TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS
Forward-looking statements are predictions based on ourthe Company’s current expectations and assumptions regarding future events. They are not guarantees or assurances of any outcomes, financial results, or levels of activity, performance or achievements, and youreaders are cautioned not to place undue reliance upon them. These forward-looking statements are subject to a number of estimates, and assumptions, and known and unknown risks, uncertainties and other factors. OurThe Company’s actual results may vary materially from those discussed in the forward-looking statements included herein as a result of the factors discussed under Item 1A—Risk Factors, and the following important factors:
•the decisions of governmental and regulatory bodies, including decisions to raise or lower customer rates;
•the timeliness and outcome of regulatory commissions’ and other authorities’ actions concerning rates, capital structure, authorized return on equity, capital investment, system acquisitions and dispositions, taxes, permitting, water supply and management, and other decisions;
•changes in customer demand for, and patterns of use of, water and energy, such as may result from conservation efforts;efforts, or otherwise;
•limitations on the availability of ourthe Company’s water supplies or sources of water, or restrictions on ourits use thereof, resulting from allocation rights, governmental or regulatory requirements and restrictions, drought, overuse or other factors;
•a loss of one or more large industrial or commercial customers due to adverse economic conditions, or other factors;
•changes in laws, governmental regulations and policies, including with respect to environmental, health and safety, data and consumer privacy, security and protection, water quality and water quality accountability, contaminants of emerging contaminants,concern, public utility and tax regulations and policies, and impacts resulting from U.S., state and local elections;elections and changes in federal, state and local executive administrations;
•the Company’s ability to collect, distribute, use, secure and store consumer data in compliance with current or future governmental laws, regulations and policies with respect to data and consumer privacy, security and protection;
•weather conditions and events, climate variability patterns, and natural disasters, including drought or abnormally high rainfall, prolonged and abnormal ice or freezing conditions, strong winds, coastal and intercoastal flooding, pandemics (including COVID-19) and epidemics, earthquakes, landslides, hurricanes, tornadoes, wildfires, electrical storms, sinkholes and solar flares;
•the outcome of litigation and similar governmental and regulatory proceedings, investigations or actions, including matters related to actions;
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•the Freedom Industries chemical spill in West Virginiarisks associated with the Company’s aging infrastructure, and the preliminarily approved global class action settlement agreement related to this chemical spill;
•exposure or infiltration of ourthe Company’s technology and critical infrastructure operational technology and IT systems, including the disclosure of sensitive, personal or confidential information contained therein, through physical or cyber attacks or other means;
•changes in ourthe Company’s capital requirements;
•the intentional or unintentional actions of a third party, including contamination of ourthe Company’s water supplies or the water provided to ourits customers;
•acquiring, closing and integrate water and wastewater systemssuccessfully integrating regulated operations;
•the Company’s Military Services Group (“MSG”) entering into our regulated operations, and enter intonew military installation contracts, price redeterminations, and other agreements and contracts, with or otherwise obtain,the U.S. government; and
•realizing anticipated benefits and synergies from new customersacquisitions;
•risks and uncertainties following the completion of the sale of the Company’s Homeowner Services Group (“HOS”), including:
•the Company’s ability to receive any contingent consideration provided for in our market-based businesses;the HOS sale, as well as amounts due, payable and owing to the Company under the seller note when due; and
•the ability of the Company to redeploy successfully and timely the net proceeds of this transaction into the Company’s Regulated Businesses;
•risks and uncertainties associated with contracting with the U.S. government, including ongoing compliance with applicable government procurement and security regulations;
•cost overruns relating to improvements in or the expansion of ourthe Company’s operations;
•the Company’s ability to maintain safe work sites;
•the ability of energy providers, state governments and other third parties to achieve or fulfill their GHG emission reduction goals, including for example, our water servicewithout limitation through stated renewable portfolio standards and management solutions that are focused on customers in the natural gas exploration and production market;carbon transition plans;
•changes in general economic, political, business and financial market conditions;
•access to sufficient debt and/or equity capital on satisfactory terms and when and as needed to support operations and capital expenditures;
•fluctuations in inflation or interest rates;rates, and the Company’s ability to address or mitigate the impacts thereof;
•fluctuations in the value of, or assumptions and estimates related to, its benefit plan assets and liabilities, including with respect to its pension and other post-retirement benefit plans, that could increase our costexpenses and plan funding
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requirements;
•changes in federal or state general, income and other tax laws, including any further rules, regulations, interpretations(i) future significant tax legislation, and guidance by the U.S. Department of the Treasury and state or local taxing authorities (collectively, the “Related Interpretations”) related to the enactment of the Tax Cuts and Jobs Act (the “TCJA”),(ii) the availability of, or the Company’s compliance with, the terms of applicable tax credits and tax abatement programs, and our ability to utilize our U.S. federal and state income tax net operating loss (“NOL”) carryforwards;programs;
•migration of customers into or out of ourthe Company’s service territories;territories and changes in water and energy consumption resulting therefrom;
•the use by municipalities of the power of eminent domain or other authority to condemn ourthe systems of one or more of the Company’s utility subsidiaries, or the assertion by private landowners of similar rights against us;such utility subsidiaries;
•any difficulty or inability to obtain insurance ourfor the Company, its inability to obtain insurance at acceptable rates and on acceptable terms and conditions, or ourits inability to obtain reimbursement under existing or future insurance programs and coverages for any losses sustained;
•the incurrence of impairment charges, changes in fair value and other adjustments related to ourthe Company’s goodwill or the value of its other assets;
•labor actions, including work stoppages and strikes;
•the Company’s ability to retain and attract highly qualified employees;and skilled employees and/or diverse talent;
•civil disturbances or unrest, or terrorist threats or acts, or public apprehension about future disturbances, unrest, or terrorist threats or acts; and
•the impact of new, and changes to existing, accounting standards.
These forward-looking statements are qualified by, and should be read together with, the risks and uncertainties set forth above and the risk factors included in Item 1A—Risk Factors and other statements contained in this Annual Report on Form 10-K, and youreaders should refer to such risks, uncertainties and risk factors in evaluating such forward-looking statements. Any forward-looking statements we makethe Company makes shall speak only as of the date this Annual Report on Form 10-K was filed with the United StatesU.S. Securities and Exchange Commission (“SEC”). Except as required by the federal securities laws, we dothe Company does not have any obligation, and weit specifically disclaimdisclaims any undertaking or intention, to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or otherwise. New factors emerge from time to time, and it is not possible for usthe Company to predict all such factors. Furthermore, it may not be possible to assess the impact of any such factor on ourthe Company’s businesses, either viewed independently or together, or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. The foregoing factors should not be construed as exhaustive.
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PART I
The Company
With a history dating back to 1886, American Water is the largest and most geographically diverse, publicly-traded water and wastewater utility company in the United States, as measured by both operating revenues and population served. A holding company originally incorporated in Delaware in 1936, we employthe Company employs approximately 6,9006,500 professionals who provide drinking water, wastewater and other related services to an estimated 15over 14 million people in 46 states,24 states. The Company conducts the Districtmajority of Columbia and Ontario, Canada. The largest component of the Company’sits business includes ratethrough regulated subsidiariesutilities that provide water and wastewater services, collectively presented as ourthe “Regulated Businesses.” We conduct the majority of our business through the Regulated Businesses segment. WeThe Company also operate severaloperates other market-based businesses that provide a broad range of related and complementary water and wastewater services within four operating segments that individuallyto the U.S. government on military installations, as well as municipalities. Individually, these market-based businesses do not meet the criteria of a reportable segment in accordance with generally accepted accounting principles in the United States (“GAAP”). These four, non-reportable operating segments, and are collectively presented as our “Market-Based Businesses,throughout this Annual Report on Form 10-K within “Other,” which is consistent with how management assesses the results of these businesses.
On December 9, 2021 (the “Closing Date”), the Company sold all of the equity interests of the HOS subsidiaries. See Item 1—Business—Other—Sale of Homeowner Services Group below and Note 5—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional information.
On January 1, 2022, the Company completed the sale of its New York subsidiary, see Item 1—Business—Regulated Businesses—Sale of New York American Water Company, Inc. below and Note 5—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional information.
Throughout this Annual Report on Form 10-K, (this “Form 10-K”), unless the context otherwise requires, references to “we,” “us,” “our,” the “Company,” and “American Water” mean American Water Works Company, Inc. and its subsidiaries, taken together as a whole. References to “parent company” mean American Water Works Company, Inc., without its subsidiaries.
Regulated Businesses
| Operating Revenues (in millions) | Number of Customers (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||
| Water (a) | Wastewater | Total | % of Total | Water | Wastewater | Total | % of Total | ||||||||||||||||||||||||||||||||||||||||
| New Jersey | $ | 858 | $ | 51 | $ | 909 | 25.9 | % | 663 | 59 | 722 | 20.9 | % | ||||||||||||||||||||||||||||||||||
| Pennsylvania | 714 | 105 | 819 | 23.4 | % | 679 | 97 | 776 | 22.5 | % | |||||||||||||||||||||||||||||||||||||
| Missouri | 367 | 16 | 383 | 10.9 | % | 480 | 22 | 502 | 14.6 | % | |||||||||||||||||||||||||||||||||||||
| Illinois | 310 | 39 | 349 | 10.0 | % | 297 | 71 | 368 | 10.7 | % | |||||||||||||||||||||||||||||||||||||
| California | 281 | 4 | 285 | 8.1 | % | 189 | 3 | 192 | 5.6 | % | |||||||||||||||||||||||||||||||||||||
Total—Top Five States (b) | 2,530 | 215 | 2,745 | 78.3 | % | 2,308 | 252 | 2,560 | 74.2 | % | |||||||||||||||||||||||||||||||||||||
Other (c) | 733 | 27 | 760 | 21.7 | % | 853 | 36 | 889 | 25.8 | % | |||||||||||||||||||||||||||||||||||||
| Total Regulated Businesses | $ | 3,263 | $ | 242 | $ | 3,505 | 100.0 | % | 3,161 | 288 | 3,449 | 100.0 | % | ||||||||||||||||||||||||||||||||||
| Operating Revenues (In millions) | Number of Customers (In thousands) | |||||||||||||||||||||||||
| Water (a) | Wastewater | Total | % of Total | Water | Wastewater | Total | % of Total | |||||||||||||||||||
| New Jersey | $ | 698 | $ | 41 | $ | 739 | 25.0 | % | 639 | 48 | 687 | 20.5 | % | |||||||||||||
| Pennsylvania | 617 | 44 | 661 | 22.3 | % | 658 | 64 | 722 | 21.5 | % | ||||||||||||||||
| Illinois | 284 | 20 | 304 | 10.3 | % | 284 | 33 | 317 | 9.5 | % | ||||||||||||||||
| Missouri | 280 | 9 | 289 | 9.8 | % | 466 | 13 | 479 | 14.3 | % | ||||||||||||||||
| Indiana | 222 | — | 222 | 7.5 | % | 302 | — | 302 | 9.0 | % | ||||||||||||||||
| California | 219 | 3 | 222 | 7.5 | % | 175 | 3 | 178 | 5.3 | % | ||||||||||||||||
| West Virginia | 143 | 1 | 144 | 4.9 | % | 166 | 1 | 167 | 5.0 | % | ||||||||||||||||
Total - Top Seven States (b) | 2,463 | 118 | 2,581 | 87.3 | % | 2,690 | 162 | 2,852 | 85.1 | % | ||||||||||||||||
Other states (c) | 353 | 24 | 377 | 12.7 | % | 470 | 31 | 501 | 14.9 | % | ||||||||||||||||
| Total Regulated Businesses | $ | 2,816 | $ | 142 | $ | 2,958 | 100.0 | % | 3,160 | 193 | 3,353 | 100.0 | % | |||||||||||||
(b)The Company’s “Top Five States” are determined based upon operating revenues.
(c)Includes the Company’s utility operations in the Notesfollowing states: Georgia, Hawaii, Indiana, Iowa, Kentucky, Maryland, Tennessee, Virginia and West Virginia and other revenue attributable collectively to Consolidated Financial Statements for additional information.the Regulated Businesses. The Company completed the sale of its New York subsidiary on January 1, 2022 and the sale of its Michigan subsidiary on February 4, 2022.
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Customers
The vast majority of ourthe Company’s regulated water customers are metered, which allows usthe Company to measure and bill for ourits customers’ water usage, typically on a monthly basis. We employThe Company employs a variety of methods of customer meter reading to monitor consumption. These methods range from meters with mechanical registers where consumption is manually recorded by meter readers, to meters with electronic registers capable of transmitting consumption data to proximity devices (touch read) or via radio frequency to mobile or fixed network data collectors. OurThe Company’s wastewater customers are billed either a flat rate or based upon their water consumption.
Residential customers make up a substantial portion of ourthe Company’s customer base in all of the states in which we operate. Weit operates. The Company also serve:serves (i) commercial customers, such as hospitals, food and beverage providers, commercial property developers and proprietors, and energy suppliers;suppliers, (ii) industrialfire service customers, such as large-scale manufacturers, mining and production operations; and (iii) public authorities, such as government buildings and other public sector facilities, including schools. In addition, we supplywhere the Company supplies water through ourits distribution systems to public fire hydrants for firefighting purposes and to private fire customers for use in fire suppression systems in office buildings and other facilities, (iii) industrial customers, such as large-scale manufacturers, mining and toproduction operations, (iv) public authorities, such as government buildings and other waterpublic sector facilities, including schools and universities, and (v) other utilities and community water and wastewater systems in the form of bulk contracts for the supply of water suppliesor the treatment of wastewater for distribution to their own customers.
The following chart depicts the allocation of ourthe Company’s Regulated Businesses’ operating revenue of $3,505 million by type, including a breakout of the total water services revenues by class of customer, for the year ended December 31, 2017:2022:
(a)Includes water revenues from public authorities and other utilities and community water systems under bulk contracts.
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Presented in the table summarizesbelow is the number of water and wastewater customers wethe Company served by class as of December 31:31, 2022, 2021 and 2020, which represents approximately 14 million people served as of December 31, 2022:
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||
| (In thousands) | Water | Wastewater | Water | Wastewater | Water | Wastewater | |||||||||||||||||||||||||||||
| Residential | 2,870 | 270 | 2,972 | 245 | 2,948 | 236 | |||||||||||||||||||||||||||||
| Commercial | 219 | 17 | 225 | 15 | 225 | 15 | |||||||||||||||||||||||||||||
| Fire service | 51 | — | 52 | — | 50 | — | |||||||||||||||||||||||||||||
| Industrial | 4 | — | 4 | — | 4 | — | |||||||||||||||||||||||||||||
| Public and other (a) | 17 | 1 | 16 | 1 | 17 | 1 | |||||||||||||||||||||||||||||
| Total (b) | 3,161 | 288 | 3,269 | 261 | 3,244 | 252 | |||||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | |||||||||||||||
| (In thousands) | Water | Wastewater (a) | Water | Wastewater | Water | Wastewater | |||||||||||
| Residential | 2,872 | 182 | 2,846 | 171 | 2,829 | 133 | |||||||||||
| Commercial | 221 | 11 | 220 | 10 | 219 | 8 | |||||||||||
| Industrial | 4 | — | 4 | — | 4 | — | |||||||||||
| Public & other | 63 | — | 61 | — | 60 | — | |||||||||||
| Total | 3,160 | 193 | 3,131 | 181 | 3,112 | 141 | |||||||||||
(b)The Company completed the sale of its New York subsidiary on January 1, 2022 and the sale of its Michigan subsidiary on February 4, 2022.
Customer growth in ourthe Company’s Regulated Businesses is primarily driven by:from (i) adding new customers to ourits customer base through acquisitions of water and/or wastewater utility systems;systems, (ii) organic population growth (or decline) in ourits authorized service areas;areas, and (iii) sale of water to other water utilities and community water systems.
Capital Investment
The operations of ourthe Company’s Regulated Businesses are generally subject to economic regulation by PUCs in the statestates in which they operate, with the primary responsibility of the PUCs to promotebeing the promotion of the overall public interest by balancing the interest of customers and utility investors. Specific authority might differ from state to state, but in most states, PUCs review and approve rates charged to customers, accounting treatments, long-term financing programs and cost of capital, operation and maintenance (“O&M”) expenses, capital expenditures, O&M expenses, taxes, affiliated transactions and affiliate relationships, reorganizations, and mergers and acquisitions.acquisitions, and dispositions, along with imposing certain penalties or granting certain incentives. Regulatory policies vary from state to state and could potentiallycan change over time. These policies will affect the timing, as well as the extent, of recovery of expenses and the realized return on invested capital.
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The Company’s Regulated Businesses support regulatory practices at the PUCs and state legislatures that mitigate the adverse impact of regulatory lag. ExamplesPresented in the table below are examples of approved regulatory practices include:
practices:
| Regulatory Practices | Description | States Allowed | ||||||||||||
| Infrastructure replacement | Allows rates to change periodically, outside a general rate case proceeding, to reflect recovery of capital investments made to replace infrastructure necessary to sustain safe and reliable services for | IA, IL, IN, KY, MO, NJ, | ||||||||||||
| Future test year | A | CA, HI, IA, IL, IN, KY, | ||||||||||||
| Hybrid test year | ||||||||||||||
| Utility plant recovery mechanisms | Allows recovery of the full return on utility plant costs during the construction period, instead of capitalizing an allowance for funds used during | CA, IL, KY, | ||||||||||||
| Expense mechanisms | Allows changes in certain operating expenses, which may fluctuate based on conditions beyond the utility’s control, to be recovered outside of a general rate case proceeding or deferred until the next general rate case proceeding. | CA, HI, IL, IN, MD, MO, NJ, | ||||||||||||
| Revenue stability mechanisms | CA, IL | |||||||||||||
| Consolidated tariffs | Use of a unified rate structure for water systems owned and operated by a single utility, which may or may not be physically interconnected. The consolidated tariff pricing structure may be used fully or partially in a state, and is generally used to | CA, IA, IL, IN, KY, MD, MO, NJ, PA, VA, WV | ||||||||||||
| Deferred accounting | A regulator’s willingness to defer recognition of financial impacts when setting rates for utilities. | All | ||||||||||||
apply and enhance certain mechanisms where they already exist.
Acquisitions and Strategic Growth
The U.S. water and wastewater industries include investor-owned systems as well as municipal systems that are owned and operated by local governments or governmental subdivisions. Both industries are highly fragmented. According to the U.S. Environmental Protection Agency (“EPA”), as of 2017, approximately 84% of the United States water market is served by municipal systems and approximately 98% of the country’s wastewater systems are government owned. The EPA also estimates, as of 2017, that there are approximatelyover 50,000 community water systems and approximately 20,000over 15,000 community wastewater systems in the United States, with over halfapproximately 80% of the community water systems serving a population of 5003,000 or less. This large number of relatively small, fragmented water and wastewater systems may result in inefficiencies in the marketplace, since such utilities may not have the operating expertise, financial and technological capability or economies of scale to provide services or raise capital as efficiently as larger utilities. Larger utilities that have greater access to capital are generally more capable of making mandated and other necessary infrastructure upgrades to their water and wastewater systems. In addition, water and wastewater utilities with large customer bases, spread across broad geographic regions, may more easily absorb the impact of significant variations in precipitation and temperatures, such as droughts, excessive rain and cool or warm temperatures in specific areas. Larger utilities generally are able to spread support services over a larger customer base, thereby reducing the costs to serve each customer. Since many administrative and support activities can be efficiently centralized to gain economies of scale, companies that participate in industry consolidation have the potential to improve operating efficiencies, lower costs per unit and improve service at the same time.
A fundamental aspect of ourthe Company’s growth strategy is to pursue acquisitions of small and medium water and/or wastewater systems of between 1,000 and 30,000 customer connections, in close geographic proximity to areas where we operate ourthe Company operates its Regulated Businesses.Businesses, see Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information. The close proximity of acquisition opportunities to ourthe Company’s regulated footprint allows usit to integrate and manage the acquired systems and operations primarily using ourthe Company’s existing management (although the Company typically retains the majority, if not all, of the employees of the acquired systems) and to achieve operational efficiencies and prioritize capital investment needs. OurThe Company’s current customer mix of 94%92% water and 6%8% wastewater also presents strategic opportunities for wastewater growth and systems consolidation, addingallowing the Company to add wastewater customers where weit already serveserves water customers. We intendThe Company intends to continue to expand ourits regulated footprint geographically by acquiring water and wastewater systems in ourits existing markets and, if appropriate, pursuepursuing acquisition opportunities in certain domestic markets where we dothe Company does not currently operate ourits Regulated Businesses. Before entering new regulated markets, wethe Company will evaluate the business and regulatory climates to ensure that weit will have the opportunity to achieve an appropriate rate of return on ourits investment while maintaining ourits high standards for providing safe, reliable and affordable services to our customers, as well asits customers. The Company will also evaluate whether there is a line of sight to grow our base customers to sufficient scale in a significant level tonew regulated market so that it can attain efficiencies after entering thea new domestic market.
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Sale of New York American Water Company, Inc.
On January 1, 2022, the Company completed the sale of its New York subsidiary to Liberty Utilities (Eastern Water Holdings) Corp. (“Liberty”), an indirect, wholly owned subsidiary of Algonquin Power & Utilities Corp. Under the terms of the Stock Purchase Agreement, dated November 20, 2019, as amended, by and among the Company, the Company’s New York subsidiary and Liberty (the “Stock Purchase Agreement”), Liberty purchased from the Company all of the capital stock of the Company’s New York subsidiary for a purchase price of $608 million in 2015,cash. The sale was approved by the New Jersey enactedYork State Department of Public Service on December 16, 2021. The Company’s regulated New York operations had approximately 127,000 customers in the State of New York. See Note 5—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional information.
Industry Legislation
On November 15, 2021, the Infrastructure Investment and Jobs Act (the “IIJA”) was signed into law and provides for up to $55 billion to aid in improving the country’s ailing water infrastructure, including $23.4 billion for drinking water and wastewater, $15 billion for lead service line replacement (through the drinking water state revolving fund), and $10 billion for the treatment of per- and polyfluoroalkyl substances (“PFAS”) and other contaminants of emerging concern. The IIJA also included a low-income assistance program, in which eligible low-income customers who receive their water from public and private entities may participate. The Company has leveraged these funds throughout its service areas to benefit its customers.
In December 2020, Congress passed, and the President signed into law, a $900 billion COVID-19 relief and $1.4 trillion U.S. government appropriations package for 2021, which included $638 million for a low-income water assistance program and $2.8 billion for capitalization grants under the Clean Water Infrastructure Protection Act, which allows municipalities with a water or wastewater system that meets certain emergent conditions, to allow it to sell the system on an expedited basis without a referendum. Also, inand Drinking Water state revolving funds.
In 2017, New Jersey enacted the Water Quality Accountability Act (the “WQAA”), which sets new operational standards for all water utilities in New Jersey, including municipal and investor-owned utilities.utilities with more than 500 service connections. This law imposes new requirements in areas such as cybersecurity, asset management, water quality reporting, remediation of notices of violation, and hydrant and valve maintenance. The WQAA requires the most senior water manager, or either the executive director for municipal utility authorities or the mayor or chief executive officer for municipally owned public water systems, to certify that the system meets the requirements under the WQAA. Enhanced WQAA legislation includes additional enforcement requirements for disclosure of results, requires the sale of systems for prolonged violations and imposes new cybersecurity requirements and asset management plans. The new amendments, which provide for both civil and criminal penalties for falsification of documents, were signed by the Governor with an effective date of November 8, 2021.
In 2020, Missouri enacted the Water Safety and Security Act, which requires small and medium-sized water providers to create cybersecurity, valve inspection and hydrant inspection programs.
The Company’s regulated subsidiaries in California, Illinois, Indiana, Iowa, Kentucky, Maryland, Missouri, New Jersey, Pennsylvania, Tennessee, Virginia and West Virginia have access to utility valuation legislation and regulation for private sector investment in public sector water and wastewater systems. The Company supports full optionality for municipalities, including state legislation that enables the consolidation of the largely fragmented water and wastewater industries through third-party fair market valuations of purchased property and the consolidation of water and wastewater rates. Our Regulated Businesses in California, Illinois, Indiana, Missouri, New Jersey and Pennsylvania have access to fair market value legislation for private sector investment in public sector systems.property. Fair market value assessment of water and wastewater systems is an alternative to the traditional depreciated original cost method of valuation, providingwhich allows the Company to offer municipalities with a fair and objective purchase price for their system assets that is more reflective of the assets’ fair market value, while providing the utility hasCompany with increased assurance of recovering investmentopportunity to recover the purchase price over the life of the assets. Ultimately, we believepurchased system assets, subject to PUC approval. In 2021, the Tennessee Public Utility Commission implemented acquisition valuation rules that many communities could benefit from receiving safe and reliableinclude a methodology to value water and wastewater service from an experienced utility with proven accessassets based upon the new replacement cost of the assets less the depreciation, in addition to capital and financial, technical, and managerial resources.other valuation methodology options.
Consolidated tariffs use a unified rate structure for systems owned and operated by a single utility, which may or may not be physically interconnected. Consolidated tariff pricing moderates the impact of periodic fluctuations in local costs and promotes a more universal water infrastructure investment in the state.a jurisdiction. As a result, consolidated tariffs can make it easier to incorporate new systems into an existing utility, and can ensuresupport economies of scale for even the smallest of systems and prioritize capital needs across the state.jurisdiction. Overall, this bringsthe Company believes that consolidated tariffs bring cost-effective, higher qualityhigh-quality services to a larger number of citizens. Tencustomers. Eleven of ourthe Company’s regulated subsidiariesjurisdictions currently have some form of consolidated tariff pricing, including California, Illinois, Indiana, Iowa, Kentucky, Maryland, Missouri, New Jersey, Pennsylvania, Virginia and West Virginia.
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Competition
Condemnation and Eminent Domain
All or portions of ourthe Regulated Businesses’ utility assets could be acquired by state, municipal or other government entities through one or more of the following methods: (i) eminent domain (also known as condemnation); (ii) the right of purchase given or reserved by a municipality or political subdivision when the original certificate of public convenience and necessityCPCN was granted; and (iii) the right of purchase given or reserved under the law of the state in which the utility subsidiary was incorporated or from which it received its certificate.CPCN. The acquisition consideration related to such a proceeding initiated by a local government may be determined consistent with applicable eminent domain law, or may be negotiated or fixed by appraisers as prescribed by the law of the state or the jurisdiction of the particular CPCN.
As such, the Regulated Businesses are periodically subject to condemnation proceedings in the particular franchise or charter.ordinary course of business. For example, the Monterey water service system assets (the “Monterey system assets”) of the Company’s California subsidiary (“Cal Am”) are the subject of a potential condemnation action by the Monterey Peninsula Water Management District (the “MPWMD”) stemming from a November 2018 public ballot initiative. In 2019, the MPWMD issued a preliminary valuation and cost of service analysis report, finding in part that (1) an estimate of the Monterey system assets’ total value plus adjustments would be approximately $513 million, (2) the cost of service modeling results indicate significant annual reductions in revenue requirements and projected monthly water bills, and (3) the acquisition of the Monterey system assets by the MPWMD would be economically feasible. In 2020, the MPWMD certified a final environmental impact report, analyzing the environmental impacts of the MPWMD’s project to (1) acquire the Monterey system assets through the power of eminent domain, if necessary, and (2) expand its geographic boundaries to include all parts of this system.
In February 2021, the MPWMD filed an application with the Local Agency Formation Commission of Monterey County (“LAFCO”) seeking approval to become a retail water provider and annex approximately 58 parcels of land into the MPWMD’s boundaries. In June 2021, LAFCO’s commissioners voted to require a third-party independent financial study as to the feasibility of an acquisition by the MPWMD of the Monterey system assets. In December 2021, LAFCO’s commissioners denied the MPWMD’s application to become a retail water provider, determining that the MPWMD does not have the authority to proceed with a condemnation of the Monterey system assets. On April 1, 2022, the MPWMD filed a lawsuit against LAFCO challenging its decision to deny the MPWMD’s application seeking approval to become a retail water provider. For more information on the lawsuit against LAFCO, see Item 3—Legal Proceedings—Proposed Acquisition of Monterey System Assets — Local Area Formation Commission Litigation. By letter dated October 3, 2022, the MPWMD notified Cal Am of a decision to appraise the Monterey system assets and requesting access to a number of Cal Am’s properties and documents to assist the MPWMD with such an appraisal. Cal Am responded by letter on October 24, 2022, denying the request for access, stating that the MPWMD does not have the right to appraise Cal Am’s system without LAFCO approval to become a retail water provider.
Also, five municipalities in the Chicago, Illinois area (approximately 30,300 customers in total) formed a water agency and filed an eminent domain lawsuit against the Company in January 2013, seeking to condemn the water pipeline that serves those five municipalities. During a valuation trial held in January 2023, the parties settled the lawsuit and the water agency dismissed the eminent domain case, and as a result the Company will retain the pipeline. As part of the dismissal, the Company’s Illinois subsidiary and another subsidiary entered into a settlement agreement with the water agency agreeing to, among other things, maintain through December 31, 2027 the utility-specific wholesale water rate passed through to customers of the pipeline, such that the rate, exclusive of other pass-through charges, remains no higher than the current rate.
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Furthermore, the law in certain jurisdictions in which ourthe Regulated Businesses operate including, for example, California, provides for eminent domain rights allowing private property owners to file a lawsuit to seek just compensation against a public utility, if a public utility’s infrastructure has been determined to be a substantial cause of damage to that property. In these actions, the plaintiff would not have to prove that the public utility acted negligently. These actionsIn California, for example, lawsuits have occurredbeen filed in connection with large-scale natural events such as floods, mudslides and debris flow, broken water mains, landslides and wild and brush fires.wildfires. Some of these lawsuits have included allegations that infrastructure of certain utilities triggered the natural event that resulted in damage to the property. In some cases, the PUC has allowed certain costs or losses incurred by the utility to be recovered from customers in rates, but in other cases such recovery in rates has been disallowed. Also, the utility may have obtained insurance that could respond to some or all of such losses, although the utility would be at risk for any losses not ultimately subject to rate or insurance recovery or losses that exceed the limits of such insurance.
Water Supply and Wastewater Services
| Surface Water | Ground Water | Purchased Water | |||||||||||||||
| New Jersey | 74% | 22% | 4% | ||||||||||||||
| Pennsylvania | 91% | 7% | 2% | ||||||||||||||
| Missouri | 78% | 21% | 1% | ||||||||||||||
| Illinois | 54% | 35% | 11% | ||||||||||||||
| California | — | 68% | 32% | ||||||||||||||
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| Surface Water | Ground Water | Purchased Water | |||
| New Jersey | 72% | 24% | 4% | ||
| Pennsylvania | 91% | 7% | 2% | ||
| Illinois | 53% | 36% | 11% | ||
| Missouri | 80% | 19% | 1% | ||
| Indiana | 44% | 56% | — | ||
| California | — | 65% | 35% | ||
| West Virginia | 100% | — | — | ||
In connection with supply planning for most surface or groundwater sources, we employthe Company employs models to determine safe yields under different rainfall and drought conditions. Surface and ground water levels are routinely monitored so that supply capacity deficits may, to the extent possible, be predicted and mitigated through demand management and additional supply development. In California, where the state has been experiencing a multi-year drought, the Company utilizes multiple water supply options including numerous ground water wells in multiple aquifers as well as various long-term purchase water agreements with regional water suppliers to optimize supplies while assuring resiliency during dry years. An example of ourthe Company’s use of long-term planning to ensure that we haveit has adequate water supply is ourits involvement in the Monterey Peninsula Water Supply Project (the “Water Supply Project”) in California. The Water Supply Project includes the construction of a desalination plant, to be owned by California-American Water Company (“Cal Am”), our wholly ownedthe Company’s California subsidiary, and the construction of wells that would supply water to the desalination plant. In addition, the Water Supply Project also includes Cal Am’sthe California subsidiary’s purchase of water from a groundwater replenishment project (the “GWR Project”) between Monterey One Water (formerly known as the Monterey Regional Water Pollution Control AgencyAgency) and the Monterey Peninsula Water Management District (the “MPWMD”).MPWMD. The Water Supply Project is intended, among other things, to fulfill obligations of Cal Amthe California subsidiary to eliminate unauthorized diversions from the Carmel River as required under orders of the California State Water Resources Control Board (the “SWRCB”). For more information, see Item 3—Legal Proceedings—Alternative Water Supply in Lieu of Carmel River Diversions and Note 16—Commitments and Contingencies—Contingencies—Alternative Water Supply in Lieu of Carmel River Diversions, in the Notes to the Consolidated Financial Statements.
Wastewater services involve the collection of wastewater from customers’ premises through sewer lines. The wastewater is then transported through a sewer network to a treatment facility, where it is treated to meet required regulatory standards for wastewater before being returned to the environment. The solid waste by-product of the treatment process is disposed of or recycled in accordance with applicable standards and regulations.
Seasonality
Customer demand for ourthe Company’s water service is affected by weather and tends to vary with temperature rainfall levels and theamount and frequency of rainfall. Customer demand is generally greater during the warmer months, primarily due to increased water usage for irrigation systems and other outdoor water use. As such, wethe Company typically expect ourexpects its operating revenues to be the highest in the third quarter of each year. Weather that is hotter andand/or drier than average generally increases operating revenues, whereas, weather that is cooler and/or wetter than average generally serves to suppresssuppresses customer water demand and can reduce water operating revenues. ThreeTwo of ourthe Company’s jurisdictions, California Illinois and New York,Illinois, have adopted revenue stability mechanisms which permit usthe Company to collect state PUC-authorized revenue for a given period whichthat is not tied to the volume of water sold during that period, thereby lessening the impact of weather variability. See “Economic Regulation—Regulation and Rate Making” for additional information regarding revenue stability mechanisms.
Other
Other primarily includes the services provided do not require significant capital investment. Operating revenues for our Market-Based Businesses were $422 million for 2017, $451 million for 2016 and $434 million for 2015, accounting for 13%, 14% and 14%, respectively, of the Company’s total operating revenues for the same periods. Included within our Market-Based Businesses’ results is operating revenues attributed to Canadian operations of $5 million for 2017 and $6 million for both 2016 and 2015, respectively.
same periods.
Military Services Group
The contract price for ninefour of ourMSG’s contracts with the U.S. government is subject to redetermination two years after commencement of operations, and every three years thereafter. Price redetermination is a contract mechanism to periodically adjust the service fee in the next period, to reflect changes in contract obligations and anticipated market conditions. The remaining four14 contracts with the U.S. government are subject to annual price adjustments under a mechanism similar to price redetermination, called “Economic Price Adjustment.” All of these18 contracts maycould be terminated, in whole or in part, prior to the end of the 50-year term for convenience of the U.S. government, or as a result of default or non-performance by the MSG subsidiary performing the contract. In either event, pursuant to termination provisions applicable to all of these contracts, weMSG would be entitled to recover allowable costs that weit may have incurred under the contract, plus the contract profit margin on incurred costs. OurMSG’s backlog of revenue associated with ourits contracts with the U.S. government is approximately $3.6$6.9 billion,, with an average remaining contract term of 4240 years.
Sale of Homeowner Services Group
Notes to Consolidated Financial Statements for additional information.
Competition
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Environmental, Health and Safety, and Water Quality and Other Regulation
Safe Drinking Water Act
The Safe Drinking Water Act and related regulations establish national quality standards for drinking water. The EPA has issued rules governing the levels of numerous, naturally occurring and man-mademanufactured chemical and microbial contaminants and radionuclides allowable in drinking water, and continues to propose new rules. These rules also prescribe testing requirements for detecting regulated contaminants, the treatment systems that may be used for removing those contaminants, and other requirements. To date, the EPA has set standards for approximatelyover 90 contaminants and water quality indicators for drinking water, and there is a process in place to make a regulatory determination on at least five additional compounds every five years.
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The Company is within the EPA’s time frame for compliance with standards and rules developed under the regulation of these standards,the Safe Drinking Water Act, which includes sample collection, data analysis, and, in some instances engineering planning and system implementation. Recent monitoring under the Long-Term 2 Rule has resulted in the need for more than 30implementation of our surface water systems to provide additional protection against cryptosporidium. In most cases, this will involve installing UV disinfection at an estimated cost ranging from $150 million to $250 million.treatment enhancements. Further, the EPA is actively considering regulations for a number of contaminants, including strontium, hexavalent chromium, fluoride, nitrosamines, perchlorate, some pharmaceuticals and certain volatile organic compounds. We doThe Company does not anticipate that any such regulations, if enacted, will require implementation in 2018.
Although it is difficult to project the ultimate costs of complying with the above or other pending or future requirements, we expectthe Company expects current cost requirements under the Safe Drinking Water Act and other similar laws to be recoverable through the regulatory process and therefore compliance costs are not expected to have a material impact on ourits operations or financial condition. In addition, capital expenditures and operating costs to comply with environmental mandates have been traditionally recognized by the state PUCs as appropriate for inclusion in establishing rates. As a result, we expectthe Company expects to recover the operating and capital costs resulting from these pending or future requirements.
Lead and Copper Rule and Reduction of Lead in Drinking Water Act
The Company currently estimates that less than 5% of the service lines within its regulated service territories contain lead on either the Company or customer portion of the service line. The Company is replacing LSLs as part of its ongoing water main replacement and service line renewal projects. The Company’s goal is to work with the communities it currently serves to replace our lead service linesa significant majority of presently known LSLs in most of its service areas over an approximate 10 year time frame,by the end of 2030, at an estimated cost ranging fromadditional investment range of $600 million to $1.2 billion. In casesThe Company believes this will be attainable for most of its service areas where we are replacing an American Water ownedpublic policy is supportive of this goal. The IIJA was signed into law in November 2021 and provides for up to $15 billion for lead service line our standard approachreplacement through drinking water state revolving funds. The Company is awaiting further guidance on eligibility, the application process and the distribution of these funds. With regard to future acquisitions, the Company will be to replace the company-owned portionwork with those communities as part of the service line, and work with the customeracquisition process to replace the customer-owned portion of the service line. Replacing the full service line is considered a best practice as advised by the Lead Service Line Replacement Collaborative, an association of leading water industry organizations.set LSL removal goals appropriate for those systems. The prioritization of this work will dependLSL removal is dependent on several factors, including ourthe Company’s planned water main and service line renewal projects, adjacent projects by municipalities or other utilities, LCR compliance monitoring results, and cooperation with ourits customers with respect to replacing the customer-owned portion of the LSL as necessary. In certain cases, these and other factors may result in a shorter or longer time frame for replacement. Because replacing the external LSL in its entirety is advised by several water industry organizations including the U.S. National Drinking Water Advisory Council, the Lead Service Line Replacement Collaborative, and the American Water Works Association, the Company’s preferred approach is to replace the entire external LSL if lead is found on either the Company or customer portion of the service line.line; full LSL replacement is also consistent with the LCRR. The Lead Service Line Replacement Collaborative is a diverse group of public health, water utility, environmental, labor, consumer and housing organizations from across the country working together to encourage communities to accelerate the full replacement of LSLs through collaborative efforts at the local level.
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Clean Water Act
The Clean Water Act regulates discharges from drinking water and wastewater treatment facilities into lakes, rivers, streams and groundwater. In addition to requirements applicable to ourthe Company’s wastewater collection systems, ourits operations require discharge permits under the National Pollutant Discharge Elimination System (“NPDES”) permit program established under the Clean Water Act, which must be renewed every five years. Pursuant to the NPDES permit program, the EPA and implementing states set maximum discharge limits for wastewater effluents and overflows from wastewater collection systems. Discharges that exceed the limits specified under NPDES permits can lead to the imposition of fines and penalties, and persistent non-compliance could lead to significant fines and penalties and other compliance costs. In addition, the difficulty of obtaining and complying with NPDES permits, and renewing expiring permits, may impose time and cost burdens on ourthe Company’s operations. From time to time, discharge violations occur at ourthe Company’s facilities, some of which result in fines. We doThe Company does not expect any such violations or fines to have a material impact on ourits results of operations or financial condition.
Research and Development
Contaminants of Emerging ContaminantsConcern
The Chemicals Abstract Service Registry contains over 130203 million registered chemicals, with a new substance being produced approximately every 3 seconds from chemical breakdown and reformation. We arean estimated 1,400 species of disease-causing microbes that can affect humans. The Company is continually investigating new substances and contaminants, employing a team of scientists, engineers and public health professionals to identify threats to ourits water supply, to act on emerging regulations and new health advisories, and to researchevaluate the influxbenefits of alternative or advanced treatment technologies. We maintain state-of-the-artThe Company utilizes water quality testing equipment and implementimplements new and emerging technologies to help predict and managedetect potential water supply contamination issues. Examples of ourthe Company’s efforts include:
•monitoring impacts of environmental pathogen loads and removal through wastewater systems;
•characterizing factors that contribute to the formation of potentially carcinogenic disinfection by-products to define best practices for their mitigation;
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•advancing the science on holistic management strategies to improve distribution system water quality further;
•using ourits research findings to communicate information to ourits customers (via a web site) onregarding potential actions to limit occurrences of Legionella in their buildings; in this regard, the actions they can take to manage Legionella (the Centers for Disease Control and Prevention statistics indicate that water-associated disease from Legionella is on the rise, with exposure typically associated with customer-owned plumbing systems in large buildings);buildings;
•developing expanded monitoring methods for short-chain and fluorinated replacement PFAS and piloting treatment techniques;
•systematically investigating PFAS removal by treatment processes in a wide range of water matrices;
•leading a PFAS risk communication strategy for the water sector;
•using innovative technologies to detect harmfuland manage algal blooms and ultrasonic technology testing to help prevent taste and odor events and to eliminate cyanotoxins before they get to the water treatment plant;
•implementing water source assessment tools, including sensors and data analytics, to evaluate and track chemical storage and transport through watersheds and to detectaid in the identification of source water contamination events;
•developing methodology and
advanced measurement techniques for contaminants of emerging concern to investigate transport, occurrence and treatment; andAmerican Water Works Service Company, Inc. (the “Service(“Service Company”) is oura wholly owned subsidiary of the Company that provides support and operational services to the Company’s operating subsidiaries.Company and its affiliates. These services are predominantly provided to ourthe Company’s Regulated Businesses under contracts that have been approved by PUCs, where necessary, and are also provided to (i) our three Market-Based Businesses organized under American Water Enterprises, Inc., our wholly owned subsidiary (“AWE”),the MSG and (ii) KeystoneCSG businesses as requested or may otherwise be necessary. Services provided by the Service Company may include accounting and finance, administration, business development, communications, compliance, education and training, engineering, health and safety, human resources, information systems, internal audit, investor relations, legal and governance, operations, procurement, R&D, rates and regulatory support, security, risk management and insurance, treasury, and water quality and R&D. Thequality. Service Company also operates two nationalprovides customer service centers located in Alton, Illinois and Pensacola, Florida, which provide customer relations, field service and operational support to ourthe Company’s Regulated Businesses.Businesses, which includes call handling, billing, a major accounts program and other related services. Services are provided by the Service Company at cost, enabling ourthe Company’s operating subsidiaries to fulfill their responsibilities in a cost-effective manner, while providing them access to in-depth, functional expertise.
Environmental, Social Responsibility and Governance
The Company considers environmental, social responsibility and governance(“ESG”) principles fundamental to its corporate strategy and values. Integration of these principles into the Company’s daily operations emphasizes its belief that “how” a company operates is just as important as “what” a company does.
Delivering a reliable supply of safe, clean and affordable water to customers and treating wastewater has been fundamental to the Company’s business for decades. Within every community in which the Company operates, there is an opportunity to make a sustainable positive impact on the community, reflect the communities served with diverse and skilled employees, and maintain the governance and diligence to meet or exceed service expectations for decades to come.
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Key Highlights
Demonstrated ESG Leadership
•The Company’s values and actions have achieved prestigious recognition by many leading firms devoted to recognizing companies that demonstrate ESG leadership.
•The Company was ranked fifth in the Energy and Utilities industry category within Newsweek’s 2023 list of America’s Most Responsible Companies and ranked 19th within Barron’s list of the 100 Most Sustainable Companies in 2022.
•The Company was included in the Bloomberg Gender Equality Index for the fifth consecutive year, was recognized as a top-scoring company, for the fourth consecutive year, on the Disability Equality Index (DEI)®, as well as a Military Friendly Employer and Supplier.
•The Company earned the U.S. Department of Homeland Security SAFETY Act Designation for its internal enterprise security program, which includes risk management processes, personnel training and emergency exercises, and security oversight activities. The Company was the first U.S. water and wastewater company and third utility to earn this designation.
Environmental and Sustainability
•Emissions for the Company’s Regulated Businesses
•The Company established medium- and long-term goals that are science-based and aligned with the Paris Agreement, for scope 1 (direct) and scope 2 (indirect, derived from the Company’s purchase of power) greenhouse gas emissions reductions.
•The goals aim to reduce absolute scope 1 and 2 emissions by 50% by 2035 (from a 2020 baseline year) and achieve net zero scope 1 and scope 2 emissions by 2050.
•These goals complement the Company’s existing short-term goal of reducing absolute scope 1 and 2 greenhouse gas emissions by more than 40% by 2025 (from a 2007 baseline year).
•The Company has also estimated certain of its scope 3 greenhouse gas emissions, including Categories 1 (Purchased Goods and Services), 2 (Capital Goods), 3 (Fuel and Energy Related Activities) and 6 (Business Travel).
•Water Quality & Wastewater
•The Company employs a team of R&D scientists dedicated to partnering with water research organizations on water quality and technology-based source water monitoring.
•The Company received 11 drinking water Notices of Violation (“NOVs”) in 2022, two of which were related to water quality and maximum contaminant level exceedances. These metrics are determined by counting the overall number of drinking water NOVs and drinking water NOVs related to maximum contaminant level exceedances received by the Company in accordance with internally established procedures, which may exclude NOVs related to newly-acquired systems and associated with third-party violations, among others.
•The Company invested approximately $2.3 billion in renewing and improving assets of the Regulated Businesses in 2022 and expects to invest between $12.5 billion to $13 billion over the next five years. Nearly 70% of the Company’s capital plan is dedicated to infrastructure renewal and improvement, 10% to 12% is allocated to resiliency, and the balance is invested in water quality, operational efficiency, system expansion and other categories.
•Policy Leadership
•The Company collaborates and partners with federal and state agencies to support effective environmental, health and safety, and water quality and affordability standards and regulations.
•The Company participates in many industry organizations at the local, state and national level, including: The National Association of Water Companies (NAWC), American Water Works Association (AWWA) and Edison Electric Institute (EEI).
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Social Responsibility
•Customers
•The Company’s average monthly residential water bills were approximately $57 in 2022, or 0.77% of the median household income, based on data from the U.S. Census Bureau’s American Community Survey. The Company is focused on keeping customer bills affordable compared to income, driving a culture of continuous improvement, diligent cost management, and technology enhancements that help drive affordability.
•The Company supports low-income customer assistance programs across 12 states: California, Illinois, Indiana, Iowa, Kentucky, Maryland, Missouri, New Jersey, Pennsylvania, Tennessee, Virginia and West Virginia.
•To better reflect the customers that the Company serves, the Company increased spend with diverse suppliers and small businesses in 2022 by more than 35% compared to last year.
•For 2022, the Company achieved an aggregate residential customer satisfaction rating in the top half among the Company’s industry peer group. We measure performance on Customer Experience through our performance on the J.D. Power U.S. Water Utility Residential Customer Satisfaction Study. The study measures the satisfaction of residential water customers of the 90 largest water utilities in the United States and considers six factors to score companies on a 1,000-point scale: quality and reliability; price; conservation; billing and payment; communications; and customer service.
•Employees
•During 2022, over 117,000 hours of safety training, including physical security and cybersecurity training, were completed by the Company’s employees, as well as a mandatory Code of Ethics training requirement.
•The Company has made significant progress toward its zero injuries goal, reducing workplace injuries by 52% since 2017. Through year-end 2022, the Company has further reduced its OSHA recordable injury rate (“ORIR”) to 0.85, the lowest in the Company’s recorded history, which is approximately two times better than the water industry average.
•During 2022, approximately 83% of the Company’s job requisitions had a diverse candidate pool, with approximately 46% of transfers or promotions filled by diverse individuals.
•Communities
•More than $900,000 was donated in 2022 by the Company’s employees and the American Water Charitable Foundation (AWCF), a 501(c)(3) private foundation established by American Water in 2010, of which over $430,000 was provided by employees through workplace giving campaigns including the United Way, Water For People and other volunteering giving campaigns that supported more than 1,600 public charities nationwide. These efforts were in addition to the $2.3 million given by the AWCF through the Keep Communities Flowing Grant Program - more than $3 million combined.
•Stakeholder Engagement
•In 2022, the Company completed a materiality assessment to align ESG efforts with stakeholder priorities. Participants included, among others, regulators, investors, customers, employees, and a member of the Company’s Board of Directors. The results of the assessment will be included in the Company’s 2021-2022 Sustainability Report, which will be published in 2023.
Governance
•Board and Committees
•The Board of Directors and each of its standing committees are led by an independent, non-executive chair.
•The Board of Directors met 15 times in 2022.
•The Board of Directors’ Safety, Environmental, Technology and Operations (SETO) Committee, which oversees several key ESG matters, met four times in 2022.
•The Board of Directors reflects gender, racial and experiential diversity. As of December 31, 2022, approximately 64% of the Company’s directors voluntarily self-identified as diverse based on gender, race, disability and military veteran status.
