American Water Works Company, Inc. (Form: 10-Q, Received: 05/02/2012 17:00:05)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2012

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

For the transition period from to

Commission file: number 001-34028

AMERICAN WATER WORKS COMPANY, INC.

(Exact name of registrant as specified in its charter)


Delaware		51-0063696
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1025 Laurel Oak Road, Voorhees, NJ		08043
(Address of principal executive offices)		(Zip Code)

(856) 346-8200

(Registrant’s telephone number, including area code)

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at April 26, 2012
Common Stock, $0.01 par value per share		176,216,320 shares

TABLE OF CONTENTS

AMERICAN WATER WORKS COMPANY, INC.

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2012

INDEX


PART I. FINANCIAL INFORMATION	1

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS		1-17
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		18 -28
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		29
ITEM 4. CONTROLS AND PROCEDURES		29

PART II. OTHER INFORMATION		29

ITEM 1. LEGAL PROCEEDINGS		29
ITEM 1A. RISK FACTORS		33
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		34
ITEM 3. DEFAULTS UPON SENIOR SECURITIES		34
ITEM 4. MINE SAFETY DISCLOSURES		34
ITEM 5. OTHER INFORMATION		34
ITEM 6. EXHIBITS		35

SIGNATURES		36
EXHIBITS INDEX

EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2
EXHIBIT 101

PART I. FINANCIAL INFORMATION

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Balance Sheets (Unaudited)

(In thousands, except per share data)


	March 31, 2012			December 31, 2011
ASSETS
Property, plant and equipment
Utility plant—at original cost, net of accumulated depreciation of $3,419,284 at March 31 and $3,360,005 at December 31	$	10,991,185		$	10,872,042
Nonutility property, net of accumulated depreciation of $173,215 at March 31 and $164,417 at December 31		148,314			149,056

Total property, plant and equipment		11,139,499			11,021,098

Current assets
Cash and cash equivalents		9,502			14,207
Restricted funds		27,418			32,438
Utility customer accounts receivable		141,415			150,720
Allowance for uncollectible accounts		(12,810	)		(15,319	)
Unbilled utility revenues		127,068			134,938
Other receivables, net		63,235			60,413
Income taxes receivable		2,625			7,672
Materials and supplies		30,355			28,598
Assets of discontinued operations		137,505			929,858
Other		62,796			54,134

Total current assets		589,109			1,397,659

Regulatory and other long-term assets
Regulatory assets		1,090,003			1,079,661
Restricted funds		17,896			25,503
Goodwill		1,195,069			1,195,069
Other		56,163			57,401

Total regulatory and other long-term assets		2,359,131			2,357,634

TOTAL ASSETS	$	14,087,739		$	14,776,391

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

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Balance Sheets (Unaudited)

(In thousands, except per share data)


	March 31, 2012			December 31, 2011
CAPITALIZATION AND LIABILITIES
Capitalization
Common stock ($.01 par value, 500,000 shares authorized, 176,200 and 175,664 shares outstanding at March 31 and December 31, respectively)	$	1,762		$	1,757
Paid-in-capital		6,192,426			6,180,558
Accumulated deficit		(1,847,750	)		(1,848,801	)
Accumulated other comprehensive loss		(95,549	)		(97,677	)

Common stockholders’ equity		4,250,889			4,235,837
Preferred stock without mandatory redemption requirements		4,547			4,547

Total stockholders’ equity		4,255,436			4,240,384

Long-term debt
Long-term debt		5,350,514			5,339,947
Redeemable preferred stock at redemption value		19,280			21,137

Total capitalization		9,625,230			9,601,468

Current liabilities
Short-term debt		147,212			515,050
Current portion of long-term debt		30,126			28,858
Accounts payable		162,414			243,709
Taxes accrued		59,137			36,606
Interest accrued		103,037			59,067
Liabilities of discontinued operations		32,781			382,218
Other		208,982			223,597

Total current liabilities		743,689			1,489,105

Regulatory and other long-term liabilities
Advances for construction		384,182			386,970
Deferred income taxes		1,332,331			1,288,797
Deferred investment tax credits		29,047			29,427
Regulatory liabilities		332,110			325,829
Accrued pension expense		391,458			411,998
Accrued postretirement benefit expense		236,286			237,086
Other		40,015			38,963

Total regulatory and other long-term liabilities		2,745,429			2,719,070

Contributions in aid of construction		973,391			966,748
Commitments and contingencies (See Note 9)		—			—

TOTAL CAPITALIZATION AND LIABILITIES	$	14,087,739		$	14,776,391

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

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Operations and Comprehensive Income (Unaudited)

(In thousands, except per share data)


	Three Months Ended March 31,
	2012			2011
Operating revenues	$	618,554		$	596,715

Operating expenses
Operation and maintenance		310,004			310,821
Depreciation and amortization		92,104			86,878
General taxes		57,121			55,498
(Gain) loss on asset dispositions and purchases		(413	)		268

Total operating expenses, net		458,816			453,465

Operating income		159,738			143,250

Other income (expenses)
Interest, net		(79,654	)		(76,191	)
Allowance for other funds used during construction		4,362			2,828
Allowance for borrowed funds used during construction		2,081			1,204
Amortization of debt expense		(1,266	)		(1,292	)
Other, net		(616	)		(1,155	)

Total other income (expenses)		(75,093	)		(74,606	)

Income from continuing operations before income taxes		84,645			68,644
Provision for income taxes		35,393			27,945

Income from continuing operations		49,252			40,699
Loss from discontinued operations, net of tax		(7,498	)		(14,466	)

Net income	$	41,754		$	26,233

Other comprehensive income, net of tax:
Pension plan amortized to periodic benefit cost:
Prior service cost, net of tax of $28 and $28, respectively		44			44
Actuarial loss, net of tax of $1,167 and $720, respectively		1,825			1,126
Foreign currency translation adjustment		259			318

Other comprehensive income		2,128			1,488

Comprehensive income	$	43,882		$	27,721


Basic earnings per common share: (a)
Income from continuing operations	$	0.28		$	0.23

Loss from discontinued operations, net of tax	$	(0.04	)	$	(0.08	)

Net income	$	0.24		$	0.15

Diluted earnings per common share: (a)
Income from continuing operations	$	0.28		$	0.23

Loss from discontinued operations, net of tax	$	(0.04	)	$	(0.08	)

Net income	$	0.24		$	0.15

Average common shares outstanding during the period:
Basic		175,914			175,259

Diluted		177,028			176,048

Dividends per common share	$	0.23		$	0.22

(a)	Amounts may not sum due to rounding.

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

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Cash Flows (Unaudited)

(In thousands, except per share data)


	Three Months Ended March 31,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	41,754		$	26,233
Adjustments
Depreciation and amortization		92,104			86,878
Provision for deferred income taxes		76,256			39,990
Amortization of deferred investment tax credits		(380	)		(385	)
Provision for losses on utility accounts receivable		1,658			1,541
Allowance for other funds used during construction		(4,362	)		(2,828	)
(Gain) loss on asset dispositions and purchases		(413	)		268
Pension and non-pension postretirement benefits		20,141			17,860
Other, net		(3,381	)		10,802
Changes in assets and liabilities
Receivables and unbilled utility revenues		11,246			26,070
Taxes receivable, including income taxes		4,370			(5,680	)
Other current assets		(9,935	)		(18,099	)
Pension and non-pension post retirement benefit contributions		(40,427	)		(48,803	)
Accounts payable		(45,684	)		(26,244	)
Taxes accrued, including income taxes		(16,532	)		21,621
Interest accrued		43,818			42,758
Other current liabilities		(22,134	)		(10,456	)

Net cash provided by operating activities		148,099			161,526

CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures		(233,366	)		(176,411	)
Acquisitions		(104	)		(1,445	)
Proceeds from sale of assets and securities		461,375			158
Removal costs from property, plant and equipment retirements, net		(10,927	)		(8,597	)
Net funds released		12,627			20,107

Net cash provided by (used in) investing activities		229,605			(166,188	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt		14,372			298
Repayment of long-term debt		(6,229	)		(62,637	)
Net (repayments) borrowings under short-term debt agreements		(347,951	)		135,217
Proceeds from issuances of employee stock plans and DRIP		9,634			6,694
Advances and contributions for construction, net of refunds of $3,607 and $4,072 at March 31, 2012 and 2011, respectively		7,820			5,111
Change in bank overdraft position		(20,570	)		(40,528	)
Debt issuance costs		0			(552	)
Redemption of preferred stocks		(1,100	)		0
Dividends paid		(40,414	)		(38,525	)
Other		2,029			0

Net cash (used in) provided by financing activities		(382,409	)		5,078

Net (decrease) increase in cash and cash equivalents		(4,705	)		416
Cash and cash equivalents at beginning of period		14,207			13,112

Cash and cash equivalents at end of period	$	9,502		$	13,528

Non-cash investing activity:
Capital expenditures acquired on account but unpaid at quarter-end	$	75,755		$	66,306
Non-cash financing activity:
Advances and contributions	$	1,182		$	5,822

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

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)

(In thousands, except per share data)


	Common Stock									Accumulated Other			Treasury Stock						Preferred Stock of Subsidiary Companies Without Mandatory		Total
	Shares		Par Value		Paid-in Capital		Accumulated Deficit			Comprehensive Loss			Shares			At Cost			Redemption Requirements		Stockholders’ Equity
Balance at December 31, 2011		175,664	$	1,757	$	6,180,558	$	(1,848,801	)	$	(97,677	)		0		$	0		$	4,547	$	4,240,384
Net income		—		—		—		41,754			—			—			—			—		41,754
Direct stock reinvestment and purchase plan, net of expense of $1		17		0		570		—			—			—			—			—		570
Employee stock purchase plan		0		0		132		—			—			31			1,046			—		1,178
Stock-based compensation activity		519		5		11,166		(165	)		—			(31	)		(1,046	)		—		9,960
Other comprehensive income, net of tax of $1,195		—		—		—		—			2,128			—			—			—		2,128
Dividends		—		—		—		(40,538	)		—			—			—			—		(40,538	)

Balance at March 31, 2012		176,200	$	1,762	$	6,192,426	$	(1,847,750	)	$	(95,549	)		0		$	0		$	4,547	$	4,255,436


	Common Stock									Accumulated Other			Treasury Stock						Preferred Stock of Subsidiary Companies Without Mandatory		Total
	Shares		Par Value		Paid-in Capital		Accumulated Deficit			Comprehensive Loss			Shares			At Cost			Redemption Requirements		Stockholders’ Equity
Balance at December 31, 2010		174,996	$	1,750	$	6,156,675	$	(1,959,235	)	$	(71,446	)		(1	)	$	(19	)	$	4,547	$	4,132,272
Net income		—		—		—		26,233			—			—			—			—		26,233
Direct stock reinvestment and purchase plan, net of expense of $5		18		0		485		—			—			—			—			—		485
Employee stock purchase plan		29		0		751		—			—			0			0			—		751
Stock-based compensation activity		304		3		6,972		(143	)		—			1			19			—		6,851
Preferred stock redemption		—		—		—		—			—			—			—			0		0
Other comprehensive income, net of tax of $748		—		—		—		—			1,488			—			—			—		1,488
Dividends		—		—		—		(38,525	)		—			—			—			—		(38,525	)

Balance at March 31, 2011		175,347	$	1,753	$	6,164,883	$	(1,971,670	)	$	(69,958	)		0		$	0		$	4,547	$	4,129,555

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 (Unaudited)

(In thousands, except per share data)

Note 1: Basis of Presentation

The accompanying Consolidated Balance Sheet of American Water Works Company, Inc. and Subsidiary Companies (the “Company”) at March 31, 2012, the Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2012 and 2011, the Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011, and the Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2012 and 2011, are unaudited, but reflect all adjustments, which are, in the opinion of management, necessary to present fairly the consolidated financial position, the consolidated changes in stockholders’ equity, the consolidated results of operations and comprehensive income, and the consolidated cash flows for the periods presented. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Because they cover interim periods, the unaudited consolidated financial statements and related notes to the consolidated financial statements do not include all disclosures and notes normally provided in annual financial statements and, therefore, should be read in conjunction with the Company’s Consolidated Financial Statements and related Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the year, due primarily to the seasonality of the Company’s operations.

During the fourth quarter of 2011, the Company discovered errors in the Company’s calculations of gains or losses on discontinued operations that originated in the first and second quarters of 2011. As a result, the Company recorded after-tax charges totaling $24,555, which included associated parent company goodwill, to reduce the net asset values of those businesses to their net realizable values. These charges were recognized within discontinued operations and net income and included in the operating results for the year ended December 31, 2011. In the footnotes to the Consolidated Financial Statements for the period ended December 31, 2011, the Company corrected the presentation of the first and second quarters of 2011. Additionally the Company reflected this correction in the corresponding prior period presented in the Consolidated Statements of Operations and Comprehensive Income for the period ended March 31, 2012. The write-downs included in the first quarter of 2011 totaled $21,099, and the remaining amount of $3,456 will be presented in the corresponding prior period of the second quarter of 2012.

Note 2: New Accounting Pronouncements

The following recently announced accounting standards have been adopted by the Company and have been included in the consolidated results of operations, financial position or footnotes of the accompanying Consolidated Financial Statements:

Fair Value Measurements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued updated accounting guidance related to fair value measurements and disclosures that result in common fair value measurements and disclosures between U.S. Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards. This new guidance amends current fair value measurement and disclosure guidance to increase transparency around valuation inputs and investment categorization. This guidance is effective for interim and annual periods beginning on January 1, 2012 and is required to be applied prospectively. The adoption of this guidance is not expected to have a significant impact on the Company’s results of operations, financial position or cash flows.

Comprehensive Income

In June 2011, the FASB issued guidance on the presentation of comprehensive income. The new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement or in two separate but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. In December 2011, the FASB deferred the requirement to present reclassification adjustments of other comprehensive income on the face of the income statement. The new guidance is effective for the Company beginning on January 1, 2012. As the Company already presents the components of net income and other comprehensive income in one continuous statement, the adoption of the new guidance did not have an impact on its results of operations, financial position or cash flows.

Testing Goodwill for Impairment

In September 2011, the FASB updated the accounting guidance related to testing goodwill for impairment. This update permits an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test that is currently in place. Under the new guidance, an entity will not be required to calculate the fair value of a reporting unit unless the entity determines, based on the qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. This update is effective for annual and interim goodwill impairment tests performed by the Company beginning on January 1, 2012. The adoption of this update did not have a significant impact on its results of operations, financial position or cash flows.

Note 3: Goodwill

The Company’s annual goodwill impairment test is conducted at November 30 of each calendar year. Interim reviews are performed when the Company determines that a triggering event that would more likely than not reduce the fair value of a reporting unit below its carrying value has occurred.

In the first quarter of 2011, the Company assessed fair value, including allocated goodwill, and recorded impairments of $21,099 for the pending sales of its Arizona and New Mexico subsidiaries, and $561 for the pending sale of the Company’s assets of its Texas subsidiary. These impairment charges were included in operating results of discontinued operations. (see Note 13)

The following table summarizes the three-month changes in goodwill of the Company’s continuing operations by reporting unit:


	Regulated Unit					Market-Based Operations					Consolidated
	Cost		Accumulated Impairment			Cost		Accumulated Impairment			Cost		Accumulated Impairment			Total Net
Balance at January 1, 2012	$	3,399,368	$	(2,332,670	)	$	235,990	$	(107,619	)	$	3,635,358	$	(2,440,289	)	$	1,195,069
Reclassifications and other activity		0		0			0		0			0		0			0

Balance at March 31, 2012	$	3,399,368	$	(2,332,670	)	$	235,990	$	(107,619	)	$	3,635,358	$	(2,440,289	)	$	1,195,069

Balance at January 1, 2011	$	3,399,884	$	(2,332,670	)	$	235,990	$	(107,619	)	$	3,635,874	$	(2,440,289	)	$	1,195,585
Reclassifications and other activity		0		0			0		0			0		0			0

Balance at March 31, 2011	$	3,399,884	$	(2,332,670	)	$	235,990	$	(107,619	)	$	3,635,874	$	(2,440,289	)	$	1,195,585

The Company may be required to recognize an impairment of goodwill in the future due to market conditions or other factors related to the Company’s performance. 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, the lack of an increase in the Company’s market price consistent with its peer companies, or decreases in control premiums. A decline in the forecasted results in our business plan, such as changes in rate case results or capital investment budgets or changes in our interest rates, could also result in an impairment charge. Recognition of impairments of a significant portion of goodwill would negatively affect the Company’s reported results of operations and total capitalization, the effect of which could be material and could make it more difficult for the Company to maintain its credit ratings, secure financing on attractive terms, maintain compliance with debt covenants and meet expectations of our regulators.

Note 4: Stockholders’ Equity

Common Stock

In March 2010, the Company established American Water Stock Direct, a dividend reinvestment and direct stock purchase plan (the “DRIP”). Under the DRIP, stockholders may reinvest cash dividends and purchase additional Company common stock, up to certain limits, through a transfer agent without commission fees. The Company’s transfer agent may buy newly issued shares directly from the Company or shares held in the Company’s treasury. The transfer agent may also buy shares in the public markets or in privately negotiated transactions. Purchases generally will be made and credited to DRIP accounts once each week. As of March 31, 2012, there were 4,856 shares available for future issuance under the DRIP. The following table summarizes information regarding issuances under the DRIP for the three months ended March 31, 2012 and 2011:


	2012		2011
Shares of common stock issued		17		18
Cash proceeds received	$	571	$	490

Cash dividend payments made during the three months ended March 31, 2012 and 2011 were as follows:


	2012		2011
Dividends per share, three months ended:
March 31	$	0.23	$	0.22

Total dividends paid, three months ended:
March 31	$	40,414	$	38,525

On February 24, 2012, the Company declared a quarterly cash dividend payment of $0.23 per share payable on June 1, 2012 to all shareholders of record as of April 20, 2012. As of March 31, 2012, the Company had accrued dividends totaling $40,526 included in Other current liabilities on the accompanying Consolidated Balance Sheets.

Stock-Based Compensation

The Company has granted stock option and restricted stock unit awards to non-employee directors, officers and other key employees of the Company pursuant to the terms of its 2007 Omnibus Equity Compensation Plan (the “Plan”). As of March 31, 2012, a total of 10,240 shares were available for grant under the Plan. Shares issued under the Plan may be authorized-but-unissued shares of Company stock or reacquired shares of Company stock, including shares purchased by the Company on the open market for purposes of the Plan.

The Company recognizes compensation expense for stock awards over the vesting period of the award. The following table presents stock-based compensation expense recorded in operation and maintenance expense in the accompanying Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2012 and 2011:


	2012			2011
Stock options	$	846		$	826
Restricted stock units		1,290			1,205
Employee stock purchase plan		132			97

Stock-based compensation in operation and maintenance expense		2,268			2,128
Income tax benefit		(884	)		(830	)

After-tax stock-based compensation expense	$	1,384		$	1,298

There were no significant stock-based compensation costs capitalized during the three months ended March 31, 2012 and 2011, respectively.

