The following discussion should be read together with the financial statements and the notes thereto included elsewhere in this Form 10-K. This discussion contains forward-looking statements that are based on management's current expectations, estimates and projections about our business, operations and financial performance. The cautionary statements made in this Form 10-K should be read as applying to all related forward-looking statements whenever they appear in this Form 10-K. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discuss under "Risk Factors" and elsewhere in this Form 10-K. You should read "Risk Factors" and "Forward-Looking Statements."

Executive Overview

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 approximately 6,700 employees provide drinking water, wastewater and other water related services to an estimated 14 million people in more than 30 states and in two Canadian provinces. Our primary business involves the ownership of water and wastewater utilities that provide water and wastewater services to residential, commercial, industrial and other customers. Our Regulated Businesses that provide these services are generally subject to economic regulation by state regulatory agencies in the states in which they operate. The federal government and the states also regulate environmental, health and safety and water quality matters. Our Regulated Businesses provide services in 16 states and serves approximately 3.2 million customers based on the number of connections to our water and wastewater networks. 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. As noted under "Business Section," our financial condition and results of operations are influenced by a variety of industry-wide factors, including but not limited to
(i) economic utility regulation; (ii) economic environment; (iii) the need for infrastructure investment; (iv) an overall trend of declining water usage per customer; (v) weather and seasonality; and (vi) access to and quality of water supply.

In 2012, we continued the execution of our strategic goals. Our commitment to operational excellence led to success in portfolio optimization, improved regulated operating efficiency, improved performance of our Market-Based Operations, and enabled us to provide increased value to our customers and investors. During the year, we focused on executing our portfolio optimization, actively addressing regulatory lag and declining usage, continuing to make efficient use of capital and continuing to improve our regulated operation and maintenance ("O&M") efficiency ratio. Also, in 2012, we focused on the expansion of our Market-Based Operations, particularly on the Homeowner Services Group and Military Contract Operations, and on optimizing our municipal contract operations business model that is designed to provide value creation for both American Water and the municipality.

2012 Financial Results

All financial information in this Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), reflects only continuing operations. In 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 our Texas subsidiary's assets was completed in June 2011, while the sales of our regulated subsidiaries in Arizona, New Mexico and Ohio were completed during 2012. Additionally, on December 13, 2011, we completed the sale of Applied Water Management, Inc. which was part of our Contract Operations line of business within our Market-Based segment. Therefore, the financial results of all of these entities have been presented as discontinued operations for all periods, unless

otherwise noted. See Note 3 to Consolidated Financial Statements for further details on our discontinued operations.

For the year ended December 31, 2012, we continued to increase our net income, while making significant capital investment in our infrastructure and implementing operational efficiency improvements necessary to offset increases in production and employee benefit costs. Aided by rate increases and favorable weather in the Northeast and Midwest regions of the United States, most notably in June and July, for the year ended December 31, 2012, we generated $2,876.9 million in total operating revenue, and $358.1 million in net income compared to total operating revenue of $2,666.2 million, and $309.6 million in net income in 2011. Our Regulated Businesses, our largest operating segment, generated $2,564.4 million in operating revenue, representing 89.1% of our consolidated operating revenue compared to $2,368.9 million in operating revenues representing 88.8% of our consolidated operating revenue in 2011. This increase of 8.3% in operating revenues, when compared to 2011, was primarily due to rate increases and increased sales volume in all customer classes in 2012. Additionally, for the year ended December 31, 2012, our Market-Based Operations generated $330.3 million in operating revenue, compared to $327.8 million in operating revenues in 2011, an increase of 0.8%.

Net income from continuing operations was $374.3 million for the year ended December 31, 2012 compared to net income from continuing operations of $304.9 million for the year ended December 31, 2011. Diluted earnings from continuing operations per average common share was $2.11 for the year ended December 31, 2012 as compared to $1.73 for year ended December 31, 2011. For the year ended December 31, 2012, we reported net income of $358.1 million, or diluted earnings per share of $2.01 compared to net income of $309.6 million, or diluted EPS of $1.75 for the comparable period in 2011. Net income for 2012 includes income tax charges of $6.5 million, or $0.04 diluted loss per share, resulting from the divestiture of our Arizona, New Mexico and Ohio subsidiaries. In addition, we generated increased cash flows from operations during 2012 of $955.6 million, compared to $808.4 million in 2011.