•The Company’s average director tenure was approximately 7 years as of December 31, 2022.
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•The members of the Company’s Board of Directors have demonstrated expertise, including, among others, experience in utility operations, regulatory matters, sustainability, customer service, cybersecurity, the military, financial services and capital markets, service as a public company CEO, CFO and/or board member, and management of global operations.
•ESG-Related Disclosures and Transparency
•The Company issued its annual ESG Data Summary on its website, covering sustainability performance for key metrics within the 2022 calendar year.
•In addition, the Company issued its second annual Inclusion, Diversity & Equity Report and launched a new diversity website, which describes the Company’s inclusion and diversity strategies, practices, policies and programs from across the business. New disclosures include:
•EEO-1 data for 2020 and 2021;
•Summary of results and conclusions from the Company’s third-party pay equity studies and internal labor market analyses; and
•Two new people-related goals in the 2022 Annual Performance Plan (“APP”) meant to increase representation of women and increase ethnic and racial diversity among employees at American Water, adding to existing APP sustainability goals.
•The Company discloses on its website its Political Contributions Policy, and, on an annual basis, information related to its political contributions, payments to tax-exempt organizations and trade associations, and lobbying expenditures.
Human Capital Resources
Overview
The Company’s people are a critical part of its business, and the Company’s investment in its people begins with the recruitment of qualified and diverse talent and continues throughout employment. The Company’s employee value proposition, called weCARE, is a central part of the Company’s human capital resources mission and focuses on employee experience as an influencer of an employee’s opinions and emotional response about the Company as an employer.
Additionally, the Company believes that representing the communities in which it serves plays a key role in its ability to serve its customers and improves its talent. To support this proposition, the Company promotes an inclusive culture where its employees are given the opportunity to develop to their fullest potential and understand that they directly contribute to the Company’s ability to operate, grow, and serve its customers. The Company also believes that investing in the safety, health and well-being of its employees is a key component of its people and culture goals, and that these investments allow employees to generate great ideas, provide quality customer service and make a difference in the lives of the Company’s customers.
Employee MattersHealth and Safety
A longstanding value and strategy of the Company is safety. In this regard, the Company continues to focus on the safety of its employees and contractors so that they may return home from work in the same, or better, condition than when they arrived. The Company strives for all employees to feel emotionally safe, live a healthy lifestyle and be physically safe at work and at home. The Company assesses occupational health and safety to measure performance across the entire organization, with the ultimate goal of achieving zero incidents, injuries and fatalities for the Company’s employees and contractors.
To uphold the Company’s commitment to safety, the Company’s employees completed over 117,000 hours of employee safety training, including physical security and cybersecurity training, during 2022. Additionally, through frequent labor-management meetings, the Company encourages open exchanges to explore new ways to further enhance safety on the job. All employees are empowered to demonstrate safety leadership by taking the time they need to complete a task safely and to use “Stop Work Authority” — the power to stop working immediately whenever they believe a task is unsafe — to personally mitigate the hazard or issue or collaborate with management to create a safe situation. The Company believes that this Stop Work Authority is so important that it is stated on the back of every employee’s identification badge.
For 2022, the Company had its lowest ORIR injury rate in its recorded history, achieving an 18.8% reduction in injuries compared to 2021, taking into account a 7% decrease in labor hours due to the sales of HOS and the Company’s New York subsidiary. Also, the number of Days Away Restricted or Transferred (“DART”) injuries decreased by 36.1% compared to 2021. This decrease shows a significant improvement in those injuries that have a higher severity. For 2022, the Company’s ORIR was 0.85 (52 injuries) and its DART rate was 0.37 (23 injuries), compared to an ORIR of 0.97 (64 injuries) and a DART rate of 0.54 (36 injuries) in 2021.
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In 2022, American Water teams led by promoting safety leading indicator activities, including pre-job safety briefings and near miss reporting, and by achieving internal Certified Safe Worker designations. Near miss reports, where employees report potential hazards or incidents in a safe and secure manner, increased by 20% in 2022 over 2021, and 97% of near miss incident corrective actions were completed, with nearly 90% completed within 30 days. The Company utilizes near miss reporting and timely corrective actions as key measurements of employee engagement and safety performance.
The commitment to safety as a strategic imperative also includes building a culture of well-being where all employees can feel emotionally safe and live a healthy lifestyle. Through well-being education, the Company is able to encourage employees to take preventative actions and increase participation in annual well-care exams and cancer screenings, which increased by over 4% during 2022, compared to 2021.
Employee and Workplace Reintegration
As an essential business that provides water and wastewater services, during 2022, the Company continued to focus on the care and safety of its employees, contractors, vendors and others who work at or visit the Company’s worksites. The Company launched its employee and workplace reintegration plan to bring its employees safely back to the workplace and in its field operations in the wake of easing of COVID-19-related restrictions by federal, state and local governmental and health authorities. The Company instituted greater workplace flexibility, including hybrid work opportunities, where feasible. The Company supported these reintegration efforts by keeping employees’ safety, health and emotional well-being as a top priority and by continuing to follow guidance from the U.S. Centers for Disease Control and Prevention, as well as federal, state and local health authorities. The Company also continued to provide employees with temporary medical and emotional health benefits as needed during 2022. To keep employees informed on the changing conditions during reintegration and to support their emotional well-being, the Company held several all-employee podcasts featuring medical and emotional health speakers who discussed the status of the pandemic, provided updates on vaccine and booster activity, and led sessions focused on workforce and personal change management related to reintegration.
Inclusion, Diversity and Equity
During 2022, the Company continued to focus on creating a culture through its promotion of inclusion, diversity and equity. At all levels, the Company strives to understand, respect, value and provide equal opportunity to each employee, and to foster an environment where employees’ differences are embraced and celebrated. The Company holds as an essential concept the right of employees to proudly share their ideas and unique perspectives in an environment built on mutual respect, equity and inclusion. The Company is committed to diversity among its workforce, executive and senior management leadership teams, by reflecting the diversity of the communities in which the Company serves. The Company expects all leaders to lead with inclusion, diversity and equity.
In 2022, the Company included in its APP new workforce diversity performance goals designed to increase the representation of women and ethnic and racial diversity in the Company’s workplace. The goals measure the percentage of female and racial/ethnic diversity among the Company’s workforce based on voluntary self-identification. In addition, the Company continues to hold its leaders accountable for developing a diverse workforce by maintaining management level representation goals.
In addition, in 2022, the Company introduced its DiversityatAW.com website to provide transparency and communicate progress on the Company’s workforce diversity initiatives. This web site currently includes, among other information, the Company’s ID&E report, its EEO-1 data for 2021, key employee diversity metrics (which are updated quarterly), and a discussion of the Company’s pay equity study and internal labor market analysis.
During 2022, 83.1% of the Company’s hiring candidate pools were diverse. Additionally, for 2022, approximately 46.4% of the Company’s internal employee transfers and promotions were filled with a diverse individual, reflecting the Company’s commitment to employee development and career growth as well as the Company’s focus on diversity, inclusion and equity. For purposes of these metrics, diversity refers to gender, race, ethnicity, disability, veteran/military spouse status, and LGBTQ+ status, all based on voluntary, self-identified employee information.
The Company maintains active memberships with groups such as Hiring our Heroes, Military Spouse Employment Partnership, American Corporate Partners, CEO Action for Diversity and Inclusion, Disability: IN, Paradigm for Parity, and Out and Equal, to further enhance its ability to recruit and retain diverse employees. Among this year’s recognitions, the Company was designated as a 2022 Military Friendly® Silver Employer and recognized by Military Times for its industry-leading efforts on hiring and supporting U.S. military veterans.
The Company was also a top scorer in the 2022 Disability Equality Index for the fourth consecutive year and was recognized by U.S. Veterans Magazine as a veteran-friendly company and as an organization with a veteran-friendly supplier diversity program. The Company also received the 2022 DiversityInc Top Utility recognition for 2022.
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In keeping with the Company’s values, the Company does not tolerate discrimination, harassment or retaliation by or toward any employee, vendor, customer or other person in its workplace. All employees are required to complete anti-harassment, workplace respect and dignity, unconscious bias and inclusion and diversity training. In addition, annual Code of Ethics training is provided to all employees, which includes instructions on using the Company’s anonymous hotline for reporting potential Code of Ethics violations.
The Company’s four Employee Business Resource Groups (“EBRGs”), which represent diverse employee demographics (Women, African American/Black, LGBTQ+ and Disabilities/Caregivers), strive to create measurable and long-lasting positive impacts on employees’ careers, as well as the Company’s culture and communities in which it serves. EBRG members participate in community events throughout the year, which highlight the importance of supporting community partnerships. For example, employees participated in the annual Juneteenth Unity Walk that supported the National Alliance on Mental Illness, an organization that provides advocacy, education, and support for, and public awareness of, mental illness.
Total Rewards
American Water’s health and well-being programs are approached holistically by offering the following benefits, among others: medical, prescription, dental, vision, disability, a retirement savings plan, and life insurance coverage, as well as a health and wellness program and a menu of additional voluntary benefits. The Company’s Total Rewards programs are designed to reflect many aspects of employee health and well-being, cultivate an inclusive workforce, and motivate, attract and retain talent to seek to achieve the Company’s strategic business priorities.
As part of Total Rewards, the Company provides a comprehensive compensation and benefit program designed to recognize the vital roles the Company’s employees play. Further, all the Company’s employees, including those who are union-represented, participate in the APP, to promote alignment between performance-based compensation and the Company’s short-term performance goals. As part of its commitment to providing an inclusive and equitable culture for all employees, the Company regularly reviews pay equity to make sure pay decisions are based on the responsibilities, talents and skills of our employees, rather than, factors such as gender, race or ethnicity.
All employees who average 30 hours or more per week receive full-time benefits. Approximately 90% of all benefit eligible employees are enrolled in the Company’s healthcare benefits. Full-time employees pay approximately 16% of the total cost of medical, dental and vision coverage. Additional medical benefits include coverage for applied behavior analysis, autism treatment, transgender services and hearing aids, as well as a fertility assistance benefit. The Company also offers additional employment benefits, including holiday, vacation and sick time, which are at levels generally greater than or equal to those offered by other companies in the utility industry.
Every five years, the Company negotiates national health and welfare benefits with its union-represented employees. On November 30, 2022, a five-year extension of the Company’s national benefits agreement with its union-represented employees was reached and ratified, effective through July 2028. See —Workforce Data below for more information. The extension agreement includes, among other things, a revised benefit cost sharing allocation, six weeks of paid family leave, an increase in the target payout under the APP for covered employees, and coverage for infertility treatment beginning in plan year 2025.
Talent Development
The Company partners with business leaders to understand the key behaviors and competencies required to operate safely and effectively, and to foster professional growth with the goal to create and deploy programs designed to attract, motivate, develop and retain talented employees, and foster a learning culture. The Company also requires every employee, including its union-represented employees, to complete a minimum of 25 hours of training each year. Approximately 96.7% of activefull-time employees hired before October 1, 2022, met this requirement for 2022, with over 302,000 hours of total training completed during the year. In addition to required role-based training, managers assist employees to identify professional development opportunities, utilizing a framework of on-the-job learning, social learning, and formal learning, to help them reach their full potential and grow their careers.
Developing talent to provide a pathway to executive leadership is a critical priority for the Company. During 2022, the Company engaged in succession planning activities for the Company’s business-critical and business-impact positions. These succession plans aid in providing continued leadership for the growth and future of the Company’s business, while also seeking to promote diversity, retention and development. In addition to succession of executive and senior leadership roles, in 2022, the Company initiated talent reviews, which served to identify critical skills and competency areas as well as top and emerging talent with a focus on diversity, and supported a discussion of strengths, gaps and development plans. Talent reviews were conducted for a select group of employees, including employees who are being assessed for senior leadership or other critical roles.
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Employee Experience
The Company has established its weCARE employee value proposition that focuses on employee experience as an influencer of an employee’s opinions and emotional response about the Company as an employer. weCARE is composed of five elements: deeper connections; personal growth; shared purpose; flexibility; and well-being. weCARE represents the Company’s commitment to value its employees and build a safe, healthy and inclusive culture where every employee knows their value and is appreciated for their talents and commitment to supporting the Company’s success. The Company offers employees programs covering each of the five components of weCARE. The Company is committed to improving the employee experience by listening to employees through focus group discussions and employee surveys, among other tools. To that end, the Company captures employee feedback, which helps the Company understand how employees are feeling and permits appropriate refinement of the Company’s employee programs, benefits and support.
In early 2022, the Company introduced a new development role of Culture Champion. Each Culture Champion is responsible for partnering with their local leadership and managing and communicating local activities and actions that seek to advance the Company’s culture.
Workforce Data
As of December 31, 2017,2022, the Company had approximately 46%6,500 employees. For 2022, the Company’s employee turnover rate, which the Company defines as the ratio of ourthe number of separated employees to the 12-month average headcount during 2022, was 12.3%, down from 13.1% in 2021. American Water seeks to reduce regrettable employee turnover by assessing the effectiveness of weCARE and through its efforts to foster the Company’s employee experience.
As of December 31, 2022, approximately 47% of the Company’s workforce was represented by unions, which include 7675 collective bargaining agreements with 1914 different unions. Additionally, as of December 31, 2017 we had one collective bargaining agreement beyond expiration, affecting approximately 180 employees, all of which are actively working underIn 2022, the terms of the existing agreement, and another collective bargaining agreement in the process of being implemented, affecting approximately 20 employees. During 2018, 20 of ourCompany entered into three new collective bargaining agreements that cover approximately 215 employees, and our national benefits agreement with mostrenegotiated all 21 collective bargaining agreements that were set to expire during the year. During 2023, 18 of the labor unions representing employees in our Regulated Businesses,Company’s collective bargaining agreements will be expiringexpire in accordance with their terms.terms and the Company expects to be able to negotiate these agreements during the year. In addition, on November 30, 2022, a five-year extension of the Company’s national benefits agreement was ratified through July 31, 2028. This agreement covers approximately 3,000 of the Company’s union-represented employees and their families and provides them with healthcare and other benefits. The Company also collaborates with union leadership on topics such as safety, customer, technology and employee benefits in forums such as the Joint Healthcare Committee, National Labor Management Committee and the annual Labor Management Conference.
The Executive Development and Compensation Committee (ED&CC) of the Board of Directors establishes and reviews the Company’s overall compensation philosophy and oversees the compensation and benefits plans and programs for its executive officers. The ED&CC oversees the process of planning for executive officer succession. It also provides oversight of the Company’s inclusion, diversity and equity programs and initiatives. Further, the ED&CC is responsible for reviewing and assessing, at least annually, the Company’s culture and related culture engagement, its organizational and leadership development plans and programs, and its programs designed to identify, attract and retain high-potential employees.
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Information About Our Executive Officers
15, 2023:
| Name | Age | Office and Experience | ||||||||||||
| M. Susan | President and Chief Executive Officer. Ms. | |||||||||||||
| John C. Griffith | 56 | Executive Vice President and Chief Financial Officer. Mr. Griffith joined the Company on May 16, 2022 as its Executive Vice President and Chief Financial Officer. Prior to joining the Company, since 2014, Mr. Griffith served as Managing Director, Mergers and Acquisitions, for | ||||||||||||
Executive Vice President, | ||||||||||||||
Executive Vice President and Chief Operating Officer. | ||||||||||||||
Each executive officer is elected annually by the Board of Directors and serves until his or hertheir respective successor has been elected and qualified or his or hertheir earlier death, resignation or removal.
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Available Information
The Company maintains a website at https://amwater.com. Information contained on ourthe Company’s website, including its Sustainability Report, its Inclusion, Diversity & Equity Annual Report, and other reports or documents, including the information and data on the Company’s diversity website https://Diversityataw.com, shall not be deemed incorporated into, or to be a part of, this report, and any website references included herein are not intended to be made through active hyperlinks. We recognize ourThe Company recognizes its website as a key channel of distribution to reach public investors and as a means of disclosing material non-public information to comply with our disclosure obligations under SEC Regulation FD.
The American Water corporate governance guidelines and the charters for each of the standing committees of the Board of Directors, together with the American Water Code of Ethics and additional information regarding ourthe Company’s corporate governance, are available on ourits Investor Relations website, http:https://ir.amwater.com, and will be made available, without charge, in print to any stockholdershareholder who requests such documents from ourits Investor Relations Department, American Water Works Company, Inc., 1025 Laurel Oak Road, Voorhees,1 Water Street, Camden, NJ, 08043.08102.
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ITEM 1A. RISK FACTORS
We operate in a market and regulatory environment that involves significant risks, many of which are beyond our control. In addition to the other information included or incorporated by reference in this Annual Report on Form 10-K, the following material factors should be considered in evaluating our business and future prospects. Any of the following risks, either alone or taken together, could materially and adversely affect our business, financial position, results of operations, cash flows and liquidity.
Risks Related to Our Industry and Business Operations
Our utility operationsRegulated Businesses are subject to extensive economic regulation by state PUCs and other regulatory agencies, which significantly affects our business, financial condition, results of operations and cash flows. Our utility operationsRegulated Businesses also may be subject to fines, penalties and other sanctions for thean inability to meet these regulatory requirements.
Our Regulated Businesses provide water and wastewater services to our customers through subsidiaries that are subject to economic regulation by state PUCs. EconomicThis regulation affects the rates we charge our customers and has a significant impact on our business and results of operations. Generally, the state PUCs authorize us to charge rates that they determine are sufficient to recover our prudently incurred operating expenses, including, but not limited to, operating and maintenance costs, depreciation, financing costs and taxes, and provide us with the opportunity to earn an appropriate rate of return on invested capital.
Our ability to successfully implement our business plan and strategy depends on the rates authorized by the various state PUCs. We periodically file rate increase applications with state PUCs. The ensuing administrative process may be lengthy and costly. Our rate increase requests may or may not be approved, or may be partially approved, and any approval may not occur in a timely manner. Moreover, a PUC may not approve a rate request toin an extentamount that is sufficient to:
•cover our expenses, includingcost of operations, including: purchased waterwater; chemicals; and costs of chemicals, fuel, power and other commodities used in our operations;
•cover our operational labor and labor-related expenses, including without limitation costs and expenses associated with our pension and other post-employment benefits;
•enable us to recover our investment; and
•provide us with an opportunity to earn an appropriate rate of return on our investment.
Approval ofby the PUCs is also required in connection with other aspects of our utilities’ operations.Regulated Businesses, which are required to have numerous permits, approvals and certificates from the PUCs that regulate their businesses and authorize acquisitions, dispositions, debt and/or equity financing, and, in certain cases, affiliated transactions. Some state PUCs are empowered to impose financial penalties, fines and other sanctions for non-compliance with applicable rules and regulations. Our utilities are also required to have numerous permits, approvals and certificates from the PUCs that regulate their businesses and authorize acquisitions. Although we believe that each utility subsidiary has obtained or sought renewal of the material permits, approvals and certificates necessary for its existing operations, we are unable to predict the impact that future regulatory activities may have on our business.
In any of these cases, our business, financial condition, results of operations, cash flows and liquidity may be adversely affected. Even if the rates approved are sufficient, we face the risk that we will not achieve the rates of return on our invested capital to the extent permitted by state PUCs. This could occur if certain conditions exist, including, but not limited to, if(i) water usage is less than the level anticipated in establishing rates, (ii) customers increase their conservation efforts, (iii) we experience unusual or ifemergent situations, events or conditions (including with respect to the COVID-19 pandemic), or (iv) our investments or expenses prove to be higher than the levellevels estimated in establishing rates.
It may be difficult to predict the outcome or impact of these events on us or the actions that may be taken by the PUCs or other governmental authorities in response thereto.
Our operations and the quality of water we supply are subject to extensive and increasingly stringent environmental, water quality and health and safety laws and regulations, including with respect to contaminants of emerging contaminants,concern, compliance with which could impact both our operating costs and capital expenditures, and violations of which could subject us to substantial liabilities and costs, as well as damage to our reputation.
Our water and wastewater operations and the operations of our Market-Based Businesses are subject to extensive federal, state and local laws and regulations and, in the case of our Canadian operations, Canadian laws and regulations that govern the protection of the environment, health and safety, the quality of the water we deliver to our customers, water allocation rights, and the manner in which we collect, treat, discharge and dispose of wastewater.regulations. These requirements include, among others, CERCLA, the Clean Water Act, and the Safe Drinking Water Act, the LCRR and similarother federal and state and Canadian laws and regulations.requirements. For example, CERCLA authorizes the EPA to issue orders and bring enforcement actions to compel responsible parties to investigate and take remedial actions with respect to actual or threatened releases of hazardous substances, and can impose joint and several liability, without regard to fault, on responsible parties for the costs thereof. We are also required to obtain various environmental permits from regulatory agencies for our operations.
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significant risk to us than to a company not similarly involved in the water and wastewater industry.
In addition, CERCLA authorizes the EPA to issue orders and bring enforcement actions to compel responsible parties to investigate and take remedial actions with respect to actual or threatened releases of hazardous substances, and can impose joint and several liability, without regard to fault, on responsible parties for the costs thereof. We are also required to obtain various environmental permits from regulatory agencies for our operations.
We incur substantial operating and capital costs on an ongoing basis to comply with environmental, water quality and health and safety laws and regulations. These laws and regulations and their enforcement, generally have become more stringent over time, and new or stricter requirements could increase our costs. Although we may seek to recover ongoing compliance costs in our Regulated Businesses through customer rates, there can be no guarantee that the various state PUCs or similar regulatory bodies that govern our Regulated Businesses would approve rate increases that would enable us to recover such costs or that such costs will not materially and adversely affect our financial condition, results of operations, cash flows and liquidity.
We may also incur liabilities if, under environmental laws and regulations, we are required to investigate and clean up environmental contamination, at our properties, including potential spillsreleases of hazardous chemicals, such as chlorine, which we use to treat water, or at off-site locations where we have disposed of residual waste or caused an adverse environmental impact. The discovery of previously unknown conditions, or the imposition of cleanup obligations in the future, could result in significant costs and could adversely affect our financial condition, results of operations, cash flows and liquidity. Such remediation costs may not be covered by insurance and may make it difficult for us to secure insurance at acceptable rates in the future.
Attention is being given to contaminants of emerging contaminants,concern, including, without limitation, chemicals and other substances that currently do not have any regulatory standard in drinking water or have been recently created or discovered (including by means of scientific achievements in the analysis and detection of trace amounts of substances). Examples of sources of emerging contaminants include, but are not limited to, newly created chemical compounds (including, for example, perfluorinated compounds and manufactured nanomaterials); human and veterinary products; perfluorinated and polyfluorinated compounds; bacteria, microbes, viruses (including COVID-19), amoebae and other pathogens; and residual by-products of disinfection. We rely upon governmental agencies to set appropriate regulatory standards to protect the public from these and other contaminants. Ourcontaminants, and our role is to meet or surpass thoseprovide service that meets these standards, when established.if any. In some of our states, PUCs may disapprove of cost recovery, in whole or in part, for implementation of treatment infrastructure for an emerginga contaminant in the absence of a regulatory standard. Furthermore, given the rapid pace at which emergingthese contaminants are being created and/or discovered, we may not be able to detect and/or mitigate all such substances in our drinking water system or supplies, which could have a material adverse impact on our financial condition, results of operations and reputation. In addition, we believe emergingthese contaminants may form the basis for additional or increased federal or state regulatory initiatives and requirements in the future, which could significantly increase the cost of our operations.
Limitations on availability of water supplies or restrictions on our use of water supplies as a resultbecause of government regulation or action may adversely affect our access to sources of water, our ability to supply water to customers or the demand for our water services.
Our ability to meet the existing and future demand of our customers depends on the availability of an adequate supply of water. As a general rule, sources of public water supply, including rivers, lakes, streams, and groundwater aquifers and recycled water sources, are held in the public trust and are not generally owned by private interests. As a result, we typically do not own the source water that we use in our operations, and the availability of our water supply is established through allocation rights (determined by legislation or court decisions) and passing-flow requirements set by governmental entities. Passing-flow requirements set minimum volumes ofentities or by entering into water that must pass through specified water sources, such as rivers and streams, in order to maintain environmental habitats and meet water allocation rights of downstream users. Allocation rights are imposed to ensure sustainability of major water sources and passing-flow requirements are most often imposed on source waters from smaller rivers, lakes and streams.purchase agreements. These requirements, which can change from time to time, and vary by state or region, may adversely impact our water supply. Supply issues, such as drought, overuse of sources of water, the protection of threatened species or habitats, contamination or other factors may limit the availability of ground and surface water. If we are unable to secure available or alternative sources of water, our business, financial condition, results of operations and cash flows could be adversely affected.
For example, in our Monterey County, California operations, we are seeking to augment our sources of water supply, principally to comply with an October 20, 2009the cease and desist orderorders issued by the SWRCB in July 1995 and October 2009 (the “1995 Order,” the “2009 Order”), and, as amended by an order in July 2016, (thethe “2016 Order”), of and, collectively, the SWRCB“Orders”) that requiresrequire Cal Am to significantly decrease its diversions from the Carmel River in accordance with a reduction schedule that terminatesterminated on December 31, 2021 (the “2021 Deadline”).2021. See Item 3—Legal Proceedings—Alternative Water Supply in Lieu of Carmel River Diversions, which includes additional information regarding this matter. We are also required to augment our Monterey County sources of water supply to comply with the requirements of the Endangered Species Act. We cannot predict whetherFor 2022, Cal Am willcomplied with the diversion limitations contained in the 2016 Order, but continued compliance with these limitations in 2023 and future years may be able to secure alternative sourcesimpacted by a number of factors, including without limitation continued drought conditions in California and the exhaustion of water supply reserves, and will require successful development of alternate water supply sources sufficient to meet customer demand. While the Company cannot currently predict the likelihood or ifresult of any adverse outcome associated with these matters, further attempts to comply with the Orders may result in material
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additional costs or obligations, including fines and penalties against Cal Am will be exposed to liabilities if it is unable to meetin the 2021 Deadline underevent of noncompliance with the 2009 OrderOrders, which could have a material adverse effect upon us and the 2016 Order. If Cal Am or any of our other subsidiaries are unable to secure an alternative source of water, or if other adverse consequences result from the events described above, our business, financial condition, results of operations and cash flows could be adversely affected. See Item 3—Legal Proceedings—Alternative Water Supply in Lieu of Carmel River Diversions, which includes additional information regarding this matter.
Service disruptions caused by severe weather conditions, climate variability patterns or natural or other disasters may disrupt our operations or reduce the demand for our water services, which could adversely affect our financial condition, results of operations, cash flows and liquidity.
Service interruptions due to severe weather, climate variability patterns and natural or other natural events are possible across all our businesses. These include, among other things, storms, freezing conditions, high wind conditions, hurricanes, tornadoes, earthquakes, landslides, drought, wildfires, coastal and intercoastal floods or high water conditions, including those in or near designated flood plains, pandemics (including COVID-19) and epidemics, severe electrical storms, sinkholes and solar flares. Weather and other natural events such as these may affect the condition or operability of our facilities, limiting or preventing us from delivering water or wastewater services to our customers, or requiring us to make substantial capital expenditures to repair any damage. Tariffs in place or cost recovery proceedings with respect to our Regulated Businesses may not provide reimbursement to us, in whole or in part, for any of these impacts.
Government restrictions on water use may also result in decreased use of water services, even if our water supplies are sufficient to serve our customers, which may adversely affect our financial condition, results of operations and cash flows. Seasonal and other drought conditions, including, for example, those currently being experienced in California, that may impact our water services are possible across all of our service areas. Governmental restrictions imposed in response to a drought may apply to all systems within a region independent of the supply adequacy of any individual system. As examples, drought conditions had persisted in California over a five-year period, and had been declared in New Jersey in 2016. In 2017, these droughts were declared concluded, but other droughts thatResponses may occurrange from timevoluntary to time may result in the imposition of voluntary or mandatory water use targets,restrictions, rationing restrictions, water conservation regulations, and requirements to minimize water system leaks. While expenses incurred in implementing water conservation and rationing plans may generally be recoverable provided the relevant PUC determines they were reasonable and prudent, we cannot assurebe certain that any such expenses incurred will, in fact, be fully recovered. Moreover, reductions in water consumption, including those resulting from installation of equipment or changed consumer behavior, may persist even after a drought has ended and restrictions are repealed and the drought has ended,lifted, which could adversely affect our business, financial condition, results of operations and cash flows.
Climate variability may cause increased volatility in weather and may impact water usage and related revenue or require additional expenditures, all of which may not be fully recoverable in rates or otherwise.
The issue of climate variability is receiving increasing attention nationally and worldwide. Some scientific experts are predicting aThere is consensus among climate scientists that there will be worsening of weather volatility in the future associated with climate variability. Many climate variability predictions if true, present several potential challenges to water and wastewater utilities, including us, such as:
•increased frequency and duration of droughts;
•increased precipitation and flooding;
•increased frequency and severity of storms and other weather events;
•challenges associated with changes in temperature or increases in ocean levels;
•potential degradation of water quality;
•decreases in available water supply and changes in water usage patterns;
•increases in disruptions in service;
•increased costs to repair damaged facilities; or
•increased costs to reduce risks associated with the increasing frequency and severity of natural events, including to improve the resiliency and reliability of our water production and deliverywastewater treatment and conveyance facilities and systems.
Because of the uncertainty of weather volatility related to climate variability, we cannot predict its potential impact on our business, financial condition, results of operations, cash flows and liquidity. Furthermore, laws and regulations have been enacted or proposed that seek to reduce or limit greenhouse gas emissions and require or would require additional reporting and monitoring, and these regulations may become more pervasive or stringent in light of changing governmental agendas and priorities, although the exact nature and timing of these changes is uncertain. Although some or all potential expenditures and costs associated with respect tothe impact of climate variability and related laws and regulations on our Regulated Businesses could be recovered through rates, infrastructure replacement surcharges or other regulatory mechanisms, there can be no assurance that state PUCs would authorize rate increases to enable us to recover such expenditures and costs, in whole or in part.
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The current regulatory rate setting process may result in a significant delay, also known as “regulatory lag,” from the time that we invest in infrastructure improvements, incur increased operating expenses as a result of inflation or other factors, incur increased cost of capital, including as a result of increasing short- and long-term rates, or experience declining water usage, to the time at which we can seek to address these events in rate case applications; our inability to mitigate or minimize regulatory lag could adversely affect our business.
There is typically a delay, known as “regulatory lag,” between the time our Regulated Businesses make a capital investment or incur an operating expense increase and the time when those costs are reflected in rates. In addition, billings permitted by state PUCs typically are, to a considerable extent, based on the volume of water usage in addition to a minimum base rate. Thus, we may experience regulatory lag between the time our revenues are affected by declining usage and the time we are able to adjust the rate per gallon of usage to address declining usage. Our inability to mitigate or reduce regulatory lag could have an adverse effect on our financial condition, results of operations, cash flows and liquidity.
We endeavor to mitigate or reduce regulatory lag by pursuing constructive regulatory practices. For example, two of our states have approved revenue stability mechanisms that adjust rates periodically to ensure that a utility’s revenue will be sufficient to cover its costs regardless of sales volume, including recognition of declining sales resulting from reduced consumption, while providing an incentive for customers to use water more efficiently. In addition, 10 of our state PUCs permit rates to be adjusted outside of the general rate case application process through surcharges that address certain capital investments, such as replacement of aging infrastructure. These surcharges are adjusted periodically based on factors such as project completion or future budgeted expenditures, and specific surcharges are eliminated once the related capital investment is incorporated in new PUC approved rates. Furthermore, in setting rates, nine of our state PUCs allow us to use future test years, which extend beyond the date a rate request is filed to allow for current or projected revenues, expenses and investments to be reflected in rates on a more timely basis. Other examples of such regulatory practices include expense mechanisms that allow us to increase rates for certain cost increases that are beyond our control, such as purchased water costs, property or other taxes, or power, conservation, chemical or other expenditures. These mechanisms enable us to adjust rates in less time after costs have been incurred than would be the case under a general rate case application process without the mechanisms.
While these mechanisms have mitigated or reduced regulatory lag in several of our regulated states, we continue to seek approval of regulatory practices to mitigate or reduce regulatory lag in those jurisdictions that have not approved them. Furthermore, PUCs may fail to adopt new surcharges and existing mechanisms may not continue in their current form, or at all, or we may be unable or become ineligible to continue to utilize certain of these mechanisms in the future. Although we intend to continue our efforts to seek state PUC approval of constructive regulatory practices to mitigate or reduce regulatory lag, our efforts may not be successful, or even if partially successful, our business, financial condition, results of operations, cash flows and liquidity may be materially and adversely affected.
Changes in laws and regulations can significantly and materially affect our business, financial condition, results of operations, cash flows and liquidity.
The impact of any future revisions or changes in interpretations of existing regulations or the adoption of new laws and regulations applicable to our Regulated Businesses is uncertain. Changes in laws or regulations, the imposition of additional laws and regulations, changes in enforcement practices of regulators, government policies or court decisions can materially affect our operations, results of operations and cash flows. Certain of the individuals who serve as regulators are elected or political appointees. Therefore, elections which result in a change of political administration or new appointments may also result in changes of the individuals who serve as regulators and changes in the policies of the regulatory agencies that they serve. New laws or regulations, new interpretations of existing laws or regulations, changes in agency policy, including those made in response to shifts in public opinion, or conditions imposed during the regulatory hearing process could have the following consequences, among others:
•making it more difficult for us to increase our rates and, as a consequence, to recover our costs or earn our expected rates of return;
•changing the determination of the costs, or the amount of costs, that would be considered recoverable in rate cases and other regulatory proceedings;
•restricting our ability to terminate our services to customers who owe us money for services previously provided or limiting our bill collection efforts;
•requiring us to provide water or wastewater services at reduced rates to certain customers;
•limiting or restricting our ability to acquire water or wastewater systems, purchase or dispose of assets, or issue long-term debt or equity, or making it less cost-effective for us to do so;
•negatively impacting, among other things: (i) tax rates or positions or the deductibility of expenses under federal or state tax laws, (ii) the availability or amount of, or our ability to comply with the terms and conditions of, tax credits or tax
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abatement benefit, (iii) the amount of taxes owed, (iv) the timing of tax effects on rates or (v) the ability to utilize our net operating loss carryforwards;
•changing regulations that affect the benefits we expected to receive when we began offering services in a particular area;
•increasing the associated costs of, or difficulty complying with, environmental, health, safety, consumer privacy, water quality, and water quality accountability laws and regulations to which our operations are subject;
•changing or placing additional limitations on change in control requirements relating to any concentration of ownership of our common stock;
•making it easier for governmental entities to convert our assets to public ownership via condemnation, eminent domain or other similar process, or for governmental agencies or private plaintiffs to assess liability against us for damages under these or similar processes;
•increasing the costs or difficulty of complying with proposed changes to federal contractor affirmative action audits;
•placing limitations, prohibitions or other requirements with respect to the sharing of information and participation in transactions by or between a regulated subsidiary and us or our other affiliates, including Service Company and any of our other subsidiaries;
•restricting or prohibiting our extraction of water from rivers, streams, reservoirs or aquifers; and
•revoking or altering the terms of a CPCN issued to us by a state PUC or other governmental authority.
Regulatory and environmental risks associated with the collection, treatment and disposal of wastewater may impose significant costs and liabilities.
The wastewater collection, treatment and disposal operations of our subsidiaries are subject to substantial regulation and involve environmental risks. If collection, treatment or disposal systems fail, overflow, or do not operate properly, untreated or inadequately treated wastewater or other contaminants could spill onto nearby properties or into nearby streams and rivers, causing damage to persons or property, injury to aquatic life and economic damages. This risk is most acute during periods of substantial rainfall or flooding, which are the main causes of sewer overflow and system failure. Liabilities resulting from such damage could adversely and materially affect our business, financial condition, results of operations and cash flows. Certain of our wastewater systems have commercial and industrial customers that are subject to specific limitations on the type, character and strength of the wastewater they are permitted to discharge into our systems. The failure by these commercial and industrial customers to comply with their respective discharge requirements could, in turn, negatively impact our operations, damage our facilities or cause us to exceed applicable discharge limitations and requirements. Liabilities resulting from such exceedance events could adversely and materially affect our business, financial condition, results of operations and cash flows.
A loss of one or more large industrial or commercial customers could have a material adverse impact upon the results of operations of one or more of our Regulated Businesses.
Adverse economic conditions or other factors canmay cause our customers, particularly industrial and large commercial customers, to curtail operations. A curtailment of operations by an industrialsuch a customer would typically resultresults in reduced water usage by that customer. In more severe circumstances, the decline in usage could be permanent. Any decrease in demand resulting from difficult economic conditions affecting these industrial customers could adversely affect our financial condition and results of operations. Tariffs in place with respect to our Regulated Businesses may not reimburse us, in whole or in part, for any of these impacts.
Our Regulated Businesses require significant capital expenditures and may suffer if we fail to secure appropriate funding to make investments, experience increases in short- and long-term interest rates or if we experience delays in completing major capital expenditure projects.
The water and wastewater utility business is capital intensive. We invest significant amounts of capital to add, replace and maintain property, plant and equipment, and to improve aging infrastructure. In 2017,2022, we invested $1.4$2.3 billion in net Company-funded capital improvements. The level of capital expenditures necessary to maintain the integrity of our systems will likely increase incontinue into the future.future and, we believe, will increase. We expect to fund capital improvement projects using cash generated from operations (including, among other things, a portion of the net proceeds from the sale of HOS) borrowings under our revolving credit facility and commercial paper programs and issuances of long-term debt.debt and equity. We may not be able to access our revolving credit facility or the commercial paper, long-term debt and equity capital markets, when necessary or desirable to fund capital improvements on favorable terms or at all. If we are not able to obtain sufficient financing, we couldmay be unable to maintain our existing property, plant and equipment, fund our capital investment strategies meet our growth targets andor expand our rate base to enable us to earn satisfactory future returns onmeet our investments.growth targets. Even with adequate financial resources to make required capital expenditures, we face the additional risk that we will not complete our major capital projects on time, as a result of supply chain interruptions, construction delays, permitting delays, labor shortages or other disruptions, environmental restrictions, legal and regulatory challenges, or other obstacles. Each of these outcomes could adversely affect our business, financial condition, results of operations and cash flows.
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Aging infrastructure may lead to service disruptions, property damage and increased capital expenditures and O&M expenses and other costs, all of which could negatively impact our financial results.
We have risks associated with aging infrastructure, including water and sewer mains, pumping stations and water and wastewater treatment facilities. Additionally, we may have limited information regarding buried and newly acquired assets, which could challenge our ability to conduct efficient asset management and maintenance practices. Assets that have aged beyond their expected useful lives may experience a higher rate of failure. Failure of aging infrastructure could result in increased capital expenditures and O&M expenses and other costs, and negatively impact our future O&M efficiency ratio. In addition, failure of aging infrastructure may result in property damage, and in safety, environmental and public health impacts. To the extent that any increased costs or expenditures are not fully recovered in rates, our results of operations, liquidity and cash flows could be negatively impacted.
Seasonality could adversely affect the volume of water sold and our revenues.
The volume of water we sell during the warmer months, typically in the summer, is generally greater than during other months, due primarily to increased water usage for irrigation systems, swimming pools, cooling systems and other applications. Throughout the year, and particularly during typically warmer months, the volume of water sold tends to vary with temperature, rainfall levels and rainfall frequency. In the event that temperatures during the typically warmer months are cooler than normal, or if there is more rainfall than normal, the amount of water we sell may decrease and adversely affect our revenues.
Contamination of water supplies or our water service provided to our customers could result in service limitations and interruptions and exposure to substances not typically found in potable water supplies, and could subject us and our subsidiaries to reductions in usage and other responsive obligations, government enforcement actions, damage to our reputation and private litigation.
The water supplies that flow into our treatment plants or are delivered through our distribution system, or the water service that is provided to our customers, may be subject to contamination, including, among other items, contamination from naturally-occurring compounds, chemicals in groundwater systems, pollution resulting from man-mademanufactured sources (such as perchlorate, perfluorinated and polyfluorinated compounds, methyl tertiary butyl ether, 1,4-dioxane, lead and other materials, or chemical spills or other accidentsincidents that result in contaminants entering the water source), and possible terrorist attacks.attacks or other similar incidents. In addition, new categories of these substancescontaminants continue to emerge in the water treatment industry. If one of our water supplies or the water service provided to our customers is contaminated, depending on the nature of the contamination, we may have to take responsive actions that could include, among other things (1) continuing limitedlimiting use of the water supply under a “Do Not Use” protective order that enables continuation of basic sanitation and essential fire protection, or (2) interrupting the use of that water supply.supply, in whole or in part, potentially impacting basic sanitation and fire protection needs. If service is disrupted, our financial condition, results of operations, cash flows, liquidity and reputation may be adversely affected. In addition, we may incur significant costs in order to treat the contaminated source through the expansion of our current treatment facilities or the development of new sources of supply or new treatment methods. We may be unable to recover costs associated with treating or decontaminating water supplies through insurance, customer rates, tariffs or contract terms. Anyterms, and any recovery of these costs that we are able to obtain through regulatory proceedings or otherwise may not occur in a timely manner. Moreover, we could be subject to claims for damages arising from government enforcement actions or toxic tort or other lawsuits arising out of an interruption of service or human exposure to hazardous substances in our drinking water and water supplies.
Since we engageare engaged in the business of providing water service to our customers, contamination of the water supply, or the water service provided to our customers, could result in substantial injury or damage to our customers, employees or others and we could be exposed to substantial claims and litigation. Such claims could relate to, among other things, personal injury, loss of life, business interruption, property damage, pollution, and environmental damage and may be brought by our customers or third parties. Litigation and regulatory proceedings are subject to inherent uncertainties and unfavorable rulings can and do occur, and weoccur. We may not be protected from these claims or negative impacts therefromof these claims in whole or in part by tariffs or other contract terms. Negative impacts to our reputation may occur even if we are not liable for any contamination or other environmental damage or the consequences arising out of human exposure to contamination or hazardous substances inwithin the water supply or water supplies.distributed finished drinking water. In addition, insurance coverage may not cover all or a portion of these losses, and are subject to deductibles and other limitations. Pending or future claims against us could have a material adverse impact on our business, financial condition, results of operations and cash flows.
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We are subject to adverse publicity and reputational risks, which make us vulnerable to negative customer perception and could lead to increased regulatory oversight or other sanctions.
The failure of, or the requirement to repair, upgrade or dismantle, any of our dams may adversely affect our financial condition, results of operations, cash flows and liquidity.
The properties of our Regulated Businesses segment include 8073 dams, athe majority of which are earthen dams. The failure of any of whichthese dams could result in personal injury and property damage, including without limitation downstream property damage, for which we may be liable. The failure of a dam would also adversely affect our ability to supply water in sufficient quantities to our customers and could adversely affect our financial condition and results of operations. Any losses or liabilities incurred due to a failure of one of our dams might not be covered by insurance policies or be recoverable in rates, and such losses may make it difficult for us to secure insurance at acceptable rates in the future.
We also are required from time to time to decommission, repair or upgrade the dams that we own. The cost of such repairs or upgrades can be and has been material. The federal and state agencies that regulate our operations may adopt rules and regulations requiring us to dismantle our dams, which also could entail material costs. Although in most cases the PUC has permitted recovery of expenses and capital investment related to dam rehabilitation, we might not be able to recover costs of repairs, upgrades or dismantling through rates in the future. The inability to recover these costs or delayed recovery of the costs as a result of regulatory lag can affect our financial condition, results of operations, cash flows and liquidity.
Any failure of our network of water and wastewater pipes, water mains and water reservoirs could result in losses and damages that may affect our financial condition and reputation.
Our operating subsidiaries distribute water and collect wastewater through an extensive network of pipes, water mains and storage systems located across the United States. A failure of major pipes, mains or reservoirs could result in injuries, property and propertyother damage for which we may be liable. The failure of major pipes, mains and reservoirs may also result in the need to shut down some facilities or parts of our network in order to conduct repairs. Such failures and shutdowns may limit our ability to supply water in sufficient quantities to our customers and to meet the water and wastewater delivery requirements prescribed by government regulators, including state PUCs with jurisdiction over our operations, and adversely affect our financial condition, results of operations, cash flows, liquidity and reputation. Any business interruption or other losses might not be covered by insurance policies or be recoverable in rates, and such losses may make it difficult for us to secure insurance at acceptable rates in the future. Moreover, to the extent such business interruptions or other losses are not covered by insurance, they may not be recovered through rate adjustments.
An important part of our growth strategy is the acquisition of water and wastewater systems, which involves risks, including competition for acquisition opportunities from other regulated utilities, governmental entities and other buyers, thatwhich may hinder or limit our ability to grow our business.
An important element of our growth strategy is the acquisition and optimization of water and wastewater systems in order to broaden our current, and move into new, service areas. We may not be able to acquire other systems or businesses if we cannot identify suitable acquisition opportunities or reach mutually agreeable terms with acquisition candidates. candidates, and whether or not any particular acquisition is successfully completed, these activities are expensive and time consuming and are subject to the availability of capital and personnel resources to complete such acquisitions.
Further, competition for acquisition opportunities from other regulated utilities, governmental entities and other strategic and financial buyers may hinder our ability to expand our business. As consolidation activity increases in the water and wastewater industries and competition for acquisitions continues to increase, the prices for suitable acquisition candidates may increase and limit our ability to expand through acquisitions.
The negotiation and execution of potential acquisitions as well as the integration of acquired systems or businesses with our existing operations could require us to incur significant costs, and cause diversion of our management’s time and resources.resources and have a material adverse impact on our results of operations. Future acquisitions by us could result in, among other things:
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•unanticipated capital expenditures;
•unanticipated acquisition-related expenses;
•incurrence or assumption of debt, contingent liabilities and environmental liabilities of or with respect to an acquired business,and obligations, including liabilities that were unknown or undisclosed at the time of acquisition;
•failure to recover acquisition premiums;adjustments or premiums due to unfavorable decisions by PUCs and other governmental authorities;
•failure to maintain effective internal control over financial reporting;
•recording goodwill and other intangible assets at values that ultimately may be subject to impairment charges;
•fluctuations in quarterly and/or annual results;
•failure to realize anticipated benefits and synergies, such as cost savings and revenue enhancements; and
•difficulties in integrating or assimilating acquired systems’ operations, personnel, benefits, services and systems.systems and water quality, cybersecurity and infrastructure protection measures.
Some or all of these items could have a material adverse effect on our business. The systems and businesses we acquire in the future may not achieve anticipated sales andrevenue, return on equity or profitability, or other perceived synergies, and any difficulties we encounter in the integration process could interfere with our operations, reduce our operating marginsnet income and profitability or adversely affect our internal control over financial reporting.
Our Regulated Businesses are subject to condemnation and other proceedings through eminent domain or other similar authorized process, which could materially and adversely affect their results of operations and financial condition.
Municipalities and other government subdivisions have historically been involved in the provision of water and wastewater services in the United States, and organized efforts may arise from time to time in one or more of the service areas in which our Regulated Businesses operate to convert our assets to public ownership and operation through exercise of the governmental power of eminent domain, or another similar authorized process. Should aA municipality, or other government subdivision or a citizen group may seek to acquire our assets through eminent domain or such other process, either directly or indirectly as a result of a citizen petition, we may resistpetition.
For example, in November 2018, Monterey, California ballot Measure J, which was added by a citizens group, was certified as having been approved by a public vote, requiring the acquisition.MPWMD to conduct a study and submit a written plan concerning the feasibility of a potential purchase of the Monterey system assets without an additional public vote. The public vote led to the issuance by the MPWMD of (i) a preliminary report finding, among other things, that the acquisition of the Monterey system assets by the MPWMD would be economically feasible, and (ii) a final environmental impact report analyzing the environmental impacts of such an acquisition through the power of eminent domain. See Item 1—Business—Regulated Businesses—Condemnation and Eminent Domain and Item 3—Legal Proceedings—Proposed Acquisition of Monterey System Assets — Local Area Formation Commission Litigation, which includes additional information regarding these matters.
Furthermore, the law in certain jurisdictions in which our Regulated Businesses operate including, for example, California, provideprovides for eminent domain rights allowing private property owners to file a lawsuit to seek just compensation against a public utility, if the public utility’s infrastructure has been determined to be a substantial cause of damage to that property. In these actions, the plaintiff would not have to prove that the public utility acted negligently. These actionsIn California, lawsuits have occurredbeen filed in connection with large-scale natural events such as floods, mudslides and debris flow, broken water mains, landslides and wild and brush fires.wildfires. Some of these lawsuits have included allegations that infrastructure of certain utilities triggered the natural event that resulted in damage to the property. In some cases, the PUC has disallowed recovery in rates of losses incurred by these utilities as a result of such lawsuits.
Contesting an exercise of condemnation, eminent domain or other similar process, or responding to a citizen petition, may result in costly legal proceedings and may divert the attention of management of affected Regulated Businesses from the operation of those businesses.management. Moreover, our efforts to resist the condemnation, eminent domain or other process may not be successful, which may require us to sell the operations at issue in a condemnation proceeding or to pay a private property owner compensation for the property damage suffered. If a municipality or other government subdivision succeeds in acquiring the assets of one or more of our Regulated Businesses through eminent domain or other process, there is a risk that we will not receive adequate compensation for the business, that we will not be able to keep the compensation, or that we will not be able to divest the business without incurring significant charges. Any of these outcomes may have a material adverse effect on our business, results of operations, financial condition, cash flows and liquidity.
We rely on technology systems to facilitate the management of our business and customer and supplier relationships, and a disruption of these systems could adversely affect our business.