Stock Options

In the first quarter of 2012, the Company granted non-qualified stock options to certain employees under the Plan. The stock options vest ratably over the three-year service period beginning January 1, 2012. These awards have no performance vesting conditions and the grant date fair value is amortized through expense over the requisite service period using the straight-line method. The following table presents the weighted-average assumptions used in the pricing model for 2012 grants and the resulting weighted-average grant date fair value per share of stock options granted:


Dividend yield		2.70	%
Expected volatility		28.36	%
Risk-free interest rate		0.77	%
Expected life (years)		4.4
Exercise price	$	34.12
Grant date fair value per share	$	6.11

Stock options granted under the Plan have maximum terms of seven years, vest over periods ranging from one to three years, and are granted with exercise prices equal to the market value of the Company’s common stock on the date of grant. As of March 31, 2012, $5,892 of total unrecognized compensation cost related to the non-vested stock options is expected to be recognized over the weighted-average period of 2.0 years.

The table below summarizes stock option activity for the three months ended March 31, 2012:


	Shares			Weighted Average Exercise Price (per share)		Weighted Average Remaining Life (years)		Aggregate Intrinsic Value
Options outstanding at January 1, 2012		3,112		$	22.70
Granted		603			34.12
Forfeited or expired		(31	)		25.34
Exercised		(379	)		21.62

Options outstanding at March 31, 2012		3,305		$	24.89		4.7	$	30,271

Exercisable at March 31, 2012		2,002		$	21.96		3.7	$	24,167

The following table summarizes additional information regarding stock options exercised during the three months ended March 31, 2012 and 2011:


	2012		2011
Intrinsic value	$	4,662	$	1,523
Exercise proceeds		8,197		5,549
Income tax benefit		1,214		181

Restricted Stock Units

In the first quarter of 2012, the Company granted restricted stock units to certain employees under the Plan. The restricted stock units vest ratably over the three-year performance period beginning January 1, 2012 (the “Performance Period”); however, distribution of the shares is contingent upon the achievement of internal performance measures and, separately, certain market thresholds over the Performance Period. The restricted stock units granted with performance and service conditions are valued at the market value of the Company’s common stock on the date of grant. The restricted stock units granted with market and service conditions are valued using a Monte Carlo model. Weighted-average assumptions used in the Monte Carlo simulation are as follows for the 2012 grants:


Expected volatility	22.60	%
Risk-free interest rate	0.42	%
Expected life (years)	3

The grant date fair value of the restricted stock awards that (a) have market and/or performance and service conditions and (b) vest ratably is amortized through expense over the requisite service period using the graded-vesting method. As of March 31, 2012, $6,843 of total unrecognized compensation cost related to the non-vested restricted stock units is expected to be recognized over the weighted-average remaining life of 1.4 years.

The table below summarizes restricted stock unit activity for the three months ended March 31, 2012:


	Shares			Weighted-Average Grant Date Fair Value (per share)
Non-vested total at January 1, 2012		577		$	25.09
Granted		147			37.64
Vested		(168	)		22.08
Forfeited		(9	)		27.42
Cancelled		(2	)		22.08

Non-vested total at March 31, 2012		545		$	29.37

The following table summarizes additional information regarding restricted stock units distributed during the three months ended March 31, 2012 and 2011:


	2012		2011
Intrinsic value	$	5,804	$	1,695
Income tax benefit		798		99

If dividends are declared with respect to shares of the Company’s common stock before the restricted stock units are distributed, the Company credits a liability for the value of the dividends that would have been paid if the restricted stock units were shares of Company common stock. When the restricted stock units 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 $165 and $143 to retained earnings during the three months ended March 31, 2012 and 2011, respectively.

Employee Stock Purchase Plan

Under the Nonqualified Employee Stock Purchase Plan (the “ESPP”), employees can use payroll deductions to acquire Company stock at the lesser of 90% of the fair market value of (a) the beginning or (b) the end of each three-month purchase period. As of March 31, 2012 there were 1,562 shares of common stock reserved for issuance under the ESPP. During the three months ended March 31, 2012, the Company issued 31 shares under the ESPP.

Note 5: Long-Term Debt

The Company primarily issues long-term debt to fund capital expenditures at the regulated subsidiaries. The components of long-term debt are as follows:


	Rate	Weighted Average Rate			Maturity Date	March 31, 2012		December 31, 2011
Long-term debt of American Water Capital Corp. (“AWCC”)(a)
Private activity bonds and government funded debt
Fixed rate	4.85%-6.75%		5.72	%	2018-2040	$	322,610	$	322,610
Senior notes
Fixed rate	5.39%-10.00%		6.25	%	2013-2040		3,089,409		3,089,409
Long-term debt of other subsidiaries
Private activity bonds and government funded debt
Fixed rate	0.00%-6.20%		5.04	%	2012-2039		1,218,756		1,206,332
Mortgage bonds
Fixed rate	5.48%-9.71%		7.40	%	2012-2039		697,800		697,800
Mandatory redeemable preferred stock	8.47%-9.75%		8.61	%	2019-2036		21,001		22,101
Notes payable and other(b)	9.50%-13.96%		12.19	%	2013-2026		1,635		1,691

Long-term debt							5,351,211		5,339,943
Unamortized debt discount, net(c)							42,876		43,888
Fair value adjustment to interest rate hedge							5,833		6,111

Total long-term debt						$	5,399,920	$	5,389,942

(a)	AWCC, which is a wholly-owned subsidiary of the Company, has a strong support agreement with its parent that, under certain circumstances, is the functional equivalent of a guarantee.

(b)	Includes capital lease obligations of $1,208 and $1,264 at March 31, 2012 and December 31, 2011, respectively.

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

The following long-term debt was issued in 2012:


Company	Type	Interest Rate		Maturity		Amount
Other subsidiaries	Private activity bonds and government funded debt – fixed rate		1.00%-2.41%		2029-2032	$	14,372

Total issuances						$	14,372

The following long-term debt was retired through optional redemption or payment at maturity during 2012:


Company	Type	Interest Rate		Maturity		Amount
Other subsidiaries	Mortgage bonds – fixed rate		7.95%		2012	$	4,200
Other subsidiaries	Private activity bonds and government funded debt – fixed rate		0.00%-5.90%		2012-2031		1,973
Other subsidiaries	Mandatory redeemable preferred stock		4.60%-6.00%		2013-2019		1,100
Other	Capital leases						56

Total retirements and redemptions						$	7,329

Interest, net includes interest income of approximately $2,812 and $2,649 for the three months ended March 31, 2012 and 2011, respectively.

The Company previously entered into an interest-rate swap to hedge $100,000 of its 6.085% fixed-rate debt maturing 2017. The Company pays variable interest of six-month LIBOR plus 3.422%. This fixed rate and variable rate interest swap is accounted for as a fair-value hedge. The swap matures with the fixed-rate debt in 2017. The Company uses a combination of fixed-rate and variable-rate debt to manage interest rate exposure.

At March 31, 2012 and December 31, 2011, the Company had a $100,000 notional amount variable interest rate swap fair value hedge outstanding. The following table provides a summary of the derivative fair value balance recorded by the Company and the line item in the Consolidated Balance Sheet in which such amount is recorded:


Balance sheet classification	March 31, 2012		December 31, 2011
Regulatory and other long-term assets
Other	$	5,590	$	5,824
Long-term debt
Long-term debt		5,833		6,111

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


	March 31, 2012			March 31, 2011
Income Statement Classification
Interest, net
Loss on swap	$	(234	)	$	(1,153	)
Gain on borrowing		277			987
Hedge Ineffectiveness		43			(166	)

Note 6: Short-Term Debt

The components of short-term debt are as follows:


	March 31, 2012		December 31, 2011
Commercial paper, net of $3 and $52 discount at March 31 and December 31, respectively	$	133,097	$	481,048
Bank overdraft		14,115		34,002

Total short-term debt	$	147,212	$	515,050

Note 7: Income Taxes

The Company’s estimated annual effective tax rate for the three months ended March 31, 2012 was 40.0% compared to 40.6% for the three months ended March 31, 2011, excluding various discrete items. The Company’s actual effective tax rates on continuing operations for the three months ended March 31, 2012 and 2011 were 41.8% and 40.7%, respectively.

Note 8: Pension and Other Postretirement Benefits

The following table provides the components of net periodic benefit costs:


	Three Months Ended March 31,
	2012			2011
Components of net periodic pension benefit cost
Service cost	$	8,507		$	8,410
Interest cost		17,521			17,262
Expected return on plan assets		(19,619	)		(18,027	)
Amortization of:
Prior service cost		181			180
Actuarial loss		7,402			4,638

Net periodic pension benefit cost	$	13,992		$	12,463


	Three Months Ended March 31,
	2012			2011
Components of net periodic other postretirement benefit cost
Service cost	$	3,526		$	3,485
Interest cost		7,858			7,805
Expected return on plan assets		(7,140	)		(7,195	)
Amortization of:
Prior service credit		(479	)		(481	)
Actuarial loss		2,384			1,783

Net periodic other postretirement benefit cost	$	6,149		$	5,397

The Company contributed $32,931 to its defined benefit pension plan in the first three months of 2012 and expects to contribute $64,944 during the balance of 2012. In addition, the Company contributed $7,496 for the funding of its other postretirement plans in the first three months of 2012, and expects to contribute $22,487 during the balance of 2012.

Note 9: Commitments and Contingencies

The Company is routinely involved in legal actions incident to the normal conduct of its business. At March 31, 2012, the Company has accrued approximately $2,800 as probable costs and it is reasonably possible that additional losses could range up to $30,400 for these matters. For certain matters, the Company is unable to estimate possible losses. The Company believes that damages or settlements recovered by plaintiffs in such claims or actions, if any, will not have a material adverse effect on the Company’s results of operations, financial position or cash flows.

The Company enters into agreements for the provision of services to water and wastewater facilities for the United States military, municipalities and other customers. The Company’s military services agreements expire between 2051 and 2060 and have remaining performance commitments as measured by estimated remaining contract revenue of $2,004,000 at March 31, 2012. The military contracts are subject to customary termination provisions held by the U.S. Federal Government prior to the agreed upon contract expiration. The Company’s Operations and Maintenance agreements with municipalities and other customers expire between 2012 and 2048 and have remaining performance commitments as measured by estimated remaining contract revenue of $1,038,000 at March 31, 2012. Some of the Company’s long-term contracts to operate and maintain a municipality’s, federal government’s or other party’s water or wastewater treatment and delivery facilities include responsibility for certain maintenance of 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.

Note 10: Environmental Matters

The Company’s water and wastewater operations are subject to federal, state, local and foreign requirements relating to environmental protection, and as such, the Company periodically becomes subject to environmental claims in the normal course of business. Environmental expenditures that relate to current operations or provide a future benefit are expensed or capitalized as appropriate. Remediation costs that relate to an existing condition caused by past operations are accrued, on an undiscounted basis, when it is probable that these costs will be incurred and can be reasonably estimated. Remediation costs accrued amounted to $5,500 at March 31, 2012 and December 31, 2011, respectively. The accrual relates to a conservation agreement entered into by a subsidiary of the Company with the National Oceanic and Atmospheric Administration (“NOAA”) requiring the Company to, among other provisions, implement certain measures to protect the steelhead trout and its habitat in the Carmel River watershed in the state of California. The Company has agreed to pay $1,100 annually from 2010 to 2016. The Company pursues recovery of incurred costs through all appropriate means, including regulatory recovery through customer rates. The Company’s regulatory assets at March 31, 2012 and December 31, 2011 include $9,117 and $9,187, respectively, related to the NOAA agreement.

Note 11: Earnings per Common Share

Earnings per share is calculated using the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security. The Company has participating securities related to restricted stock units, granted under the Company’s 2007 Omnibus Equity Compensation Plan, that earn dividend equivalents on an equal basis with common shares. In applying the two-class method, undistributed earnings are allocated to both common shares and participating securities. The following is a reconciliation of the Company’s income from continuing operations, income (loss) from discontinued operations, net income and weighted-average common shares outstanding for calculating basic earnings per share:


	Three Months Ended March 31,
	2012			2011
Basic:
Income from continuing operations	$	49,252		$	40,699
Loss from discontinued operations		(7,498	)		(14,466	)
Net income		41,754			26,233
Less: Distributed earnings to common shareholders		40,563			38,651
Less: Distributed earnings to participating securities		16			16

Undistributed earnings		1,175			(12,434	)
Undistributed earnings allocated to common shareholders		1,175			(12,429	)
Undistributed earnings allocated to participating securities		0			(5	)

Total income from continuing operations available to common shareholders, basic	$	49,236		$	40,688

Total income available to common shareholders, basic	$	41,738		$	26,222

Weighted-average common shares outstanding, basic		175,914			175,259

Basic earnings per share: (a)
Income from continuing operations	$	0.28		$	0.23

Loss from discontinued operations, net of tax	$	(0.04	)	$	(0.08	)

Net income	$	0.24		$	0.15

(a)	Amounts may not sum due to rounding.

Diluted earnings per common share is based on the weighted-average number of common shares outstanding adjusted for the dilutive effect of common stock equivalents related to the restricted stock units, stock options, and employee stock purchase plan. The dilutive effect of the common stock equivalents is calculated using the treasury stock method and expected proceeds on vesting of the restricted stock units, exercise of the stock options and purchases under the employee stock purchase plan. The following is a reconciliation of the Company’s income from continuing operations, income (loss) from discontinued operations, net income and weighted-average common shares outstanding for calculating diluted earnings per share:


	Three Months Ended March 31,
	2012			2011
Diluted:
Total income from continuing operations available to common shareholders, basic	$	49,236		$	40,688
Loss from discontinued operations, net of tax		(7,498	)		(14,466	)
Total income available to common shareholders, basic		41,738			26,222
Undistributed earnings allocated to participating securities		0			(5	)

Total income from continuing operations available to common shareholders, diluted	$	49,236		$	40,683

Total income available to common shareholders, diluted	$	41,738		$	26,217

Weighted-average common shares outstanding, basic		175,914			175,259
Stock-based compensation:
Restricted stock units		492			398
Stock options		620			389
Employee stock purchase plan		2			2

Weighted-average common shares outstanding, diluted		177,028			176,048

Diluted earnings per share: (a)
Income from continuing operations	$	0.28		$	0.23

Loss from discontinued operations, net of tax	$	(0.04	)	$	(0.08	)

Net income	$	0.24		$	0.15

(a)	Amounts may not sum due to rounding.

The following potentially dilutive common stock equivalents were not included in the earnings per share calculations because they were anti-dilutive:


	Three Months Ended March 31,
	2012		2011
Stock options		603		736
Restricted stock units where certain performance conditions were not met		101		134

Note 12: Fair Value of Assets and Liabilities

Fair Value of Financial Instruments

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

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

Preferred stock with mandatory redemption requirements and long-term debt: The fair values of preferred stock with mandatory redemption requirements and long-term debt are categorized within the fair value hierarchy based on the inputs that are used to value each instrument. The fair value of long-term debt classified as Level 1 is calculated using quoted prices in active markets. Level 2 instruments are valued using observable inputs and Level 3 instruments are valued using observable and unobservable inputs. The fair values of instruments classified as Level 2 and 3 are determined by a valuation model which is based on a conventional discounted cash flow methodology and utilizes assumptions of current market rates. 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 BBB+ debt securities. The Company used

these yield curve assumptions to derive a base yield for the Level 2 and Level 3 securities. Additionally, the Company adjusted the base yield for specific features of the debt securities including call features, coupon tax treatment and collateral for the Level 3 instruments.

The carrying amounts (including fair value adjustments previously recognized in acquisition purchase accounting) and fair values of the financial instruments are as follows:


			At Fair Value as of March 31, 2012
Recurring Fair Value Measures	Carrying Amount		Level 1		Level 2		Level 3		Total
Preferred stocks with mandatory redemption requirements	$	20,930	$	0	$	0	$	26,191	$	26,191
Long-term debt (excluding capital lease obligations)		5,377,782		2,288,017		1,598,608		2,665,817		6,552,442


As of December 31, 2011	Carrying Amount		Fair Value
Preferred stocks with mandatory redemption requirements	$	22,036	$	26,458
Long-term debt (excluding capital lease obligations)		5,366,642		6,230,547

Recurring Fair Value Measurements

The following table presents assets and liabilities measured and recorded at fair value on a recurring basis and their level within the fair value hierarchy as of March 31, 2012 and December 31, 2011, respectively:


	At Fair Value as of March 31, 2012
Recurring Fair Value Measures	Level 1		Level 2			Level 3		Total
Assets:
Restricted funds	$	45,314		—			—	$	45,314
Rabbi trust investments		—	$	258			—		258
Deposits		1,786		—			—		1,786
Mark-to-market derivative asset		—		5,590			—		5,590

Total assets	$	47,100	$	5,848			—	$	52,948

Liabilities:
Deferred compensation obligation		—	$	9,476			—	$	9,476

Total liabilities		—	$	9,476			—	$	9,476

Total net assets (liabilities)	$	47,100	$	(3,628	)		—	$	43,472


	At Fair Value as of December 31, 2011
Recurring Fair Value Measures	Level 1		Level 2			Level 3		Total
Assets:
Restricted funds	$	57,941		—			—	$	57,941
Rabbi trust investments		—	$	518			—		518
Deposits		2,287		—			—		2,287
Mark-to-market derivative asset		—		5,824			—		5,824

Total assets	$	60,228	$	6,342			—	$	66,570

Liabilities:
Deferred compensation obligation		—	$	9,036			—	$	9,036

Total liabilities		—	$	9,036			—	$	9,036

Total net assets (liabilities)	$	60,228	$	(2,694	)		—	$	57,534

Restricted funds – The Company’s restricted funds primarily represent proceeds received from financings for the construction and capital improvement of facilities and from customers for future services under operations and maintenance projects. The proceeds

of these financings are held in escrow until the designated expenditures are incurred. Restricted funds expected to be released within twelve months subsequent to the balance sheet date are classified as current.

Rabbi trust investments – The Company’s rabbi trust investments consist primarily of fixed income investments from which supplemental executive retirement plan benefits are paid. The Company includes these assets in Other long-term assets.

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

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

Mark-to-market derivative asset– 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 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.

Non-recurring Fair Value Measurements

As discussed in Note 3, no goodwill impairment was recognized by the Company’s continuing operations for the three months ended March 31, 2012 and March 31, 2011. The Company’s goodwill valuation model includes significant unobservable inputs and falls within Level 3 of the fair value hierarchy.

Note 13: Discontinued Operations

As part of the Company’s strategic review of its business investments, it has previously entered into agreements to sell assets or stock of certain subsidiaries.

In January 2012, the Company received $461,057 in proceeds upon the close of the sale of its Arizona and New Mexico subsidiaries. There was no gain or loss on sale recorded at the time of closing. Final proceeds of the sale are subject to certain post-close adjustments. As disclosed in Note 1 included herein, the Company revised the first quarter of 2011 for an after-tax impairment charge of $21,099, which was recorded as an asset impairment charge to reduce parent company goodwill that had been allocated to these subsidiaries. The effect of this impairment charge has been presented in the results of discontinued operations for the first quarter of 2011 presented below.

