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.
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.
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.
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.
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.
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.
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
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.
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
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.
Work stoppages and other labor relations matters could adversely affect our results of operations.operations and the ability to serve our customers.
Our federal NOL carryforwards will begin to expire in 2028, and our state NOL carryforwards will begin to expire in 2018 through 2037. Our ability to utilize our NOL carryforwards is primarily dependent upon our ability to generate sufficient taxable income. We have, in the past, been unable to utilize certain of our state NOL carryforwards, and the establishment or increase of a valuation allowance in the future would reduce our deferred income tax assets and our net income.
Our actual results may differ from those estimated by management in making its assessment as to our ability to use the NOL carryforwards. Moreover, adoption of Related Interpretations with respect to the TCJA and other changes in income tax laws, the economy and the general business environment could affect the future utilization of our NOL carryforwards. If we are unable to fully utilize our NOL carryforwards to offset taxable income generated in the future, our financial position, results of operations and cash flows could be materially adversely affected.
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
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.
Additional Risks Related to Our Market-Based Businesses
We (excluding our regulated subsidiaries) provide performance guarantees with respect to certain obligationsThe success of our Market-Based Businesses,business is dependent upon our ability to attract, hire and retain highly qualified, skilled and/or diverse talent, including financial guarantees or deposits,engineers, licensed operators, water quality and management professionals who have the desired experience and expertise. Similar to other organizations, the Company may have challenges implementing its human capital management and employee succession plans to attract and retain such talent based on a number of factors including, among others, market conditions, retirements and geography. If we are unable to meet these human capital resource challenges, our public-sector and public clients, and these clients may seek to enforce the guarantees if our Market-Based Businesses do not satisfy these obligations.
Under the terms of some of our agreements for the provision of services to water and wastewater facilities with municipalities, other governmental entities and other customers, American Water (excluding our regulated subsidiaries) provides guarantees of specified performance obligations of our Market-Based Businesses, including financial guarantees or deposits. In the event our Market-Based Businesses fail to perform these obligations, the entity holding the guarantees may seek to enforce the performance commitments against us or proceed against the deposit. In that event, ourbusiness, financial condition, results of operations and cash flows may be materially and liquidity couldadversely impacted.
Our business may be adversely affected.affected by the intentional misconduct of our employees and contractors.
At December 31, 2017, we had remaining performance commitments as measured by remaining contract revenue totaling approximately $3.6 billion,Our Code of Ethics requires employees and this amount is likelycontractors to increase ifmake decisions ethically and in compliance with applicable law and regulatory requirements, and our Market-Based Businesses expand. The presenceCode of these commitments may adversely affect our financial conditionEthics and make it more difficult for usits underlying policies, practices and procedures. All employees are required to secure financingcomplete training on attractive terms.
AWE’s operations are subject to various risks associated with doing business withand review the U.S. government.
We enter into contracts with the U.S. government for the operationCode of Ethics on an annual basis, and maintenance of water and wastewater systems, which contracts may be terminated, in whole or in part, prior to the endviolations of the 50-year termCode of Ethics could result in disciplinary actions up to, and including, termination. Despite these efforts to prevent misconduct, it is possible for convenienceemployees or contractors to engage in intentional misconduct and violate laws and regulations through, among other things, theft, fraud, misappropriation, bribery, corruption and engaging in conflicts of the U.S. governmentinterest or asrelated person transactions, or otherwise committing serious breaches of our Code of Ethics and our policies, practices and procedures. Intentional misconduct by employees or contractors could result in substantial liability, higher costs, increased regulatory scrutiny and significant reputational harm, any of which could have 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 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. Any early contract termination or unfavorable price redetermination could adversely affectmaterial adverse effect on our financial condition, results of operations and cash flows.
Moreover, entering into contracts with the U.S. government subjects us to a number
AWE operates a number of water and wastewater systems under O&M contracts and faces the risk that the owners of those systems may fail to provide capital to properly maintain those systems, which may negatively affect AWE as the operator of the systems.
AWE operates a number of water and wastewater systems under O&M contracts. Pursuant to these contracts, AWE operates the system according to the standards set forth in the applicable contract, and it is generally the responsibility of the owner of the system to undertake capital improvements. In some cases, AWE may not be able to convince the owner to make needed improvements in order to maintain compliance with applicable regulations. Although violations and fines incurred by water and wastewater systems may be the responsibility of the owner of the system under these contracts, those non-compliance events may reflect poorly on AWE as the operator of the system and us, and damage our reputation, and in some cases, may result in liability to us to the same extent as if we were the owner.
AWE’s Market-Based Businesses are party to long-term contracts to operate and maintain water and wastewater systems under which we may incur costs in excess of payments received.
Some of AWE’s Market-Based Businesses enter into long-term contracts under which they agree to operate and maintain a municipality’s, federal government’s or other party’s water or wastewater treatment and delivery facilities, which includes specified major maintenance for some of those facilities, in exchange for an annual fee. These Market-Based Businesses are generally subject to the risk that costs associated with operating and maintaining the facilities, including production costs such as purchased water, electricity, fuel and chemicals used in water treatment, may exceed the fees received from the municipality or other contracting party. Losses under these contracts or guarantees may adversely affect our financial condition, results of operations, cash flows and liquidity.
Keystone’s operations may expose us to substantial costs and liabilities with respect to environmental laws and matters.
Keystone’s operations, and the operation generally of natural gas and oil exploration and production facilities by Keystone’s customers, are subject to stringent federal, state and local laws, rules, regulations and ordinances governing the release of materials into the environment or otherwise relating to environmental protection. These provisions may require the acquisition by Keystone of permits or licenses before providing its services to customers, prohibit the release of substances defined thereunder as hazardous in connection with these activities, and impose substantial liabilities for the violation thereof that may result from these operations. Failure to comply with these laws, rules, regulations and ordinances may result in substantial environmental remediation and other costs to Keystone, the assessment of administrative, civil and criminal penalties or the issuance of injunctions restricting or prohibiting certain activities. Under existing environmental laws and regulations, Keystone could be held strictly liable for the removal or remediation of previously released materials or property contamination regardless of whether the release resulted from its operations, or whether its operations were in compliance with all applicable laws at the time they were performed. While we have structured and maintained our ownership and control of Keystone’s operations in such a way that we believe should insulate the Company, its regulated subsidiaries and its other Market-Based Businesses from any liabilities associated with Keystone’s operations, including liabilities for environmental matters, there can be no assurance that such efforts will be sufficient to prevent the Company from incurring liability for the operations of Keystone.
Changes in environmental laws and regulations occur frequently, and any changes to these or other laws governing the natural gas and oil exploration industry that result in more stringent or costly water or wastewater handling, storage, transport, disposal or cleanup requirements could require Keystone to make significant expenditures to maintain compliance with such requirements, may harm Keystone’s business and results of operations by reducing the demand for Keystone’s water and related services, and may otherwise have a material adverse effect on Keystone’s competitive position, financial condition, results of operations and cash flows.
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ITEM 1B. | ITEM 1B. UNRESOLVED STAFF COMMENTS |
None
OurITEM 2. PROPERTIES
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:
72•80 surface water treatment plants;
527•490 groundwater treatment plants;
8 combined (surface water and groundwater) treatment plants;
127•175 wastewater treatment plants;
50,382•53,500 miles of transmission, distribution and collection mains and pipes;
1,103•1,100 groundwater wells;
1,428•1,700 water and wastewater pumping stations;
1,313•1,100 treated water storage facilities; and
80•73 dams.
We haveThe Company has ongoing infrastructure renewal programs in all states in which ourits Regulated Businesses operate. These programs consist of both the rehabilitation of existing mains and equipment, and the replacement of mains and equipment that have been damaged or have reached, or are near, the end of their useful service lives. The properties of our Market-Based Businesseswithin Other consist mainly of office furniture and IT equipment, and are primarily located in New Jersey.equipment. Approximately 52%51% of all properties that we ownthe Company owns are located in New Jersey and Pennsylvania.
We maintainThe Company maintains property insurance against loss or damage to ourits properties by fire or other perils, subject to certain exceptions. For insured losses, we arethe Company is self-insured to the extent that any losses are within the policy deductible or exceed the amount of insurance maintained.
We believeThe Company believes that ourits properties are generally maintained in good operating condition and in accordance with current standards of good water and wastewater industry practice.
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.
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.
Regional Desalination Project Litigation
The Regional Desalination Project (the “RDP”) involved the construction of a desalination facility in the City of Marina, north of Monterey. The RDP was intended to, among other things, eliminate unauthorized diversions from the Carmel River as requiredconflicting regulatory interpretations under the 2009 Order. In December 2010, the CPUC approved the RDP, which was to be implemented through a Water Purchase Agreement and ancillary agreements (collectively, the “Agreements”) among the Marina Coast Water District (“MCWD”), the Monterey County Water Resources Agency (“MCWRA”) and Cal Am. In 2011, due to a conflict of interest concerning a former member of MCWRA’s Board of Directors, MCWRA stated that the Agreements were void, and, as a result, Cal Am terminated the Agreements. In April 2015, the CPUC approved a settlement agreement among Cal Am, MCWRA and the County of Montereyan attempt to resolve these matters amongconflicting interpretations prior to seeking judicial intervention, Cal Am has met with the parties signingMPWMD and the agreement. In March 2016,SWRCB several times. The SWRCB agreed to circulate revisions to its 2012 interpretive letter, which would be subject to a public comment period. Any failure to follow the Supreme Court of California granted MCWD’s petition for review ofMPWMD’s resolution or the CPUC approval,SWRCB’s written interpretation, despite these conflicting interpretations, could potentially result in fines, penalties and followingother actions against Cal Am.
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.
In October 2012,the SWRCB concurs, that Cal Am filedhas obtained a Complaintpermanent supply of water to substitute for Declaratory Relief against MCWRA and MCWD, which was ultimately transferred topast unauthorized Carmel River diversions. While the San Francisco County Superior Court, seeking a determination as to whetherCompany cannot currently predict the Agreements are void as alikelihood or result of any adverse outcome associated with these matters, further attempts to comply with the alleged conflict of interest. In June 2015,2009 Order and the court entered a final judgment agreeing with Cal Am’s position that four of the five Agreements are void, and one, the credit line agreement, is not void. In November 2016 the Supreme Court of California denied MCWD’s final appeal of this judgment, which allows further proceedings to determine the amount of damages that may be awardedOrder in the proceeding.
In July 2015,future may result in material additional costs and obligations to Cal Am, including fines and MCWRA filed a Complaint in San Francisco County Superior Court against MCWD and RMC Water and Environment (“RMC”), a private engineering consulting firm, seeking to recover compensatory damages in excess of $10 million associated with the failure of the RDP, as well as punitive and treble damages, statutory penalties and attorneys’ fees. Shortly thereafter, complaints seeking similar damages were filed in the same court by MCWD and RMC against Cal Am and MCWRA in excess of $19 million in the aggregate. In December 2015,event of noncompliance with the court consolidated all of these complaints into a single action,2009 Order and trial in this matter has been scheduled for June 18, 2018. On December 21, 2017, RMC filed a Motion for Summary Judgment and a hearing on such motion is scheduled for March 15, 2018. On December 6, 2017, MCWD filed a Motion for Judgment on the Pleadings and a hearing on such motion took place on February 2, 2018. On February 5, 2018, the court dismissed Cal Am’s and MCWRA’s tort law claims against MCWD, and allowed Cal Am leave to amend its breach of contract claims against MCWD. The court’s decision does not impact Cal Am’s and MCWRA’s tort claims against RMC. Cal Am and MCWRA were given until February 19, 2018 to amend their breach of contract claims. Cal Am and MCWRA are considering their responses to the order, including an appeal to the California Court of Appeal.2016 Order.
Monterey Peninsula Water Supply Project
TheCPUC Final Approval of Water Supply Project is intended to reduce water diversions from the Carmel River and involves construction of a desalination plant, owned by Cal Am, and purchase of water by Cal Am from a groundwater replenishment project (the “GWR Project”) between the Monterey Regional Water Pollution Control Agency and the MPWMD.
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.
On September 15,In 2016, the CPUC unanimously approved a final decision to authorize Cal Am to enter into a water purchase agreement for the GWR Project and to construct a pipeline and pump station facilities and recover up to the incurred $50 million in associated costs plus AFUDC, subject to meeting certain criteria. If
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.
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
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.
OnWater Supply Project Land Acquisition and Slant Well Site Use
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.
The CPUC held hearings from October 25 through November 3, 2017 on Cal Am’s request for a certificate of public convenience and necessity for the Water Supply Project. This request remains pending.
In December 2014, the MCWD and the Ag Land Trust, an agricultural land conservancy, filed petitions against the Coastal Commission and A permanent easement granted by CEMEX to Cal Am which were ultimately transferredwas recorded in June 2018 to allow Cal Am access to the Santa Cruz County Superior Court, seeking to vacate the Coastal Commission’s approval of the coastal development permitproperty and to permanently restrain Cal Amconstruct, operate and the Coastal Commission from constructing the test slant well pending full compliance with the California Environmental Quality Act and the California Coastal Act. The court denied these petitions, and on January 11, 2017, the Supreme Court of California denied MCWD’s petition for review of this decision. MCWD filed a similar petition in January 2015 against the State Lands Commission and Cal Am, which remains pending.
In November 2015, MCWD filed a Petition for Writ of Mandate and Complaint for Declaratory and Injunctive Relief in Santa Cruz County Superior Court against the Coastal Commission and Cal Am challenging the amendment of the coastal development permits and seeking an injunction against further test well pumping. In September 2016, the court denied MCWD’s petition with respect to all claims, except claims related to those raised in the December 2014 petitions discussed above. On October 3, 2017, after conducting a trial for all matters raised in MCWD’s November 2015 challenge, other than claims that had been denied by the court in September 2016, the court denied MCWD’s claims with respect to these matters. On January 12, 2018, MCWD filed a notice of appeal of the court’s judgment.
Based on the foregoing, Cal Am estimates that the earliest date by whichmaintain the Water Supply Project desalination plant could be completed is sometimeintake wells. in 2021. There can be no assuranceNovember 2019, the City notified CEMEX that, based on this permanent easement and Cal Am’s proposed use of the site for the intake wells, CEMEX has breached or will soon breach a prior 1996 annexation agreement (to which Cal Am was not a party). The City states that it intends to seek declaratory relief from CEMEX and Cal Am ordering that Cal Am’s applicationextraction is limited to 500 acre-feet per year of groundwater, that Cal Am cannot export extracted water out of the basin, and that the permanent easement granted by CEMEX to Cal Am is void. CEMEX has denied the City’s claims and requested indemnification from Cal Am under the terms of the permanent easement. Cal Am and CEMEX believe that there is no valid limitation under the annexation agreement on Cal Am’s right to pump brackish groundwater and seawater at the site for desalination and use by Cal Am’s customers.
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
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.
California Public Utilities Commission Residential Rate Design ProceedingCounty of Monterey filed its own notice to become the exclusive GSA at the CEMEX site in order to resolve the overlap, which is permitted under SGMA. SDWR accepted Monterey County’s filing in December 2019, and now lists Monterey County as the exclusive GSA for the site.
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
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.
On February 24, 2017, Cal Am, the MPWMD, the CPUC’s Office of Ratepayer Advocates, and the Coalition of Peninsula Businesses filed for CPUC approval of a joint settlement agreement (the “Joint Settlement Agreement”), which among other things, proposed to resolve the CPUC’s residential tariff administration concerns by providing for a waiver by Cal Am of $0.5 million of cost recovery for residential customers through the WRAM/MCBA in lieu of a penalty. Approval of the Joint Settlement Agreement, which is required for it to take effect,matter remains pending before the CPUC.
On March 28, 2017, the administrative law judge assigned to the proceeding issued a ruling stating there was sufficient evidence to conclude, on a preliminary basis, that Cal Am’s administration of the residential tariff violated certain provisions of the California Public Utilities Code and a CPUC decision. The ruling ordered Cal Am to show cause why it should not be penalized for these administrative violations and directed the settling parties to address whether the cost recovery waiver in the Joint Settlement Agreement was reasonable compared to a potential penalty range described by the administrative law judge. During hearings held on April 13-14, 2017, the administrative law judge clarified that this potential penalty range is $3 million to $179 million (calculated as a continuing violation dating back to 2000 and applying penalties of up to $20,000 per day until January 1, 2012 and penalties of up to $50,000 per day thereafter, reflecting a 2012 change to the relevant statute). The administrative law judge also noted that a per diem penalty may not be appropriate, as Cal Am’s monthly billing practices did not allow Cal Am to update customer-provided information for billing purposes on a daily basis. Hearings before the administrative law judge in this matter were held in August, September and November 2017. Cal Am also submitted additional testimony on the issue of whether Cal Am should be penalized, and if so, the reasonable amount of any such penalty. This proceeding remains pending, and the CPUC has set a statutory deadline of September 30, 2018 for the completion of the proceeding.pending.
West Virginia Elk River Freedom Industries Chemical Spill
Background
On January 9, 2014, a chemical storage tank owned bySee Note 16—Commitments and Contingencies—Contingencies—West Virginia Elk River Freedom Industries Inc. leaked two substances, 4-methylcyclohexane methanol (“MCHM”), and PPH/DiPPH, a mix of polyglycol ethers, into the Elk River near the WVAWC treatment plant intake in Charleston, West Virginia. After having been alerted to the leak of MCHM by the West Virginia Department of Environmental Protection, WVAWC took immediate steps to gather more information about MCHM, augment its treatment process as a precaution, and begin consultations with federal, state and local public health officials. As soon as possible after it was determined that the augmented treatment process would not fully remove the MCHM, a joint decision was reached in consultation with the West Virginia Bureau for Public Health to issue a “Do Not Use” order for all of its approximately 93,000 customer accounts in parts of nine West Virginia counties served by the Charleston treatment plant. By January 18, 2014, none of WVAWC’s customers were subject to the Do Not Use order.