As operators of critical infrastructure, we may face a heightened risk of physical and/and cyber attacks from internal or cyber attacks.external sources. Our water and wastewater systems may be vulnerable to disability or failures as a result of physical or cyber attacks, acts of
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war or terrorism, vandalism or other causes. Our operational technology and ITtechnology systems throughout our businesses may be vulnerable to unauthorized external or internal access, due to hacking, viruses, acts of violence, war or terrorism, and other causes. Unauthorized access to confidential information located or stored on these systems could negatively and materially impact our reputation, customers, employees, suppliers and other third parties. Further, third parties, including vendors, suppliers and contractors, who perform certain services for us or administer and maintain our sensitive information, could also be targets of cyber attacks and unauthorized access to their operational or technology systems. While we have instituted certain safeguards to protect our operational technology and ITtechnology systems, those safeguards may not always be effective due to the evolving nature of cyber attacks and cyber vulnerabilities. We cannot guarantee that such protections will be completely successful in the event of a cyber attack.
If, despite our security measures, a significant physical attack or cyber breach occurred, our operations could be disrupted, property damaged, and customer and other confidential information lost or stolen; we could experience substantial loss of revenues, response costs and other financial loss; we could suffer a loss of management time, attention and resources from our regular business operations; andwe may be subject to increased regulation,regulatory requirements; and we may experience litigation and damage to our reputation, any of which could have a negative impact on our business, results of operations and cash flows. Experiencing a physical or cyber security incident could also cause us to be non-compliant with applicable laws and regulations or contracts that require us to report cybersecurity incidents or breaches or securely maintain confidential data, causing us to incur costs related to legal claims or proceedings and regulatory fines or penalties. These types of events, either impacting our facilities or the industry in general, could also cause us to incur additional security and insurance related costs. Losses resulting from a physical or cyber attack against us or our operations or assets may not be covered by, or may exceed the coverage provided by, applicable insurance policies.
In addition, in the ordinary course of business, we collect and retain sensitive information, including personally identifiable information, about our customers and employees. In many cases, we outsource administration of certain functions to vendors that couldhave been and will continue to be targets of cyber attacks. Any theft, loss and/or fraudulent use of customer, employee or proprietary data as a result of a cyber attack on us or a vendor could also subject us to significant litigation, liability and costs, as well as adversely impact our reputation with customers and regulators, among others.
We have obtained insurance to provide coverage for a portion of the losses and damages that may result from a physical attack, cyber attack or a security breach, but such insurance is subject to a number of exclusions and may not cover the total loss or damage caused by an attack or a breach. Furthermore, the market for cybersecurity insurance is relatively new and coverage available for cybersecurity events will likely evolve as the industry matures. In the future, adequate insurance may not be available at rates that we believe are reasonable, and the costs of responding to and recovering from a physical attack, cyber attack or security breach incident may not be covered by insurance or recoverable in rates.
Our business is subject to complex and evolving federal, state and local laws and regulations regarding consumer privacy and the protection or transfer of data relating to individuals, which could result in, among other things, public disclosure of incidents, private or governmental claims or litigation against us, changes to our business practices, monetary penalties, reputational harm and increased cost of operations.
Laws and regulations are changing and increasing rapidly with respect to data and consumer privacy, security and protection. We are subject to an increasing number of complex and continually evolving data and consumer privacy, security and protection laws and regulations administered by various federal, state and local governments, including, for example, the California Consumer Privacy Act of 2018, together with its amendments and implementing regulations, the Virginia Consumer Data Protection Act and the Cyber Incident Reporting for Critical Infrastructure Act of 2022. New laws and regulations may require us to disclose incidents to authorities, regulators and/or the public, when we otherwise may not have been required to disclose such incidents under previous laws and regulations, and such disclosures could negatively and materially impact our reputation, customers, employees, suppliers and other third parties. Federal and state governments have also adopted or are proposing other limitations on, or requirements regarding, the collection, distribution, use, security and storage of personally identifiable information. In addition, the Federal Trade Commission and state attorneys general are applying federal and state consumer protection laws to impose standards on the collection, use and dissemination of data. Moreover, we expect that current laws, regulations and industry standards concerning privacy, data protection and information security in the United States will continue to evolve and increase, and we cannot determine the impact that compliance with such future laws, regulations or standards will have on us or on our business. Any failure or perceived failure by us to comply with current or future federal, state, or local data or consumer privacy or security laws, regulations, policies, guidance, industry standards, or legal obligations, or any incident resulting in unauthorized access to, or the acquisition, release, or transfer of, personally identifiable information or other data relating to our customers, employees and others, may result in private or governmental enforcement actions, litigation or other claims against us, fines and penalties, or adverse perception or publicity about us and our businesses, which could have a material adverse effect on our reputation and business and could result in us incurring substantial costs. These events could also require us to change our business practices, and the events or such changes may result in significant diversions of resources, distract management and divert the focus and attention of our security and technical personnel from other critical activities. Any of the foregoing consequences could have a material adverse effect on our business, financial
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condition, results of operations, cash flows and liquidity.
We may sustain losses that exceed or are excluded from our insurance coverage or for which we are self-insured.
We maintain insurance coverage, some of which may be self-insured, as part of our overall legal and risk management strategy to minimize potential liabilities arising from our Regulated Businesses, as well as the operations of MSG and CSG. Our insurance programs have varying coverage limits, exclusions and maximums, and insurance companies may seek to deny claims we might make. Generally, our insurance policies cover property damage, worker’s compensation, employer’s liability, general liability, cybersecurity, terrorism risks and automobile liability. Each policy includes deductibles or self-insured retentions and policy limits for covered claims. As a result, we may sustain losses that exceed or that are excluded from our insurance coverage, or for which we are self-insured and must therefore utilize our own financial resources to cover such losses. Although in the past we have been generally able to obtain insurance coverage related to our business, there can be no assurance that we can secure all necessary or appropriate insurance in the future, or that such insurance can be economically secured. For example, catastrophic events can result in decreased coverage limits, more limited coverage, increased premium costs or deductibles.
We rely on technology to facilitate the management of our business as well as our customer and supplier relationships, and a failure or disruption of implemented technology could materially and adversely affect our business.
Technology is an integral part of our business and operations, and any failure or disruption of the technology or related systems we implement could significantly limit our ability to manage and operate our business effectively and efficiently, which, in turn, could cause our business and competitive position to suffer and adversely affect our results of operations. We use technology systems to, among other things, bill customers, process orders, provide customer service, manage certain plant operations and construction projects, create and manage our financial records and other operational data, track assets, remotely monitor our plants and facilities, and manage human resources, supply chain, inventory, and accounts receivable collections. As a specific example, we depend on water meters to record and communicate the amount of water our customers use, which information in turn is used to generate customer bills, and in recent years, we have experienced greater than expected performance failures with certain water meters used in the Regulated Businesses. When failures occur, we work with meter manufacturers to determine and address the cause of such failures. While these and other failures that we have experienced have not to date had a material adverse effect on our operations, there can be no assurance that efforts to address performance failures or other issues we may experience with water meters or other implemented technology will be successful in the future and that these or future failures of water meters or other technological issues will not have a material adverse effect on us.
Although we do not believe that the technology we have implemented or may in the future implement is at a materially greater risk of failure than that used by other similar organizations, our technology and operations that use or rely on technology remain vulnerable to damage or interruption from, among other things: failure or interruption of the technology or its related systems; loss or failure of power, internet, telecommunications or data network systems; and operator error or improper operation by, the negligent or improper supervision of, or the intentional acts of, employees, contractors and other third parties. Any or all of these events could have a material adverse impact on our business, results of operations, financial condition and cash flows.
An inability to successfully develop and implement new technologies poses substantial risks to our business and operational excellence strategies, which could have a material adverse effect on our business and financial results.
A significant part of our long-term strategic plan focuses on safety, operational excellence, cost and expense efficiency (including O&M expense efficiency), water quality and affordability, asset and capital management and the customer experience. For example, we have made and plan to continue to make significant investments in developing, deploying, integrating and maintaining customer-facing technologies, applications to support field service and customer service operations, water source sensor and evaluation technologies, meter data management and analytics, and intelligent automation technologies. There can be no assurance that we will be successful in designing, developing, deploying, integrating or maintaining these new technologies. Because these efforts can be long-term in nature, these new technologies may be more costly or time-consuming than expected to design, develop, integrate and complete and may not ultimately deliver the expected or desired benefits upon completion. While we have and will continue to seek to recover costs and earn a return on capital expenditures with respect to the costs and expenses of development and deployment of these new technologies in our Regulated Businesses, there can be no assurance that we will be able to do so in every instance or at all, and our inability to do so may adversely affect our ability to achieve intended cost and expense, including O&M expense, efficiencies or other key performance results and, ultimately, could materially and adversely impact our business, financial condition, results of operations and cash flows.
Our inability to efficiently upgrade and improve our operational technology and ITtechnology systems, or implement new systems, could result in higher than expected costs or otherwise adversely impact our internal controls environment, operations and profitability.
Upgrades and improvements to computer systems and networks, or the implementation of new systems, may require substantial amounts of management’s time and financial resources to complete, and may also result in system or network defects or operational errors due to multiple factors, including employees’ ability to effectively use the new or upgraded system. We continue to implement technology to improve our business processes and customer interactions, and have installed new, and upgraded existing, technology
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systems. These efforts support our broader strategic initiatives and are intended to improve our operations and enhance our customer service capabilities. Any technical or other difficulties in upgrading and improving existing or implementing new technology systems may increase costs beyond those anticipated and have an adverse or disruptive effect on our operations and reporting processes, including our internal control over financial reporting. We may also experience difficulties integrating current systems with new or upgraded systems, which may impact our ability to serve our customers effectively or efficiently. Although we make efforts to minimize any adverse impact on our controls, business and operations, we cannot assure that all such impacts have been or will be mitigated, and any such impacts could harm our business (individually or collectively) and have a material adverse effect on our results of operations, financial condition and cash flows.
Disruptions in our supply chain related to goods, such as pipe, chemicals, power and other fuel, equipment, water and other raw materials, and services, could adversely impact our operations and our ability to serve our customers, as well as our financial results.
Our ability to serve our customers and operate our business in compliance with regulatory requirements is dependent upon purchasing or securing necessary goods and services from our suppliers and vendors. These items include but are not limited to contracted services, chemicals, pipe, valves, hydrants, fittings, equipment (including personal protective equipment), water, and power and other fuel. Examples of supply chain disruptions include reduced quantities of goods available in the marketplace, delays in manufacturing or shipping goods, labor shortages at our suppliers or vendors, natural or other disasters and operational impacts to some of our suppliers or vendors. Disruptions in our supply chain related to goods and services have occurred and we anticipate will continue to occur into the foreseeable future. For example, a recent fire at a plant owned by the sole supplier of permanganate in the Western Hemisphere has severely limited the U.S. supply of potassium and sodium permanganate, two chemicals used by water utilities to treat water. The Company is seeking to utilize alternative methods of treatment and to manage its existing supplies of permanganate, but any inability to source sufficient quantities of these chemicals or utilize alternative chemicals may have a material adverse effect on the Company’s ability to comply with applicable environmental and regulatory requirements.
Supply chain disruptions may cause us to be unable to purchase or otherwise obtain needed goods or services at a reasonable price or at all, and may significantly increase the price of goods and services we may obtain from suppliers and vendors. This, in turn, may adversely impact our operations and our ability to serve our customers in compliance with regulatory requirements, as well as our associated results of operations, cash flows and financial condition. While we attempt to plan for and have contingencies in place to address supply chain disruptions, our mitigation efforts may not be successful or may have further negative impacts on us.
Our business has inherently dangerous workplaces.work sites. If we fail to maintain safe work sites, we may experience workforce or customer injuries or loss of life, and be exposed to financial losses, including penalties and other liabilities.
Safety is a core value and a strategy at American Water. Our safety record isperformance and progress to our ultimate desired goal of zero injuries are critical to our ability to carry out our operations effectively and to serve our customers, and thereby, to support our reputation. We maintain health and safety standardspractices to protect our employees, customers, contractors, vendors and the public. Although we intendEliminating all hazards all of the time is extremely challenging, but through strict adherence to adhere to suchour health and safety standardspractices, and aim for zero injuries, it is extremely difficultempowering employees to avoid accidents at all times.be safety leaders who are instructed to and expected to stop work if deemed “unsafe,” we believe we can achieve an injury-free workplace.
In addition, our operations can involve the delivery, handling, storage, use and storagedisposal of hazardous chemicals, which, if improperly delivered, handled, stored, used or disposed of, could result in serious injury, death, environmental damage or property damage, and could subject us to penalties or other liabilities. We are also subject to regulations dealing withvarious environmental, transportation and occupational health and safety.safety regulations. Although we maintain functional employee groups whose primary purpose is to ensure we implement effective environmental health safety, and environmentalsafety work procedures and practices throughout our organization, including construction sites and maintenance sites,operating facilities, the failure to comply with suchthese regulations or procedures could subject us to liability.
Work stoppages and other labor relations matters could adversely affect our results of operations.operations and the ability to serve our customers.
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As of December 31, 2017,2022, approximately 46%47% of our workforce was represented by unions, and we had 7675 collective bargaining agreements in place with 1914 different unions representing our unionized employees. These collective bargaining agreements, including 35 which expired in 2017, and 2018 of which will expire during 2018,2023, are subject to periodic renewal and renegotiation. Moreover, our national benefits agreement with most of the labor unions that represent employees in our Regulated Businesses expires on July 31, 2018 and will be renegotiated during 2018. We may not be able to successfully renew or renegotiate these labor contracts, or enter into new agreements, on terms that are fairacceptable to us. Any negotiations or dispute resolution processes undertaken in connection with our labor contracts could be delayed or affected by labor actions or work stoppages. Labor actions, work stoppages or the threat of work stoppages, and our failure to obtain favorable labor contract terms during renegotiations, may disrupt our operations, negatively impact the ability to serve our customers, and result in higher labor costs, which could adversely affect our reputation, financial condition, results of operations, cash flows and liquidity. While we have developed contingency plans to be implemented as necessary if a work stoppage or strike does occur, a strike or work stoppage may have a material adverse impact on our financial position, results of operations and cash flows.
Financial, Economic and Market-Related Risks
Our indebtedness could adversely affect our business adversely and limit our ability to plan for or respond to changes in our business, and we may be unable to generate sufficient cash flows to satisfy our liquidity needs.
As of December 31, 2017,2022, our aggregate long-term and short-term debt balance (including preferred stock with mandatory redemption requirements) was $7.7$12.4 billion, and our working capital (defined as current assets less current liabilities) was in a deficit position. Our indebtedness could have important consequences, including:
•limiting our ability to obtain additional financing to fund future working capital requirements or capital expenditures;
•exposing us to interest rate risk with respect to the portion of our indebtedness that bears interest at variable rates;
•limiting our ability to pay dividends on our common stock or make payments in connection with our other obligations;
•impairing our access to the capital markets for debt and equity;
•requiring that an increasing portion of our cash flows from operations be dedicated to the payment of the principal and interest on our debt, thereby reducing funds available for future operations, dividends on our common stock or capital expenditures;
•limiting our ability to take advantage of significant business opportunities, such as acquisition opportunities, and to react to changes in market or industry conditions; and
•placing us at a competitive disadvantage compared to those of our competitors that have less debt.
During 2022, we utilized existing sources of liquidity, such as our current cash balances, cash flows from operations and borrowings under our commercial paper program, to meet our short-term liquidity requirements. We believe that existing sources of liquidity will be sufficient to meet our cash requirements for the foreseeable future. In order to meet our capital expenditure and other operational needs, however, we may be required to makeborrow additional borrowingsfunds under ourthe revolving credit facility or issue new short-termfacility. In the event of a sustained market deterioration, we may need to obtain additional sources of liquidity, which would require us to evaluate available alternatives and long-term debt securities.take appropriate actions. Moreover, additional borrowings may be required to repay or refinance outstanding indebtedness. Debt maturities and sinking fund payments in 2018, 20192023, 2024 and 20202025 will be $322$281 million, $170$476 million and $51$598 million, respectively. We can provide no assurance that we will be able to access the debt or equity capital markets on favorable terms, if at all.all, to repay or refinance this debt. Moreover, ifas new debt is added to our current debt levels, the related risks we now face could intensify, limiting our ability to repay or refinance existing debt on favorable terms.
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Our inability to access the debt or equity capital or financial markets or other events could affect our ability to meet our long-term commitments or liquidity needs at reasonable cost, and our ability to meet long-term commitments, which could adversely affect our financial condition and results of operations.
In addition to cash from operations, during 2022, we relyrelied primarily on oura revolving credit facility, which was increased from $2.25 billion to $2.75 billion in October 2022, a commercial paper programs,program, which was increased from $2.10 billion to $2.60 billion in October 2022, and the debt capital markets, to satisfy our liquidity needs. In this regard, our principal external sources of short-term liquidity are our $1.6 billion commercial paper program and our $1.75 billionThe revolving credit facility. Our revolving credit facility currently expires in accordance with its terms in June 2020. WeOctober 2027. Historically, we have regularly useused our commercial paper program under thisrather than the revolving credit facility as a principal source of short-term borrowing due to the generally more attractive rates we generally cancould obtain in the commercial paper market. As of December 31, 2017, American Water Capital Corp. (“AWCC”), our wholly owned financing subsidiary, had2022, there were no outstanding borrowings under the revolving credit facility, and had $905$1,177 million of commercial paper outstanding and $84$78 million in outstanding letters of credit. There can be no assurance that AWCCwe will be able to continue to access itsthis commercial paper program or its revolving credit facility, when, as and if desired, or that the amount of capital available thereunder will be sufficient to meet all of our liquidity needs at a reasonable, or any, cost.
In order to meet our capital expenditure needs, we intend to issue a combination of short-term and long-term debt securities and/or additional equity shares of common stock. Disruptions in the debt or equity capital markets or changes in our credit ratings or other events could also limit our ability to access capital on terms favorable to us or at all. While the lending banks that participate in ourthe revolving credit facility have met all ofto date honored their obligations,commitments under those facilities, disruptions in the credit markets, changes in our credit ratings, or deterioration of the banking industry’s financial condition could discourage or prevent lenders from meeting their existing lending commitments, extending the terms of such commitments, or agreeing to new commitments. These or other occurrences may cause our lenders to not meet their existing commitments, andIn such a case, we may not be able to access the commercial paper, debt or loanequity capital markets, or debt marketsother sources of potential liquidity, in the future on terms acceptable to us or at all. Furthermore, our inability to maintain, renew or replace commitments under thisour revolving credit facility could materially increase our cost of capital and adversely affect our financial condition, results of operations and liquidity. Longer termShort- or long-term disruptions or volatility in the debt or equity capital and credit markets as a result of uncertainty,economic, legislative, political or other uncertainties, including as a result of changes in U.S. tax and other laws, reduced financing alternatives, or failures of significant financial institutions could adversely affect our access to the capital necessary to provide adequate liquidity needed for our business. Any significant disruptionSignificant volatility or disruptions in the debt or equity capital debt or credit markets, or financial institution failures, could require us to take measures to conserve cash until the market stabilizes or until alternative financing can be arranged. Such measures could include delaying or deferring capital expenditures, reducing or suspending dividend payments, and reducing other discretionary expenditures.
The occurrence of any of our lenders to meet their commitments that result from financial market disruptions,these circumstances could expose us to increased interest or other expense, require us to institute cash or liquidity conservation measures or otherwise adversely and materially affect our business, financial condition, results of operations, cash flows and liquidity.liquidity, which may limit or impair our ability to achieve our strategic, business and operational goals and objectives.
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We have recorded a significant amount of goodwill and intangible and other assets, and we may never realize the full value of our intangible assets, causing usbe required to record impairments thator changes in fair value to these assets, which may negatively affect our financial condition and results of operations.
Our total assets include $1.4as of December 31, 2022 included $1.1 billion of goodwill and $347 million of total assets measured and recorded at December 31, 2017.fair value on a recurring basis. The goodwill is primarily associated with the acquisition of American Water by an affiliate of our previous owner in 2003 and the acquisition of E’town Corporation by a predecessor to our previous owner in 2001, and, to a lesser extent, the acquisition of Keystone in 2015.2003. Goodwill represents the excess of the purchase price the purchaser paid over the fair value of the net tangible and other intangible assets acquired. Goodwill is recorded at fair value on the date of an acquisition and is reviewed annually or more frequently if changes in circumstances indicate the carrying value may not be recoverable. As required by the applicable accounting rules, in the past, we have taken significant non-cash charges to operating results for impairments to goodwill impairmentsor other intangible assets, and have recorded changes in the past.
fair value of financial instruments and other assets. We may be required to recognize in the future an impairment of goodwill or a change in the futurefair value of financial instruments or certain other assets due to market conditions, or other factors related to our performance or the performance of an acquired business.business, or other circumstances that may impact the fair value of a financial instrument or the other asset. See Note 18—Fair Value of Financial Information in the Notes to the Consolidated Financial Statements for information on the fair value of financial and other assets. These market conditions could include a decline over a period of time of our stock price, a decline over a period of time in valuation multiples of comparable water utilities, market price performance of our common stock that compares unfavorably to our peer companies, decreases in control premiums, or with respect to Keystone, fluctuations in the level of exploration and production activities in the Marcellus and Utica shale regions served by Keystone, a prolonged depression of natural gas prices or other factors that negatively impact our current or future forecasts of operating results, cash flows or key assumptions.circumstances. A decline in the results forecasted in our business plan due to events such as changes in rate case results, capital investment budgets or interest rates, could also result in an impairment charge. Recognition of impairments of goodwill and changes in fair value of certain of our other assets would result in a charge to income in the period in which the impairment or change occurred, which may negatively affect our financial condition, results of operations and total capitalization. The effects of any such impairment or change could be material and could make it more difficult to maintain our credit ratings, secure financing on attractive terms, maintain compliance with debt covenants and meet the expectations of our regulators.
Market volatility and other conditions may impact the value of benefit plan assets and liabilities, as well as assumptions related to the benefit plans, which may require us to provide significant additional funding.
The performance of the capital markets affects the values of the assets that are held in trust to satisfy significant future obligations under our pension and postretirement benefit plans. The value of these assets is subject to market fluctuations and volatility, which may cause investment returns to fall below our projected return rates. A decline in the market value of theour pension and postretirement benefit plan assets as of the measurement date or a change in the projection of the future return on plan assets can increase the funding requirements under our pension and postretirement benefit plans. Additionally, our pension and postretirement benefit plan liabilities are sensitive to changes in interest rates. Interest rates have experienced volatility and are subject to potential further adjustments based on the actions of the U.S. Federal Reserve, and others. If interest rates decrease,are lower at the current measurement date than the prior measurement date, our liabilities would increase, potentially increasing benefit expense and funding requirements. Further, changes in demographics,assumptions, such as increases in life expectancy assumptions and increasing trends in health care costs may also increase our funding requirements. Future increases in pension and other postretirement costs as a result of reduced plan assets may not be fully recoverable in rates, in which case our results of operations and financial position could be negatively affected.
In addition, market factors can affect assumptions we use in determining funding requirements with respect to our pension and postretirement plans. For example, a relatively modest change in our assumptions regarding discount rates can materially affect our calculation of funding requirements. To the extent that market data compels us to reduce the discount rate used in our assumptions is reduced, our benefit obligations could be materially increased, which could adversely affect our financial position, results of operations and cash flows.
Additional Risks Related to Other Businesses
Parent company provides performance guarantees with respect to certain of the obligations of our Other businesses, including financial guarantees or deposits, which may adversely affect parent company if the guarantees are successfully enforced.
Under the terms of certain agreements under which our Other businesses, primarily MSG,provide water and wastewater services to municipalities and federal governmental entities, parent company provides guarantees of specified performance obligations, including financial guarantees or deposits. In the event these obligations are not performed, the entity holding the guarantees may seek to enforce the performance commitments against parent company or proceed against the deposit. In that event, our financial condition, results of operations, cash flows and liquidity could be adversely affected. At December 31, 2022, we had remaining performance commitments, as measured by remaining contract revenue, totaling approximately $6.9 billion related to MSG’s contracts, and this amount is likely to increase if the number of military bases served by MSG increases. The presence of these commitments may adversely affect our financial condition and make it more difficult for us to secure financing on attractive terms.
MSG’s operations are subject to various risks associated with doing business with the U.S. government.
MSG enters into contracts with the U.S. government for the operation and maintenance of water and wastewater systems, which contracts may be terminated, in whole or in part, prior to the end of the 50-year term for convenience of the U.S. government or as a result of default or non-performance by the subsidiary performing the contract. In addition, the contract price for each of these military contracts is typically subject to either an annual economic price adjustment, or a price redetermination two years after commencement
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of operations and every three years thereafter. Annual economic price adjustment is an inflation index-based contract price increase mechanism. Price redetermination is a contract mechanism to periodically adjust the service fee in the next period to reflect changes in contract obligations and market conditions. Any early contract termination or unfavorable annual economic price adjustment or price redetermination could adversely affect our financial condition, results of operations and cash flows. Moreover, entering into contracts with the U.S. government subjects us to a number of operational and compliance risks, including dependence on the level of government spending and compliance with and changes in governmental procurement and security regulations. We are subject to potential government investigations of our business practices and compliance with government procurement and security regulations, which are complex, and compliance with these regulations can be expensive and burdensome. If we were charged with wrongdoing as a result of an investigation, we could be suspended or debarred from bidding on or receiving awards of new contracts with the U.S. government or our existing contracts could be terminated, which could have a material adverse effect on our results of operations and cash flows.
General Risk Factors
New accounting standards or changes to existing accounting standards could materially impact how we report our results of operations, cash flowflows and financial condition.
Our Consolidated Financial Statements are prepared in accordance with GAAP. The SEC, the Financial Accounting Standards Board or other authoritative bodies or governmental entities may issue new pronouncements or new interpretations of existing accounting standards that may require us to change our accounting policies.policies or critical accounting estimates. These changes are beyond our control, can be difficult to predict and could materially impact how we report our results of operations, cash flowflows and financial condition. We could be required to apply a new or revised standard retroactively, which could also adversely affect our previously reported results of operations, cash flowflows and financial condition.
Undetected errors in internal controls and information reporting could result in the disallowance of cost recovery and noncompliant disclosure.
Our internal controls, accounting policies and practices and internal information systems are designed to enable us to capture and process transactions and information in a timely and accurate manner in compliance with GAAP, taxation requirements, federal securities laws and regulations and other laws and regulations applicable to us. Such compliance permits us to, among other things, disclose and report financial and other information in connection with the recovery of our costs and with the reporting requirements under federal securities, tax and other laws and regulations.
We have also implemented corporate governance, internal control and accounting policies and procedures in connection with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) and relevant SEC rules, as well as other applicable regulations. Such internal controls and policies have been and continue to be closely monitored by our management and Board of Directors to ensure continued compliance with these laws, rules and regulations. Management is also responsible for establishing and maintaining internal control over financial reporting and is required to assess annually the effectiveness of these controls. While we believe these controls, policies, practices and systems are adequate to verify data integrity, unanticipated andor unauthorized actions of employees or temporary lapses in internal controls due to shortfalls in oversight or resource constraints could lead to undetected errors that could result in the disallowance of cost recovery and noncompliantnon-compliant disclosure and reporting. The consequences of these events could have a negative impact on our results of operations, cash flows and financial condition. The inability of management to certify as to the effectiveness of these controls due to the identification of one or more material weaknesses in these controls could also harm our reputation, increase financing costs or could also adversely affect our or AWCC’s ability to access the capital markets.
Our continued success is dependent upon our ability to attract, hire and retain highly qualified, skilled and/or diverse talent.
Our business may be adversely affected.affected by the intentional misconduct of our employees and contractors.
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ITEM 1B. UNRESOLVED STAFF COMMENTS |
The Company’s properties consist primarily of:of (i) water and wastewater treatment plants;plants, (ii) mains and pipes used for transmission, distribution and collection of water and wastewater;wastewater, (iii) wells and other sources of water supply, such as reservoirs;reservoirs, (iv) water and wastewater pumping stations;stations, (v) meters and fire hydrants;hydrants, (vi) general structures, including buildings, dams and treated water storage facilities;facilities, (vii) land and easements;easements, (viii) vehicles;vehicles, (ix) software rights, and;and (x) other equipment and facilities, the majority of which are used directly in the operation of ourits systems. Substantially all of ourthe Company’s properties are owned by ourits subsidiaries, with a large percentage subject to liens of ourits mortgage bonds. We lease ourA wholly owned subsidiary of parent company owns the Company’s corporate offices,headquarters, located in Voorhees,Camden, New Jersey, and the Company and its operating subsidiaries lease office space, equipment and furniture from certain of ourthe Company’s wholly owned subsidiaries. These properties are utilized by ourthe Company’s directors, officers and staff in the conduct of the business.
The properties of ourthe Company’s Regulated Businesses consist mainly of:of approximately:
ITEM 3. LEGAL PROCEEDINGS
Set forth below is information related to the Company’s material pending legal proceedings as of February 15, 2023, other than ordinary routine litigation incidental to the business, required to be disclosed in this Annual Report on Form 10-K. The information below should be read together with Note 16—Commitments and Contingencies in the Notes to the Consolidated Financial Statements. In accordance with the SEC’s disclosure rules, the Company has elected to disclose environmental proceedings involving the Company and a governmental authority if the amount of potential monetary sanctions, exclusive of interest and costs, that the Company reasonably believes will result from such proceeding is $1 million or more.
Alternative Water Supply in Lieu of Carmel River Diversions
Compliance with SWRCB Orders to Reduce Carmel River Diversions
Under the 2009 Order, Cal Am is required, among other things, to decrease significantly its yearly diversions of water from the Carmel River according to a set reduction schedule. See Item 1—Business—Regulated Businesses—Water Supply and Wastewater Services and Item 1A—Risk Factors. The 2009 Order responded to claims that Cal Am had not sufficiently implemented actions to terminate its unpermitted diversions of water from the Carmel River as required by athe 1995 SWRCB order.Order issued by the SWRCB. In July 2016, at the request of Cal Am and several Monterey County government agencies, the SWRCB issued the 2016 Order approving a five-year extensiondeadline of the deadline to complyDecember 31, 2021 for Cal Am’s compliance with the 2009 Order.
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The 2009 Order to December 31, 2021. In November 2016, the Water Ratepayers Association of the Monterey Peninsula,includes a citizens’ advocacy group, filed an action in Sacramento County Superior Court against the SWRCB and its board members, and namingcondition prohibiting Cal Am asfrom diverting water from the real partyCarmel River for new service connections or for any increased use of water at existing service addresses resulting from a change in interest, seeking to reverse the extension of the 2009 Order, to rescind the designation byzoning or use. In 2011, the California Public Utilities Commission (the “CPUC”) of Cal Am as the public utility water provider to the Monterey Peninsula, and to appointissued a receiver to overseedecision directing modifications in Cal Am’s compliance withtariffs to recognize the moratorium mandated by the 2009 Order, and directing Cal Am to seek written guidance from the SWRCB with ultimate transferrespect to any unresolved issues of interpretation or implementation of this condition. In 2012, the Deputy Director of the SWRCB sent a public entity.letter to Cal Am providing an interpretation as to the calculation of a baseline to determine increases in use of water at existing service addresses. In March 2018, the MPWMD adopted a resolution directing Cal Am to interpret the baseline in a manner that conflicts with the SWRCB’s written interpretation. In May 2017,2018, Cal Am notified the MPWMD and the SWRCB filed demurrersthat it intends to seek declaratory relief concerning the action, and on June 12, 2017, the court entered an order sustaining those demurrers and dismissing the action with prejudice.
Following issuance by the court’s dispositionCoastal Commission in November 2022 of a related issuecoastal development permit, as described below, Cal Am continues to work constructively with all appropriate agencies to obtain the remaining required permits for the Water Supply Project. However, there can be no assurance that the Water Supply Project in another case, MCWD’s petition for reviewits current configuration will be completed on a timely basis, if ever. For the year ended December 31, 2022, Cal Am has complied with the diversion limitations contained in the 2016 Order. Continued compliance with the diversion limitations in 2023 and future years may be impacted by a number of factors, including without limitation continued drought conditions in California and the CPUC-approved settlement agreement was remandedexhaustion of water supply reserves, and will require successful development of alternate water supply sources sufficient to meet customer demand. The 2009 Order and the 2016 Order remain in effect until Cal Am certifies to the CPUC,SWRCB, and remains pending.
Monterey Peninsula Water Supply Project
Cal Am’s ability to move forward on the Water Supply Project is and has been subject to extensive administrative review by the CPUC and other government agencies, obtaining necessary permits, and intervention from other parties. On January 12, 2017, the CPUC issued a Draft Environmental Impact Report/Environmental Impact Statement. A final report is expected at the end of the first quarter of 2018.
In 2018, the CPUC unanimously approved another final decision finding that the Water Supply Project meets the CPUC’s requirements for a CPCN and an additional procedural phase was not necessary to consider alternative projects. The CPUC’s 2018 decision concludes that the Water Supply Project is the best project to address estimated future water demands in Monterey, and, in addition to the cost recovery approved in its 2016 decision, adopts Cal Am’s cost estimates for the Water Supply Project, which amounted to an aggregate of $279 million plus AFUDC at a rate representative of Cal Am’s actual financing costs. The 2018 final decision specifies the procedures for recovery of all of Cal Am’s prudently incurred costs associated with the Water Supply Project upon its completion, subject to the frameworks included in the final decision related to cost caps, O&M costs, financing, ratemaking and contingency matters. The reasonableness of the Water Supply Project costs will be reviewed by the CPUC when Cal Am seeks cost recovery for the Water Supply Project. Cal Am is also required to implement mitigation measures to avoid, minimize or offset significant environmental impacts from the construction and operation of the Water Supply Project and comply with a mitigation monitoring and reporting program, a reimbursement agreement for CPUC costs associated with that program, and reporting requirements on plant operations following placement of the Water Supply Project in service. Cal Am has incurred $206 million in aggregate costs as of December 31, 2022, related to the Water Supply Project, which includes $51 million in AFUDC.
In September 2021, Cal Am, Monterey One Water and the MPWMD reached an agreement on Cal Am’s purchase of additional water from an expansion to the GWR Project, which is not expected to produce additional water until 2024 at the earliest. The amended and restated water purchase agreement for the GWR Project expansion is subject to review and approval of the CPUC, and in November 2021, Cal Am filed an application with the CPUC that sought review and approval of the amended and restated water purchase agreement. Cal Am also requested rate base treatment of the additional capital investment for certain Cal Am facilities required to maximize the water supply from the expansion to the GWR Project and a related Aquifer Storage and Recovery Project, totaling approximately $81 million. This requested amount was in addition to, and consistent in regulatory treatment with, the prior $50 million of cost recovery for facilities associated with the original water purchase agreement, which was approved by the CPUC in its unanimous 2016 final decision.
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On December 5, 2022, the CPUC issued a final decision that authorizes Cal Am to enter into the amended water purchase agreement, and specifically to increase pumping capacity and reliability of groundwater extraction from the Seaside Groundwater Basin. The final decision sets the cost cap for the proposed facilities at approximately $62 million. Cal Am may seek recovery of amounts above the cost cap in a subsequent rate filing or general rate case. Additionally, the final decision authorizes AFUDC at Cal Am’s actual weighted average cost of debt for most of the facilities.
On December 30, 2022, Cal Am filed with the CPUC an application for rehearing of the CPUC’s December 5, 2022 final decision. Cal Am is requesting inclusion in the cost cap all infrastructure costs for the GWR Project expansion that were not included in the final decision. Cal Am believes that the December 5, 2022 final decision is contrary to the CPUC’s precedent and that obtaining recovery of these infrastructure costs is a key component of the GWR Project expansion and Cal Am’s ability to meet the future water supply needs of its customers in Monterey. This application remains pending.
While Cal Am believes that its expenditures to date have been prudent and necessary to comply with the 2009 Order and the 2016 Order, as well as the CPUC’s 2016 and 2018 final decisions, Cal Am cannot currently predict its ability to recover all of its costs and expenses associated with the Water Supply Project and there can be no assurance that Cal Am will be able to recover all of such costs and expenses in excess of the $112 million in aggregate construction costs, exceed $50 million,plus applicable AFUDC, previously approved by the CPUC in its 2016 and December 2022 final decisions. See Note 16—Commitments and Contingencies in the Notes to the Consolidated Financial Statements for further discussion.
Coastal Development Permit Application
In 2018, Cal Am submitted a coastal development permit application (the “Marina Application”) to the City of Marina (the “City”) for those project components of the Water Supply Project located within the City’s coastal zone. Members of the City’s Planning Commission, as well as City councilpersons, have publicly expressed opposition to the Water Supply Project. In May 2019, the City issued a notice of final local action based upon the denial by the Planning Commission of the Marina Application. Thereafter, Cal Am appealed this decision to the Coastal Commission, as permitted under the City’s code and the California Coastal Act. At the same time, Cal Am submitted an application (the “Original Jurisdiction Application”) to the Coastal Commission for a coastal development permit for those project components located within the Coastal Commission’s original jurisdiction. After Coastal Commission staff issued reports recommending denial of the Original Jurisdiction Application, noting potential impacts on environmentally sensitive habitat areas and wetlands and possible disproportionate impacts to communities of concern, in September 2020, Cal Am withdrew the Original Jurisdiction Application in order to address the staff’s environmental justice concerns.The withdrawal of the Original Jurisdiction Application did not impact Cal Am’s appeal of the City’s denial of the Marina Application, which remains pending before the Coastal Commission.In November 2020, Cal Am refiled the Original Jurisdiction Application.
On October 5, 2022, Cal Am announced a phasing plan for the proposed desalination plant component of the Water Supply Project. The desalination plant and slant wells originally approved by the CPUC would produce up to 6.4 million gallons of desalinated water per day. Under the phased approach, the facilities would initially be constructed to produce up to 4.8 million gallons per day of desalinated water, enough to meet anticipated demand through about 2030, and would limit the number of slant wells initially constructed. As demand increases in the future, desalination facilities would be allowedexpanded to meet the additional demand. The phased approach seeks to meet near-term demand by allowing for additional supply as it becomes needed, while also providing an opportunity for regional future public participation and was developed by Cal Am based on feedback received from the community.
On November 18, 2022, the Coastal Commission approved the Marina Application and the Original Jurisdiction Application with respect to the phased development of the proposed desalination plant, subject to compliance with a number of conditions, all of which Cal Am expects to satisfy. Cal Am continues to seek additional cost recovery.the remaining permits necessary to construct the Water Supply Project.
On December 29, 2022, the City, Marina Coast Water District (“MCWD”), MCWD’s groundwater sustainability agency (“GSA”), and the MPWMD jointly filed a petition for writ of mandate in Monterey County Superior Court against the Coastal Commission, alleging that the Coastal Commission violated the California Coastal Act and the California Environmental Quality Act in issuing a coastal development permit to Cal Am for construction of the MPWSP slant wells. Cal Am is named as a real party in interest. This matter remains pending.
Subject to the impact or resolution of this litigation, construction of the desalination plant is expected to begin in 2024 and the desalination plant is estimated to be in-service by the end of 2027.
Desalination Plant Development Permit
The proposed desalination plant for the Water Supply Project is to be located in an unincorporated portion of Monterey County, California, on a site owned by CEMEX, Inc. (“CEMEX”), and requires a combined development permit from Monterey County prior to commencement of construction. In April 2019, Monterey County’s Planning Commission voted to approve the permit. In July 2019, the Board of Supervisors heard appeals filed by MCWD and a public advocacy group, at which time it denied the appeals and
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approved the permit. In August 2019, MCWD filed a petition in Monterey County Superior Court challenging Monterey County’s approval of Cal Am’s combined development permit application and seeking injunctive relief to enjoin Monterey County and Cal Am from commencing construction of the desalination plant. In October 2019, after a hearing, the court denied, without prejudice, MCWD’s motion for a preliminary injunction, but issued a stay of Monterey County’s approval of the combined development permit, precluding commencement of physical construction of the desalination plant, but allowing Cal Am to continue to obtain permits needed for the desalination plant’s construction. In January 2021, the court issued its decision granting in part and denying in part MCWD’s petition. The court found that Monterey County did not completely comply with all of the requirements necessary to approve the combined development permit and set aside its approval so that Monterey County could come into compliance. The court denied all of MCWD’s other claims. The court also lifted its stay on physical construction at the plant site.
In May 2021, Cal Am filed a notice of appeal as to the Monterey County Superior Court’s January 2021 decision, seeking to challenge the court’s decision on Monterey County’s statement of overriding considerations. Monterey County filed a notice of appeal as to the same issue in May 2021. In June 2021, MCWD filed cross-appeals on its claims that had been denied by the court. These appeals remain pending.
Proposed Zoning Changes at CEMEX Site for Slant Wells
In August 2018, the City circulated a public review draft of proposed amendments to its local coastal program and zoning ordinance, and placed the matter for consideration on the Planning Commission’s agenda for its September 2018 meeting. The proposed amendments would change zoning at the CEMEX site to open space and restrict future uses, including with respect to Cal Am’s planned use of the site for the slant wells for the Water Supply Project. Any change to the City’s local coastal program must ultimately be approved by the Coastal Commission. Cal Am, CEMEX and the Coastal Commission each submitted letters opposing the proposed amendments. At its November 2018 meeting, the Planning Commission adopted a resolution recommending that the Marina City Council consider approving the amendments.
In December 2018, the Marina City Council considered the proposed amendments. Cal Am, CEMEX and the Coastal Commission again submitted letters opposing the proposed changes, but the City Council unanimously adopted a resolution amending its local coastal plan and a draft amendment to its zoning ordinance. Changes to the ordinance require a second reading before becoming final, which occurred at the City’s December 2018 meeting. The changes to the local coastal plan must be submitted to the Coastal Commission for approval and are not effective until such approval is obtained.
Test Slant Well Permitting
A preliminary step to building the Water Supply Project desalination plant is the construction and operation of a test slant well to confirm the suitability of the property on which intake wells will be located to draw water from under Monterey Bay. In November 2014, the California Coastal Commission (the “Coastal Commission”) approved coastal development permits for the test slant well, enabling Cal Am to construct and operate the test slant well. The permits would have expired onEffective February 28, 2018, at which time Cal Am would have been required to decommission the test slant well but becausepumping ceased, except for minimal maintenance pumping activities, in accordance with Cal Am’s coastal development permits. Because Cal Am couldmay use the test slant well as one of the slant wells for the Water Supply Project, itCal Am sought an amendment of its coastal development permitsand obtained from the Coastal Commission permit amendments to allow the test slant well to remain in place and be maintained on site until February 28, 2019. The Coastal Commission approved the permit amendment on December 13, 2017. The2024. A required lease obtained from the California State Lands Commission, (the “State Lands Commission”), as amended, after a two-year extension granted on November 29, 2017, is to expireexpired on December 16, 2019.2022. Cal Am has filed an applications for extension of the State Lands Commission lease. This application remains pending.
In July 13, 2017, the Coastal Commission adopted a consent agreement and cease and desist order requiring sand mining operations on the property owned by CEMEX on which intake wells for the Water Supply Project will be located, to cease by the end of 2020 and the property to be sold to either a non-profit or governmental entity. The consent agreement strictly limits future use of the property but preserves Cal Am’s existing property rights and allows uses consistent with existing easements and other rights of record.
In May 2020, the City filed a lawsuit in Monterey County Superior Court, naming Cal Am and CEMEX as defendants, and MCWRA and MCWD as real parties in interest. The lawsuit, as amended, alleges a claim for breach of contract against CEMEX and seeks declaratory relief to void the permanent easement and prohibiting extraction of water by Cal Am’s slant wells at the CEMEX
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site in excess of 500 acre-feet per year and the export of such water outside the groundwater basin. In November 2020, Cal Am, CEMEX and MCWRA filed demurrers, which were overruled by the court at a hearing held in February 2021.
In August 2020, MCWD filed a cross-complaint in the May 2020 lawsuit against Cal Am, CEMEX and MCWRA, alleging claims for specific performance of certain provisions of the 1996 annexation agreement related to the property owned by CEMEX on which intake wells for the Water Supply Project will be approved or that the Water Supply Project will be completedlocated, as well as claims of water rights, nuisance and unreasonable water use, and seeking additional declaratory relief. Following various rulings on a timely basis, if ever. Furthermore, there can be no assurance thatdemurrers filed by Cal Am, willCEMEX and MCWRA, in February 2021, the court sustained, without leave to amend, the demurrer to MCWD’s nuisance claim and overruled the remainder of the demurrers. In October 2021, the court granted a motion filed by Cal Am related to MCWD’s cross-complaint, which motion requested a referral of certain issues related to MCWD’s water rights and unreasonable use claims to the SWRCB for its expert advisory opinion. The SWRCB has scheduled hearings on the referred issues before its Administrative Hearing Officer, which took place in the fourth quarter of 2022 and are set to continue into early 2023. The Monterey County Superior Court has set a trial date of October 23, 2023, for the City’s lawsuit.
Challenges Related to Compliance with California’s Sustainable Groundwater Management Act
Under California’s Sustainable Groundwater Management Act (“SGMA”) enacted in 2015, groundwater basins designated by the state as critically overdrafted must be ablemanaged by a GSA by 2020 in accordance with an approved groundwater sustainability plan (“GSP”) designed to complyachieve sustainability by 2040. Under the SGMA, GSAs have broad powers to achieve sustainability including, but not limited to, regulating groundwater extraction by imposing fees on groundwater extractions and controlling groundwater extractions by regulating, limiting or suspending extractions from wells. The 400-acre CEMEX site overlies a small portion of the 180/400 Subbasin of the Salinas Valley Groundwater Basin; the 84,000-acre 180/400 Subbasin has been designated by the state as critically overdrafted, mainly due to seawater intrusion into the subbasin.
In late 2016, the Salinas Valley Basin Groundwater Sustainability Agency (the “SVBGSA”) was formed as a joint powers authority to become the GSA for the Salinas Valley Groundwater Basin and prepare a GSP. In April 2018, the City filed a notice to become the GSA for the CEMEX site, creating an overlap with the diversion reduction requirements and other remaining requirements underSVBGSA’s filing for the 2009 Order and180/400 Subbasin. In 2016, the 2016 Order,SVBGSA commenced preparation of a GSP covering the entire 180/400 subbasin, including the CEMEX site, but in August 2019 the City filed a notice that it intends to prepare its own GSP for the CEMEX site with the intent to severely limit or prohibit groundwater pumping at that any such compliancesite. The State Department of Water Resources (“SDWR”) has taken the position that until the overlap is resolved, it will not resultaccept the GSP from either agency, placing the subbasin at risk of being placed in material additional costs or obligationsa probationary status and subject to Cal Am orstate management. In December 2019, the Company.
In December 2016,2019, the CPUC issuedCity filed a final decisionlawsuit in Monterey County Superior Court challenging Monterey County’s filing, and SDWR’s acceptance of the filing, as the exclusive GSA for the CEMEX site. The City has named Monterey County and its Board of Supervisors, its GSA, and SDWR and its director as defendants, and the SVBGSA and its Board of Directors as real parties. The City seeks to invalidate Monterey County’s filing, as well as injunctive relief to preserve the City’s status as a proceeding involvingGSA for the site. To protect its interest in the matter, Cal Am filed an application to intervene in this lawsuit, which was granted. Monterey County filed cross-claims against the City and SDWR. After a hearing, in August 2021, the court denied the claims brought by the City and granted Monterey County’s cross-claims, finding that the City’s GSA notice was untimely, the Monterey County GSA was the exclusive GSA for the CEMEX site, and the SVBGSA’s GSP was properly adopted for the entire 180/400 subbasin, including the CEMEX site. In November 2021, the City appealed this decision, and in December 2021, Monterey County appealed the court’s decision as to the finding that the City’s action creating a GSA was not void.
In September 2020, Cal Am filed a separate but related complaint in Monterey County Superior Court challenging the validity of actions taken by the City and its GSA in adopting a new residential rate designgroundwater sustainability plan for the CEMEX site, and the validity of the provisions of such plan. Due to the overlap of issues in the City’s lawsuit with those in the validation action, the parties stipulated to a stay of the validation action pending determination of the claims in the City’s action, which was approved by the court in December 2020.
In February 2021, the City filed a separate but related in rem reverse validation complaint challenging the adoption by Monterey County of a GSP for the CEMEX site. This complaint remains pending. Currently, both validation actions remain stayed during the pendency of the City’s appeals.
Proposed Acquisition of Monterey System Assets — Local Area Formation Commission Litigation
In November 2018, voters in Monterey, California passed “Measure J,” which decided that the MPWMD should conduct a feasibility study concerning the potential purchase of Cal Am’s Monterey District. The decision allowedsystem assets, and, if feasible, to proceed with a purchase of
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those assets without an additional public vote. This service territory represents approximately 40,000 customers. See Item 1—Business—Regulated Businesses—Condemnation and Eminent Domain for recoverymore information on this matter.