Also in the first quarter of 2011, the Company recorded a pretax impairment charge of $561 after evaluating the pending sale of the assets of the Company’s regulated subsidiary in Texas.

The Company has also entered into an agreement to sell the stock of its Ohio subsidiary. The sale price is currently estimated at approximately $101,000, plus assumed liabilities, for an estimated enterprise value of approximately $120,000. The sale is subject to certain closing adjustments. In February 2012, the Ohio public utility commission approved the sale, which is expected to close during the second quarter of 2012.

Charges recorded in connection with the discontinued operations include estimates that are subject to subsequent adjustment.

A summary of discontinued operations presented in the Consolidated Statements of Operations and Comprehensive Income follows:


	Three Months Ended March 31,
	2012			2011
Operating revenues	$	16,217		$	38,127
Total operating expenses, net		12,453			48,165

Operating income (loss)		3,764			(10,038	)
Other income (expenses), net		(120	)		292

Income (loss) from discontinued operations before income taxes		3,644			(9,746	)
Provision for income taxes		11,142			4,720

Loss from discontinued operations	$	(7,498	)	$	(14,466	)

Assets and liabilities of discontinued operations in the accompanying Consolidated Balance Sheets include the following:


	March 31, 2012		December 31, 2011
ASSETS
Total property, plant and equipment	$	118,488	$	833,023
Current assets		10,194		21,906
Regulatory assets		3,691		43,849
Goodwill		5,132		29,608
Other		0		1,472

Total assets of discontinued operations	$	137,505	$	929,858

LIABILITIES
Long-term debt	$	10,884	$	11,697
Current portion of long-term debt		48		12,839
Other current liabilities		7,287		29,530
Advances for construction		5,772		205,034
Regulatory liabilities		2,124		4,617
Other		3,453		15,540
Contributions in aid of construction		3,213		102,961

Total liabilities of discontinued operations	$	32,781	$	382,218

Note 14: Segment Information

The Company has two operating segments, which are also the Company’s two reportable segments, referred to as Regulated Businesses and Market-Based Operations.

The following table includes the Company’s summarized segment information:


	As of or for the Three Months Ended March 31, 2012
	Regulated Businesses		Market-Based Operations		Other			Consolidated
Net operating revenues	$	541,875	$	80,581	$	(3,902	)	$	618,554
Depreciation and amortization		84,788		1,681		5,635			92,104
Total operating expenses, net		394,642		70,763		(6,589	)		458,816
Income (loss) from continuing operations before income taxes		90,416		10,469		(16,240	)		84,645
Total assets		12,182,806		272,516		1,632,417			14,087,739
Assets of discontinued operations (included in total assets above)		141,945		0		(4,440	)		137,505
Capital expenditures		233,198		168		0			233,366
Capital expenditures of discontinued operations (included in above)		2,699		0		0			2,699

	As of or for the Three Months Ended March 31, 2011
	Regulated Businesses		Market-Based Operations		Other			Consolidated
Net operating revenues	$	528,281	$	75,382	$	(6,948	)	$	596,715
Depreciation and amortization		78,580		1,769		6,529			86,878
Total operating expenses, net		394,347		68,274		(9,156	)		453,465
Income (loss) from continuing operations before income taxes		77,062		7,674		(16,092	)		68,644
Total assets		12,363,160		235,282		1,508,937			14,107,379
Assets of discontinued operations (included in total assets above)		908,497		7,355		1,535			917,387
Capital expenditures		175,972		439		0			176,411
Capital expenditures of discontinued operations (included in above)		5,880		58		0			5,938

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Certain matters within this Quarterly Report on Form 10-Q include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements included in this Form 10-Q, other than statements of historical fact, may constitute forward-looking statements. Forward-looking statements can be identified by the use of words such as “may,” “should,” “will,” “could,” “estimates,” “predicts,” “potential,” “continue,” “anticipates,” “believes,” “plans,” “expects,” “future” and “intends” and similar expressions. Forward-looking statements may involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance to differ from those projected in the forward-looking statements. These statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and difficult to predict and could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements. Factors that could cause or contribute to differences in results and outcomes from those in our forward-looking statements include, without limitation, those items discussed in the “Risk Factors” section or other sections in the Company’s Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission (“SEC”), as well as in Item IA of Part II of this Quarterly Report. We undertake no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

General

American Water Works Company, Inc. (herein referred to as “American Water” or the “Company”) is the largest investor-owned United States water and wastewater utility company, as measured both by operating revenue and population served. Our primary business involves the ownership of water and wastewater utilities that provide water and wastewater services to residential, commercial and industrial customers. Our Regulated Businesses that provide these services are generally subject to economic regulation by state regulatory agencies (“PUCs”) in the states in which they operate. We report the results of these businesses in our Regulated Businesses segment. We also provide services that are not subject to economic regulation by state regulatory agencies. We report the results of these businesses in our Market-Based Operations segment. For further description of our businesses, see the “Business” section found in our Form 10-K for the year ended December 31, 2011 filed with the SEC.

You should read the following discussion in conjunction with our Consolidated Financial Statements and related Notes included elsewhere in this Quarterly Report on Form 10-Q and in our Form 10-K for the year ended December 31, 2011 filed with the SEC.

Overview

All financial information in the below Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), reflects only continuing operations. As previously disclosed in our Form 10-K for the year ended December 31, 2011, as part of our portfolio optimization initiative, we entered into agreements to sell our regulated subsidiaries in Arizona, New Mexico, Ohio and our regulated water and wastewater systems in Texas. The sale of the Texas subsidiary assets was completed in June 2011. On January 31, 2012 we completed the divestiture of the Arizona and New Mexico subsidiaries and on May 1, 2012, the divestiture of our Ohio subsidiary was completed. Also, on December 31, 2011, we completed the sale of Applied Water Management, Inc. (“AWM”), which was part of our Contract Operations line of business within our Market-Based segment. Therefore, the financial results of these entities have been presented as discontinued operations for all periods presented, unless otherwise noted. Additionally, during the fourth quarter of 2011, we discovered errors in our calculations of gains or losses on discontinued operations that originated in the first and second quarters of 2011. As a result, we recorded after-tax charges totaling $24.6 million, which included associated parent company goodwill, to reduce the net asset values of those businesses to their net realizable values. These charges were recognized within discontinued operations and net income and included in the operating results for the year ended December 31, 2011. The write-down included in the first quarter of 2011 totaled $21.1 million and is reflected, where necessary, in the amounts reported for the three months ended March 31, 2011.

Financial Results . For the three months ended March 31, 2012, we reported net income of $41.8 million, or diluted earnings per share (“EPS”) of $0.24 compared to $26.2 million, or diluted EPS of $0.15 for the comparable period in 2011. Income from continuing operations was $49.3 million for the first quarter of 2012 compared to $40.7 million for the first quarter of 2011. Diluted income from continuing operations per average common share was $0.28 for the first quarter of 2012 as compared to $0.23 for the first quarter of 2011.

The primary driver contributing to the increase in net income from continuing operations was increased revenues resulting from rate increases, as well as slightly higher revenues in our Market-Based Operations. Partially offsetting these increases was higher depreciation expense in our Regulated segment as a result of additional utility plant placed in service. For further details, see “Consolidated Results of Operations and Variances” and “Segment Results” below.

In 2012, our goals focus on continuing our portfolio optimization initiative, actively addressing regulatory lag and declining usage, continuing to make efficient use of capital and continuing to improve on our regulated operation and maintenance (“O&M”) efficiency ratio. Also in 2012, we will look to expand our Market-Based Operations with a focus on the Homeowners Services Group and Military Contract Operations and optimize our municipal contract operations business model to provide for value creation for both American Water and the municipality.

The progress that we have made in the first quarter of 2012 with respect to these objectives is described below.

Implementation of Portfolio Optimization Initiative. We continue to execute our plan for optimizing our Regulated Businesses’ portfolio. In January 2012, we completed our sale of regulated operations in Arizona and New Mexico, and on May 1, 2012, we completed the divestiture of our Ohio subsidiary, for approximately $101 million, plus assumed liabilities of approximately $19 million. Ohio American Water serves approximately 58,000 customers.

Also, on May 1, 2012, we completed our purchase of seven regulated water systems in New York, for approximately $39 million in cash plus assumed liabilities. This acquisition adds approximately 50,000 customers to our New York regulated operations.

Rate Cases and Regulatory Matters . During the first quarter of 2012, we filed a general rate case in Virginia requesting additional annualized revenues for jurisdictional customers of approximately $5.7 million. Also, during the three months ended March 31, 2012, we were granted additional annualized revenues from general rate cases, totaling $32.6 million.

On February 23, 2012, the Iowa Utilities Board approved an additional $2.8 million of annualized revenues for our Iowa subsidiary. The increase approximated what we had been collecting in rates since July 29, 2011 under interim rates and the partial settlement that was reached in October 2011. Also, on March 7, 2012, our rate case filed in June of 2011 was approved by the Missouri Public Service Commission and the new rates became effective on April 1, 2012.

On March 20, 2012, the New York State Public Service Commission approved an order for Long Island American Water for a rate increase of approximately $5.6 million of which $3.0 million became effective April 1, 2012. The remainder of the $5.6 million annualized revenue increase of $1.4 million and $1.2 million will become effective April 1, 2013 and April 1, 2014, respectively.

The table below details additional annualized revenues, including step increases and assuming a constant volume, resulting from rate authorizations granted in the first quarter of 2012:


	Annualized Rate Increases Granted
	(In millions)
State
General Rate Cases:
Missouri	$	24.0
New York		5.6
Iowa		2.8
Other		0.2

Total General Rate Cases	$	32.6

In April, 2012, additional annualized revenues of $1.7 million resulting from infrastructure charges for our Pennsylvania subsidiary become effective.

On May 1, 2012, our New Jersey rate case, which we filed in the third quarter of 2011, was approved by the Board of Public Utilities. The new rates provide for additional annualized revenue of $30.0 million and are effective May 1, 2012.

As of May 2, 2012, we are awaiting final orders in four states, where we have continuing operations, requesting additional annualized revenues of $101.2 million. There is no assurance that all, or any portion thereof, of any requested increases will be granted.

San Clemente Dam

As noted in the Form 10-K California-American Water Company (“CAWC”) challenged the Proposed Decision, as revised (the “PD”), of the administrative law judge assigned to CAWC’s application for approval of the Carmel River Reroute and San Clemente Dam Removal Project. In the PD, the administrative law judge recommended that recovery of virtually all of the historical costs of approximately $27 million should be denied.

As disclosed in more detail in Part II, Item 1, “Legal Proceedings” in this 10-Q, on April 24, 2012, Commissioner Catherine J. K. Sandoval of the California Public Utilities Commission (“CPUC”) issued an Alternate Proposed Decision (the “Alternate PD”). The Alternate PD among other things would permit CAWC’s rate recovery of the historical costs as well as allowing CAWC to earn its full rate of equity return and the actual cost of debt on the project. Additionally, the Alternate PD would place all authorized and estimated costs in a regulatory asset account and would provide recovery of the regulatory assets over a twenty-year period beginning July 1, 2012. No date has been scheduled for the CPUC’s decision on the PD or the Alternate PD. There are no assurances that the PD or the Alternate PD will be approved as written and both are subject to change.

Continue Improvement in O&M Efficiency Ratio for our Regulated Businesses. Our O&M efficiency ratio (a non-GAAP measure) is defined as operation and maintenance expense divided by operating revenues, where both operation and maintenance expense and operating revenues are adjusted for purchased water expense. Our O&M efficiency ratio was 45.3% for the three months ended March 31, 2012 compared to 48.1% for the same period in 2011. We evaluate our operating performance using this

measure because management believes it is an important measure of the efficiency of our regulated operations. This information is intended to enhance an investor’s overall understanding of our operating performance. The O&M efficiency ratio is not a measure defined under GAAP. It also may not be comparable to other companies’ operating measures and should not be used in place of the GAAP information provided elsewhere in this report. The following table provides reconciliation between operation and maintenance expense as a percentage of operating revenues as determined in accordance with GAAP and our operating efficiency ratio for the three months ended March 31, 2012 as compared to March 31, 2011:

Regulated Operation and Maintenance Efficiency Ratio (a Non-GAAP Measure)


	For the three months ended March 31,
	2012			2011
	(In thousands)
Total regulated O&M expense	$	257,931		$	264,953
Less: Regulated purchased water expense		22,410			20,815

Adjusted regulated O&M expense(a)	$	235,521		$	244,138

Total regulated operating revenues	$	541,875		$	528,281
Less: Regulated purchased water revenues*		22,410			20,815

Adjusted regulated operating revenues(b)	$	519,465		$	507,466

Regulated O&M efficiency ratio(a)/(b)		45.3	%		48.1	%

Calculation assumes purchased water revenues approximate purchased water expenses.

Consolidated Results of Operations and Variances

Three Months Ended March 31, 2012 Compared To Three Months Ended March 31, 2011


	For the three months ended March 31,						Favorable (Unfavorable) Change
(In thousands)	2012			2011			Favorable (Unfavorable) Change
Operating revenues	$	618,554		$	596,715		$	21,839

Operating expenses
Operation and maintenance		310,004			310,821			817
Depreciation and amortization		92,104			86,878			(5,226	)
General taxes		57,121			55,498			(1,623	)
(Gain) loss on asset dispositions and purchases		(413	)		268			681

Total operating expenses, net		458,816			453,465			(5,351	)

Operating income		159,738			143,250			16,488

Other income (expenses)
Interest, net		(79,654	)		(76,191	)		(3,463	)
Allowance for other funds used during construction		4,362			2,828			1,534
Allowance for borrowed funds used during construction		2,081			1,204			877
Amortization of debt expense		(1,266	)		(1,292	)		26
Other, net		(616	)		(1,155	)		539

Total other income (expenses)		(75,093	)		(74,606	)		(487	)

Income from continuing operations before income taxes		84,645			68,644			16,001
Provision for income taxes		35,393			27,945			(7,448	)

Income from continuing operations		49,252			40,699			8,553
Loss from discontinued operations, net of tax		(7,498	)		(14,466	)		6,968

Net income	$	41,754		$	26,233		$	15,521

Basic earnings per common share: (a)
Income from continuing operations	$	0.28		$	0.23
Loss from discontinued operations, net of tax	$	(0.04	)	$	(0.08	)

Net income	$	0.24		$	0.15

Diluted earnings per common share: (a)


	For the three months ended March 31,
(In thousands)	2012			2011
Income from continuing operations	$	0.28		$	0.23
Loss from discontinued operations, net of tax	$	(0.04	)	$	(0.08	)

Net income	$	0.24		$	0.15

Average common shares outstanding during the period:
Basic		175,914			175,259
Diluted		177,028			176,048

(a)

Amounts may not sum due to rounding.

The following is a summary discussion of the consolidated results of operations for the three months ended March 31, 2012 compared to the three months ended March 31, 2011, followed by a discussion of the segment operating results for the three months ended March 31, 2012 compared to the same period in the prior year:

Operating revenues. Consolidated operating revenues for the three months ended March 31, 2012 increased $21.8 million, or 3.7%, compared to the same period in 2011. This change reflects a $13.6 million increase in our Regulated Businesses segment, which was mainly attributable to rate increases partially offset by lower consumption, and a $5.2 million increase in our Market-Based Operations segment, which was primarily due to an increase in the Contract Operations Group revenues attributable to incremental capital project activity associated with our military services contracts. For further information, see the respective “Operating Revenues” discussions within the “Segment Results.”

Operation and maintenance. Consolidated operation and maintenance expense for the three months ended March 31, 2012 decreased $0.8 million, or 0.3%, compared to the same period in 2011. This change was driven by a $7.0 million decrease in our Regulated Businesses segment partially offset by a $3.2 million increase in our Market-Based Operations segment. For further information, see the respective “Operation and Maintenance” discussions within the “Segment Results.”

Depreciation and amortization. Depreciation and amortization expense increased by $5.2 million, or 6.0%, for the three months ended March 31, 2012 compared to the same period in the prior year as a result of additional utility plant placed in service.

General taxes. General taxes expense, which includes taxes for property, payroll, gross receipts, and other miscellaneous items, increased by $1.6 million, or 2.9%, for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 and was principally due to payroll, property, gross receipts and capital stock taxes.

Other income (expenses). Interest expense, net of interest income, which is the primary component of our other income (expenses), increased by $3.5 million, or 4.5% for the three months ended March 31, 2012 compared to the same period in the prior year. This increase was primarily due to accelerated amortization in 2011 of $3.1 million in unamortized debt discounts associated with debt that was redeemed during the first quarter of 2011.

Provision for income taxes. Our consolidated provision for income taxes increased $7.4 million, or 26.7%, to $35.4 million for the three months ended March 31, 2012. The effective tax rates for the three months ended March 31, 2012 and 2011 were 41.8% and 40.7%, respectively.

Loss from discontinued operations, net of tax. As noted above, the financial results of our regulated water and wastewater subsidiaries in Arizona, New Mexico, Texas and Ohio, as well as those of our AWM subsidiary within the Market-Based Operations segment, have been classified as discontinued operations for all periods presented. The decrease in the loss from discontinued operations, net of tax is primarily related to the $21.1 million write-down recorded in the first quarter of 2011 to reduce the net asset values of certain of our discontinued operations. This 2011 charge was offset by a benefit of $4.7 million related to the cessation of depreciation for our Arizona, New Mexico and Texas subsidiaries for the three months ended March 31, 2011. Included in the three months ended March 31, 2012 is a benefit associated with the cessation of depreciation of our Arizona, New Mexico and Ohio subsidiaries of $1.6 million. Under GAAP, operations that are considered discontinued operations cease to depreciate their assets. Also reflected in the three months ended March 31, 2012, is a $9.7 million charge for income taxes resulting from the divestiture of our Arizona and New Mexico subsidiaries.

Segment Results

We have two operating segments, which are also our reportable segments: the Regulated Businesses and the Market-Based Operations. We evaluate the performance of our segments and allocate resources based on several factors, with the primary measure being income from continuing operations before income taxes.

Comparison of Results of Operations for the Three Months Ended March 31, 2012 and 2011

Regulated Segment

The following table summarizes certain financial information for our Regulated Businesses for the periods indicated:


	For the three months ended March 31,
	2012		2011		Increase (Decrease)
	(In thousands)
Operating revenues	$	541,875	$	528,281	$	13,594
Operation and maintenance expense		257,931		264,953		(7,022	)
Operating expenses, net		394,642		394,347		295
Income from continuing operations before income taxes		90,416		77,062		13,354

Operating revenues. Our primary business involves the ownership of water and wastewater utilities that provide services to residential, commercial, industrial and other customers. This business is subject to state regulation, and our results of operations are impacted significantly by rates authorized by the state regulatory commissions in the states in which we operate.

Operating revenues increased by $13.6 million, or 2.6%, for the three months ended March 31, 2012 compared to the three months ended March 31, 2011. The increase was primarily due to rate increases obtained through rate authorizations for a number of our operating companies (most of which were granted and became effective during periods throughout 2011) the impact of which was approximately $19.6 million. These increases were offset by decreased revenues of approximately $6.2 million attributable to lower demand in the first quarter of 2012 compared to the first quarter of 2011.