Following the Freedom Industries chemical spill, numerous lawsuits were filed against WVAWC and certain other Company-affiliated entities (collectively, the “American Water Defendants”) with respect to this matterChemical Spill in the U.S. District CourtNotes to Consolidated Financial Statements for information regarding the Southern District of West Virginia or West Virginia Circuit Courts in Kanawha, Boone and Putnam counties, and to date, more than 70 cases remain pending. Four of the cases pending before the U.S. districtfinal court were consolidated for purposes of discovery, and an amended consolidated class action complaint for those cases (the “Federal action”) was filed in December 2014 by several plaintiffs. In January 2016, all of the then-filed state court cases were referred to West Virginia’s Mass Litigation Panel for further proceedings, which have been stayed until April 22, 2018 pending the approval by the court in the Federal action of a global agreement to settle all of such cases, as described below. The court in the Federal action has continued the start of the trial indefinitely pending ongoing settlement approval activities.
Proposed Global Class Action Settlement
In October 2016, the court in the Federal action approved the preliminary principles, terms and conditions of a binding global agreement in principle to settle claims among the American Water Defendants, and all class members, putative class members, claimants and potential claimants, arising out of the Freedom Industries chemical spill. On April 27, 2017, the parties filed with the court in the Federal action a proposed settlement agreement providing details of the terms of the settlement of these matters and requesting that the court in the Federal action grant preliminary approval of such settlement. On July 6, 2017, the court in the Federal action issued an opinion denying without prejudice the joint motion for preliminary approval of the Settlement. On August 25, 2017, the parties filed a proposed amendedglobal settlement agreement and related materials addressing the matters set forth in the July 6, 2017 order.
On September 21, 2017, the court in the Federal action issued an order granting preliminary approval of a settlement class and proposed class action settlement (the “Settlement”) with respect to claims against the American Water Defendants by all putative class members (collectively, the “Plaintiffs”) for all claims and potential claims arising out of the Freedom Industries chemical spill. The Settlement proposes a global resolution of all federal and state litigation and potential claims against the American Water Defendants and their insurers. Under the terms and conditions of the Settlement and the proposed amended settlement agreement, the American Water Defendants have not admitted, and will not admit, any fault or liability for any of the allegations made by the Plaintiffs in any of the actions to be resolved. Under federal class action rules, claimants had the right, until December 8, 2017, to elect to opt out of the final Settlement, in which case such claimant would not receive any benefit from or be bound by the terms of the Settlement. As of January 31, 2018, less than 100 of the 225,000 estimated putative Plaintiffs have submitted opt-out notices. The deadline to file a claim in the Settlement is February 21, 2018.
The proposed aggregate pre-tax amount of the Settlement with respect to the Company is $126 million. The aggregate portion of the Settlement to be contributed by WVAWC, net of insurance recoveries, is $43 million (approximately $26 million after-tax), taking into account the September 2017 settlement with one of the Company’s general liability insurance carriers discussed below. Another defendant to the Settlement is to contribute up to $25 million to the Settlement. Two of the Company’s general liability insurance carriers, which provide an aggregate of $50 million in insurance coverage to the Company under these policies, had been originally requested to participate in the Settlement at the time of the initial filing of the binding agreement in principle with the court in the Federal action, but did not agree to do so at that time. WVAWC filed a lawsuit against one of these carriers alleging that the carrier’s failure to agree to participate in the Settlement constituted a breach of contract. On September 19, 2017, the Company and the insurance carrier settled this lawsuit for $22 million, out of a maximum of $25 million in potential coverage under the terms of the relevant policy, in exchange for a full release by the Company and WVAWC of all claims against the insurance carrier related to theJanuary 2014 Freedom Industries, Inc. chemical spill. WVAWC and the settling insurer have agreed to stay this litigation pending final approval of the Settlement. The Company and WVAWC continue to pursue vigorously their rights to insurance coverage for contributions by WVAWC to the Settlement in mandatory arbitration with the remaining non-participating carrier. This arbitration proceeding remains pending. Despite these efforts, the Company may not ultimately be successful in obtaining full or further reimbursement under this insurance policy for amounts that WVAWC may be required to contribute to the Settlement.
The proposed Settlement would establish a two-tier settlement fund for the payment of claims, comprised of (i) a simple claim fund, which is also referred to as the “guaranteed fund,” of $76 million, of which $29 million will be contributed by WVAWC, including insurance deductibles, and $47 million would be contributed by two of the Company’s general liability insurance carriers, and (ii) an individual review claim fund of up to $50 million, of which up to $14 million would be contributed by WVAWC and up to $36 million would be contributed by a number of the Company’s general liability insurance carriers. Separately, up to $25 million would be contributed to the guaranteed fund by another defendant to the Settlement. If any final approval order by the court in the Federal action with respect to the Settlement is appealed and such appeal would delay potential payment to claimants under the Settlement, WVAWC and the other defendant to the Settlement will contribute up to $50 million and $25 million, respectively, to the Settlement (not including, in the case of WVAWC, any contributions by the Company’s general liability insurance carriers which would not be made until such time as a final, non-appealable order is issued) into an escrow account during the pendency of such appeals. For certain claims, WVAWC and the other defendant to the Settlement may, in lieu of these escrowed contributions, make advance payments of such claims if agreed to by the parties. All administrative expenses of the Settlement and attorneys’ fees of class counsel related thereto would be paid from the funds designated to pay claims covered by the Settlement.
As a result of these events, in the third quarter of 2016, the Company recorded a charge to earnings, net of insurance receivables, of $65 million ($39 million after-tax). Additionally, in the third quarter of 2017, the Company recorded a benefit of $22 million ($13 million after-tax) as an additional insurance receivable reflecting the settlement with the insurance carrier described above. The Company intends to fund WVAWC’s contributions to the Settlement through existing sources of liquidity, although no contribution by WVAWC will be required unless and until the terms of the Settlement are finally approved by the court in the Federal action. Furthermore, under the terms of the Settlement, WVAWC has agreed that it will not seek rate recovery from the PSC for approximately $4 million in direct response costs expensed in 2014 by WVAWC relating to the Freedom Industries chemical spill as well as for amounts paid by WVAWC under the Settlement.
The Company’s insurance policies operate under a layered structure where coverage is generally provided in the upper layers after claims have exhausted lower layers of coverage. The $36 million to be contributed by a number of the Company’s general liability insurance carriers to the individual review claim fund, as noted above, is from higher layers of the insurance structure than the insurance carrier that was requested, but presently has not agreed, to participate in the Settlement. Any recovery by WVAWC or the Company from the remaining non-participating carrier would reimburse WVAWC for its contributions to the guaranteed fund.
Notice of the terms of the Settlement to members of the settlement class commenced on October 11, 2017. Following the notice period, on January 9, 2018, the court in the Federal action held a fairness hearing to consider final approval of the Settlement, which was continued on February 1, 2018 to address certain open matters. At this hearing, the court in the Federal action indicated that it intended to enter an order approving the Settlement, and the parties submitted a proposed order to the court on February 2, 2018.
There can be no assurance that the Settlement will not be amended further or that the court will provide its final approval as to any agreement negotiated between the parties reflecting the terms of the Settlement.
The American Water Defendants believe that WVAWC has responded appropriately to, and, other than through the Settlement, has no responsibility for, the Freedom Industries chemical spill, and that the American Water Defendants have valid, meritorious defenses to the lawsuits. Nevertheless, WVAWC and the Company are unable to predict the outcome of any lawsuit against the American Water Defendants brought or maintained by a claimant that has elected to opt out of the Settlement, and any such outcome or outcomes could have a material adverse effect on the Company’s financial condition, results of operations, cash flows, liquidity and reputation.
Other Related Proceedings
Additionally, investigations were initiated with respect to the matter by the U.S. Chemical Safety and Hazard Investigation Board (the “CSB”), the U.S. Attorney’s Office for the Southern District of West Virginia, the West Virginia Attorney General, and the PSC. As a result of the U.S. Attorney’s Office investigation, Freedom Industries and six former Freedom Industries employees (three of whom also were former owners of Freedom Industries), pled guilty to violations of the federal Clean Water Act. The PSC issued an order on June 15, 2017 concluding its investigation without requiring WVAWC to take any further action with respect to the matters covered by the general investigation.
The CSB is an independent investigatory agency with no regulatory mandate or ability to issue fines or citations; rather, the CSB can only issue recommendations for further action. In response to the Freedom Industries chemical spill, the CSB commenced an investigation shortly thereafter. In September 2016, the CSB issued and adopted its investigation report in which it recommended that the Company conduct additional source water protection activities. On April 4, 2017, the CSB indicated that the implementation by the Company of source water protection activities resolved the first two parts of the CSB’s recommendation. The CSB also noted that compliance by the Company with the third part of its recommendation is ongoing and that closure of this part is contingent upon completion of updated contingency planning for the Company’s water utilities outside of West Virginia. In light of public response to its original September 2016 investigation report, on May 11, 2017, the CSB issued a new version of this report. The primary substantive change addressed CSB’s factual evaluation of the duration and volume of contamination from the leaking tank, decreasing its estimate of the leak time but increasing the volume estimate by 10%. No substantive changes were made to the conclusions and recommendations in the original report.
On March 16, 2017, the Lincoln County (West Virginia) Commission (the “LCC”) passed a county ordinance entitled the “Lincoln County, WV Comprehensive Public Nuisance Investigation and Abatement Ordinance.” The ordinance establishes a mechanism that Lincoln County believes will allow it to pursue criminal or civil proceedings for the “public nuisance” it alleges was caused by the Freedom Industries chemical spill. On April 20, 2017, the LCC filed a complaint in Lincoln County state court against WVAWC and certain other defendants not affiliated with the Company, alleging that the Freedom Industries chemical spill caused a public nuisance in Lincoln County. The complaint seeks an injunction against WVAWC that would require the creation of various databases and public repositories of documents related to the Freedom Industries chemical spill, as well as further study and risk assessments regarding the alleged exposure of Lincoln County residents to the released chemicals. On June 12, 2017, the Mass Litigation Panel entered an order granting a motion to transfer this case to its jurisdiction and stayed the case consistent with the existing stay order. The LCC has elected to opt out of the Settlement. On January 26, 2018, the LCC filed a motion seeking to lift the stay imposed by the Mass Litigation Panel. This motion is pending. WVAWC believes that this lawsuit is without merit and intends to vigorously contest the claims and allegations raised in the complaint.
WVAWC and the Company are unable to predict the outcome of the ongoing government investigations or actions or any legislative initiatives that might affect WVAWC’s water utility operations.
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.
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.
Contract Operations Group -- East Palo AltoOther Matters
In April 2021, American Water System Voluntary Report
On April 10, 2017, AWE,Resources, LLC (“AWR”), which, prior to the parent entityDecember 9, 2021 sale of the Company’s Contract Operations Group, voluntarily reported to the Division of Drinking Waterformer HOS business was one of the SWRCB potential violations of the California Safe Drinking Water Act (the “CSDWA”)indirect, wholly owned subsidiaries comprising that business, received a grand jury subpoena in connection with AWE’s operationan investigation by the U.S. Attorney’s Office for the Eastern District of New York (the “EDNY”). The subpoena seeks documents regarding AWR’s operations and its contractor network in the New York City metropolitan area. On September 9, 2022, a former employee of AWR pled guilty in U.S. District Court to two felony counts in connection with the matters being investigated by the EDNY. The Company has been fully cooperating with the EDNY investigation and continues to do so, and continues to believe that the investigation is not focused on the Company.
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.
On June 15, 2017, the SWRCB issued to AWE a citation that required AWE to, among other things: comply with regulations related to water operator certifications, lead and copper tap sampling requirements and the publishing of a Consumer Confidence Report; provide public notification of the LCR violation; and prepare a corrective action plan to evaluate the causes leading to these incidents and measures to be taken to prevent recurrence of future incidents. The citation did not impose on AWE any monetary penalties, but the SWRCB reserved the right to take additional enforcement action.
By letter dated October 4, 2017, the SWRCB advised AWE that it is in compliance withHOS operations (including all of the directivesCompany’s equity interests in AWR), in December 2021, the Company and relevant statutoryAWR entered into an agreement with the buyer of the HOS operations, which facilitates a common defense for, and administrative provisions specifiedthe sharing of information concerning, the EDNY investigation and any legal or regulatory inquiries or proceedings related to or resulting from it or the subject matter in the SWRCB’s June 15, 2017 citation. While AWE has completed allsubpoena (collectively, the “Covered Matters”). The Company, on behalf of AWR, is required compliance activitiesto defend any Covered Matter, using commercially reasonable efforts to resolve it on a reasonably expedient basis. Further, the Company is required to consult with respectthe buyer in specified circumstances and obtain its prior written consent (which consent may not be unreasonably withheld, conditioned or delayed) before entering into any resolution of any Covered Matter that imposes non-monetary provisions or undertakings or any other terms for which there will be no indemnification under this agreement. In addition, until March 9, 2025, the Company is required to indemnify the buyer for any monetary losses or out-of-pocket damages (as described in the agreement) incurred by the buyer or certain of the HOS subsidiaries to the citation,extent directly arising in connection with, or directly resulting from, any Covered Matter.
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.
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ITEM 4. | MINE SAFETY DISCLOSURES |
ITEM 4. MINE SAFETY DISCLOSURES
Not applicableapplicable.
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:
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| | | | | | | | | | | | | | | | |
| | 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 |
| | — |
|
| |
(a) | Dividends declared during the three months ended December 31, 2017 and 2016, include quarterly dividends payable December 1 and March 1. |
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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ITEM 6. | SELECTED FINANCIAL DATA |
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| | | | | | | | | | | | | | | | | | | |
| 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 | ) |
| |
(a) | In November 2014, we disposed of our Class B Biosolids operating segment by selling our subsidiary, Terratec Environmental Ltd (“Terratec”) in Ontario, Canada. The results of Terratec are presented as discontinued operations and, as such, have been excluded from Income from continuing operations for the years ended December 31, 2014 and 2013. |
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(b) | The information for the years ended December 31, 2014 and 2013, has been revised to reflect the retrospective application of Accounting Standard Update 2015-15, Presentation of Debt Issuance Costs, which was adopted by the Company as of December 31, 2015. |
| |
(c) | The information for the years ended December 31, 2014 and 2013, has been revised to reflect the retrospective application of Accounting Standard Update 2015-17, Income Taxes, which was adopted by the Company as of December 31, 2015. |
| |
(d) | The information for the years ended December 31, 2016, 2015, 2014 and 2013, has been revised to reflect the retrospective application of Accounting Standard Update 2016-09, Improvements to Employee Share-Based Payment Accounting, which was adopted by the Company as of January 1, 2017. |
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(e) | The information for the year ended December 31, 2013, has been revised to reflect the retrospective application of Accounting Standard Update 2016-15, Classification of Certain Cash Receipts and Cash Payments, which was adopted by the Company as of December 31, 2017. |
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(f) | The information for the years ended December 31, 2016, 2015, 2014 and 2013, has been revised to reflect the retrospective application of Accounting Standard Update 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash, which was adopted by the Company as of December 31, 2017. |
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ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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.
2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) | |
Financial Results
The following table provides highlights of ourFor the years ended December 31, 2022, 2021 and 2020, diluted earnings per share (GAAP) were $4.51, $6.95 and our adjusted$3.91, respectively. The 2021 financial results included a pre-tax gain of $748 million relating to the sale of HOS and a $45 million pre-tax contribution to the American Water Charitable Foundation, a consolidated net impact of $2.70 diluted earnings per share. After excluding the gain related to the sale of HOS and charitable contribution in 2021, diluted earnings per share (a non-GAAP measure):
|
| | | | | | | | | | | |
| 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 |
|
For the year ended December 31, 2017, net income attributable to common stockholders was $2.38 per diluted share, a decrease of $0.24 per diluted share, or 9.2%, as compared to the prior year. Includedincreased $0.26 in the 2017 amount was: (i) an after-tax benefit of $13 million, or $0.07 per diluted share, resulting from an insurance settlement with one of our general liability insurance carriers related to the Freedom Industries chemical spill; (ii) an after-tax charge of $4 million, or $(0.02) per diluted share, resulting from the early extinguishment of debt at the parent company; and (iii) a non-cash, after-tax re-measurement charge of $125 million, or $0.70 per diluted share, 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 on December 22, 2017. Included in the 2016 amounts was an after-tax charge of $39 million, or $(0.22) per diluted share, resulting from the binding global agreement in principle to settle claims associated with the Freedom Industries chemical spill. For additional information, see Item 3—Legal Proceedings—West Virginia Elk River Freedom Industries Chemical Spill.
