Good morning, and welcome to American Water's 2016 Year-End Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ed Vallejo. Please go ahead.

Thank you, Amy, and good morning, everyone. And thank you for joining us for today’s call. As Amy said we will keep the call to about an hour and at the end of our prepared remarks, we will have time for your questions. During the course of this conference call, both in our prepared remarks and in answers to your questions, we may make forward-looking statements that represent our expectations regarding our future performance or other future events. Now these statements are predictions based upon our current expectations, estimates, and assumptions. However, since these estimates deal with future events, they are subject to numerous risks, uncertainties, and other factors that may cause the actual results to be materially different from the results indicated or implied by such statements. Additional information regarding these risks, uncertainties and factors as well as a more detailed analysis of our financials and other important information is provided in the earnings release and in our 2016 Form 10-K each has filed with the SEC. Reconciliation tables for non-GAAP financial information discussed on this conference call including adjusted earnings per share, adjusted return on equity in the O&M efficiency ratio can be found in the appendix of the slide deck for this call. The slide deck itself can be found on our Investor Relations page of our website. All statements in this call related to earnings and earnings per share refer to diluted earnings and earnings per share. And before I turn the call over to Susan, let me briefly talk about the American Water Investor Relations team. As you know Melissa Schwarzell was promoted recently to a new position in our rates team and almost at the same time Cathy DeMots our IR Executive Assistant decided to retire after 30 years with American Water. I'd like to take this opportunity to thank you, Melissa and Cathy for all their hard work, dedication and camaraderie during that time in the Investor Relations Group. Now as part of America Water's commitment to developing talent from within we promoted Ralph Jedlicka who has been part of the finance team since 2007 to be our new Director of Investor Relations. And then we would lucky to find Kelley Uyeda, a professional with 10 years of IR experience to be our new Executive Assistant. I'm personally very excited about our new team most of you folks have already interacted with Kelley and Ralph and we look forward to meeting you all when we go out on the road on investor visits. And with that said; now I'd like to turn the call over to American Water's President and CEO, Susan Story.

Thanks Ed. Good morning, everyone, and thanks for joining us. Today our CFO, Linda Sullivan will cover the fourth quarter and full-year financial results and our COO, Walter Lynch, we'll give key updates on our operations. We will highlight a number of 2016 Company records and achievements throughout our presentation. Just to name a few. We accomplished record levels in safety, capital investment, O&M efficiency and regulated acquisition. All of these achievements are possible because of our engaged employees are safe and efficient operations and our smart investments. And this enabled us to achieve top quartile customer satisfaction continued 7% to 10% long-term EPS growth and top dividend growth. Our employees delivered another strong year of results by successfully executing our strategy. In 2016, we invested about $1.5 billion, the highest in our Company's history, $1.3 billion of that was invested in our regulated systems to improve service reliability and water quality for our customers. We're able to increase our investments to this level because our hard working employees continually improve both O&M and capital efficiency. We're proud of our ability to deliver on our growth goals while effectively managing every dollar that we can deliver excellent customer service. While limiting the impact on our customers build. Most importantly, we know our customers need to trust that the water we provide them is clean and it safe. Once again we met or surpassed EPA requirements in 2016. In fact, our systems were 21 times better than the industry in drinking water quality and compliance as measured by the EPAs drinking water database. This is absolutely foundational to our business. Our customer base is growing by a record 82,000 customers through closed and pending regulated acquisition. This is in addition to the13000 customers added from organic growth in our existing service…

Thanks, Susan. Good morning, everyone. As Susan mentioned, our regulated businesses had a strong year all around with historic capital investment, strategic acquisitions and continued O&M efficiency gains that benefit our customers. Let's walk through some of the regulatory highlights of the fourth quarter of 2016. In December, we received an order adjusting rates for Illinois American Water. The case was driven by approximately $340 million and infrastructure investments across Illinois to ensure reliable service. The order will result in$35.2 million in additional annual base rate revenue. Additionally and included a volume balancing account, which is a type of revenue stabilization mechanism. We would also like to note that Illinois American Water was rated the top water utility and customer satisfaction in the Midwest by J.D. Power. In West Virginia, we received approval for a distribution system improvement charge, which will enable us to accelerate our infrastructure replacement reliability program, through DSIC, West Virginia American Water will make approximately $29 million in system-wide upgrades in 2017, which remain a 40% increase of pipeline replacement from 2016 and only impact our average customer by about $0.52 per month. We're also weighting the West Virginia Commission's decision of an agreement related to the PFCs review of the Freedom Industries chemical spill. The settlement recognize the important changes made over the past three years to improve customer confidence in the water system and additional efforts plan in areas like source water monitoring, protection planning and public communications. We believe this resolution is in the best interest of our customers, our employees and our company. As always, we'll continue to bring our customers the best service possible and we believe that we're positioned to be an industry leader in source water protection and planning. In addition, California American Water is requested an extension of…