The following table sets forth the percentage of Regulated Businesses’ revenues and billed water sales volume by customer class:


	For the three months ended March 31,
	2012				2011				2012				2011
	Operating Revenues								Billed Water Sales Volume
	(Dollars in thousands)								(Gallons in millions)
Customer Class
Water service:
Residential	$	305,897	56.5	%	$	297,445	56.3	%		38,475	50.3	%		39,138	50.4	%
Commercial		106,672	19.7	%		101,240	19.2	%		17,285	22.6	%		17,350	22.4	%
Industrial		26,928	5.0	%		26,658	5.0	%		8,975	11.8	%		9,270	11.9	%
Public and other		71,281	13.1	%		70,046	13.3	%		11,726	15.3	%		11,832	15.3	%
Other water revenues		2,739	0.5	%		5,298	1.0	%		—	—			—	—

Total water revenues		513,517	94.8	%		500,687	94.8	%		76,461	100.0	%		77,590	100.0	%

Wastewater service		19,121	3.5	%		18,491	3.5	%
Other revenues		9,237	1.7	%		9,103	1.7	%

	$	541,875	100.0	%	$	528,281	100.0	%

The following discussion addresses the increase or decrease in the Regulated Businesses’ revenues and associated billed water sales volumes in gallons by customer class.

Water Services — Water service operating revenues from residential customers for the three months ended March 31, 2012 totaled $305.9 million, an $8.5 million increase, or 2.8%, over the same period of 2011, mainly due to rate increases, partially offset by a decrease in sales volume. The volume of water sold to residential customers decreased by 1.7% for the three months ended March 31, 2012 to 38.5 billion gallons, from 39.1 billion gallons for the same period in 2011. We believe the main factor contributing to the decline is an increased customer focus on conservation and more efficient water-related appliances.

Water service operating revenues from commercial water customers for the three months ended March 31, 2012 increased by $5.4 million, or 5.4%, to $106.7 million mainly due to rate increases, partially offset by a decrease in sales volume compared to the same period in 2011. The volume of water sold to commercial customers decreased by 0.4% for the three months ended March 31, 2012, to 17.3 billion gallons, from 17.4 billion gallons for the three months ended March 31, 2011.

Water service operating revenues from industrial customers totaled $26.9 million for the three months ended March 31, 2012, an increase of $0.3 million, or 1.0%, from those recorded for the same period of 2011, mainly due to rate increases partially offset by a decrease in sales volume. The volume of water sold to industrial customers totaled 9.0 billion gallons for the three months ended March 31, 2012, a decrease of 3.2% from the 9.3 billion gallons for the three months ended March 31, 2011.

Water service operating revenues from public and other customers, including municipal governments, other governmental entities and resale customers increased $1.2 million, or 1.8% to $71.3 million, for the three months ended March 31, 2012, mainly due to rate increases. Revenues from municipal governments for fire protection services and customers requiring special private fire service facilities totaled $31.6 million for the three months ended March 31, 2012, a decrease of $0.2 million over the same period of 2011. Revenues generated by sales to governmental entities and resale customers for the three months ended March 31, 2012 totaled $39.7 million, an increase of $1.4 million from the three months ended March 31, 2011.

Wastewater services — Our subsidiaries provide wastewater services in nine states. Revenues from these services increased by $0.6 million, or 3.4%, to $19.1 million for the three months ended March 31, 2012, from the same period of 2011. The increase was primarily attributable to rate increases in a number of our operating companies.

Operation and maintenance. Operation and maintenance expense decreased $7.0 million, or 2.7%, for the three months ended March 31, 2012, compared to the same period in the prior year. The following table provides information regarding operation and maintenance expense for the three months ended March 31, 2012 and 2011, by major expense category:


	For the three months ended March 31,
	2012		2011		Increase (Decrease)			Percentage
	(In thousands)
Production costs	$	58,460	$	58,573	$	(113	)		(0.2	%)
Employee-related costs		115,361		122,582		(7,221	)		(5.9	%)
Operating supplies and services		48,575		48,827		(252	)		(0.5	%)
Maintenance materials and services		16,134		17,455		(1,321	)		(7.6	%)
Customer billing and accounting		9,070		8,098		972			12.0	%
Other		10,331		9,418		913			9.7	%

Total	$	257,931	$	264,953	$	(7,022	)		(2.7	%)

Production costs and employee-related costs, which account for approximately 67% of the total Regulated Businesses operation and maintenance expense, are discussed in more detail below.

Production costs, by major expense type were as follows:


	For the three months ended March 31,
	2012		2011		Increase (Decrease)			Percentage
	(In thousands)
Fuel and power	$	20,100	$	20,069	$	31			0.2	%
Purchased water		22,410		20,815		1,595			7.7	%
Chemicals		9,508		10,277		(769	)		(7.5	%)
Waste disposal		6,442		7,412		(970	)		(13.1	%)

Total	$	58,460	$	58,573	$	(113	)		(0.2	%)

Overall production costs remained relatively unchanged for the three months ended March 31, 2012 compared to 2011 with a reduction in chemical costs and waste disposal costs offset by higher purchased water costs. The reduction in chemical costs is attributable to lower water turbidity experience, a reduction in the required production due to the mild winter temperatures in the first quarter of 2012 and a decrease in chemical pricing and lower consumption. The decrease in waste disposal costs is due to the recognition in 2011 of previously deferred costs allowed by a cost recovery mechanism in one of our operating companies. The increase in purchased water costs is primarily due to higher system delivery in certain districts within our California subsidiary for which 100% of the water is sourced from others as a result of an unusually dry first quarter in 2012.

Employee-related costs, including salaries and wages, group insurance, and pension expense, decreased $7.2 million or 5.9%, for the three months ended March 31, 2012 compared to the same period in the prior year. These employee-related costs represented 44.7% and 46.3% of operation and maintenance expense for the three months ended March 31, 2012 and 2011, respectively. The following table provides information with respect to components of employee-related costs for the three months ended March 31, 2012 and 2011:


	For the three months ended March 31,
	2012		2011		Increase (Decrease)			Percentage
	(In thousands)
Salaries and wages	$	78,388	$	80,649	$	(2,261	)		(2.8	%)
Pensions		13,339		17,156		(3,817	)		(22.2	%)
Group insurance		18,869		20,169		(1,300	)		(6.4	%)
Other benefits		4,765		4,608		157			3.4	%

Total	$	115,361	$	122,582	$	(7,221	)		(5.9	%)

The decreases in salaries and wages and group insurance are mainly attributable to a reduction in headcount driven by vacant positions, an increase in costs capitalized as a result of the nature of projects worked on during 2012, which is mainly a result of the milder winter weather in the first quarter of 2012 compared to the first quarter 2011, as well as lower incentive compensation. These decreases were partially offset by higher costs resulting from annual wage increases and $2.4 million in severance-related costs associated with organizational realignment. The decrease in pension expense for the three months ended March 31, 2012 was primarily due to decreased contributions in certain of our regulated operating companies whose costs and revenue requirements are based on the actual cash contributions to our pension trust accounts.

Operating supplies and services include the day-to-day expenses of office operation, legal and other professional services, transportation expenses, information systems rental charges and other office equipment rental charges. These costs decreased $0.3 million, or 0.5%, for the three months ended March 31, 2012, primarily due to reduction in leased vehicle costs, partially offset by higher contracted services.

Maintenance materials and services, which include emergency repairs as well as costs for preventive maintenance, decreased $1.3 million, or 7.6%, for the three months ended March 31, 2012. This decrease was attributable to lower costs related to paving and backfilling, most of which is attributable to a decrease in the number of main breaks as a result of the milder winter weather.

Customer billing and accounting expenses, which include uncollectible accounts expense, postage and other customer related expenses, increased by $1.0 million, or 12.0%, for the three months ended March 31, 2012 compared to the same period in the prior year. This increase was primarily due to an increase in uncollectible expense of $0.8 million and higher collection agency fees.

Other operation and maintenance expenses include casualty and liability insurance premiums and regulatory costs. The increase in these costs was driven by higher insurance costs for the three months ended March 31, 2012, as 2011 insurance costs reflected incremental credits resulting from positive resolution of prior years’ claims.

Operating expenses . The increase in operating expenses is primarily due to higher depreciation and amortization expense of $6.2 million, principally resulting from additional utility plant placed in service, and an increase in general taxes of $1.2 million, principally attributable to higher property, gross receipts and capital stock taxes offset by the decrease in operation and maintenance expense, as explained above.

Market-Based Operations

The following table provides certain financial information for our Market-Based Operations segment for the periods indicated:


	For the three months ended March 31,
	2012		2011		Increase
	(In thousands)
Operating revenues	$	80,581	$	75,382	$	5,199
Operation and maintenance expense		67,771		64,536		3,235
Operating expenses, net		70,763		68,274		2,489
Income from continuing operations before income taxes		10,469		7,674		2,795

Operating revenues. The net increase in revenues is primarily attributable to an increase in the Contract Operations Group revenues of $5.0 million, mainly due to incremental revenues associated with military construction and operations & maintenance projects.

Operation and maintenance. Operation and maintenance expense increased $3.2 million, or 5.0%, for the three months ended March 31, 2012 compared to the same period in the prior year. The following table provides information regarding operation and maintenance expense for the three months ended March 31, 2012 and 2011, by major expense category:


	For the three months ended March 31,
	2012		2011		Increase (Decrease)			Percentage
	(In thousands)
Production costs	$	12,039	$	12,341	$	(302	)		(2.4	%)
Employee-related costs		17,518		17,561		(43	)		(0.2	%)
Operating supplies and services		27,804		23,282		4,522			19.4	%
Maintenance materials and services		9,008		9,357		(349	)		(3.7	%)
Other, including uncollectible expense		1,402		1,995		(593	)		(29.7	%)

Total	$	67,771	$	64,536	$	3,235			5.0	%

The overall increase in O&M expenses for the three months ended March 31, 2012 compared to the same period in the prior year is driven by the increase in operating supplies and services. The increase in operating supplies and services is mainly attributable to higher expenses in the Contract Operations Group, which are related to the increased activity with our military construction projects, reflecting the increase in revenues.

Operating expense . The increase in operating expenses is primarily due to the increase in operation and maintenance expense, which is explained above.

Liquidity and Capital Resources

For a general overview of our sources and uses of capital resources, see the introductory discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources,” contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2011.

We believe that our ability to access the capital markets, our revolving credit facility and our cash flows from operations will generate sufficient cash to fund our short-term capital requirements. The Company funds liquidity needs for capital investment, working capital and other financial commitments through cash flows from operations, public and private debt offerings, commercial paper markets and a revolving credit facility with $840.0 million in aggregate total commitments from a diversified group of banks. The Company closely monitors the financial condition of the financial institutions associated with its credit facility.

In order to meet our short-term liquidity needs, we, through American Water Capital Corp, (“AWCC”), our financing subsidiary, primarily issue commercial paper, which is supported by the revolving credit facility. The revolving credit facility is also used, to a limited extent, to support our issuance of letters of credit. AWCC had no outstanding borrowings and $36.8 million of outstanding letters of credit under the revolving credit facility as of March 31, 2012. As of March 31, 2012, AWCC had $803.2 million under our credit facility that we can use to fulfill our short-term liquidity needs, issue letters of credit and support our $133.1 million outstanding commercial paper. We can provide no assurances that our lenders will meet their existing commitments or that we will be able to access the commercial paper or loan markets in the future on terms acceptable to us, or at all.

Cash Flows from Operating Activities

Cash flows from operating activities primarily result from the sale of water and wastewater services and, due to the seasonality of demand, are greatest during the third quarter of each fiscal year. Cash flows from operating activities for the three months ended March 31, 2012 were $148.1 million compared to $161.5 million for the three months ended March 31, 2011.

The following table provides a summary of the major items affecting our cash flows from operating activities for the three months ended March 31, 2012 and 2011:


	For the three months ended March 31,
	2012			2011
	(In thousands)
Net income	$	41,754		$	26,233
Add (subtract):
Non-cash operating activities(1)		181,623			154,126
Changes in working capital(2)		(34,851	)		29,970
Pension and postretirement healthcare contributions		(40,427	)		(48,803	)

Net cash flows provided by operations	$	148,099		$	161,526

(1)

Includes depreciation and amortization, provision for deferred income taxes, amortization of deferred investment tax credits, provision for losses on utility accounts receivable, allowance for other funds used during construction, (gain) loss on asset dispositions and purchases, pension and non-pension postretirement benefits expense and other non-cash items. Details of each component can be found in the Consolidated Statements of Cash Flows.

(2)	Changes in working capital include changes to accounts receivable and unbilled utility revenue, taxes receivable including income taxes, other current assets, accounts payable, taxes accrued (including income taxes), interest accrued and other current liabilities.

The decrease in cash flows from operations for the three months ended March 31, 2012 compared to the same period in 2011 is primarily driven by changes in working capital.

During the first quarter of 2012, we revised the amount we expect to contribute to fund our pension plans for 2012. We estimate employer contributions to the plan to be approximately $97.9 million for 2012 compared to $126.7 million, as previously disclosed in Form 10-K for the year ended December 31, 2011. The 2012 contribution is subject to change as a result of the annual valuation occurring in the third quarter of 2012, which is based on the Employee Retirement Income Security Act of 1974 minimum funding requirements.

Cash Flows from Investing Activities

The following table provides information regarding cash flows provided by or used in investing activities for the periods indicated:


	For the three months ended March 31,
	2012			2011
	(In thousands)
Net capital expenditures	$	(233,366	)	$	(176,411	)
Proceeds from sale of assets and securities		461,375			158
Other investing activities, net(1)		1,596			10,065

Net cash flows provided by (used in) investing activities	$	229,605		$	(166,188	)

(1)	Includes acquisitions, removal costs from property, plant and equipment retirements, net, and net funds released.

Cash flows provided by investing activities for the three months ended March 31, 2012 was $229.6 million compared to cash flows used in investing activities of $166.2 million for the three months ended March 31, 2011. The variance from 2011 to 2012 is mainly attributable to the proceeds received from the sale of our Arizona and New Mexico subsidiaries on January 31, 2012. Capital expenditures increased $57.0 million to $233.4 million for the three months ended March 31, 2012 from $176.4 million for the three months ended March 31, 2011. This increase is attributable to increased spending on infrastructure replacement programs due to the milder winter weather in the first quarter of 2012, an increase in capital spending for our business transformation project as well as expenditures associated with the replacement of one of our New Jersey water treatment facilities.

Cash Flows from Financing Activities

Our financing activities, primarily focused on funding capital expenditures, include the issuance of long-term and short-term debt, primarily through AWCC. We intend to access the capital markets on a regular basis, subject to market conditions. In addition, new infrastructure may be financed with customer advances and contributions for construction (net of refunds).

The following long-term debt was issued during the first three months of 2012:


Company	Type	Interest Rate			Maturity	Amount
Other subsidiaries	Private activity bonds and government funded debt – fixed rate		1.00%-2.41	%	2029-2032	$	14,372

Total issuances						$	14,372

Proceeds from the above issuances were received from the Pennsylvania Infrastructure Investment Authority and will be used to fund certain specified projects.

The following long-term debt was retired through optional redemption, sinking fund provisions or payment at maturity during the first three months of 2012:


Company	Type	Interest Rate		Maturity		Amount (In thousands)
Other subsidiaries	Mortgage bonds-fixed rate		7.95%		2012	$	4,200
Other subsidiaries	Private activity bonds and government funded debt-fixed rate		0.00%-5.90%		2012-2031		1,973
Other subsidiaries	Mandatory redeemable preferred stock		4.60%-6.00%		2013-2019		1,100
Other	Capital leases						56

Total retirements and redemptions						$	7,329

Included in the long-term debt redemptions/retirements is $4.2 million related to our Ohio subsidiary, which is classified as discontinued operations.

From time to time, and as market conditions warrant, we may engage in long-term debt retirements via tender offers, open market repurchases or other viable alternatives. Subsequent to March 31, 2012, we have issued notices of redemption for $150.4 million of outstanding bonds with original maturity dates ranging from 2026 to 2038 and interest rates ranging from 5.25% to 5.90%. These bonds will now mature at various dates in the second quarter. We intend to refinance these bonds in 2012 with either commercial paper borrowings or long-term debt.

Credit Facilities and Short-Term Debt

The components of short-term debt at March 31, 2012 were as follows:


	Amount
	(In thousands)
Commercial paper, net	$	133,097
Bank overdraft		14,115

Total short-term debt	$	147,212

The following table provides information as of March 31, 2012, regarding letters of credit sub-limits and available capacities under the revolving credit facility, as well as outstanding amounts of commercial paper and borrowings under the revolving credit facilities:


	Credit Facility Commitment		Available Credit Facility Capacity		Letter of Credit Sub-limit		Available Letter of Credit Capacity		Outstanding Commercial Paper (Net of Discount)		Credit Line Borrowings
	(In thousands)
March 31, 2012	$	840,000	$	803,159	$	150,000	$	113,159	$	133,097	$	—

Interest rates on advances under the revolving credit facility are based on either the prime rate or LIBOR, plus an applicable margin based upon our credit ratings, as well as total outstanding amounts under the facility at the time of the borrowing. The current spread over LIBOR is 22.5 basis points and the maximum spread over LIBOR is 55 basis points.

The weighted-average interest rate on short-term borrowings for the three months ended March 31, 2012 was approximately 0.52% compared to 0.40% for the three months ended March 31, 2011.

Capital Structure

The following table provides information regarding our capital structure for the periods presented:


	At March 31, 2012			At December 31, 2011
Common stockholder equity and preferred stock without mandatory redemption rights		43	%		42	%
Long-term debt and redeemable preferred stock at redemption value		55	%		53	%
Short-term debt and current portion of long-term debt		2	%		5	%

		100	%		100	%

Debt Covenants

Our debt agreements contain financial and non-financial covenants. To the extent that we are not in compliance, we or our subsidiaries may be restricted in our ability to pay dividends, issue debt or access our revolving credit facility. We were in compliance with our covenants as of March 31, 2012. Our failure to comply with restrictive covenants under our credit facilities could accelerate repayment obligations.

Certain long-term notes and the revolving credit facility require us to maintain a ratio of consolidated total indebtedness to consolidated total capitalization of not more than 0.70 to 1.00. As of March 31, 2012, our ratio was 0.57 and therefore we were in compliance with the covenant.

Security Ratings

Our access to the capital markets, including the commercial paper market, and respective financing costs in those markets, is directly affected by securities ratings of the entity that is accessing the capital markets. We primarily access the capital markets, including the commercial paper market, through AWCC. However, we also issue debt through our regulated subsidiaries, primarily in the form of tax exempt securities, to lower our overall cost of debt.