Excluding these items, adjusted diluted earnings per share (a non-GAAP measure) was $3.03 for the year ended December 31, 2017, an increase of $0.19 per diluted share, or 6.7%,2022 as compared to the prior year.2021. This increase was primarily due todriven by continued growth in our the Regulated Businesses, largely driven by from infrastructure investment acquisitions and organic growth, combined with growth in our Market-Based Businesses from our Homeowner Services Group and Keystone. These increases were partially offset by lower water services demand in 2017 in our Regulated Businesses, attributable in part to overall warmer weather in 2016,acquisitions, as well as lower capital upgrades in our Military Services Group. For further discussionorganic growth, offset somewhat by impacts from inflationary pressures on production costs and higher interest costs along with higher depreciation expenses from the growth of our consolidated resultsthe business. Results for 2022 also reflect the favorable impact of operations, as well as financial results for our Regulated Businesses segment and our Market-Based Businesses, see “Consolidated Results of Operations” and “Segment Results of Operations” for additional information.
Adjusted diluted earningsweather, estimated at $0.06 per share, represents a non-GAAP financial measureprimarily due to hot and means diluted earnings per share, calculated in accordance with GAAP, excluding the impact of: (i) the third quarter of 2017 insurance settlement related to the Freedom Industries chemical spill; (ii) the early extinguishment of debt at the parent companydry weather in the third quarter of 2017; (iii) the non-cash, after-tax re-measurement charge2022 as compared to a $0.02 per share favorable impact in 2021. Also, included in the fourth quarterresults for 2022 are $0.24 per share from interest income earned on the seller note and income earned on revenue share agreements, which compares to HOS operating results for 2021 of 2017 resulting from$0.31 per share. Lastly, the impact ofoperating results for the changeCompany’s New York subsidiary, which was sold on January 1, 2022, were $0.12 per share in 2021. See Note 5—Acquisitions and Divestitures in the federal tax rate on the Company’s deferred income taxes from enactment of the TCJA; and (iv) the fourth quarter of 2016 binding global agreementNotes to Consolidated Financial Statements for additional information.
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
Strategic Focus and 2017 Achievements
We believe our success in the future will be driven by engaged employees, smart investments and safe, efficient operations, leading to satisfied customers which in turn will lead to constructive regulatory outcomes and sustainable financial performance. Our strategy, which is driven by our vision and core values, will continue to be anchored on our five central themes:
Customer—Our customers are at the center of everything we do. We want to be the best, and if our customers have a choice as to who serves them, we want it to be us.
In 2017, we:
achieved both a customer satisfaction rating and a service quality rating in the top quartile among our water industry peers;
expanded our customer experience initiative, designed to make it easier for customers to do business with us, and enhanced our quality of service through implementation and upgrades of technology tools; and
continued to make needed infrastructure investment while implementing operational efficiency improvements to keep customer rates affordable.
Looking forward, we will:
target the achievement of customer satisfaction and service quality targets in the top quartile of service industries, beyond the water and wastewater industry. We have a three year plan to enhance technology and innovation in our customer experience through: (i) leveraging secure artificial intelligence to better serve our customers; (ii) using on-line customer communities for immediate input and reactions before rolling out programs; and (iii) mapping our most frequent customer interactions and re-working our internal processes to how the customer wants services; and
aim for top quartile targets for drinking water quality and being an industry leader in system resiliency and environmental stewardship. We intend to continue to make needed infrastructure investments while implementing operational efficiency improvements to help keep customer rates affordable.
Safety—Safety is both a strategy and a value at American Water. We put safety first in everything that we do.
In 2017, we:
finished the year with fewer employee injuries than the prior year and exceeded our targeted results for our Occupational Safety and Health Administration recordable incident rate and our Days Away Restricted or Transferred rate; and
strengthened our safety culture as measured by employee responses to safety-related questions in the Company’s culture survey, and scored 13 points above “High Performing Companies” in the category of safety, as measured by CEB, Inc. Our safety council, consisting of management and labor employees from across theThe Company continued its mission of developing and implementing recommendations to reinforce the Company’s commitment to safety.
Looking forward, we will:
strive toward zero workplace injuries;
focus on requiring that the contractors that perform work for the Company are approved in accordance with the Contractor Safety Qualification Practice and are held to the same standards as our employees; and
continue our focus on “near miss reporting,” to promote continuous learning and corrective action regarding potential safety hazards.
People—We are building a diverse, fully-engaged, high performance workforce and culture and creating an environment where our people feel valued, included and accountable.
In 2017, we continued to demonstrate our commitment to employees by expanding training and development across the Company, with the vast majority of our employees completing at least 20 hours of training during 2017. We also added new Respect and Diversity training to strengthen our values-based culture.
Looking forward, we will continue to:
improve the diversity of our overall employee population, reflective of our customers and communities;
implement a strategic workforce plan which will address the changing requirements of our business and our jobs, and how we will fill those critical positions throughout the Company to promote continuity and help us to meet future operational needs; and
dedicate ourselves to personal development through effective training and development plans.
Growth—We expect to continuecontinues to grow ourits businesses, with the significant majority of ourits growth to be achieved in ourthe Regulated Businesses through:through (i) continued capital investment in the Company’s infrastructure to provide safe, clean, reliable and affordable water and wastewater services to our customers;its customers, and (ii) regulated acquisitions to expand ourthe Company’s services to new customers. We also expect to continue to grow our Market-Based Businesses, which leverage our core water and wastewater competencies.
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:
$1.4 billion, of which the majority was in our Regulated Businesses, as discussed below:
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:
April 3, 2017 acquisitionassets of Shorelands Water Company, Inc. (“Shorelands”) in a stock transactionEgg Harbor City for $33 million in the form of 438,211 shares of our common stock. Shorelands, which is now a part of our New Jersey subsidiary, provides water service to approximately 11,000 customers in Monmouth County, New Jersey; and the
December 18, 2017 acquisition of the McKeesport system for $159$22 million. This acquisition was the first acquisition executed under Pennsylvania’s Act 12 of 2016, which allows municipalities to sellThe 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.
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.
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:
On September 29, 2017, our Other Matters
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.
Looking forward, we expect to invest between $8.0 billion to $8.6 billion from 2018 to 2022, including a range of $1.6 billion to $1.8 billion in 2018. Our expected future investment includes:
capital investment for infrastructure improvements in our Regulated Businesses of $7.2 billion over the next five years, including a range of $1.4 billion to $1.5 billion expected in 2018;
growth from acquisitions in our Regulated Businesses to expand our water and wastewater customer base of between $600 million to $1.2 billion over the next five years, including a range of $120 million to $240 million expected in 2018; and
strategic capital investments of approximately $200 million over the next five years, including approximately $100 million expected in 2018. These investments include strategic growth opportunities in our Market-Based Businesses and the construction of our new corporate headquarters in Camden, New Jersey, which is expected to be completed during the second half of 2018 and is eligible for up to $164 million in tax credits from New Jersey’s Economic Development Authority.Operational Excellence
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:
Technology and Operational Efficiency—We continue to strive for industry-leading operational efficiency, driven by technology. Our technology investments are aimed at enhancing our customer experience and operational efficiency.
In 2017:
our Regulated Businesses achieved anCompany’s adjusted regulated O&M efficiency ratio (a non-GAAP measure) of 33.8%was 33.7% for the year ended December 31, 2017,2022, compared to 34.9% and 35.9%34.1% for the yearsyear ended December 31, 2016 and 2015, respectively.2021. The continued improvement in our adjusted O&M efficiency ratio in 2017 was attributable to bothreflects an increase in operating revenues and a decrease in O&M expenses (seefor the following table). The improvementRegulated Businesses, after considering the adjustment for the amortization of the excess accumulated deferred income taxes (“EADIT”) shown in the 2016 adjusted O&M efficiency ratio overtable below, as well as the 2015 ratio was primarily attributable to an increase in operating revenues;
we introduced new tools such as FSR Customer One View, which provides our employees with information such as neighborhood maps, customer usage data, billing and payment history, and real-time meter reads; and MapCall, which helps to manage location based assets such as hydrants, valves, meters, among others; along with implementing technology upgrades to our national customer services, focused on helping us improve customer service;
we continued our commitment to water quality and the environment by leveraging new technologies; we now have advanced water quality sensors at all of our major drinking water intake sites and we are automating our reporting and compliance systems; and
we implemented other technology tools that will enhance communication, collaboration and mobility to help our operations and support employees work more safely and efficiently, and enhance the customer experience.
Looking forward, we will focus on technology and efficiency to:operating costs.
be the leader in optimizing technology deployment across the water and wastewater industry, with a keen focus on specific, innovative projects that will set us apart from other utilities, and to help us serve our customers with greater ease, make us safer and help us operate more efficiently; and
achieve our goal of anThe Company’s adjusted O&M efficiency ratio equal to or below 32.0% by 2022.
Our adjustedregulated O&M efficiency ratio is a non-GAAP measure and is defined by the Company as our regulatedits operation and maintenance expenses from the Regulated Businesses, divided by our regulatedthe operating revenues from the Regulated Businesses, where both operation and maintenance expenses and operating revenues were adjusted to eliminate purchased water expense. Additionally,Operating revenues were further adjusted to exclude reductions for the amortization of the EADIT. Also excluded from operation and maintenance expenses we have excludedis the allocable portion of non-operation and maintenancenon-O&M support services costs, mainly depreciation and general taxes, that arewhich is reflected in ourthe Regulated Businesses segment as operation and maintenance expenses, but for consolidated financial reporting purposes, areis categorized within other line items in the accompanying Consolidated Statements of Operations. For the years ended December 31, 2017 and 2016, we have alsoThe items discussed above were excluded from operation and maintenance expenses the impact of certain Freedom Industries chemical spill settlement activities. We excluded all of the above items from theO&M efficiency ratio calculation as we believe such itemsthey are not reflective of management’s ability to increase the efficiency of our regulated operations. Going forward, we expect changes to our adjusted O&M efficiency ratio related to the impact of the enactment of the TCJA and the adoption of new accounting standards in the future.Regulated Businesses.
We evaluate ourThe Company evaluates its operating performance using this ratio, and believes it is useful to investors because we believe it directly measures improvement in the operating performance and efficiency of our regulated operations.the Regulated Businesses. This information is intendedderived from the Company’s consolidated financial information but is not presented in its financial statements prepared in accordance with GAAP. This information supplements and should be read in conjunction with the Company’s GAAP disclosures, and should be considered as an addition to, enhance an investor’s overall understanding of our operating performance. Ourand not a substitute for, any GAAP measure. The Company’s adjusted regulated O&M efficiency ratio (i) is not an accounting measure that is based on GAAP; (ii) is not based on a GAAP financial measure andstandard, objective industry definition or method of calculation; (iii) may not be comparable to other companies’ operating measures,measures; and (iv) should not be used in place of the GAAP information provided elsewhere in this Annual Report on Form 10-K.
With respect to our adjusted O&M efficiency ratio goal for 2022, we are unable to provide without unreasonable efforts a quantitative reconciliation
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.
The following table provides the calculation of ourCompany’s adjusted regulated O&M efficiency ratio and a reconciliation that compares operation and maintenance expenses and operating revenues, each as determined in accordance with GAAP, to those amounts utilized in the calculation of ourits adjusted O&M efficiency ratio:
| | | | | | | | | | | | | | | | | |
| 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.
|
| | | | | | | | | | | |
| 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 | % |
| |
(a) | Includes the impact of the binding global agreement in principle to settle claims in 2016 and a settlement with one of our general liability insurance carriers in 2017. |
| |
(b) | The calculation assumes regulated purchased water revenues approximate regulated purchased water expenses. |
Regulatory Matters
The followingGeneral Rate Cases
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 |
|
| | | | | | | | | | | |
(a)(In millions) | The effective date of theEffective Date | | Amount |
General rate order was May 24, 2017, authorizing the implementation of interim rates as of April 1, 2016.cases by state: |
| | |
(b)New Jersey | September 1, 2022 | | $ | 46 | |
Hawaii | July 1, 2022 | | 2 | |
West Virginia | February 25, 2022 | | 13 | |
California, Step rates for 2017 effective January 13, 2017 through February 2, 2017. Step rates for 2016 and 2015 effective Increase | January 1, 2016 and 2022 | | 9 | |
Pennsylvania, Step Increase | January 1, 2015, respectively.2022 | | 20 | |
Total general rate case authorizations | | | $ | 90 | |
On December 7, 2017,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 settlement in our Pennsylvania subsidiary’sconstant 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 | |
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.
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.
During the third quarter of 2016, our CaliforniaCompany’s Virginia subsidiary filed a general rate case requesting $35$14 million in additional annualized revenuesrevenues. Interim rates were effective on May 1, 2022, and an increase of $8the 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 escalation year of 2019 and the attrition year of 2020. During the fourthfirst quarter of 2016, our2023.
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.
The following Presented in the table provides infrastructure surcharge authorizations effective from 2015 through 2017, and depictsbelow are annualized incremental revenues, assuming a constant water sales volume:volume and customer count, resulting from infrastructure surcharge authorizations that became effective during 2022:
|
| | | | | | | | | | | |
(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 |
|
| | | | | | | | | | | |
(a)(In millions) | For 2017, $10 million effective June 1 and $4 million effective December 10. For 2016, $9 million effective June 1 and $10 million effective December 1. For 2015, $9 million effective January 1.Effective Date | | Amount |
Infrastructure surcharges by state: | | | |
(b)New Jersey | For 2017, $1 million effective (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, (the2022 | | 6 | |
Total infrastructure surcharge cap was reached after the first quarter of 2017). For 2016, $11 million, $2 million, $6 million and $9 million effective January 1, April 1, July 1 and October 1, respectively. For 2015, $2 million, $4 million and $8 million effective April 1, July 1 and October 1, respectively.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:
| | | | | | | | | | | |
(c)(In millions) | For 2016, $1 million effective Effective Date | | Amount |
Infrastructure surcharge filings by state: | | | |
Missouri | January 16, 2023 | | $ | 15 | |
West Virginia | January 1, and $6 million effective August 1. For 2015, $5 million effective 2023 | | 7 | |
Pennsylvania | January 1, and $1 million effective February 1.2023 | | 3 | |
Total infrastructure surcharge filings | | | $ | 25 | |
On December 28, 2017, our West Virginia subsidiary received a decision on its infrastructure surcharge filing authorizing additional annualized revenues of $3 million, effective on January 1, 2018. Additionally, on December 20, 2017, our Illinois subsidiary filed for an infrastructure surcharge requesting $3 million in additional annualized revenues, which will become effective on January 1, 2018.
There is no assurance that all or any portion of these requests will be granted.
Pending Infrastructure Surcharge Filings
The following table details of our pendingOn January 20, 2023, the Company’s Indiana subsidiary filed an infrastructure surcharge filings:proceeding requesting $21 million in additional annualized revenue
|
| | | | | |
(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 |
|
There is no assurance that all or any portion of these requests will be granted.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 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.
Tax Matters
Tax Cutsappeal on March 4, 2022. Response and Jobs Act
On DecemberReply briefs were filed on June 22, 2017, the TCJA was signed into law, which, among other things, enacted significant2022, and complex changesAugust 4, 2022, respectively. There is no financial impact to the Internal Revenue Code of 1986, including a reduction in the maximum U.S. federal corporate income tax rate from 35% to 21%Company as of January 1, 2018, and certain other provisions related specifically to the public utility industry, including continuation of interest expense deductibility, the exclusion from utilizing bonus depreciation and the normalization of deferred income tax. The enactment of the TCJA required a re-measurement of our deferred income taxes that materially impacted our 2017 results of operations and financial position. The portion of this re-measurement related to our Regulated Businesses was substantially offset by a regulatory liability, as we believe it is probable that the deferred income tax excesses created by the TCJA will be refunded to customers in future rates. The remaining portion of this re-measurement of the net deferred income tax liability was recorded as a non-cash charge to earnings of $125 million during the fourth quarter of 2017.
Other Tax Matters
On April 11, 2017, the state of New York enacted legislation that increased the state income tax rate on our taxable income attributable to New York. This legislation eliminated the production of water as a qualified manufacturing activity in New York, which effectively increased the state income tax rate in New York. As a result of the legislative change, we were required to re-measure our cumulative deferred income tax balances usingNJBPU’s order, since the higher state income tax rate inacquisition adjustments are currently recorded as goodwill on the second quarterConsolidated Balance Sheets.
On July 7, 2017, the State of Illinois enacted legislation that increased, effective July 1, 2017, the state income tax rate on our taxable income attributable to Illinois from 7.75% to 9.5%. As a result of the legislative change, we were required to re-measure our cumulative deferred income tax balances using the higher state income tax rate in the third quarter of 2017. This change in legislation was the primary cause of an increase to our unitary deferred income tax liability of $7 million. The portion of this increase related to our Illinois subsidiary calculated on a stand-alone basis was $4 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 recorded at the consolidated level, resulting in a non-cash, cumulative charge to earnings of $3 million during the third quarter of 2017.
Consolidated Results of Operations
The followingPresented in the table presents ourbelow are the Company’s consolidated results of operations and the ensuing discussions provide explanations for the variances related to the major components: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 | ) |
Operating Revenues
In 2017, operating revenues increased $55 million, or 1.7%, primarily due to a:
$87 million increase in our Regulated Businesses principally due to authorized rate increases to fund infrastructure investment growth, as well as acquisitions and organic growth, offset in part by lower water services demand in 2017, including a $15 million reduction due to warmer weather in 2016; partially offset by a
$29 million decrease in our Market-Based Businesses mainly due to lower capital upgrades in our Military Services Group, driven largely by reduced military base budgets, offset in part by incremental revenues in our Homeowner Services Group from contract growth and price increases, and in Keystone from an increase in operations as a result of market recovery in the natural gas industry.