Thank you, Walter and good morning everyone. We reported earnings of $0.57 per share in the fourth quarter of 2016, up $0.02 over the same quarter last year. As shown on Slide 16, our Regulated segment and market-based businesses were each up $0.001 and parent was flat to the prior year. For the full-year, we reported earnings of $2.62 per share, excluding the $0.22 charge from the binding agreement, our adjusted earnings per share were $2.84, up $0.20 or 7.6% compared to the prior year. These adjusted results were driven by our regulated segment which was $0.23 or 8.7%. Our market-based businesses were down $0.01 and parent was down $0.02 as expected. Turning to Slide 17. Let me discuss the quarterly results by business segment compared to fourth quarter last year. Our regulated operations were up $0.001 overall, revenue was up $0.12 from authorized rate cases and infrastructure mechanisms to support investment growth, acquisitions and organic growth. O&M expense was higher by $0.05, $0.03 of which was due to timing. As we mentioned in our third quarter earnings call, we expected about $10 million of certain maintenance, repairs, and tank painting expenses to be completed in the fourth quarter of 2016. We also had higher depreciation and general taxes of $0.03 each driven primarily by our investment growth. For our market-based businesses we were up $0.001 mainly from the 2016 addition of Vandenberg Air Force Base in our Military Services Group and price redeterminations at several military basis. We recorded price redeterminations related to prior periods in the quarter they are completed. Turning to Slide 18. Let me walk through our 2016 adjusted earnings per share, compared to the prior year. The regulated businesses adjusted earnings were up $0.23 or 8.7% with four major drivers: First, revenue was higher by…

Thanks, Linda. Before taking your questions, I want to highlight very briefly our Company value of environmental leadership and what it means to our customers. As the Company that relies on environmental protection for the services we provide, American Water is naturally focused on sustainability, not just because it's the right thing to do, which is certainly is, but also because it's our business imperatives. It is more than just compliance with laws and regulations. Although we are proud that our systems are 21 times better than the industry. It extends to partnerships with environmental groups in our local watershed, the faster protection and education on water issue. It also means that we are front and center, national policy issues around sustainable water supply, water quality and replacing aging infrastructure. There are approximately 53,000 water treatment plants in the United States with about 400 of those participating in the EPA and AWWA partnership for safe water program. In 2016, only 33 plants receive the President's Award, the programs highest honor. Pennsylvania American Water was awarded nine of these 33 out of a total of 53,000 water treatment plants. Also in 2016, American Water was recognized by the Environmental business journal for our water quality and sustainability and named by news week, as one of America's top green company. Our efforts have also translated into eight patents, most dealing with water treatment technology as well as $43 million of research grant awarded over the years and of course that is because of the people we have at American Water. Our R&D group of 15 employees includes eight Ph.D. and four people with other advanced degrees. They work hard everyday with researchers across the globe to find better ways to sustain, treat, deliver, and recycle our precious water resources and our 6,800 employees, including operations, engineering, water quality, and environmental lab professionals are always finding better ways to serve our customers and protect our environment. While awards are good, the best recognition is highly satisfied customers in their peace of mind. With that, we're happy to take your questions.

[Operator Instructions] The first question comes from David Cader at Baird.

Hi, guys. Thank you for taking the question.

Hi, David.

I was hoping that you could comment a little bit on Keystone’s ability to continue to take market share even if especially in light of rising natural gas prices?