On January 30, 2012, Standard & Poor’s Ratings Services, which we refer to as S&P, reaffirmed its BBB+ corporate credit rating on AWCC and American Water and AWCC’s “A2” short-term rating. Both S&P and Moody’s rating outlook for both American Water and AWCC is stable. The following table shows the Company’s securities ratings as of March 31, 2012:


Securities	Moody’s Investors Service		Standard & Poor’s Ratings Service
Senior unsecured debt		Baa2		BBB+
Commercial paper		P2		A2

A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency, and each rating should be evaluated independently of any other rating. Security ratings are highly dependent upon our ability to generate cash flows in an amount sufficient enough to service our debt and meet our investment plans. We can provide no assurances that our ability to generate cash flows is sufficient to maintain our existing ratings. None of our borrowings are subject to default or prepayment as a result of the downgrading of these security ratings, although such a downgrading could increase fees and interest charges under our credit facilities.

As part of the normal course of business, we routinely enter into contracts for the purchase and sale of water, energy, chemicals and other services. These contracts either contain express provisions or otherwise permit us and our counterparties to demand adequate assurance of future performance when there are reasonable grounds for doing so. In accordance with the contracts and applicable contract law, if we are downgraded by a credit rating agency, especially if such downgrade is to a level below investment grade, it is possible that a counterparty would attempt to rely on such a downgrade as a basis for making a demand for adequate assurance of future performance. Depending on our net position with a 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 depend upon the facts and circumstances of our situation at the time of the demand. If we can reasonably claim that we are willing and financially able to perform our obligations, it may be possible to argue successfully that no collateral should be posted or that an amount equal only to two or three months of future payments should be sufficient. We do not expect that our posting of collateral will have a material adverse impact on our results of operations, financial position or cash flows.

Dividends

Our board of directors has adopted a dividend policy to distribute to our stockholders a portion of our net cash provided by operating activities as regular quarterly dividends, rather than retaining that cash for other purposes. We expect that dividends will be paid quarterly to holders of record approximately 15 days prior to the distribution date. Since the dividends on our common stock will not be cumulative, only declared dividends will be paid.

On March 1, 2012, the Company made a cash dividend payment of $0.23 per share to all shareholders of record as of February 3, 2012. In March 2011, the Company made a cash dividend payment of $0.22 per share to all shareholders of record as of February 18, 2011.

On February 24, 2012, our board of directors declared a quarterly cash dividend payment of $0.23 per share payable on June 1, 2012 to all shareholders of record as of April 20, 2012.

Market Risk

There have been no significant changes to our market risk since December 31, 2011. For a discussion of our exposure to market risk, refer to Part II, Item 7A. “Quantitative and Qualitative Disclosures about Market Risk,” contained in our Annual Report on Form 10-K for the year ended December 31, 2011.

Application of Critical Accounting Policies and Estimates

Our financial condition, results of operations and cash flows are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates,” in our Form 10-K for the year ended December 31, 2011 filed with the SEC for a discussion of our critical accounting policies.

Recent Accounting Pronouncements

See Part I, Item 1 Consolidated Financial Statements Note 2 – New Accounting Pronouncements in this Quarterly Report on Form 10-Q for a discussion of new accounting standards recently adopted or pending adoption.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are subject to market risks in the normal course of business, including changes in interest rates and equity prices. For further discussion of market risks, see “Market Risk” in Part I, Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

American Water Works Company, Inc. maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed or submitted under the Securities Exchange Act of 1934 (“the Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Our management, including the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) of the Exchange Act) as of March 31, 2012 pursuant to 15d-15(e) under the Exchange Act.

Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2012, our disclosure controls and procedures were effective at a reasonable level of assurance. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during the three months ended March 31, 2012, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

The following information updates and amends the information provided in the Company’s annual report on Form 10-K for the year ended December 31, 2011 (the “Form 10-K”) in Part I, Item 3, “Legal Proceedings.”

Alternative Water Supply in Lieu of Carmel River Diversions

As described in the Form 10-K, the California State Water Resources Control Board adopted a Cease and Desist Order applicable to California-American Water Company (“CAWC”) on October 20, 2009 (the “2009 Order”), and CAWC appealed the 2009 Order to the Superior Court of California, challenging the findings and requirements of the 2009 Order. CAWC, the State Water Resources Control Board and other parties to CAWC’s action and related actions have entered into settlement negotiations, which are continuing.

As also described in the Form 10-K, CAWC filed a petition (the “Petition”) with the California Public Utilities Commission (“CPUC”) seeking clarification that it may go forward with constructing four pipelines and two pump stations (the “Ancillary Facilities”), regardless of the status of the Regional Desalination Project (the “Project”) that was to be implemented through a Water Purchase Agreement (“WPA”) and ancillary agreements (the “Agreements”) among the Marina Coast Water District (“MCWD”), the Monterey County Water Resources Agency (“MCWRA”) and CAWC. As also noted in the Form 10-K, at a prehearing conference with respect to the Petition held on January 24, 2012, CAWC advised the administrative law judge assigned to the matter that it will seek CPUC approval of an alternate project, and the administrative law judge directed CAWC to file, jointly with MCWD and MCWRA, if possible, a status report addressing various issues related to the Project and to submit a compliance filing to address CAWC’s plans to move forward on a new project.

CAWC, MCWD and MCWRA were unable to reach agreement on a status report. As a result, on March 1, 2012, each entity filed a separate status report, and CAWC also filed a compliance report. In addition, on March 15, 2012, the three entities each filed responses to some or all of the other entities’ filings.

In the filings, CAWC asserted, among other things, that proceeding with the Project is no longer in the public interest because the Project cannot be completed in time to meet the California State Water Resources Control Board’s December 2016 deadline for reducing normal diversions from the Carmel River. MCWD urged the CPUC to, among other things, dismiss or deny the Petition and direct CAWC, MCWRA and MCWD to expeditiously perform their contractual obligations in connection with the Project. MCWRA stated that it leaves it to CAWC to address how CAWC presently intends to move forward. Each of the parties also generally reasserted certain positions previously taken with respect to this matter, which are summarized in the Form 10-K.

MCWD also asserted in its filings that if the CPUC determines that the Project is no longer the preferred water supply solution, it should require CAWC to reimburse MCWD for all costs expended by MCWD in connection with the Project. In its status report, MCWRA asserted that it was entitled to reimbursement of all costs or expenses relating to the Project, including enumerated expenses under the WPA. Each of MCWD and MCWRA also claimed that it is entitled to forgiveness of the indebtedness to CAWC that it incurred in connection with the Project. In response, CAWC has challenged MCWD’s claim that it is entitled to reimbursement for certain claimed litigation expenses, and has stated generally that, in light of the failure of MCWD and MCWRA to fulfill their contractual obligations under the WPA, their entitlement to reimbursement is unclear.

By letter dated March 27, 2012, counsel for MCWD stated that MCWD may have claims against CAWC and/or American Water Works Company, Inc. related to the Project and/or alternatives to the Project. The letter did not formally assert claims, but called for the preservation of all relevant evidence. By letter dated March 30, 2012, addressed to, among others, CAWC and MCWD, the County of Monterey (the “County”) and MCWRA stated that they may have legal claims against the addressees and the addressees may have evidence relevant to claims the County and MCWRA may have against other parties, and called for the preservation of evidence related to specified matters, including matters related to the Project. By separate letters, each dated April 20, 2012, to counsel for MCWD, MCWRA and the County, counsel for CAWC called for the preservation of evidence relevant to the WPA and other Project-related agreements.

On April 23, 2012, CAWC filed an application with the CPUC for approval of the Monterey Peninsula Water Supply Project (the “New Project”). The New Project involves construction of a desalination plant and related facilities, all to be owned by CAWC. In addition, the New Project may encompass CAWC’s purchase of water from the proposed Monterey Peninsula Groundwater Replenishment Project, a joint project between the Monterey Regional Water Pollution Control Agency and the Monterey Peninsula Water Management District (“MPWMD”). The New Project also would involve aquifer storage and recovery through an already established aquifer storage and recovery program between CAWC and the MPWMD. In its application, CAWC is seeking approval to construct a desalination plant that can accommodate 9.0 million gallons per day. However, if the Groundwater Replenishment Project meets certain specified milestones by the time CAWC is ready to construct the plant (currently estimated to be near the end of 2014) and the cost for water to be purchased by CAWC is reasonable, CAWC would make the appropriate filing to reduce the size of the desalination plant so that it accommodates 5.4 million gallons per day.

CAWC has estimated the total project cost for the 9.0 million gallons per day desalination plant and related facilities to be approximately $367 million ($320 million if the size of the plant is reduced to 5.4 million gallons per day). CAWC stated in the application that it anticipates, based on discussion with the State Water Resources Control Board , that it is eligible for a State Revolving Fund Loan for the New Project. The application also seeks CPUC approval of ratemaking mechanisms designed to enable CAWC to recover its costs related to construction and operation of the New Project, including funding for principal and interest on the State Revolving Fund Loan.

CAWC’s ability to move forward on the New Project will be subject to extensive administrative review, including public hearings before the CPUC and testimony from intervening parties. In addition, a large number of federal, state and local approvals must be obtained, and other possible impediments, including a Monterey County ordinance limiting sponsorship of a desalination project to government-owned enterprises, must be addressed (however, the CPUC’s General Counsel has opined in a letter to the Monterey County Counsel that the ordinance is preempted and of no legal validity). Therefore, we cannot assure you that the New Project will be approved or completed.

San Clemente Dam

As noted in the Form 10-K, CAWC has challenged the Proposed Decision, as revised (the “PD”), of the administrative law judge assigned to CAWC’s application for approval of the Carmel River Reroute and San Clemente Dam Removal Project. The CPUC vote on the PD has been postponed several times.

On April 24, 2012, Commissioner Catherine J. K. Sandoval of the CPUC issued an Alternate Proposed Decision (the “Alternate PD”). The Alternate PD also provided for approval of the project, but includes significant changes from the PD.

The Alternate PD, like the PD, provided for rate recovery by CAWC of the $49 million in prospective costs over a 20 year period, but would not place a firm cap on projected costs, which would enable CAWC to seek authority from the CPUC to raise the cap if project costs exceed $49 million. In addition, the Alternate PD would permit CAWC to earn its full rate of equity return and the actual cost of debt on the project. While the $49 million to be recovered by CAWC would be offset by tax benefits derived by CAWC’s donation of certain land, the offset will not apply to a parcel being used for utility purposes and which is not part of the project. In addition, the Alternate PD would permit CAWC’s rate recovery of approximately $27 million in historical costs. The Alternate PD would place all authorized and estimated costs in a regulatory asset account and would provide recovery of the regulatory asset over a twenty-year period beginning July 1, 2012. The Alternate PD also finds that CAWC did not make a misrepresentation regarding descriptions of the use of the dam as a point of water diversion.

Parties to the proceeding may file comments on the Alternate PD by May 14, 2012. No date has been scheduled for the CPUC’s decision on the PD and the Alternate PD.

Other Matters

As previously disclosed in the Form 10-K, in November 2010, the Ontario Ministry of Justice commenced a proceeding against Terratec Environmental Ltd., one of the Company’s Canadian subsidiaries, alleging the violation of the Ontario Water Resource Act in connection with the alleged discharge of anaerobic digestate into a creek that leads to Lake Ontario. Terratec has settled this matter by agreeing to pay a fine in an amount that is not material.

The Company at times is involved in other proceedings or litigation arising in the ordinary course of business. We do not believe that the ultimate resolution of these matters will materially affect the Company’s financial position or results of operations. However, litigation and other proceedings are subject to many uncertainties, and the outcome of individual matters is not predictable with assurance. It is possible that some litigation and other proceedings could be decided in a manner that is unfavorable to us, and that any such unfavorable decisions could have a material adverse effect on the Company’s business, financial condition, results of operations, and cash flows.

ITEM 1A.

RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in the “Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2011 and our other public filings, which could materially affect our business, financial condition or future results. There have been no material changes from risk factors previously disclosed in “Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2011.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.

MINE SAFETY DISCLOSURES

None

ITEM 5.

OTHER INFORMATION

None

EXHIBIT INDEX


Exhibit Number		Exhibit Description
	*10.1	2012 Annual Incentive Plan Highlights Brochure

	*10.2	American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2012 Nonqualified Stock Option Grant for ML1 – L5

	*10.3	American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2012 Performance Stock Unit Grant Form A for ML1 – L5

	*10.4	American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2012 Performance Stock Unit Grant Form B for ML1 – L5

	*31.1	Certification of Jeffry Sterba, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act

	*31.2	Certification of Ellen C. Wolf, Senior Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act

	*32.1	Certification of Jeffry Sterba, President and Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act

	*32.2	Certification of Ellen C. Wolf, Senior Vice President and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act

	101	The following financial statements from American Water Works Company, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012, filed with the Securities and Exchange Commission on May 2, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Cash Flows; (iv) the Consolidated Statements of Changes in Stockholders’ Equity; (v) the Consolidated Statements of Comprehensive Income and (vi) the Notes to Consolidated Financial Statements.

*	filed herewith.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 2nd day of May, 2012.

American Water Works Company, Inc.

(Registrant)

/s/ Jeffry Sterba

Jeffry Sterba

President and Chief Executive Officer

(Principal Executive Officer)

/s/ Ellen C. Wolf

Ellen C. Wolf

Senior Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

EXHIBIT INDEX


Exhibit Number		Exhibit Description
	*10.1	2012 Annual Incentive Plan Highlights Brochure

	*10.2	American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2012 Nonqualified Stock Option Grant for ML1 – L5

	*10.3	American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2012 Performance Stock Unit Grant Form A for ML1 – L5

	*10.4	American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan 2012 Performance Stock Unit Grant Form B for ML1 – L5

	*31.1	Certification of Jeffry Sterba, President and Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act

	*31.2	Certification of Ellen C. Wolf, Senior Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act

	*32.1	Certification of Jeffry Sterba, President and Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act

	*32.2	Certification of Ellen C. Wolf, Senior Vice President and Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act

	101	The following financial statements from American Water Works Company, Inc.’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012, filed with the Securities and Exchange Commission on May 2, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Cash Flows; (iv) the Consolidated Statements of Changes in Stockholders’ Equity; (v) the Consolidated Statements of Comprehensive Income and (vi) the Notes to Consolidated Financial Statements.

*	filed herewith.

Exhibit 10.1

LOGO

2012

Annual

Incentive

Plan

Table of Contents


THE 2012 AMERICAN WATER ANNUAL INCENTIVE PLAN			1

Your Performance—Your Award			1

Eligibility			2

DETERMINING AIP AWARDS			4

Step 1: Establish initial award pool based on overall corporate performance			4

Step 2: Allocate overall corporate funding to organizational groups/ functional areas, and adjust specific organizational group/functional area funding to reflect results			6

Step 3: Determine individual AIP award based on (a) *individual performance,* and (b)available organizational group/functional area funding; awards are paid from available organizational group/functional area award pool			6

WHAT THE 2012 AIP MEANS FOR YOU			7

Performance Ratings			7

Award Funding Determination			8

Receiving Your AIP Award			10

FREQUENTLY ASKED QUESTIONS			11


American Water		1

THE 2012 AMERICAN WATER ANNUAL INCENTIVE PLAN

Your Performance — Your Award

At American Water, your performance counts. We rely on our employees’ knowledge and skills to help the company achieve its business objectives.

•

The American Water 2012 Annual Incentive Plan (AIP) is designed to give eligible exempt employees an annual opportunity to earn a cash award that recognizes and rewards their contributions to the company’s success. This means that company and individual performance are both taken into account to determine cash awards under the plan. We continue to make adjustments to the AIP design to reinforce the link between company and individual performance and award payouts. This year will include a new goal of Business Transformation Performance.

•

We are continuing the funding approach that was used in 2011, which directly ties the amount of available cash for AIP payouts to company performance against specific metrics. AIP funding for all eligible, exempt employees will depend on the company’s achieving its financial, business transformation and operational goals.

•

Your individual performance continues to play a large role in determining the amount of your payout . Employees who exceed their performance targets could receive higher payouts. Conversely, employees who under-perform and do not meet their performance targets could receive lower payouts or no payout at all. In short, your performance directly impacts the amount of your award.

The 2012 AIP is designed to challenge and motivate you to perform at your highest level, and promote the creation of value to the customer and shareholder. Read this brochure to learn about how the 2012 plan works and what it means for you.


American Water		2

The 2012 AIP

Elements of the Program

• AIP award pool funding is based on overall corporate performance against specific financial, business transformation and operational goals (represented by the Corporate Multiplier), then allocated across organizational groups/functional areas—at senior management’s discretion—depending on organizational group/functional area results.

• AIP funding for all eligible exempt employees depends on the company achieving its financial, business transformation and operational goals.

• A pre-determined financial threshold for company performance must be met in order for funding and any award to be provided under the AIP.

• Individual award payouts will be based on individual performance against specific goals represented by the Individual Performance Factor and paid from available organizational group/functional area funding.

• For 2012, the Individual Performance Factor range is 0%-200%. Individual payouts will be capped at 200% of AIP target award.

• Award opportunity (Target Award) is expressed as a percentage of base salary. (See Attachment B).

• Actual payout may be lower or higher than target depending on company and individual performance against specific goals.

• Individual performance is assessed by your manager and measured against your pre - determined performance goals.

• Your AIP will be distributed as a cash award in March.

• You must be actively employed with American Water on the date awards are paid to receive your 2012 AIP payout. You (or your beneficiary) may be eligible for a prorata award if you are disabled, retire, die, involuntarily terminate (not “for cause”) or a divestiture occurred after June 30, 2012. Involuntary termination for cause would not be eligible.

Eligibility

•

You are eligible for an AIP award opportunity if you are a regular, full-time exempt employee of American Water.

•

Regular, full-time exempt employees who join American Water on or before September 30, 2012 are also eligible to participate in the AIP on a prorated basis.

•

Employees transferred from nonexempt to exempt status on or after September 30 ^th are not eligible in the current plan year.

•

You must be an active employee with American Water on the date the payout is made in order to receive the award. You (or your beneficiary) may be eligible for


American Water		3

a prorata award if you are disabled, retire, die, involuntarily terminate (not “for cause”) or a divestiture occurred after June 30, 2012. (Retirement under this plan is age 55 and 10 years of service.)

•

If you are promoted during the plan year to a position with a higher AIP target level, or if you are reclassified/transferred to a position with a lower AIP target level, your award payout will be based on your new target level as of December 14, 2012, except ML4s and above who will be prorated at each salary and target level.

•

You are not eligible for an AIP award if:

•

you transfer from exempt status to nonexempt status during the current plan year or your job was reclassified to nonexempt status,

•

your performance rating is “Unacceptable” or “Too Soon to Rate,”

•

you have not complied with the company’s annual Code of Ethics certification by the established deadline,

•

your employment was involuntarily terminated for cause.

Why Is the Plan Based on Individual Performance?

Since the value (as reflected in our share price and our return to shareholders) and success of our business depend on the achievement of annual company and individual performance goals, American Water recognizes the need to differentiate and reward the performance of employees who enable us to reach these goals. The 2012 AIP is designed to ensure that award payouts are directly tied to measurable contributions — both company and individual — to American Water’s success.


American Water		4

DETERMINING AIP AWARDS

AIP award payouts depend on individual performance; they also depend on overall corporate performance and organizational group/functional area results (which determine award pool funding).