In 2016, operating revenues increased $143 million, or 4.5%, primarily due to a:
$128 million increase in our Regulated Businesses principally due to authorized rate increases to fund infrastructure investment growth, as well as acquisitions and organic growth; and a
$17 million increase in our Market-Based Businesses mainly due to our acquisition of Keystone in the third quarter of 2015 and incremental revenues from our Homeowner Services and Contract Operations Groups from contract growth, partially offset by lower capital upgrades in our Military Services Group.
Operation and Maintenance
In 2017, operation and maintenance expense decreased $126 million, or 8.4%, primarily due to a:
$85 million decrease in our Regulated Businesses principally due to a $65 million net charge recorded in 2016, resulting from the binding global agreement in principle to settle claims associated with the Freedom Industries chemical spill in West Virginia, and a $22 million benefit recorded in 2017, resulting from a related insurance settlement with one of our general liability insurance carriers; and a
$35 million decrease in our Market-Based Businesses mainly due to lower capital upgrades in our Military Services Group, as discussed above, partially offset by higher employee-related costs from growth in Keystone and increased customer uncollectible expense in Homeowner Services from contract growth during 2017.
In 2016, operation and maintenance expense increased $100 million, or 7.1%, primarily due to a:
$81 million increase in our Regulated Businesses principally due to a $65 million charge recorded in 2016, resulting from the binding global agreement in principle to settle claims associated with the Freedom Industries chemical spill in West Virginia, as well as higher employee-related costs and litigation expenses, partially offset by lower casualty insurance and customer uncollectible expense; and an
$14 million increase in our Market-Based Businesses which included $11 million from our acquisition of Keystone in the third quarter of 2015, as well as incremental costs associated with growth in our Homeowner Services and Contract Operations Group, partially offset by lower capital upgrades in our Military Services Group, as discussed above.
Depreciation and Amortization
In 2017 and 2016, depreciation and amortization expense increased $22 million and $30 million, or 4.7% and 6.8%, respectively. The increase for both periods was primarily due to additional utility plant placed in service. Included in 2017 was the impact of revised depreciation rates from a depreciation study approved by the ICC in our Illinois subsidiary, resulting in lower depreciation expense of $16 million. Included in 2016 was incremental depreciation and amortization expense resulting from our acquisition of Keystone in the third quarter of 2015.
General Taxes
In 2017 and 2016, general taxes increased $1 million and $15 million, or 0.4% and 6.2%, respectively. The increase in 2016 was primarily due to incremental property and gross receipts taxes in our Regulated Businesses.
Gain on Asset Dispositions and Purchases
In 2017 and 2016, gain on asset dispositions and purchases increased $6 million and $7 million, or 60.0% and 233.3%, respectively. The increase in 2017 was primarily due to a $7 million gain recognized on a land sale in our Kentucky subsidiary. The increase in 2016 was largely attributable to a gains recognized on a land sale in our Pennsylvania subsidiary and an acquisition in our Missouri subsidiary.
Other Income (Expense)
In 2017 and 2016, other expenses increased $22 million and $17 million, or 7.1% and 5.8%, respectively. The increase in 2017 was primarily due to an increase in interest expense from the issuance of incremental long-term debt in 2017 and the fourth quarter of 2016, as well as a $6 million charge resulting from the early extinguishment of debt at the parent company. The increase in 2016 was largely attributable to an increase in interest expense from the issuance of incremental long-term debt, as well as an increase in short-term interest expense, mainly due to higher levels of short-term borrowings during 2016, coupled with an increase in the average short-term borrowing rates in 2016, as compared to the prior year.
Provision for Income Taxes
In 2017, our provision for income taxes increased by $184 million, or 60.9%, from the previous year. The increase is primarily due to higher pretax income and a non-cash, after-tax re-measurement charge of $125 million, 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, which included a reduction in the maximum U.S. federal corporate income tax rate from 35% to 21%. The $125 million charge includes $6 million allocated to our Regulated Businesses segment, $5 million to our Market-Based Businesses and $114 million to our Other segment. In 2016, our provision for income taxes decreased $4 million, or 1.3%, from the previous year. This decrease was primarily due to the decrease in pre-tax income. The effective tax rates were 53.3%, 39.2% and 39.1% for the years ended December 31, 2017, 2016 and 2015, respectively.
As of December 31, 2017, we’ve recognized federal NOL carryforwards of $1.05 billion. The TCJA eliminated the bonus depreciation deduction for property acquired or constructed after September 27, 2017, and we currently expect to utilize the benefits of our federal NOL carryforwards over the next two years. See Note 13—Income Taxes in the Notes to Consolidated Financial Statements for additional information.
Segment Results of Operations
OurThe Company’s operating segments are determined based on how wecomprised of its businesses which generate revenue, incur expense and have separate financial information which is regularly used by management to make operating decisions, assess performance and allocate resources. We evaluateThe Company operates its business primarily through one reportable segment, the performance of our segments and allocate resources based on several factors, with the primary measure being net income attributable to common stockholders. The majority of our business is conducted through our Regulated Businesses reportable segment. We also operate several market-based businesses that provide a broad range of related and complementary water and wastewater services within four operating segments that individually doOther primarily includes MSG, which does not meet the criteria of a reportable segment in accordance with GAAP. These four, non-reportable operating segmentsOther also includes corporate costs that are collectively presented as our Market-Basednot allocated to the Regulated Businesses which segment, interest income related to the seller promissory note and income from the revenue share agreement from the sale of HOS, eliminations of inter-segment transactions and fair value adjustments related to acquisitions that have not been allocated to the Regulated Businesses segment.This presentation is consistent with how management assesses the results of these businesses. 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.
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.
Regulated Businesses Segment
The followingPresented in the table summarizes certainbelow is financial information for ourthe Regulated Businesses:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 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
The followingPresented in the tables below is information regarding the main components of the Regulated Businesses’ 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.
| | | | | | | | | | | | | | | | | |
| 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 | ) |
| |
Note: | The correlation between water revenues and billed water volumes shown in the preceding tables is impacted by the California drought. In 2015, and to a lesser extent in 2016, California experienced a severe drought. In April 2015, the Governor mandated water usage restrictions to reduce overall water usage by 25% in the state compared to 2013 levels. In April 2017, the mandated water usage restrictions were removed. In California, revenue is decoupled from sales volume through the WRAM/MCBA, aligning our water conservation goals with those of the state and our customers, and therefore usage reductions do not impact earnings. |
In 2017,Company’s New York operations. Excluding the Company’s New York operations, for 2022, operating revenues increased $87$248 million, or 3.0%, primarily due to a:
$81to: (i) a $180 million increase from authorized rate increases, including infrastructure surcharges, principally to fund infrastructure investment growth in various states;
$43 (ii) a $36 million increase attributable tofrom water and wastewater acquisitions, as well as organic growth in existing systems; (iii) a $17 million net increase as a result of reduced amortization of EADIT, primarily in the Company’s New Jersey subsidiary; and (iv) a
$9 $13 million estimated net increase resulting from higher wastewater treatment volumesprimarily due to warmer and an increasedrier than normal weather in private firethe third quarter of 2022 in the Company’s New Jersey and Missouri service connections;territories, which was partially offset by a
$48 million decrease due to lower water services demand, including a $15 million reduction due to warmer and drier than normal weather in 2016.
In 2016, operating revenues increased $128 million, or 4.7%, primarily due to a:
$92 million increase from authorized rate increases, including infrastructure surcharges, principally to fund investment growththe second quarter of 2021 in various states;
$19 million increase attributable to water and wastewater acquisitions, as well as organic growth in existing systems;
$4 million increase resulting from higher wastewater treatment volumes and an increase in private fire service connections; and
$13 million increase mainly due to revenues from balancing accounts, primarily in our California subsidiary, as well as surcharges and other adjustments.the Northeast.
Operation and Maintenance
The following tablesPresented in the table below is information regarding the main components of the Regulated Businesses’ operating and the ensuing discussions provide explanationsmaintenance expense:
| | | | | | | | | | | | | | | | | |
| 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 |
|
Production Costs
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
|
In 2017, production costs increased $10 million, or 3.5%, primarily due to a:
$6 million increase in purchased water principally due to usage increases in our California subsidiary,Company’s New York operations. After excluding the result of the lifting in April 2017 of California water usage restrictions that had been mandated in 2015 due to the state’s extreme drought;
$2 million increase in fuel and power largely attributable to higher system delivery of water and supplier price increases in our Missouri and California subsidiaries; and
$2 million increase in waste disposal mainly due to higher sludge removal costs in our Illinois and Missouri subsidiaries.
In 2016, production costs increased $6 million, or 2.1%, primarily due to a:
$5 million increase in purchased water principally due to price increases in our California subsidiary; and a
$4 million increase in waste disposal largely attributable to higher sludge removal costs in several of our subsidiaries; partially offset by a
$2 million decrease in fuel and power mainly due to a price decrease in ourCompany’s New Jersey subsidiary.
Employee-Related Costs
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
|
In 2017,York operations, for 2022, employee-related costs increased $3 million, or 0.7%, primarily dueremained consistent compared to a:
$4 million increase in pensions principally due to a lower discount rate in 2017, resulting in increased plan obligations; and a
$5 million increase in other benefits largely attributable to higher employer 401(k) savings plan contributions and2021. In 2022, the Regulated Businesses experienced an increase in training costs; partially offset by a
$4 million decrease in group insurance mainly due to lower medical claims experienced in 2017 and a decrease in other postretirement benefit plan costs resulting from plan amendments approved in 2016, offset in part by higher enrollment in 2017 and increases in group insurance rates.
In 2016, employee-related costs increased $13 million, or 3.0%, primarily due to a:
$15 million increase in salaries and wages principally due to merit increases and higher annual performance plan expense and an increase in compensation expense inheadcount to support of the growth, of the business,which was offset in part by an increase inhigher capitalized labor attributableand overhead rates, as well as lower pension service costs.
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
$2the Company’s New York operations. Excluding the Company’s New York operations, for 2022, production costs increased $42 million, decrease in group insurance largely attributable to a $10 million decrease in other postretirement benefit plan costs resulting from plan amendments approved in 2016, offset in part by $9 million of higher medical claims experienced in 2016.
Operating Supplies and Services
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
|
In 2017, operating supplies and services decreased $3 million, or 1.4%, primarily due to a:
$9 million decreaseinflationary pressures which resulted in other principally due to charges recorded in 2016, including a $5 million write-off of timekeeping system costs that were previously capitalizedincreased fuel, power and a $7 million judgment in litigation; partially offset by a
$4 million increase in office supplies and services largely attributable to higher employee relocation, telecommunication and office supplies expense.
In 2016, operating supplies and services increased $18 million, or 9.3%, primarily due to a:
$17 million increase in other principally due to a $5 million write-off of timekeeping system costs that were previously capitalized and a $7 million judgment in litigation, both recorded in 2016, and a $3 million adjustment recorded in 2015 to recognize previously expensed business transformation costs as a regulatory asset in our California subsidiary, resulting from a rate case decision.
Maintenance Materials and Supplies
In 2017, maintenance materials and supplies decreased $3 million, or 4.1%, primarily due to lower tank painting expense in our New Jersey subsidiary and the timing of maintenance activities.
In 2016, maintenance materials and supplies increased $3 million, or 4.3%, primarily due to a:
$10 million increase in tank painting expense in several of our subsidiaries; partially offset by a
$5 million decrease in main breaks driven by milder winter weather in 2016.chemical costs.
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.
$65 million net charge recorded in 2016, resulting from the binding global agreement in principle to settle claims associated with the Freedom Industries chemical spill in West Virginia,Depreciation and a $22 million benefit recorded in 2017, resulting from a related insurance settlement with one of our general liability insurance carriers; and
$5 million decrease in casualty insurance expense attributable to a lower claims experience.Amortization
In 2016, other operation and maintenance expenses increased $50 million, or 89.3%, primarily due2022, as compared to a:
$65 million charge recorded in 2016, resulting from the binding global agreement in principle to settle claims associated with the Freedom Industries chemical spill in West Virginia; partially offset by a
$15 million decrease in casualty insurance expense attributable to a lower claims experience.
Operating Expenses, net.
In 2017, operating expenses, net decreased $71 million, or 3.8%, primarily due to a:
$85 million decrease in operation and maintenance expense as explained above; and a
$7 million gain recognized on a land sale in our Kentucky subsidiary; partially offset by a
$22 million increase in2021, depreciation and amortization expense attributable to additional utility plant placed in service; included in the 2017 expense amount was the impact of revised rates from a depreciation study approved by the ICC in our Illinois subsidiary, resulting in lower depreciation expense of $16 million.
In 2016, operating expenses, net increased $120$32 million or 6.9%, primarily due to a:
$81 million increase in operation and maintenance expense as explained above;
$30 million increase in depreciation and amortization expense attributable to additional utility plant placed in service from capital infrastructure investments and incremental depreciationacquisitions.
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
$14 million increase in general taxes principallyEADIT due to incremental property and gross receipts taxes.the completion of stub period amortization, pursuant to regulatory orders. The amortization of EADIT is generally offset with reductions in revenue.
Market-Based Businesses
The followingOther
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:
$56the sale of HOS, which had operating revenues of $293 million decrease in our Military Services Group principally due to lower capital upgrades in 2017,2021. Excluding the Company’s HOS operations, for 2022, operating revenues increased $34 million, largely driven by reduced military base budgetsan increase in capital and O&M projects in MSG, primarily at Joint Base Lewis-McChord and the completionUnited States Military Academy at West Point, New York.
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
$6services for 2021, was $39 million decrease in our Contract Operations Group largely attributablerelated to the completion of several contractsCompany’s HOS operations and a $45 million pre-tax contribution to the AWCF. Excluding the Company’s HOS operations and AWCF contribution, for 2022, operating supplies and services increased $13 million, primarily driven by costs associated with increased capital and O&M projects in 2017; partially offset by aMSG, as discussed above.
$18Maintenance Materials and Supplies
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
$16services increased $8 million, increase in Keystone primarily due to an increase in operations as a resultCSG costs related to contract with the City of market recovery in the natural gas industry.Camden, New Jersey.
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.
$15Depreciation and Amortization
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.
Gain on Sale of Businesses
During the fourth quarter of 2015;
$112021, the Company recognized a pre-tax gain of $748 million increase in our Homeowner Services Group mainly duerelating to contract growth, as well as expansion into new geographic areas and price increases for existing customers; and a
$11the sale of HOS. In 2022, the Company recorded post-closing adjustments, primarily related to working capital, of pre-tax income of $20 million, increase in our Contract Operations Group largely attributable to contract growth, specifically from our contract in Camden, New Jersey; partially offset by a
$21 million decrease in our Military Services Group principally due to lower capital upgrades in 2016, offset in part by incremental revenues fromwhich increased the addition of the Vandenberg Air Force Base contract in 2016.
Operation and Maintenance
The following table and ensuing discussions provide explanations for the variancestotal gain related to the major componentssale of operationHOS. See Note 5—Acquisitions and maintenance expense:Divestitures in the Notes to Consolidated Financial Statements for additional information.
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
|
Provision for Income TaxesIn 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.
$44
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
$3 million increaseDistribution System Improvement Charge filings. The legislation also permits the IURC to allow recovery through tracking mechanisms for changes in employee-relatedproperty tax and for costs largely attributable to higher headcountreferenda or action by elected or appointed individuals. Legislation was signed by the Governor on March 10, 2022, and became effective on July 1, 2022.
•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.
$5 million increase in other mainly due•California passed Senate Bill 1469, which allows the CPUC to an increase in customer uncollectible expense in our Homeowner Services Group asconsider and authorize the implementation of a result of contract growth in 2017.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 2016, operation and maintenance expense increased $14 million, or 3.9%, primarily due to a:
$11 million increase from Keystone, which was acquired in the third quarter of 2015, including $8 million in employee-related costs and $1 million each in production costs, operating supplies and services, and an;
$11 million increase in maintenance materials and supplies largely attributable to contract growth in our Homeowner Services and Contract Operations Groups, and higher claims, marketing expenses and costs associated with our investment in a new customer information system in our Homeowner Services Group; and a
$10 million increase in employee-related costs principally due to the addition of the Vandenberg Air Force Base contract in 2016, and increased headcount resulting from contract growth in our Homeowner Services and Contract Operations Groups; partially offset by a
$18 million decrease in operating supplies and services mainly due to lower capital upgrades in our Military Services Group, as discussed above.
Liquidity and Capital Resources
We regularly evaluate and monitor our cash requirements for capital investments, acquisitions, operations, commitments, debt maturities, interest and dividends. Our business is capital intensive, with a majority of this capital funded by cash flows from operations. When necessary, we also obtain funds from external sources, primarily in the debt markets and through short-term commercial paper borrowings. We also have access to equity capital markets, if needed. Our access to external financing on reasonable terms depends on our credit ratings and current business conditions, including that of the utility and water utility industries in general, as well as conditions in the debt or equity capital markets, and the national and international economic and geopolitical arenas. If these business, market, financial and other conditions deteriorate to the extent that we no longer are able to access the capital markets on reasonable terms, we have access to an unsecured revolving credit facility with aggregate bank commitments of $1.75 billion, with an expiration date of June 2020 (subject to extension by us for up to two one-year periods). We rely on this revolving credit facility and the capital markets to fulfill our short-term liquidity needs, to issue letters of credit and to support our $1.6 billion commercial paper program. Disruptions in the credit markets may discourage lenders from extending the terms of such commitments or agreeing to new commitments. Market disruptions may also limit our ability to issue debt and equity securities in the capital markets. See “Credit Facilities and Short-Term Debt” for further discussion.
