2016
Numerator:
Net income attributable to common shareholders	$	567			$	426			$	468
Denominator:
Weighted average common shares outstanding—Basic	180				178				178
Effect of dilutive common stock equivalents	—				1				1
Weighted average common shares outstanding—Diluted	180				179				179

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

Equity Forward Transaction and Common Stock Issuance

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

Note 18: Fair Value of Financial Information

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

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

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

The following tables provide the carrying amounts, including fair value adjustments previously recognized in acquisition purchase accounting, and a fair value adjustment related to interest rate swap fair value hedges (classified as Level 2 in the fair value hierarchy), and the fair values of the financial instruments:

	Carrying Amount				December 31, 2018
		Level 1				Level 2				Level 3				Total
Preferred stock with mandatory redemption requirements	$	8			$	—			$	—			$	9			$	9
Long-term debt (excluding capital lease obligations)	7,638				5,760				433				1,728				7,921

	Carrying Amount				December 31, 2017
		Level 1				Level 2				Level 3				Total
Preferred stock with mandatory redemption requirements	$	10			$	—			$	—			$	14			$	14
Long-term debt (excluding capital lease obligations)	6,809				4,846				976				1,821				7,643

Fair Value Measurements

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

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

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

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

Recurring Fair Value Measurements

The following tables provide assets and liabilities measured and recorded at fair value on a recurring basis and their level within the fair value hierarchy as of December 31, 2018 and 2017, respectively:

	December 31, 2018
	Level 1				Level 2				Level 3				Total
Assets:
Restricted funds	$	29			$	—			$	—			$	29
Rabbi trust investments	15				—				—				15
Deposits	3				—				—				3
Other investments	3				—				—				3
Total assets	50				—				—				50
Liabilities:
Deferred compensation obligations	17				—				—				17
Mark-to-market derivative liabilities	—				14				—				14
Total liabilities	17				14				—				31
Total assets (liabilities)	$	33			$	(14	)		$	—			$	19

	December 31, 2017
	Level 1				Level 2				Level 3				Total
Assets:
Restricted funds	$	28			$	—			$	—			$	28
Rabbi trust investments	15				—				—				15
Deposits	4				—				—				4
Other investments	3				—				—				3
Total assets	50				—				—				50
Liabilities:
Deferred compensation obligations	17				—				—				17
Mark-to-market derivative liabilities	—				3				—				3
Total liabilities	17				3				—				20
Total assets (liabilities)	$	33			$	(3	)		$	—			$	30

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

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

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

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

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

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

Nonrecurring Fair Value Measurements

The following table provides assets measured and recorded at fair value on a nonrecurring basis and their level within the fair value hierarchy as of December 31, 2018:

	At Fair Value as of December 31, 2018
	Level 1				Level 2				Level 3				Total				2018 Impairment Charge
Assets:
Keystone goodwill (a)	$	—			$	—			$	38			$	38			$	53
Keystone intangible asset (a)	—				—				3				3				4
Total	$	—			$	—			$	41			$	41			$	57

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

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

Note 19: Leases

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

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

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

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

The leases related to the portion of the facilities funded by the Company have required payments from the Company to the Partners that approximate the payments required by the terms of the IDBs from the Partners to the Company (as the holder of the IDBs). As the ownership of the portion of the facilities constructed by the Company will revert back to the Company at the end of the lease, the Company has recorded these as capital leases. The lease obligation and the receivable for the principal amount of the IDBs are presented by the Company on a net basis. The carrying value of the facilities funded by the Company recognized as a capital lease asset was $147 million and $150 million as of December 31, 2018 and 2017, respectively, which is presented in Property, plant and equipment on the Consolidated Balance Sheets. The future payments under the lease obligations are equal to and offset by the payments receivable under the IDBs.