AIP awards will be determined according to the following three-step process:

Step 1:

Establish initial award pool based on overall corporate performance

Step 2:

Allocate overall corporate funding to organizational groups/functional areas, and adjust specific organizational group/functional area funding to reflect results

Step 3:

Determine AIP award based on individual performance; awards are paid from available organizational group/functional area funding

Step 1:

Establish initial award pool based on overall corporate performance

Each year, American Water establishes funding for the AIP award pool. In 2012, the funding will be directly tied to company performance and represented by the Corporate Multiplier. The Corporate Multiplier can range from 0% to 150% depending on how well the company performed against the financial, business transformation and operational goals described below. Note that a pre-determined threshold for company performance — 2012 Diluted Earnings Per Share (EPS) must be at least 90% of target —must be met in order for funding of any award to be provided under the AIP for Business Transformation and Operational Performance Factors.


American Water		5

•

Financial Metric (Weighted 55%) *

•

Diluted Earnings Per Share is a widely tracked measure of financial performance/profitability, and is calculated as follows:

Net Income to Common Stockholders

Average Outstanding Shares (including dilutive securities such as stock options)

Diluted Earnings per Share

2012 Diluted Earnings Per Share (EPS) must be at least 94.3% of target for any financial funding and award to be provided under the AIP.

•

Business Transformation (Weighted 15%)

•

Enterprise Resource Plan (ERP) go live with successful third quarter close (Judgment of Management with Discretion of the Board of Directors.)

•

Operational Performance (Weighted 30%)*

•

Environmental Compliance Notices of Violation (NOVs) (7.5%)

•

Safety Performance (7.5%)

•

Customer Satisfaction Survey (7.5%)

•

Customer Service Quality Survey (7.5%)

*	These outcomes are based on a combination of surveys, end-of-year results, data and other annual reports (For more details on these performance measures, see Attachment A at the back of this brochure).

Please note that AIP funding for all employees will depend on how well the company achieves its financial, business transformation and operational goals. A pre-determined financial threshold for company performance must be met in order for funding and any award to be provided under the AIP. For 2012, the threshold is 90% of EPS target.

The financial, business transformation and operational metrics are added together to determine the Corporate Multiplier. So, even if certain metrics are not achieved, the


American Water		6

funding may be reduced, but not eliminated altogether. However, if the company’s financial performance does not meet the threshold, the Corporate Multiplier will be reduced to zero, which would eliminate any award payout. The Corporate Multiplier (and thus funding for payouts) may be adjusted to take into account nonrecurring items such as impairment charges, dissolutions or acquisitions of businesses or costs associated with one-time events.

Step 2: Allocate overall corporate funding to organizational groups/ functional areas, and adjust specific organizational group/functional area funding to reflect results

Once the overall corporate funding is determined as described under Step 1, senior management will allocate the Corporate funding to American Water’s organizational groups and functional areas. The funding for each organizational group/functional area may be increased or decreased, at senior management’s discretion, to reflect specific organizational group/functional area results.

Step 3: Determine individual AIP award based on (a) individual performance, and (b) available organizational group/functional area funding; awards are paid from available organizational group/functional area award pool

Your AIP target award (i.e., your award opportunity) is based on your job with the company and is expressed as a percentage of your base salary. Your actual award payout may be higher or lower than target depending on whether individual and company performance goals have been met, and your organizational group’s/functional area’s results. Contact your manager for information on your individual AIP Target Award.

Your individual performance factor is based on (a) your performance against specific targets, and

(b) the amount of organizational group/functional area funding available

LOGO


American Water		7

The Individual Performance Factor represents how well you achieve your annual individual performance goals. Your Individual Performance Factor (IPF) can range from 0% to 200%, depending on your performance for the plan year and the amount of organizational group/functional area funding available. This performance factor will then be multiplied by your Target Award to determine your 2012 AIP award payout. Individual payouts will be capped at 200% of AIP target award.

Individual AIP awards are then paid from the available organizational group/functional area award funding, which may impact the original IPF determination. The sum of all individual awards within a given organizational group/functional area must not exceed its allocated pool of dollars.

WHAT THE 2012 AIP MEANS FOR YOU

Performance Ratings

Most people are motivated to do their best; therefore the better you perform, the greater your potential award will be under the Plan . It is your responsibility to maximize your award opportunity by achieving or exceeding your goals.

Each year, you and your manager identify four to six high priority and challenging performance targets, which represent where you can directly impact the company’s success. These performance targets and their weightings should be specific, measurable and aligned with the company’s performance targets. During your year-end performance review, you and your manager will discuss how well you performed against the established targets, and rate your performance using one of the following performance ratings:


				Rating
				Exceptional
				Highly Effective
				Commendable
				Needs Improvement
				Unacceptable
				Too Soon to Rate


American Water		8

Later, during the AIP process, your manager will use your rating to determine your Individual Performance Factor. Depending on how you performed during the year, you could potentially earn a higher payout than in previous years — or you could earn a lower payout or no payout at all. In other words, the AIP design gives you more power to impact the size of your award. It also means that you are accountable for meeting your performance goals.

Award Funding Determination

Below are four scenarios that demonstrate how AIP funding may be calculated:


AIP Funding Assumptions

Total AIP Funding *		$	20,000,000
Total AIP Funding for Organizational Group*		$	2,000,000

* The total is the sum of the target awards for the eligible employees.
	Performance
	Scenario 1	Scenario 2		Scenario 3	Scenario 4
• Company	Above Target		Target	Threshold	Below Threshold
— Financial Performance Factor	1.39		0.94	0.25	0.00
— Business Transformation Performance Factor	1.10		0.85	0.50	0.00
— Operational Performance Factor	0.90		1.16	0.50	0.00


American Water		9


	Scenario 1	Scenario 2	Scenario 3	Scenario 4
STEP 1: Establish corporate funding based on overall corporate performance

Total of AIP Targets (A)	$20,000,000	$20,000,000	$20,000,000	$20,000,000
Financial Performance Factor (i) (55% weight)	1.39 x 0.55 = 0.76	0.94 x 0.55 = 0.52	0.25 x 0.55 = 0.14	0.00 x 0.55 = 0.00
Business Transformation Performance Factor (ii) (15% Weight)	1.10 x 0.15 = 0.17	0.85 x 0.15 = 0.13	0.50 x 0.15 = 0.07	0.00 x 0.15 = 0.00
Operational Performance Factor (iii) (30% weight)	0.90 x 0.30 = 0.27	1.16 x 0.30 = 0.35	0.50 x 0.30 = 0.15	0.00 x 0.30 = 0.00
i + ii + iii = Corporate Multiplier (B)	1.20	1.00	0.36	0.00
A x B = Corporate Funding	$20,000,000 x 1.20 = $24,000,000	$20,000,000 x 1.00 = $20,000,000	$20,000,000 x 0.36 = $7,200,000	$20,000,000 x 0.00 = $0

STEP 2: Allocate overall corporate funding to organizational groups/functional areas; adjust specific organizational group/functional area funding to reflect results

Organizational Group Pool (C) *(Allocated from corporate funding)*	$2,400,000	$2,000,000	$720,000	$0
Organizational Group Adjustment (D)	1.00 (Target)	.80 (Below Target)	1.20 (Above Target)	1.00 (Target)
C x D = Organizational Group Pool *(adjusted based on results)*	$2,400,000 x 1.00 = $2,400,000	$2,000,000 x 0.80 = $1,600,000	$720,000 x 1.20 = $864,000	$0 x 1.00 = $0

Both company and individual performance can significantly impact your final payout. Also, remember that the sum of individual awards for a specific organizational group/functional area must equal the funding allocated to that organizational group/functional area.

Please discuss the AIP with your manager to ensure you clearly understand how the formula works and how your performance impacts your potential award payout.


American Water		10

Receiving Your AIP Award

Awards will be paid in cash no later than March 15, 2013. If you are eligible for an award payout, please keep in mind that:

•

You must be actively employed with the company on the date of payout.

•

The payout will be based on your annual base salary as of December 14, 2012 and subject to all federal, state and local income tax withholdings.

•

The American Water Board of Directors or its Designee has the right to adjust the award determination(s) and/or award payouts(s) at its discretion.

Remember, it’s your performance — and your award: The contributions you make to American Water’s success throughout the year ultimately impact the amount of your payout. Be sure to carefully review this brochure; then speak with your manager about the AIP and about what you can do to improve your performance and share the financial rewards of American Water’s success.


American Water		11

FREQUENTLY ASKED QUESTIONS


Question		Answer
How does the plan reward performance?		The AIP allows us to differentiate and reward the performance of employees who contribute to the achievement of the company’s goals. The 2012 AIP directly ties award payouts to measurable contributions (company, organizational group/functional area and individual) to American Water’s success.

Who is eligible for the AIP?		All regular, full-time exempt employees are eligible to participate. If you join American Water on or before September 30, 2012, you are also eligible to participate in the plan on a prorated basis.

What do I have to do to receive an AIP award?		Any payout will depend largely on your performance, as well as on company, organizational group/ functional area performance (including financial, business transformation and operational), which determines funding. If your performance is rated “Needs Improvement” or higher, you may receive an award payout—but only if threshold company performance metrics have been met. If your performance rating is “Unacceptable” or “Too Soon to Rate,” you will not receive a payout. To maximize your award opportunity, it’s important to meet with your manager to establish meaningful performance goals, then work hard throughout the year to achieve those goals.

How is my AIP target award opportunity determined? How can I find out what it is?		Your AIP target award opportunity is based on your job and is expressed as a percentage of your base salary. Please see your manager to learn more about your target award opportunity for 2012.

How will my AIP award payout be calculated?		The size of the pool which funds your award is determined based on overall corporate performance and adjusted to reflect specific organizational group/functional area results. AIP funding for all eligible employees will depend on the company and/or organizational group/functional area achieving its operational and business transformation as well as financial goals. Once individual awards are calculated, they are paid from the organizational group/functional area funding.


American Water		12


Question		Answer
What is the minimum and maximum that could be paid under the plan (as a percent of target)?		AIP award payouts can range from zero, to a maximum of an Individual Performance Factor of 200%. Payouts are capped at 200% of AIP target award.

Will I receive an award payout if I meet my individual performance goals but the company *does not* achieve minimum (threshold) performance?		No. A pre-determined financial threshold for company performance must be met in order for funding and any award to be provided under the AIP.

What happens if I leave American Water before I receive my award payout?		To receive the award payout, you must be actively employed with American Water on the date the payment is to be made. You (or your beneficiary) may be eligible for a prorata award if you are disabled, retire, die, involuntarily terminate (not “for cause”) or a divestiture occurred after June 30, 2012. (Retirement under this plan is age 55 and 10 years of service.) Employees involuntarily terminated for cause would not be eligible.

What happens if I change job positions within American Water during the plan year?		Your award payout will be based on your base salary and target level percentage as of December 14, 2012.

This brochure is the 2012 American Water Annual Incentive Plan. The American Water Board of Directors or its Designee, whose decisions will be final and binding, will determine interpretations of the Plan. The company reserves the right to amend, modify, or discontinue the Plan during the plan year or at any time in the future. Participation in the Plan does not convey any commitment to ongoing employment.


American Water		Attachment A

2012 AIP FINANCIAL PAYOUT CURVE

DILUTED EARNINGS PER SHARE (EPS) (55%)


% Target Achieved	% Payout
103.1%		150.0	%
102.6%		140.0	%
102.1%		130.0	%
101.0%		120.0	%
100.5%		110.0	%
100.0%		100.0	%
98.4%		81.3	%
97.4%		62.5	%
95.8%		43.8	%
94.3%		25.0	%
<94.3%		0	%

*	For 2012, the EPS target is within the range of our earnings guidance of $1.90 to $2.00.

BUSINESS TRANSFORMATION PERFORMANCE

2012 AIP MEASURE

Enterprise Resource Plan (ERP) go live with successful third quarter close

(Judgment of Management with Discretion of the Board of Directors.)


American Water		Attachment A

2012 AIP OPERATIONAL MEASURES

Environmental Compliance (7.5%)

For determining environmental compliance, AW will count Notices of Violation (NOV) for which the company is responsible as described in the Environmental Non-Compliance Reporting Practice. For 2012 AW’s NOV target is 17.


NOVs	Award
11		150.0	%
13		137.5	%
15		125.0	%
16		112.5	%
17		100.0	%
18		87.5	%
19		75.0	%
20		62.5	%
21		50.0	%
>21		0	%

Safety Performance (7.5%)

Safety performance will be determined using the total OSHA Recordable Incident Rate (ORIR) which measures all injuries and illnesses requiring treatment beyond first aid for every 200,000 hours worked. For 2012 the goal has been set at 3.35 which is 25% below the Bureau of Labor Statistics (BLS) Water Utility Average ORIR of 4.5 and will be evaluated against the graduated award scale below.


ORIR	Award
3.15		150.0	%
3.20		137.5	%
3.25		125.0	%
3.30		112.5	%
3.35		100.0	%
3.45		87.5	%
3.55		75.0	%
3.65		62.5	%
3.75		50.0	%
>3.75		0	%


American Water		Attachment A

2012 AIP OPERATIONAL MEASURES

Service Quality (7.5%)

This metric is measured by the Service Quality Survey (SQS) which is conducted throughout the year for customers requesting service resulting in completion of a service order by a Field Service Representative (FSR). The score is based on the survey question: “Overall, how satisfied were you with the outcome of your service contact?” taking the top two response categories of a 5 point response scale (5. Extremely Satisfied, 4. Very Satisfied, 3. Somewhat Satisfied, 2. Somewhat Dissatisfied, 1. Very Dissatisfied). The AW goal for 2012 is 85% and the graduated award scale is provided below.


SQS %	Award
90		150	%
89		140	%
88		130	%
87		120	%
86		110	%
85		100	%
84		90	%
83		80	%
82		70	%
81		60	%
80		50	%
< 80		0	%

Customer Satisfaction (7.5%)

This metric measures overall customer satisfaction through a random customer survey containing the following question, “Overall, how satisfied have you been with (Company Name) in general during the past twelve months”, which has a five-point response scale (Extremely Satisfied, Very Satisfied, Somewhat Satisfied, Somewhat Dissatisfied, Very Dissatisfied), response percentages in the top three categories are indicative of overall customer satisfaction levels and a 90% target has been set.


CSS%	Award
95		150	%
94		140	%
93		130	%
92		120	%
91		110	%
90		100	%
89		90	%
88		80	%
87		70	%
86		60	%
85		50	%
<85		0	%


American Water		Attachment B

2012 ANNUAL INCENTIVE PLAN TARGETS


EXEMPT POSITIONS
Grade	AIP %
ML4		30	%
L5-L6		20	%
L7		15	%
L8-L9		10	%
L10-L12		5	%

Exhibit 10.2

AMERICAN WATER WORKS COMPANY, INC.

2007 OMNIBUS EQUITY COMPENSATION PLAN

NONQUALIFIED STOCK OPTION GRANT

This STOCK OPTION GRANT, dated as of February 23, 2012, (the “ Date of Grant ”) is delivered by American Water Works Company, Inc. (the “ Company ”) to (the “ Participant ”).

RECITALS

WHEREAS, the Committee (as defined in the American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan) has adopted a 2012 Long Term Incentive Plan (“ 2012 LTIP ”) pursuant to which designated employees will be granted equity awards (collectively, the “ Equity Award ”) for shares of Common Stock of the Company, par value $0.01 per share, (the “ Company Stock ”);

WHEREAS, the Equity Award is comprised of three separate grants, a nonqualified stock option and two performance stock unit grants;

WHEREAS, the Committee has determined that the Participant is eligible to participate in the 2012 LTIP and to grant the Participant an Equity Award under the 2012 LTIP; and

WHEREAS, the Committee has determined that the nonqualified stock option portion of the Equity Award granted to the Participant pursuant to the 2012 LTIP shall be issued under the American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan (the “ Plan ”), and the terms and conditions of such nonqualified stock option shall be memorialized in this grant (the “ Grant ”).

NOW, THEREFORE, the parties to this Grant, intending to be legally bound hereby, agree as follows:

1. Grant of Option . Subject to the terms and conditions set forth in this Grant and in the Plan, the Company hereby grants to the Participant a nonqualified stock option (the “ Option ”) to purchase shares of Company Stock, at an exercise price of $34.12 per share of Company Stock.

2. Exercisability of Option .

(a) Except as provided in subparagraphs (b) or (c) below, the Option shall become exercisable on the following dates, if the Participant continues to be employed by, or providing service to, the Employer (as defined in the Plan) from the Date of Grant through the applicable date:


Date		Shares for Which the Option is Exercisable
January 1, 2013		1/3
January 1, 2014		1/3
January 1, 2015		1/3

The exercisability of the Option is cumulative, but shall not exceed 100% of the shares of Company Stock subject to the Option. If the foregoing schedule would produce fractional shares of Company Stock, the number of shares of Company Stock for which the Option becomes exercisable shall be rounded down to the nearest whole share of Company Stock. The Option shall become fully exercisable on January 1, 2015, if the Participant is employed by, or providing service to, the Employer on such date.

(b) If at any time prior to the date the Participant’s Option becomes exercisable as described in subparagraph (a) above, the Participant’s employment or service with the Employer is terminated on account of death or Total Disability (as defined below), the Option shall become fully exercisable on the date of the Participant’s termination of employment or service with the Employer on account of death or Total Disability. For purposes of this Grant, the term “ Total Disability ” shall mean that the Participant has been determined to be totally disabled by the Social Security Administration.

(c) If a Change of Control (as defined in the Plan) occurs while the Participant is employed by or providing service to the Employer, then the Option shall become fully exercisable as of the date of the Change of Control.

3. Term of Option .

(a) The Option shall have a term from the Date of Grant through December 31, 2018, and shall terminate at the expiration of that period, unless it is terminated at an earlier date pursuant to the provisions of this Grant or the Plan.

(b) The Option shall automatically terminate upon the happening of the first of the following events:

(i) If the Participant’s employment or service with the Employer terminates on account of death or Total Disability, the expiration of the one year period following the date of the Participant’s termination of employment or service on account of death or Total Disability.

(ii) If the Participant’s employment or service with the Employer terminates on account of Normal Retirement (as defined below), the expiration of the one year period following the date of the Participant’s termination of employment or service on account of Normal Retirement. For purposes of this Grant, the term “ Normal Retirement ” shall mean, at the time of the Participant’s termination of employment or service with the Employer, that the Participant has attained both (A) at least age 55, and (B) total years of employment and service with the Employer equals or exceeds 10.

(iii) If the Participant’s employment or service with the Employer terminates for any reason other than on account of Cause (as defined below), Normal Retirement, death or Total Disability, the expiration of the ninety (90) day period following the date of the Participant’s termination of employment or service for any reason other than on account of termination for Cause, death, Total Disability or Normal Retirement.