The primary factors contributing to the increase in net income from continuing operations for the year ended December 31, 2012 were increased revenues resulting from rate increases and higher customer usage as well as slightly higher revenues in our Market-Based Operations segment partially offset by higher operation and maintenance expense, depreciation and amortization expense and general taxes. See "Consolidated Results of Operations and Variances" and "Segment Results" below for further detailed discussion of the consolidated results of operations, as well as our business segments.

Implementation of Portfolio Optimization Initiative

In 2012, we continued to execute our plan for optimizing our portfolio. In January 2012, we completed the sale of regulated operations in Arizona and New Mexico. Net proceeds, after all post-close adjustments, amounted to $458.9 million. In May 2012, we completed the divestiture of our Ohio subsidiary. The net proceeds, after all post-close adjustments, totaled $102.2 million.

During 2012, the Company closed on ten acquisitions of various regulated water and wastewater systems for a total aggregate purchase price of $44.6 million. Included in this amount is the acquisition of seven regulated water systems in New York for a purchase price of $36.7 million plus assumed liabilities. This acquisition added approximately 50,000 water customers to our regulated operations. Effective August 17, 2012, the New York State Public Service Commission approved a plan to merge these seven regulated water systems with and into our Long Island subsidiary, which was then renamed New York American Water Company.

Capital Investments

We invested approximately $929 million and $925 million in Company-funded capital improvements in 2012 and 2011, respectively. These capital investments are needed on an ongoing basis to comply with existing and new regulations, renew aging treatment and network assets, provide capacity for new growth and ensure

system reliability, security and quality of service. The need for continuous investment presents a challenge due to the potential for regulatory lag, or the delay in recovering our operating expenses and earning an appropriate rate of return on our invested capital and a return of our invested capital. In conjunction with our capital program, management continued its focus on reducing regulatory lag during 2012. For 2013 we anticipate spending approximately $950 million on Company-funded capital investments, including expenditures associated with our business transformation project.

On August 1, 2012, our new business systems associated with Phase I of our business transformation project became operational. Phase I consisted of the roll-out of the Enterprise Resource Planning systems ("ERP"), which encompasses applications that handle human resources, finance, and supply chain/procurement management activities. Phase II consists of the roll-out of a new Enterprise Asset Management system, which will manage an asset's lifecycle, and a Customer Information System, which will contain all billing and data pertaining to American Water's customers for our Regulated segment. Phase II is expected to be substantially complete by December 31, 2013. Through December 31, 2012, we have spent $257.8 million including AFUDC on this business transformation project with $118.1 of that amount spent in 2012.

Rate Cases and Regulatory Matters

In 2012, we received authorizations for additional annualized revenues from general rate cases, totaling $123.1 million. During 2012, rate cases were approved for our California, Illinois, Indiana, Iowa, Missouri, New Jersey, New York, Tennessee and Virginia subsidiaries. Also, in 2012, we were granted $18.4 million in additional annualized revenues, assuming constant sales volumes from infrastructure charges in several of our states and in July 2012, our California cost of capital application was approved. On January 1, 2013, additional annualized revenue of $6.5 million resulting from infrastructure charges in our Pennsylvania subsidiary became effective.

Other regulatory activities occurring in 2012 that allow us to address regulatory lag include the passing of legislation by the general assembly in Pennsylvania which expanded the use of infrastructure replacement programs to wastewater systems and the rules adopted by the New Jersey Board of Public Utilities in the second quarter of 2012 that allow the implementation of a distribution system improvement charge for specified water infrastructure investments. On July 20, 2012, our New Jersey subsidiary submitted a foundational filing for this charge and our filing was approved on October 23, 2012.