In February 2021, the MPWMD filed an application with LAFCO seeking approval to become a retail water provider and annex approximately 58 parcels of land into the MPWMD’s boundaries. In December 2021, LAFCO’s commissioners denied the MPWMD’s application to become a retail water provider, determining that the MPWMD does not have the authority to operate the Monterey system assets, a result that precludes the MPWMD from proceeding with a condemnation thereof. On April 1, 2022, the MPWMD filed a lawsuit against LAFCO challenging its denial. On June 17, 2022, the court granted, with conditions, a motion by Cal Am of $32 million in under-collectionsto intervene in the water revenue adjustment mechanism/modified cost balancing account (“WRAM/MCBA”) over a five-year period, plus interest,MPWMD’s lawsuit against LAFCO. On December 13, 2022, the court sustained in part, and modified existing conservation and rationing plans. In its decision,denied in part, demurrers that had been filed by LAFCO seeking to dismiss the CPUC noted concern regarding Cal Am’s residential tariff administration, specifically regarding the lack of verification of customer-provided information about the number of residents per household.MPWMD’s lawsuit. This information was used for generating billing determinants under the tiered rate system. As a result, the CPUC kept this proceeding open to address several issues, including whether Cal Am’s residential tariff administration violated a statute, rule or CPUC decision, and if so, whether a penalty should be imposed.
West Virginia Elk River Freedom Industries Chemical Spill
Dunbar, West Virginia Water Main Break Class Action Litigation
On the evening of June 23, 2015, a 36-inch pre-stressed concrete transmission water main, installed in the early 1970s, failed. The water main is part of WVAWC’sthe West Relay pumping station located in the City of Dunbar.Dunbar, West Virginia and owned by West Virginia-American Water Company, the Company’s West Virginia subsidiary (“WVAWC”). The failure of the main caused water outages and low pressure tofor up to approximately 25,000 WVAWC customers. In the early morning hours of June 25, 2015, crews completed a repair, but that same day, the repair developed a leak. On June 26, 2015, a second repair was completed and service was restored that day to approximately 80% of the impacted customers, and to the remaining approximately 20% by the next morning. The second repair showed signs of leaking but the water main was usable until June 29, 2015, to allow tanks to refill. The system was reconfigured to maintain service to all but approximately 3,000 customers while a final repair was being completed safely on June 30, 2015. Water service was fully restored on July 1, 2015, to all customers affected by this event.
On June 2, 2017, a class action complaint captioned Jeffries, et al. v. West Virginia-American Water Company was filed in West Virginia Circuit Court in Kanawha County against WVAWC on behalf of a purportedan alleged class of residents and business owners who lost water service or pressure as a result of the Dunbar main break. The complaint alleges breach of contract by WVAWC for failure to supply water, violation of West Virginia law regarding the sufficiency of WVAWC’s facilities and negligence by WVAWC in the design, maintenance and operation of the water system. The Jeffriesplaintiffs seek unspecified alleged damages on behalf of the class for lost profits, annoyance and inconvenience, and loss of use, as well as punitive damages for willful, reckless and wanton behavior in not addressing the risk of pipe failure and a large outage.
In February 2020, the Jeffries plaintiffs filed a motion seeking class certification on the issues of breach of contract and negligence, and to determine the applicability of punitive damages and a multiplier for those damages if imposed. In July 2020, the Circuit Court entered an order granting the Jeffries plaintiffs’ motion for certification of a class regarding certain liability issues but denying certification of a class to determine a punitive damages multiplier. In August 2020, WVAWC filed a Petition for Writ of Prohibition in the Supreme Court of Appeals of West Virginia seeking to vacate or remand the Circuit Court’s order certifying the issues class. In January 2021, the Supreme Court of Appeals remanded the case back to the Circuit Court for further consideration in light of a decision issued in another case relating to the class certification issues raised on appeal. On July 5, 2022, the Circuit Court entered an order again certifying a class to address at trial certain liability issues but not to consider damages. On August 26, 2022, WVAWC filed another Petition for Writ of Prohibition in the Supreme Court of Appeals of West Virginia challenging the West Virginia Circuit Court’s July 5, 2022 order. The Writ Petition has been supported by an amicus brief filed by certain water and utility industry trade groups. On February 9, 2023, the Supreme Court of Appeals accepted the Writ Petition by issuing a Rule to Show Cause and scheduling oral argument for April 26, 2023.
The Company and WVAWC believe that WVAWC has valid, meritorious defenses to the claims raised in this class action complaint. complaint and WVAWC will continue to vigorously defend itself against these allegations.
Chattanooga, Tennessee Class Action Litigation
On OctoberSeptember 12, 2017, WVAWC filed2019, Tennessee-American Water Company, the Company’s Tennessee subsidiary (“TAWC”), experienced a leak in a 36-inch water transmission main, which caused service fluctuations or interruptions to TAWC customers and the issuance of a boil water notice. TAWC repaired the main by early morning on September 14, 2019, and restored full water service by the afternoon of September 15, 2019, with the boil water notice lifted for all customers on September 16, 2019.
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On September 17, 2019, a complaint captioned Bruce, et al. v. American Water Works Company, Inc., et al. was filed in the Circuit Court of Hamilton County, Tennessee against TAWC, the Company and Service Company (collectively, the “Tennessee-American Water Defendants”), on behalf of a proposed class of individuals or entities who lost water service or suffered monetary losses as a result of the Chattanooga incident (the “Tennessee Plaintiffs”). The complaint alleged breach of contract and negligence against the Tennessee-American Water Defendants, as well as an equitable remedy of piercing the corporate veil. In the complaint as originally filed, the Tennessee Plaintiffs were seeking an award of unspecified alleged damages for wage losses, business and economic losses, out-of-pocket expenses, loss of use and enjoyment of property and annoyance and inconvenience, as well as punitive damages, attorneys’ fees and pre- and post-judgment interest. In September 2020, the court a motion seeking to dismissdismissed all of the plaintiffs’ counts alleging statutoryTennessee Plaintiffs’ claims in their complaint, except for the breach of contract claims against TAWC, which remain pending. In October 2020, TAWC answered the complaint, and common law tort claims. Furthermore, WVAWC asserts that the PSC, and notparties have been engaging in discovery. On January 12, 2023, after hearing oral argument, the court has primary jurisdiction over allegations involving violationsissued an oral ruling denying the Tennessee Plaintiffs’ motion for class certification. On February 9, 2023, the Tennessee Plaintiffs sought reconsideration of the applicable tariff,ruling by the public utility codecourt, and related rules. This motion remains pending.any final ruling is appealable to the Tennessee Court of Appeals, as allowed under Tennessee law.
TAWC and the Company believe that TAWC has meritorious defenses to the claims raised in this class action complaint, and TAWC is vigorously defending itself against these allegations.
In April 2021, American Water System Voluntary Report
In connection with the sale of the City of East Palo Alto’s water distribution system. Upon the resignation of the system’s general manager in March 2017, AWE discovered that it may have operated the system without a properly certified operator for two years, the triennial LCR sampling was not completed, and the 2015 Consumer Confidence Report improperly reported data for lead and copper samples from the system’s upstream water provider. Promptly after discovering these issues, AWE engaged an outside law firm to conduct an internal investigation and has reported the results of that investigation to the SWRCB.
While it is not possible at this time to predict the SWRCB has previously reserved the right to take additional enforcement action. In February 2018, the SWRCB referred this matter to the San Mateo County, California District Attorney’s office for further investigation. AWE continues to cooperate with the SWRCB, the City of East Palo Alto and the San Mateo County District Attorney regarding this matter. Proven violationsoutcome of the CSDWAinvestigation or determine the amount, if any, of fines, penalties or other liabilities that may resultbe incurred in civil and criminal penalties.connection with it, the Company does not currently believe that the investigation will have a material adverse effect on the Company’s results of operations, financial condition or liquidity.
General
Periodically, the Company is involved in other proceedings or litigation arising in the ordinary course of business. Other than those proceedings described in this Item 3—Legal Proceedings, the Company does not believe that the ultimate resolution of these matters will materially affect its 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 unfavorably to the Company, and that any such unfavorable decisions could have a material adverse effect on its business, financial condition, results of operations and cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicableapplicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Since April 23, 2008, ourthe Company’s common stock has traded on the New York Stock Exchange (“NYSE”) under the symbol “AWK.” The following table summarizes the per share range of the high and low intraday sales prices of our common stock as reported on the NYSE and the per share cash dividends paid and declared:
| Intraday Market Prices | Per Share Dividends Paid | Per Share Dividends Declared (a) | ||||||||||||||
| 2017 | High | Low | ||||||||||||||
| Fourth Quarter | $ | 92.37 | $ | 80.89 | $ | 0.415 | $ | 0.83 | ||||||||
| Third Quarter | 83.14 | 77.36 | 0.415 | 0.415 | ||||||||||||
| Second Quarter | 82.89 | 74.63 | 0.415 | 0.415 | ||||||||||||
| First Quarter | 78.73 | 69.96 | 0.375 | — | ||||||||||||
| Intraday Market Prices | Per Share Dividends Paid | Per Share Dividends Declared (a) | ||||||||||||||
| 2016 | High | Low | ||||||||||||||
| Fourth Quarter | $ | 76.12 | $ | 69.41 | $ | 0.375 | $ | 0.75 | ||||||||
| Third Quarter | 85.24 | 72.12 | 0.375 | 0.375 | ||||||||||||
| Second Quarter | 84.54 | 68.09 | 0.375 | 0.375 | ||||||||||||
| First Quarter | 70.10 | 58.90 | 0.34 | — | ||||||||||||
As of February 15, 2018,January 31, 2023, there were 178,551,923181,858,619 shares of common stock outstanding held by approximately 2,6442,234 record holders. Holders of ourthe Company’s common stock are entitled to receive dividends when they are declared by ourits Board of Directors. When dividends on common stock are declared, they are typically paidSee Note 9—Shareholders’ Equity in March, June, September and December. Future dividends are not guaranteed by the Company and will be dependent on future earnings, financial requirements, contractual provisions of debt agreements and other relevant factors. For moreNotes to Consolidated Financial Statements for additional information regarding restrictions on the payment of dividends on our common stock, see Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Dividends.Company’s dividends.
In February 2015, ourthe Board of Directors authorized an anti-dilutive common stock repurchase program to mitigate the dilutive effect of shares issued through ourthe Company’s dividend reinvestment, employee stock purchase and executive compensation activities. The program allows usthe Company to purchase up to 10 million shares of ourits outstanding common stock over an unrestricted period of time in the open market or through privately negotiated transactions. The program is conducted in accordance with Rule 10b-18 of the Exchange Act, and, to facilitate these repurchases, we enterthe Company enters into Rule 10b5-1 sharestock repurchase plans with a third partythird-party broker, which allow usthe Company to repurchase shares of its common stock at times when we mayit otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. Subject to applicable regulations, wethe Company may elect to amend or cancel the program or sharethe stock repurchase parameters at ourits discretion to manage dilution.
From April 1, 2015, the date repurchases under the anti-dilutive stock repurchase program commenced, through December 31, 2017,2022, the Company repurchased an aggregate of 3,950,0004,860,000 shares of its common stock under the program, including 700,000leaving an aggregate of 5,140,000 shares repurchased during the first half of 2017.available for repurchase under this program. There were no repurchases of common stock in the last half2022.
ITEM 6. [RESERVED]
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Contents
| For the Years Ended December 31, | |||||||||||||||||||
| (In millions, except per share data) | 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||
| Statement of Operations data: | |||||||||||||||||||
| Operating revenues | $ | 3,357 | $ | 3,302 | $ | 3,159 | $ | 3,011 | $ | 2,879 | |||||||||
Income from continuing operations (a) | 426 | 468 | 476 | 430 | 371 | ||||||||||||||
Income from continuing operations per basic common share (a) | $ | 2.39 | $ | 2.63 | $ | 2.66 | $ | 2.40 | $ | 2.08 | |||||||||
Income from continuing operations per diluted common share (a) | 2.38 | 2.62 | 2.64 | 2.39 | 2.07 | ||||||||||||||
| Balance Sheet data: | |||||||||||||||||||
Total assets (b) (c) | $ | 19,482 | $ | 18,482 | $ | 17,241 | $ | 16,038 | $ | 15,064 | |||||||||
Long-term debt and redeemable preferred stock at redemption value (b) | 6,498 | 5,759 | 5,874 | 5,442 | 5,225 | ||||||||||||||
| Other data: | |||||||||||||||||||
| Cash dividends declared per common share | $ | 1.66 | $ | 1.50 | $ | 1.36 | $ | 1.24 | $ | 1.12 | |||||||||
Net cash provided by operating activities (d) (e) (f) | 1,449 | 1,289 | 1,195 | 1,122 | 956 | ||||||||||||||
Net cash used in investing activities (f) | (1,672 | ) | (1,590 | ) | (1,459 | ) | (1,029 | ) | (1,068 | ) | |||||||||
Net cash provided by (used in) financing activities (d) (e) (f) | 207 | 328 | 290 | (104 | ) | 104 | |||||||||||||
| Capital expenditures included in net cash used in investing activities | (1,434 | ) | (1,311 | ) | (1,160 | ) | (956 | ) | (980 | ) | |||||||||
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read together with the Consolidated Financial Statements and the notesNotes thereto included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about ourthe Company’s 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. OurThe Company’s 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 discussthat are discussed under “Forward-Looking Statements,” Item 1A—Risk Factors and elsewhere in this Form 10-K. The Company has a disclosure committee consisting of members of senior management and other key employees involved in the preparation of the Company’s SEC reports. The disclosure committee is actively involved in the review and discussion of the Company’s SEC filings. For a discussion and analysis of the Company’s financial statements for fiscal 2021 compared to fiscal 2020, please refer to Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 16, 2022.
Overview
American Water is the largest and most geographically diverse, publicly-traded water and wastewater utility company in the United States, as measured by both operating revenues and population served. We employThe Company employs approximately 6,9006,500 professionals who provide drinking water, wastewater and other related services to an estimated 15over 14 million people in 46 states, the District of Columbia and Ontario, Canada. Our24 states. The Company’s primary business involves the ownership of utilities that provide water and wastewater services to residential, commercial, industrial, public authority, fire service and sale for resale customers, collectively presented as ourthe “Regulated Businesses.” OurThe Company’s utilities operate in 16approximately 1,600 communities in 14 states and serve approximatelyin the United States, with 3.4 million active customers based on the number of active service connections to ourwith services provided by its water and wastewater networks. Our Regulated BusinessesServices provided by the Company’s utilities are generallysubject to regulation by PUCs. The Company also operates other businesses not subject to economic regulation by certain state utility commissions or other entities engaged in utility regulation, collectively referred to as PUCs. We also operate market-based businesses within four operating segments, providing a broad range of related and complementaryPUCs that provide water and wastewater services to the U.S. government on military bases, municipalities, oil and gas exploration and production companies,installations, as well as commercial, industrial and residential customers. Individually, these four operating segments do not meet the criteria of a reportable segment in accordance with generally accepted accounting principles in the United States (“GAAP”), and aremunicipalities, collectively presented throughout this Form 10-K within “Other.” See Item 1—Business for additional information.
Selected Financial Data
This selected financial data below should be read in conjunction with the Company’s Consolidated Financial Statements and related Notes in this Annual Report on Form 10-K as our Market-Based Businesses, which is consistent with how management assesseswell as the resultsremainder of these businesses.this Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations.
| For the Years Ended December 31, | |||||||||||||||||||||||||||||
| (In millions, except per share data) | 2022 | 2021 | 2020 | 2019 | 2018 | ||||||||||||||||||||||||
| Statement of Operations data: | |||||||||||||||||||||||||||||
| Operating revenues | $ | 3,792 | $ | 3,930 | $ | 3,777 | $ | 3,610 | $ | 3,440 | |||||||||||||||||||
| Net income attributable to common shareholders | 820 | 1,263 | 709 | 621 | 567 | ||||||||||||||||||||||||
| Net income attributable to common shareholders per basic common share | 4.51 | 6.96 | 3.91 | 3.44 | 3.16 | ||||||||||||||||||||||||
| Net income attributable to common shareholders per diluted common share | 4.51 | 6.95 | 3.91 | 3.43 | 3.15 | ||||||||||||||||||||||||
| Balance Sheet data: | |||||||||||||||||||||||||||||
| Total assets | $ | 27,787 | $ | 26,075 | $ | 24,766 | $ | 22,682 | $ | 21,223 | |||||||||||||||||||
| Long-term debt and redeemable preferred stock at redemption value | 10,929 | 10,344 | 9,333 | 8,644 | 7,576 | ||||||||||||||||||||||||
| Other data: | |||||||||||||||||||||||||||||
| Cash dividends declared per common share | $ | 2.62 | $ | 2.41 | $ | 2.20 | $ | 2.00 | $ | 1.82 | |||||||||||||||||||
| Net cash provided by operating activities | 1,108 | 1,441 | 1,426 | 1,383 | 1,386 | ||||||||||||||||||||||||
| Net cash used in investing activities | (2,127) | (1,536) | (2,061) | (1,945) | (2,036) | ||||||||||||||||||||||||
| Net cash provided by (used in) financing activities | 1,000 | (345) | 1,120 | 494 | 726 | ||||||||||||||||||||||||
| Capital expenditures included in net cash used in investing activities | (2,297) | (1,764) | (1,822) | (1,654) | (1,586) | ||||||||||||||||||||||||
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Financial Results
| For the Years Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Diluted earnings per share (GAAP): | |||||||||||
| Net income attributable to common stockholders | $ | 2.38 | $ | 2.62 | $ | 2.64 | |||||
| Non-GAAP adjustments: | |||||||||||
| Impact of Freedom Industries settlement activities | (0.12 | ) | 0.36 | — | |||||||
| Income tax impact | 0.05 | (0.14 | ) | — | |||||||
| Net non-GAAP adjustment | (0.07 | ) | 0.22 | — | |||||||
| Early extinguishment of debt at the parent company | 0.03 | — | — | ||||||||
| Income tax impact | (0.01 | ) | — | — | |||||||
| Net non-GAAP adjustment | 0.02 | — | — | ||||||||
| Impact of re-measurement from the Tax Cuts and Jobs Act | 0.70 | — | — | ||||||||
| Total net non-GAAP adjustments | 0.65 | 0.22 | — | ||||||||
| Adjusted diluted earnings per share (non-GAAP) | $ | 3.03 | $ | 2.84 | $ | 2.64 | |||||
Growth Through Capital Investment in principle to settle claims related to the Freedom Industries chemical spill. We believe that this non-GAAP measure provides investors with useful information by excluding certain matters that may not be indicative of our ongoing operating results,Infrastructure and that providing this non-GAAP measure will allow investors to understand better our businesses’ operating performance and facilitate a meaningful year-to-year comparison of our results of operations. Although management uses this non-GAAP financial measure internally to evaluate our results of operations, we do not intend results excluding the adjustments to represent results as defined by GAAP, and the reader should not consider them as indicators of performance. This non-GAAP financial measure is derived from our consolidated financial information but is not presented in our financial statements prepared in accordance with GAAP, and thus it should be considered in addition to, and not as a substitute for, measures of financial performance prepared in accordance with GAAP. In addition, this non-GAAP financial measure as defined and used above may not be comparable to similarly titled non-GAAP measures used by other companies, and, accordingly, it may have significant limitations on its use.Regulated Acquisitions
In 2017, we invested $1.7 billion, a record level of annual investment since 2022,the Company went publicinvested $2.6 billion, primarily in 2008, and $200 million more than 2016, which had previously been a record year for investment. Our 2017 investment included:
Regulated Businesses Growth and Optimization
•$2.3 billion capital investment in the Regulated Businesses, the substantial majority for infrastructure replacementsimprovements and improvements;replacements; and
•$210315 million to fund acquisitions in ourthe Regulated Businesses, which added approximately 40,00070,000 customers during 2022, in addition to approximately 18,500 customers added through organic growth during 2022. This includes the Company’s Pennsylvania subsidiary’s acquisition of the wastewater system assets from the York City Sewer Authority and the City of York on May 27, 2022, for a cash purchase price of $235 million, $20 million of which was funded as a deposit to the seller in April 2021 in connection with the execution of the acquisition agreement.
On October 11, 2022, the Company’s Pennsylvania subsidiary entered into an agreement to acquire the wastewater assets of the Butler Area Sewer Authority for a total purchase price of $232 million in cash, subject to adjustment as provided for in the Asset Purchase Agreement. This system provides wastewater service for approximately 14,700 customer connections. The Company expects to close this acquisition by the end of 2023, pending regulatory approval.
On March 29, 2021, the Company’s New Jersey subsidiary entered into an agreement to acquire the water and wastewater customers, including bulk customers, highlighted by the:
As of December 31, 2022, the Company has entered into agreements for 21 pending acquisitions in the Regulated Businesses, including the two agreements discussed above, to add approximately 32,400 additional customers.
Sale of Homeowner Services Group
On December 9, 2021, the Company sold all of the equity interests in subsidiaries that comprised the Company’s HOS to a wholly owned subsidiary of funds advised by Apax Partners LLP, a global private equity advisory firm (the “Buyer”), for total consideration of approximately $1.275 billion, resulting in pre-tax gain of $748 million during the fourth quarter of 2021. The consideration was comprised of $480 million in cash, a seller promissory note issued by the Buyer in the principal amount of $720 million, and a contingent cash payment of $75 million payable upon satisfaction of certain conditions on or before December 31, 2023. See Note 18—Fair Value of Financial Information for additional information relating to the seller promissory note and contingent cash payment. For the year ended December 31, 2022, the Company recorded post-close adjustments, primarily related to working capital, of pre-tax income of $20 million, which is included in Gain on sale of businesses on the Consolidated Statements of Operations.
The seller note has a five-year term, is payable in cash, and bears interest at a rate of 7.00% per year during the term. The Company recognized $50 million of interest income during the year ended December 31, 2022, from the seller note.
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The Company and the Buyer also entered into revenue share agreements, pursuant to which the Company is to receive 10% of the revenue generated from customers who are billed for home warranty services through an applicable Company subsidiary (an “on-bill” arrangement), and 15% of the revenue generated from any future on-bill arrangements entered into after the closing. Unless earlier terminated, this agreement has a term of up to 15 years, which may be renewed for up to two five-year periods. The Company recognized $9 million of income during the year ended December 31, 2022, from the revenue share agreements, which is included in Other, net on the Consolidated Statements of Operations. See Note 5—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional information.
Sale of New York American Water Company, Inc.
On January 1, 2022, the Company completed the previously disclosed sale of its regulated utility operations in New York to Liberty Utilities (Eastern Water Holdings) Corp. (“Liberty”), an indirect, wholly owned subsidiary of Algonquin Power & Utilities Corp. Liberty purchased from the Company all of the capital stock of the Company’s New York subsidiary for a purchase price based uponof $608 million in cash. See Note 5—Acquisitions and Divestitures in the fair market valueNotes to Consolidated Financial Statements for additional information.
Sale of Michigan American Water Company
On February 4, 2022, the Company completed the sale of its operations in Michigan for $6 million in cash.
Future Growth
The Company expects to invest between $14 billion to $15 billion over the next five years, and between $30 billion to $34 billion over the next 10 years, including $2.9 billion in 2023. The Company’s expected future investments include:
•capital investment for infrastructure improvements in the Regulated Businesses between $12.5 billion to $13 billion over the next five years, and between $27 billion to $30 billion over the next 10 years, including $2.5 billion expected in 2023; and
•growth from acquisitions in the Regulated Businesses to expand the Company’s water and wastewater customer base of between $1.5 billion to $2 billion over the next five years, and between $3 billion to $4 billion over the next 10 years, including $400 million expected in 2023.
Presented in the following chart is the estimated allocation of the system. Under Act 12,Company’s expected capital investment for infrastructure improvements in its Regulated Businesses over the rate base for this acquisition was approved at $158 million. The McKeesport system, which is now partnext five years, by purpose:
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Military Services Group
On June 30, 2022, MSG was awarded a contract for the ownership, operation, maintenance and maintenancereplacement of the water and wastewater systemsutility system assets at Wright-Patterson Air Force Base, the largest single-site employerNaval Station Mayport in the state of Ohio.Jacksonville, Florida. The contract award includes estimated revenues ofwas effective July 1, 2022, and its total revenue is approximately $490$341 million over a 50-year period, subject to an annual economic price adjustment. InThe performance start date for operation is scheduled for March 1, 2023. MSG operates and maintains water and/or wastewater systems and related capital programs as part of the fourth quarter of 2017,U.S. government’s Utilities Privatization Program. This contract represents the 18th installation in MSG’s footprint and the first contract with respect to a bid protest was filed on this contract by an unsuccessful bidder. U.S. Navy installation.
Permanganate Supply Disruption
In January 2018,2023, a fire occurred at a plant owned by the bid protest was sustained becausesole supplier of permanganate in the Western Hemisphere, which has severely limited the U.S. supply of potassium and sodium permanganate, two chemicals used by water utilities to treat water. The Company is seeking to utilize alternative methods of treatment and to manage its existing supplies of permanganate, but any inability to source sufficient quantities of these chemicals or utilize alternative chemicals may have a required element ofmaterial adverse effect on the solicitation was not properly considered. The protester’s bid proposal will be re-evaluated,Company’s ability to comply with applicable environmental and we believe that the contract previously awarded to our Military Services Group will be reinstated.regulatory requirements.
The following chart depicts the estimated allocation of our expected capital investment for infrastructure improvements in our Regulated Businesses from 2018 to 2022, by purpose:
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Presented in the most comparable financial measure calculated in accordance with GAAP. In calculating the components of the ratio, certain items that may ultimately be excluded would be reflective of events that cannot be reasonably predicted at this time. The unavailable information would include, among other things, the impact of items currently excluded fromtable below is the calculation of the components, adjustments for weather conditions that exceed a certain threshold of variability and adjustments for events or circumstances that may not be reflective of ongoing operating results. The probable significance of these items is also presently unknown and cannot be reasonably estimated.
| For the Years Ended December 31, | |||||||||||||||||
| (Dollars in millions) | 2022 | 2021 | 2020 | ||||||||||||||
| Total operation and maintenance expenses | $ | 1,589 | $ | 1,777 | $ | 1,622 | |||||||||||
| Less: | |||||||||||||||||
| Operation and maintenance expenses—Other | 244 | 452 | 364 | ||||||||||||||
| Total operation and maintenance expenses—Regulated Businesses | 1,345 | 1,325 | 1,258 | ||||||||||||||
| Less: | |||||||||||||||||
| Regulated purchased water expenses | 154 | 153 | 149 | ||||||||||||||
| Allocation of non-operation and maintenance expenses | 31 | 34 | 41 | ||||||||||||||
Adjusted operation and maintenance expenses—Regulated Businesses (i) | $ | 1,160 | $ | 1,138 | $ | 1,068 | |||||||||||
| Total operating revenues | $ | 3,792 | $ | 3,930 | $ | 3,777 | |||||||||||
| Less: | |||||||||||||||||
| Operating revenues—Other | 287 | 546 | 522 | ||||||||||||||
| Total operating revenues—Regulated Businesses | 3,505 | 3,384 | 3,255 | ||||||||||||||
| Less: | |||||||||||||||||
Regulated purchased water revenues (a) | 154 | 153 | 149 | ||||||||||||||
| Revenue reductions from the amortization of EADIT | (89) | (104) | (7) | ||||||||||||||
Adjusted operating revenues—Regulated Businesses (ii) | $ | 3,440 | $ | 3,335 | $ | 3,113 | |||||||||||
Adjusted O&M efficiency ratio—Regulated Businesses (i) / (ii) | 33.7 | % | 34.1 | % | 34.3 | % | |||||||||||
(a) The calculation assumes regulated purchased water revenues approximate regulated purchased water expenses.
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| For the Years Ended December 31, | |||||||||||
| (Dollars in millions) | 2017 | 2016 | 2015 | ||||||||
| Total operation and maintenance expenses | $ | 1,378 | $ | 1,504 | $ | 1,404 | |||||
| Less: | |||||||||||
| Operation and maintenance expenses—Market-Based Businesses | 337 | 372 | 358 | ||||||||
| Operation and maintenance expenses—Other | (50 | ) | (44 | ) | (49 | ) | |||||
| Total operation and maintenance expenses—Regulated Businesses | 1,091 | 1,176 | 1,095 | ||||||||
| Less: | |||||||||||
| Regulated purchased water expenses | 128 | 122 | 117 | ||||||||
| Allocation of non-operation and maintenance expenses | 29 | 30 | 35 | ||||||||
Impact of Freedom Industries settlement activities (a) | (22 | ) | 65 | — | |||||||
Adjusted operation and maintenance expenses—Regulated Businesses (i) | $ | 956 | $ | 959 | $ | 943 | |||||
| Total operating revenues | $ | 3,357 | $ | 3,302 | $ | 3,159 | |||||
| Less: | |||||||||||
| Operating revenues—Market-Based Businesses | 422 | 451 | 434 | ||||||||
| Operating revenues—Other | (23 | ) | (20 | ) | (18 | ) | |||||
| Total operating revenues—Regulated Businesses | 2,958 | 2,871 | 2,743 | ||||||||
| Less: | |||||||||||
Regulated purchased water revenues (b) | 128 | 122 | 117 | ||||||||
Adjusted operating revenues—Regulated Businesses (ii) | $ | 2,830 | $ | 2,749 | $ | 2,626 | |||||
Adjusted O&M efficiency ratio—Regulated Businesses (i) / (ii) | 33.8 | % | 34.9 | % | 35.9 | % | |||||
Regulatory Matters
Presented in the table provides general rate case authorizations effective from 2015 through 2017, and depictsbelow are annualized incremental revenues, including reductions for the amortization of EADIT that are generally offset in income tax expense, assuming a constant water sales volume:volume and customer count, resulting from general rate case authorizations that became effective during 2022:
| (In millions) | 2017 | 2016 | 2015 | ||||||||
| General rate case authorizations by state: | |||||||||||
New York (effective June 1, 2017) | $ | 4 | $ | — | $ | — | |||||
Virginia (a) | 5 | — | — | ||||||||
Iowa (effective March 27, 2017) | 4 | — | — | ||||||||
California (b) | 5 | 2 | 5 | ||||||||
Illinois (effective January 1, 2017) | 25 | — | — | ||||||||
Kentucky (effective August 28, 2016) | — | 7 | — | ||||||||
Missouri (effective July 20, 2016 and July 22, 2016) | — | 5 | — | ||||||||
West Virginia (effective February 25, 2016) | — | 18 | — | ||||||||
Indiana (effective January 29, 2016 and January 29, 2015) | — | 2 | 5 | ||||||||
New Jersey (effective September 21, 2015) | — | — | 22 | ||||||||
| Other | — | — | 1 | ||||||||
| Total general rate case authorizations | $ | 43 | $ | 34 | $ | 33 | |||||
| Amount | |||||||||||
| General rate | |||||||||||
| September 1, 2022 | $ | 46 | |||||||||
| Hawaii | July 1, 2022 | 2 | |||||||||
| West Virginia | February 25, 2022 | 13 | |||||||||
| California, Step | January 1, | 9 | |||||||||
| Pennsylvania, Step Increase | January 1, | 20 | |||||||||
| Total general rate case authorizations | $ | 90 | |||||||||
| (In millions) | Effective Date | Amount | |||||||||
| General rate cases by state: | |||||||||||
| Pennsylvania | January 28, 2023 | $ | 138 | ||||||||
| Illinois | January 1, 2023 | 67 | |||||||||
| California, Step Increase | January 1, 2023 | 13 | |||||||||
| Total general rate case authorizations | $ | 218 | |||||||||
On December 15, 2022, the Illinois Commerce Commission issued an order approving the adjustment of base rates requested in a rate case filed on February 10, 2022, by the Company’s Illinois subsidiary. As updated in the Illinois subsidiary’s June 29, 2022 rebuttal filing, was approved authorizingthe request sought $83 million in additional annualized revenues of $62excluding previously recovered infrastructure surcharges. The general rate case order approved a $67 million, annualized increase in water and wastewater system revenues excluding previously recovered infrastructure surcharges, effective on January 1, 20182023, based on an authorized return on equity of 9.8%, authorized rate base of $1.64 billion, a common equity ratio of 49.0% and a debt ratio of 51.0%. The annualized revenue increase is being driven primarily by significant water and wastewater system capital investments since the Illinois subsidiary’s 2017 rate case order that have been completed or are planned through December 31, 2023, expected higher pension and other postretirement benefit costs, and increases in production costs, including chemicals, fuel and power costs.
On December 8, 2022, the Pennsylvania Public Utility Commission issued an order approving the joint settlement of the rate case filed on April 29, 2022, by the Company’s Pennsylvania subsidiary. The general rate case order approved a $138 million annualized increase in water and wastewater revenues and authorizes implementation of the new water and wastewater rates effective January 28, 2023. The rate case proceeding was resolved through a “black box” settlement agreement and did not specify an approved return on equity (“ROE”). The annualized revenue increase is driven primarily by significant incremental capital investments since the Pennsylvania subsidiary’s 2021 rate case order that will be completed through December 31, 2023, increases in pension and other postretirement benefits expense and increases in production costs, including chemicals, fuel and power costs. The general rate case order also includes recovery of the Company’s Pennsylvania subsidiary’s COVID-19 deferral balance.
On August 17, 2022, the Company’s New Jersey subsidiary was authorized additional annual revenues of $46 million in its general rate case, effective September 1, 2022, based on an authorized return on equity of 9.6%, authorized rate base of $4.15 billion, a common equity ratio of 54.6% and a long-term debt ratio of 45.4%. The request incorporated updated estimates of production costs, including chemicals, fuel and power costs. Beginning January 1, 2023, the Company’s New Jersey subsidiary will defer as a regulatory asset or liability, as appropriate, the difference between its pension expense and other postretirement benefits expense and those amounts included in base rates. The deferral period for this regulatory asset or liability will be two years or, if earlier, will end at the conclusion of the Company’s New Jersey subsidiary’s next general rate case. The Company’s New Jersey subsidiary also withdrew its request, without prejudice, to recover its existing authorized COVID-19-related regulatory asset in the general rate case and will seek recovery in a separate proceeding within the process established in the New Jersey Board of Public Utilities’ (the “NJBPU”) generic COVID-19-related proceeding.
53
On February 24, 2022, WVAWC was authorized additional annual revenues of $13 million in its general rate case, effective February 25, 2022, based on an authorized return on equity of 9.8%, authorized rate base of $734 million and a common equity ratio of 47.9%. Staff of the Public Service Commission of West Virginia moved for reconsideration of the final order on several grounds. WVAWC filed its response to the Staff's Petition for Reconsideration on March 28, 2022, in support of the authorized revenue requirement. On October 21, 2022, the Public Service Commission of West Virginia denied the motion for reconsideration.
Pending General Rate Case and Cost of Capital Filings
On September 15, 2017, our New JerseyJuly 1, 2022, the Company’s California subsidiary filed a general rate case requesting $129an increase in 2024 revenue of $56 million and a total increase in revenue over the 2024 to 2026 period of $95 million, with all increases compared against 2022 revenues. The Company updated its filing in January 2023 to capture the authorized step increase effective January 1, 2023. The filing was also updated to incorporate a decoupling proposal and a revision to the Company’s sales and associated variable expense forecast. The revised requested additional annualized waterrevenues for the test year 2024 is now $37 million, compared against 2023 revenues. This excludes the proposed step rate and wastewater revenues.attrition rate increase for 2025 and 2026 of $20 million and $19 million, respectively. The total revenue requirement request for the three-year rate case cycle, incorporating updates to present rate revenues and forecasted demand, is $76 million.
On June 30, 2017, ourJuly 1, 2022, the Company’s Missouri subsidiary filed a general rate case requesting $84$105 million in additional annualized water and wastewater revenues.
On April 3, 2017, our California subsidiary filed an application requesting a cost of capital of 8.49%, compared to 8.41% currently authorized. On February 6, 2018, a proposed decision was issued byNovember 15, 2021, the administrative law judge and we plan to work through the regulatory process with the CPUC over the next several months.
The Company’s California subsidiary filed an updatesubmitted its application on May 3, 2021, to set its general rate case, adjusting its requestcost of capital for additional annualized revenues2022 through 2024. According to $32 million and increasing its requestthe CPUC’s procedural schedule, a decision setting the authorized cost of capital is expected to $9 millionbe issued in the escalation yearfirst quarter of 2019.2023.
Infrastructure Surcharges
A number of states have authorized the use of regulatory mechanisms that permit rates to be adjusted outside of a general rate case for certain costs and investments, such as infrastructure surcharge mechanisms that permit recovery of capital investments to replace aging infrastructure.
| (In millions) | 2017 | 2016 | 2015 | ||||||||
| Infrastructure surcharge authorizations by state: | |||||||||||
Missouri (effective December 15, 2017 and June 27, 2015) | $ | 6 | $ | — | $ | 2 | |||||
New Jersey (a) | 14 | 19 | 9 | ||||||||
Indiana (effective March 22, 2017 and May 4, 2016) | 8 | 3 | — | ||||||||
Tennessee (effective March 14, 2017, March 15, 2016 and June 29, 2015) | 2 | 2 | 2 | ||||||||
Pennsylvania (b) | 1 | 28 | 14 | ||||||||
West Virginia (effective January 1, 2017) | 2 | — | — | ||||||||
Illinois (c) | — | 7 | 6 | ||||||||
New York (effective December 1, 2015) | — | — | 1 | ||||||||
| Total infrastructure surcharge authorizations | $ | 33 | $ | 59 | $ | 34 | |||||
| Amount | |||||||||||
| Infrastructure surcharges by state: | |||||||||||
| $ | 11 | ||||||||||
| Pennsylvania | (b) | 19 | |||||||||
| Missouri | (c) | 30 | |||||||||
| Tennessee | August 8, 2022 | 3 | |||||||||
| Kentucky | July 1, 2022 | 3 | |||||||||
| Indiana | March 21, 2022 | 8 | |||||||||
| West Virginia | March 1, 2022 | 3 | |||||||||
| Illinois | January 1, | 6 | |||||||||
| Total infrastructure surcharge | $ | 83 | |||||||||
(a)In 2022, $1 million was effective December 30 and $10 million was effective June 27.
(b)In 2022, $8 million was effective on October 1, $9 million was effective July 1 and $2 million was effective April 1.
(c)In 2022, $18 million was effective August 11 and $12 million was effective February 1.
54
Presented in the table below are annualized incremental revenues, assuming a constant water sales volume and customer count, resulting from infrastructure surcharge authorizations that became effective on or after January 1, 2023:
| Amount | |||||||||||
| Infrastructure surcharge filings by state: | |||||||||||
| Missouri | January 16, 2023 | $ | 15 | ||||||||
| West Virginia | January 1, | 7 | |||||||||
| Pennsylvania | January 1, | 3 | |||||||||
| Total infrastructure surcharge filings | $ | 25 | |||||||||
Pending Infrastructure Surcharge Filings
| (In millions) | Date Filed | Amount | |||
| Pending infrastructure surcharge filings by state: | |||||
| Indiana | January 18, 2018 | $ | 7 | ||
| Tennessee | November 7, 2017 | 2 | |||
| Virginia | October 31, 2017 | 1 | |||
| Total pending infrastructure surcharge filings | $ | 10 | |||
Other Regulatory Matters
In September 2020, the CPUC released a decision under its Low-Income Rate Payer Assistance program rulemaking that required the Company’s California subsidiary to file a proposal to alter its water revenue adjustment mechanism in its next general rate case filing in 2022, which would become effective in January 2024. On August 4, 2017, our IllinoisOctober 5, 2020, the Company’s California subsidiary filed an application for rehearing of the decision and following the CPUC’s denial of its rehearing application in September 2021, the Company’s California subsidiary filed a petition for writ of review with the Illinois Commerce CommissionCalifornia Supreme Court on October 27, 2021. On May 18, 2022, the California Supreme Court issued a writ of review for the Company’s California subsidiary’s petition and the petitions filed by other entities challenging the decision. Independent of the judicial challenge, California passed Senate Bill 1469, which allows the CPUC to consider and authorize the implementation of a mechanism that separates the water corporation’s revenue and its water sales. Legislation was signed by the Governor on September 30, 2022, and became effective on January 1, 2023. In response to the legislation, on January 27, 2023, the Company’s California subsidiary filed an updated application requesting the CPUC to consider a Water Resources Sustainability Plan decoupling mechanism in its pending 2022 general rate case, which would be effective 2024 through 2026.
On March 2, 2021, an administrative law judge (“ICC”ALJ”) to place into effect, revised depreciation rates applicable to our depreciablein the Office of Administrative Law of New Jersey filed an initial decision with the NJBPU that recommended denial of a petition filed by the Company’s New Jersey subsidiary, which sought approval of acquisition adjustments in rate base of $29 million associated with the acquisitions of Shorelands Water Company, Inc. in 2017 and the Borough of Haddonfield’s water and wastewater plant, resulting fromsystems in 2015. On July 29, 2021, the NJBPU issued an order adopting the ALJ’s initial decision without modification. The Company’s New Jersey subsidiary filed a new depreciation study.Notice of Appeal with the New Jersey Appellate Division on September 10, 2021. The petition requested that these new rates would be effective January 1, 2017. On November 21, 2017,Company’s New Jersey subsidiary filed its brief in support of the ICC approved this petition, which resulted in lower depreciation expense of $16 million in 2017.
55
Table of 2017. This change in legislation was the primary cause of an increase to our unitary deferred income tax liability of $11 million. The portion of this increase related to our New York subsidiary calculated on a stand-alone basis was $7 million, and was offset by a regulatory asset, as we believe it is probable of recovery in future rates. The remaining increase in the deferred income tax liability was calculated through state tax apportionment rates and recorded at the consolidated level, resulting in a non-cash, cumulative charge to earnings of $4 million during the second quarter of 2017.Contents
Consolidated Results of Operations
| For the Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (In millions) | |||||||||||||||||
| Operating revenues | $ | 3,792 | $ | 3,930 | $ | 3,777 | |||||||||||
| Operating expenses: | |||||||||||||||||
| Operation and maintenance | 1,589 | 1,777 | 1,622 | ||||||||||||||
| Depreciation and amortization | 649 | 636 | 604 | ||||||||||||||
| General taxes | 281 | 321 | 303 | ||||||||||||||
| Total operating expenses, net | 2,519 | 2,734 | 2,529 | ||||||||||||||
| Operating income | 1,273 | 1,196 | 1,248 | ||||||||||||||
| Other income (expense): | |||||||||||||||||
| Interest expense | (433) | (403) | (397) | ||||||||||||||
| Interest income | 52 | 4 | 2 | ||||||||||||||
| Non-operating benefit costs, net | 77 | 78 | 49 | ||||||||||||||
| Gain on sale of businesses | 19 | 747 | — | ||||||||||||||
| Other, net | 20 | 18 | 22 | ||||||||||||||
| Total other income (expense) | (265) | 444 | (324) | ||||||||||||||
| Income before income taxes | 1,008 | 1,640 | 924 | ||||||||||||||
| Provision for income taxes | 188 | 377 | 215 | ||||||||||||||
| Net income attributable to common shareholders | $ | 820 | $ | 1,263 | $ | 709 | |||||||||||
| For the Years Ended December 31, | Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2017 vs. 2016 | 2016 vs. 2015 | |||||||||||||||||||||
| (Dollars in millions) | $ | % | $ | % | |||||||||||||||||||||
| Operating revenues | $ | 3,357 | $ | 3,302 | $ | 3,159 | $ | 55 | 1.7 | $ | 143 | 4.5 | |||||||||||||
| Operating expenses: | |||||||||||||||||||||||||
| Operation and maintenance | 1,378 | 1,504 | 1,404 | (126 | ) | (8.4 | ) | 100 | 7.1 | ||||||||||||||||
| Depreciation and amortization | 492 | 470 | 440 | 22 | 4.7 | 30 | 6.8 | ||||||||||||||||||
| General taxes | 259 | 258 | 243 | 1 | 0.4 | 15 | 6.2 | ||||||||||||||||||
| Gain on asset dispositions and purchases | (16 | ) | (10 | ) | (3 | ) | (6 | ) | 60.0 | (7 | ) | 233.3 | |||||||||||||
| Total operating expenses, net | 2,113 | 2,222 | 2,084 | (109 | ) | (4.9 | ) | 138 | 6.6 | ||||||||||||||||
| Operating income | 1,244 | 1,080 | 1,075 | 164 | 15.2 | 5 | 0.5 | ||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||||
| Interest, net | (342 | ) | (325 | ) | (308 | ) | (17 | ) | 5.2 | (17 | ) | 5.5 | |||||||||||||
| Loss on early extinguishment of debt | (7 | ) | — | — | (7 | ) | 100.0 | — | — | ||||||||||||||||
| Other, net | 17 | 15 | 15 | 2 | 13.3 | — | — | ||||||||||||||||||
| Total other income (expense) | (332 | ) | (310 | ) | (293 | ) | (22 | ) | 7.1 | (17 | ) | 5.8 | |||||||||||||
| Income before income taxes | 912 | 770 | 782 | 142 | 18.4 | (12 | ) | (1.5 | ) | ||||||||||||||||
| Provision for income taxes | 486 | 302 | 306 | 184 | 60.9 | (4 | ) | (1.3 | ) | ||||||||||||||||
| Net income attributable to common stockholders | $ | 426 | $ | 468 | $ | 476 | $ | (42 | ) | (9.0 | ) | $ | (8 | ) | (1.7 | ) | |||||||||
Segment Results of Operations
As a result of the sale of HOS, the categories which were previously shown as “Market-Based Businesses” and “Other” have been combined and shown as Other. Segment results for the year ended December 31, 2021, have been adjusted retrospectively to reflect this change.
56
Regulated Businesses Segment
| For the Years Ended December 31, | Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2017 vs. 2016 | 2016 vs. 2015 | |||||||||||||||||||||
| (Dollars in millions) | $ | % | $ | % | |||||||||||||||||||||
| Operating revenues | $ | 2,958 | $ | 2,871 | $ | 2,743 | $ | 87 | 3.0 | $ | 128 | 4.7 | |||||||||||||
| Operation and maintenance | 1,091 | 1,176 | 1,095 | (85 | ) | (7.2 | ) | 81 | 7.4 | ||||||||||||||||
| Operating expenses, net | 1,781 | 1,852 | 1,732 | (71 | ) | (3.8 | ) | 120 | 6.9 | ||||||||||||||||
| Net income attributable to common stockholders | 559 | 472 | 473 | 87 | 18.4 | (1 | ) | (0.2 | ) | ||||||||||||||||
| For the Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (In millions) | |||||||||||||||||
| Operating revenues | $ | 3,505 | $ | 3,384 | $ | 3,255 | |||||||||||
| Operation and maintenance | 1,345 | 1,325 | 1,258 | ||||||||||||||
| Depreciation and amortization | 633 | 601 | 562 | ||||||||||||||
| General taxes | 264 | 301 | 285 | ||||||||||||||
| Other operating expenses | — | 1 | (3) | ||||||||||||||
| Other income (expense) | (220) | (195) | (221) | ||||||||||||||
| Income before income taxes | 1,042 | 962 | 932 | ||||||||||||||
| Provision for income taxes | 188 | 172 | 217 | ||||||||||||||
| Net income attributable to common shareholders | $ | 854 | $ | 789 | $ | 715 | |||||||||||
Operating Revenues
| For the Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (In millions) | |||||||||||||||||
| Water services: | |||||||||||||||||
| Residential | $ | 1,941 | $ | 1,935 | $ | 1,895 | |||||||||||
| Commercial | 710 | 676 | 627 | ||||||||||||||
| Fire service | 147 | 151 | 147 | ||||||||||||||
| Industrial | 153 | 141 | 133 | ||||||||||||||
| Public and other | 267 | 239 | 226 | ||||||||||||||
| Total water services | 3,218 | 3,142 | 3,028 | ||||||||||||||
| Wastewater services: | |||||||||||||||||
| Residential | 174 | 151 | 134 | ||||||||||||||
| Commercial | 45 | 37 | 34 | ||||||||||||||
| Industrial | 4 | 4 | 3 | ||||||||||||||
| Public and other | 19 | 16 | 14 | ||||||||||||||
| Total wastewater services | 242 | 208 | 185 | ||||||||||||||
Other (a) | 45 | 34 | 42 | ||||||||||||||
| Total operating revenues | $ | 3,505 | $ | 3,384 | $ | 3,255 | |||||||||||
(a)Includes other operating revenues consisting primarily of miscellaneous utility charges, fees and the ensuing discussions provide explanationsrents.