(iv) The date on which the Participant ceases to be employed by, or provide service to, the Employer for Cause. In addition, notwithstanding the prior provisions of this Paragraph 3, if the Participant engages in conduct that constitutes Cause after the Participant’s employment or service terminates, the Option shall immediately terminate. For purposes of this Grant, the term “ Cause ” shall mean a finding by the Committee that the Participant (A) has breached his or her employment or service contract with the Employer, if any; (B) has engaged in disloyalty to the Employer, including, without limitation, fraud, embezzlement, theft, commission of a felony or proven dishonesty; (C) has disclosed trade secrets or confidential information of the Employer to persons not entitled to receive such information; (D) has breached any written noncompetition or nonsolicitation agreement between the Participant and the Employer; or (E) has engaged in such other behavior detrimental to the interests of the Employer as the Committee determines.

Notwithstanding the foregoing, in no event may the Option be exercised after December 31, 2018. Any portion of the Option that is not exercisable at the time the Participant ceases to be employed by, or provide service to, the Employer shall immediately terminate.

4. Exercise Procedures .

(a) Subject to the provisions of Paragraphs 2 and 3 above, the Participant may exercise part or all of the exercisable portion of the Option by giving the Company written notice of intent to exercise in the manner provided in this Grant, specifying the number of shares of Company Stock as to which the Option is to be exercised and the method of payment. Payment of the exercise price shall be made in accordance with procedures established by the Committee from time to time based on the type of payment being made but, in any event, prior to issuance of the shares of Company Stock. The Participant shall pay the exercise price (i) in cash; (ii) with the approval of the Committee, by delivering shares of Company Stock, which shall be valued at their fair market value on the date of delivery, or by attestation (on a form prescribed by the Committee) to ownership of shares of Company Stock having a fair market value on the date of exercise, equal to the exercise price; (iii) by payment through a broker in accordance with procedures permitted by Regulation T of the Federal Reserve Board; or (iv) by such other method as the Committee may approve, to the extent permitted by applicable law. The Committee may impose from time to time such limitations as it deems appropriate on the use of shares of Company Stock to exercise the Option.

(b) The obligation of the Company to deliver shares of Company Stock upon exercise of the Option shall be subject to all applicable laws, rules, and regulations and such approvals by governmental agencies as may be deemed appropriate by the Committee, including such actions as Company counsel shall deem necessary or appropriate to comply with relevant securities laws and regulations. The Company may require that the Participant (or other person exercising the

Option after the Participant’s death) represent that the Participant is purchasing the shares of Company Stock for the Participant’s own account and not with a view to, or for sale in connection with, any distribution of the shares of Company Stock, or such other representations as the Committee deems appropriate.

(c) All obligations of the Company under this Grant shall be subject to the rights of the Company as set forth in the Plan to withhold amounts required to be withheld for any taxes, if applicable.

5. Change of Control . Except as set forth in Paragraph 2(c) of this Grant, the provisions of the Plan applicable to a Change of Control shall apply to the Option, and, in the event of a Change of Control, the Committee may take such actions as it deems appropriate pursuant to the Plan.

6. Restrictions on Exercise . Except as the Committee may otherwise permit pursuant to the Plan, only the Participant may exercise the Option during the Participant’s lifetime and, after the Participant’s death, the Option shall be exercisable (subject to the limitations specified in the Plan) solely by the legal representatives of the Participant, or by the person who acquires the right to exercise the Option by will or by the laws of descent and distribution, to the extent that the Option is exercisable pursuant to this Agreement.

7. Grant Subject to Plan Provisions . This Grant is made pursuant to the Plan, the terms of which are incorporated herein by reference, and in all respects shall be interpreted in accordance with the Plan. The Grant and exercise of the Option are subject to interpretations, regulations and determinations concerning the Plan established from time to time by the Committee in accordance with the provisions of the Plan, including, but not limited to, provisions pertaining to (i) rights and obligations with respect to withholding taxes, (ii) the registration, qualification or listing of the shares of Company Stock, (iii) changes in capitalization of the Company, and (iv) other requirements of applicable law. The Committee shall have the authority to interpret and construe the Option pursuant to the terms of the Plan, and its decisions shall be conclusive as to any questions arising hereunder. By accepting this Grant, the Participant agrees to be bound by the terms of the Plan and the Grant and that all decisions and determinations of the Committee with respect to the Grant shall be final and binding on the Participant and the Participant’s beneficiaries.

8. Restrictions on Sale or Transfer of Shares .

(a) The Participant agrees that he or she shall not sell, transfer, pledge, donate, assign, mortgage, hypothecate or otherwise encumber the shares of Company Stock underlying the Option unless the shares of Company Stock are registered under the Securities Act of 1933, as amended (the “ Securities Act ”) or the Company is given an opinion of counsel reasonably acceptable to the Company that such registration is not required under the Securities Act.

(b) As a condition to receive any shares of Company Stock upon the exercise of the Option, the Participant agrees:

(i) to be bound by the Company’s policies regarding the limitations on the transfer of such shares, and understands that there may be certain times during the year that the Participant will be prohibited from selling, transferring, pledging, donating, assigning, mortgaging, hypothecating or otherwise encumbering the shares; and

(ii) that the shares of Company Stock obtained by the Participant upon the exercise of the Option shall be subject to the restrictions set forth in the Company’s Stock Retention Program for Executives.

9. No Employment or Other Rights . This Grant shall not confer upon the Participant any right to be retained by or in the employ or service of the Employer and shall not interfere in any way with the right of the Employer to terminate the Participant’s employment or service at any time. The right of the Employer to terminate at will the Participant’s employment or service at any time for any reason is specifically reserved.

10. No Stockholder Rights . Neither the Participant, nor any person entitled to exercise the Participant’s rights in the event of the Participant’s death, shall have any of the rights and privileges of a stockholder with respect to the shares of Company Stock subject to the Option, until certificates for shares of Company Stock have been issued upon the exercise of the Option.

11. Assignment and Transfers . Except as the Committee may otherwise permit pursuant to the Plan, the rights and interests of the Participant under this Grant may not be sold, assigned, encumbered or otherwise transferred except, in the event of the death of the Participant, by will or by the laws of descent and distribution. In the event of any attempt by the Participant to alienate, assign, pledge, hypothecate, or otherwise dispose of the Option or any right hereunder, except as provided for in this Grant, or in the event of the levy or any attachment, execution or similar process upon the rights or interests hereby conferred, the Company may terminate the Option by notice to the Participant, and the Option and all rights hereunder shall thereupon become null and void. The rights and protections of the Company hereunder shall extend to any successors or assigns of the Company and to the Company’s parents, subsidiaries, and affiliates. This Agreement may be assigned by the Company without the Participant’s consent.

12. Effect on Other Benefits . The value of shares of Company Stock received upon exercise of the Option shall not be considered eligible earnings for purposes of any other plans maintained by the Company or the Employer. Neither shall such value be considered part of the Participant’s compensation for purposes of determining or calculating other benefits that are based on compensation, such as life insurance.

13. Applicable Law . The validity, construction, interpretation and effect of this instrument shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the conflicts of laws provisions thereof.

14. Notice . Any notice to the Company provided for in this instrument shall be addressed to the Company in care of the General Counsel at the Company’s corporate headquarters, and any notice to the Participant shall be addressed to such Participant at the current address shown on the payroll records of the Employer, or to such other address as the Participant may designate to the Employer in writing. Any notice shall be delivered by hand, sent by telecopy or enclosed in a properly sealed envelope addressed as stated above, registered and deposited, postage prepaid, in a post office regularly maintained by the United States Postal Service.

IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Grant, effective as of the Date of Grant.

AMERICAN WATER WORKS COMPANY, INC.

By: Jeffry E. Sterba

LOGO

Its: President and CEO

Exhibit 10.3

AMERICAN WATER WORKS COMPANY, INC.

2007 OMNIBUS EQUITY COMPENSATION PLAN

PERFORMANCE STOCK UNIT GRANT

This PERFORMANCE STOCK UNIT GRANT, dated as of February 23, 2012, (the “ Date of Grant ”), is delivered by American Water Works Company, Inc. (the “ Company ”) to (the “ Participant ”).

RECITALS

WHEREAS, the Equity Award is comprised of three separate grants, a nonqualified stock option and two performance stock unit grants;

WHEREAS, the Committee has determined that the Participant is eligible to participate in the 2012 LTIP and to grant the Participant an Equity Award under the 2012 LTIP; and

WHEREAS, the Committee has determined that the performance stock unit portion of the Equity Award granted to the Participant pursuant to the 2012 LTIP shall be issued under the American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan (the “ Plan ”), and the terms and conditions of the performance stock unit grant that may be earned based on the performance goal relating to the Company’s Total Stockholder Return shall be memorialized in this grant (the “ Grant ”).

NOW, THEREFORE, the parties to this Grant, intending to be legally bound hereby, agree as follows:

1. Grant of Performance Stock Units . Subject to the terms and conditions set forth in this Grant and the Plan, the Company hereby grants to the Participant performance stock units (the “ Performance Units ”). The Performance Units are contingently awarded and will be earned and distributable if and only to the extent that the performance goal and other conditions set forth in this Grant are met. Each Performance Unit shall be a phantom right and shall be equivalent to one share of Company Stock on the applicable payment date, as described in Paragraph 5 below. The number of Performance Units set forth above is equal to the target number of shares of Company Stock that the Participant will earn for 100% achievement of the performance goal described in Paragraph 3 below (the “ Target Award ”).

2. Performance Unit Account . The Company shall establish and maintain a Performance Unit account as a bookkeeping account on its records (the “ Performance Unit Account ”) for the Participant and shall record in such Performance Unit Account the number of Performance Units granted to the Participant. The Participant shall not have any interest in any fund or specific assets of the Company by reason of this grant or the Performance Unit Account established for the Participant.

3. Performance Goal .

(a) Unless a Change of Control (as defined below) occurs prior to the end of the Performance Period (as defined below), the distribution of the shares of Company Stock attributable to the Performance Units is contingent upon achievement of the performance goal described in subparagraph (b) below for the Performance Period and the Participant satisfying the continuation of employment and service with the Employer (as defined in the Plan) requirement described in Paragraph 4 below.

(b) The Company’s Total Stockholder Return (“ TSR ”) (as described in subparagraph (c) below) will be compared to the TSR of the companies in the Peer Group (as defined below) over the Performance Period. The actual number of Performance Units the Participant earns may be greater or less than the Target Award, or even zero, based on the Company’s TSR relative to the TSR performance of the companies in the Peer Group, as follows:


Level of Achievement	Percentile Ranking Relative to Peer Group	Percentage of Target Award Earned
Maximum	75%	175%
Target	50%	100%
Threshold	25%	25%

If the Company’s actual TSR performance is between measuring points, the number of Performance Units the Participant earns will be interpolated. If the Company’s actual TSR performance is below the threshold, no Performance Units will be earned and all of Performance Units will be forfeited. If the Company’s actual TSR performance is greater than the maximum, only the maximum number of Performance Units will be earned.

(c) TSR represents stock price performance and dividend accumulation over the Performance Period for the Company and Peer Group. For purposes of this calculation, the initial stock price and the ending stock price are determined using the twenty (20) day average stock price for December 31, 2011, and December 31, 2014, as applicable. The twenty (20) day average stock price is the average of the daily closing stock prices for the twenty (20) trading days that end on the applicable December 31. To determine stock price performance, a dividend adjustment factor will be determined. The dividend adjustment factor takes into account each per share dividend paid for the Performance Period as well as the effect of any appreciation in stock price by reason of deeming the dividend to be reinvested in the stock. TSR is determined by adjusting the ending stock price as determined above by the dividend adjustment factor and comparing it to the initial stock price. The initial Company Stock price is $31.44 per share.

(d) Following the end of the Performance Period, the Committee will determine whether and to what extent the performance goal has been met and certify the number of Performance Units the Participant has earned, if any. Except as described in Paragraph 4 below, the Participant must be employed by, or providing service to, the Employer on the last day of the Performance Period in order to earn the Performance Units.

(e) If a Change of Control occurs prior to the end of the Performance Period, then the Performance Period will end on the date of the Change of Control and the Performance Units will be deemed earned at the Target Award level as of the date of the Change of Control (the “ Change of Control Date ”). For purposes of this Grant, the term “Change of Control” shall mean as such term is defined in the Plan, except that a Change of Control shall not be deemed to have occurred for purposes of this Grant unless the event constituting the Change of Control constitutes a change in ownership or effective control of the Company, or in the ownership of a substantial portion of the assets of the Company, within the meaning of section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ”) and its corresponding regulations.

(f) For purposes of this Grant, the term “Performance Period” shall mean the three-year period beginning on January 1, 2012 and ending December 31, 2014, and the term “Peer Group” shall mean those companies that comprise the Dow Jones U.S. Utilities Index as of January 1, 2012.

4. Termination of Employment or Service .

(a) If, at least one year after the beginning of the Performance Period, but prior to the end of the Performance Period, the Participant ceases to be employed by, or provide service to, the Employer on account of any reason other than a termination for Cause (as defined below), the Participant will earn a pro-rata portion of the Performance Units, if the performance goal and the requirements of this Grant are met as of the last day of the Performance Period. The prorated portion will be determined as the number of Performance Units that would have been earned if the Participant had remained employed through the last day of the Performance Period, multiplied by a fraction, which fraction shall be equal to (i) 1/3, if the Participant’s employment or service with the Employer terminates on or after January 1, 2013, but prior to January 1, 2014; (ii) 2/3, if the Participant’s employment or service with the Employer terminates on or after January 1, 2014, but prior to January 1, 2015; and (iii) 3/3, if the Participant’s employment or service terminates with the Employer on or after January 1, 2015. If the Participant ceases to be employed by, or provide service to, the Employer for any reason other than on account of Cause, the prorated number of Performance Units will be distributed in accordance with Paragraph 5.

(b) If at any time prior to the earlier of January 1, 2013 or a Change of Control, the Participant’s employment or service with the Employer is terminated by the Employer on account of any reason or no reason or by the Participant for any reason or no reason, all of the Performance Units subject to this Grant shall be immediately forfeited as of the date of the Participant’s termination of employment or service with the Employer and the Participant shall not have any rights with respect to the distribution of any portion of the Performance Units.

(c) If at any time prior to the date the Performance Units are distributed in accordance with Paragraph 5 the Participant’s employment or service with the Employer is terminated on

account of Cause, all of the Performance Units subject to this Grant shall be immediately forfeited and the Participant will not have any rights with respect to the distribution of any portion of the Performance Units, irrespective of the level of achievement of the performance goal. For purposes of this Grant, the term “ Cause ” shall mean a finding by the Committee that the Participant (A) has breached his or her employment or service contract with the Employer, if any; (B) has engaged in disloyalty to the Employer, including, without limitation, fraud, embezzlement, theft, commission of a felony or proven dishonesty; (C) has disclosed trade secrets or confidential information of the Employer to persons not entitled to receive such information; (D) has breached any written noncompetition or nonsolicitation agreement between the Participant and the Employer; or (E) has engaged in such other behavior detrimental to the interests of the Employer as the Committee determines.

5. Time and Form of Payment with Respect to Performance Units . Unless an election is made pursuant to Paragraph 6 below, the Participant will receive a distribution with respect to the Performance Units earned as described in Paragraphs 3 and 4 above within seventy (70) days following the earlier of (i) January 1, 2015 (the “ Distribution Date ”), or (ii) the Change of Control Date. The Performance Units will be distributed in shares of Company Stock, with each Performance Unit earned equivalent to one share of Company Stock. Any Performance Units not earned because of the failure to attain the performance goal and service condition will be forfeited.

6. Deferrals . The Participant may make an irrevocable election to defer the Distribution Date (or further defer the Deferred Date (as defined below), if applicable) of all of the Performance Units that are earned, plus dividend equivalents earned on such Performance Units as described in Paragraph 7 below, to a later date, provided that (i) the election shall not take effect until at least twelve (12) months after the date on which the election is made, (ii) the deferred Distribution Date cannot be earlier than five (5) years from the original Distribution Date under Paragraph 5 above (or five (5) years from the applicable Deferred Date, if a subsequent deferral of a Deferred Date is being made), and (iii) the election must be made no less than twelve (12) months prior to the date of the Distribution Date (twelve (12) months prior to the previously applicable Deferred Date, if a subsequent deferral of a Deferred Date is being made). To defer the Distribution Date, the Participant must elect to defer 100% of the Performance Units, including corresponding dividend equivalents, earned by the Participant under this Grant, as well as 100% of the other performance stock units, including corresponding dividend equivalents, earned by the Participant under the 2012 LTIP, and complete the deferral election form provided to the Participant by the Committee. If the Participant desires to make a further deferral, the Participant must make such election on a separate form provided by the Committee for such purpose. Any such election shall be made in accordance with section 409A of the Code and any corresponding guidance and regulations issued under section 409A of the Code. Notwithstanding a Participant’s election pursuant to this Paragraph, if the Change of Control Date occurs prior to the Deferred Date, the distribution of the Participant’s earned Performance Units, plus corresponding dividend equivalents, will be the Change of Control Date. If a Distribution Date is delayed one or more times pursuant to this Paragraph 6, the new Distribution Date shall be referred to as the “Deferred Date.”

7. Dividend Equivalents . Until the earlier of the Distribution Date (or the Deferred Date, if elected) or the Change of Control Date, if any dividends are declared with respect to the shares

of Company Stock, the Company shall credit to a dividend equivalent account (the “ Dividend Equivalent Account ”) the value of the dividends that would have been distributed if the Performance Units credited to the Participant’s Performance Unit Account at the time of the declaration of the dividend were shares of Company Stock. At the same time that the Performance Units are converted to shares of Company Stock and distributed to the Participant, the Company shall pay to the Participant a lump sum cash payment equal to the value of the dividends credited to the Participant’s Dividend Equivalent Account; provided, however, that any dividends that were credited to the Participant’s Dividend Equivalent Account that are attributable to Performance Units that have been forfeited as provided in Paragraph 3 and 4 above shall be forfeited and not payable to the Participant. No interest shall accrue on any dividend equivalents credited to the Participant’s Dividend Equivalent Account.

8. Change of Control . Except as set forth above, the provisions set forth in the Plan applicable to a Change of Control (as defined in the Plan) shall apply to the Performance Units, and, in the event of a Change of Control, the Committee may take such actions as it deems appropriate pursuant to the Plan and is consistent with the requirements of section 409A of the Code.

9. Acknowledgment by Participant . By accepting this Grant, the Participant acknowledges that with respect to any right to distribution pursuant to this Grant, the Participant is and shall be an unsecured general creditor of the Company without any preference as against other unsecured general creditors of the Company, and the Participant hereby covenants for himself or herself, and anyone at any time claiming through or under the Participant, not to claim any such preference, and hereby disclaims and waives any such preference which may at any time be at issue, to the fullest extent permitted by applicable law. The Participant also hereby agrees to be bound by the terms and conditions of the Plan and this Grant. The Participant further agrees to be bound by the determinations and decisions of the Committee with respect to this Grant and the Plan and the Participant’s rights to benefits under this Grant and the Plan, and agrees that all such determinations and decisions of the Committee shall be binding on the Participant, his or her beneficiaries and any other person having or claiming an interest under this Grant and the Plan on behalf of the Participant.