Right. So our Keystone operations are in the Appalachian Basin and we're the only water services provider that does the cycle of water management except, of course, we do not at the end the cycle take the waste at the site and put them into the deep wells that have been controversial. So because of that we're finding that more and more of the E&P’s want to deploy their capital for their own. For example, development of pipelines and for their own services. So we can step in and basically handle providing the water and recycling the water on the site and they don't have to worry about it. So we've gone from 20% when we purchased them in July 2015 to 35% now, we still believe that there are opportunities for growth in the area. And in fact what we're finding now is that there's so much work in the area that we're seeing some of the pre-kind of 2016 downturn, we're seeing some of the pricing come back for the services and the need for the large E&P’s especially to feel comfortable that they have a partner who has a very strong commitment to environmental sustainability. So we do think that there is further room to grow in Appalachian Basin.

Excellent. Thank you. And you guys touched a little bit on this in your prepared remarks, but I was hoping you could maybe talk a little bit about some of the levers you have to continue to improve O&M efficiency?

Hi, this is Walter. Yes, we're continually working on reducing our expenses, as you know when we talk about, I think a big enabler is the technology and that's why I highlighted the technology we're using in Pennsylvania. One of the big advantages we have as a Company is we're able to deploy technology in one area, take the learnings of that technology and then applied across American Water to realize significant value. So I would say the technology, I highlighted the technologies, I highlighted in the past around non-revenue water and finding leaks in West Virginia doing things like using technology to streamline our routes, so that our people in the field are more efficient. Those are the things we're going to be doing across American Water to drive efficiencies. And a lot of the low hanging fruit we've already gotten, but the technology is going to be a key enabler.

One of the things we're excited about. For example, there's a lot in the press about drones and delivering packages. We are actually in New Jersey, American utilizing drones and infrared to actually go over pipes in the ground from the air and we are finding that we're able to spot leaks and find leaks before they ever occur in main breaks and you don't have to dig up the ground or anything, it's pretty cool some of the things we're doing. And there was an FSR that I was out within Northern New Jersey a you months ago, David, and he had the smartphone and when I’d say we went into a house I would say the royal. He went in and change the meter and I was with him in the house and we walked outside and this gentleman has been with the Company 38 years and he looked, watch this, he said I can read this meter immediately on my smartphone. So there's a lot of really need things going on in terms of deploying technology in very practical way, not just the high-tech level ways, but things that make it easier for our frontline employees to serve our customers better and we're just at the beginning of that we believe.

Excellent. Thank you, guys. That was helpful.

The next question is from Angie Storozynski of Macquarie.

Thank you. So since your Analyst Day that's been a lot of updates that could have had impact on your M&A prospects. Right we had a little bit more clarity around the Trump’s infrastructure plan and what type of water infrastructure you would actually focus on we have a New Jersey build that seems to be pushing for similar CapEx requirements on municipal water utilities versus investor-owned utilities. Could you talk about those trends and also we seem to be having a little bit more movement on the corporate water M&A. If you could just give me a sense of how you think about M&A since the Analyst Day?

Sure, Andy. Thank you for the question. I will start and then Walter can talk specifically about the New Jersey situation. So interestingly, I've been involved with the Bipartisan Policy Center working on looking at the whole infrastructure issues around the administration in their efforts. And it's interesting, there are a lot of parties are interested we have a coalition, with the U.S. Chamber and NAM and several groups that are looking at this I think the question is remains as were is the money coming from. So for us on the infrastructure we are very excited that there is a focus on infrastructure. We like that there is a lot of interest from both sides of the aisle and public-private partnerships. So we just have to see how that plays out, but the good news for us is, regardless of what plays out nationally we have such a strong capital investment program and being an investor-owned water utility. We can see about that for us we're just continuing to do our business which is robust and as we said, we continue to invest more and more capital. So there could be something, the other we're monitoring it closely and hopefully we will see something come from that. The last question you ask and then Walter can talk about what's going on in New Jersey with the issue of municipalities. We are constantly as we said in Investor Day we survey the landscape of all municipalities and companies that are out there that meet our guidelines and our discipline in terms of acquisition, but we are very disciplined. So when we look we don't see the need to grow for the sake of growing unless it is a good - it's a good investment for us for the long-term. Our…