57
| For the Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (Gallons in millions) | |||||||||||||||||
| Billed water services volumes: | |||||||||||||||||
| Residential | 162,105 | 173,644 | 178,753 | ||||||||||||||
| Commercial | 77,627 | 77,476 | 75,875 | ||||||||||||||
| Industrial | 37,265 | 35,738 | 34,875 | ||||||||||||||
| Fire service, public and other | 51,966 | 51,957 | 49,031 | ||||||||||||||
| Total billed water services volumes | 328,963 | 338,815 | 338,534 | ||||||||||||||
Included in operating revenues for the variances2021, was $127 million related to the three components of operating revenues––water services revenues, wastewater services revenues and other revenues:
| For the Years Ended December 31, | Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2017 vs. 2016 | 2016 vs. 2015 | |||||||||||||||||||||
| (Dollars in millions) | $ | % | $ | % | |||||||||||||||||||||
| Billed water services revenues: | |||||||||||||||||||||||||
| Residential | $ | 1,654 | $ | 1,592 | $ | 1,536 | $ | 62 | 3.9 | $ | 56 | 3.6 | |||||||||||||
| Commercial | 603 | 580 | 559 | 23 | 4.0 | 21 | 3.8 | ||||||||||||||||||
| Industrial | 137 | 134 | 130 | 3 | 2.2 | 4 | 3.1 | ||||||||||||||||||
| Public and other | 351 | 338 | 331 | 13 | 3.8 | 7 | 2.1 | ||||||||||||||||||
| Other | 31 | 53 | 39 | (22 | ) | (41.5 | ) | 14 | 35.9 | ||||||||||||||||
| Total billed water services revenues | 2,776 | 2,697 | 2,595 | 79 | 2.9 | 102 | 3.9 | ||||||||||||||||||
| Unbilled water services revenues | (11 | ) | 13 | (3 | ) | (24 | ) | (184.6 | ) | 16 | (533.3 | ) | |||||||||||||
| Total water services revenues | 2,765 | 2,710 | 2,592 | 55 | 2.0 | 118 | 4.6 | ||||||||||||||||||
| Wastewater services revenues | 142 | 112 | 97 | 30 | 26.8 | 15 | 15.5 | ||||||||||||||||||
| Other revenues | 51 | 49 | 54 | 2 | 4.1 | (5 | ) | (9.3 | ) | ||||||||||||||||
| Total operating revenues | $ | 2,958 | $ | 2,871 | $ | 2,743 | $ | 87 | 3.0 | $ | 128 | 4.7 | |||||||||||||
| For the Years Ended December 31, | Increase (Decrease) | Increase (Decrease) | ||||||||||||||||||
| 2017 | 2016 | 2015 | 2017 vs. 2016 | 2016 vs. 2015 | ||||||||||||||||
| (Gallons in millions) | Gallons | % | Gallons | % | ||||||||||||||||
| Billed water services volumes: | ||||||||||||||||||||
| Residential | 174,420 | 174,599 | 175,653 | (179 | ) | (0.1 | ) | (1,054 | ) | (0.6 | ) | |||||||||
| Commercial | 82,147 | 82,489 | 81,772 | (342 | ) | (0.4 | ) | 717 | 0.9 | |||||||||||
| Industrial | 39,404 | 38,465 | 38,991 | 939 | 2.4 | (526 | ) | (1.3 | ) | |||||||||||
| Public and other | 51,341 | 50,678 | 51,324 | 663 | 1.3 | (646 | ) | (1.3 | ) | |||||||||||
| Total billed water services volumes | 347,312 | 346,231 | 347,740 | 1,081 | 0.3 | (1,509 | ) | (0.4 | ) | |||||||||||
Operation and Maintenance
| For the Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (In millions) | |||||||||||||||||
| Employee-related costs | $ | 505 | $ | 522 | $ | 495 | |||||||||||
| Production costs | 387 | 353 | 335 | ||||||||||||||
| Operating supplies and services | 242 | 245 | 242 | ||||||||||||||
| Maintenance materials and supplies | 96 | 93 | 84 | ||||||||||||||
| Customer billing and accounting | 59 | 66 | 58 | ||||||||||||||
| Other | 56 | 46 | 44 | ||||||||||||||
| Total | $ | 1,345 | $ | 1,325 | $ | 1,258 | |||||||||||
Employee-Related Costs
| For the Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (In millions) | |||||||||||||||||
| Salaries and wages | $ | 395 | $ | 402 | $ | 382 | |||||||||||
| Group insurance | 59 | 66 | 65 | ||||||||||||||
| Pensions | 21 | 25 | 20 | ||||||||||||||
| Other benefits | 30 | 29 | 28 | ||||||||||||||
| Total | $ | 505 | $ | 522 | $ | 495 | |||||||||||
Included in employee-related costs for the variances2021, was $16 million related to the major components of operation and maintenance expense:
| For the Years Ended December 31, | Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2017 vs. 2016 | 2016 vs. 2015 | |||||||||||||||||||||
| (Dollars in millions) | $ | % | $ | % | |||||||||||||||||||||
| Production costs | $ | 298 | $ | 288 | $ | 282 | $ | 10 | 3.5 | $ | 6 | 2.1 | |||||||||||||
| Employee-related costs | 446 | 443 | 430 | 3 | 0.7 | 13 | 3.0 | ||||||||||||||||||
| Operating supplies and services | 209 | 212 | 194 | (3 | ) | (1.4 | ) | 18 | 9.3 | ||||||||||||||||
| Maintenance materials and supplies | 70 | 73 | 70 | (3 | ) | (4.1 | ) | 3 | 4.3 | ||||||||||||||||
| Customer billing and accounting | 51 | 54 | 63 | (3 | ) | (5.6 | ) | (9 | ) | (14.3 | ) | ||||||||||||||
| Other | 17 | 106 | 56 | (89 | ) | (84.0 | ) | 50 | 89.3 | ||||||||||||||||
| Total | $ | 1,091 | $ | 1,176 | $ | 1,095 | $ | (85 | ) | (7.2 | ) | $ | 81 | 7.4 | |||||||||||
| For the Years Ended December 31, | Increase (Decrease) | Increase (Decrease) | ||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2017 vs. 2016 | 2016 vs. 2015 | ||||||||||||||||||||
| (Dollars in millions) | $ | % | $ | % | ||||||||||||||||||||
| Purchased water | $ | 128 | $ | 122 | $ | 117 | $ | 6 | 4.9 | $ | 5 | 4.3 | ||||||||||||
| Fuel and power | 89 | 87 | 89 | 2 | 2.3 | (2 | ) | (2.2 | ) | |||||||||||||||
| Chemicals | 47 | 47 | 48 | — | — | (1 | ) | (2.1 | ) | |||||||||||||||
| Waste disposal | 34 | 32 | 28 | 2 | 6.3 | 4 | 14.3 | |||||||||||||||||
| Total | $ | 298 | $ | 288 | $ | 282 | $ | 10 | 3.5 | $ | 6 | 2.1 | ||||||||||||
| For the Years Ended December 31, | Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2017 vs. 2016 | 2016 vs. 2015 | |||||||||||||||||||||
| (Dollars in millions) | $ | % | $ | % | |||||||||||||||||||||
| Salaries and wages | $ | 334 | $ | 336 | $ | 321 | $ | (2 | ) | (0.6 | ) | $ | 15 | 4.7 | |||||||||||
| Pensions | 32 | 28 | 30 | 4 | 14.3 | (2 | ) | (6.7 | ) | ||||||||||||||||
| Group insurance | 54 | 58 | 60 | (4 | ) | (6.9 | ) | (2 | ) | (3.3 | ) | ||||||||||||||
| Other benefits | 26 | 21 | 19 | 5 | 23.8 | 2 | 10.5 | ||||||||||||||||||
| Total | $ | 446 | $ | 443 | $ | 430 | $ | 3 | 0.7 | $ | 13 | 3.0 | |||||||||||||
58
Production Costs
| For the Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (In millions) | |||||||||||||||||
| Purchased water | $ | 154 | $ | 153 | $ | 149 | |||||||||||
| Fuel and power | 104 | 97 | 88 | ||||||||||||||
| Chemicals | 78 | 59 | 57 | ||||||||||||||
| Waste disposal | 51 | 44 | 41 | ||||||||||||||
| Total | $ | 387 | $ | 353 | $ | 335 | |||||||||||
Included in production costs for 2021, was $8 million related to higher capital investment; partially offset by a
| For the Years Ended December 31, | Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2017 vs. 2016 | 2016 vs. 2015 | |||||||||||||||||||||
| (Dollars in millions) | $ | % | $ | % | |||||||||||||||||||||
| Contracted services | $ | 84 | $ | 84 | $ | 81 | $ | — | — | $ | 3 | 3.7 | |||||||||||||
| Office supplies and services | 49 | 45 | 44 | 4 | 8.9 | 1 | 2.3 | ||||||||||||||||||
| Transportation | 14 | 13 | 16 | 1 | 7.7 | (3 | ) | (18.8 | ) | ||||||||||||||||
| Rents | 15 | 14 | 14 | 1 | 7.1 | — | — | ||||||||||||||||||
| Other | 47 | 56 | 39 | (9 | ) | (16.1 | ) | 17 | 43.6 | ||||||||||||||||
| Total | $ | 209 | $ | 212 | $ | 194 | $ | (3 | ) | (1.4 | ) | $ | 18 | 9.3 | |||||||||||
Customer Billing and Accounting
In 2017 and 2016,2022, as compared to 2021, customer billing and accounting decreased $3$7 million and $9 million, or 5.6% and 14.3%, respectively. The decrease in both years was primarily due to the sale of the Company’s New York operations and lower uncollectible customer uncollectible expense attributable to focused collection efforts.accounts expense.
Other
In 2017,2022, as compared to 2021, other operation and maintenance decreased $89increased $10 million or 84.0%, primarily due to a:increase to the insurance other than group reserve which had an unfavorable claims experience compared to prior year.
In 2016, other operation and maintenance expenses increased $50 million, or 89.3%, primarily due2022, as compared to a:
General Taxes
In 2022, as compared to 2021, general taxes decreased $37 million, primarily related to the sale of the Company’s New York operations.
Other Income (Expense)
In 2022, as compared to 2021, other expenses increased $25 million primarily due to higher interest expense as a result of an $800 million long-term debt issuance in May 2022 and amortization expense resulting from our acquisition of Keystonehigher interest rates on short-term debt due to macroeconomic market conditions.
Provision for Income Taxes
In 2022, as compared to 2021, the Regulated Businesses’ provision for income taxes increased $16 million. The Regulated Businesses’ effective income tax rate was 18.0% and 17.9% for the years ended December 31, 2022 and 2021, respectively. The increase was primarily due to the decrease in the third quarteramortization of 2015; and
Presented in the table summarizes certain financialbelow is information for our Market-Based Businesses and the ensuing discussions provide explanations for the variance related to operating revenues:Other:
| For the Years Ended December 31, | Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2017 vs. 2016 | 2016 vs. 2015 | |||||||||||||||||||||
| (Dollars in millions) | $ | % | $ | % | |||||||||||||||||||||
| Operating revenues | $ | 422 | $ | 451 | $ | 434 | $ | (29 | ) | (6.4 | ) | $ | 17 | 3.9 | |||||||||||
| Operation and maintenance | 337 | 372 | 358 | (35 | ) | (9.4 | ) | 14 | 3.9 | ||||||||||||||||
| Operating expenses, net | 360 | 391 | 370 | (31 | ) | (7.9 | ) | 21 | 5.7 | ||||||||||||||||
| Net income attributable to common stockholders | 38 | 39 | 42 | (1 | ) | (2.6 | ) | (3 | ) | (7.1 | ) | ||||||||||||||
| For the Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (In millions) | |||||||||||||||||
| Operating revenues | $ | 287 | $ | 546 | $ | 522 | |||||||||||
| Operation and maintenance | 244 | 452 | 364 | ||||||||||||||
| Depreciation and amortization | 16 | 35 | 42 | ||||||||||||||
| Gain on sale of businesses | 19 | 748 | 3 | ||||||||||||||
| Income before income taxes | (34) | 678 | (8) | ||||||||||||||
| Provision for income taxes | — | 205 | (2) | ||||||||||||||
| Net (loss) income attributable to common shareholders | $ | (34) | $ | 474 | $ | (6) | |||||||||||
Operating Revenues
In 2017,2022, operating revenues decreased $29$259 million or 6.4%, primarily due to a:
Operation and Maintenance
Presented in the table below is information regarding the main components of a large projectOther’s operating and maintenance expense:
| For the Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (In millions) | |||||||||||||||||
| Operating supplies and services | $ | 120 | $ | 191 | $ | 118 | |||||||||||
| Maintenance materials and supplies | 35 | 123 | 114 | ||||||||||||||
| Employee-related costs | 73 | 109 | 111 | ||||||||||||||
| Production costs | 10 | 7 | 6 | ||||||||||||||
| Other | 6 | 22 | 15 | ||||||||||||||
| Total | $ | 244 | $ | 452 | $ | 364 | |||||||||||
Operating Supplies and Services
Included in mid-2016 at Fort Polk;operating supplies and a
Included in maintenance materials and supplies for 2021, was $96 million increase in our Homeowner Services Group mainly duerelated to contract growth, as well as expansion into new geographic areasthe Company’s HOS operations. Excluding the Company’s HOS operations, for 2022, operating supplies and price increases for existing customers; and a
Employee-Related Costs
In 2016, operating revenues increased $172022, as compared to 2021, employee-related costs decreased $36 million or 3.9%, primarily due to a:the sale of HOS.
In 2022, as compared to 2021, depreciation and amortization decreased $19 million increase from Keystone, which was acquired inprimarily due to the thirdsale of HOS.
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Gain on Sale of Businesses
During the fourth quarter of 2015;
| For the Years Ended December 31, | Increase (Decrease) | Increase (Decrease) | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2017 vs. 2016 | 2016 vs. 2015 | |||||||||||||||||||||
| (Dollars in millions) | $ | % | $ | % | |||||||||||||||||||||
| Production costs | $ | 37 | $ | 35 | $ | 36 | $ | 2 | 5.7 | $ | (1 | ) | (2.8 | ) | |||||||||||
| Employee-related costs | 97 | 94 | 76 | 3 | 3.2 | 18 | 23.7 | ||||||||||||||||||
| Operating supplies and services | 121 | 165 | 182 | (44 | ) | (26.7 | ) | (17 | ) | (9.3 | ) | ||||||||||||||
| Maintenance materials and supplies | 67 | 68 | 57 | (1 | ) | (1.5 | ) | 11 | 19.3 | ||||||||||||||||
| Other | 15 | 10 | 7 | 5 | 50.0 | 3 | 42.9 | ||||||||||||||||||
| Total | $ | 337 | $ | 372 | $ | 358 | $ | (35 | ) | (9.4 | ) | $ | 14 | 3.9 | |||||||||||
In 2017, operation and maintenance expense2022, as compared to 2021, provision for income taxes decreased $35$205 million or 9.4%, primarily due to a:the sale of HOS. See Note 5—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional information.
Tax Matters
On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 (the “IRA”). The IRA contains a Corporate Alternative Minimum Tax (“CAMT”) provision, effective January 1, 2023. To determine if a company is considered an applicable corporation subject to CAMT, the company’s average adjusted financial statement income (“AFSI”) for the three consecutive years preceding the tax year must exceed $1 billion. An applicable corporation must make several adjustments to AFSI when determining CAMT under the new law. Initial guidance regarding the application of the CAMT was issued on December 27, 2022, and additional guidance is forthcoming. The Company is continuing to assess the impact of the initial guidance and will continue to monitor as additional guidance is released.
On July 8, 2022, Pennsylvania Governor Tom Wolf signed into law Act 53 of 2022, which reduces the Pennsylvania State Income Tax Rate in yearly increments starting January 1, 2023, with an initial rate of 8.99% and ending effective January 1, 2031, with a rate of 4.99%. Under Accounting Standards Codification Topic 740, Income Taxes (“ASC 740”), the tax effects of changes in tax laws must be recognized in the period in which the law is enacted. ASC 740 also requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. As such, the Company’s accumulated deferred income tax (“ADIT”) balances for its Pennsylvania subsidiary were remeasured during the quarter ended September 30, 2022, to estimate the impacts of the recently enacted tax rate. The remeasurement reduced the ADIT liability by $159 million decreaseas of December 31, 2022 and created a corresponding regulatory liability since the EADIT is expected to be returned to customers in operating suppliesa future rate case. However, since the rate is declining in yearly increments, the total EADIT will be subject to change.
On September 27, 2022, Iowa’s Department of Revenue announced a reduction in the state’s top corporate rate from 9.8% to 8.4% effective January 1, 2023. As such, the Company’s ADIT balances for its Iowa subsidiary were remeasured during the quarter ended September 30, 2022, to estimate the impacts of the recently enacted tax rate. The remeasurement reduced the ADIT liability by $2 million as of December 31, 2022 and services principally duecreated a corresponding regulatory liability since the EADIT is expected to lower capital upgradesbe returned to customers in our Military Services Groupa future rate case.
Federal Net Operating Loss
The Company had no federal NOL carryover balance as of December 31, 2021.
Legislative Updates
During 2022, the Company’s regulatory jurisdictions enacted the following legislation that has been approved and is effective as of February 15, 2023:
•Indiana passed Senate Enrolled Act 272, which requires public reporting of a non-jurisdictional utility’s asset management programs. Non-jurisdictional utilities are exempt from the jurisdiction of the Indiana Utility Regulatory Commission (the “IURC”). The legislation also creates a water and wastewater research and extension program at a state university to serve as a repository for data collected from utilities. Additionally, the legislation establishes oversight and a receivership program in 2017, as discussed above, as well as lower advertisingthe IURC for non-jurisdictional utilities with violations that create environmental or human health and marketing expensesafety issues. Legislation was signed by the Governor on March 7, 2022, and became effective on July 1, 2022.
•Indiana passed water and wastewater utility asset financing legislation, Senate Enrolled Act 273, which authorizes the recovery of property tax in our Homeowners Services Group; partially offset by a
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•Virginia passed Senate Bill 500 and House Bill 182, which requires the Virginia State Corporation Commission, in Keystone dueany future ratemaking proceeding for an investor-owned water/wastewater utility, to an increaseevaluate the utility on a stand-alone basis and utilize the utility’s actual end-of-test period capital structure and cost of capital without regard to the cost of capital, capital structure, or investments of any other entities with which the utility may be affiliated. Legislation was signed by the Governor on April 11, 2022, and became effective on July 1, 2022.
•Illinois passed House Bill 900/Public Act 102-0698, which contains appropriations to the Department of Commerce and Economic Opportunity of $3 million for the purposes of the Water and Sewer Finance Assistance Act (H.B. 414/Public Act 102-0262) and $55 million for the purposes of the federal Low-Income Household Water Assistance Program (LIHWAP). Legislation was signed by the Governor on April 19, 2022, with these provisions of the bill taking effect on July 1, 2022.
•Tennessee passed Senate Bill 2282 and House Bill 2346, which requires all utilities to implement a cyber security plan and update it every two years to provide for the protection of the utility’s facilities from unauthorized use, alteration, ransom, or destruction of electronic data. The relevant regulatory body will verify if a utility has complied or impose reasonable sanctions if out of compliance. Utility compliance will be required by July 1, 2023. Legislation was signed by the Governor on June 1, 2022, and became effective immediately.
•The Missouri General Assembly passed state and local property tax tracker legislation, Senate Bill 745, which requires a utility to defer to a regulatory asset or liability account any difference in operations as a result of market recoverywhat was actually paid in state or local property taxes and what was used to set the revenue requirement in the natural gas industry, offset in part in our Contract Operations Group as several contracts wereutility’s most recently completed in 2017;general rate case. Legislation was signed by the Governor on June 29, 2022, and abecame effective on August 28, 2022.
Liquidity and Capital Resources
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If these unfavorable business, market, financial and other conditions deteriorate to the extent that the Company is no longer able to access the commercial paper and/or capital markets on reasonable terms, AWCC has access to an unsecured revolving credit facility. AWCC’s revolving credit facility is used principally to support its commercial paper program, to provide additional liquidity support, and to provide a sublimit for the issuance of up to $150 million in letters of credit. On October 26, 2022, AWCC and certain lenders amended and restated the credit agreement with respect to the revolving credit facility to, among other things, increase the maximum commitments under the facility from $2.25 billion to $2.75 billion and to extend the expiration date of the facility from March 2025 to October 2027. Subject to satisfying certain conditions, the credit agreement also permits AWCC to increase the maximum commitment under the facility by up to an aggregate of $500 million and to request extensions of its expiration date for up to two one-year periods. Also, effective October 26, 2022, the maximum aggregate principal amount of short-term borrowings authorized under AWCC’s commercial paper program was increased from $2.10 billion to $2.60 billion. As of December 31, 2022, AWCC had no outstanding borrowings and $78 million of outstanding letters of credit under its revolving credit facility, with $1.50 billion available to fulfill its short-term liquidity needs and to issue letters of credit.
The Company believes that its ability to access the debt and equity capital markets, the revolving credit facility and cash flows from operations will generate sufficient cash to fund the Company’s short-term requirements. The Company believes it has sufficient liquidity and the reductionability to manage its expenditures, should there be a disruption of the U.S. federal corporate income tax rate from 35%capital and credit markets. However, there can be no assurance that the lenders will be able to 21%, we anticipate a decreasemeet existing commitments to AWCC under the revolving credit facility, or that AWCC will be able to access the commercial paper or loan markets in the future revenue authorizations associated with our Regulated Businesses, initially leading to lower cash flows. We expect this cash flow impact to decline over time, as our Regulated Businesses’ rate base grows, the result of lower deferred income tax liabilities, which offset rate base. The lower deferred income tax liabilities are mainly due to: (i) a lower U.S. federal corporate income tax rate; (ii) the normalization (refunding to customers) of the re-measured deferred income tax liabilities over the remaining life of the associated assets; and (iii) the loss of future bonus depreciation deductions on capital projects that began after September 27, 2017.acceptable terms or at all.
Cash Flows Provided byfrom Operating Activities
Cash flows provided byfrom operating activities primarily result from the sale of water and wastewater services and, due to the seasonality of demand, are generally greater during the warmer months. OurThe Company’s future cash flows provided byfrom operating activities will be affected by, among other things: customers’ ability to pay for service in a timely manner, economic utility regulation; inflation;regulation, inflation, compliance with environmental, health and safety standards;standards, production costs;costs, maintenance costs, customer growth;growth, declining customer usage of water;water, employee-related costs, including pension funding;funding, weather and seasonality; taxes;seasonality, taxes, and overall economic conditions.
| For the Years Ended December 31, | |||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | ||||||||||||||
| Net income | $ | 820 | $ | 1,263 | $ | 709 | |||||||||||
| Add (less): | |||||||||||||||||
| Depreciation and amortization | 649 | 636 | 604 | ||||||||||||||
Deferred income taxes and amortization of investment tax credits (c) | 80 | 230 | 207 | ||||||||||||||
Other non-cash activities (a) | (16) | (27) | — | ||||||||||||||
Changes in working capital (b) | (355) | 126 | (55) | ||||||||||||||
| Pension and non-pension postretirement benefit contributions | (51) | (40) | (39) | ||||||||||||||
| (Gain) or loss on sale of businesses | (19) | (747) | — | ||||||||||||||
| Net cash provided by operating activities | $ | 1,108 | $ | 1,441 | $ | 1,426 | |||||||||||
(a)Includes provision for losses on accounts receivable, pension and non-pension postretirement benefits and other non-cash, net. Details of each component can be found on the Consolidated Statements of Cash Flows.
(b)Changes in working capital include changes to receivables and unbilled revenues, income tax receivable, accounts payable and accrued liabilities, accrued taxes and other current assets and liabilities, net.
(c)The decrease in the 2022 deferred tax activity is primarily due to the settlement of the deferred tax liability related to New York American Water, sold in January 2022.
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| For the Years Ended December 31, | |||||||||||
| (In millions) | 2017 | 2016 | 2015 | ||||||||
| Net income | $ | 426 | $ | 468 | $ | 476 | |||||
| Add (less): | |||||||||||
| Depreciation and amortization | 492 | 470 | 440 | ||||||||
| Deferred income taxes and amortization of investment tax credits | 462 | 295 | 312 | ||||||||
Other non-cash activities (a) | 16 | 35 | 37 | ||||||||
| Impact of Freedom Industries settlement activities | (22 | ) | 65 | — | |||||||
Changes in working capital (b) | 123 | 9 | (13 | ) | |||||||
| Pension and postretirement benefit contributions | (48 | ) | (53 | ) | (57 | ) | |||||
| Net cash flows provided by operating activities | $ | 1,449 | $ | 1,289 | $ | 1,195 | |||||
In 2017,2022, cash flows provided by operating activities increased $160decreased $333 million. The changes were driven by $338 million of estimated tax payments primarily due to an increase in net income after non-cash adjustments, includingfor taxable gains on the impactsales of the enactment of the TCJA,Company’s HOS business and an increase in cash flows from working capital. The main factors contributing to the net income increase are described in the “Consolidated Results of Operations” section and include higher operating revenues, partially offset by higher income taxes due to a $125 million re-measurement charge resulting from the impact of the change in the federal tax rate on the Company’s deferred income taxes from the enactment of the TCJA. The increase in non-cash activities was mainly attributable to the increase in deferred income taxes, as mentioned above, and an increase in depreciation and amortization due to additional utility plant placed in service. The change in working capital was principally due to: (i) the timing of accounts payable and accrued liabilities, including the accrual recorded during 2016 for the binding global agreement in principle to settle claims associated with the Freedom Industries chemical spill in West Virginia; (ii) a decrease in unbilled revenues as a result of our Military Services Group achieving significant capital project milestones during 2016; and (iii) a change in other current assets and liabilities, including the decrease in other current assets associated with the termination of our four forward starting swap agreements and timing of payments clearing our cash accounts.
The Company expects to make pension and postretirement contributions to the plan trusts up to $45of $39 million in 2018. In addition, we estimate that contributions will amount to $47 million, $47 million, $51 million and $58 million in 2019, 2020, 2021 and 2022, respectively.2023. Actual amounts contributed could change materially from these estimatesthis estimate as a result of changes in assumptions and actual investment returns, among other factors.
Cash Flows Used infrom Investing Activities
| For the Years Ended December 31, | |||||||||||
| (In millions) | 2017 | 2016 | 2015 | ||||||||
| Capital expenditures | $ | (1,434 | ) | $ | (1,311 | ) | $ | (1,160 | ) | ||
| Acquisitions | (177 | ) | (204 | ) | (197 | ) | |||||
Other investing activities, net (a) | (61 | ) | (75 | ) | (102 | ) | |||||
| Net cash flows used in investing activities | $ | (1,672 | ) | $ | (1,590 | ) | $ | (1,459 | ) | ||
| For the Years Ended December 31, | |||||||||||||||||
| (In millions) | 2022 | 2021 | 2020 | ||||||||||||||
| Capital expenditures | $ | (2,297) | $ | (1,764) | $ | (1,822) | |||||||||||
| Acquisitions, net of cash acquired | (315) | (135) | (135) | ||||||||||||||
| Proceeds from sale of assets, net of cash on hand | 608 | 472 | 2 | ||||||||||||||
| Removal costs from property, plant and equipment retirements, net | (123) | (109) | (106) | ||||||||||||||
| Net cash used in investing activities | $ | (2,127) | $ | (1,536) | $ | (2,061) | |||||||||||
In 2017 and 2016,2022, cash flows used in investing activities increased $591 million primarily due to an increase in our regulatedincreased payments for capital expenditures principallyand acquisitions partially offset by proceeds of $608 million received from incremental investments associated with the sale of the Company’s New York operations. The Company continues to invest across all infrastructure categories, mainly replacement and renewal of our transmission and distribution and services, meter and fire hydrants infrastructure in ourthe Company’s Regulated Businesses.Businesses, as discussed below.
| For the Years Ended December 31, | For the Years Ended December 31, | |||||||||||||||||||||||||||
| (In millions) | 2017 | 2016 | 2015 | (In millions) | 2022 | 2021 | 2020 | |||||||||||||||||||||
| Transmission and distribution | $ | 551 | $ | 568 | $ | 527 | Transmission and distribution | $ | 901 | $ | 749 | $ | 704 | |||||||||||||||
| Treatment and pumping | 171 | 151 | 136 | Treatment and pumping | 190 | 197 | 306 | |||||||||||||||||||||
| Services, meter and fire hydrants | 281 | 297 | 214 | Services, meter and fire hydrants | 546 | 366 | 333 | |||||||||||||||||||||
| General structure and equipment | 281 | 202 | 174 | General structure and equipment | 380 | 251 | 299 | |||||||||||||||||||||
| Sources of supply | 54 | 59 | 53 | Sources of supply | 95 | 64 | 54 | |||||||||||||||||||||
| Wastewater | 96 | 34 | 56 | Wastewater | 185 | 137 | 126 | |||||||||||||||||||||
| Total capital expenditures | $ | 1,434 | $ | 1,311 | $ | 1,160 | Total capital expenditures | $ | 2,297 | $ | 1,764 | $ | 1,822 | |||||||||||||||
In 2017, our2022, the Company’s capital expenditures increased $123$533 million or 9.4%, primarily due to investment in our general structure and equipment and wastewater categories. In 2016, our capital expenditures increased $151 million, or 13.0%, principally due to investmentan increase across the majority of ourmost infrastructure categories.
As previously noted, we expectover the next five years the Company expects to invest between $8.0$14 billion to $8.6$15 billion, from 2018 to 2022, with $7.2 billion of this range for infrastructure improvements in our Regulated Businesses. In 2018, we expect to invest between $1.6$12.5 billion to $1.8 billion, with a range of $1.4 billion to $1.5$13 billion for infrastructure improvements in ourthe Regulated Businesses. Also in 2018, we expectBusinesses, and the Company expects to invest between $120 million$30 billion to $240$34 billion over the next 10 years. In 2023, the Company expects to invest $2.9 billion, consisting of $2.5 billion for infrastructure improvements and $400 million for acquisitions in ourthe Regulated Businesses, and approximately $100 million for strategic growth opportunities, including the constructionBusinesses.
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Cash Flows from Financing Activities
| For the Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| (In millions) | |||||||||||||||||
| Proceeds from long-term debt | $ | 822 | $ | 1,118 | $ | 1,334 | |||||||||||
| Repayments of long-term debt | (15) | (372) | (342) | ||||||||||||||
| (Repayments of) proceeds from term loan | — | (500) | 500 | ||||||||||||||
| Net short-term borrowings (repayments) with maturities less than three months | 591 | (198) | (5) | ||||||||||||||
| Dividends paid | (467) | (428) | (389) | ||||||||||||||
Other financing activities, net (a) | 69 | 35 | 22 | ||||||||||||||
| Net cash provided by (used in) financing activities | $ | 1,000 | $ | (345) | $ | 1,120 | |||||||||||
(a)Includes proceeds from issuances of common stock under various employee stock plans and the Company’s dividend reinvestment plan, net of taxes paid, advances and contributions in aid of construction, net of refunds, and debt issuance costs and make-whole premiums on early debt redemption.
In 2022, cash flows provided by financing activities increased $1,345 million, primarily due to an increase in commercial paper borrowings, the repayment in full at maturity of the $500 million term loan in 2021 and repayments of long-term debt due to the prepayment of $327 million in aggregate principal amount of AWCC’s outstanding senior notes in 2021, with no comparable repayments in 2022. These changes were partially offset by lower proceeds from long-term debt.
The Company’s financing activities are primarily focused on funding regulated infrastructure construction expenditures, includeregulated acquisitions and payment of dividends. These activities included the issuance of long-term and short-term debt, primarily through AWCC. In addition, new infrastructure may be funded with customer advances and contributions in aid of construction, net of refunds, which amounted to $28 million, $16 million and $26 million for the years ended December 31, 2017, 2016 and 2015, respectively. Based on the needs of ourthe Regulated Businesses and the Company, AWCC may borrow funds or issue its debt in the capital markets and then, through intercompany loans, provide those borrowings to the Regulated Businesses and the parent company. The Regulated Businesses and the parent company are obligated to pay their portion of the respective principal and interest to AWCC, in the amount necessary to enable AWCC to meet its debt service obligations. The parentParent company’s borrowings are not a source of capital for the Regulated Businesses, therefore, the parent company is not able to recover the interest charges on its debt through regulated water and wastewater rates. As of December 31, 2017, AWCC has made long-term fixed rate loans and commercial paper loans to our Regulated Businesses amounting to $3.9 billion and $586 million, respectively. Additionally, as of December 31, 2017,2022, AWCC has made long-term fixed rate loans and commercial paper loans to the Regulated Businesses amounting to $7.6 billion. Additionally, as of December 31, 2022, AWCC has made long-term fixed rate loans and commercial paper loans to parent company amounting $1.6 billion and $319 million, respectively.to $3.6 billion.
On August 10, 2017,May 5, 2022, AWCC completed a $1.35 billion debt offering which included the sale of $600issued $800 million aggregate principal amount of its 2.95% Senior Notes4.45% senior notes due 2027, and $750 million aggregate principal amount of its 3.75% Senior Notes due in 2047.2032. At the closing, of the offering, AWCC received, after deduction of underwriting discounts and debt issuance costs, $1.33 billion. On September 13, 2017,before deduction of offering expenses, net proceeds of approximately $792 million. AWCC used proceeds from the offering to prepay $138 million of its outstanding 5.62% Series C Senior Notes due December 21, 2018 (“Series C Senior Notes”) and $181 million of its outstanding 5.77% Series D Senior Notes due December 21, 2021 (“Series D Senior Notes”). AWCC also used thenet proceeds of this offeringthe offering: (i) to lend funds to parent company and its regulated subsidiaries; (ii) to repay AWCC’s commercial paper obligationsobligations; and (iii) for general corporate purposes, and subsequently, on October 15, 2017, to repay at maturity, $524 million of its 6.085% Senior Notes.
One of the principal market risks to which the Company is exposed is changes in interest rates. In order to manage the exposure, we followthe Company follows risk management policies and procedures, including the use of derivative contracts such as swaps. We reducetreasury lock agreements. The Company also reduces exposure to interest rates by managing commercial paper and debt maturities. We doThe Company does not enter into derivative contracts (through AWCC) for speculative purposes and dodoes not use leveraged instruments. The derivative contracts entered into are for periods consistent with the related underlying exposures. The Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. We minimizeThe Company minimizes the counterparty credit risk on these transactions by dealing only dealing with leading, credit-worthycreditworthy financial institutions, having long-term credit ratings of “A” or better.
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In November and December 11, 2017, we2022, the Company entered into forward starting swapfour 10-year treasury lock agreements, each with notional amounts oftotaling $100 million, to reduce interest rate exposure on debt expected to be issued in 2018.2023. These forward starting swaptreasury lock agreements terminate in November 2018,January 2024, and have an average fixed rate of 2.59%3.56%. WeIn January 2023, the Company entered into three additional 10-year treasury lock agreements, with notional amounts totaling $100 million, to reduce interest rate exposure on debt expected to be issued in 2023. These treasury lock agreements terminate in January 2024, and have an average fixed rate of 3.35%. The Company designated these forward starting swaptreasury lock agreements as cash flow hedges, with their fair valuesvalue recorded in accumulated other comprehensive gain or loss. Upon termination, the cumulative gain or loss recorded in accumulated other comprehensive gain or loss will be amortized through interest, net over the term of the new debt.
In May 2015, theFebruary 2021, parent company and AWCC filed with the SEC a universal shelf registration statement that enables usthe Company to meet ourits capital needs through the offer and sale to the public from time to time of an unlimited amount of various types of securities, including American Water common stock, preferred stock, and other equity and hybrid securities, and AWCC debt securities, all subject to market conditions and demand, general economic conditions, and as applicable, rating status. The shelf registration statement will expire in May 2018.February 2024. During 2017, 20162022, 2021 and 2015, $1.352020, $800 million, $1.10 billion, $550 million and $550 million,$1.00 billion, respectively, of debt securities were issued pursuant tounder this and predecessor registration statements.
| Company | Type | Rate | Weighted Average Rate | Maturity | Amount (in millions) | |||||||||||||||||||||||||||
AWCC (a) | Senior notes—fixed rate | 4.45% | 4.45% | 2032 | $ | 800 | ||||||||||||||||||||||||||
| Other American Water subsidiaries | Private activity bonds and government funded debt—fixed rate | 0.00%-1.75% | 1.03% | 2027-2042 | 22 | |||||||||||||||||||||||||||
| Total issuances | $ | 822 | ||||||||||||||||||||||||||||||
| Company | Type | Rate | Maturity | Amount (In millions) | ||||||
| AWCC | Senior notes—fixed rate | 2.95%-3.75% | 2027-2047 | $ | 1,350 | |||||
| Other American Water subsidiaries | Private activity bonds and government funded debt—fixed rate | 0.00%-1.44% | 2020-2037 | 31 | ||||||
| Other American Water subsidiaries | Mortgage bonds—fixed rate | 3.92% | 2020 | $ | 3 | |||||
| Other American Water subsidiaries | Term loan | 4.62%-5.12% | 2021 | $ | 11 | |||||
| Total issuances | $ | 1,395 | ||||||||
| Company | Type | Rate | Weighted Average Rate | Maturity | Amount (in millions) | |||||||||||||||||||||||||||
| AWCC | Private activity bonds and government funded debt—fixed rate | 1.79%-2.31% | 2.24% | 2024-2031 | $ | 1 | ||||||||||||||||||||||||||
| Other American Water subsidiaries | Private activity bonds and government funded debt—fixed rate | 0.00%-5.50% | 1.50% | 2022-2051 | 13 | |||||||||||||||||||||||||||
| Other American Water subsidiaries | Mandatorily redeemable preferred stock | 8.49% | 8.49% | 2022 | 1 | |||||||||||||||||||||||||||
| Total retirements and redemptions | $ | 15 | ||||||||||||||||||||||||||||||
| Company | Type | Rate | Maturity | Amount (In millions) | ||||||
| AWCC | Senior notes—fixed rate | 5.62%-6.09% | 2017-2021 | $ | 844 | |||||
| AWCC | Private activity bonds and government funded debt—fixed rate | 1.79%-2.90% | 2021-2031 | 1 | ||||||
| Other American Water subsidiaries | Private activity bonds and government funded debt—fixed rate | 0.00%-5.38% | 2017-2041 | 15 | ||||||
| Other American Water subsidiaries | Mortgage bonds—fixed rate | 7.08% | 2017 | 33 | ||||||
| Other American Water subsidiaries | Mandatorily redeemable preferred stock | 8.49%-9.18% | 2031-2036 | 2 | ||||||
| Other American Water subsidiaries | Term loan | 4.31%-5.31% | 2021 | 1 | ||||||
| Total retirements and redemptions | $ | 896 | ||||||||
| Company | Type | Rate | Maturity | Amount (In millions) | ||||||
AWCC (a) | Senior notes—fixed rate | 3.00%-4.00% | 2026-2046 | $ | 550 | |||||
| Other American Water subsidiaries | Private activity bonds and government funded debt—fixed rate | 1.00%-1.36% | 2026-2037 | 3 | ||||||
| Total issuances | $ | 553 | ||||||||
| Company | Type | Rate | Maturity | Amount (In millions) | ||||||
| AWCC | Senior notes—fixed rate | 5.52% | 2016 | $ | 37 | |||||
| AWCC | Private activity bonds and government funded debt—fixed rate | 1.79%-2.90% | 2021-2031 | 1 | ||||||
| Other American Water subsidiaries | Private activity bonds and government funded debt—fixed rate | 0.00%-5.30% | 2016-2041 | 104 | ||||||
| Other American Water subsidiaries | Mandatorily redeemable preferred stock | 8.49%-9.18% | 2031-2036 | 2 | ||||||
| Total retirements and redemptions | $ | 144 | ||||||||
| Company | Type | Rate | Maturity | Amount (In millions) | ||||||
AWCC (a) | Senior notes—fixed rate | 3.40%-4.30% | 2025-2045 | $ | 550 | |||||
| Other American Water subsidiaries | Private activity bonds and government funded debt—fixed rate | 1.00%-1.56% | 2032 | 15 | ||||||
| Total issuances | $ | 565 | ||||||||
| Company | Type | Rate | Maturity | Amount (In millions) | ||||||
| AWCC | Senior notes—fixed rate | 6.00% | 2015 | 30 | ||||||
| AWCC | Private activity bonds and government funded debt—fixed rate | 1.79%-5.25% | 2015-2031 | $ | 36 | |||||
Other American Water subsidiaries (a) | Private activity bonds and government funded debt—fixed rate | 0.00%-5.40% | 2015-2041 | 61 | ||||||
| Other American Water subsidiaries | Mandatorily redeemable preferred stock | 8.49%-9.18% | 2031-2036 | 4 | ||||||
| Total retirements and redemptions | $ | 131 | ||||||||
From time to time and as market conditions warrant, wethe Company may engage in long-term debt retirements through make-whole redemptions, tender offers, open market repurchases or other viable alternativesalternatives.
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Issuer and Guarantor of Senior Notes
The outstanding senior notes issued by AWCC have been issued under two indentures, each by and between AWCC and Computershare Trust Company, N.A., as successor to strengthen our balance sheets.Wells Fargo Bank, National Association, as trustee, providing for the rights and obligations of the parties thereto and the holders of the notes issued thereunder. The senior notes also have been issued with the benefit of a support agreement, as amended, between parent company and AWCC, which serves as the functional equivalent of a full and unconditional guarantee by parent company of AWCC’s payment obligations under the senior notes. No other subsidiary of parent company provides guarantees for any of the outstanding senior notes. If AWCC is unable to make timely payment of any interest, principal or premium, if any, on such senior notes, parent company will provide to AWCC, at its request or the request of any holder of such senior notes, funds to make such payment in full. If AWCC fails or refuses to take timely action to enforce certain rights under the support agreement or if AWCC defaults in the timely payment of any amounts owed to any holder of such senior notes, when due, the support agreement provides that the holder may proceed directly against parent company to enforce such rights or to obtain payment of the defaulted amounts owed to that holder.
Because parent company is a holding company and substantially all of its operations are conducted through its subsidiaries other than AWCC, parent company’s ability to facilitatefulfill its obligations under the repurchases, wesupport agreement will be dependent upon its receipt of sufficient cash dividends or distributions from its operating subsidiaries. See Note 9—Shareholders’ Equity—Dividends and Distributions, in the Notes to the Consolidated Financial Statements for a summary of the limitations on parent company and its subsidiaries to pay dividends or make distributions. Furthermore, parent company’s operating subsidiaries are separate and distinct legal entities and, other than AWCC, have also entered into Rule 10b5-1 share repurchase plansno obligation to make any payments on the senior notes or to make available or provide any funds for such payment, other than through their repayment obligations under intercompany loans, if any, with a third-party broker, which allows usAWCC. Based on the foregoing, parent company’s obligations under the support agreement will be effectively subordinated to repurchase shares at times when we may otherwise be prevented from doing so under insider trading lawsall indebtedness and other liabilities, including trade payables, lease commitments and moneys borrowed or because of self-imposed trading blackout periods. Subject to applicable regulations, we may elect to amendother indebtedness incurred or cancel this repurchase program or the share repurchase parameters at our discretion. As of December 31, 2017, we have repurchased an aggregate of 3,950,000 shares of common stock under this program.issued by parent company’s subsidiaries other than AWCC.
Credit Facilities and Short-Term Debt
Interest rates on advances under the Company’s revolving credit facility are based on a credit spread to the EurodollarSecured Overnight Financing Rate (“SOFR”) rate (or applicable market replacement rate) or base rate, each determined in accordance with AWCC’s then-applicable Moody Investors Service or Standard & Poor’s Ratings ServicesService’s and S&P Global Ratings’ then applicable credit rating. At current ratings, that spread would be 0.90%.rating on AWCC’s senior unsecured, non-credit enhanced debt. The facility is used principally to support AWCC’s commercial paper program and to provide up to $150 million in letters of credit. Indebtedness under the facility isand AWCC’s commercial paper are considered “debt” for purposes of a support agreement between the Companyparent company and AWCC, which serves as a functional equivalent of a full and unconditional guarantee by the Companyparent company of AWCC’s payment obligations underthereunder.
Presented in the tables below are the aggregate credit facility.
| 2022 | |||||||||||||||||
| Commercial Paper Limit | Letters of Credit | Total (a) | |||||||||||||||
| (In millions) | |||||||||||||||||
| Total availability | $ | 2,600 | $ | 150 | $ | 2,750 | |||||||||||
| Outstanding debt | (1,177) | (78) | (1,255) | ||||||||||||||
| Remaining availability as of December 31, 2022 | $ | 1,423 | $ | 72 | $ | 1,495 | |||||||||||
(a)Total remaining availability of $1.50 billion as of December 31, 20172022, may be accessed through revolver draws.
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| 2021 | |||||||||||||||||
| Commercial Paper Limit | Letters of Credit | Total (a) | |||||||||||||||
| (In millions) | |||||||||||||||||
| Total availability | $ | 2,100 | $ | 150 | $ | 2,250 | |||||||||||
| Outstanding debt | (584) | (76) | (660) | ||||||||||||||
| Remaining availability as of December 31, 2021 | $ | 1,516 | $ | 74 | $ | 1,590 | |||||||||||
(a)Total remaining availability of $1.59 billion as of December 31, 2021, may be accessed through revolver draws.
Presented in the table below is the Company’s total available liquidity as of December 31, 2022 and 2016:2021:
| (Dollars in millions) | Credit Facility Commitment | Available Credit Facility Capacity | Letter of Credit Sublimit | Available Letter of Credit Capacity | Commercial Paper Limit | Available Commercial Paper Capacity | |||||||||||||||||
| December 31, 2017 | $ | 1,762 | $ | 1,673 | $ | 150 | $ | 66 | $ | 1,600 | $ | 695 | |||||||||||
| December 31, 2016 | 1,766 | 1,668 | 150 | 62 | 1,600 | 751 | |||||||||||||||||
| Cash and Cash Equivalents | Availability on Revolving Credit Facility | Total Available Liquidity | |||||||||||||||
| (In millions) | |||||||||||||||||
| Available liquidity as of December 31, 2022 | $ | 85 | $ | 1,495 | $ | 1,580 | |||||||||||
| Available liquidity as of December 31, 2021 | 116 | 1,590 | 1,706 | ||||||||||||||
The weighted-averageweighted average interest rate on AWCCAWCC’s outstanding short-term borrowings was approximately 4.41% and 0.20%, for the years ended December 31, 20172022 and 2016 was approximately 1.24% and 0.78%,2021, respectively.
Capital Structure
| 2022 | 2021 | 2020 | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | |||||||||||||||||||||||
| Total common stockholders' equity | 41.0 | % | 42.1 | % | 43.5 | % | |||||||||||||||||||
| Total common shareholders’ equity | Total common shareholders’ equity | 38.3 | % | 39.9 | % | 37.1 | % | ||||||||||||||||||
| Long-term debt and redeemable preferred stock at redemption value | 49.6 | % | 46.4 | % | 50.6 | % | Long-term debt and redeemable preferred stock at redemption value | 54.4 | % | 56.6 | % | 53.6 | % | ||||||||||||
| Short-term debt and current portion of long-term debt | 9.4 | % | 11.5 | % | 5.9 | % | Short-term debt and current portion of long-term debt | 7.3 | % | 3.5 | % | 9.3 | % | ||||||||||||
| Total | 100 | % | 100 | % | 100 | % | Total | 100 | % | 100 | % | 100 | % | ||||||||||||
The changes in the capital structure mix between periods were mainly attributable to an increase in the current portionimpacts of the HOS sale on December 9, 2021, and the repayment of short-term borrowings with proceeds from the sale, and the Company’s long-term debt.debt offering that was completed on May 5, 2022.
Debt Covenants
Covenants in certain long-term notes and the revolving credit facility require usthe Company to maintain a ratio of consolidated debt to consolidated capitalization (as defined in the relevant documents) of not more than 0.70 to 1.00. On December 31, 2017, our2022, the Company’s ratio was 0.590.62 to 1.00 and therefore we werethe Company was in compliance with the covenants.
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Security Ratings
15, 2023, as issued by Moody’s Investors Service on December 19, 2022, and S&P Global Ratings on February 6, 2023:
| Securities | Moody’s Investors Service | |||||||||||||
| Rating outlook | Stable | Stable | ||||||||||||
| Senior unsecured debt | Baa1 | A | ||||||||||||
| Commercial paper | P-2 | A-1 | ||||||||||||
As part of theits normal course of business, wethe Company routinely enterenters into contracts for the purchase and sale of water, energy,power and other fuel, chemicals and other services. These contracts either contain express provisions or otherwise permit usthe Company and ourits 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 arethe Company is downgraded by a credit rating agency, especially if such downgrade is to a level below investment grade, it is possible that a counterparty would attempt to rely on such a downgrade as a basis for making a demand for adequate assurance of future performance, which could include a demand that wethe Company must provide collateral to secure ourits obligations. We doThe Company does not expect to post any collateral which will have a material adverse impact on the Company’s results of operations, financial position or cash flows.
Dividends and possible future developments that may affectRegulatory Restrictions
For discussion of the Company’s income and cash flows. Historically, dividends, have been paid quarterly to holders of record less than 30 days prior to the distribution date. Since the dividends on our common stock are not cumulative, only declared dividends are paid.
| 2017 | 2016 | 2015 | |||||||||
| December | $ | 0.415 | $ | 0.375 | $ | 0.34 | |||||
| September | $ | 0.415 | $ | 0.375 | $ | 0.34 | |||||
| June | $ | 0.415 | $ | 0.375 | $ | 0.34 | |||||
| March | $ | 0.375 | $ | 0.34 | $ | 0.31 | |||||
Insurance Coverage
| Contractual obligation (In millions) | Total | 1 year or Less | 2-3 Years | 4-5 years | More Than 5 years | |||||||||||||||
Long-term debt obligations (a) | $ | 6,814 | $ | 320 | $ | 218 | $ | 420 | $ | 5,856 | ||||||||||
Interest on long-term debt (b) | 5,047 | 324 | 600 | 571 | 3,552 | |||||||||||||||
Operating lease obligations (c) | 123 | 15 | 26 | 17 | 65 | |||||||||||||||
Purchase water obligations (d) | 979 | 59 | 130 | 129 | 661 | |||||||||||||||
Other purchase obligations (e) | 235 | 235 | — | — | — | |||||||||||||||
Postretirement benefit plans' obligations (f) | 3 | — | 3 | — | — | |||||||||||||||
Pension plan obligations (f) | 239 | 39 | 91 | 109 | — | |||||||||||||||
| Preferred stocks with mandatory redemption requirements | 10 | 2 | 3 | 2 | 3 | |||||||||||||||
| Interest on preferred stock with mandatory redemption requirements | 5 | 1 | 1 | 1 | 2 | |||||||||||||||
Other obligations (g) | 1,113 | 430 | 213 | 154 | 316 | |||||||||||||||
| Total | $ | 14,568 | $ | 1,425 | $ | 1,285 | $ | 1,403 | $ | 10,455 | ||||||||||
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires that management apply accounting policies and make estimates, assumptions and judgments that could significantly affect a company’sthe Company’s financial condition, results of operations and cash flows. Actual results could differ from these estimates, assumptions and judgments. Management believes that the areas described below require significant judgment in the application of accounting policy or in making estimates and assumptions in matters that are inherently uncertain and that may change in subsequent periods. Accordingly, changes in the estimates, assumptions and judgments applied to these accounting policies could have a significant impact on ourthe Company’s financial condition, results of operations and cash flows, as reflected in ourthe Company’s Consolidated Financial Statements. Management has reviewed the critical accounting polices described below with our audit committee,the Company’s Audit, Finance and Risk Committee, including the estimates, assumptions and judgments used in their application. Additional discussion regarding these critical accounting policies and their application can be found in Note 2—Significant Accounting Policies in the Notes to the Consolidated Financial Statements for additional information.Statements.