In order to meet our short-term liquidity needs, we, through AWCC, our wholly owned financing subsidiary, issue commercial paper, which is supported by the revolving credit facility. As of December 31, 2017, AWCC had no outstanding borrowings and $84 million of outstanding letters of credit underThe Company uses its revolving credit facility, with $1.75 billion available to fulfill our short-term liquidity needs and to issue letters of credit, which supported $905 million in outstanding commercial paper. We believe that our ability to access the capital markets, our revolving credit facility and our cash flows from operations will generate sufficient cash to fund our short-term requirements. We have no plans to issue equity under normal operating conditions in the foreseeable future with the limited exception of privately or investor-owned acquisitions whose sellers require equity as necessary to complete the acquisition. We believe we have sufficient liquidity and the ability to manage our expenditures, should there be a disruption of the capital and credit markets. However, we can provide no assurances that the lenders will meet their existing commitments to AWCC under the revolving credit facility or that we will be able to access the commercial paper or loan markets in the future on terms acceptable to us or at all.
In addition, our regulated subsidiaries receive advances and contributions from customers, home builders and real estate developers to fund construction necessary to extend service to new areas. Advances for construction are refundable for limited periods, which vary according to state regulations, as new customers begin to receive service or other contractual obligations are fulfilled. Amounts which are no longer refundable are reclassified to contributions in aid of construction. Utility plant funded by advances and contributions is excluded from our Regulated Businesses rate base. Generally, we depreciate contributed property and amortize contributions in aid of construction at the composite rate of the related property. Some of our subsidiaries do not depreciate contributed property, based upon regulatory guidelines. The taxability of advances and contributions in aid of construction was changed with the enactment of the TCJA. Previously, the majority of advances and contributions that we collected were not taxable however, with the enactment of the TCJA, they will be taxable going forward. Regulatory treatment for advances and contributions under the TCJA has not yet been defined and we are working with our regulatory jurisdictions to determine impacts to the Company and our customers.
We use our capital resources, including cash, primarily to:to (i) fund operating and capital requirements;requirements, (ii) pay interest and meet debt maturities;maturities, (iii) pay dividends;dividends, (iv) fund acquisitions; andacquisitions, (v) fund pension and postretirement benefit obligations. We investobligations, and (vi) to pay federal income taxes. The Company invests a significant amount of cash on regulated capital projects where we expectit expects to earn a long-term return on investment. Additionally, we operatethe Company operates in rate regulated environments in which the amount of new investment recovery may be limited, and where such recovery generally takes place over an extended period of time, and certain capital recovery is also subject to regulatory lag. See Item 1—Business—Regulated Businesses—Economic Regulation and Rate Making. We expect for additional information. The Company expects to fund future maturities of long-term debt through a combination of external debt and, to the extent available, cash flows from operations. Since we expect ourthe Company expects its capital investments over the next few years to be greater than ourits cash flows from operating activities, we have nothe Company currently plans to reducefund the excess of its capital investments over its cash flows from operating activities for the next five years through a combination of long-term debt significantly.and equity in addition to the remaining proceeds from the sale of HOS. The remaining proceeds from the sale of HOS include receipt of a seller promissory note, plus interest, and a contingent cash payment payable upon satisfaction of certain conditions on or before December 31, 2023. If necessary, wethe Company may delay certain capital investments or other funding requirements or pursue financing from other sources to preserve liquidity. In this event, we believe wethe Company believes it can rely upon cash flows from operations to meet ourits obligations and fund ourits minimum required capital investments for an extended period of time.
WithThe Company regularly evaluates and monitors its cash requirements for capital investments, acquisitions, operations, commitments, debt maturities, interest and dividends. The Company’s business is capital intensive, with a majority of this capital funded by cash flows from operations. The Company also obtains funds from external sources, primarily in the enactmentdebt markets and through short-term commercial paper borrowings, and may also access the equity capital markets as needed or desired to support capital funding requirements. In order to meet short-term liquidity needs, American Water Capital Corp. (“AWCC”), the wholly owned finance subsidiary of parent company, issues commercial paper that is supported by its revolving credit facility. The Company’s access to external financing on reasonable terms may depend on, as appropriate, any or all of the TCJAfollowing: current business conditions, including that of the utility and water utility industry in general; conditions in the debt or equity capital markets; the Company’s credit ratings; and conditions in the national and international economic and geopolitical arenas. Disruptions in the credit markets may discourage lenders from extending the terms of such commitments or agreeing to new commitments. Market disruptions may also limit the Company’s ability to issue debt and equity securities in the capital markets.
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.
We expect that the enactment of the TCJA to be accretive to our consolidated earnings over time through: (i) growth in rate base for the same level of expected capital expenditures due to the impact of the lower U.S. federal corporate income tax rate and the re-measurement of our deferred income tax assets and liabilities; (ii) increased earnings in our Market-Based Businesses due to the lower U.S. federal corporate income tax rate; all partially offset by (iii) the impact of increased debt due to lower cash flows from operations. We believe that we will likely begin paying federal income taxes towards the end of 2019, when we expect our federal NOL carryforwards balance will be fully benefited or used, and expect to be a full cash taxpayer by 2020, although this timing could be impacted by any significant changes in our future results of operations and the outcome of regulatory proceedings regarding the TCJA.
Cash flows provided by operating activities have been a reliable, steady source of funding, sufficient to meet operating requirements, make our dividend payments and fund a portion of our capital expenditure requirements. We expect to seek access to debt capital markets to meet the balance of our capital expenditure requirements as needed. We also have access to equity capital markets, if needed. Operating cash flows can be negatively affected by changes in ourthe Company’s rate regulated environments, or changes in ourthe economy, interest rates, the timing of tax payments, and the Company’s customers’ economic outlook and ability to pay for service in a timely manner. As such, our working capital needs are primarily limited to funding increases in customer accounts receivable and unbilled revenues, mainly associated with revenue increases in our Regulated Businesses. Wemanner, among other items. The Company can provide no assurance that ourits customers’ historical payment pattern will continue in the future. Sometimes ourThe Company’s current liabilities may exceed current assets because of ourmainly from debt maturities due within one year and the periodic use of short-term debt as a funding source, primarily to meet scheduled maturities of long-term debt, fund acquisitions and construction projects, as well as cash needs, which can fluctuate significantly due to the seasonality of the business stage of our acquisitions and construction projects. We addressother factors. The Company addresses cash timing differences primarily through the aforementionedits short-term liquidity funding mechanisms.
The followingPresented in the table providesbelow is a summary of the major items affecting ourthe Company’s cash flows provided byfrom operating activities:
| | | | | | | | | | | | | | | | | |
| 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.
|
| | | | | | | | | | | |
| 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 |
|
| |
(a) | Includes provision for losses on accounts receivable, gain on asset dispositions and purchases, pension and non-pension postretirement benefits and other non-cash, net. Details of each component can be found in the Consolidated Statements of Cash Flows. |
| |
(b) | Changes in working capital include changes to receivables and unbilled revenues, accounts payable and accrued liabilities, and other current assets and liabilities, net. |
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.
In 2016, cash flows provided byits New York regulated operations, increased $94 million, primarily due to an increase in net income after non-cash adjustments, including the impact of the binding global agreement in principle to settle claims associated with the Freedom Industries chemical spill in West Virginia, 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 O&M expenses. The increase in non-cash activities was mainly attributable to an increase in depreciation and amortization due to additional utility plant placed in service. The change in working capital was principally due to: (i) a change in accounts receivable and unbilled revenues resulting from continuous improvement in our Regulated Businesses’ collection efforts, as well as the contribution of $45 million to the American Water Charitable Foundation. Partially offsetting these changes was a decrease in unbilled revenues in our Military Services Group attributable to lower capital upgrades in 2016 as compareddue to the same periodgain recognized from the sale of HOS in 2015; (ii) the timing of accounts payable and accrued liabilities; and (iii) a change in other current assets and liabilities.2021.
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
The followingPresented in the table providesbelow is a summary of the major items affection ouraffecting the Company’s 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) | |
| |
(a) | Includes removal costs from property, plant and equipment retirements and proceeds from sale of assets and securities. |
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.
OurThe Company’s infrastructure investment plan consists of both infrastructure renewal programs, where we replace infrastructure,the Company replaces mains, services, meters, hydrants and valves, as needed, and major capital investment projects, where we constructthe Company constructs new water and wastewater treatment and delivery facilities to meet new customer growth and water quality regulations. OurThe Company’s projected capital expenditures and other investments are subject to periodic review and revision to reflect changes in economic conditions and other factors.
The followingPresented in the table providesbelow is a summary of our historicalthe Company’s capital expenditures related to the upgrading of our infrastructure and systems:by category:
| | | 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.
WeThe Company also grow ourgrows its business primarily through acquisitions of water and wastewater systems, as well as other water-related services.systems. These acquisitions are complementarygenerally located in geographic proximity to ourthe Company’s existing businessRegulated Businesses and support continued geographical diversification and growth of ourits operations. Generally, acquisitions are funded initially with short-term debt, and later refinanced with long-term financing. During 2022, the proceeds from long-term debt.
The following provides a summary of the acquisitions and dispositions affecting our cash flows from investing activities:
2017:
The majority of cashCompany paid for acquisitions pertained to the $159 million purchase of the McKeesport system, excluding a $5 million non-escrowed deposit made in 2016.
Paid $18 million for 16 water and wastewater systems, excluding the McKeesport system and Shorelands (a stock transaction), representing approximately 7,000 customers.
Received $15$315 million for the saleacquisition of assets and securities.
2016:
Paid $199 million for 1526 water and wastewater systems, representing in the aggregate approximately 42,00070,000 customers.
Made a non-escrowed deposit of $5 million related to the McKeesport system acquisition.
Received $9 million for the sale of assets and securities.
2015:
Paid $133 million for the acquisition of our 95% interest in Water Solutions Holdings, LLC, the parent company of Keystone.
Paid $64 million for 14 water and wastewater systems, representing approximately 24,000 customers.
Received $5 million for the sale of assets and securities.
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.
Cash Flows from Financing Activities
OurPresented in the table below is a summary of the major items affecting the Company’s 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.
As a result of AWCC’s prepayment of the Series C Senior Notes and the Series D Senior Notes, and payment of a make-whole premium amount to the holders thereof of $34 million, we recorded a $6 million charge resulting from the early extinguishment of debt at the parent company. Substantially all of the early debt extinguishment costs allocable to the Regulated Businesses were recorded as regulatory assets for we believe they are probable of recovery in future rates. Approximately $1 million of the early debt extinguishment costs allocable to the Regulated Businesses were amortized in 2017.purposes.
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.
On August 7, 2017, coinciding with AWCC’s $1.35 billion debt offering, we terminated four existing forward starting swapIn April 2022, the Company entered into several 10-year treasury lock agreements, with notional amounts totaling $400 million, and an aggregate notional amountaverage fixed interest rate of $300 million,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 the treasury lock agreements, 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, 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 October 2017, we terminated our interest-rate swap to hedge $100 million of its 6.085% Senior Notes maturing in the fourth quarter of 2017. The Company paid variable interest of six-month LIBOR plus 3.422%, and had designated this interest rate swap as a fair value hedge, accounted for at fair value with gains or losses, as well as the offsetting gains or lossesNo ineffectiveness was recognized on the hedged item, recognized in interest, net. The net gain and loss recognized by the Company was de minimishedging instruments for the periodsyears ended December 31, 2017 and 2016.2022, 2021 or 2020.
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.
The followingPresented in the table detailsbelow are the issuances of long-term debt in 2017:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 |
|
(a)This indebtedness is considered “debt” for purposes of a support agreement between parent company and AWCC, which serves as a functional equivalent of a full and unconditional guarantee by parent company of AWCC’s payment obligations under such indebtedness. See “—Issuer and Guarantor of Senior Notes” below.The followingPresented in the table detailsbelow are the retirements and redemptions of long-term debt that was retiredin 2022 through sinking fund provisions, optional redemption or payment at maturity during 2017:maturity:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 |
|
The following table details the issuances of long-term debt in 2016:
|
| | | | | | | | | | |
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 |
|
| |
(a) | On November 17, 2016, AWCC completed an offering of its senior fixed rate notes. Proceeds from this offering were used to lend funds to the Company and its Regulated Businesses, to repay commercial paper borrowings and for general corporate purposes. |
The following table details the long-term debt that was retired through sinking fund provisions, optional redemption or payment at maturity during 2016:
|
| | | | | | | | | | |
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 |
|
The following table details the issuances of long-term debt in 2015:
|
| | | | | | | | | | |
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 |
|
| |
(a) | On August 13, 2015, AWCC completed an offering of its senior fixed rate notes. Proceeds from this offering were used to lend funds to the Company and its Regulated Businesses, to repay commercial paper borrowings and to finance redemptions of long-term debt. |
The following table details the long-term debt that was retired through sinking fund provisions, optional redemption or payment at maturity during 2015:
|
| | | | | | | | | | |
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 |
|
| |
(a) | Includes $2 million of non-cash redemptions resulting from the use of restricted funds. |
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.
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.
In February 2015, our BoardAs a wholly owned finance subsidiary of Directors authorized an anti-dilutive, common stock repurchase program to mitigate the effectparent company, AWCC has no significant assets other than obligations of shares issued through our dividend reinvestment, employee stock purchaseparent company and executive compensation activities. The program allows the Company to purchase up to 10 million sharescertain of its outstanding common stock, over an unrestricted periodsubsidiaries in its Regulated Businesses segment to repay certain intercompany loans made to them by AWCC. AWCC’s ability to make payments of time,amounts owed to holders of the senior notes will be dependent upon AWCC’s receipt of sufficient payments of amounts owed pursuant to the terms of such intercompany loans and from its ability to issue indebtedness or otherwise obtain loans in the open market or through privately negotiated transactions. The program is conducted in accordance with Rule 10b-18future, the proceeds of which would be used to fund the repayment of the Exchange Act,senior notes.
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
We have an unsecured revolving credit facility of $1.75 billion that expires in June 2020. In March 2016, and under the terms of the revolving credit agreement dated June 30, 2015, AWCC exercised its right to increase its borrowing capacity available under our revolving credit facility from the aggregate maximum of $1.25 billion, to $1.75 billion. All other terms, conditions and covenants with respect to the existing facility remained unchanged. On June 30, 2015, AWCC and its lenders extended the termination date of the revolving credit facility from October 2018, to June 2020. This amended and restated agreement also allowed AWCC to request to extend further the term of the credit facility for up to two one-year periods. An extension request must satisfy certain conditions and receive approval of the lenders, as set forth in the revolving credit agreement.
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.
AWCC also has an outstandingfacility commitments, commercial paper program that is backed bylimit and letter of credit availability under the revolving credit facility, the maximum aggregate outstanding amount of which was increased on March 22, 2016, from $1.0 billion to $1.6 billion.
Keystone has its own line of credit facility with a maximum availability of up to $12 million, the actual amount of which is determined pursuant to a collateral base calculation. Borrowings under this facility are payable upon demand with interest being paid monthly. Interest accrues each day at a rate per annum equal to 2.75% above the greater of the one month or one day LIBOR. The borrowing base under the facility allows for financing up to the greater of the note or 80% of eligible accounts receivable. Based on the collateral assets at December 31, 2017, $7 million was available to borrow. At December 31, 2017, there were no outstanding borrowings.
The following table summarizes information regarding the Company’s aggregate credit facility commitments, letter of credit sub-limits and available funds under those revolving credit facilities, as well as outstanding amountsthe available capacity for each, as of commercial paper and outstanding borrowings under the respective facilitiesDecember 31:
| | | | | | | | | | | | | | | | | |
| 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.
| | | | | | | | | | | | | | | | | |
| 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
The followingPresented in the table indicatesbelow is the percentage of ourthe Company’s capitalization represented by the components of ourits capital structure as of December 31:
| | | | | | | | | | | 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
OurThe Company’s debt agreements contain financial and non-financial covenants. To the extent that we arethe Company is not in compliance with these covenants, an event of default may occur under one or more debt agreements and wethe Company, or ourits subsidiaries, may be restricted in ourits ability to pay dividends, issue new debt or access ourthe revolving credit facility. OurThe long-term debt indentures contain a number of covenants that, among other things, prohibit or restrict the Company from issuing debt secured by the Company’s assets, subject to certain exceptions. Our failureFailure to comply with any of these covenants could accelerate repayment obligations.
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.
Security Ratings
Our access to the capital markets, including the commercial paper market, and respective financing costs in those markets, may be directly affected by our securities ratings. We primarily access the debt capital markets, including the commercial paper market, through AWCC. However, we have also issued debt through our regulated subsidiaries, primarilyPresented in the form of tax exempt securities or borrowings under state revolving funds, to lower our overall cost of debt.
The following table presents ourbelow are long-term and short-term credit ratingratings and rating outlookoutlooks as of February 20, 2018:
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 | | Standard & Poor’sS&P Global Ratings Service |
Rating outlook | | Stable | | Stable |
Rating Outlook | Negative | | Stable |
Senior unsecured debt | A3 | Baa1 | | A |
Commercial paper | P-2 | P-2 | | A-1 |
On January 19, 2018, Moody’s Investors Service changed the rating outlooks to negative, from stable, for 24 regulated utilities and utility holding companies, including the Company, all of which were primarily impacted by enactment of the TCJA. A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency, and each rating should be evaluated independently of any other rating. Security ratings are highly dependent upon ourthe ability to generate cash flows in an amount sufficient to service our debt and meet our investment plans. WeThe Company can provide no assurances that ourits ability to generate cash flows is sufficient to maintain ourits existing ratings. None of ourthe Company’s borrowings are subject to default or prepayment as a result of the downgrading of these security ratings, although such a downgrading could increase fees and interest charges under ourits credit facility.