As of February 21, 2013, we are awaiting final orders in two states requesting additional annualized revenue of approximately $36.9 million.

Continue Improvement in O&M Efficiency Ratio for our Regulated Businesses

Our O&M efficiency ratio (a non-GAAP measure) is defined as our regulated operation and maintenance expense divided by regulated operating revenues, where both O&M expense and operating revenues are adjusted to eliminate purchased water expense. We have modified, for all periods presented, our O&M efficiency ratio to exclude the allocable portion of non-O&M support services cost, mainly depreciation and general taxes, that are reflected in the Regulated Businesses segment as O&M costs but for consolidated financial reporting purposes are categorized within other lines in the Statement of Operations. Management believes that this modified calculation better reflects the Regulated Businesses segment's O&M efficiency ratio. Our O&M efficiency ratio was 40.1% for the year ended December 31, 2012 compared to 42.4% and 44.2% for the years ended December 31, 2011 and 2010, respectively. We evaluate our operating performance using this measure, as it is the primary measure of the efficiency of our regulated operations. This information is intended to enhance an investor's overall understanding of our operating performance. O&M efficiency ratio is not a measure defined under GAAP and may not be comparable to other companies' operating measures or deemed more useful than the GAAP information provided elsewhere in this report. The following table provides a reconciliation between operation and maintenance expense and operating revenues, as determined in accordance with GAAP, and to

those amounts utilized in the calculation of our O&M efficiency ratio for the years ended December 31, 2012, 2011 and 2010:

Regulated O&M Efficiency Ratio (a Non-GAAP Measure)



                                                      For the years ended December 31,
                                                  2012              2011              2010
Total O&M expense                              $ 1,350,040       $ 1,301,794       $ 1,290,941
Less:
O&M expense-Market-Based Operations                276,809           278,375           256,633
O&M expense-Other                                  (56,755 )         (69,192 )         (61,138 )

Total Regulated O&M expense                      1,129,986         1,092,611         1,095,446
Less:
Regulated purchased water expense                  110,173            99,008            99,834
Allocation of internal non-O&M costs                35,067            30,590            29,414

Adjusted Regulated O&M expense(a)                  984,746           963,013           966,198

Total Operating Revenues                         2,876,889         2,666,236         2,555,035
Less:
Operating revenues-Market-Based Operations         330,329           327,815           294,723
Operating revenues-Other                           (17,874 )         (30,470 )         (25,344 )

Total Regulated operating revenues               2,564,434         2,368,891         2,285,656
Less: Regulated purchased water expense*           110,173            99,008            99,834

Adjusted Regulated operating revenues(b)       $ 2,454,261       $ 2,269,883       $ 2,185,822

Regulated O&M efficiency ratio (a)/(b)                40.1 %            42.4 %            44.2 %

* Note calculation assumes purchased water revenues approximate purchased water expenses.

Growing our Market-Based Operations

In August 2012, our Homeowner Services Group ("HOS") was selected by the New York City Water Board as the official service line protection provider to homeowners. HOS will make services available to an estimated 650,000 homeowners throughout the city's five boroughs. Also, during the third quarter of 2012, HOS announced that it is expanding the number of communities in which it provides water and sewer line protection programs to homeowners in Connecticut, Indiana, Michigan and Ohio.

Other matters

In September 2010, we declared "impasse" in negotiations of our national benefits agreement with most of the labor unions representing employees in our Regulated Businesses. The prior agreement expired on July 31, 2010; however, negotiations did not produce a new agreement. We implemented our "last, best and final" offer on January 1, 2011 in order to provide health care coverage for our employees in accordance with the terms of the offer. The unions have challenged our right to implement our last, best, and final offer. In this regard, following the filing by the Utility Workers Union of America of an unfair labor practice charge, the NLRB issued a complaint against us in January 2012, claiming that we implemented the last, best and final offer without providing sufficient notice of the existence of a dispute with the Federal Mediation and Conciliation Service, a state mediation agency, and several state departments of labor. We have asserted that we did, in fact, provide sufficient notice.