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Regulation and Regulatory Accounting
Application of this authoritative guidance has a further effect on ourthe Company’s financial statements as it pertains to allowable costs used in the ratemaking process. We makeThe Company makes significant assumptions and estimates to quantify amounts recorded as regulatory assets and liabilities. Such judgments include, but are not limited to, assets and liabilities related to regulated acquisitions, pension and postretirement benefits, depreciation rates and taxes. Due to timing and other differences in the collection of revenues, these authoritative accounting principles allow a cost that would otherwise be charged as an expense by ana non-regulated entity, to be deferred as a regulatory asset if it is probable that such cost is recoverable through future rates. Conversely, the principles require the creation of a regulatory liability for amounts collected in rates to recover costs expected to be incurred in the future, or amounts collected in excess of costs incurred and are refundable to customers. Regulators may also impose certain fines or penalties.
For each regulatory jurisdiction where we conductthe Company conducts business, we assess,the Company assesses, at the end of each reporting period, whether the regulatory assets continue to meet the criteria for probable future recovery and regulatory liabilities continue to meet the criteria for probable future recovery or settlement. This assessment includes consideration of factors such as changes in applicable regulatory environments;environments, recent rate orders (including recent rate orders on recovery of a specific or similar incurred cost to other regulated entities in the same jurisdictionjurisdiction) and the status of any pending or potential legislation that could impact the ability to recover costs through regulated rates.legislation. If subsequent events indicate that the regulatory assets or liabilities no longer meet the criteria for probable future recovery or probable future settlement, ourthe Company’s Consolidated Statements of Operations and financial position could be materially affected. In addition, if we concludethe Company concludes in a future period that a separable portion of the business no longer meets the criteria, we arethe Company is required to eliminate the financial statement effects of regulation for that part of the business, which would include the elimination of any or all regulatory assets and liabilities that had been recorded in the Consolidated Financial Statements. Failure to meet the criteria of this authoritative guidance could materially impact ourthe Company’s Consolidated Financial Statements.
As of December 31, 20172022 and 2016, our2021, the Company’s regulatory asset balance was $1.1$1.0 billion and $1.3$1.1 billion, respectively, and ourits regulatory liability balance was $1.7$1.6 billion and $403 million,$1.6 billion, respectively. See Note 6—3—Regulatory Assets and LiabilitiesMatters in the Notes to Consolidated Financial Statements for further information regarding ourthe Company’s significant regulatory assets and liabilities.
Accounting for Income Taxes
Significant management judgment is required in determining the provision for income taxes, primarily due to the uncertainty related to tax positions taken, as well as deferred tax assets and liabilities, valuation allowances and the utilization of net operating lossNOL carryforwards.
In accordance with applicable authoritative guidance, we accountthe Company accounts for uncertain income tax positions using a benefit recognition model with a two-step approach, including a more-likely-than-not recognition threshold and a measurement approach based on the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement. If it is not more-likely-than-not that the benefit of the tax position will be sustained on its technical merits, no benefit is recorded. Uncertain tax positions that relate only to timing of when an item is included on a tax return are considered to have met the recognition threshold. Management evaluates each position based solely on the technical merits and facts and circumstances of the position, assuming the position will be examined by a taxing authority having full knowledge of all relevant information. Significant judgment is required to determine whether the recognition threshold has been met and, if so, the appropriate amount of unrecognized tax benefit to be recorded in the Consolidated Financial Statements.
Under GAAP, specifically Accounting Standards Codification (“ASC”) TopicASC 740, Income Taxes, the tax effects of changes in tax laws must be recognized in the period in which the law is enacted. ASC 740 also requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. Thus, atFor the date of enactment, the Company’s deferred taxes were re-measured based upon the new tax rate. For our regulated entities, the change in deferred taxes are recorded as either an offset to a regulatory asset or a regulatory liability and may be subject to refund to customers. For ourthe Company’s unregulated operations, the change in deferred taxes are recorded as a non-cash re-measurement adjustment to earnings.
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Table of the SEC has recognized the complexity of reflecting the impacts of changes in tax law, more specifically the TCJA, and on December 22, 2017, issued guidance in Staff Accounting Bulletin 118 (“SAB 118”) which clarifies accounting for income taxes under ASC 740 if information is not yet available or complete and provides for up to a one year period in which to complete the required analyses and accounting. SAB 118 describes three scenarios or buckets associated with a company’s status of accounting for the TCJA:(1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of tax reform and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply ASC 740, based on the provisions of the tax laws that were in effect immediately prior to the TCJA being enacted. The significant assumptions considered and evaluated by the Company relating to our accounting for the TCJA, include, but are not limited to, the:Contents
Actual income taxes could vary from estimated amounts due to the future impacts of various items, including changes in income tax laws, ourthe Company’s forecasted financial condition and results of operations, failure to successfully implement tax planning strategies and recovery of taxes through the regulatory process for ourthe Regulated Businesses, as well as results of audits and examinations of filed tax returns by taxing authorities. While we believe theThe resulting tax balances as of December 31, 20172022 and 20162021 are appropriately accounted for in accordance with the applicable authoritative guidance,guidance; however, the ultimate outcome of tax matters could result in favorable or unfavorable adjustments to ourthe Consolidated Financial Statements and such adjustments could be material. See Note 13—14—Income Taxes in the Notes to Consolidated Financial Statements for additional information regarding income taxes.
Accounting for Pension and Postretirement Benefits
The Company’s pension and postretirement benefit costs are developed from actuarial valuations. Inherent in these valuations are key assumptions provided by the Company to its actuaries, including the discount rate and expected long-term rate of return on plan assets. Material changes in the Company’s pension and postretirement benefit costs may occur in the future due to changes in these assumptions as well as fluctuations in plan assets. The assumptions are selected to represent the average expected experience over time and may differ in any one year from actual experience due to changes in capital markets and the overall economy. These differences will impact the amount of pension and other postretirement benefit expense that the Company recognizes. The primary assumptions are:
•Discount Rate—The discount rate is used in calculating the present value of benefits, which are based on projections of benefit payments to be made in the future. The objective in selecting the discount rate is to measure the single amount that, if invested at the measurement date in a portfolio of high-quality debt instruments, would provide the necessary future cash flows to pay the accumulated benefits when due;due.
•Expected Return on Plan Assets (“EROA”)—Management projects the future return on plan assets considering prior performance, but primarily based upon the plans’ mix of assets and expectations for the long-term returns on those asset classes. These projected returns reduce the net benefit costs we record currently;the Company records currently.
•Rate of Compensation Increase—Management projects employees’ pay increases, which are used to project employees’ pension benefits at retirement;retirement.
•Health Care Cost Trend Rate—Management projects the expected increases in the cost of health care; andcare.
•Mortality—Management retainedadopted the Society of Actuaries RP-2014Pri-2012 mortality base table, butthe most recent table developed from private pension plan experience, which provides rates of mortality in 2012 and adopted the new MP-2017 generational projectionMP-2021 mortality improvement scale to projectgradually adjust future mortality improvementsrates downward due to increased longevity in each year after 2006.2012.
The discount rate assumption, which is determined for the pension and postretirement benefit plans independently, is subject to change each year, consistent with changes in applicable high-quality, long-term corporate bond indices. We useThe Company uses an approach that approximates the process of settlement of obligations tailored to the plans’ expected cash flows by matching the plans’ cash flows to the coupons and expected maturity values of individually selected bonds. The yield curve was developed for a portfolio containing the majority of United States-issued AA-graded non-callable (or callable with make-whole provisions) corporate bonds. For each plan, the discount rate was developed as the level equivalent rate that would yield the same present value as using spot rates aligned with the projected benefit payments. The weighted-average discount rate assumption for determining pension benefit obligations was 3.75%5.58%, 4.28%2.94% and 4.66%2.74% at December 31, 2017, 20162022, 2021 and 2015,2020, respectively. The weighted-average discount rate assumption for determining other post-retirementpostretirement benefit obligations was 3.73%5.60%, 4.26%2.90% and 4.67%2.56% at December 31, 2017, 20162022, 2021 and 2015,2020, respectively.
In selecting an EROA, wethe Company considered tax implications, past performance and economic forecasts for the types of investments held by the plans. The long-termweighted-average EROA assumption used in calculating pension cost was 6.49%6.50% for 2017, 7.02%2022, 6.50% for 2016,2021, and 6.91%6.50% for 2015.2020. The weighted averageweighted-average EROA assumption used in calculating other postretirement benefit costs was 5.09%3.60% for 2017, 5.37%2022, 3.67% for 20162021 and 4.92%3.68% for 2015.
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Target Allocation | Percentage of Plan Assets as of December 31, | ||||||||
| Asset Category | 2018 | 2017 | 2016 | ||||||
| Equity securities | 43 | % | 44 | % | 49 | % | |||
| Fixed income | 50 | % | 49 | % | 42 | % | |||
| Real Estate | 5 | % | 5 | % | 7 | % | |||
| Real estate investment trusts (“REITs”) | 2 | % | 2 | % | 2 | % | |||
| Total | 100 | % | 100 | % | 100 | % | |||
| 2023 Target Allocation | Percentage of Plan Assets as of December 31, | |||||||||||||||||||
| Asset Category | 2022 | 2021 | ||||||||||||||||||
| Equity securities | 37 | % | 57 | % | 53 | % | ||||||||||||||
| Fixed income | 63 | % | 43 | % | 47 | % | ||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | ||||||||||||||
Presented in the plan’s funded status volatility. It is also intended to reducetable below are the pension plan’s exposure to interest rates since a higher proportion of long duration fixed-income securities that have a duration similar to thatallocations of the pension liabilities should reduce interest rate risk associated with the plan’s liabilities.
| 2023 Target Allocation (a) | Percentage of Plan Assets as of December 31, | |||||||||||||||||||
| Asset Category | 2022 | 2021 | ||||||||||||||||||
| Equity securities | 27 | % | 30 | % | 22 | % | ||||||||||||||
| Fixed income | 73 | % | 70 | % | 78 | % | ||||||||||||||
| Total | 100 | % | 100 | % | 100 | % | ||||||||||||||
(a)Refer to Note 15—Employee Benefits in the Notes to Consolidated Financial Statements for additional details on the allocations forof assets and the Company’strusts which fund the other postretirement benefit plans by asset category were as follows:
Target Allocation | Percentage of Plan Assets as of December 31, | ||||||||
| Asset Category | 2018 | 2017 | 2016 | ||||||
| Equity securities | 38 | % | 35 | % | 33 | % | |||
| Fixed income | 62 | % | 65 | % | 67 | % | |||
| REITs | — | — | — | ||||||
| Total | 100 | % | 100 | % | 100 | % | |||
The investments of the pension and postretirement welfare plan trusts include debt and equity securities held either directly or through mutual funds, commingled funds.funds and limited partnerships. The trustee for the Company’s defined benefit pension and postretirement welfare plans uses an independent valuation firm to calculate the fair value of plan assets. Additionally, the Company independently verifies the assets values. Approximately 41% of the assets are valued using the quoted market price for the assets in an active market at the measurement date, while 59% of the assets are valued using other inputs.
In selecting a rate of compensation increase, we considerthe Company considers past experience in light of movements in inflation rates. OurThe Company’s rate of compensation increase was 3.02%3.51% for 2017, 3.07%2022, 3.51% for 20162021 and 3.10%3.51% for 2015.2020.
In selecting health care cost trend rates, we considerthe Company considers past performance and forecasts of increases in health care costs. As of January 1, 2017, our2022, the Company’s health care cost trend rate assumption used to calculate the periodic benefit cost was 7%6.00% in 20172022 gradually declining to 5%5.00% in 20212026 and thereafter. As of December 31, 2017,2022, the Company is projectingprojects that medical inflation will continuebe 7.00% in 2023 gradually declining to persist for longer than expected5.00% in 2031 and it will ultimately trend down to 4.50%, but not until 2026.thereafter.
| Change in Actuarial Assumption (Dollars in millions) | Impact on Other Postretirement Benefit Obligation as of December 31, 2017 | Impact on 2017 Total Service and Interest Cost Components | ||||||
| Increase assumed health care cost trend by 1% | $ | 73 | $ | 5 | ||||
| Decrease assumed health care cost trend by 1% | $ | (60 | ) | $ | (4 | ) | ||
Benefit Plan Amendments
In December 2022, the Company amended the American Water Pension Plan (“AWPP”), a tax-qualified defined benefit pension plan, to restructure it as of December 31, 2022. The restructuring involved the spin-off of certain inactive participants from the existing AWPP into a separate tax-qualified defined benefit pension plan, the American Water Pension Plan for Certain Inactive Participants (“AWPP Inactive”). Benefits offered to the plan participants remain unchanged. Actuarial gains and losses associated with AWPP Inactive will be amortized over the average remaining life expectancy of the inactive participants, which increases the amortization period from approximately 7 years to 18 years. The longer amortization period is expected to lower the Company’s pre-tax pension expense by approximately $5 million in 2023. The actuarial gains and losses associated with the AWPP will continue to be amortized over the average remaining service period for active participants. The Company remeasured the pension plan obligation and assets for each plan as of December 31, 2022.
72
Upon evaluating prior plan changes, Company funding and market performance, in December 2022, the Company completed plan amendments to spin-off and merge a portion of the American Water Retiree Welfare Plan, with and into the Company’s medical plan for active employees (“Active Medical Plan”), in order to repurpose the over-funded portion of the Bargained Retiree Voluntary Employees’ Beneficiary Association (“Bargained VEBA”) trust. Benefits offered to the plan participants remain unchanged. As a result of these assumptions changechanges, effective December 31, 2022, the Company transferred investment assets from the Bargained VEBA into the existing trust maintained for the benefit of Active Medical Plan participants (“Active VEBA”). The transfer of these Bargained VEBA investment assets into the Active VEBA permits access to approximately $194 million of assets for purposes of paying active union employee medical benefits. The Company recorded the transfer of assets as a negative contribution and therefore did not record a gain or loss, as permitted by accounting guidance. See Note 18—Fair Value of Financial Information in the Notes to Consolidated Financial Statements, for additional information on accounting for the assets as investments in debt and equity securities as of December 31, 2022.
Revenue Recognition
Revenue from the Company’s Regulated Businesses is generated primarily from water and wastewater services delivered to customers. These contracts contain a single performance obligation, the delivery of water or wastewater services, as the promise to transfer the individual good or service is not separately identifiable from other promises within the contracts and, therefore, is not distinct. Revenues are recognized over time, as services are provided. There are generally no significant financing components or variable consideration. Revenues include amounts billed to customers on a cycle basis, and unbilled amounts calculated based on estimated usage from the date of the meter reading associated with the latest customer bill, to the end of the accounting period. The amounts that the Company has a right to invoice are determined by each customer’s actual usage, an indicator that the invoice amount corresponds directly to the value transferred to the customer.
Increases or decreases in the volumes delivered to customers and rate mix due to changes in usage patterns in customer classes in the period could be significant to the calculation of unbilled revenue. In addition, changes in the timing of meter reading schedules and the number and type of customers scheduled for each meter reading date would also have an effect on the unbilled revenue calculation. Unbilled revenue for the Company’s regulated utilities as of December 31, 2022 and 2021 was $178 million and $162 million, respectively.
The Company also recognizes revenue when it is probable that future recovery of previously incurred costs or future refunds that are to be credited to customers will occur through the ratemaking process.
Revenue from the Company’s former HOS business, which was sold in December 2021, was generated through various protection programs in which the Company provided fixed fee services to domestic homeowners and smaller commercial customers for interior and exterior water and sewer lines, interior electric and gas lines, heating and cooling systems, water heaters, power surge protection and other related services. Most of the contracts had a one-year term and each service was a separate performance obligation, satisfied over time, as the customers simultaneously received and consumed the benefits provided from the service. Customers were obligated to pay for the protection programs ratably over 12 months or via a one-time, annual fee, with revenues recognized ratably over time for those services. Advances from customers were deferred until the performance obligation was satisfied.
The Company also has long-term, fixed fee contracts to operate and maintain water and wastewater systems for the U.S. government on various military installations and facilities owned by municipal customers. Billing and revenue recognition for the fixed fee revenues occurs ratably over the term of the contract, as customers simultaneously receive and consume the benefits provided by the Company. Additionally, these contracts allow the Company to make capital improvements to underlying infrastructure, which are initiated through separate modifications or amendments to the original contract, whereby stand-alone, fixed pricing is separately stated for each improvement. The Company has determined that these capital improvements are separate performance obligations, with revenue recognized over time based on performance completed at the end of each reporting period. Losses on contracts are recognized during the period in which the losses first become probable and estimable. Revenues recognized during the period in excess of billings on construction contracts are recorded pensionas unbilled revenues, with billings in excess of revenues recorded as other current liabilities until the recognition criteria are met. Changes in contract performance and postretirement benefit amountsrelated estimated contract profitability may result in revisions to costs and funding requirements could also change.revenues and are recognized in the period in which revisions are determined. Unbilled revenue within Other as of December 31, 2022 and 2021 was $97 million and $86 million, respectively.
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Accounting for Contingencies
Actual amounts realized upon settlement or other resolution of loss contingencies may be different than amounts recorded and disclosed and could have a significant impact on the liabilities, revenue and expenses recorded on the Consolidated Financial Statements. For a discussion of contingencies, seeSee Note 15—16—Commitments and Contingencies in the Notes to Consolidated Financial Statements.Statements for additional information regarding contingencies.
See Note 2—Significant Accounting Policies in the Notes to Consolidated Financial Statements for a description of recent accounting standards.
The Company is exposed to market risk associated with changes in commodity prices, equity prices and interest rates. We areThe Company is exposed to risks from changes in interest rates as a result of ourits issuance of variable and fixed rate debt and commercial paper. We manage ourThe Company manages its interest rate exposure by limiting ourits variable rate exposure and by monitoring the effects of market changes in interest rates. WeThe Company also havehas the ability to enter into financial derivative instruments, which could include instruments such as, but not limited to, interest rate swaps, forward starting swaps swaptions and U.S. Treasury lock agreements to manage and mitigate interest rate risk exposure. As of December 31, 2017,2022, a hypothetical increase of interest rates by 1% associated with ourthe Company’s short-term borrowings would result in an $8a $6 million increase in short-term interest expense.
The Company has two forward starting swap agreements with an aggregate notional amount of $200 million to reduce interest rate exposure on debt expected to be issued in 2018. The forward starting swap agreements terminate in November 2018 and have an average fixed rate of 2.59%. When entering into forward starting interest rate swaps, the Company is subject to market risk with respect to changes in the underlying benchmark interest rate that impacts the fair value of the forward starting interest rate swaps. We manage market risk by matching terms of the swaps with the critical terms of the expected debt issuance. The fair value of the forward starting swaps at December 31, 2017 was in a loss position of $3 million. A hypothetical 1% adverse change in interest rates would result in a decrease in the fair value of our forward starting swaps of approximately $32 million at December 31, 2017.
The market price of ourthe Company’s common stock may experience fluctuations, which may be unrelated to ourits operating performance. In particular, ourthe Company’s stock price may be affected by general market movements as well as developments specifically related to the water and wastewater industry. These could include, among other things, interest rate movements, quarterly variations or changes in financial estimates by securities analysts and governmental or regulatory actions. This volatility may make it difficult for usthe Company to access the capital markets in the future through additional offerings of ourits common stock or other equity securities, regardless of ourits financial performance, and such difficulty may preclude usthe Company from being able to take advantage of certain business opportunities or meet business obligations.
74
The Company’s retirement trust assets are exposed to the market prices of debt and equity securities. Changes to the retirement trust asset values can impact the Company’s pension and other benefits expense, funded status and future minimum funding requirements. Changes in interest rates can impact retirement liabilities. We aimThe Company aims to reduce risk through asset diversification and by investing in long duration fixed-income securities that have a duration similar to that of ourits pension liabilities, seeking to hedge some of the interest rate sensitivity of ourits liabilities. That way, if interest rates fall and liabilities increase, we expectthe Company expects that the fixed-income assets in ourits retirement trust will also increase in value. WeThe Company also expect ourexpects its risk to be reduced through ourits ability to recover pension and other benefit costs through rates.
75
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | |||||
| Audited Consolidated Financial Statements | |||||
76
Report of Independent Registered Public Accounting Firm
To the Board of Directors and StockholdersShareholders of
American Water Works Company, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of American Water Works Company, Inc. and its subsidiaries(the “Company”) as of December 31, 20172022 and 2016,2021,and the related consolidated statements of operations, of comprehensive income, ofchanges in shareholders’ equity and cash flows and of changes in stockholders’ equity for each of the three years in the period ended December 31, 2017,2022, including the related notes (collectively referred to as the “consolidated financial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2017,2022, based on criteria established in Internal Control - Integrated Framework(2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidatedfinancial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20172022 and 20162021, and the results of theiritsoperations and their itscash flows for each of the three years in the period ended December 31, 20172022 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2022, based on criteria established in Internal Control - Integrated Framework(2013)issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A.Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB")(PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether theconsolidatedfinancial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
77
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Accounting for the Effects of Rate Regulation
As described in Notes 2 and 3 to the consolidated financial statements, the Company’s consolidated regulatory assets and liabilities balances were $1,030 million and$1,595 million, respectively, as of December 31, 2022. The Company’s regulated utilities are subject to regulation by multiple state utility commissions and the Company follows authoritative accounting principles required for rate regulated utilities, which requires the effects of rate regulation to be reflected in the Company’s consolidated financial statements. As disclosed by management, for each regulatory jurisdiction where the Company conducts business, the Company assesses, at the end of each reporting period, whether the regulatory assets continue to meet the criteria for probable future recovery and regulatory liabilities continue to meet the criteria for probable future settlement. This assessment includes consideration of factors such as changes in regulatory environments, recent rate orders (including recent rate orders on recovery of a specific or similar incurred cost to other regulated entities in the same jurisdiction) and the status of any pending or potential legislation.
The principal considerations for our determination that performing procedures relating to accounting for the effects of rate regulation is a critical audit matter are the significant judgment by management in accounting for regulatory assets and liabilities relative to whether regulatory assets continue to meet the criteria for probable future recovery and regulatory liabilities continue to meet the criteria for probable future settlement as a result of changes in regulatory environments, recent rate orders, and the status of any pending or potential legislation. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing audit procedures and evaluating audit evidence obtained relating to management’s judgments.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the Company’s regulatory accounting process, including controls over management’s assessment and consideration of factors related to the probability of future recovery or settlement. These procedures alsoincluded, among others, evaluating the reasonableness of management’s judgments regarding the probability of recovery and settlement based on the Company’s correspondence with regulators, status of regulatory proceedings, past practices, and other relevant information; evaluating the related accounting and disclosure implications; and evaluating regulatory assets and liabilities balances based on provisions and formulas outlined in rate orders and other correspondence with the Company’s regulators.
| /s/ PricewaterhouseCoopers LLP | ||
| Philadelphia, Pennsylvania | ||
| February | ||
We have served as the Company’s auditor since 1948.
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American Water Works Company, Inc. and Subsidiary Companies
| December 31, 2017 | December 31, 2016 | ||||||
| ASSETS | |||||||
| Property, plant and equipment | $ | 21,716 | $ | 19,954 | |||
| Accumulated depreciation | (5,470 | ) | (4,962 | ) | |||
| Property, plant and equipment, net | 16,246 | 14,992 | |||||
| Current assets: | |||||||
| Cash and cash equivalents | 55 | 75 | |||||
| Restricted funds | 27 | 20 | |||||
| Accounts receivable, net | 272 | 269 | |||||
| Unbilled revenues | 212 | 263 | |||||
| Materials and supplies | 41 | 39 | |||||
| Other | 113 | 118 | |||||
| Total current assets | 720 | 784 | |||||
| Regulatory and other long-term assets: | |||||||
| Regulatory assets | 1,061 | 1,289 | |||||
| Goodwill | 1,379 | 1,345 | |||||
| Other | 76 | 72 | |||||
| Total regulatory and other long-term assets | 2,516 | 2,706 | |||||
| TOTAL ASSETS | $ | 19,482 | $ | 18,482 | |||
Consolidated Balance Sheets
(In millions, except share and per share data)
| December 31, 2017 | December 31, 2016 | ||||||
| CAPITALIZATION AND LIABILITIES | |||||||
| Capitalization: | |||||||
| Common stock ($0.01 par value, 500,000,000 shares authorized, 182,508,564 and 181,798,555 shares issued, respectively) | $ | 2 | $ | 2 | |||
| Paid-in-capital | 6,432 | 6,388 | |||||
| Accumulated deficit | (723 | ) | (873 | ) | |||
| Accumulated other comprehensive loss | (79 | ) | (86 | ) | |||
| Treasury stock, at cost (4,064,010 and 3,701,867 shares, respectively) | (247 | ) | (213 | ) | |||
| Total common stockholders' equity | 5,385 | 5,218 | |||||
| Long-term debt | 6,490 | 5,749 | |||||
| Redeemable preferred stock at redemption value | 8 | 10 | |||||
| Total long-term debt | 6,498 | 5,759 | |||||
| Total capitalization | 11,883 | 10,977 | |||||
| Current liabilities: | |||||||
| Short-term debt | 905 | 849 | |||||
| Current portion of long-term debt | 322 | 574 | |||||
| Accounts payable | 195 | 154 | |||||
| Accrued liabilities | 630 | 609 | |||||
| Taxes accrued | 33 | 31 | |||||
| Interest accrued | 73 | 63 | |||||
| Other | 167 | 112 | |||||
| Total current liabilities | 2,325 | 2,392 | |||||
| Regulatory and other long-term liabilities: | |||||||
| Advances for construction | 271 | 300 | |||||
| Deferred income taxes, net | 1,551 | 2,596 | |||||
| Deferred investment tax credits | 22 | 23 | |||||
| Regulatory liabilities | 1,664 | 403 | |||||
| Accrued pension expense | 384 | 419 | |||||
| Accrued postretirement benefit expense | 40 | 87 | |||||
| Other | 66 | 67 | |||||
| Total regulatory and other long-term liabilities | 3,998 | 3,895 | |||||
| Contributions in aid of construction | 1,276 | 1,218 | |||||
| Commitments and contingencies (See Note 15) | |||||||
| TOTAL CAPITALIZATION AND LIABILITIES | $ | 19,482 | $ | 18,482 | |||
| For the Years Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Operating revenues | $ | 3,357 | $ | 3,302 | $ | 3,159 | |||||
| Operating expenses: | |||||||||||
| Operation and maintenance | 1,378 | 1,504 | 1,404 | ||||||||
| Depreciation and amortization | 492 | 470 | 440 | ||||||||
| General taxes | 259 | 258 | 243 | ||||||||
| Gain on asset dispositions and purchases | (16 | ) | (10 | ) | (3 | ) | |||||
| Total operating expenses, net | 2,113 | 2,222 | 2,084 | ||||||||
| Operating income | 1,244 | 1,080 | 1,075 | ||||||||
| Other income (expense): | |||||||||||
| Interest, net | (342 | ) | (325 | ) | (308 | ) | |||||
| Loss on early extinguishment of debt | (7 | ) | — | — | |||||||
| Other, net | 17 | 15 | 15 | ||||||||
| Total other income (expense) | (332 | ) | (310 | ) | (293 | ) | |||||
| Income before income taxes | 912 | 770 | 782 | ||||||||
| Provision for income taxes | 486 | 302 | 306 | ||||||||
| Net income attributable to common stockholders | $ | 426 | $ | 468 | $ | 476 | |||||
Basic earnings per share: (a) | |||||||||||
| Net income attributable to common stockholders | $ | 2.39 | $ | 2.63 | $ | 2.66 | |||||
Diluted earnings per share: (a) | |||||||||||
| Net income attributable to common stockholders | $ | 2.38 | $ | 2.62 | $ | 2.64 | |||||
| Weighted-average common shares outstanding: | |||||||||||
| Basic | 178 | 178 | 179 | ||||||||
| Diluted | 179 | 179 | 180 | ||||||||
| Dividends declared per common share | $ | 1.66 | $ | 1.50 | $ | 1.36 | |||||
| (a) Amounts may not calculate due to rounding. | |||||||||||
| December 31, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Property, plant and equipment | $ | 29,736 | $ | 27,413 | |||||||
| Accumulated depreciation | (6,513) | (6,329) | |||||||||
| Property, plant and equipment, net | 23,223 | 21,084 | |||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | 85 | 116 | |||||||||
| Restricted funds | 32 | 20 | |||||||||
| Accounts receivable, net of allowance for uncollectible accounts of $60 and $75, respectively | 334 | 271 | |||||||||
| Income tax receivable | 114 | 4 | |||||||||
| Unbilled revenues | 275 | 248 | |||||||||
| Materials and supplies | 98 | 57 | |||||||||
| Assets held for sale | — | 683 | |||||||||
| Other | 312 | 155 | |||||||||
| Total current assets | 1,250 | 1,554 | |||||||||
| Regulatory and other long-term assets: | |||||||||||
| Regulatory assets | 990 | 1,051 | |||||||||
| Seller promissory note from the sale of the Homeowner Services Group | 720 | 720 | |||||||||
| Operating lease right-of-use assets | 82 | 92 | |||||||||
| Goodwill | 1,143 | 1,139 | |||||||||
| Postretirement benefit assets | — | 193 | |||||||||
| Other | 379 | 242 | |||||||||
| Total regulatory and other long-term assets | 3,314 | 3,437 | |||||||||
| Total assets | $ | 27,787 | $ | 26,075 | |||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
79
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Balance Sheets
(In millions, except share and per share data)
| December 31, 2022 | December 31, 2021 | ||||||||||
| CAPITALIZATION AND LIABILITIES | |||||||||||
| Capitalization: | |||||||||||
| Common stock ($0.01 par value; 500,000,000 shares authorized; 187,200,539 and 186,880,413 shares issued, respectively) | $ | 2 | $ | 2 | |||||||
| Paid-in-capital | 6,824 | 6,781 | |||||||||
| Retained earnings | 1,267 | 925 | |||||||||
| Accumulated other comprehensive loss | (23) | (45) | |||||||||
| Treasury stock, at cost (5,342,477 and 5,269,324 shares, respectively) | (377) | (365) | |||||||||
| Total common shareholders' equity | 7,693 | 7,298 | |||||||||
| Long-term debt | 10,926 | 10,341 | |||||||||
| Redeemable preferred stock at redemption value | 3 | 3 | |||||||||
| Total long-term debt | 10,929 | 10,344 | |||||||||
| Total capitalization | 18,622 | 17,642 | |||||||||
| Current liabilities: | |||||||||||
| Short-term debt | 1,175 | 584 | |||||||||
| Current portion of long-term debt | 281 | 57 | |||||||||
| Accounts payable | 254 | 235 | |||||||||
| Accrued liabilities | 706 | 701 | |||||||||
| Accrued taxes | 49 | 176 | |||||||||
| Accrued interest | 91 | 88 | |||||||||
| Liabilities related to assets held for sale | — | 83 | |||||||||
| Other | 255 | 217 | |||||||||
| Total current liabilities | 2,811 | 2,141 | |||||||||
| Regulatory and other long-term liabilities: | |||||||||||
| Advances for construction | 316 | 284 | |||||||||
| Deferred income taxes and investment tax credits | 2,437 | 2,421 | |||||||||
| Regulatory liabilities | 1,590 | 1,600 | |||||||||
| Operating lease liabilities | 70 | 80 | |||||||||
| Accrued pension expense | 235 | 285 | |||||||||
| Other | 202 | 180 | |||||||||
| Total regulatory and other long-term liabilities | 4,850 | 4,850 | |||||||||
| Contributions in aid of construction | 1,504 | 1,442 | |||||||||
| Commitments and contingencies (See Note 16) | |||||||||||
| Total capitalization and liabilities | $ | 27,787 | $ | 26,075 | |||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
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American Water Works Company, Inc. and Subsidiary Companies
Consolidated Statements of Operations
(In millions, except per share data)
| For the Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Operating revenues | $ | 3,792 | $ | 3,930 | $ | 3,777 | |||||||||||
| Operating expenses: | |||||||||||||||||
| Operation and maintenance | 1,589 | 1,777 | 1,622 | ||||||||||||||
| Depreciation and amortization | 649 | 636 | 604 | ||||||||||||||
| General taxes | 281 | 321 | 303 | ||||||||||||||
| Total operating expenses, net | 2,519 | 2,734 | 2,529 | ||||||||||||||
| Operating income | 1,273 | 1,196 | 1,248 | ||||||||||||||
| Other income (expense): | |||||||||||||||||
| Interest expense | (433) | (403) | (397) | ||||||||||||||
| Interest income | 52 | 4 | 2 | ||||||||||||||
| Non-operating benefit costs, net | 77 | 78 | 49 | ||||||||||||||
| Gain on sale of businesses | 19 | 747 | — | ||||||||||||||
| Other, net | 20 | 18 | 22 | ||||||||||||||
| Total other income (expense) | (265) | 444 | (324) | ||||||||||||||
| Income before income taxes | 1,008 | 1,640 | 924 | ||||||||||||||
| Provision for income taxes | 188 | 377 | 215 | ||||||||||||||
| Net income attributable to common shareholders | $ | 820 | $ | 1,263 | $ | 709 | |||||||||||
Basic earnings per share: (a) | |||||||||||||||||
| Net income attributable to common shareholders | $ | 4.51 | $ | 6.96 | $ | 3.91 | |||||||||||
Diluted earnings per share: (a) | |||||||||||||||||
| Net income attributable to common shareholders | $ | 4.51 | $ | 6.95 | $ | 3.91 | |||||||||||
| Weighted average common shares outstanding: | |||||||||||||||||
| Basic | 182 | 182 | 181 | ||||||||||||||
| Diluted | 182 | 182 | 182 | ||||||||||||||
(a)Amounts may not calculate due to rounding.
The accompanying notes are an integral part of these Consolidated Financial Statements.
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American Water Works Company, Inc. and Subsidiary Companies
Consolidated Statements of Comprehensive Income
(In millions)
| For the Years Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Net income attributable to common stockholders | $ | 426 | $ | 468 | $ | 476 | |||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Change in employee benefit plan funded status, net of tax of $2, $(14) and $(6) in 2017, 2016 and 2015, respectively | 7 | (21 | ) | (10 | ) | ||||||
| Pension amortized to periodic benefit cost: | |||||||||||
| Actuarial loss, net of tax of $5, $4 and $3 in 2017, 2016 and 2015, respectively | 7 | 6 | 5 | ||||||||
| Foreign currency translation adjustment | (1 | ) | — | (1 | ) | ||||||
| Unrealized (loss) gain on cash flow hedges, net of tax of $(4), $10 and $0 in 2017, 2016 and 2015, respectively | (6 | ) | 17 | — | |||||||
| Net other comprehensive income (loss) | 7 | 2 | (6 | ) | |||||||
| Comprehensive income attributable to common stockholders | $ | 433 | $ | 470 | $ | 470 | |||||
| For the Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Net income attributable to common shareholders | $ | 820 | $ | 1,263 | $ | 709 | |||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||
| Change in employee benefit plan funded status, net of tax of $5, $0 and $(4) in 2022, 2021 and 2020, respectively | 14 | (1) | (12) | ||||||||||||||
| Defined benefit pension plan actuarial loss, net of tax of $1, $1 and $1 in 2022, 2021 and 2020, respectively | 3 | 4 | 3 | ||||||||||||||
| Unrealized gain (loss) on cash flow hedges, net of tax of $1, $1 and $(1) in 2022, 2021 and 2020, respectively | 5 | 1 | (4) | ||||||||||||||
| Net other comprehensive income (loss) | 22 | 4 | (13) | ||||||||||||||
| Comprehensive income attributable to common shareholders | $ | 842 | $ | 1,267 | $ | 696 | |||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
82
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Statements of Cash Flows
(In millions)
| For the Years Ended December 31, | |||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||||||||
| Net income | $ | 820 | $ | 1,263 | $ | 709 | |||||||||||
| Adjustments to reconcile to net cash flows provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | 649 | 636 | 604 | ||||||||||||||
| Deferred income taxes and amortization of investment tax credits | 80 | 230 | 207 | ||||||||||||||
| Provision for losses on accounts receivable | 24 | 37 | 34 | ||||||||||||||
| (Gain) or loss on sale of businesses | (19) | (747) | — | ||||||||||||||
| Pension and non-pension postretirement benefits | (47) | (41) | (14) | ||||||||||||||
| Other non-cash, net | 7 | (23) | (20) | ||||||||||||||
| Changes in assets and liabilities: | |||||||||||||||||
| Receivables and unbilled revenues | (114) | (74) | (97) | ||||||||||||||
| Income tax receivable | (110) | 21 | (3) | ||||||||||||||
| Pension and non-pension postretirement benefit contributions | (51) | (40) | (39) | ||||||||||||||
| Accounts payable and accrued liabilities | (8) | 66 | (2) | ||||||||||||||
| Accrued taxes | (118) | 129 | 3 | ||||||||||||||
| Other assets and liabilities, net | (5) | (16) | 44 | ||||||||||||||
| Net cash provided by operating activities | 1,108 | 1,441 | 1,426 | ||||||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||||||||
| Capital expenditures | (2,297) | (1,764) | (1,822) | ||||||||||||||
| Acquisitions, net of cash acquired | (315) | (135) | (135) | ||||||||||||||
| Proceeds from sale of assets, net of cash on hand | 608 | 472 | 2 | ||||||||||||||
| Removal costs from property, plant and equipment retirements, net | (123) | (109) | (106) | ||||||||||||||
| Net cash used in investing activities | (2,127) | (1,536) | (2,061) | ||||||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||||||||
| Proceeds from long-term debt | 822 | 1,118 | 1,334 | ||||||||||||||
| Repayments of long-term debt | (15) | (372) | (342) | ||||||||||||||
| (Repayments of) proceeds from term loan | — | (500) | 500 | ||||||||||||||
| Net short-term borrowings (repayments) with maturities less than three months | 591 | (198) | (5) | ||||||||||||||
| Advances and contributions in aid of construction, net of refunds of $19, $25 and $24 in 2022, 2021 and 2020, respectively | 74 | 62 | 28 | ||||||||||||||
| Debt issuance costs and make-whole premium on early debt redemption | (7) | (26) | (15) | ||||||||||||||
| Dividends paid | (467) | (428) | (389) | ||||||||||||||
| Other, net | 2 | (1) | 9 | ||||||||||||||
| Net cash provided by (used in) financing activities | 1,000 | (345) | 1,120 | ||||||||||||||
| Net (decrease) increase in cash, cash equivalents and restricted funds | (19) | (440) | 485 | ||||||||||||||
| Cash, cash equivalents and restricted funds at beginning of period | 136 | 576 | 91 | ||||||||||||||
| Cash, cash equivalents and restricted funds at end of period | $ | 117 | $ | 136 | $ | 576 | |||||||||||
| Cash paid during the year for: | |||||||||||||||||
| Interest, net of capitalized amount | $ | 414 | $ | 389 | $ | 382 | |||||||||||
| Income taxes, net of refunds of $2, $6 and $2 in 2022, 2021 and 2020, respectively | $ | 335 | $ | 1 | $ | 7 | |||||||||||
| Non-cash investing activity: | |||||||||||||||||
| Capital expenditures acquired on account but unpaid as of year end | $ | 330 | $ | 292 | $ | 221 | |||||||||||
| Seller promissory note from the sale of the Homeowner Services Group | $ | — | $ | 720 | $ | — | |||||||||||
| Contingent cash payment from the sale of the Homeowner Services Group | $ | — | $ | 75 | $ | — | |||||||||||
| For the Years Ended December 31, | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net income | $ | 426 | $ | 468 | $ | 476 | |||||
| Adjustments to reconcile to net cash flows provided by operating activities: | |||||||||||
| Depreciation and amortization | 492 | 470 | 440 | ||||||||
| Deferred income taxes and amortization of investment tax credits | 462 | 295 | 312 | ||||||||
| Provision for losses on accounts receivable | 29 | 27 | 32 | ||||||||
| Gain on asset dispositions and purchases | (16 | ) | (10 | ) | (3 | ) | |||||
| Pension and non-pension postretirement benefits | 57 | 54 | 61 | ||||||||
| Other non-cash, net | (54 | ) | (36 | ) | (53 | ) | |||||
| Changes in assets and liabilities: | |||||||||||
| Receivables and unbilled revenues | 21 | (31 | ) | (84 | ) | ||||||
| Pension and non-pension postretirement benefit contributions | (48 | ) | (53 | ) | (57 | ) | |||||
| Accounts payable and accrued liabilities | 38 | 60 | 80 | ||||||||
| Other assets and liabilities, net | 64 | (20 | ) | (9 | ) | ||||||
| Impact of Freedom Industries settlement activities | (22 | ) | 65 | — | |||||||
| Net cash provided by operating activities | 1,449 | 1,289 | 1,195 | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Capital expenditures | (1,434 | ) | (1,311 | ) | (1,160 | ) | |||||
| Acquisitions, net of cash acquired | (177 | ) | (204 | ) | (197 | ) | |||||
| Proceeds from sale of assets and securities | 15 | 9 | 5 | ||||||||
| Removal costs from property, plant and equipment retirements, net | (76 | ) | (84 | ) | (107 | ) | |||||
| Net cash used in investing activities | (1,672 | ) | (1,590 | ) | (1,459 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Proceeds from long-term debt | 1,395 | 553 | 565 | ||||||||
| Repayments of long-term debt | (896 | ) | (144 | ) | (132 | ) | |||||
| Proceeds from short-term borrowings with maturities greater than three months | — | — | 60 | ||||||||
| Repayments of short-term borrowings with maturities greater than three months | — | — | (60 | ) | |||||||
| Net short-term borrowings with maturities less than three months | 55 | 221 | 180 | ||||||||
| Proceeds from issuances of employee stock plans and direct stock purchase plan | 26 | 26 | 39 | ||||||||
| Advances and contributions for construction, net of refunds of $22, $31 and $23 in 2017, 2016 and 2015, respectively | 28 | 16 | 26 | ||||||||
| Debt issuance costs | (13 | ) | (5 | ) | (7 | ) | |||||
| Make-whole premium on early debt redemption | (34 | ) | — | — | |||||||
| Dividends paid | (289 | ) | (261 | ) | (239 | ) | |||||
| Anti-dilutive share repurchases | (54 | ) | (65 | ) | (126 | ) | |||||
| Taxes paid related to employee stock plans | (11 | ) | (13 | ) | (16 | ) | |||||
| Net cash provided by (used in) financing activities | 207 | 328 | 290 | ||||||||
| Net (decrease) increase in cash and cash equivalents and restricted funds | (16 | ) | 27 | 26 | |||||||
| Cash and cash equivalents and restricted funds at beginning of period | 99 | 72 | 46 | ||||||||
| Cash and cash equivalents and restricted funds at end of period | $ | 83 | $ | 99 | $ | 72 | |||||
| Cash paid during the year for: | |||||||||||
| Interest, net of capitalized amount | $ | 338 | $ | 327 | $ | 309 | |||||
| Income taxes, net of refunds of $0, $0 and $1 in 2017, 2016 and 2015, respectively | $ | 30 | $ | 16 | $ | 12 | |||||
| Non-cash investing activity: | |||||||||||
| Capital expenditures acquired on account but unpaid as of year end | $ | 204 | $ | 171 | $ | 224 | |||||
| Acquisition financed by treasury stock | $ | 33 | $ | — | $ | — | |||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
83
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Statements of Changes in Stockholders’Shareholders’ Equity
(In millions)millions, except per share data)
| Common Stock | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive Loss | Treasury Stock | Total Shareholders' Equity | |||||||||||||||||||||||||||||||||||||||||||
| Shares | Par Value | Paid-in Capital | Shares | At Cost | |||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2019 | 185.9 | $ | 2 | $ | 6,700 | $ | (207) | $ | (36) | (5.1) | $ | (338) | $ | 6,121 | |||||||||||||||||||||||||||||||||
| Net income attributable to common shareholders | — | — | — | 709 | — | — | — | 709 | |||||||||||||||||||||||||||||||||||||||
| Common stock issuances (a) | 0.6 | — | 47 | — | — | (0.1) | (10) | 37 | |||||||||||||||||||||||||||||||||||||||
| Net other comprehensive income | — | — | — | — | (13) | — | — | (13) | |||||||||||||||||||||||||||||||||||||||
| Dividends ($2.20 declared per common share) | — | — | — | (400) | — | — | — | (400) | |||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | 186.5 | $ | 2 | $ | 6,747 | $ | 102 | $ | (49) | (5.2) | $ | (348) | $ | 6,454 | |||||||||||||||||||||||||||||||||
| Net income attributable to common shareholders | — | — | — | 1,263 | — | — | — | 1,263 | |||||||||||||||||||||||||||||||||||||||
| Common stock issuances (a) | 0.4 | — | 34 | — | — | (0.1) | (17) | 17 | |||||||||||||||||||||||||||||||||||||||
| Net other comprehensive income | — | — | — | — | 4 | — | — | 4 | |||||||||||||||||||||||||||||||||||||||
| Dividends ($2.41 declared per common share) | — | — | — | (440) | — | — | — | (440) | |||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | 186.9 | $ | 2 | $ | 6,781 | $ | 925 | $ | (45) | (5.3) | $ | (365) | $ | 7,298 | |||||||||||||||||||||||||||||||||
| Net income attributable to common shareholders | — | — | — | 820 | — | — | — | 820 | |||||||||||||||||||||||||||||||||||||||
| Common stock issuances (a) | 0.5 | — | 43 | — | — | (0.1) | (12) | 31 | |||||||||||||||||||||||||||||||||||||||
| Net other comprehensive income | — | — | — | — | 22 | — | — | 22 | |||||||||||||||||||||||||||||||||||||||
| Dividends ($2.62 declared per common share) | — | — | — | (478) | — | — | — | (478) | |||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | 187.4 | $ | 2 | $ | 6,824 | $ | 1,267 | $ | (23) | (5.4) | $ | (377) | $ | 7,693 | |||||||||||||||||||||||||||||||||
| Common Stock | Accumulated Other Comprehensive Loss | Treasury Stock | Total Stockholders' Equity | |||||||||||||||||||||||||||
| Shares | Par Value | Paid-in Capital | Accumulated Deficit | Shares | At Cost | |||||||||||||||||||||||||
| Balance as of December 31, 2014 | 179.5 | $ | 2 | $ | 6,302 | $ | (1,296 | ) | $ | (82 | ) | (0.2 | ) | $ | (11 | ) | $ | 4,915 | ||||||||||||
| Cumulative effect of change in accounting principle | — | — | — | (8 | ) | — | — | — | (8 | ) | ||||||||||||||||||||
| Net income attributable to common stockholders | — | — | — | 476 | — | — | — | 476 | ||||||||||||||||||||||
| Direct stock reinvestment and purchase plan | 0.1 | — | 4 | — | — | — | — | 4 | ||||||||||||||||||||||
| Employee stock purchase plan | 0.1 | — | 5 | — | — | — | — | 5 | ||||||||||||||||||||||
| Stock-based compensation activity | 1.2 | — | 40 | (1 | ) | — | (0.1 | ) | (6 | ) | 33 | |||||||||||||||||||
| Repurchases of common stock | — | — | — | — | — | (2.3 | ) | (126 | ) | (126 | ) | |||||||||||||||||||
| Net other comprehensive income (loss) | — | — | — | — | (6 | ) | — | — | (6 | ) | ||||||||||||||||||||
| Dividends | — | — | — | (244 | ) | — | — | — | (244 | ) | ||||||||||||||||||||
| Balance as of December 31, 2015 | 180.9 | $ | 2 | $ | 6,351 | $ | (1,073 | ) | $ | (88 | ) | (2.6 | ) | $ | (143 | ) | $ | 5,049 | ||||||||||||
| Net income attributable to common stockholders | — | — | — | 468 | — | — | — | 468 | ||||||||||||||||||||||
| Direct stock reinvestment and purchase plan | 0.1 | — | 5 | — | — | — | — | 5 | ||||||||||||||||||||||
| Employee stock purchase plan | 0.1 | — | 7 | — | — | — | — | 7 | ||||||||||||||||||||||
| Stock-based compensation activity | 0.7 | — | 25 | (1 | ) | — | (0.1 | ) | (5 | ) | 19 | |||||||||||||||||||
| Repurchases of common stock | — | — | — | — | — | (1.0 | ) | (65 | ) | (65 | ) | |||||||||||||||||||
| Net other comprehensive income (loss) | — | — | — | — | 2 | — | — | 2 | ||||||||||||||||||||||
| Dividends | — | — | — | (267 | ) | — | — | — | (267 | ) | ||||||||||||||||||||
| Balance as of December 31, 2016 | 181.8 | $ | 2 | $ | 6,388 | $ | (873 | ) | $ | (86 | ) | (3.7 | ) | $ | (213 | ) | $ | 5,218 | ||||||||||||
| Cumulative effect of change in accounting principle | — | — | — | 21 | — | — | — | 21 | ||||||||||||||||||||||
| Net income attributable to common stockholders | — | — | — | 426 | — | — | — | 426 | ||||||||||||||||||||||
| Direct stock reinvestment and purchase plan | 0.1 | — | 8 | — | — | — | — | 8 | ||||||||||||||||||||||
| Employee stock purchase plan | 0.1 | — | 7 | — | — | — | — | 7 | ||||||||||||||||||||||
| Stock-based compensation activity | 0.5 | — | 22 | — | — | (0.1 | ) | (7 | ) | 15 | ||||||||||||||||||||
| Acquisitions via treasury stock | — | — | 7 | — | — | 0.4 | 27 | 34 | ||||||||||||||||||||||
| Repurchases of common stock | — | — | — | — | — | (0.7 | ) | (54 | ) | (54 | ) | |||||||||||||||||||
| Net other comprehensive income (loss) | — | — | — | — | 7 | — | — | 7 | ||||||||||||||||||||||
| Dividends | — | — | — | (297 | ) | — | — | — | (297 | ) | ||||||||||||||||||||
| Balance as of December 31, 2017 | 182.5 | $ | 2 | $ | 6,432 | $ | (723 | ) | $ | (79 | ) | (4.1 | ) | $ | (247 | ) | $ | 5,385 | ||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
84
American Water Works Company, Inc. and Subsidiary Companies
Notes to Consolidated Financial Statements
(Unless otherwise noted, in millions, except per share data)
Note 1: Organization and Operation
American Water Works Company, Inc. (the “Company” or “American Water”) is thea holding company for regulated and market-based subsidiaries that provide water and wastewater services throughout the United States and Ontario, Canada.States. References to “parent company” mean American Water Works Company, Inc., without its subsidiaries. The Company’s primary business involves the ownership of regulated utilities that provide water and wastewater services in 1614 states in the United States, collectively referred to as the “Regulated Businesses.” The Company also operates other market-based businesses that provide water and wastewater services within four, non-reportable operating segments, collectively referred to as the “Market-Based Businesses.presented throughout this Annual Report on Form 10-K within “Other.” TheseThe Company’s primary market-based businesses includeincluded within Other are the Military Services Group (“MSG”), which conducts operation and maintenance (“O&M”) ofenters into long-term contracts with the U.S. government to provide water and wastewater systemsservices on various military bases;installations; and the former Homeowner Services Group which primarily provides water and sewer line protection plans for homeowners; the Contract Operations Group, which conducts O&M of water and wastewater facilities for municipalities and industrial customers; and Keystone Clearwater Solutions, LLC (“Keystone”HOS”), which provides waterwas sold on December 9, 2021, and provided various warranty protection programs and other home services for natural gas exploration and production companies.to residential customers.