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
Our Board of Directors authorizesAccess to the payment of dividends. Our ability to pay dividends on our common stock is subject to having access to sufficient sources of liquidity,capital markets, including the net incomecommercial paper market, and cash flows of our subsidiaries, the receipt of dividends and repayments of indebtedness from our 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 determinedrespective financing costs in those markets, may be directly affected by the BoardCompany’s securities ratings. The Company primarily accesses the debt capital markets, including the commercial paper market, through AWCC. However, the Company has also issued debt through its regulated subsidiaries, primarily in the form of Directors on a quarterly basismortgage bonds and takes into consideration, among other factors, currenttax exempt securities or borrowings under state revolving funds, to lower the overall cost of debt.
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.
During 2017, 2016 and 2015, we paid $289 million, $261 million and $239 million in cash dividends, respectively. The following table summarizes the per share cash dividends paid for the years ended December 31, 2017, 2016 and 2015:
|
| | | | | | | | | | | |
| 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 |
|
On December 8, 2017, our Board of Directors declared a quarterly cash dividend payment of $0.415 per share payable on March 1, 2018, to stockholders of record as of February 7, 2018.
Regulatory Restrictions
The issuance by the Company or AWCC of long-term debt or equity securities does not require authorization of any state PUC if no guarantee or pledge of the regulated subsidiaries is utilized. However, state PUC authorization is required to issue long-term debt at most of our regulated subsidiaries. Our regulated subsidiaries normally obtain the required approvals on a periodic basis to cover their anticipated financing needs for a period of time or in connection with a specific financing.
Under applicable law, our subsidiaries can pay dividends only from retained, undistributed or current earnings. A significant loss recorded at a subsidiary may limit the dividends that the subsidiary can distribute to us. Furthermore, the ability of our subsidiaries to pay upstream dividends or repay indebtedness to American Water is subject to compliance with applicable regulatory restrictions and financial obligations, including,dividend policy, see Note 9—Shareholders’ Equity in the Notes to Consolidated Financial Statements for example, debt service and preferred and preference stock dividends, as well as applicable corporate, tax and other laws and regulations, and other agreements or covenants made or entered into by American Water and its subsidiaries.additional information.
Insurance Coverage
We carryThe Company carries various property, casualty, cyber and financial insurance policies with limits, deductibles and exclusions that we believeit believes are consistent with industry standards. However, insurance coverage may not be adequate or available to cover unanticipated losses or claims. Additionally, annual policy renewals can be impacted by claims experience which in turn can impact coverage terms and conditions on a going forwardgoing-forward basis. We areThe Company is self-insured to the extent that losses are within the policy deductible or exceed the amount of insurance maintained. Such losses could have a material adverse effect on ourthe Company’s short-term and long-term financial condition and ourits results of operations and cash flows.
Contractual Obligations and Commitments
We enter into contractual obligations with third parties in the ordinary course of business. Information related to our contractual obligations as of December 31, 2017 is summarized in the table below:
|
| | | | | | | | | | | | | | | | | | | | |
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 |
|
Note: The above table reflects only financial obligations and commitments. Therefore, performance obligations associated with our Market-Based Businesses are not included in the above amounts. Also, uncertain tax positions of $106 million are not reflected in this table as we cannot predict when open tax years will close with completed examinations. See Note 13—Income Taxes in the Notes to the Consolidated Financial Statements.
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(a) | Represents sinking fund obligations, debt maturities and capital lease obligations. |
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(b) | Represents expected interest payments on outstanding long-term debt. Amounts reported may differ from actual due to future financing of debt. |
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(c) | Represents future minimum payments under non-cancelable operating leases, primarily for the lease of motor vehicles, buildings, land and other equipment including water facilities and systems constructed by partners under the Public-Private Partnerships described below. |
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(d) | Represents future payments under water purchase agreements for minimum quantities of water. |
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(e) | Represents the open purchase orders as of December 31, 2017 for goods and services purchased in the ordinary course of business. |
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(f) | Represents contributions expected to be made to pension and postretirement benefit plans for the years 2018 through 2022. |
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(g) | Includes an estimate of advances for construction to be refunded, capital expenditures estimated to be required under legal and binding contractual obligations, contracts entered into for energy purchases, a liability associated with a conservation agreement and service agreements. |
Public-Private Partnerships
WVAWC has entered into a series of agreements with various public entities, which we refer to as the Partners, to establish certain joint ventures, commonly referred to as “public-private partnerships.” Under the public-private partnerships, WVAWC constructed utility plant, financed by WVAWC, and the Partners constructed utility plant (connected to WVAWC’s property), financed by the Partners. WVAWC agreed to transfer and convey some of its real and personal property to the Partners in exchange for an equal principal amount of Industrial Development Bonds, commonly referred to as IDBs, issued by the Partners under a state Industrial Development Bond and Commercial Development Act. WVAWC leased back the total facilities, including portions funded by both WVAWC and the Partners, under leases for a period of 40 years.
The leases have payments that approximate the payments required by the terms of the IDBs. These payments are considered “PILOT payments” which represent payments that WVAWC otherwise would pay as property taxes on the properties. We have presented the transaction on a net basis in the Consolidated Financial Statements. The carrying value of the transferred facilities, which is presented in property, plant and equipment in the Consolidated Balance Sheets, was approximately $150 million as of December 31, 2017.
Performance Obligations
We have entered into agreements for the provision of services to water and wastewater facilities for the United States military, municipalities and other customers. These military services agreements expire between 2051 and 2068 and have remaining performance commitments as measured by estimated remaining contract revenues of $3.6 billion as of December 31, 2017. The operations and maintenance agreements with municipalities and other customers expire between 2018 and 2038 and have remaining performance commitments as measured by estimated remaining contract revenue of $711 million as of December 31, 2017. Some of the Company’s long-term contracts to operate and maintain a municipality’s, federal government’s or other party’s water or wastewater treatment and delivery facilities include responsibility for certain major maintenance for some of the facilities, in exchange for an annual fee.
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.
Regulation and Regulatory Accounting
OurThe Company’s regulated utilities are subject to economic regulation by PUCs and, as such, we followthe Company follows the authoritative accounting principles required for rate regulated utilities, which requires usthe Company to reflect the effects of rate regulation in ourits Consolidated Financial Statements. Use of this authoritative guidance is applicable to utility operations that meet the following criteria: (i) third-party regulation of rates; (ii) cost-based rates; and (iii) a reasonable assumption that rates will be set to recover the estimated costs of providing service, plus a return on net investment, or rate base. As of December 31, 2017, we2022, the Company concluded that the operations of ourits utilities met the criteria.
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.
On December 22, 2017, the TCJA was signed into law, which, among other things, enacted significant and complex changes to the Internal Revenue Code of 1986, including a reduction in the maximum U.S. federal corporate income tax rate from 35% to 21% as of January 1, 2018. The TCJA created significant excess deferred income taxes that the Company and its regulatory jurisdictions believe should be refunded to customers. As such, we recorded these amounts as regulatory liabilities. The PUCs in our regulatory jurisdictions have opened formal proceedings related to the TCJA and we have begun working with our regulators on options to provide the income tax savings to our customers, and to address customer rate impacts and cash flow impacts for the Company. The outcome of these proceedings will likely take some time and could vary by regulatory jurisdiction.
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.
Goodwill
As of December 31, 2017 and 2016, our goodwill balance was $1.4 billion and $1.3 billion, respectively. Under GAAP, goodwill must be allocated at the reporting unit level, which is defined as an operating segment or one level below, and evaluated for impairment minimally, once a year. We perform an annual review for impairment of goodwill as of November 30 of each year, or more frequently if we determine that changes in circumstances or a triggering event that would more likely than not, reduce the fair value of a reporting unit below its carrying value, has occurred. Adverse industry or economic trends, lower projections of profitability, or a sustained decline in our market capitalization, among other things, may be indicators of potential goodwill impairment issues, requiring the testing of the carrying value for recoverability.
Entities evaluating goodwill for impairment have the option of first performing a qualitative assessment to determine whether a quantitative assessment is necessary. In performing a qualitative assessment, we assess and makes judgments, among other things, around macroeconomic conditions, industry and market conditions, overall financial performance, cost factors and entity specific events. These factors require significant judgment and estimates, and application of alternative assumptions could produce significantly different results. If it is determined, based upon qualitative factors, that the fair value of a reporting unit is more likely than not, greater than its carrying value, no further testing is required. If an entity bypasses the qualitative assessment, or performs the qualitative assessment but determines that the fair value of a reporting unit is more likely than not, less than its carrying value, a two-step, quantitative fair value assessment is performed.
The first step of a quantitative assessment compares the estimated fair value of the reporting unit to its respective net carrying value, including goodwill, on the measurement date. If the estimated fair value of the reporting unit is less than such reporting unit’s carrying value, then the second step of the quantitative assessment is performed to measure the amount of the impairment loss, if any, for such reporting unit.
The second step of a quantitative assessment requires an allocation of fair value to the individual assets and liabilities of the reporting unit, using purchase price allocation accounting guidance in order to determine the implied fair value of goodwill. If the implied fair value of goodwill is less than the carrying value for the reporting unit, an impairment loss is recorded as a reduction to goodwill and a charge to operating expense. Application of goodwill impairment testing requires significant management judgment, including the identification of reporting units and determining the fair value of the reporting unit. We estimate fair value using a combination of a discounted cash flow analysis and market multiples analysis. Significant assumptions used in these fair value analyses include, but are not limited to, forecasts of future operating results, discount and growth rates, capital expenditures, tax rates, working capital, weighted average cost of capital and projected terminal values. Changes in estimates or the application of alternative assumptions could produce significantly different results.
At November 30, 2017, we completed qualitative assessments for our Regulated Businesses, Military Services Group and Contract Operations Group reporting units, and determined that no qualitative factors were present that would indicate the estimated fair values of these reporting units were less than their respective carrying values. As such, we determined that the two-step, quantitative fair value assessment was not necessary for these reporting units as of November 30, 2017.
At November 30, 2017, we completed step one of the two-step, quantitative assessment for our Homeowner Services Group and Keystone reporting units, and concluded there were no impairments to their respective goodwill carry values. We used an income approach valuation technique which estimates discounted future cash flows from operations, which relies on a single scenario reflecting the best estimate of projected cash flows. The estimated fair value of the Homeowner Services Group reporting unit exceeded its carrying value by more than 156%. The estimated fair value of the Keystone reporting unit exceeded its carrying value by approximately 11%. If further decline in the fair value were to occur, the Keystone reporting unit would be at risk of failing step one of the two-step, quantitative assessment. Additional discussion regarding our goodwill can be found in Note 7—Goodwill and Other Intangible Assets in the Notes to the Consolidated Financial Statements.
Impairment of Long-Lived Assets
Long-lived assets include land, buildings, equipment and long-term investments. Other than land and long-term investments, our long-lived assets are depreciated over their estimated useful lives and are reviewed for impairment whenever changes in circumstances indicate that their carrying value may not be recoverable. Such circumstances include, but are not limited to, a significant decrease in the market value of the long-lived asset, a change in the asset’s expected useful life or physical condition, a history of operating or cash flow losses associated with the use of the asset or a significant adverse change in the manner in which the asset is being used or is planned to be used. When such events or changes occur, we estimate the fair value of the long-lived asset from future cash flows expected to result from its use and, if applicable, the eventual disposition of the asset, and compare it to the carrying value of the asset. If the carrying value of the long-lived asset is greater than its fair value, an impairment loss is recognized equal to the amount by which carrying value exceeds fair value. Key variables that must be estimated include assumptions regarding sales volume, rates, operating costs, labor and other benefit costs, capital additions, assumed discount rates and other economic factors. These variables require significant management judgment and include inherent uncertainties, since they are forecasting future events. A variation in the assumptions used could lead to a different conclusion regarding the realizability of a long-lived asset and, thus, could have a significant effect on our Consolidated Financial Statements.
The long-lived assets of our regulated utilities are grouped 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 fair values of our long-term investments are dependent on the financial performance and solvency of the entities in which we invest, as well as volatility inherent in the external markets, all of which are factors that we consider when assessing the potential impairment of these investments. If such long-term investments are considered impaired, an impairment loss is recognized equal to the amount by which the investment’s carrying value exceeds its fair value.
Revenue Recognition
Revenue for our regulated utilities is recognized as water and wastewater services are delivered to customers and includes amounts billed to customers on a cycle basis, and unbilled amounts which are based on estimated usage from the date of the meter reading associated with the latest customer bill, to the end of the accounting period. 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 our regulated utilities as of December 31, 2017 and 2016 was $152 million and $161 million, respectively.
Revenues of the Market-Based Businesses are recognized as services are rendered. For certain construction contracts, revenue is recognized over the contract term based on a calculated ratio that compares the costs incurred to date during the period to the total estimated costs for the entire contract. Losses on contracts are recognized during the period in which the loss first becomes probable and estimable. Revenues recognized during the period in excess of billings on construction contracts are recorded as unbilled revenue. Billings in excess of revenues recognized on construction contracts are recorded as other current liabilities on the balance sheet until the recognition criteria are met. Changes in contract performance and related estimated contract profitability may result in revisions to costs and revenues and are recognized in the period in which revisions are determined. Unbilled revenue for our Market-Based Businesses as of December 31, 2017 and 2016 was $60 million and $102 million, respectively.
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.
We evaluateThe Company evaluates the probability of realizing deferred tax assets quarterly by reviewing a forecast of future taxable income and ourits intent and ability to implement tax planning strategies, if necessary, to realize deferred tax assets. WeThe Company also assess ourassesses its ability to utilize tax attributes, including those in the form of carryforwards, for which the benefits have already been reflected in the financial statements. We recordThe Company records valuation allowances for deferred tax assets when we concludeit concludes that it is more-likely-than-not such benefit will not be realized in future periods.
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.
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 recording of regulatory liabilities from the re-measurement of the Company’s deferred income taxes, and the uncertainty of regulatory treatment in our various jurisdictions in which the Company currently operates;
allocation of interest deductibility at the parent to our subsidiaries;
bonus depreciation deductions for assets constructed and placed in service during the period September 28, 2017 through December 31, 2017; and
normalization periods for our re-measured deferred taxes.
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
We maintainThe Company maintains noncontributory defined benefit pension plans covering eligible employees of ourits regulated utility and shared service operations. The Company also maintains other postretirement benefit plans providing medical and life insurance to eligible retirees. See Note 14—2—Significant Accounting Policies and Note 15—Employee Benefits in the Notes to Consolidated Financial Statements for furtheradditional information regarding the description of and accounting for the defined benefit pension plans and postretirement benefit plans.
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.
The asset allocations for the Company’s U.S. pension plan by asset category were as follows:2020.
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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 | % |
During 2017,Presented in the Company reducedtable below are the riskallocations of its investments in the pension plan assets by reducing its exposure to equities from 60% to 50%, and increasing its long duration fixed-income allocation from 40% to 50%. This new structure is designed to reduceasset category:
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| | 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.
The Company’s other postretirement benefit plans are partially funded. Theplan assets by asset category:
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| | 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:
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| | 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 | | — |
| | — |
| | — |
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Total | | 100 | % | | 100 | % | | 100 | % |
The Company’s target asset allocation, is evaluated periodically through asset liability studies. The studies consider projected cash flows of maturity liabilities, projected asset class returns and risks, correlations, and the Company’s risk tolerance. In 2017, the Company conducted new asset-liability studies for the Post-Retirement Plans and approved new asset allocations for both plans. The Post-Retirement Medical Bargaining plan increased its equity allocation from 20% to 30% due to rising medical claims and medical inflation and the long duration portion of the portfolio was reduced from 80% to 70%. The Post-Retirement Non-Bargaining Medical Plan’s allocation was adjusted to reduce volatility and interest rate risk in a manner similar to that described above with respect to the pension plan, reducing the equity allocation from 70% to 60% and increasing the fixed-income allocation from 30% to 40%. The Post-Retirement Medical Non-Bargaining plan’s equity allocation was reduced due to the cap on benefits for some non-union participants and the resultant reduction in the plan’s liabilities. These changes will be implemented in 2018.
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.
Assumed health care cost trend rates have a significant effect on the amounts reported for the other postretirement benefit plans. The health care cost trend rate is based on historical rates and expected market conditions. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
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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 |
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Decrease assumed health care cost trend by 1% | | $ | (60 | ) | | $ | (4 | ) |
WeCompany will use a weighted-average discount rate and EROA of 3.75%5.58% and 5.95%6.75%, respectively, for estimating our 2018its 2023 pension costs. Additionally, wethe Company will use a weighted-average discount rate and expected blended return based on weighted assetsEROA of 3.73%5.60% and 4.77%5.00%, respectively, for estimating our 2018its 2023 other postretirement benefit costs. A decrease in the discount rate or the EROA would increase ourthe Company’s pension expense. Our 2017 and 2016The Company’s 2022 pension and postretirement total net benefit costs were $56credit was $47 million and $54 million, respectively.the 2021 pension and postretirement total net benefit credit was $41 million. The Company expects to make pension and postretirement benefit contributions to the plan trusts up to $45of $39 million in 2018, and $47 million, $47 million, $51 million and $58 million in 2019, 2020, 2021 and 2022, respectively. Actual2023; however, the actual amounts contributed could change significantlymaterially from these estimates.this estimate. The assumptions are reviewed annually and at any interim re-measurement of the plan obligations. The impact of assumption changes is reflected in the recorded pension and postretirement benefit amounts as they occur, or over a period of time if allowed under applicable accounting standards.