On October 16, 2012, the NLRB Administrative Law Judge hearing the matter ruled that, although we did provide sufficient notification to the Federal Mediation and Conciliation Service, we did not provide notice to

state agencies, in violation of the National Labor Relations Act. The Administrative Law Judge ordered, among other things, that we cease and desist from implementing the terms of our last, best and final offer and make whole all affected employees for losses suffered as a result of our implementation of our last, best and final offer. The "make whole" order, if upheld on appeal, would require us to provide backpay plus interest, from January 1, 2011 through the date of the final determination. Based on current estimates and assumptions, we estimate the cash impact could be in the range of $2.5 to $3.5 million per year, with the total impact dependent on the length of time the issue remains unresolved. On November 2012, we filed an exception to the decision of the Administrative Law Judge in order to obtain a review by the full NLRB.

2013 and Beyond

Our strategy for the future will continue to focus on customers, expansion through targeted growth, environmental sustainability, and regulatory and public policy. We will also continue to modernize our infrastructure and to focus on operational efficiencies, while bolstering a culture of continuous improvement.

In 2013, we will continue to focus on our customers by achieving established customer satisfaction and service quality targets. We will expand our Regulated Business segment through focused acquisitions and/or organic growth, while expanding in our Market-Based segment from new core growth, expanded markets and new offerings. In regards to environmental sustainability, we are committed to maximizing our protection of the environment, reducing our carbon and waste footprints and water lost through leakage. We will drive appropriate legislative and regulatory policy changes by actively addressing regulatory lag that impacts return on our investments and promoting constructive regulatory frameworks. We expect to file up to four general rate cases as well as file for infrastructure surcharges. Additionally, we expect, as part of our general rate case filings or separate filings, to seek appropriate pass-through mechanisms and forward-looking adjustments or mechanisms that recognize declining usage.

In 2013, we expect to invest approximately $950 million to upgrade our infrastructure and systems. We also expect to continue to improve our regulated O&M efficiency ratio and expect to meet or exceed the five-year goal we established in 2011 to be below 40%, one to two years early. A significant component in both the capital and O&M efficiency objectives is to optimize our supply chain process to provide more value for each dollar of capital and O&M spent. We anticipate completing Phase II of our business transformation; and continue to close the gap between our allowed and our earned regulated return. We are committed to operating our business responsibly and managing our operating and capital costs in a manner that serves our customers and produces value for our shareholders. We are committed to an ongoing strategy that leverages processes and technology innovation to make ourselves more effective and efficient.

Consolidated Results of Operations

The following table sets forth our consolidated statement of operations data for the years ended December 31, 2012, 2011 and 2010:

                                                           Years Ended December 31,
                                                    2012             2011             2010
Operating revenues                               $ 2,876,889      $ 2,666,236      $ 2,555,035

Operating expenses
Operation and maintenance                          1,350,040        1,301,794        1,290,941
Depreciation and amortization                        381,503          351,821          330,264
General taxes                                        221,212          210,478          205,597
(Gain) loss on asset dispositions and
purchases                                               (839 )           (993 )            111

Total operating expenses, net                      1,951,916        1,863,100        1,826,913

Operating income                                     924,973          803,136          728,122

Other income (expenses)
Interest, net                                       (310,794 )       (312,415 )       (313,765 )
Allowance for other funds used during
construction                                          15,592           13,131            9,644
Allowance for borrowed funds used during
construction                                           7,771            5,923            5,225
Amortization of debt expense                          (5,358 )         (5,055 )         (4,516 )
Other, net                                              (926 )         (1,040 )          4,714

Total other income (expenses)                       (293,715 )       (299,456 )       (298,698 )

Income from continuing operations before
income taxes                                         631,258          503,680          429,424
Provision for income taxes                           257,008          198,751          174,352

Income from continuing operations                    374,250          304,929          255,072
Income (loss) from discontinued operations,
net of tax                                           (16,180 )          4,684           12,755