Note 2: Significant Accounting Policies
Regulation
The Company’s regulated utilities are subject to economic regulation by certainmultiple state utility commissions or other entities engaged in utility regulation, collectively referred to as Public Utility Commissions (“PUCs” or “Regulators”). As such, the Company follows authoritative accounting principles required for rate regulated utilities, which requires the effects of rate regulation to be reflected in the Company’s Consolidated Financial Statements. PUCs generally authorize revenue at levels intended to recover the estimated costs of providing service, plus a return on net investments, or rate base. Regulators may also approve accounting treatments, long-term financing programs and cost of capital, operation and maintenance (“O&M”) expenses, capital expenditures, O&M expenses, taxes, affiliated transactions and affiliate relationships, reorganizations, mergers, acquisitions and mergers, and acquisitions,dispositions, along with imposing certain penalties or granting certain incentives. Due to timing and other differences in the collection of a regulated utility’s revenue, an incurredrevenues, these authoritative accounting principles allow a cost that would otherwise be charged as an expense by a non-regulated entity, couldto be deferred as a regulatory asset if it is probable that such cost is recoverable through future rates. Conversely, the authoritative accountingthese principles also require the creation of a regulatory liability for amounts collected in rates to recover costs expected to be incurred in the future, or amounts collected in excess of costs incurred and are refundable to customers. See Note 6—3—Regulatory AssetsMatters for additional information.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires that management make estimates, assumptions and Liabilities.judgments that could affect the Company’s financial condition, results of operations and cash flows. Actual results could differ from these estimates, assumptions and judgments. The Company considers its critical accounting estimates to include (i) the application of regulatory accounting principles and the related determination and estimation of regulatory assets and liabilities, (ii) revenue recognition and the estimates used in the calculation of unbilled revenue, (iii) accounting for income taxes, (iv) benefit plan assumptions and (v) the estimates and judgments used in determining loss contingencies. The Company’s critical accounting estimates that are particularly sensitive to change in the near term are amounts reported for regulatory assets and liabilities, income taxes, benefit plan assumptions and contingency-related obligations.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of American Water and all of its subsidiaries in which a controlling interest is maintained after the elimination of intercompany balances and transactions.
Property, Plant and Equipment
Property, plant and equipment consists primarily of utility plant.plant utilized by the Company’s regulated utilities. Additions to utility plant and replacement of retirement units of utility plant are capitalized and include costs such as materials, direct labor, payroll taxes and benefits, indirect items such as engineering and supervision, transportation and an allowance for funds used during construction (“AFUDC”). Costs for repair, maintenance and minor replacements are charged to O&M expense as incurred.
The cost of property,utility plant and equipment is depreciated using the straight-line average remaining life, group method. The Company’s regulated utilities record depreciation in conformity with amounts approved by PUCs, after regulatory review of the information the Company submits to support its estimates of the assets’ remaining useful lives.
85
Nonutility property consists primarily of buildings and equipment utilized by the Company’s MSG business and for internal operations. This property is stated at cost, net of accumulated depreciation, which is calculated using the straight-line method over the useful lives of the assets.
When units of property, plant and equipment are replaced, retired or abandoned, the carrying value is credited against the asset and charged to accumulated depreciation. To the extent the Company recovers cost of removal or other retirement costs through rates after the retirement costs are incurred, a regulatory asset is recorded. In some cases, the Company recovers retirement costs through rates during the life of the associated asset and before the costs are incurred. These amounts result in a regulatory liability being reported based on the amounts previously recovered through customer rates, until the costs to retire those assets are incurred.
The costs incurred to acquire and internally develop computer software for internal use are capitalized as a unit of property. The carrying value of these costs amounted to $346$369 million and $345$374 million as of December 31, 20172022 and 2016,2021, respectively.
Cash and Cash Equivalents, and Restricted Funds
Substantially all cash is invested in interest-bearing accounts. All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents.
Restricted funds consistsconsist primarily of proceeds from financings for the construction and capital improvement of facilities, and deposits for future services under O&M projects. Proceeds are held in escrow or interest-bearing accounts until the designated expenditures are incurred. Restricted funds are classified inon the Consolidated Balance Sheets as either current or long-term based upon the intended use of the funds.
| 2017 | 2016 | ||||||
| Cash and cash equivalents | $ | 55 | $ | 75 | |||
| Restricted funds | 27 | 20 | |||||
| Restricted funds included in other long-term assets | 1 | 4 | |||||
| Cash and cash equivalents, and restricted funds as presented in the Consolidated Statements of Cash Flows | $ | 83 | $ | 99 | |||
Accounts Receivable and Unbilled Revenues
Accounts receivable include regulated utility customer accounts receivable, which represent amounts billed to water and wastewater customers generally on a cyclemonthly basis. Credit is extended based on the guidelines of the applicable PUCs and collateral is generally not required. Also included are market-based trade accounts receivable and nonutility customer receivables of the regulated subsidiaries. Unbilled revenues are accrued when service has been provided but has not been billed to customers and when costs exceed billings on market-based construction contracts.
Allowance for Uncollectible Accounts
Allowances for uncollectible accounts are maintained for estimated probable losses resulting from the Company’s inability to collect receivables from customers. Accounts that are outstanding longer than the payment terms are considered past due. A number of factors are considered in determining the allowance for uncollectible accounts, including the length of time receivables are past due, and previous loss history.history, current economic and societal conditions and reasonable and supportable forecasts that affect the collectability of receivables from customers. The Company generally writes off accounts when they become uncollectible or are over a certain number of days outstanding. See Note 5—7—Allowance for Uncollectible Accounts.
Accounts for additional information.
Materials and Supplies
Materials and supplies are stated at the lower of cost or net realizable value. Cost is determined using the average cost method.
Seller Promissory Note
The Company’s seller promissory note is accounted for under Accounting Standards Codification (“ASC”) Topic 310, Receivables, and is classified as held for investment and accounted for at amortized cost at the present value of consideration received for the sale of its HOS business. Interest income from the seller promissory note is accrued based on the principal amount outstanding and earned over the contractual life of the loan.
Leases
The Company has operating and finance leases involving real property, including facilities, utility assets, vehicles, and equipment. The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, accrued liabilities and operating lease liabilities on the Consolidated Balance Sheets. Finance leases are included in property, plant and equipment, accrued liabilities and other long-term liabilities on the Consolidated Balance Sheets. The Company has made an accounting policy election not to include operating leases with a lease term of twelve months or less.
86
ROU assets represent the right to use an underlying asset for the lease term and the lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are generally recognized at the commencement date based on the present value of discounted lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of discounted lease payments. The implicit rate is used when readily determinable. ROU assets also include any upfront lease payments and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) and non-lease components (e.g., common-area maintenance costs), which are generally accounted for separately; however, the Company accounts for the lease and non-lease components as a single lease component for certain leases. Certain lease agreements include variable rental payments adjusted periodically for inflation. Additionally, the Company applies a portfolio approach to effectively account for the ROU assets and lease liabilities. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Goodwill
Goodwill represents the excess of the purchase price paid over the estimated fair value of the assets acquired and liabilities assumed in the acquisition of a business. Goodwill is not amortized butand must be allocated at the reporting unit level, which is defined as an operating segment or one level below, and tested for impairment at least annually, or on an interim basismore frequently if an event occurs or circumstances change that would more likely than not, reduce the fair value of a reporting unit below its carrying value. Goodwill
The Company’s goodwill is primarily associated with the acquisition of American Water by an affiliate of the Company by RWE AktiengesellschaftCompany’s previous owner in 2003 and the acquisition of Keystone in 2015, and has been assignedallocated to reporting units based on the fair values at the date of the acquisitions. TheFor purposes of testing goodwill for impairment, the reporting units in the Regulated Businesses segment are aggregated into a single reporting unit. The Market-Based Businessesgoodwill of Other is comprised of four non-reportablethe MSG reporting units. unit.
The Company’s annual impairment testtesting is performed as of November 30 of each year, in conjunction with the completion of the Company’s annual business plan.year. The Company assesses qualitative factors to determine whether quantitative testing is necessary. If it is necessary to perform the two-step quantitative goodwill impairment test. Ifdetermined, based onupon qualitative factors, that the estimated fair value of thea reporting unit is, more likely than not, greater than theits carrying amount,value, no further testing is required. If the Company bypasses the qualitative assessment or performs the qualitative assessment butand determines that itthe estimated fair value of a reporting unit, is more likely than not, that its fair value is less than its carrying amount,value, a quantitative, two-step, fair value-based testassessment is performed.
The Company believes the assumptions and other considerations used to value goodwill to be appropriate. However,appropriate, however, if actual experience differs from the assumptions and considerations used in its analysis, the resulting change could have a material adverse impact on the Consolidated Financial Statements. See Note 7—8—Goodwill and Other Intangible Assets.Assets for additional information.
Impairment of Long-Lived Assets
Long-lived assets, other than goodwill, include land, buildings,property, plant and equipment and long-term investments. Long-livedThe Company evaluates long-lived assets other than investments and land, are depreciated over their estimated useful lives, and are reviewed for impairment whenever changes inwhen circumstances indicate the carrying value of those assets may not be recoverable. The Company determines if long-lived assets are potentially impaired by comparing the undiscounted expected future cash flows to the carrying value when indicators of impairment exist. When the undiscounted cash flow analysis indicates a long-lived asset may not be recoverable. Such circumstances would include items such as a significant decrease inrecoverable, the market valueamount of a long-lived asset, a significant adverse change in the manner the asset is being used or planned to be used or in its physical condition, or a history of operating or cash flow losses associated with the use of the asset. In addition, changes in the expected useful life of these long-lived assets may also be an impairment indicator. When such events or changes occur, the Company estimates the fair value of the asset from future cash flows expected to result from the use and, if applicable, the eventual disposition of the asset and compares that to the carrying value of the asset. If the carrying value is greater than the fair value, an impairment loss is recorded.
The long-lived assets of the Company’s regulated utility subsidiariesutilities are testedgrouped on a separate entity basis for impairment testing, as they are integrated state-wide operations that do not have the option to curtail service and generally have uniform tariffs. A regulatory asset is charged to earnings if and when future recovery in rates of that asset is no longer probable.
The Company holdsbelieves the assumptions and other investments including investmentsconsiderations used to value long-lived assets to be appropriate, however, if actual experience differs from the assumptions and considerations used in privately held companies and investments in joint ventures accounted for usingits estimates, the equity method. The Company’s investments in privately held companies and joint ventures are classified as other long-term assets in the accompanying Consolidated Balance Sheets.
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Advances for Construction and Contributions in Aid of Construction
Regulated utility subsidiaries may receive advances for construction and contributions in aid of construction from customers, home builders and real estate developers to fund construction necessary to extend service to new areas.
Advances are refundable for limited periods of time as new customers begin to receive service or other contractual obligations are fulfilled. Included in other current liabilities as of December 31, 20172022 and 2016 in2021 on the accompanying Consolidated Balance Sheets are estimated refunds of $19 million and $23 million, and $21 million, respectively. ThoseThese amounts represent expected refunds during the next 12-month period.
Advances that are no longer refundable are reclassified to contributions. Contributions are permanent collections of plant assets or cash for a particular construction project. For ratemaking purposes, the amount of such contributions generally serves as a rate base reduction since the contributions represent non-investor supplied funds.
Generally, the Company depreciates utility plant funded by contributions and amortizes its contributions balance as a reduction to depreciation expense, producing a result which is functionally equivalent to reducing the original cost of the utility plant for the contributions. In accordance with applicable regulatory guidelines, some of the Company’s utility subsidiaries do not amortize contributions, and any contribution received remains on the balance sheet indefinitely. Amortization of contributions in aid of construction was $27$37 million, $27$36 million and $26$32 million for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, respectively.
Revenue Recognition
Under ASC Topic 606, Revenue From Contracts With Customers, andall related amendments (collectively, “ASC 606”), a performance obligation is a promise within a contract to transfer a distinct good or service, or a series of Revenues
The Company’s revenues from contracts with customers are recognizeddiscussed below. Customer payments for contracts are generally due within 30 days of billing and none of the contracts with customers have payment terms that exceed one year; therefore, the Company elected to apply the significant financing component practical expedient and no amount of consideration has been allocated as a financing component.
Regulated Businesses Revenue
Revenue from the Company’s Regulated Businesses is generated primarily from water and wastewater services delivered to customers. These contracts contain a single performance obligation, the delivery of water and/or wastewater services, as the promise to transfer the individual good or service is not separately identifiable from other promises within the contracts and, therefore, is not distinct. Revenues are provided, andrecognized over time, as services are provided. There are generally no significant financing components or variable consideration. Revenues include amounts billed to customers on a cycle basis and unbilled amounts calculated based on estimated usage from the date of the meter reading associated with the latest customer bill, to the end of the accounting period. The amounts that the Company has a right to invoice are determined by each customer’s actual usage, an indicator that the invoice amount corresponds directly to the value transferred to the customer. The Company also recognizes revenue when it is probable that future recovery of previously incurred costs or future refunds that are to be credited to customers will occur through the ratemaking process.
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Other Revenue
The Company has agreements with the U.S. governmentlong-term, fixed fee contracts to operate and maintain water and wastewater systems atfor the U.S. government on various military bases pursuant to 50-year contracts (“military agreements”). These contracts also include construction components that are accountedinstallations and facilities owned by municipal customers. Billing and revenue recognition for separately from the O&M components. Ninefixed fee revenues occurs ratably over the term of the military agreements are subject to periodic price redetermination adjustmentscontract, as customers simultaneously receive and modifications for changes in circumstance. The remaining four agreements are subject to annual price adjustments under a mechanism similar to price redeterminations.consume the benefits provided by the Company. Additionally, these contracts allow the Company to make capital improvements to underlying infrastructure, which are initiated through separate modifications or amendments to the original contract, whereby stand-alone, fixed pricing is separately stated for each improvement. The Company has agreements ranging in length from one to 25 yearsdetermined that these capital improvements are separate performance obligations, with municipalities and businesses in various industries to operate and maintain water and wastewater systems (“O&M agreements”). Revenues from operations and management services are recognized as services are provided. See Note 15—Commitments and Contingencies.
Prior to December 9, 2021, through various warranty protection programs and other home services, the Company previously provided fixed fee services to residential customers for interior and exterior water and sewer lines, interior electric and gas lines, heating and cooling systems, water heaters and other home appliances, as well as power surge protection and other related services through its former HOS business. Most of the contracts had a one-year term and each service was a separate performance obligation, satisfied over time, as the customers simultaneously received and consumed the benefits provided from the service. Customers were obligated to pay for the protection programs ratably over 12 months or via a one-time, annual fee, with revenues recognized ratably over time for those services. Advances from customers were deferred until the performance obligation was satisfied.
Income Taxes
Certain income and expense items are accounted for in different time periods for financial reporting than for income tax reporting purposes. The Company provides deferred income taxes on the difference between the tax basis of assets and liabilities and the amounts at which they are carried in the financial statements. These deferred income taxes are based on the enacted tax rates expected to be in effect when these temporary differences are projected to reverse. In addition, the regulated utility subsidiaries recognize regulatory assets and liabilities for the effect on revenues expected to be realized as the tax effects of temporary differences, previously flowed through to customers, reverse.
Investment tax credits have been deferred by the regulated utility subsidiaries and are being amortized to income over the average estimated service lives of the related assets.
The Company recognizes accrued interest and penalties related to tax positions as a component of income tax expense and accounts for sales tax collected from customers and remitted to taxing authorities on a net basis. See Note 13—14—Income Taxes.Taxes for additional information.
Allowance for Funds Used During Construction
AFUDC is a non-cash credit to income with a corresponding charge to utility plant that represents the cost of borrowed funds or a return on equity funds devoted to plant under construction. The regulated utility subsidiaries record AFUDC to the extent permitted by the PUCs. The portion of AFUDC attributable to borrowed funds is shown as a reduction of interest, net inon the accompanying Consolidated Statements of Operations. Any portion of AFUDC attributable to equity funds would be included in other, income (expenses) innet on the accompanying Consolidated Statements of Operations. AFUDC is summarizedPresented in the following table below is AFUDC for the years ended December 31:
| 2017 | 2016 | 2015 | |||||||||
| Allowance for other funds used during construction | $ | 19 | $ | 15 | $ | 13 | |||||
| Allowance for borrowed funds used during construction | 8 | 6 | 8 | ||||||||
| 2022 | 2021 | 2020 | |||||||||||||||
| Allowance for other funds used during construction | $ | 20 | $ | 27 | $ | 30 | |||||||||||
| Allowance for borrowed funds used during construction | 14 | 10 | 13 | ||||||||||||||
Derivative Financial Instruments
The Company uses derivative financial instruments primarily for purposes of hedging exposures to fluctuations in interest rates. These derivative contracts are entered into for periods consistent with the related underlying exposures and do not constitute positions independent of those exposures. The Company does not enter into derivative contracts for speculative purposes and does not use leveraged instruments.
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All derivatives are recognized on the balance sheet at fair value. On the date the derivative contract is entered into, the Company may designatedesignates the derivative as a hedge of the fair value of a recognized asset or liability (fair-value hedge) or a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash-flow hedge).
Cash flows from derivative contracts are included in net cash provided by operating activities inon the accompanying Consolidated Statements of Cash Flows. See Note 11—Long-Term Debt for additional information.
Pension and Other Postretirement Benefits
The Company maintains defined benefit pension plans and other postretirement benefit plans for eligible employees and retirees. The plan obligation and costs of providing benefits under these plans are annually measured as of December 31. The measurement involves various factors, assumptions and accounting elections. The impact of assumption changes or experience different from that assumed on pension and other postretirement benefit obligations is recognized over time rather than immediately recognized in the Consolidated Statements of Operations and the Consolidated Statements of Comprehensive Income. Cumulative gains and losses that are in excess of 10% of the greater of either the projected benefit obligation or the fair value of plan assets are amortized over the expected average remaining future service period of the current active membership for the plans, with the exception of the American Water Pension Plan for Certain Inactive Participants (“AWPP Inactive”), which is amortized over the average remaining life expectancy of the inactive participants. See Note 15—Employee Benefits for additional information.
The Company’s policy is to recognize curtailments when the total expected future service of plan participants is reduced by greater than 10% due to an event that results in terminations and/or retirements.
New Accounting Standards
in 2022:
| Standard | Description | Date of Adoption | Application | Effect on the Consolidated Financial Statements | ||||||||||||||||||||||
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity | Simplification of | Modified retrospective | The | |||||||||||||||||||||||
| Disclosures by Business Entities about Government Assistance | The amendments in this update require additional disclosures regarding government grants and contributions. These disclosures require information on the following three items about government transactions to be provided: information on the nature of | January 1, | The standard did not have a material impact on the Consolidated | |||||||||||||||||||||||
| Reference Rate Reform | December 21, 2022 | Prospective | The standard did not have a material impact on the Consolidated | |||||||||||||||||||||||
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Presented in the table below are recently issued accounting standards that have not yet been adopted by the Company as of December 31, 2017:
2022:
| Standard | Description | Date of Adoption | Application | Estimated Effect on the Consolidated Financial Statements | ||||||||||||||||||||||
| January 1, | ||||||||||||||||||||||||||
The Company is evaluating | ||||||||||||||||||||||||||||
| The main provisions of | January 1, | The Company is evaluating | ||||||||||||||||||||||||||
Reclassifications
Certain reclassifications have been made to prior periods in the accompanying Consolidated Financial Statements and notesNotes to conform to the current presentation.
Note 3: Regulatory Matters
General Rate Cases
Presented in the table below are annualized incremental revenues, including reductions for the amortization of the excess accumulated deferred income taxes (“EADIT”) that are generally offset in income tax expense, assuming a constant water sales volume and customer count, resulting from general rate case authorizations that became effective during 2022:
| (In millions) | Effective Date | Amount | |||||||||
| General rate cases by state: | |||||||||||
| New Jersey | September 1, 2022 | $ | 46 | ||||||||
| Hawaii | July 1, 2022 | 2 | |||||||||
| West Virginia | February 25, 2022 | 13 | |||||||||
| California, Step Increase | January 1, 2022 | 9 | |||||||||
| Pennsylvania, Step Increase | January 1, 2022 | 20 | |||||||||
| Total general rate case authorizations | $ | 90 | |||||||||
Presented in the table below are annualized incremental revenues, including reductions for the amortization of EADIT that are generally offset in income tax expense, assuming a constant water sales volume and customer count, resulting from general rate case authorizations that became effective on or after January 1, 2023:
| (In millions) | Effective Date | Amount | |||||||||
| General rate cases by state: | |||||||||||
| Pennsylvania | January 28, 2023 | $ | 138 | ||||||||
| Illinois | January 1, 2023 | 67 | |||||||||
| California, Step Increase | January 1, 2023 | 13 | |||||||||
| Total general rate case authorizations | $ | 218 | |||||||||
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On December 15, 2022, the Illinois Commerce Commission issued an order approving the adjustment of base rates requested in a rate case filed on February 10, 2022, by the Company’s Illinois subsidiary. As updated in the Illinois subsidiary’s June 29, 2022 rebuttal filing, the request sought $83 million in additional annualized revenues excluding previously recovered infrastructure surcharges. The general rate case order approved a $67 million annualized increase in water and wastewater system revenues excluding previously recovered infrastructure surcharges, effective January 1, 2023, based on an authorized return on equity of 9.8%, authorized rate base of $1.64 billion, a common equity ratio of 49.0% and a debt ratio of 51.0%. The annualized revenue increase is being driven primarily by significant water and wastewater system capital investments since the Illinois subsidiary’s 2017 rate case order that have been completed or are planned through December 31, 2023, expected higher pension and other postretirement benefit costs, and increases in production costs, including chemicals, fuel and power costs.
On December 8, 2022, the Pennsylvania Public Utility Commission issued an order approving the joint settlement of the rate case filed on April 29, 2022, by the Company’s Pennsylvania subsidiary. The general rate case order approved a $138 million annualized increase in water and wastewater revenues and authorizes implementation of the new water and wastewater rates effective January 28, 2023. The rate case proceeding was resolved through a “black box” settlement agreement and did not specify an approved return on equity (“ROE”). The annualized revenue increase is driven primarily by significant incremental capital investments since the Pennsylvania subsidiary’s 2021 rate case order that will be completed through December 31, 2023, increases in pension and other postretirement benefits expense and increases in production costs, including chemicals, fuel and power costs. The general rate case order also includes recovery of the Company’s Pennsylvania subsidiary’s COVID-19 deferral balance.
On August 17, 2022, the Company’s New Jersey subsidiary was authorized additional annual revenues of $46 million in its general rate case, effective September 1, 2022, based on an authorized return on equity of 9.6%, authorized rate base of $4.15 billion, a common equity ratio of 54.6% and a long-term debt ratio of 45.4%. The request incorporated updated estimates of production costs, including chemicals, fuel and power costs. Beginning January 1, 2023, the Company’s New Jersey subsidiary will defer as a regulatory asset or liability, as appropriate, the difference between its pension expense and other postretirement benefits expense and those amounts included in base rates. The deferral period for this regulatory asset or liability will be two years or, if earlier, will end at the conclusion of the Company’s New Jersey subsidiary’s next general rate case. The Company’s New Jersey subsidiary also withdrew its request, without prejudice, to recover its existing authorized COVID-19-related regulatory asset in the general rate case and will seek recovery in a separate proceeding within the process established in the New Jersey Board of Public Utilities’ (the “NJBPU”) generic COVID-19-related proceeding.
On February 24, 2022, the Company’s West Virginia subsidiary (“WVAWC”) was authorized additional annual revenues of $13 million in its general rate case, effective February 25, 2022, based on an authorized return on equity of 9.8%, authorized rate base of $734 million and a common equity ratio of 47.9%. Staff of the Public Service Commission of West Virginia moved for reconsideration of the final order on several grounds. WVAWC filed its response to the Staff's Petition for Reconsideration on March 28, 2022, in support of the authorized revenue requirement. On October 21, 2022, the Public Service Commission of West Virginia denied the motion for reconsideration.
Pending General Rate Case Filings
On July 1, 2022, the Company’s California subsidiary filed a general rate case requesting an increase in 2024 revenue of $56 million and a total increase in revenue over the 2024 to 2026 period of $95 million, with all increases compared against 2022 revenues. The Company updated its filing in January 2023 to capture the authorized step increase effective January 1, 2023. The filing was also updated to incorporate a decoupling proposal and a revision to the Company’s sales and associated variable expense forecast. The revised requested additional annualized revenues for the test year 2024 is now $37 million, compared against 2023 revenues. This excludes the proposed step rate and attrition rate increase for 2025 and 2026 of $20 million and $19 million, respectively. The total revenue requirement request for the three-year rate case cycle, incorporating updates to present rate revenues and forecasted demand, is $76 million.
On July 1, 2022, the Company’s Missouri subsidiary filed a general rate case requesting $105 million in additional annualized revenues.
On November 15, 2021, the Company’s Virginia subsidiary filed a general rate case requesting $14 million in additional annualized revenues. Interim rates were effective on May 1, 2022, and the difference between interim and final approved rates is subject to refund. On September 26, 2022, a settlement agreement, supported by all parties except one, was filed with the Virginia State Corporation Commission for a $11 million annual revenue increase. Public hearings were held on September 27 and 28, 2022. A final decision on this matter is expected in the first quarter of 2023.
The Company’s California subsidiary submitted its application on May 3, 2021, to set its cost of capital for 2022 through 2024. According to the CPUC’s procedural schedule, a decision setting the authorized cost of capital is expected to be issued in the first quarter of 2023.
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Infrastructure Surcharges
A number of states have authorized the use of regulatory mechanisms that permit rates to be adjusted outside of a general rate case for certain costs and investments, such as infrastructure surcharge mechanisms that permit recovery of capital investments to replace aging infrastructure. Presented in the table below are annualized incremental revenues, assuming a constant water sales volume and customer count, resulting from infrastructure surcharge authorizations that became effective during 2022:
| (In millions) | Effective Date | Amount | |||||||||
| Infrastructure surcharges by state: | |||||||||||
| New Jersey | (a) | $ | 11 | ||||||||
| Pennsylvania | (b) | 19 | |||||||||
| Missouri | (c) | 30 | |||||||||
| Tennessee | August 8, 2022 | 3 | |||||||||
| Kentucky | July 1, 2022 | 3 | |||||||||
| Indiana | March 21, 2022 | 8 | |||||||||
| West Virginia | March 1, 2022 | 3 | |||||||||
| Illinois | January 1, 2022 | 6 | |||||||||
| Total infrastructure surcharge authorizations | $ | 83 | |||||||||
(a)In 2022, $1 million was effective December 30 and $10 million was effective June 27.
(b)In 2022, $8 million was effective on October 1, $9 million was effective July 1 and $2 million was effective April 1.
(c)In 2022, $18 million was effective August 11 and $12 million was effective February 1.
Presented in the table below are annualized incremental revenues, assuming a constant water sales volume and customer count, resulting from infrastructure surcharge authorizations that became effective on or after January 1, 2023:
| (In millions) | Effective Date | Amount | |||||||||
| Infrastructure surcharge filings by state: | |||||||||||
| Missouri | January 16, 2023 | $ | 15 | ||||||||
| West Virginia | January 1, 2023 | 7 | |||||||||
| Pennsylvania | January 1, 2023 | 3 | |||||||||
| Total infrastructure surcharge filings | $ | 25 | |||||||||
Pending Infrastructure Surcharge Filings
On January 20, 2023, the Company’s Indiana subsidiary filed an infrastructure surcharge proceeding requesting $21 million in additional annualized revenue
On November 18, 2022, the Company’s Indiana subsidiary filed an infrastructure surcharge proceeding requesting $7 million in additional annualized revenues.
Other Regulatory Matters
In September 2020, the CPUC released a decision under its Low-Income Rate Payer Assistance program rulemaking that required the Company’s California subsidiary to file a proposal to alter its water revenue adjustment mechanism in its next general rate case filing in 2022, which would become effective in January 2024. On October 5, 2020, the Company’s California subsidiary filed an application for rehearing of the decision and following the CPUC’s denial of its rehearing application in September 2021, the Company’s California subsidiary filed a petition for writ of review with the California Supreme Court on October 27, 2021. On May 18, 2022, the California Supreme Court issued a writ of review for the Company’s California subsidiary’s petition and the petitions filed by other entities challenging the decision. Independent of the judicial challenge, California passed Senate Bill 1469, which allows the CPUC to consider and authorize the implementation of a mechanism that separates the water corporation’s revenue and its water sales. Legislation was signed by the Governor on September 30, 2022, and became effective on January 1, 2023. In response to the legislation, on January 27, 2023, the Company’s California subsidiary filed an updated application requesting the CPUC to consider a Water Resources Sustainability Plan decoupling mechanism in its pending 2022 general rate case, which would be effective 2024 through 2026.
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On March 2, 2021, an administrative law judge (“ALJ”) in the Office of Administrative Law of New Jersey filed an initial decision with the NJBPU that recommended denial of a petition filed by the Company’s New Jersey subsidiary, which sought approval of acquisition adjustments in rate base of $29 million associated with the acquisitions of Shorelands Water Company, Inc. in 2017 and the Borough of Haddonfield’s water and wastewater systems in 2015. On July 29, 2021, the NJBPU issued an order adopting the ALJ’s initial decision without modification. The Company’s New Jersey subsidiary filed a Notice of Appeal with the New Jersey Appellate Division on September 10, 2021. The Company’s New Jersey subsidiary filed its brief in support of the appeal on March 4, 2022. Response and Reply briefs were filed on June 22, 2022, and August 4, 2022, respectively. There is no financial impact to the Company as a result of the NJBPU’s order, since the acquisition adjustments are currently recorded as goodwill on the Consolidated Balance Sheets.
Regulatory Assets
Regulatory assets represent costs that are probable of recovery from customers in future rates. Approximately 50% of the Company’s total regulatory asset balance at December 31, 2022 earns a return. Presented in the table below is the composition of regulatory assets as of December 31:
| 2022 | 2021 | ||||||||||
| Deferred pension expense | $ | 251 | $ | 323 | |||||||
| Removal costs recoverable through rates | 307 | 313 | |||||||||
| Regulatory balancing accounts | 26 | 52 | |||||||||
| Other | 406 | 439 | |||||||||
Less: Regulatory assets included in assets held for sale (a) | — | (76) | |||||||||
| Total regulatory assets | $ | 990 | $ | 1,051 | |||||||
(a)These regulatory assets are related to the sale of the Company’s New York subsidiary, which was completed on January 1, 2022, and are included in assets held for sale on the Consolidated Balance Sheets as of December 31, 2021. See Note 5—Acquisitions and Divestitures for additional information.
The Company’s deferred pension expense includes a portion of the underfunded status that is probable of recovery through rates in future periods of $251 million and $317 million as of December 31, 2022 and 2021, respectively. The remaining portion is the pension expense in excess of the amount contributed to the pension plans which is deferred by certain subsidiaries and will be recovered in future service rates as contributions are made to the pension plan.
Removal costs recoverable through rates represent costs incurred for removal of property, plant and equipment or other retirement costs.
Regulatory balancing accounts accumulate differences between revenues recognized and authorized revenue requirements until they are collected from customers or are refunded. Regulatory balancing accounts include low income programs and purchased power and water accounts.
Other regulatory assets include the financial impacts relating to the COVID-19 pandemic, purchase premium recoverable through rates, tank painting costs, certain construction costs for treatment facilities, property tax stabilization, employee-related costs, business services project expenses, coastal water project costs, rate case expenditures and environmental remediation costs among others. These costs are deferred because the amounts are being recovered in rates or are probable of recovery through rates in future periods.
The Company has current regulatory assets of $40 million and $16 million included in other current assets on the Consolidated Balance Sheet as of December 31, 2022 and 2021, respectively, which is primarily made up of rate adjustment mechanisms.
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Regulatory Liabilities
Regulatory liabilities generally represent amounts that are probable of being credited or refunded to customers through the rate making process. Also, if costs expected to be incurred in the future are currently being recovered through rates, the Company records those expected future costs as regulatory liabilities. Presented in the table below is the composition of regulatory liabilities as of December 31:
| 2022 | 2021 | ||||||||||
| Income taxes recovered through rates | $ | 1,127 | $ | 1,093 | |||||||
| Removal costs recovered through rates | 275 | 291 | |||||||||
| Postretirement benefit liability | 100 | 153 | |||||||||
| Other | 88 | 110 | |||||||||
Less: Regulatory liabilities included in liabilities related to assets held for sale (a) | — | (47) | |||||||||
| Total regulatory liabilities | $ | 1,590 | $ | 1,600 | |||||||
(a)These regulatory liabilities are related to the sale of the Company’s New York subsidiary, which was completed on January 1, 2022, and are included in liabilities related to assets held for sale on the Consolidated Balance Sheets as of December 31, 2021. See Note 5—Acquisitions and Divestitures for additional information.
Income taxes recovered through rates relate to deferred taxes that will likely be refunded to the Company’s customers. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (“TCJA”) was signed into law, which, among other things, enacted significant and complex changes to the Internal Revenue Code of 1986, as amended, including a reduction in the federal corporate income tax rate from 35% to 21% as of January 1, 2018. The enactment of the TCJA required a re-measurement of the Company’s deferred income taxes. The portion of this re-measurement related to the Regulated Businesses was substantially offset by a regulatory liability as EADIT will be used to benefit its regulated customers in future rates. All of the Company’s regulated subsidiaries are amortizing EADIT and crediting customers.
Removal costs recovered through rates are estimated costs to retire assets at the end of their expected useful lives that are recovered through customer rates over the lives of the associated assets.
On August 31, 2018, the Postretirement Medical Benefit Plan was remeasured to reflect an announced plan amendment which changed benefits for certain union and non-union plan participants. As a result of the remeasurement, the Company recorded a $227 million reduction to the net accumulated postretirement benefit obligation, with a corresponding regulatory liability.
Other regulatory liabilities include the financial impacts relating to the COVID-19 pandemic, TCJA reserve on revenue, pension and other postretirement benefit balancing accounts, legal settlement proceeds, deferred gains and various regulatory balancing accounts.
The Company has current regulatory liabilities of $5 million and $8 million included in other current liabilities on the Consolidated Balance Sheets as of December 31, 2022 and 2021, respectively, which primarily is made up of TCJA reserve on revenue.
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Note 4: Revenue Recognition
Disaggregated Revenues
Presented in the table below are operating revenues disaggregated for the year ended December 31, 2022:
| Revenues from Contracts with Customers | Other Revenues Not from Contracts with Customers (a) | Total Operating Revenues | |||||||||||||||
| Regulated Businesses: | |||||||||||||||||
| Water services: | |||||||||||||||||
| Residential | $ | 1,938 | $ | 3 | $ | 1,941 | |||||||||||
| Commercial | 709 | 1 | 710 | ||||||||||||||
| Fire service | 147 | — | 147 | ||||||||||||||
| Industrial | 152 | 1 | 153 | ||||||||||||||
| Public and other | 252 | — | 252 | ||||||||||||||
| Total water services | 3,198 | 5 | 3,203 | ||||||||||||||
| Wastewater services: | |||||||||||||||||
| Residential | 173 | 1 | 174 | ||||||||||||||
| Commercial | 45 | — | 45 | ||||||||||||||
| Industrial | 4 | — | 4 | ||||||||||||||
| Public and other | 19 | — | 19 | ||||||||||||||
| Total wastewater services | 241 | 1 | 242 | ||||||||||||||
| Miscellaneous utility charges | 36 | — | 36 | ||||||||||||||
| Alternative revenue programs | — | 15 | 15 | ||||||||||||||
| Lease contract revenue | — | 9 | 9 | ||||||||||||||
| Total Regulated Businesses | 3,475 | 30 | 3,505 | ||||||||||||||
| Other | 288 | (1) | 287 | ||||||||||||||
| Total operating revenues | $ | 3,763 | $ | 29 | $ | 3,792 | |||||||||||
(a)Includes revenues associated with provisional rates, alternative revenue programs, lease contracts and intercompany rent, which are outside the scope of ASC 606, and accounted for under other existing GAAP.
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Presented in the table below are operating revenues disaggregated for the year ended December 31, 2021:
| Revenues from Contracts with Customers | Other Revenues Not from Contracts with Customers (a) | Total Operating Revenues | |||||||||||||||
| Regulated Businesses: | |||||||||||||||||
| Water services: | |||||||||||||||||
| Residential | $ | 1,935 | $ | — | $ | 1,935 | |||||||||||
| Commercial | 676 | — | 676 | ||||||||||||||
| Fire service | 151 | — | 151 | ||||||||||||||
| Industrial | 141 | — | 141 | ||||||||||||||
| Public and other | 230 | — | 230 | ||||||||||||||
| Total water services | 3,133 | — | 3,133 | ||||||||||||||
| Wastewater services: | |||||||||||||||||
| Residential | 151 | — | 151 | ||||||||||||||
| Commercial | 37 | — | 37 | ||||||||||||||
| Industrial | 4 | — | 4 | ||||||||||||||
| Public and other | 16 | — | 16 | ||||||||||||||
| Total wastewater services | 208 | — | 208 | ||||||||||||||
| Miscellaneous utility charges | 26 | — | 26 | ||||||||||||||
| Alternative revenue programs | — | 9 | 9 | ||||||||||||||
| Lease contract revenue | — | 8 | 8 | ||||||||||||||
| Total Regulated Businesses | 3,367 | 17 | 3,384 | ||||||||||||||
| Other | 547 | (1) | 546 | ||||||||||||||
| Total operating revenues | $ | 3,914 | $ | 16 | $ | 3,930 | |||||||||||
(a)Includes revenues associated with provisional rates, alternative revenue programs, lease contracts and intercompany rent, which are outside the scope of ASC 606, and accounted for under other existing GAAP.
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Presented in the table below are operating revenues disaggregated for the year ended December 31, 2020:
| Revenues from Contracts with Customers | Other Revenues Not from Contracts with Customers (a) | Total Operating Revenues | |||||||||||||||
| Regulated Businesses: | |||||||||||||||||
| Water services: | |||||||||||||||||
| Residential | $ | 1,895 | $ | — | $ | 1,895 | |||||||||||
| Commercial | 627 | — | 627 | ||||||||||||||
| Fire service | 147 | — | 147 | ||||||||||||||
| Industrial | 133 | — | 133 | ||||||||||||||
| Public and other | 201 | — | 201 | ||||||||||||||
| Total water services | 3,003 | — | 3,003 | ||||||||||||||
| Wastewater services: | |||||||||||||||||
| Residential | 134 | — | 134 | ||||||||||||||
| Commercial | 34 | — | 34 | ||||||||||||||
| Industrial | 3 | — | 3 | ||||||||||||||
| Public and other | 14 | — | 14 | ||||||||||||||
| Total wastewater services | 185 | — | 185 | ||||||||||||||
| Miscellaneous utility charges | 32 | — | 32 | ||||||||||||||
| Alternative revenue programs | — | 25 | 25 | ||||||||||||||
| Lease contract revenue | — | 10 | 10 | ||||||||||||||
| Total Regulated Businesses | 3,220 | 35 | 3,255 | ||||||||||||||
| Other | 523 | (1) | 522 | ||||||||||||||
| Total operating revenues | $ | 3,743 | $ | 34 | $ | 3,777 | |||||||||||
(a)Includes revenues associated with provisional rates, alternative revenue programs, lease contracts and intercompany rent, which are outside the scope of ASC 606, and accounted for under other existing GAAP.
Contract Balances
Contract assets and contract liabilities are the result of timing differences between revenue recognition, billings and cash collections. In the Company’s MSG, certain contracts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Contract assets are recorded when billing occurs subsequent to revenue recognition and are reclassified to accounts receivable when billed and the right to consideration becomes unconditional. Contract liabilities are recorded when the Company receives advances from customers prior to satisfying contractual performance obligations, particularly for construction contracts, and are recognized as revenue when the associated performance obligations are satisfied.
Contract assets of $86 million, $71 million and $39 million are included in unbilled revenues on the Consolidated Balance Sheets as of December 31, 2022, 2021 and 2020, respectively. There were $161 million of contract assets added during 2022, and $146 million of contract assets were transferred to accounts receivable during 2022. There were $71 million of contract assets added during 2021, and $39 million of contract assets were transferred to accounts receivable during 2021.
Contract liabilities of $91 million, $19 million and $35 million are included in other current liabilities on the Consolidated Balance Sheets as of December 31, 2022, 2021 and 2020, respectively. There were $189 million of contract liabilities added during 2022, and $117 million of contract liabilities were recognized as revenue during 2022. There were $152 million of contract liabilities added during 2021, and $168 million of contract liabilities were recognized as revenue during 2021.
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Remaining Performance Obligations
Remaining performance obligations (“RPOs”) represent revenues the Company expects to recognize in the future from contracts that are in progress. The Company enters into agreements for the provision of services to water and wastewater facilities for the U.S. military, municipalities and other customers. As of December 31, 2022, the Company’s O&M and capital improvement contracts in MSG and the Contract Services Group have RPOs. Contracts with the U.S. government for work on various military installations expire between 2051 and 2071 and have RPOs of $7.0 billion as of December 31, 2022, as measured by estimated remaining contract revenue. Such contracts are subject to customary termination provisions held by the U.S. government, prior to the agreed-upon contract expiration. Contracts with municipalities and commercial customers expire between 2026 and 2038 and have RPOs of $589 million as of December 31, 2022, as measured by estimated remaining contract revenue. Some of the Company’s long-term contracts to operate and maintain the federal government’s, a municipality’s or other party’s water or wastewater treatment and delivery facilities include responsibility for certain maintenance for some of those facilities, in exchange for an annual fee. Unless specifically required to perform certain maintenance activities, the maintenance costs are recognized when the maintenance is performed.
Note 5: Acquisitions and Divestitures
Regulated Businesses
Closed Acquisitions
During 2017,2022, the Company closed on 1826 acquisitions of various regulated water and wastewater systems for a total aggregate purchase price of $210 million. This included$335 million, of which $315 million was funded in 2022, which added approximately 70,000 water and wastewater customers, including the acquisition of the City of York wastewater system assets of the Municipal Authority of the City of McKeesport, Pennsylvania, on December 18, 2017. noted below. Assets acquired from these acquisitions, principally utility plant, totaled $207 million. Liabilities$337 million and liabilities assumed totaled $23 million, including $9 million$6 million. Several of contributions in aid of construction and assumed debt of $7 million. The Company recorded additional goodwill of $29 million associated with four of itsthese acquisitions which is reported in its Regulated Businesses segment. Of this total goodwill, approximately $1 million is expected to be deductiblewere accounted for tax purposes. Additionally, the Company recognized a bargain purchase gain of $3 million associated with three of the acquisitions.as business combinations. The preliminary purchase price allocations related to these acquisitions accounted for as business combinations will be finalized once the valuation of assets acquired has been completed, no later than one year after their acquisition date.
On May 27, 2022, the Company’s Pennsylvania subsidiary acquired the public wastewater collection and treatment system assets from the York City Sewer Authority and the City of York for a purchase price of $235 million, in cash, $20 million of which was funded as a deposit to the seller in April 2021 in connection with the execution of the acquisition agreement. The system assets serve, directly and indirectly through bulk contracts, more than 45,000 customers. The acquisition was accounted for as a business combination and the preliminary purchase price allocation will be finalized once the valuation of assets acquired has been completed, no later than one year after the acquisition date. The preliminary purchase price allocation consisted primarily of $231 million of utility plant and $4 million of goodwill, which is reported in the Company’s Regulated Businesses segment.
During 2016,2021, the Company closed on 1523 acquisitions of various regulated water and wastewater systems for a total aggregate purchase price of $199$112 million. This included the acquisition of substantially all of the wastewater collection and treatment assets of the Sewer Authority of the City of Scranton, Pennsylvania (“Scranton”) in December 2016. Assets acquired from these acquisitions, principally utility plant, totaled $194 million. Liabilities assumed totaled $30$114 million including $14 million of contributions in aid of construction and assumed debt of $6 million. During 2016, the Company recorded additional goodwill of $43 million associated with five of its acquisitions, which is reported in its Regulated Businesses segment. Of this total goodwill, approximately $31 million is expected to be deductible for tax purposes. Additionally, during 2017 the Company recorded a measurement period adjustment of $5 million, increasing the goodwill recognized from the Scranton acquisition.
The pro forma impact of ourthe Company’s acquisitions was not material to ourthe Consolidated Statements of Operations for the years ended December 31, 20172022, 2021 and 2016.2020.
Pending Acquisitions
On October 11, 2022, the Company’s Pennsylvania subsidiary entered into an agreement to acquire the wastewater assets of the Butler Area Sewer Authority for a total purchase price of $232 million in cash, subject to adjustment as provided for in the Asset Purchase Agreement. This system provides wastewater service for approximately 14,700 customer connections. The Company expects to close this acquisition by the end of 2023, pending regulatory approval.
On March 29, 2021, the Company’s New Jersey subsidiary entered into an agreement to acquire the water and wastewater assets of Egg Harbor City for $22 million. The water and wastewater systems currently serve approximately 1,500 customers each, or 3,000 combined, and are being sold through the New Jersey Water Infrastructure Protection Act process. The Company expects to close this acquisition in early 2023.
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Sale of New York American Water Company, Inc.
On January 1, 2022, the Company completed the previously disclosed sale of its regulated utility operations in New York to Liberty Utilities (Eastern Water Holdings) Corp. (“Liberty”), an indirect, wholly owned subsidiary of Algonquin Power & Utilities Corp. Liberty purchased from the Company all of the capital stock of the Company’s New York subsidiary for a purchase price of $608 million in cash. The sale was approved by the New York State Department of Public Service on December 16, 2021. The Company’s regulated New York operations represented approximately 127,000 customers in the State of New York. The assets and related liabilities of the New York subsidiary were classified as held for sale on the Consolidated Balance Sheets as of December 31, 2021.
Presented in the table below are the components of assets held for sale and liabilities related to assets held for sale of the New York subsidiary as of December 31, 2021:
| December 31, 2021 | |||||
| Property, plant and equipment | $ | 556 | |||
| Current assets | 18 | ||||
| Regulatory assets | 76 | ||||
| Goodwill | 27 | ||||
| Other assets | 6 | ||||
| Assets held for sale | $ | 683 | |||
| Current liabilities | 13 | ||||
| Regulatory liabilities | 47 | ||||
| Other liabilities | 23 | ||||
| Liabilities related to assets held for sale | $ | 83 | |||
Sale of Michigan American Water Company
On February 4, 2022, the Company completed the sale of its operations in Michigan for $6 million in cash.