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.
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.
Accounting for Contingencies
We recordThe Company records loss contingencies when management determines that the outcome of future events is probable of occurring and when the amount of the loss or a range of losses can be reasonably estimated. The determination of a loss contingency is based on managementmanagement’s judgment and estimates about the likely outcome of the matter, which may include an analysis of different scenarios. Liabilities are recorded or adjusted when events or circumstances cause these judgments or estimates to change. In assessing whether a loss is reasonably possible, management considers many factors, which include, but are not limedlimited to: the nature of the litigation, claim or assessment, review of applicable law, opinions or views of legal counsel and other advisors, and the experience gained from similar cases or situations. We provideThe Company provides disclosures for material contingencies when management deems there is a reasonable possibility that a loss or an additional loss may be incurred. We provideThe Company provides estimates of reasonably possible losses when such estimates may be reasonably determined, either as a single amount or within a reasonable range.
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.
NewRecent Accounting Standards
See Note 2—Significant Accounting Policies in the Notes to Consolidated Financial Statements for a description of recent accounting standards.
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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We areITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
OurCompany’s risks associated with price increases for chemicals, electricity and other commodities are reduced through contractual arrangements and the expected ability to recover price increases through rates, in the next general rate case proceeding or other regulatory mechanism, as authorized by each regulatory jurisdiction. Non-performance by these commodity suppliers could have a material adverse impact on ourthe Company’s results of operations, financial position and cash flows.
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.
We areThe Company is exposed to credit risk through ourits water, wastewater and other water-related services provided by our Regulated Businesses and Market-Based Businesses. Ourrelated services. The Company’s Regulated Businesses serve residential, commercial, industrial and other customers, while our Market-Based Businessesthe businesses within Other engage in business activities with developers, government entities and other customers. OurThe Company’s primary credit risk is exposure to customer default on contractual obligations and the associated loss that may be incurred due to the non-payment of customer accounts receivable balances. OurThe Company’s credit risk is managed through established credit and collection policies which are in compliance with applicable regulatory requirements and involve monitoring of customer exposure and the use of credit risk mitigation measures such as letters of credit or prepayment arrangements. OurThe Company’s credit portfolio is diversified with no significant customer or industry concentrations. In addition, ourthe Regulated Businesses are generally able to recover all prudently incurred costs including uncollectible customer accounts receivable expenses and collection costs through rates.
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.
We areThe Company is also exposed to a potential national economic recession or deterioration in local economic conditions in the markets in which we operate.it operates. The credit quality of ourthe Company’s customer accounts receivable is dependent on the economy and the ability of ourits customers to manage through unfavorable economic cycles and other market changes. In addition, there can be no assurances that regulators will grant sufficient rate authorizations. Therefore, ourthe Company’s ability to fully recover operating expense, recover ourits investment and provide an appropriate return on invested capital made in ourthe Regulated Businesses may be adversely impacted.
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Audited Consolidated Financial Statements | |
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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.
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.
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/s/ PricewaterhouseCoopers LLP |
Philadelphia, Pennsylvania |
February 20, 201815, 2023 |
We have served as the Company’s auditor since 1948.
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Balance Sheets
(In millions, except share and per share data)
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| December 31, 2017 | | December 31, 2016 |
ASSETS |
Property, plant and equipment | $ | 21,716 |
| | $ | 19,954 |
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Accumulated depreciation | (5,470 | ) | | (4,962 | ) |
Property, plant and equipment, net | 16,246 |
| | 14,992 |
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Current assets: | | | |
Cash and cash equivalents | 55 |
| | 75 |
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Restricted funds | 27 |
| | 20 |
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Accounts receivable, net | 272 |
| | 269 |
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Unbilled revenues | 212 |
| | 263 |
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Materials and supplies | 41 |
| | 39 |
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Other | 113 |
| | 118 |
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Total current assets | 720 |
| | 784 |
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Regulatory and other long-term assets: | | | |
Regulatory assets | 1,061 |
| | 1,289 |
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Goodwill | 1,379 |
| | 1,345 |
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Other | 76 |
| | 72 |
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Total regulatory and other long-term assets | 2,516 |
| | 2,706 |
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TOTAL ASSETS | $ | 19,482 |
| | $ | 18,482 |
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The accompanying notes are an integral part of these Consolidated Financial Statements.
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Balance Sheets
(In millions, except share and per share data)
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| 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 |
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Paid-in-capital | 6,432 |
| | 6,388 |
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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 |
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Long-term debt | 6,490 |
| | 5,749 |
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Redeemable preferred stock at redemption value | 8 |
| | 10 |
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Total long-term debt | 6,498 |
| | 5,759 |
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Total capitalization | 11,883 |
| | 10,977 |
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Current liabilities: | | | |
Short-term debt | 905 |
| | 849 |
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Current portion of long-term debt | 322 |
| | 574 |
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Accounts payable | 195 |
| | 154 |
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Accrued liabilities | 630 |
| | 609 |
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Taxes accrued | 33 |
| | 31 |
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Interest accrued | 73 |
| | 63 |
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Other | 167 |
| | 112 |
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Total current liabilities | 2,325 |
| | 2,392 |
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Regulatory and other long-term liabilities: | | | |
Advances for construction | 271 |
| | 300 |
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Deferred income taxes, net | 1,551 |
| | 2,596 |
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Deferred investment tax credits | 22 |
| | 23 |
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Regulatory liabilities | 1,664 |
| | 403 |
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Accrued pension expense | 384 |
| | 419 |
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Accrued postretirement benefit expense | 40 |
| | 87 |
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Other | 66 |
| | 67 |
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Total regulatory and other long-term liabilities | 3,998 |
| | 3,895 |
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Contributions in aid of construction | 1,276 |
| | 1,218 |
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Commitments and contingencies (See Note 15) |
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TOTAL CAPITALIZATION AND LIABILITIES | $ | 19,482 |
| | $ | 18,482 |
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The accompanying notes are an integral part of these consolidated financial statements.
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Statements of Operations
(In millions, except per share data)
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| For the Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Operating revenues | $ | 3,357 |
| | $ | 3,302 |
| | $ | 3,159 |
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Operating expenses: | | | | | |
Operation and maintenance | 1,378 |
| | 1,504 |
| | 1,404 |
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Depreciation and amortization | 492 |
| | 470 |
| | 440 |
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General taxes | 259 |
| | 258 |
| | 243 |
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Gain on asset dispositions and purchases | (16 | ) | | (10 | ) | | (3 | ) |
Total operating expenses, net | 2,113 |
| | 2,222 |
| | 2,084 |
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Operating income | 1,244 |
| | 1,080 |
| | 1,075 |
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Other income (expense): | | | | | |
Interest, net | (342 | ) | | (325 | ) | | (308 | ) |
Loss on early extinguishment of debt | (7 | ) | | — |
| | — |
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Other, net | 17 |
| | 15 |
| | 15 |
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Total other income (expense) | (332 | ) | | (310 | ) | | (293 | ) |
Income before income taxes | 912 |
| | 770 |
| | 782 |
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Provision for income taxes | 486 |
| | 302 |
| | 306 |
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Net income attributable to common stockholders | $ | 426 |
| | $ | 468 |
| | $ | 476 |
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Basic earnings per share: (a) | | | | | |
Net income attributable to common stockholders | $ | 2.39 |
| | $ | 2.63 |
| | $ | 2.66 |
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Diluted earnings per share: (a) | | | | | |
Net income attributable to common stockholders | $ | 2.38 |
| | $ | 2.62 |
| | $ | 2.64 |
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Weighted-average common shares outstanding: | | | | | |
Basic | 178 |
| | 178 |
| | 179 |
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Diluted | 179 |
| | 179 |
| | 180 |
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Dividends declared per common share | $ | 1.66 |
| | $ | 1.50 |
| | $ | 1.36 |
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(a) Amounts may not calculate due to rounding. | | | | | |
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| 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.
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.
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.
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Statements of Comprehensive Income
(In millions)
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| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2017 | | 2016 | | 2015 |
Net income attributable to common stockholders | $ | 426 |
| | $ | 468 |
| | $ | 476 |
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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 |
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| | | | | | | | | | | | | | | | | |
| 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.
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.
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 |
|
(a)Includes stock-based compensation, employee stock purchase plan and direct stock reinvestment and direct stock purchase plan activity.The accompanying notes are an integral part of these Consolidated Financial Statements.
American Water Works Company, Inc. and Subsidiary Companies
Notes to Consolidated Financial Statements
(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
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. The Company uses the equity method to report its investments in joint ventures where it holds up to a 50% voting interest and cannot exercise control over the operations and policies of the investments. Under the equity method, the Company records its interests as an investment and its percentage share of the investee’s earnings as income or losses.
In July 2015, the Company acquired a 95% interest in Water Solutions Holdings, LLC, including its wholly-owned subsidiary, Keystone Clearwater Solutions, LLC (collectively referred to as “Keystone”). The outside stockholders’ interest, which is redeemable at the option of the minority owners, is recognized as redeemable noncontrolling interest. The redeemable noncontrolling interest amounted to $7 million as of December 31, 2017 and 2016, and is included in other long-term liabilities in the accompanying Consolidated Balance Sheets. The net income in 2017 and the net loss in 2016, respectively, attributable to the noncontrolling interest was not significant. The Company has entered into an agreement whereby it has the option to acquire from the minority owners, and the minority owners have the option to sell to the Company, the remaining five percent interest at fair value, upon the occurrence of certain triggering events, or at the defined date of December 31, 2018.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates, assumptions and judgments that affect the Company’s financial condition, results of operations and cash flows. Actual results could differ from these estimates, judgments and assumptions. The Company considers its critical accounting estimates to include: the application of regulatory accounting principles and the related determination and estimation of regulatory assets and liabilities; assumptions used in impairment testing of goodwill and other long-lived assets, including regulatory assets; revenue recognition and the estimates used in the calculation of unbilled revenue; accounting for income taxes and the recently enacted Tax Cuts and Jobs Act (the “TCJA”); benefit plan assumptions; and the judgments and estimates used in the 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, goodwill, income taxes, benefit plan assumptions and contingency-related obligations.
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.
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.
Nonutility property consists primarily of buildings and equipment utilized by the Company for internal operations. This property is stated at cost, net of accumulated depreciation, which calculated using the straight-line method over the useful lives of the assets.
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.
The following table provides a reconciliation of the cash and cash equivalents, and restricted funds as presented in the Consolidated Balance Sheets, to the sum of such amounts presented in the Consolidated Statements of Cash Flows for the years ended December 31:
|
| | | | | | | |
| 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.
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 first step This quantitative testing compares the estimated fair value of the reporting unit to its respective net carrying value, including goodwill, on the measurement date. IfAn impairment loss will be recognized in the estimated fair valueamount equal to the excess of any reporting unit is less than suchthe reporting unit’s carrying value thencompared to its estimated fair value, limited to the second step is performed to measure thetotal amount of the impairment loss (if any) for suchgoodwill allocated to that reporting unit.
The second step requires an allocation of fair value to the individual assets and liabilities using purchase price allocation accounting guidance in order to determine the implied fair value of goodwill. If the implied fair valueApplication of goodwill is less than the carrying amount for the reporting unit, an impairment loss is recorded as a reduction to goodwill and a charge to operating expense. Application of the goodwill impairment testtesting requires management judgment, including the identification of reporting units and determining the fair value of the reporting unit.units. Management estimates fair value using a combination of a discounted cash flow analysis and market multiples analysis. Significant assumptions used in these fair value analysesestimations include, but are not limited to, forecasts of future operating results, discount rate and growth rates and projected terminal values.rate.
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 Company believesdetermined by measuring the assumptions and other considerations used to evaluateexcess of the carrying valueamount of the long-lived assets are appropriate. However, if actual experience differs from the assumptions and considerations used in its estimates, the resulting change could have a material adverse impact on the Consolidated Financial Statements.
The key variables to determine fair value include assumptions regarding sales volume, rates, operating costs, labor and other benefit costs, capital additions, assumed discount rates and other economic factors. These variables require significant management judgment and include inherent uncertainties, since they are forecasting future events. If such assets are considered impaired, an impairment loss is recognized equal to the amount by which the asset’s carrying value exceedsasset or asset group over its fair value.
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.
The fair values of long-term investments are dependentresulting change could have a material adverse impact on the financial performance and solvencyConsolidated Financial Statements.
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
Revenuesdistinct goods and services, to a customer. Revenue is recognized when performance obligations are satisfied and the customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for goods or services. Under ASC 606, a contract’s transaction price is allocated to each distinct performance obligation. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identifies the contracts with a customer; (ii) identifies the performance obligations within the contract, including whether any performance obligations are distinct and capable of being distinct in the context of the regulated utility subsidiariescontract; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenue when, or as, the Company satisfies each performance obligation.
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.
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.
Revenues from construction projects arerevenue recognized over the contract termtime based on performance completed at the costs incurred to date during the period compared to the total estimated costs over the entire contract.end of each reporting period. Losses on contracts are recognized during the period in which the losslosses first becomesbecome probable and estimable. Revenues recognized during the period in excess of billings on construction contracts are recorded as unbilled revenue. Billingsrevenues, with billings in excess of revenues recognized on construction contracts are recorded as other current liabilities until the recognition criteria are met. Changes in contract performance and related estimated contract profitability may result in revisions to costs and revenues and are recognized in the period in which revisions are determined. See Note 4—Revenue Recognition for additional information.
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
American WaterThe Company and its subsidiaries participate in a consolidated federal income tax return for U.S. tax purposes. Members of the consolidated group are charged with the amount of federal income tax expense determined as if they filed separate returns.
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:
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| | | | | | | | | | | |
| 2017 | | 2016 | | 2015 |
Allowance for other funds used during construction | $ | 19 |
| | $ | 15 |
| | $ | 13 |
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Allowance for borrowed funds used during construction | 8 |
| | 6 |
| | 8 |
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Environmental Costs
The Company’s water and wastewater operations and the operations of its Market-Based Businesses are subject to U.S. federal, state, local and foreign requirements relating to environmental protection, and as such, the Company periodically becomes subject to environmental claims in the normal course of business. Environmental expenditures that relate to current operations or provide a future benefit are expensed or capitalized as appropriate. Remediation costs that relate to an existing condition caused by past operations are accrued, on an undiscounted basis, when it is probable that these costs will be incurred and can be reasonably estimated. A conservation agreement entered into by a subsidiary of the Company with the National Oceanic and Atmospheric Administration in 2010 and amended in 2017 required the Company to, among other provisions, implement certain measures to protect the steelhead trout and its habitat in the Carmel River watershed in the State of California. The Company agreed to pay $1 million annually commencing in 2010 with the final payment being made in 2021. Remediation costs accrued amounted to $6 million and less than $1 million as of December 31, 2017 and 2016, respectively. | | | | | | | | | | | | | | | | | |
| 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.
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).
Changes in the fair value of a fair-value hedge, along with the gain or loss on the underlying hedged item, are recorded in current-period earnings. The gains and losses on the effective portion of cash-flow hedges are recorded in other comprehensive income, until earnings are affected by the variability of cash flows. Any ineffective portion of designated cash-flow hedges is recognized in current-period earnings.
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
The following recently issuedPresented in the table below are new accounting standards have beenthat were adopted by the Company as of December 31, 2017:
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Standard | | Description | | Date of Adoption | | Application | | Effect on the Consolidated Financial Statements (or Other Significant Matters)
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Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity | | Simplification of Employee Share-Based Payment Accounting
financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. The standard reduced the number of accounting models for convertible debt instruments and convertible preferred stock. This will result in fewer embedded conversion features being separately recognized from the host contract. Earnings per share (“EPS”) calculations have been simplified for certain instruments. | | Simplified accounting and disclosure requirements for share-based payment awards. January 1, 2022
| | Modified retrospective | | The updated guidance addresses simplification in areas such as: (i) the recognition of excess tax benefits and deficiencies; (ii) the classification of excess tax benefits and taxes paidstandard did not have a material impact on the Consolidated StatementsFinancial Statements. |
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 Cash Flows; (iii) election of antransactions and related accounting policy used to account for forfeitures;transactions, the line items on the balance sheet and (iv)income statement affected by these transactions including amounts applicable to each line, and significant terms and conditions of the amount an employer can withhold to cover income taxestransactions, including commitments and still qualify for equity classification.
contingencies. | | January 1, 20172022 | | Modified retrospective for the recognition of excess tax benefits and deficiencies; full retrospective for the classification of excess tax benefits and taxes paidProspective
| | The standard did not have a material impact on the Consolidated Statements of Cash Flows
Financial Statements. |
Reference Rate Reform | | The cumulative effect of adoption increased retained earnings by $21 million, withThis update provides an offsetting decrease to deferred income taxes, net. Adoption also increased cash flows from operating activities and decreased cash flows from financing activities by $17 million, $13 million and $16 millionadditional two-year deferral on the sunset date for temporary relief during the years endedreference rate reform transition period. After December 31, 2017, 2016 and 2015, respectively,2024, the Company will no longer be permitted to apply the relief for reference rate reform.
| | December 21, 2022 | | Prospective | | The standard did not have a material impact on the Consolidated Statements of Cash Flows.