Yes, thanks Susan. Yes, what we're referring to here is, Water Quality Accountability Act and it was introduced by center Sweeney recently and New Jersey working its way through the Senate. It's going to work its way through the Assembly obviously and then get signed by the governor. But what it does is really requires the same things for municipalities and investor around utilities. Let me give a couple of examples of what they're looking at. The testing of valves and hydrants per New Jersey Board of Public Utilities requirements would be not just required of investor-owned, but we required of all the municipalities with the New Jersey, cyber security program requirements, action plans for any notice of violation, developing a comprehensive capital long-term capital plan and a replacement rate for pipe targeted about 150 years. These are all the things that were required to do in the investor-owned side in this really going to have the same requirements for municipalities throughout New Jersey. And the whole purpose is to make sure that the water quality is protected in New Jersey and that's really the focus of centers Sweeney’s…

But you think on back of it municipalities will basically face incremental CapEx and that could actually push them to potentially privatize their systems?

Well, I think it will cause them to take a look. Do we want to do this as a municipality or do we call on American Water who has been doing it for decades and decades in New Jersey with great success and leverage our expertise. I think that's something that they are going to have to take a look at and we would be glad to talk to them about it because we are a solutions provider.

I thank the thing this points out Angie is not just EPA, what we have found in the past it's whereas we would immediately need to and would address issues that came up in terms of any non-compliance in wastewater for example, that there are many municipalities and cities that have had non-compliance items for decades. And there was just a different standard holding them accountable then us and I think one of the things we learned from plant Michigan is, safe water is for everybody and regardless of who provides that water, whether it's private or public. There should be the same standards towards safe clean water and that we have great wastewater services and sanitation service. So I think that as some of these things that happened, people have realized, it doesn't matter who the provider is. There needs to be standards that everybody follows. And for us, it's the ability to have a level playing field.

Great, thank you.

The next question is from Ryan Connors at Boenning & Scattergood.

Great. Thanks and good morning.

Hi, Ryan.

I had a question with regard to the Scranton and McKeesport transactions. I’m just trying to get a better handle on kind of how this impacts the guidance for 2017, as you do these larger transactions? Can you just walk us through kind of a Layman's back-of-the-envelope on how that impacts returns this year? In other words if presumably until you get in for your next base rate case in Pennsylvania. There's some kind of a drag there on the returns coming from those systems in particular and that would be may be trued up once you do get rates and be a tailwind beyond 2017. Is that a fair way to think about that or can you just give us – walk us through the dynamics on that?

Absolutely Ryan, so in the investor material and in our slides, we outlined kind of the overall acquisition process, and if you look at Page 12 of our slides, really starts with the agreement process. So when we look at the Scranton acquisition, we have now closed Scranton as of December 2016. That means that we take on the customers we begin to integrate them into our system and generally from a financial standpoint during the timeframe between when we close and when we get through the final rate case decision. We finance those acquisitions with shorter-term debt and we would expect these acquisitions to meet certain financial metrics, including being accretive to earnings, and so that is kind of the process that we go through until we file our next rate case decision - rate case, in the rate case process, then we will coming out of that process have our authorized amount that is included in rate base upon, which we would have the opportunity to earn full return.

Okay. So if I can paraphrase that, it’s accretive right away, but then it becomes more accretive once you actually get base rates in place. So that a fair statement or not?

It’s different for every acquisition, but yes, once you get that full amount in the rate base, that's what you would generally expect.

Okay, good. And then my other question was just big picture, I know we had the NARUC winter meetings recently and I wasn't able to get there, but I'm sure you had a number of people there. I think I saw the agenda. You had some folks on panels and things. Any takeaways there in terms of big picture emerging themes what's around the corner from a regulatory standpoint?

This is Susan, Ryan. I think everybody is just kind of wondering what's going to come out of Washington. They're looking at the issue of infrastructure what that mean. They're looking at any potential changes in the EPA for the electric side, the clean power plant, and what does this mean and the waters of the U.S. and I think everybody's also carefully watching for the tax issue. So I think there are state issues that continue to be state to state, but I think it may just like everywhere else, we're kind of watching to see what is going to happen on the new landscape and we're all kind of speculating and we can draw general models. But at the end of the day, we're waiting to see even proposals. If we have proposals, we can model and see what the impacts are. At this point, we're just kind of guessing and I think everybody's pretty much in that situation. We continue though to look at investment opportunities regardless MYR Group does with the President of MYR Group, Rob Patterson, of course, Pennsylvania has always been very innovative in the way that they look at infrastructure and ensuring that their citizens are taken care of, that are our customers. So I think it was kind of the same thing, but an uncertainty of – so what will the new rules be and how long will it take for us to know with those new rules are.