Sale of Homeowner Services Group
On December 9, 2021 (the “Closing Date”), the Company sold all of the equity interests in subsidiaries that comprised HOS to a wholly owned subsidiary of funds advised by Apax Partners LLP, a global private equity advisory firm (the “Buyer”), for total consideration of approximately $1.275 billion, resulting in pre-tax gain of $748 million. The consideration is comprised of $480 million in cash, a seller promissory note issued by the Buyer in the principal amount of $720 million, and a contingent cash payment of $75 million payable upon satisfaction of certain conditions on or before December 31, 2023. See Note 18—Fair Value of Financial Information for additional information relating to the seller promissory note and contingent cash payment. For the year ended December 31, 2022, the Company recorded post-closing adjustments, primarily related to working capital, of pre-tax income of $20 million, which is included in Gain on sale of businesses on the Consolidated Statements of Operations.
The seller note has a five-year term, is payable in cash, and bears interest at a rate of 7.00% per year during the term. The Company recognized $50 million of interest income during the year ended December 31, 2022, from the seller note. The repayment obligations of the Buyer under the seller note have been secured by a first priority security interest in certain property of the Buyer and the former HOS subsidiaries, including their cash and securities accounts, as well as a pledge of the equity interests in each of those subsidiaries, subject to certain limitations and exceptions. The seller note requires compliance with affirmative and negative covenants (subject to certain conditions, limitations and exceptions), including a covenant limiting the incurrence by the Buyer and certain affiliates of additional indebtedness in excess of certain thresholds, but does not include any financial maintenance covenants.
Beginning December 9, 2024, the Company has a put right pursuant to which it may require the seller note to be repaid in full at par, plus accrued and unpaid interest, except that upon the occurrence of a disruption event in the broadly syndicated term loan “B” debt financing market, repayment by the Buyer pursuant to the Company’s exercise of the put right will be delayed until the market disruption event ends.
The seller note may not be prepaid at the Buyer’s election except in certain limited circumstances before the fourth anniversary of the Closing Date. If the Buyer seeks to repay the seller note in breach of this non-call provision, an event of default will occur under the seller note and the Company may, among other actions, demand repayment in full together with a premium ranging from 105.5% to 107.5% of the outstanding principal amount of the loan and a customary “make-whole” payment.
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The Company and the Buyer also entered into a revenue share agreement, pursuant to which the Company is to receive 10% of the revenue generated from customers who are billed for home warranty services through an applicable Company subsidiary (an “on-bill” arrangement), and 15% of the revenue generated from any future on-bill arrangements entered into after the Closing Date. Unless earlier terminated, this agreement has a term of up to 15 years, which may be renewed for up to two five-year periods. The Company recognized $9 million of income during the year ended December 31, 2022, from the revenue share agreements, which is included in Other, net on the Consolidated Statements of Operations.
Note 4:6: Property, Plant and Equipment
| 2022 | 2021 | Range of Remaining Useful Lives | Weighted Average Useful Life | |||||||||||||||||||||||
| Utility plant: | ||||||||||||||||||||||||||
| Land and other non-depreciable assets | $ | 239 | $ | 210 | ||||||||||||||||||||||
| Sources of supply | 1,003 | 938 | 10 to 127 years | 46 years | ||||||||||||||||||||||
| Treatment and pumping facilities | 4,298 | 4,198 | 3 to 101 years | 39 years | ||||||||||||||||||||||
| Transmission and distribution facilities | 12,971 | 12,308 | 9 to 128 years | 69 years | ||||||||||||||||||||||
| Services, meters and fire hydrants | 5,162 | 4,888 | 5 to 90 years | 32 years | ||||||||||||||||||||||
| General structures and equipment | 2,289 | 2,200 | 1 to 109 years | 15 years | ||||||||||||||||||||||
| Waste collection | 1,539 | 1,363 | 5 to 113 years | 56 years | ||||||||||||||||||||||
| Waste treatment, pumping and disposal | 1,129 | 912 | 2 to 153 years | 38 years | ||||||||||||||||||||||
| Construction work in progress | 974 | 934 | ||||||||||||||||||||||||
Other (a) | 23 | (664) | ||||||||||||||||||||||||
| Total utility plant | 29,627 | 27,287 | ||||||||||||||||||||||||
| Nonutility property | 109 | 126 | 3 to 50 years | 10 years | ||||||||||||||||||||||
| Total property, plant and equipment | $ | 29,736 | $ | 27,413 | ||||||||||||||||||||||
| 2017 | 2016 | Range of Remaining Useful Lives | Weighted Average Useful Life | ||||||||
| Utility plant: | |||||||||||
| Land and other non-depreciable assets | $ | 151 | $ | 147 | |||||||
| Sources of supply | 798 | 734 | 2 to 127 Years | 45 years | |||||||
| Treatment and pumping facilities | 3,356 | 3,218 | 3 to 101 Years | 37 years | |||||||
| Transmission and distribution facilities | 9,583 | 9,043 | 9 to 156 Years | 72 years | |||||||
| Services, meters and fire hydrants | 3,754 | 3,504 | 5 to 90 Years | 30 years | |||||||
| General structures and equipment | 1,458 | 1,343 | 1 to 156 Years | 16 years | |||||||
| Waste treatment, pumping and disposal | 557 | 457 | 3 to 106 Years | 37 years | |||||||
| Waste collection | 904 | 637 | 5 to 97 Years | 55 years | |||||||
| Construction work in progress | 585 | 419 | |||||||||
| Total utility plant | 21,146 | 19,502 | |||||||||
| Nonutility property | 570 | 452 | 3 to 50 years | 6 years | |||||||
| Total property, plant and equipment | $ | 21,716 | $ | 19,954 | |||||||
Property, plant and equipment depreciation expense amounted to $460$552 million, $435 $550 million, and $405$520 million for the years ended December 31, 2017, 20162022, 2021 and 2015,2020, respectively and was included in depreciation and amortization expense inon the accompanying Consolidated Statements of Operations. The provision for depreciation expressed as a percentage of the aggregate average depreciable asset balances was 3.07%2.60%, 3.14%2.77% and 3.13%2.82% for years December 31, 2017, 20162022, 2021 and 2015,2020, respectively. Additionally, the Company had capital expenditures acquired on account but unpaid of $330 million and $292 million included in accrued liabilities on the Consolidated Balance Sheets as of December 31, 2022 and 2021, respectively.
In 2019, the Company completed and submitted its project completion certification to the New Jersey Economic Development Authority (“NJEDA”) in connection with its capital investment in its corporate headquarters in Camden, New Jersey. The NJEDA determined that the Company was qualified to receive $164 million in tax credits over a 10-year period. In October 2022, the NJEDA issued the Company a revised tax credit certificate in the amount of $161 million in tax credits to be received over the same 10-year period. The NJEDA denied previously approved capitalized interest cost amounting to $2.8 million. As a result, the Company adjusted the amounts included in Property, plant and equipment.
The Company is required to meet various annual requirements in order to monetize one-tenth of the tax credits annually and is subject to a claw-back period if the Company does not meet certain NJEDA requirements of the tax credit program in years 11 through 15.
One of the requirements to qualify for the release of credits annually is that the Company maintain a certain level of eligible positions at the qualified business facility (“QBF”). Prior to March 2020, a full-time employee must have spent at least 80% of their time at the QBF to meet the definition of eligible position or full-time job. On July 2, 2021, New Jersey’s Governor signed legislation that revised provisions of the Economic Recovery Act of 2020, which lowered the 80% requirement for spending time at the QBF to 60% of the employee’s time.
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During the COVID-19 pandemic, the NJEDA implemented certain accommodations that temporarily waived the requirement that a full-time employee spend the requisite percentage of time at the QBF to be eligible for the award under the program. This waiver expired on June 30, 2022.
On December 22, 2022, the New Jersey Governor signed legislation which provides an additional waiver to eligible businesses for the period of July 1, 2022 to December 31, 2023. Specifically, it allows businesses to waive the 60% on-site requirement if (i) full-time workers spend at least 10% of their work hours at the QBF and (ii) the business pays NJEDA 5% of the amount of the tax credit the business receives for the 2022 tax period. The legislation also (i) extends the time within which a business may terminate their participation in the program to December 31, 2023, without the NJEDA recapturing previously distributed credits; (ii) extends the time allowed under current law for a business to suspend its obligations under the incentive agreement; (iii) extends the provision to include the 2022 and 2023 tax periods; and (iv) renews and extends the right of a business to reduce the required full-time employees specified in the incentive agreement to be eligible to receive the credit. The Company is considering all of its options as a result of the most recent legislation.
In December 2022, the NJEDA issued the utilization certificate for the 2019 tax credits to the Company in the amount of $16 million. The Company sold these tax credits to external parties in December 2022 for $15 million. The loss on sale of credits was recorded to Other income (expense) in the Consolidated Results of Operations for the year ended December 31, 2022. As a result, the Company had assets of $48 million and $97 million in Other current assets and Other long-term assets, respectively, on the Consolidated Balance Sheets as of December 31, 2022. The Company has made the necessary annual filings for the years ended December 31, 2020 and 2021, and expects to make the 2022 filing by April 30, 2023. The remaining submitted filings are under review by the NJEDA and it is expected that the Company will receive final NJEDA approval and monetize the credits in 2023.
Note 5:7: Allowance for Uncollectible Accounts
| 2022 | 2021 | 2020 | |||||||||||||||
| Balance as of January 1 | $ | (75) | $ | (60) | $ | (41) | |||||||||||
| Amounts charged to expense | (24) | (37) | (34) | ||||||||||||||
| Amounts written off | 27 | 35 | 23 | ||||||||||||||
| Other, net (a) | 12 | (13) | (8) | ||||||||||||||
| Balance as of December 31 | $ | (60) | $ | (75) | $ | (60) | |||||||||||
| 2017 | 2016 | 2015 | |||||||||
| Balance as of January 1 | $ | (40 | ) | $ | (39 | ) | $ | (35 | ) | ||
| Amounts charged to expense | (29 | ) | (27 | ) | (32 | ) | |||||
| Amounts written off | 30 | 29 | 31 | ||||||||
| Recoveries of amounts written off | (3 | ) | (3 | ) | (3 | ) | |||||
| Balance as of December 31 | $ | (42 | ) | $ | (40 | ) | $ | (39 | ) | ||
| 2017 | 2016 | ||||||
| Deferred pension expense | $ | 285 | $ | 310 | |||
| Income taxes recoverable through rates | — | 241 | |||||
| Removal costs recoverable through rates | 269 | 251 | |||||
| San Clemente Dam project costs | 89 | 91 | |||||
| Regulatory balancing accounts | 113 | 110 | |||||
| Debt expense | 67 | 66 | |||||
| Make-whole premium on early extinguishment of debt | 27 | — | |||||
| Purchase premium recoverable through rates | 57 | 58 | |||||
| Deferred tank painting costs | 42 | 39 | |||||
| Other | 112 | 123 | |||||
| Total Regulatory Assets | $ | 1,061 | $ | 1,289 | |||
| 2017 | 2016 | ||||||
| Income taxes recovered through rates | $ | 1,242 | $ | — | |||
| Removal costs recovered through rates | 315 | 316 | |||||
| Pension and other postretirement benefit balancing accounts | 48 | 55 | |||||
| Other | 59 | 32 | |||||
| Total Regulatory Liabilities | $ | 1,664 | $ | 403 | |||
Note 7:8: Goodwill and Other Intangible Assets
Goodwill
| Regulated Businesses | Other | Consolidated | |||||||||||||||||||||||||||||||||||||||
| Cost | Accumulated Impairment | Cost | Accumulated Impairment | Cost | Accumulated Impairment | Total Net | |||||||||||||||||||||||||||||||||||
| Balance as of January 1, 2021 | $ | 3,461 | $ | (2,332) | $ | 483 | $ | (108) | $ | 3,944 | $ | (2,440) | $ | 1,504 | |||||||||||||||||||||||||||
| Acquisition related adjustments | (7) | — | — | — | (7) | — | (7) | ||||||||||||||||||||||||||||||||||
| Goodwill included in assets held for sale (a) | 12 | — | — | — | 12 | — | 12 | ||||||||||||||||||||||||||||||||||
| Goodwill reduced through sale of HOS | — | — | (370) | — | (370) | — | (370) | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | 3,466 | $ | (2,332) | $ | 113 | $ | (108) | $ | 3,579 | $ | (2,440) | $ | 1,139 | |||||||||||||||||||||||||||
| Goodwill from acquisitions | 4 | — | — | — | 4 | — | 4 | ||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2022 | $ | 3,470 | $ | (2,332) | $ | 113 | $ | (108) | $ | 3,583 | $ | (2,440) | $ | 1,143 | |||||||||||||||||||||||||||
(a)This goodwill is related to the sale of the Company’s New York subsidiary, which was completed on January 1, 2022, and is included in assets held for sale on the Consolidated Balance Sheets as of December 31, 2021. See Note 5—Acquisitions and Divestitures for additional information.
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| Regulated Businesses | Market-Based Businesses | Consolidated | |||||||||||||||||||||||||
| Cost | Accumulated Impairment | Cost | Accumulated Impairment | Cost | Accumulated Impairment | Total Net | |||||||||||||||||||||
| Balance as of January 1, 2016 | $ | 3,415 | $ | (2,332 | ) | $ | 327 | $ | (108 | ) | $ | 3,742 | $ | (2,440 | ) | $ | 1,302 | ||||||||||
| Goodwill from acquisitions | 43 | — | — | — | 43 | — | 43 | ||||||||||||||||||||
| Balance as of December 31, 2016 | $ | 3,458 | $ | (2,332 | ) | $ | 327 | $ | (108 | ) | $ | 3,785 | $ | (2,440 | ) | $ | 1,345 | ||||||||||
| Goodwill from acquisitions | 29 | — | — | — | 29 | — | 29 | ||||||||||||||||||||
| Measurement period adjustments | 5 | — | — | — | 5 | — | 5 | ||||||||||||||||||||
| Balance as of December 31, 2017 | $ | 3,492 | $ | (2,332 | ) | $ | 327 | $ | (108 | ) | $ | 3,819 | $ | (2,440 | ) | $ | 1,379 | ||||||||||
In 2017,2021, the Company reduced goodwill by $370 million included in Other through the sale of HOS. See Note 5—Acquisitions and Divestitures for additional information relating to the sale of HOS.
The Company completed its annual impairment testing of goodwill as of November 30, 2022, which included qualitative assessments of its Regulated Businesses and MSG reporting units. Based on these assessments, the Company determined that there were no factors present that would indicate that the fair value of these reporting units was less than their respective carrying values as of November 30, 2022.
In 2022, the Company acquired aggregate goodwill of $29$4 million associated with four of its acquisitions in the Regulated Businesses segment. Additionally, during 2017 the Company recorded a measurement period adjustment of $5 million, increasing the goodwill recognized from the Scranton acquisition completed in December 2016.
Intangible Assets
The Company completed its annual impairment assessment of goodwill as of November 30, 2017held finite-lived intangible assets, including customer relationships and 2016. It elected to apply the qualitative assessment of factors for goodwill in our Regulated Businesses and in Military Services Group and Contract Operations Group reporting units within the Market-Based Businesses for both November 30, 2017 and 2016. The Company also elected to apply the qualitative assessment of factors for annual impairment assessment of goodwill as of November 30, 2016 to its Homeowners Services Group. Based on the work performed, the Company determined that no qualitative factors were present that would indicate the estimated fair values of the above stated reporting units were less than the respective carrying values.
Note 8: Stockholders’9: Shareholders’ Equity
Under the Company’s dividend reinvestment and direct stock purchase plan (the “DRIP”), stockholdersshareholders may reinvest cash common stock dividends and purchase additional shares of Company common stock, up to certain limits, through the plan administrator without commission fees.paying brokerage commissions. Shares purchased by participants through the DRIP may be newly-issuednewly issued shares, treasury shares, or at the Company’s election, shares purchased by the plan administrator in the open market or in privately negotiated transactions. Purchases generally will be made and credited to DRIP accounts once each week. As of December 31, 2017,2022, there were approximately 4.34.2 million shares available for future issuance under the DRIP.
Anti-dilutive Stock Repurchase Program
In February 2015, the Company’s Board of Directors authorized an anti-dilutive stock repurchase program, which allowedallows the Company to purchase up to 10 million shares of its outstanding common stock from time to time over an unrestricted period of time. The Company repurchased 0.7 million shares and 1.0 milliondid not repurchase shares of common stock in the open market at an aggregate cost of $54 million and $65 million under this program forduring the years ended December 31, 20172022 and 2016, respectively.2021. As of December 31, 2017,2022, there were 6.15.1 million shares of common stock available for purchase under the program.
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Accumulated Other Comprehensive Loss
| Defined Benefit Plans | Foreign Currency Translation | Gain (Loss) on Cash Flow Hedge | Accumulated Other Comprehensive Loss | ||||||||||||||||||||
| Employee Benefit Plan Funded Status | Amortization of Prior Service Cost | Amortization of Actuarial Loss | |||||||||||||||||||||
| Beginning balance as of January 1, 2016 | $ | (126 | ) | $ | 1 | $ | 36 | $ | 2 | $ | (1 | ) | $ | (88 | ) | ||||||||
| Other comprehensive gain (loss) before reclassification | (21 | ) | — | — | — | 17 | (4 | ) | |||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | — | — | 6 | — | — | 6 | |||||||||||||||||
| Net other comprehensive income (loss) | (21 | ) | — | 6 | — | 17 | 2 | ||||||||||||||||
| Ending balance as of December 31, 2016 | $ | (147 | ) | $ | 1 | $ | 42 | $ | 2 | $ | 16 | $ | (86 | ) | |||||||||
| Other comprehensive gain (loss) before reclassification | 7 | — | — | (1 | ) | (6 | ) | — | |||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | — | — | 7 | — | — | 7 | |||||||||||||||||
| Net other comprehensive income (loss) | 7 | — | 7 | (1 | ) | (6 | ) | 7 | |||||||||||||||
| Ending balance as of December 31, 2017 | $ | (140 | ) | $ | 1 | $ | 49 | $ | 1 | $ | 10 | $ | (79 | ) | |||||||||
| Defined Benefit Plans | Gain (Loss) on Cash Flow Hedge | Accumulated Other Comprehensive Loss | |||||||||||||||||||||||||||
| Employee Benefit Plan Funded Status | Amortization of Prior Service Cost | Amortization of Actuarial Loss | |||||||||||||||||||||||||||
| Beginning balance as of January 1, 2021 | $ | (106) | $ | 1 | $ | 63 | $ | (7) | $ | (49) | |||||||||||||||||||
| Other comprehensive income (loss) before reclassification | (1) | — | — | 1 | — | ||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | — | — | 4 | — | 4 | ||||||||||||||||||||||||
| Net other comprehensive income (loss) | (1) | — | 4 | 1 | 4 | ||||||||||||||||||||||||
| Ending balance as of December 31, 2021 | $ | (107) | $ | 1 | $ | 67 | $ | (6) | $ | (45) | |||||||||||||||||||
| Other comprehensive income (loss) before reclassification | 14 | — | — | 5 | 19 | ||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | — | — | 3 | — | 3 | ||||||||||||||||||||||||
| Net other comprehensive income (loss) | 14 | — | 3 | 5 | 22 | ||||||||||||||||||||||||
| Ending balance as of December 31, 2022 | $ | (93) | $ | 1 | $ | 70 | $ | (1) | $ | (23) | |||||||||||||||||||
The Company does not reclassify the amortization of defined benefit pension cost components from accumulated other comprehensive loss directly to net income in its entirety, as a portion of these costs have been capitalizeddeferred as a regulatory asset. These accumulated other comprehensive loss components are included in the computation of net periodic pension cost. See Note 14—15—Employee Benefits.Benefits for additional information.
The amortization of the lossgain (loss) on cash flow hedgehedges is reclassified to net income during the period incurred and is included in interest, net in the accompanying Consolidated Statements of Operations.
Dividends and Distributions
The Company’s Board of Directors authorizes the payment of dividends. The Company’s ability to pay dividends on its common stock is subject to having access to sufficient sources of liquidity, net income and cash flows of the Company’s subsidiaries, the receipt of dividends and direct and indirect distributions from, and repayments of indebtedness of, the Company’s subsidiaries, compliance with Delaware corporate and other laws, compliance with the contractual provisions of debt and other agreements and other factors.
The Company’s dividend rate on its common stock is determined by the Board of Directors on a quarterly basis and takes into consideration, among other factors, current and possible future developments that may affect the Company’s income and cash flows. When dividends on common stock are declared, they are typically paid in March, June, September and December. Historically, dividends have been paid quarterly to holders of record as of a date less than 30 days prior to the distribution date. Since the dividends on the Company’s common stock are not cumulative, only declared dividends are paid.
During 2022, 2021 and 2020, the Company paid $467 million, $428 million and $389 million in cash dividends, respectively. Presented in the table below is the per share cash dividends paid for the years ended December 31:
| 2022 | 2021 | 2020 | |||||||||||||||
| December | $ | 0.6550 | $ | 0.6025 | $ | 0.55 | |||||||||||
| September | $ | 0.6550 | $ | 0.6025 | $ | 0.55 | |||||||||||
| June | $ | 0.6550 | $ | 0.6025 | $ | 0.55 | |||||||||||
| March | $ | 0.6025 | $ | 0.55 | $ | 0.50 | |||||||||||
On December 7, 2022, the Company’s Board of Directors declared a quarterly cash dividend payment of $0.6550 per share payable on March 1, 2023, to shareholders of record as of February 7, 2023.
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Under applicable law, the Company’s subsidiaries may pay dividends on their capital stock or other equity only from retained, undistributed or current earnings. A significant loss recorded at a subsidiary may limit the amount of the dividend that the subsidiary can pay. The ability of the Company’s subsidiaries to pay upstream dividends, make other upstream distributions or repay indebtedness to parent company or American Water Capital Corp. (“AWCC”), the Company’s wholly owned financing subsidiary, as applicable, is subject to compliance with applicable corporate, tax and other laws, regulatory restrictions and financial and other contractual obligations, including, for example, (i) regulatory capital, surplus or net worth requirements, (ii) outstanding debt service obligations, (iii) requirements to make preferred and preference stock dividend payments, and (iv) other contractual agreements, covenants or obligations made or entered into by the Company and its subsidiaries.
Regulatory Restrictions on Indebtedness
The issuance of long-term debt or equity securities by the Company or long-term debt by AWCC does not require authorization of any state PUC if no guarantee or pledge of the regulated subsidiaries is utilized. Based on the needs of the Regulated Businesses and parent company, AWCC may borrow funds or issue its debt in the capital markets and then, through intercompany loans, provide these borrowings to the Regulated Businesses or parent company. PUC authorization is generally required for the regulated subsidiaries to incur long-term debt. The Company’s regulated subsidiaries normally obtain these required PUC authorizations on a periodic basis to cover their anticipated financing needs for a period of time, or, as necessary, in connection with a specific financing or refinancing of debt.
Note 9:10: Stock Based Compensation
The Company has granted stock optionsunits, stock awards and restricted stock unit (“RSU”) awardsdividend equivalents to non-employee directors, officers and other key employees of the Company pursuant to the terms of its 2007 Omnibus Equity Compensation Plan (the “2007 Plan”). The total aggregate number of shares of common stock that may be issued under the 2007 Plan is 15.5 million. As of December 31, 2017, 7.7 million shares were available for grant under the 2007 Plan.
The Company had granted stock options, stock units, including RSUs and PSUs, and dividend equivalents to non-employee directors, officers and other key employees of the approval ofCompany under its 2007 Omnibus Equity Compensation Plan (the “2007 Plan”). The 2007 Plan has been replaced by the 2017 Omnibus Plan, as defined above, and no additional awards are tomay be granted under the 2007 Plan. However, shares willmay still be issued under the 2007 Plan pursuant to the terms of awards previously issued under that plan prior to May 12, 2017.
The cost of services received from employees in exchange for the issuance of stock options and restricted stock awards is measured based on the grant date fair value of the awards issued. The value of stock options and RSUsunit awards at the date of the grant is amortized through expense over the three-yearrequisite service period. All awards granted in 2017, 20162022, 2021 and 20152020 are classified as equity. The Company recognizes compensation expense for stock awards over the vesting period of the award. The Company stratified its grant populations and used historic employee turnover rates to estimate employee forfeitures. The estimated rate is compared to the actual forfeitures at the end of the reporting period and adjusted as necessary. The followingThere have been no significant adjustments to the forfeiture rates during 2022, 2021 and 2020. There were no grants of stock options to employees after 2016, and there were no stock options outstanding as of December 31, 2022. Presented in the table presentsbelow is the stock-based compensation expense recorded in operation and maintenanceO&M expense in the accompanying Consolidated Statements of Operations for the years ended December 31:
| 2022 | 2021 | 2020 | ||||||||||||||||||||||||||
| 2017 | 2016 | 2015 | ||||||||||||||||||||||||||
| Stock options | $ | 1 | $ | 2 | $ | 2 | ||||||||||||||||||||||
| RSUs | 9 | 8 | 8 | |||||||||||||||||||||||||
| RSUs and PSUs | RSUs and PSUs | $ | 26 | $ | 15 | $ | 19 | |||||||||||||||||||||
| Nonqualified employee stock purchase plan | 1 | 1 | 1 | Nonqualified employee stock purchase plan | 2 | 2 | 2 | |||||||||||||||||||||
| Stock-based compensation | 11 | 11 | 11 | Stock-based compensation | 28 | 17 | 21 | |||||||||||||||||||||
| Income tax benefit | (4 | ) | (4 | ) | (4 | ) | Income tax benefit | (6) | (4) | (5) | ||||||||||||||||||
| Stock-based compensation expense, net of tax | $ | 7 | $ | 7 | $ | 7 | Stock-based compensation expense, net of tax | $ | 22 | $ | 13 | $ | 16 | |||||||||||||||
There were no significant stock-based compensation costs capitalized during the years ended December 31, 2017, 20162022, 2021 and 2015.2020.
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Subject to limitations on deductibility imposed by the Federal income tax code, the Company receives a tax deduction based on the intrinsic value of the award at the exercise date for stock options and the distribution date for RSUs.stock units. For each award, throughout the requisite service period, the Company recognizesrecords the tax benefits, which have been included inimpacts related to compensation costs as deferred income tax assets, related to compensation costs.assets. The tax deductions in excess of the deferred benefits recorded throughout the requisite service period are recorded to the Consolidated Statements of Operations and are presented in the financing section of the Consolidated Statements of Cash Flows.
Stock OptionsUnits
| 2017 | 2016 | 2015 | |||||||||
| Dividend yield | — | % | 2.09 | % | 2.35 | % | |||||
| Expected volatility | — | % | 15.89 | % | 17.64 | % | |||||
| Risk-free interest rate | — | % | 1.15 | % | 1.48 | % | |||||
| Expected life (years) | 0 | 4.0 | 4.4 | ||||||||
| Exercise price | $ | — | $ | 65.25 | $ | 52.75 | |||||
| Grant date fair value per share | $ | — | $ | 6.61 | $ | 6.21 | |||||
| Shares (In thousands) | Weighted- Average Exercise Price (Per share) | Weighted- Average Remaining Life (Years) | Aggregate Intrinsic Value | |||||||||
| Options outstanding as of December 31, 2016 | 987 | $ | 50.65 | 4.3 | $ | 21 | ||||||
| Granted | — | — | ||||||||||
| Forfeited or expired | (14 | ) | 62.10 | |||||||||
| Exercised | (262 | ) | 42.29 | |||||||||
| Options outstanding as of December 31, 2017 | 711 | $ | 53.51 | 3.67 | $ | 29 | ||||||
| Exercisable as of December 31, 2017 | 452 | $ | 48.83 | 3.15 | $ | 21 | ||||||
| 2017 | 2016 | 2015 | |||||||||
| Intrinsic value | $ | 10 | $ | 18 | $ | 22 | |||||
| Exercise proceeds | 11 | 15 | 30 | ||||||||
| Income tax benefit realized | 3 | 6 | 7 | ||||||||
During 2017, 20162022, 2021 and 2015,2020, the Company granted RSUs, both with and without performance conditions, to certain employees under the 2007 Plan. RSUs generally vest over periods ranging from one to three years.
| Shares (in thousands) | Weighted Average Grant Date Fair Value (per share) | ||||||||||
| Non-vested total as of December 31, 2021 | 48 | $ | 112.22 | ||||||||
| Granted | 59 | 149.73 | |||||||||
| Vested | (47) | 132.59 | |||||||||
| Forfeited | (9) | 149.60 | |||||||||
| Non-vested total as of December 31, 2022 | 51 | $ | 130.43 | ||||||||
| Shares (In thousands) | Weighted Average Grant Date Fair Value (Per share) | |||||
| Non-vested total as of December 31, 2016 | 74 | $ | 56.43 | |||
| Granted | 61 | 73.43 | ||||
| Vested | (42 | ) | 56.52 | |||
| Forfeited | (4 | ) | 69.09 | |||
| Non-vested total as of December 31, 2017 | 89 | $ | 67.48 | |||
| Shares (in thousands) | Weighted Average Grant Date Fair Value (per share) | ||||||||||
| Non-vested total as of December 31, 2021 | 232 | $ | 139.40 | ||||||||
| Granted | 170 | 115.12 | |||||||||
| Vested | (150) | 105.11 | |||||||||
| Forfeited | (21) | 148.83 | |||||||||
| Non-vested total as of December 31, 2022 | 231 | $ | 142.92 | ||||||||
As of December 31, 2022, $6 million of total unrecognized compensation cost related to the nonvested PSUs is expected to be recognized over the weighted average remaining life of 0.93 years. The total fair value of PSUs vested was $24 million, $22 million and $18 million for the years ended December 31, 2022, 2021 and 2020, respectively.
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PSUs granted with one or more internal performance measures are valued at the market value of the closing price of the Company’s common stock on the date of grant. RSUsPSUs granted with market conditionsa relative total shareholder return condition are valued using a Monte Carlo simulation model. Expected volatility is based on historical volatilities of traded common stock of the Company and comparative companies using daily stock prices over the past three years. The expected term is three years and the risk-free interest rate is based on the three-year U.S. Treasury rate in effect as of the measurement date. The followingPresented in the table presentsbelow are the weighted-averageweighted average assumptions used in the Monte Carlo simulation and the weighted-averageweighted average grant date fair values of RSUsPSUs granted for the years ended December 31:
| 2017 | 2016 | 2015 | 2022 | 2021 | 2020 | |||||||||||||||||||||||
| Expected volatility | 17.40 | % | 15.90 | % | 14.93 | % | Expected volatility | 29.69% | 28.59% | 16.65% | ||||||||||||||||||
| Risk-free interest rate | 1.53 | % | 0.91 | % | 1.07 | % | Risk-free interest rate | 1.90% | 0.22% | 1.28% | ||||||||||||||||||
| Expected life (years) | 3.0 | 3.0 | 3.0 | Expected life (years) | 3.0 | 3.0 | 3.0 | |||||||||||||||||||||
| Grant date fair value per share | $ | 72.81 | $ | 77.16 | $ | 62.10 | Grant date fair value per share | $99.23 | $229.22 | $159.64 | ||||||||||||||||||
The grant date fair value of restricted stock awardsPSUs that vest ratably and have market and/or performance conditions are amortized through expense over the requisite service period using the graded-vesting method.
| Shares (In thousands) | Weighted Average Grant Date Fair Value (Per share) | |||||
| Non-vested total as of December 31, 2016 | 309 | $ | 55.94 | |||
| Granted | 186 | 63.10 | ||||
| Vested | (204 | ) | 46.10 | |||
| Forfeited | (10 | ) | 70.50 | |||
| Non-vested total as of December 31, 2017 | 281 | $ | 67.33 | |||
Employee Stock Purchase Plan
The Company maintains a nonqualified employee stock purchase plan (the “ESPP”) that expires in 2027 through which employee participants (which excludes certain of the Company’s executives) may use payroll deductions to acquire Company common stock at the lessera purchase price of 90%85% of the fair market value of the common stock at either the beginning or the end of a three-month purchase period. On February 15, 2017,A total of 2.0 million shares may be issued under the Board adopted the American Water Works Company, Inc.ESPP, and its Designated Subsidiaries 2017 Nonqualified Employee Stock Purchase Plan, which was approved by stockholders on May 12, 2017 and took effect on August 5, 2017. The prior plan was terminated as to new purchases of Company stock effective August 31, 2017. As of December 31, 2017,2022, there were 2.01.5 million shares of common stock reserved for issuance under the ESPP. The ESPP is considered compensatory. During the years ended December 31, 2017, 20162022, 2021 and 2015,2020, the Company issued 93 thousand, 93 thousandapproximately 82,000, 80,000 and 98 thousand86,000 shares, respectively, under the ESPP.
Note 10:11: Long-Term Debt
The Company obtains long-term debt through AWCC primarily to fund capital expenditures of the Regulated Businesses and to lend funds to parent company to refinance debt ofand for other purposes. Presented in the parent company. The following table summarizesbelow are the components of long-term debt as of December 31:
| Rate | Weighted Average Rate | Maturity | 2022 | 2021 | |||||||||||||||||||||||||
Long-term debt of AWCC: (a) | |||||||||||||||||||||||||||||
| Senior notes—fixed rate | 2.30%-8.27% | 3.88% | 2023-2051 | $ | 9,765 | $ | 8,965 | ||||||||||||||||||||||
| Private activity bonds and government funded debt—fixed rate | 0.60%-2.45% | 1.63% | 2023-2031 | 189 | 190 | ||||||||||||||||||||||||
| Long-term debt of other American Water subsidiaries: | |||||||||||||||||||||||||||||
| Private activity bonds and government funded debt—fixed rate | 0.00%-5.50% | 1.80% | 2023-2051 | 749 | 739 | ||||||||||||||||||||||||
| Mortgage bonds—fixed rate | 6.35%-9.19% | 7.36% | 2023-2039 | 534 | 534 | ||||||||||||||||||||||||
| Mandatorily redeemable preferred stock | 8.47%-9.75% | 8.64% | 2024-2036 | 3 | 4 | ||||||||||||||||||||||||
| Finance lease obligations | 12.25% | 12.25% | 2026 | — | 1 | ||||||||||||||||||||||||
| Long-term debt | 3.87% | 11,240 | 10,433 | ||||||||||||||||||||||||||
Unamortized debt discount, net (b) | (11) | (9) | |||||||||||||||||||||||||||
| Unamortized debt issuance costs | (19) | (23) | |||||||||||||||||||||||||||
| Less current portion of long-term debt | (281) | (57) | |||||||||||||||||||||||||||
| Total long-term debt | $ | 10,929 | $ | 10,344 | |||||||||||||||||||||||||
| Rate | Weighted Average Rate | Maturity | 2017 | 2016 | ||||||||||
Long-term debt of American Water Capital Corp. (a) | ||||||||||||||
| Senior notes—fixed rate | 2.95%-8.27% | 4.47% | 2018-2047 | $ | 5,292 | $ | 4,786 | |||||||
| Private activity bonds and government funded debt—fixed rate | 1.79%-6.25% | 5.44% | 2021-2040 | 193 | 194 | |||||||||
| Long-term debt of other American Water subsidiaries | ||||||||||||||
Private activity bonds and government funded debt—fixed rate (b) | 0.00%-6.20% | 4.59% | 2018-2041 | 712 | 695 | |||||||||
| Mortgage bonds—fixed rate | 3.92%-9.71% | 7.41% | 2019-2039 | 607 | 636 | |||||||||
| Mandatorily redeemable preferred stock | 8.47%-9.75% | 8.60% | 2019-2036 | 10 | 12 | |||||||||
| Capital lease obligations | 12.66% | 12.66% | 2026 | 1 | 1 | |||||||||
| Term loan | 4.81%-5.31% | 5.15% | 2021 | 9 | — | |||||||||
| Long-term debt | 6,824 | 6,324 | ||||||||||||
Unamortized debt premium, net (c) | 9 | 17 | ||||||||||||
| Unamortized debt issuance costs | (13 | ) | (9 | ) | ||||||||||
| Interest rate swap fair value adjustment | — | 1 | ||||||||||||
| Less current portion of long-term debt | (322 | ) | (574 | ) | ||||||||||
| Total long-term debt | $ | 6,498 | $ | 5,759 | ||||||||||
(b)Includes debt discount, net of fair value adjustments previously recognized in acquisition purchase accounting.
All mortgage bonds term loans and $709$740 million of the private activity bonds and government funded debt held by the Company’s subsidiaries were collateralized as of December 31, 2017.2022.
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Long-term debt indentures contain a number of covenants that, among other things, limit, subject to certain exceptions, the CompanyAWCC from issuing debt secured by the Company’s consolidated assets. Certain long term noteslong-term note indentures require the Company to maintain a ratio of consolidated total indebtedness to consolidated total capitalization (each as defined under the note indentures) of not more than 0.70 to 1.00. The ratio as of December 31, 20172022, was 0.590.62 to 1.00. In addition, the Company has $922$891 million of notes which include the right to redeem the notes at par value, in whole or in part, from time to time, subject to certain restrictions.restrictions, with a weighted average interest rate of 1.87%.
| Amount | |||||
| 2023 | $ | 281 | |||
| 2024 | 476 | ||||
| 2025 | 598 | ||||
| 2026 | 443 | ||||
| 2027 | 688 | ||||
| Thereafter | 8,754 | ||||
| Year | Amount | |||
| 2018 | $ | 322 | ||
| 2019 | 170 | |||
| 2020 | 51 | |||
| 2021 | 299 | |||
| 2022 | 123 | |||
| Thereafter | 5,859 | |||
| Company | Type | Rate | Weighted Average Rate | Maturity | Amount | |||||||||||||||||||||||||||
| AWCC | Senior notes—fixed rate | 4.45% | 4.45% | 2032 | $ | 800 | ||||||||||||||||||||||||||
| Other American Water subsidiaries | Private activity bonds and government funded debt—fixed rate | 0.00%-1.75% | 1.03% | 2027-2042 | 22 | |||||||||||||||||||||||||||
| Total issuances | $ | 822 | ||||||||||||||||||||||||||||||
| Company | Type | Rate | Maturity | Amount | ||||||
| AWCC | Senior notes—fixed rate | 2.95%-3.75% | 2027-2047 | $ | 1,350 | |||||
| Other American Water subsidiaries | Private activity bonds and government funded debt—fixed rate | 0.00%-1.44% | 2020-2037 | 31 | ||||||
| Other American Water subsidiaries | Mortgage bonds—fixed rate | 3.92% | 2020 | 3 | ||||||
| Other American Water subsidiaries | Term loan | 4.62%-5.12% | 2021 | 11 | ||||||
| Total issuances | $ | 1,395 | ||||||||
| Company | Type | Rate | Maturity | Amount | Company | Type | Rate | Weighted Average Rate | Maturity | Amount | ||||||||||||||||||||||||||||||||
| AWCC | Senior notes—fixed rate | 5.62%-6.09% | 2017-2021 | $ | 844 | AWCC | Private activity bonds and government funded debt—fixed rate | 1.79%-2.31% | 2.24% | 2024-2031 | $ | 1 | ||||||||||||||||||||||||||||||
| AWCC | Private activity bonds and government funded debt—fixed rate | 1.79%-2.90% | 2021-2031 | 1 | ||||||||||||||||||||||||||||||||||||||
| Other American Water subsidiaries | Private activity bonds and government funded debt—fixed rate | 0.00%-5.38% | 2017-2041 | 15 | ||||||||||||||||||||||||||||||||||||||
| Other American Water subsidiaries | Mortgage bonds—fixed rate | 7.08% | 2017 | 33 | ||||||||||||||||||||||||||||||||||||||
| Other American Water subsidiaries | Mandatorily redeemable preferred stock | 8.49%-9.18% | 2031-2036 | 2 | Other American Water subsidiaries | Private activity bonds and government funded debt—fixed rate | 0.00%-5.50% | 1.50% | 2022-2051 | 13 | ||||||||||||||||||||||||||||||||
| Other American Water subsidiaries | Term loan | 4.31%-5.31% | 2021 | 1 | Other American Water subsidiaries | Mandatorily redeemable preferred stock | 8.49% | 8.49% | 2022 | 1 | ||||||||||||||||||||||||||||||||
| Total retirements and redemptions | $ | 896 | Total retirements and redemptions | $ | 15 | |||||||||||||||||||||||||||||||||||||
On August 10, 2017,May 5, 2022, AWCC completed a $1.35 billion debt offering which included the sale of $600issued $800 million aggregate principal amount of its 2.95% Senior Notes4.45% senior notes due 2027, and $750 million aggregate principal amount of its 3.75% Senior Notes due in 2047.2032. At the closing, of the offering, AWCC received, after deduction of underwriting discounts and debt issuance costs, $1.33 billion. On September 13, 2017,before deduction of offering expenses, net proceeds of approximately $792 million. AWCC used proceeds from the offering to prepay $138 million of its outstanding 5.62% Series C Senior Notes due December 21, 2018 (“Series C Senior Notes”) and $181 million of it’s outstanding 5.77% Series D Senior Notes due December 21, 2021 (“Series D Senior Notes”). AWCC also used thenet proceeds of this offeringthe offering: (i) to lend funds to parent company and its regulated subsidiaries; (ii) to repay AWCC’s commercial paper obligationsobligations; and (iii) for general corporate purposes, and subsequently, on October 15, 2017, to repay at maturity, $524 million of its 6.085% Senior Notes.
One of the principal market risks to which the Company is exposed is changes in interest rates. In order to manage the exposure, the Company follows risk management policies and procedures, including the use of derivative contracts such as swaps.treasury lock agreements. The Company also reduces exposure to interest rates by managing commercial paper and debt maturities. The Company also does not enter into derivative contracts for speculative purposes and does not use leveraged instruments. The derivative contracts entered into are for periods consistent with the related underlying exposures. The Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations and minimizes this risk by dealing only with leading, credit-worthycreditworthy financial institutions having long-term credit ratings of “A” or better.
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In April 2022, the Company entered into several 10-year treasury lock agreements, with AWCC’s $1.35 billion debt offering,notional amounts totaling $400 million, and an average fixed interest rate of 2.89%. The Company designated these treasury lock agreements as cash flow hedges, with their fair value recorded in accumulated other comprehensive gain or loss. In May 2022, the Company terminated four existing forward starting swapthe treasury lock agreements, with an aggregate notional amount of $300 million, realizing a net gain of $19approximately $4 million, to be amortized through interest, net over 30 years. On February 8, 2017,a 10-year period, in accordance with the tenor of the debt issuance on May 5, 2022.
In November and December 11, 2017,2022, the Company entered into forward starting swapfour 10-year treasury lock agreements, each with a notional amount ofamounts totaling $100 million, to reduce interest rate exposure on debt expected to be issued in 2018.2023. These forward starting swaptreasury lock agreements terminate in November 2018,January 2024, and have an average fixed rate of 2.59%3.56%. In January 2023, the Company entered into three additional 10-year treasury lock agreements, with notional amounts totaling $100 million, to reduce interest rate exposure on debt expected to be issued in 2023. These treasury lock agreements terminate in January 2024, and have an average fixed rate of 3.35%. The Company has designated these forward starting swaptreasury lock agreements as cash flow hedges, with their fair valuesvalue recorded in accumulated other comprehensive gain or loss. Upon termination, the cumulative gain or loss recorded in accumulated other comprehensive gain or loss will be amortized through interest, net over the term of the new debt.
Note 12: Short-Term Debt
Liquidity needs for capital investment, working capital and 2016.
other financial commitments are generally funded through cash flows from operations, public and private debt offerings, commercial paper markets and, if and to the extent necessary, borrowings under the AWCC revolving credit facility, and, in the future, issuances of equity. Additionally, proceeds from the aforementioned sales of HOS and the Company’s New York subsidiary have been used primarily for capital investment in the Regulated Businesses. The following tablerevolving credit facility provides $2.75 billion in aggregate total commitments from a summarydiversified group of financial institutions. The termination date of the gross fair valuecredit agreement with respect to AWCC’s revolving credit facility is October 2027. The facility is used principally to support AWCC’s commercial paper program, to provide additional liquidity support and to provide a sub-limit of up to $150 million for letters of credit. Letters of credit are non-debt instruments maintained to provide credit support for certain transactions as requested by third parties. Subject to satisfying certain conditions, the credit agreement also permits AWCC to increase the maximum commitment under the facility by up to an aggregate of $500 million and to request extensions of its expiration date for up to two one-year periods. As of December 31, 2022, AWCC had no outstanding borrowings and $78 million of outstanding letters of credit under the revolving credit facility, with $1.50 billion available to fulfill the Company’s derivative assetshort-term liquidity needs and liabilities, as well asto issue letters of credit. The Company regularly evaluates the locationcapital markets and closely monitors the financial condition of the assetfinancial institutions with contractual commitments in its revolving credit facility. Interest rates on advances under the facility are based on a credit spread to the Secured Overnight Financing Rate (or applicable market replacement rate) or base rate, each determined in accordance with Moody Investors Service’s and liability balancesS&P Global Ratings’ then applicable credit rating on AWCC’s senior unsecured, non-credit enhanced debt.
On October 26, 2022, AWCC and certain lenders amended and restated the credit agreement with respect to the revolving credit facility to, among other things, increase the maximum commitments under the facility from $2.25 billion to $2.75 billion and to extend the expiration date of the facility from March 2025 to October 2027. Also, effective October 26, 2022, the maximum aggregate principal amount of short-term borrowings authorized under AWCC’s commercial paper program was increased from $2.10 billion to $2.60 billion.
On March 20, 2020, AWCC entered into a Term Loan Credit Agreement, by and among parent company, AWCC and the lenders party thereto (the “Term Loan Facility”). The Term Loan Facility commitments terminated at maturity on March 19, 2021, and the $500 million of principal outstanding under the Term Loan Facility was repaid in full. Borrowings under the Consolidated Balance Sheets asTerm Loan Facility bore interest at a variable annual rate based on LIBOR, plus a margin of December 31:
| Derivative Instruments | Derivative Designation | Balance Sheet Classification | 2017 | 2016 | ||||||||
| Asset derivative: | ||||||||||||
| Forward starting swaps | Cash flow hedge | Other current assets | $ | — | $ | 27 | ||||||
| Interest rate swap | Fair value hedge | Other current assets | — | 1 | ||||||||
| Liability derivative: | ||||||||||||
| Interest rate swap | Fair value hedge | Current portion of long-term debt | — | 1 | ||||||||
| Forward starting swaps | Cash flow hedge | Other current liabilities | 3 | — | ||||||||
Short-term debt consists of commercial paper and credit facility borrowings totaling $905$1,177 million and $849$584 million as of December 31, 20172022 and 2016,2021, respectively, or net of discount $1,175 million and $584 million as of December 31, 2022 and 2021, respectively. The weighted average interest rate on AWCC’s outstanding short-term borrowings was approximately 4.41%, for the year ended December 31, 2022. The weighted average interest rate on AWCC’s outstanding short-term borrowings was 0.20%, for the year ended December 31, 2021. As of December 31, 20172022, there were no commercial paper borrowings outstanding with maturities greater than three months.
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Presented in the accompanying Consolidated Statements of Operations. Interest on borrowings are based on a LIBOR-based rate, plus an applicable margin.
| 2022 | |||||||||||||||||
| Commercial Paper Limit | Letters of Credit | Total (a) | |||||||||||||||
| (In millions) | |||||||||||||||||
| Total availability | $ | 2,600 | $ | 150 | $ | 2,750 | |||||||||||
| Outstanding debt | (1,177) | (78) | (1,255) | ||||||||||||||
| Remaining availability as of December 31, 2022 | $ | 1,423 | $ | 72 | $ | 1,495 | |||||||||||
| Credit Facility Commitment | Available Credit Facility Capacity | Letter of Credit Sublimit (a) | Available Letter of Credit Capacity | Commercial Paper Limit | Available Commercial Paper Capacity | |||||||||||||||||||
| December 31, 2017 | $ | 1,762 | $ | 1,673 | $ | 150 | $ | 66 | $ | 1,600 | $ | 695 | ||||||||||||
| December 31, 2016 | 1,766 | 1,668 | 150 | 62 | 1,600 | 751 | ||||||||||||||||||
(a)Total remaining availability of $1.59 billion as of December 31, 2021, may be accessed through revolver draws. Presented in the | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash and Cash Equivalents | Availability on Revolving Credit Facility | Total Available Liquidity | |||||||||||||||
| (In millions) | |||||||||||||||||
| Available liquidity as of December 31, 2022 | $ | 85 | $ | 1,495 | $ | 1,580 | |||||||||||
| Available liquidity as of December 31, 2021 | $ | 116 | $ | 1,590 | $ | 1,706 | |||||||||||
Presented in the table below is the short-term borrowing activity for AWCC for the years ended December 31:
| 2017 | 2016 | 2022 | 2021 | |||||||||||||||
| Average borrowings | $ | 779 | $ | 850 | Average borrowings | $ | 505 | $ | 910 | |||||||||
| Maximum borrowings outstanding | 1,135 | 1,016 | Maximum borrowings outstanding | 1,177 | 1,647 | |||||||||||||
| Weighted average interest rates, computed on daily basis | 1.24 | % | 0.78 | % | ||||||||||||||
| Weighted average interest rates, as of December 31 | 1.61 | % | 0.98 | % | Weighted average interest rates, as of December 31 | 4.41 | % | 0.20 | % | |||||||||