I worked through the problem and found a solution. Im not sure if its appropriate to answer my own question or edit my question to show the solution. I will keep it here unless told otherwise. Im new to the group and not current on all the procedures.

# Name: CreateGDB.py
# Description: Create a file GDB

# Import system modules
import arcpy
from arcpy import env
import datetime

out_folder_path = "w:/GISDATA/Database_Backups"
nowstart = datetime.datetime.now()
YearMonthDay = nowstart.strftime("%Y_%m_%d")
out_name = "TEST_WSdata_" + YearMonthDay + ".gdb"

# Execute CreateFileGDB
arcpy.CreateFileGDB_management(out_folder_path, out_name)


# Set environment settings
env.workspace =    "C:\Users\cbgibson\AppData\Roaming\ESRI\Desktop10.2\ArcCatalog\TEST_WSdata.sde"

# Set local variables
inFeatures = ['WATERLINES', 'GRAVITY']
outLocation = "w:/GISDATA/Database_Backups/" +"TEST_WSdata_" + YearMonthDay + ".gdb" 

# Execute TableToGeodatabase
arcpy.FeatureClassToGeodatabase_conversion(inFeatures, outLocation)

I worked through the problem and found a solution. I also revised the code to copy ALL feature classes in the WATER dataset, instead of listing each one individually.

# Name: BackupGDB.py
# Description: Create a file GDB

# Import system modules
import arcpy
from arcpy import env # WAS MISSING IN ORIGINAL POST
import datetime

out_folder_path = "w:/GISDATA/Database_Backups"
nowstart = datetime.datetime.now()
YearMonthDay = nowstart.strftime("%Y_%m_%d")
out_name = "TEST_WSdata_" + YearMonthDay + ".gdb"

# Execute CreateFileGDB
arcpy.CreateFileGDB_management(out_folder_path, out_name)


# Set environment settings
env.workspace = "C:\Users\cbgibson\AppData\Roaming\ESRI\Desktop10.2\ArcCatalog\TEST_WSdata.sde"

# Set local variables
waterFC = arcpy.ListFeatureClasses("", "", "WATER") #CHANGED TO INCLUDE ALL FEATURE CLASSES IN THE WATER DATASET
outLocation = "w:/GISDATA/Database_Backups/" +"TEST_WSdata_" + YearMonthDay + ".gdb" 

# Execute TableToGeodatabase
for fc in waterFC:
    arcpy.FeatureClassToGeodatabase_conversion(fc, outLocation)