Net income                                       $   358,070      $   309,613      $   267,827

Basic earnings per common share:(a)
Income from continuing operations                $      2.12      $      1.74      $      1.46

Income (loss) from discontinued operations,
net of tax                                       $     (0.09 )    $      0.03      $      0.07

Net income                                       $      2.03      $      1.76      $      1.53

Diluted earnings per common share:(a)
Income from continuing operations                $      2.11      $      1.73      $      1.46

Income (loss) from discontinued operations,
net of tax                                       $     (0.09 )    $      0.03      $      0.07

Net income                                       $      2.01      $      1.75      $      1.53

Average common shares outstanding during the
period:
Basic                                                176,445          175,484          174,833

Diluted                                              177,671          176,531          175,124

(a) Amounts may not sum due to rounding.

Comparison of consolidated Results of Operations for the Years Ended December 31, 2012 and 2011

Operating revenues. Consolidated operating revenues for the year ended December 31, 2012 increased $210.7 million, or 7.9%, compared to the same period in 2011. This increase is the result of higher revenues in our Regulated Businesses of $195.5 million, which was mainly attributable to rate increases and increased sales volumes, primarily related to weather. For further information see the respective "Operating Revenues" discussions within the "Segment Results."

Operation and maintenance. Consolidated operation and maintenance expense for the year ended December 31, 2012 increased $48.2 million, or 3.7%, compared to 2011. This change was mainly attributable to a $37.4 million increase in our Regulated Businesses costs primarily related to an increase in production costs of approximately $12.2 million to support higher customer demand as well as incremental contracted services costs attributable to various projects in support of improving processes and operating efficiency and effectiveness, including the support of the go-live of our Enterprise Resource Planning system, and the use of temporary labor to backfill positions, including those positions vacated by employees assigned to our business transformation project. Also, contributing to the increase was a $7.0 million contribution made in 2012 to the American Water Charitable Foundation, a 501(c)(3) organization. For further information see the respective "Operation and Maintenance" discussions within the "Segment Results."

Depreciation and amortization. Depreciation and amortization expense increased by $29.7 million, or 8.4%, for the year ended December 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 $10.7 million, or 5.1%, for the year ended December 31, 2012 compared to the year ended December 31, 2011. This increase was principally due to higher property taxes of $7.3 million, most of which is the result of incremental taxes associated with our New York acquisition.

Other income (expenses). Other expenses decreased $5.7 million, or 1.9%, for the year ended December 31, 2012 compared to the same period in the prior year. This decrease is attributable to an increase in allowance for funds used during construction ("AFUDC") of $4.3 million resulting from increased construction activity, including our business transformation project and a decrease in interest expense, net of interest income of $1.6 million.

Provision for income taxes. Our consolidated provision for income taxes increased $58.3 million, or 29.3%, to $257.0 million for the year ended December 31, 2012. The effective tax rates for the years ended December 31, 2012 and 2011 were 40.7% and 39.5%, respectively. The rate for the twelve months ended December 31, 2011 includes a $4.5 million tax benefit related to one of our operating companies contributing non-utility property to a county authority within its operating area.

Income (loss) from discontinued operations, net of tax. As noted above, the financial results of our regulated water and wastewater systems in Arizona, New Mexico, Texas and Ohio and our Applied Water Management, Inc. subsidiary within the Market-Based Operations segment have been classified as discontinued operations for all periods presented. The loss in 2012 is primarily comprised of net losses recorded in connection with the disposition of our Arizona, New Mexico and Ohio subsidiaries. The 2011 income amount reflects the operations for the discontinued subsidiaries and an after-tax benefit of $15.1 million related to the cessation of depreciation for our Arizona, New Mexico, and Texas subsidiaries. Under GAAP, operations that are considered discontinued cease to depreciate their assets. Partially offsetting the 2011 income from discontinued operations, net of tax amount was $25.1 million after tax write-downs recorded in 2011 to reduce the net asset values of certain of our discontinued operations.

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