Got it. Thanks for your time this morning.

The next question comes from Spencer Joyce at Hilliard & Lyons.

Hi, good morning. Thanks for taking my call.

Hi, Spencer.

A couple questions here, jumping back to Keystone. Have you all disclosed or would you disclosing a capital budget for – or specifically for Keystone for this year?

No, we don't do that because it’s so small, basically they were extremely capital-light. We are open to looking at design build on a five-year basis and we would actually look at that five-year for any capital investment from a depreciation standpoint, at least for our models. But right now, it's just not significant in that and we're just not really disclosing it because it's so small.

Okay. And with the rebound in net gas prices, is it possible that 2017 could be kind of a “normalized year for Keystone” or is it too early to say that?

Well I think it depends on your definition of normal, what normal is I think going back to the low turn we've had from the middle of 2015 say through the end of last year, we know things are picking up. I mean, you can just look at natural gas prices even though they've come down a bit, because of the really warm weather we've had this winter, we know that, of course, going into the summer 2015 natural gas was 33% of power generation, coal is 33%, nuclear was 20%. Now we're starting to see as gas prices are so affordable that that will probably continue and we will probably see gas increase in those of you all who cover electric also know that regardless of what happens to the clean power plant and lot of plants are already underway and people are already building significant new combined cycle facility. So we believe that we’ve turned the corner. We see activity tremendously growing, as I said in my comments, we're seeing rig counts up, we are seeing well completion activities up along with the natural gas prices. We believe that we're getting back to a more normal, what that normally is. I think we're going to have to see over the next few months and we will continue in our quarterly discussions to say is it higher than we thought or less than we thought, but we do as we always are want to be conservative and make sure that we have a few more months under us to see what can we look at that more predictable. So it's much better than last year. Will that be back to 2013, 2014. I think we'd just have to wait and see.

Okay. Fair points there. Very helpful. Switching gears, more of a housekeeping question, I know few months back when we got the West Virginia binding settlement or agreement there, there was kind of an outstanding piece with your own insurance companies that could ultimately notice some cash. Is that still outstanding or has that been settled? Is that possible we get a bit of an influx at some point this year?

Well, it's not settled and we had two different firms, who do not participate. And so we currently – one of them requires arbitration and we have begun the arbitration process. The other we have filed a lawsuit in West Virginia against and that's public information. So we are continuing. As you know these things don't happen quickly, but we are in process. On October 28, we actually filed in Knott County against our indemnity and that one is public record. And then the other insurers we have actually started arbitration process as they are located offshore there was mandatory arbitration. And we actually have had the panel; the Chairperson of the panel has been selected. So we're continuing that process in both of those, that level of insurance together is $50 million, $25 million each.

Okay. And that would be, I guess, simply a cash flow adjustment or an item perhaps at some point, I guess, obviously, if it were to be on the income statement we can adjust that pretty easily.

Yes. It would be both and if it were as you know the entire settlement was on West Virginia American Water's books, because they were the ones that the lawsuits were against. And so if we do recover any additional fund, it would go back to West Virginia American.

Okay. Perfect. That's all I had. Congrats on a really nice year and look forward to seeing you all soon. End of Q&A

Thanks, Spencer. And I would tell you that for those that we have not been able to answer your questions, our Investor Relations will get back with you. We appreciate all of you participating today. We appreciate those of you who were at our Investor Day. If you have any questions, again, please call Ed and Ralph, they will get back to you, if we didn't get a chance to answer your questions. I'd like to remind everyone that our 2017 first quarter earnings call will be on May 4 and our annual shareholders meeting will take place on Friday, May 12. Thanks again for listening. We hope you had a great spring and we will talk to you again in May.

The conference is now concluded. Thank you for attending. You may now disconnect.