10. Restrictions on Issuance or Transfer of Shares of Company Stock .

(a) The obligation of the Company to deliver shares of Company Stock upon the Participant earning the Performance Units shall be subject to the condition that if at any time the Committee shall determine in its discretion that the listing, registration or qualification of the shares of Company Stock upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the issuance of shares of Company Stock, the shares of Company Stock may not be issued in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. The issuance of shares of Company Stock and the payment of cash to the Participant pursuant to this Grant is subject to any applicable taxes and other laws or regulations of the United States or of any state having jurisdiction thereof.

(b) As a condition to receive any shares of Company upon conversion of the earned Performance Units, the Participant agrees:

(ii) that any shares of Company Stock received by the Participant upon the distribution of the earned Performance Units pursuant to this Grant shall be subject to the restrictions set forth in the Company’s Stock Retention Program for Executives.

11. Grant Subject to Plan Provisions . This Grant is made pursuant to the Plan, the terms of which are incorporated herein by reference, and in all respects shall be interpreted in accordance with the Plan. In the event of any contradiction, distinction or difference between this Grant and the terms of the Plan, the terms of the Plan will control. Except as otherwise defined in this Grant, capitalized terms used in this Grant shall have the meanings set forth in the Plan. This Grant is subject to the interpretations, regulations and determinations concerning the Plan established from time to time by the Committee in accordance with the provisions of the Plan, including, but not limited to, provisions pertaining to (i) rights and obligations with respect to withholding taxes, (ii) the registration, qualification or listing of the shares of Company Stock, (iii) changes in capitalization of the Company, and (iv) other requirements of applicable law. The Committee shall have the authority to interpret and construe this Grant pursuant to the terms of the Plan, its decisions shall be conclusive as to any questions arising hereunder and the Participant’s acceptance of this Grant is the Participant’s agreement to be bound by the interpretations and decisions of the Committee with respect to this Grant and the Plan.

12. No Rights as Stockholder . The Participant shall not have any rights as a stockholder of the Company, including the right to any cash dividends (except as provided in Paragraph 7), or the right to vote, with respect to any Performance Units.

13. No Rights to Continued Employment or Service . This Grant shall not confer upon the Participant any right to be retained in the employment or service of the Employer and shall not interfere in any way with the right of the Employer to terminate the Participant’s employment or service at any time. The right of the Employer to terminate at will the Participant’s employment or service at any time for any reason is specifically reserved.

14. Assignment and Transfers . No Performance Units or dividend equivalents awarded to the Participant under this Grant may be transferred, assigned, pledged, or encumbered by the Participant and the Performance Units and dividend equivalents shall be distributed during the lifetime of the Participant only for the benefit of the Participant. Any attempt to transfer, assign, pledge, or encumber the Performance Units or dividend equivalents under this Grant by the Participant shall be null, void and without effect. The rights and protections of the Company hereunder shall extend to any successors or assigns of the Company. This Grant may be assigned by the Company without the Participant’s consent.

15. Withholding . The Participant shall be required to pay to the Employer, or make other arrangements satisfactory to the Employer to provide for the payment of, any federal, state, local or other taxes that the Employer is required to withhold with respect to the grant, vesting and distribution of the Performance Units and dividend equivalents. Any tax withholding obligation of the Employer with respect to the distribution of shares of Company Stock pursuant to the Performance Units that are earned by the Participant under this Grant shall be satisfied by having shares of Company Stock withheld up to an amount that does not exceed the minimum applicable withholding tax rate for federal (including FICA), state, local and other tax liabilities.

16. Effect on Other Benefits . The value of shares of Company Stock and dividend equivalents distributed with respect to the Performance Units shall not be considered eligible earnings for purposes of any other plans maintained by the Company or the Employer. Neither shall such value be considered part of the Participant’s compensation for purposes of determining or calculating other benefits that are based on compensation, such as life insurance.

17. Applicable Law . The validity, construction, interpretation and effect of this Grant shall be governed by and construed in accordance with the laws of the State of Delaware, without giving effect to the conflicts of laws provisions thereof.

18. Notice . Any notice to the Company provided for in this instrument shall be addressed to the Company in care of the General Counsel at the Company’s corporate headquarters, and any notice to the Participant shall be addressed to such Participant at the current address shown on the payroll records of the Employer, or to such other address as the Participant may designate to the Employer in writing. Any notice shall be delivered by hand, sent by telecopy or enclosed in a properly sealed envelope addressed as stated above, registered and deposited, postage prepaid, in a post office regularly maintained by the United States Postal Service.

19. Section 409A of the Code . As applicable, this Grant is intended to comply with the requirements of section 409A of the Code and shall be interpreted and administered to avoid any penalty sanctions under section 409A of the Code. If any distribution cannot be provided or made at the time specified herein or as elected by the Participant, then such distribution shall be provided in full at the earliest time thereafter when such sanctions cannot be imposed. Unless a valid election is made pursuant to Paragraph 6 above, in no event may the Participant, directly or indirectly, designate the calendar year of distribution.

[ SIGNATURE PAGE FOLLOWS ]

IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Grant, effective as of the Date of Grant.

AMERICAN WATER WORKS COMPANY, INC.

By: Jeffry E. Sterba

LOGO

Its: President and CEO

Exhibit 10.4

AMERICAN WATER WORKS COMPANY, INC.

2007 OMNIBUS EQUITY COMPENSATION PLAN

PERFORMANCE STOCK UNIT GRANT

This PERFORMANCE STOCK UNIT GRANT, dated as of February 23, 2012, (the “ Date of Grant ”), is delivered by American Water Works Company, Inc. (the “ Company ”) to (the “ Participant ”).

RECITALS

WHEREAS, the Equity Award is comprised of three separate grants, a nonqualified stock option and two performance stock unit grants;

WHEREAS, the Committee has determined that the Participant is eligible to participate in the 2012 LTIP and to grant the Participant an Equity Award under the 2012 LTIP; and

WHEREAS, the Committee has determined that the performance stock unit portion of the Equity Award granted to the Participant pursuant to the 2012 LTIP shall be issued under the American Water Works Company, Inc. 2007 Omnibus Equity Compensation Plan (the “ Plan ”), and the terms and conditions of the performance stock unit grant that may be earned based on performance goals relating to compounded earnings per share growth and operational efficiency improvement, as set forth in Exhibit A attached hereto, shall be memorialized in this grant (the “ Grant ”).

NOW, THEREFORE, the parties to this Grant, intending to be legally bound hereby, agree as follows:

1. Grant of Performance Stock Units . Subject to the terms and conditions set forth in this Grant and the Plan, the Company hereby grants to the Participant performance stock units (the “ Performance Units ”). The Performance Units are contingently awarded and will be earned and distributable if and only to the extent that the Performance Goals (as defined below) and other conditions set forth in this Grant are met. Each Performance Unit shall be a phantom right and shall be equivalent to one share of Company Stock on the applicable payment date, as described in Paragraph 5 below. The number of Performance Units set forth above is equal to the target number of shares of Company Stock that the Participant will earn for 100% achievement of the Performance Goals described in this Grant (the “ Target Award ”).

3. Performance Goals .

(a) Unless a Change of Control (as defined below) occurs prior to the end of the Performance Period (as defined below), the distribution of the shares of Company Stock attributable to the Performance Units is contingent upon achievement of the performance goals set forth in Exhibit A attached hereto (the “ Performance Goals ”) and the Participant satisfying the continuation of employment and service with the Employer (as defined in the Plan) requirement described in Paragraph 4 below.

(b) Following the end of the Performance Period, the Committee will determine whether and to what extent the Performance Goals have been met and certify the number of Performance Units the Participant has earned, if any. Except as described in Paragraph 4 below, the Participant must be employed by, or providing service to, the Employer on the last day of the Performance Period in order to earn the Performance Units.

(c) If a Change of Control occurs prior to the end of the Performance Period, then the Performance Period will end on the date of the Change of Control and the Performance Units will be deemed earned at the Target Award level as of the date of the Change of Control (the “ Change of Control Date ”). For purposes of this Grant, the term “Change of Control” shall mean as such term is defined in the Plan, except that a Change of Control shall not be deemed to have occurred for purposes of this Grant unless the event constituting the Change of Control constitutes a change in ownership or effective control of the Company, or in the ownership of a substantial portion of the assets of the Company, within the meaning of section 409A of the Internal Revenue Code of 1986, as amended (the “ Code ”) and its corresponding regulations.

(d) For purposes of this Grant, the term “Performance Period” shall mean the three-year period beginning on January 1, 2012 and ending December 31, 2014.

4. Termination of Employment or Service .

(a) If, at least one year after the beginning of the Performance Period, but prior to the end of the Performance Period, the Participant ceases to be employed by, or provide service to, the Employer on account of any reason other than a termination for Cause (as defined below), the Participant will earn a pro-rata portion of the Performance Units, if the Performance Goals and the requirements of this Grant are met as of the last day of the Performance Period. The prorated portion will be determined as the number of Performance Units that would have been earned if the Participant had remained employed through the last day of the Performance Period, multiplied by a fraction, which fraction shall be equal to (i) 1/3, if the Participant’s employment or service with the Employer terminates on or after January 1, 2013, but prior to January 1, 2014; (ii) 2/3, if the Participant’s employment or service with the Employer terminates on or after January 1, 2014, but prior to January 1, 2015; and (iii) 3/3, if the Participant’s employment or service terminates with the Employer on or after January 1, 2015. If the Participant ceases to be employed by, or provide service to, the Employer for any reason other than on account of Cause, the prorated number of Performance Units will be distributed in accordance with Paragraph 5.

(c) If at any time prior to the date the Performance Units are distributed in accordance with Paragraph 5 the Participant’s employment or service with the Employer is terminated on account of Cause, all of the Performance Units subject to this Grant shall be immediately forfeited and the Participant will not have any rights with respect to the distribution of any portion of the Performance Units, irrespective of the level of achievement of the Performance Goals. For purposes of this Grant, the term “ Cause ” shall mean a finding by the Committee that the Participant (A) has breached his or her employment or service contract with the Employer, if any; (B) has engaged in disloyalty to the Employer, including, without limitation, fraud, embezzlement, theft, commission of a felony or proven dishonesty; (C) has disclosed trade secrets or confidential information of the Employer to persons not entitled to receive such information; (D) has breached any written noncompetition or nonsolicitation agreement between the Participant and the Employer; or (E) has engaged in such other behavior detrimental to the interests of the Employer as the Committee determines.

5. Time and Form of Payment with Respect to Performance Units . Unless an election is made pursuant to Paragraph 6 below, the Participant will receive a distribution with respect to the Performance Units earned as described in Paragraphs 3 and 4 above within seventy (70) days following the earlier of (i) January 1, 2015 (the “ Distribution Date ”), or (ii) the Change of Control Date. The Performance Units will be distributed in shares of Company Stock, with each Performance Unit earned equivalent to one share of Company Stock. Any Performance Units not earned because of the failure to attain the Performance Goals and service condition will be forfeited.

Code. Notwithstanding a Participant’s election pursuant to this Paragraph, if the Change of Control Date occurs prior to the Deferred Date, the distribution of the Participant’s earned Performance Units, plus corresponding dividend equivalents, will be the Change of Control Date. If a Distribution Date is delayed one or more times pursuant to this Paragraph 6, the new Distribution Date shall be referred to as the “Deferred Date.”

7. Dividend Equivalents . Until the earlier of the Distribution Date (or the Deferred Date, if elected) or the Change of Control Date, if any dividends are declared with respect to the shares of Company Stock, the Company shall credit to a dividend equivalent account (the “ Dividend Equivalent Account ”) the value of the dividends that would have been distributed if the Performance Units credited to the Participant’s Performance Unit Account at the time of the declaration of the dividend were shares of Company Stock. At the same time that the Performance Units are converted to shares of Company Stock and distributed to the Participant, the Company shall pay to the Participant a lump sum cash payment equal to the value of the dividends credited to the Participant’s Dividend Equivalent Account; provided, however, that any dividends that were credited to the Participant’s Dividend Equivalent Account that are attributable to Performance Units that have been forfeited as provided in Paragraph 3 and 4 above shall be forfeited and not payable to the Participant. No interest shall accrue on any dividend equivalents credited to the Participant’s Dividend Equivalent Account.

10. Restrictions on Issuance or Transfer of Shares of Company Stock .

consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee. The issuance of shares of Company Stock and the payment of cash to the Participant pursuant to this Grant is subject to any applicable taxes and other laws or regulations of the United States or of any state having jurisdiction thereof.

(b) As a condition to receive any shares of Company upon conversion of the earned Performance Units, the Participant agrees:

[ SIGNATURE PAGE FOLLOWS ]

IN WITNESS WHEREOF, the Company has caused its duly authorized officer to execute this Grant, effective as of the Date of Grant.

AMERICAN WATER WORKS COMPANY, INC.


By:		Jeffry E. Sterba



Its:		President and CEO

“PSU GRANT B – EPS AND O&M EXPENSE”

EXHIBIT A

PERFORMANCE GOALS

The number Performance Units that may be earned shall be determined based on the combined achievement of Compounded Earnings Per Share Growth (as described below) (50% weighting) and Operational Efficiency Improvement (as described below) (50% weighting) over the Performance Period.

Compounded Earnings Per Share (“EPS”) Growth – will be calculated based on fully diluted EPS calculated in accordance with US GAAP as reported in the Company’s audited consolidated financial statements adjusted to exclude all items of gain, loss or expense for the fiscal year determined to be extraordinary or unusual in nature or infrequent in occurrence or related to the disposal of a segment of a business or related to a change in accounting principle, all as determined in accordance with financial accounting standards. The starting point for the calculation will be adjusted EPS of $1.78 for the year ended December 31, 2011. The ending point for the calculation will be EPS for the year ended December 31, 2014, adjusted to exclude all items of gain, loss or expense for the fiscal year determined to be extraordinary or unusual in nature or infrequent in occurrence or related to the disposal of a segment of a business or related to a change in accounting principle, all as determined in accordance with financial accounting standards.

As soon as administratively practicable following the end of the Performance Period, the Committee will certify the level of achievement of the Compounded EPS Growth.

The award scale for Compounded EPS Growth is as follows:


Compounded EPS Growth
Actual Compounded Growth	Target Award (50% Weighting)*
10% or more		175	%
9.4%		160	%
8.8%		145	%
8.2%		130	%
7.6%		115	%
7.0%		100	%
6.6%		85	%
6.2%		70	%
5.8%		55	%
5.4%		40	%
5.0%		25	%
<5.0%		0	%

A-1

Operational Efficiency Improvement – will be calculated as the ratio of total operation and maintenance expense (“O&M”) to total operating revenues for the Company’s regulated operations, with both amounts adjusted to exclude purchased water expense. This information is to be prepared in a manner that is consistent with the income statement presentation in the Company’s annual audited consolidated financial statements prepared in accordance with US GAAP, and the Segment Information reported for the Regulated Businesses segment in the notes to those financial statements. The final result will be the average of the three individual calculations for the years ended December 31, 2012, 2013 and 2014.

As soon as administratively practicable following the end of the Performance Period, the Committee will certify the level of achievement of the Operational Efficiency Improvement.

The award scale for Operational Efficiency Improvement is as follows:


Operational Efficiency Improvement
Actual Three Year Average	Target Award (50% Weighting)*
39.2% or less		175	%
39.6%		160	%
40.0%		145	%
40.4%		130	%
40.8%		115	%
41.2%		100	%
41.6%		85	%
42.0%		70	%
42.4%		55	%
42.8%		40	%
43.2%		25	%
> 43.2%		0	%

*	Results between the award percentages in the award scales will be interpolated.

If actual achievement of either of the two Performance Goals does not meet threshold performance (i.e., less than 5% for Compounded EPS Growth and greater than 43.2% for Operational Efficiency Improvement), then that Performance Goal will be reflected in the final result for determining the number of earned Performance Units at its assigned weighting with a 0%. The maximum award that may be earned for each Performance Goal is capped at 175%, and the maximum award that may be earned by the Participant is capped at 175% of the Target Award.

A-2

Example

The following is an example calculation for a Participant with a Target Award of 1,000 Performance Units:

Earnings Per Share

(In thousands, except per share)


	12/31/2011			12/31/2014
	Adjusted			Illustration

Net income (loss) per US GAAP	$	309,613		$	385,017
Adjustment for diluted EPS calculation		(68	)		(100	)
KY land donation tax benefit		(4,472	)		0
Cessation of depreciation, net of tax		(15,132	)		0
Write-downs of net assets of discontinued operations		25,107			0

		315,048			384,917
/ Average common shares outstanding - diluted		176,531			177,235

	$	1.78		$	2.17


Compounded annual growth rate					6.8	%

Operational Efficiency Ratio

(In thousands, except per share)


	Year		Operating Revenue		O&M Expense		Annual Efficiency Ratio			Three Year Average
Actual		2009	$	1,987,061	$	947,063		47.7	%
Actual		2010	$	2,185,822	$	995,612		45.5	%
Actual		2011	$	2,269,883	$	993,603		43.8	%		45.7	%
Illustration		2012	$	2,355,931	$	1,022,501		43.4	%		44.2	%
Illustration		2013	$	2,489,131	$	1,008,235		40.5	%		42.6	%
Illustration		2014	$	2,619,455	$	1,007,713		38.5	%		40.8	%

Earned Performance Units


	Achievement			Award			Weighting			Weighted Payout

Compounded Earnings Per Share Growth		6.8	%		92.5	%		50	%		46.3	%
Operational Efficiency Improvement		40.8	%		115.0	%		50	%		57.5	%

								100	%		103.8	%

In this example, the individual who was awarded a Target Grant of 1,000 Performance Units would earn 1,038 Performance Units (1,000 x 1.038), which is convertible into an equivalent number of shares of Company Stock assuming all other terms and conditions of the Grant have been satisfied.

A-3

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

(Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended,

as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)

I, Jeffry Sterba, certify that:

1. I have reviewed this quarterly report on Form 10-Q of American Water Works Company, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the consolidated financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 2, 2012

By:

/s/ Jeffry Sterba

Jeffry Sterba

President and Chief Executive Officer

(Principal Executive Officer)

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER AND CHIEF ACCOUNTING OFFICER

(Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended,

as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002)

I, Ellen C. Wolf, certify that:

1. I have reviewed this quarterly report on Form 10-Q of American Water Works Company, Inc.;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 2, 2012

By:

/s/ Ellen C. Wolf

Ellen C. Wolf

Senior Vice President and Chief Financial Officer

(Principal Financial Officer and Chief Accounting Officer)

Exhibit 32.1

AMERICAN WATER WORKS COMPANY, INC.

CERTIFICATION

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of American Water Works Company, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jeffry Sterba, President and Chief Executive Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By:

/s/ Jeffry Sterba

Jeffry Sterba

President and Chief Executive Officer

(Principal Executive Officer)

May 2, 2012

Exhibit 32.2

AMERICAN WATER WORKS COMPANY, INC.

CERTIFICATION

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of American Water Works Company, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ellen C. Wolf, Senior Vice President and Chief Financial Officer of the Company, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.


By:		/s/ Ellen C. Wolf
		Ellen C. Wolf
		Senior Vice President and Chief Financial Officer
		(Principal Financial Officer and Chief Accounting Officer)

May 2, 2012