As of December 31, 2018, the minimum annual future rental commitment under the operating leases for the portion of the facilities funded by the Partners that have initial or remaining non-cancelable lease terms in excess of one year included in the preceding minimum annual rental commitments are $4 million in 2019 through 2023, and $59 million thereafter.

Note 20: Segment Information

The Company’s operating segments are comprised of the revenue-generating components of its businesses for which separate financial information is internally produced and regularly used by management to make operating decisions and assess performance. The Company operates its businesses primarily through one reportable segment, the Regulated Businesses segment. The Company also operates market-based businesses that provide a broad range of related and complementary water and wastewater services within non-reportable operating segments, collectively referred to as the Market-Based Businesses.

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

The Company’s primary Market-Based Businesses include the Homeowner Services Group, which provides warranty protection programs to residential and smaller commercial customers; the Military Services Group, which provides water and wastewater services to the U.S. government on military installations; and Keystone, which provides water transfer services for shale natural gas exploration and production companies.

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

The following tables provide summarized segment information as of and for the years ended December 31:

	2018
	Regulated Businesses				Market-Based Businesses				Other				Consolidated
Operating revenues	$	2,984			$	476			$	(20	)		$	3,440
Depreciation and amortization	500				29				16				545
Impairment charge	—				57				—				57
Total operating expenses, net	1,912				441				(15		)		2,338
Interest, net	(280		)		4				(74		)		(350		)
Income before income taxes	826				41				(80		)		787
Provision for income taxes	224				11				(13		)		222
Net income attributable to common shareholders	602				32				(67		)		567
Total assets	18,680				999				1,544				21,223
Capital expenditures	1,477				13				96				1,586

	2017
	Regulated Businesses				Market-Based Businesses				Other				Consolidated
Operating revenues	$	2,958			$	422			$	(23	)		$	3,357
Depreciation and amortization	462				18				12				492
Total operating expenses, net	1,766				360				(22		)		2,104
Interest, net	(268		)		3				(77		)		(342		)
Income before income taxes	925				66				(79		)		912
Provision for income taxes	366				28				92				486
Net income attributable to common shareholders	559				38				(171		)		426
Total assets	17,602				599				1,281				19,482
Capital expenditures	1,316				18				100				1,434

	2016
	Regulated Businesses				Market-Based Businesses				Other				Consolidated
Operating revenues	$	2,871			$	451			$	(20	)		$	3,302
Depreciation and amortization	440				15				15				470
Total operating expenses, net	1,840				391				(14		)		2,217
Interest, net	(256		)		2				(71		)		(325		)
Income before income taxes	775				65				(70		)		770
Provision for income taxes	303				26				(27		)		302
Net income attributable to common shareholders	472				39				(43		)		468
Total assets	16,405				637				1,440				18,482
Capital expenditures	1,274				18				19				1,311

Note 21: Unaudited Quarterly Data

The following tables provide supplemental, unaudited, consolidated, quarterly financial data for each of the four quarters in the years ended December 31, 2018 and 2017, respectively. The operating results for any quarter are not indicative of results that may be expected for a full year or any future periods.

	2018
	First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Operating revenues	$	761			$	853			$	976			$	850
Operating income	217				302				335				248
Net income attributable to common shareholders	106				162				187				112
Basic earnings per share:
Net income attributable to common shareholders	$	0.60			$	0.90			$	1.04			$	0.62
Diluted earnings per share: (a)
Net income attributable to common shareholders	0.59				0.91				1.04				0.62

(a)	Amounts may not sum due to rounding.

	2017
	First Quarter				Second Quarter				Third Quarter				Fourth Quarter
Operating revenues	$	756			$	844			$	936			$	821
Operating income	230				310				432				281
Net income attributable to common shareholders	93				131				203				(1		)
Basic earnings per share:
Net income attributable to common shareholders	$	0.52			$	0.74			$	1.14			$	(0.01	)
Diluted earnings per share:
Net income attributable to common shareholders	0.52				0.73				1.13				—