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Classification of Certain Cash Receipts and Cash Payments on the Statement of Cash Flows | | Provides guidance on the presentation and classification in the Consolidated Statements of Cash Flows for the following cash receipts and payments: (i) debt prepayment or debt extinguishment costs; (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (iii) contingent consideration payments made after a business combination; (iv) proceeds from the settlement of insurance claims; (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (vi) distributions received from equity method investees; (vii) beneficial interests in securitization transactions and (viii) separately identifiable cash flows and application of the predominance principle.
| | December 31, 2017 | | Retrospective | | Adoption resulted in the change in the presentation of a $34 million make-whole premium payment from operating activities to financing activities on the Consolidated Statements of Cash Flows for the year ended December 31, 2017, as compared to the third quarter 2017 Form 10-Q. See Note 10- Long-Term Debt in the Notes to Consolidated Financial Statements for further information regarding this make-whole premium payment.
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Presentation of Changes in Restricted Cash on the Statement of Cash Flows | | Updates the accounting and disclosure guidance for the classification and presentation of changes in restricted cash on the Consolidated Statements of Cash Flows. The amended guidance requires that the statements of cash flows explain the change during the period in the total of cash, cash equivalents and amounts described as restricted cash or restricted cash equivalents. Restricted cash and restricted cash equivalents will now be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows.
| | December 31, 2017 | | Retrospective | | Adoption resulted in the inclusion of restricted funds and related changes in the total of cash and cash equivalents, and restricted funds on the Consolidated Statements of Cash Flows. Total restricted funds amounted to $28 million, $24 million and $27 million as of December 31, 2017, 2016, 2015, respectively. The adoption also resulted in an increase in net cash used in investing activities previously reported of $3 million for the year ended December 31, 2016, and a decrease of $6 million for the year ended December 31, 2015. |
Presented in the table below are recently issued accounting standards that have not yet been adopted by the Company as of December 31, 2017:
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Standard | | Description | | Date of Adoption | | Application | | Estimated Effect on the Consolidated Financial Statements (or Other Significant Matters)
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RevenueAccounting for Contract Assets and Contract Liabilities from Contracts with Customers | | Changes the criteria for recognizing revenue from a contract with a customer. Replaces existing guidance on revenue recognition, including most industry specific guidance. The objective is to provide a single, comprehensive revenue recognition model for all contracts with customers to improve comparability within industries, across industries and across capital markets. The underlying principle is that an entity will recognize revenue to depict the transfer of goods and services to customers at an amount the entity expects to be entitled to in exchange for those goods or services. The guidance requires an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Codification Topic 606, as if it had originated the contracts. The amendments in this update also requiresprovide certain practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts in a number of disclosures regarding the nature, amount, timing and uncertainty of revenue and the related cash flows.business combination. | | January 1, 2018 | | Full or modified retrospective
| | The adoption will not result in material impact to the Consolidated Financial Statements as there are no material changes to the timing or recognition of revenue. The Company plans to adopt using the modified retrospective method.
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Clarifying the Definition of a Business | | Updated the accounting guidance to clarify the definition of a business with the objective of assisting entities with evaluating whether transactions should be accounted for as acquisitions, or disposals, of assets or businesses. | | January 1, 2018 | | Prospective | | The update could result in more acquisitions being accounted for as asset acquisitions. The effect on the Company’s Consolidated Financial Statements will be dependent on the acquisitions that close subsequent to adoption.
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Standard | | Description | | Date of
Adoption
| | Application | | Estimated Effect on the Consolidated
Financial Statements
(or Other Significant Matters)
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Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
| | Updated authoritative guidance requires the service cost component of net periodic benefit cost to be presented in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. The remaining components of net periodic benefit cost are required to be presented separately from the service cost component in an income statement line item outside of operating income. Also, the guidance only allows for the service cost component to be eligible for capitalization. The updated guidance does not impact the accounting for net periodic benefit costs as regulatory assets or liabilities.
| | January 1, 2018 | | Retrospective for the presentation of net periodic benefit cost components in the income statement; prospective for the capitalization of net periodic benefit costs components in total assets.
| | The Company expects to reclassify net periodic benefit costs, other than the service cost component of approximately $9 million, $5 million and $5 million for the years ended December 31, 2017, 2016 and 2015, respectively, to Other, net in its Consolidated Statements of Operations. The Company expects to record the non-service cost component probable of recovery from (or payable to) customers as a regulatory asset (or regulatory liability) accordingly.
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Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income | | Permits entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act to retained earnings.
| | January 1, 2019;2023; early adoption permitted
| | In the period of adoption or retrospective.
Prospective | | The Company is evaluating the impact on the Consolidated Financial Statements, as well as the timing of adoption.
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Accounting for Leases | | Updated the accounting and disclosure guidance for leasing arrangements. Under this guidance, a lessee will be required to recognize the following for all leases, excluding short-term leases, at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the guidance, lessor accounting is largely unchanged.
| | January 1, 2019; early adoption permitted | | Modified retrospective | | The Company is evaluating the effect on its Consolidated Financial Statements.
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Accounting for Hedging Activities
| | Updated the accounting and disclosure guidance for hedging activities, which allows for more financial and nonfinancial hedging strategies to be eligible for hedge accounting. Under this guidance, a qualitative effectiveness assessment is permitted for certain hedges if an entity can reasonably support an expectation of high effectiveness throughout the term of the hedge, provided that an initial quantitative test establishes that the hedge relationship is highly effective. Also, for cash flow hedges determined to be highly effective, all changes in the fair value of the hedging instrument will be recorded in other comprehensive income with a subsequent reclassification to earnings when the hedged item impacts earnings.
| | January 1, 2019; early adoption permitted
| | Modified retrospective for adjustments related to the measurement of ineffectiveness for cash flow hedges; prospective for the updated presentation and disclosure requirements.
| | The Company does not expect the adoption to have a material impact on its Consolidated Financial Statements based on the hedges held as of the balance sheet date. The Company is evaluating the timing of adoption.
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Simplification of Goodwill Impairment Testing
| | Updated authoritative guidance which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments in the update, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying value exceeds the reporting unit’s fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.
| | January 1, 2020; early adoption permitted | | Prospective | | The Company is evaluating theany impact on its Consolidated Financial Statements, as well as the timing of adoption.
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MeasurementTroubled Debt Restructurings and Vintage Disclosures | | The main provisions of Credit Losses | | Updatedthis standard eliminate the receivables accounting guidance on reporting credit losses for troubled debt restructurings (“TDRs”) by creditors while enhancing disclosure requirements when a borrower is experiencing financial assets held at amortized cost basisdifficulty. Entities must apply the loan refinancing and available-for-sale debt securities. Underrestructuring guidance for receivables to determine whether a modification results in a new loan or a continuation of an existing loan. Additionally, the amendments in this guidance, expected credit losses are required to be measured based on historical experience, current conditionsupdate require that an entity disclose current-period gross write-offs by year of origination for financing receivables and reasonable and supportable forecasts that affect the collectability of the reported amount of financial assets. Also, this guidance requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a direct write-down.
net investment in leases. | | January 1, 2020;2023; early adoption permitted | | ModifiedProspective, with a modified retrospective option for amendments related to the recognition and measurement of TDRs. | | The Company is evaluating theany impact on its Consolidated Financial Statements, as well as the timing of adoption.
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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 | |
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.
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.
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.
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.
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.
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.
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.
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.
During 2015, the Company closed on 14 acquisitions of various regulated water and wastewater systems for a total aggregate purchase price of $64 million. Assets acquired, principally utility plant, totaled $90 million. Liabilities assumed totaled $26 million, including $10 million of contributions in aid of construction and assumed debt of $1 million. The Company recorded additional goodwill of $3 million associated with four of its acquisitions, which is reported in its Regulated Businesses segment and is expected to be fully deductible for tax purposes. The Company also recognized a bargain purchase gain of $3 million associated with five of its acquisitions, of which $1 million was deferred as a regulatory liability.
During 2015, the Company also closed on the Keystone acquisition, which is included as part of the Market-Based Businesses, for a total purchase price of $133 million, net of cash received. The fair value of identifiable assets acquired and liabilities assumed was $56totaled $2 million and $7 million, respectively, and principally included the acquisition. Several of nonutility property of $25 million, accounts receivable and unbilled revenues of $18 million and intangible assets of $12 million. The purchase price allocation, which is based on the estimated fair value of net assets acquired, resulted in the Company recording redeemable noncontrolling interest of $7 million and additional goodwill of $91 million. This goodwill is expected to be fully deductiblethese acquisitions were accounted for tax purposes.as business combinations.
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.
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.
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
The followingPresented in the table summarizesbelow are the major classes of property, plant and equipment by category as of December 31:
| | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
| | | | |
(a)This includes utility plant acquisition adjustment balances in addition to property, plant and equipment 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.
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.
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
The followingPresented in the table summarizesbelow are the changes in the Company’s allowances for uncollectible accounts for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| 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 | ) |
Note 6: Regulatory Assets and Liabilities
Regulatory Assets
Regulatory assets represent costs that are probable of recovery from customers in future rates. The majority of the regulatory assets earn a return. The following table summarizes the composition of regulatory assets as of December 31:
|
| | | | | | | |
| 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 |
|
The Company’s deferred pension expense includes a(a)This portion of the underfunded status thatallowance for uncollectible accounts is probableprimarily related to COVID-19 related regulatory asset activity. The 2021 and 2020 activity also includes the portion of recovery through ratesthe allowance related to the Company’s New York subsidiary, which was completed on January 1, 2022, and is included in future periods of $270 million and $300 millionassets held for sale on the Consolidated Balance Sheets as of December 31, 20172021. See Note 5—Acquisitions and 2016, 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.Divestitures for additional information.
The Company has recorded a regulatory asset for the additional revenues expected to be realized when the tax effects of temporary differences previously flowed through to customers, reverse. These temporary differences are primarily related to the difference between book and tax depreciation on property placed in service before the adoption by the regulatory authorities of full normalization for rate making purposes. Full normalization requires no flow through of tax benefits to customers. The regulatory asset for income taxes recoverable through rates is net of the reduction expected in future revenues as deferred taxes previously provided, attributable to the difference between the state and federal income tax rates under prior law and the current statutory rates, reverse over the average remaining service lives of the related assets.
Removal costs recoverable through rates represent costs incurred for removal of property, plant and equipment or other retirement costs.
San Clemente Dam project costs represent costs incurred and deferred by the Company’s California subsidiary pursuant to its efforts to investigate alternatives to strengthen or remove the dam due to potential earthquake and flood safety concerns. In June 2012, the California Public Utilities Commission (“CPUC”) issued a decision authorizing implementation of a project to reroute the Carmel River and remove the San Clemente Dam. The project includes the Company’s California subsidiary, the California State Conservancy and the National Marine Fisheries Services. Under the order’s terms, the CPUC has authorized recovery for pre-construction costs, interim dam safety measures and environmental costs and construction costs. The authorized costs are to be recovered via a surcharge over a twenty-year period which began in October 2012. The unrecovered balance of project costs incurred, including cost of capital, net of surcharges totaled $89 million and $91 million as of December 31, 2017 and 2016, respectively. Surcharges collected were $7 million and $4 million for the years ended December 31, 2017 and 2016, respectively. In the current general rate case in California, there is a pending request to reset the twenty-year recovery period to begin on January 1, 2018 and to set the annual recovery amount.
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.
Debt expense is amortized over the lives of the respective issues. Call premiums on the redemption of long-term debt, as well as unamortized debt expense, are deferred and amortized to the extent they will be recovered through future service rates.
As a result of American Water Capital Corp.’s prepayment of the 5.62% Series C Senior Notes due December 21, 2018 (“Series C Senior Notes”) and 5.77% Series D Senior Notes due December 21, 2021 (“Series D Senior Notes”) and payment of a make-whole premium amount to the holders thereof of $34 million, the Company recorded a $6 million charge resulting from the early extinguishment of debt at the parent company. Substantially all of the early debt extinguishment costs allocable to the Company’s utility subsidiaries were recorded as regulatory assets that the Company believes are probable of recovery in future rates. Approximately $1 million of the early debt extinguishment costs allocable to the Company’s utility subsidiaries was amortized in 2017.
Purchase premium recoverable through rates is primarily the recovery of the acquisition premiums related to an asset acquisition by the Company’s California Utility subsidiary during 2002, and acquisitions in 2007 by the Company’s New Jersey Utility subsidiary. As authorized for recovery by the California and New Jersey PUCs, these costs are being amortized to depreciation and amortization in the Consolidated Statements of Operations through November 2048.
Tank painting costs are generally deferred and amortized to operations and maintenance expense in the Consolidated Statements of Operations on a straight-line basis over periods ranging from two to fifteen years, as authorized by the regulatory authorities in their determination of rates charged for service.
Other regulatory assets include certain construction costs for treatment facilities, property tax stabilization, employee-related costs, deferred other postretirement benefit expense, 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.
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. The following table summarizes the composition of regulatory liabilities as of December 31:
|
| | | | | | | |
| 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 |
|
Income taxes recovered through rates relate to deferred taxes that will likely be refunded to the Company’s customers. On December 22, 2017, the TCJA was signed into law, which, among other things, enacted significant and complex changes to the Internal Revenue Code of 1986, including a reduction in the maximum U.S. federal corporate income tax rate from 35% to 21% as of January 1, 2018. The TCJA created significant excess deferred income taxes that the Company and its regulatory jurisdictions believe should be refunded to customers. Since these are significant refundable amounts, the Company believes it is probable these amounts will be refunded to customers through future rates, and as such the amounts are recorded to a regulatory liability.
Removal costs recovered through rates are estimated costs to retire assets at the end of their expected useful life that are recovered through customer rates over the life of the associated assets. In December 2008, the Company’s utility subsidiary in New Jersey, at the direction of the New Jersey Board of Public Utilities, began to depreciate $48 million of the total balance into depreciation and amortization expense in the Consolidated Statements of Operations via straight line amortization through November 2048.
Pension and other postretirement benefit balancing accounts represent the difference between costs incurred and costs authorized by the PUCs that are expected to be refunded to customers.
Other regulatory liabilities include legal settlement proceeds, deferred gains and various regulatory balancing accounts.
Note 7:8: Goodwill and Other Intangible Assets
Goodwill
The followingPresented in the table summarizesbelow are the changes in the carrying amountvalue of goodwill for the years ended December 31, 20172022 and 2016:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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.
In 2016, the Company acquired aggregate goodwill of $43 million associated with fiveone of its acquisitions in the Regulated Businesses segment.
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.
At November 30, 2017, the Company completed step one of the two-step test for its Homeowner Services Group and Keystone reporting units. The Company also completed a step one test for the Keystone reporting unit at November 30, 2016. Based on those valuations, the Company concluded that there were no impairments to its goodwill. The Company used an income approach valuation technique which estimates the discounted future cash flows of operations. The discounted cash flow analysis relies on a single scenario reflecting the best estimate of projected cash flows. Significant assumptions were used in estimating the fair values, including the discount rate, growth rate and terminal value. At November 30, 2017, the estimated fair value of the Homeowner Services Group reporting unit exceeded its carrying value by more than 156%, and the estimated fair value of the Keystone reporting unit exceeded its carrying value by approximately 11%. If further decline in the fair value were to occur, the Keystone reporting unit would be at risk of failing step one of the goodwill impairment test.
There can be no assurances that the Company will not be required to recognize an impairment of goodwill in the future due to market conditions or other factors relatedintangible assets prior to the performancesale of HOS during the fourth quarter of 2021. All of the Company’s reporting units. These market events could include a decline over a period of timefinite-lived intangible assets were sold as part of the Company’s stock price,HOS sale transaction. As a decline over a periodresult, there was no gross carrying value or net book value of time in valuation multiplescustomer relationships and other intangible assets remaining as of comparable water utilities and reporting unit companies, the lack of an increase in the Company’s market price consistent with its peer companies, decreases in control premiums or continued downward pressure on commodity prices. A decline in the forecasted results in our business plan, such as changes in rate case results or capital investment budgets or changes in our interest rates, could also result in an impairment charge. In regards to the Keystone goodwill, adverse developments in market conditions, including prolonged depression of natural gas or oil prices or other factors that negatively impact our forecast operating results, cash flows or key assumptions in the future could result in an impairment charge of a portion or all of the goodwill balance.
Other Intangible Assets
Included in other long-term assets at December 31, 20172022 and 2016, is a $8December 31, 2021. Intangible asset amortization expense amounted to $9 million and $10$12 million respectively,for the years ended December 31, 2021 and 2020, respectively. There was no amortization expense related to customer relationshiprelationships and other intangible resulting fromassets for the Keystone acquisition. This intangible is being amortized on a straight-line basis over a period of eight years.year ended December 31, 2022.
Note 8: Stockholders’9: Shareholders’ Equity
CommonDividend Reinvestment and Direct Stock Purchase Plan
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.
Accumulated Other Comprehensive Loss
The followingPresented in the table presentsbelow are the changes in accumulated other comprehensive loss by component, net of tax, for the years ended December 31, 20172022 and 2016:2021:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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.
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.
On May 12, 2017, the Company’s stockholders approved the American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan (the “2017 Omnibus Plan”), approved by the Company’s shareholders in May 2017. Stock units under the 2017 Omnibus Plan generally vest based on (i) continued employment with the Company (“RSUs”), or (ii) continued employment with the Company where distribution of the shares is subject to the satisfaction in whole or in part of stated performance-based goals (“PSUs”). A total of 7.2 million shares of common stock may be issued under the 2017 Omnibus Plan. As of December 31, 2017, 7.22022, 6.3 million shares were available for grant under the 2017 Omnibus Plan. The 2017 Omnibus Plan provides that grants of awards may be in any of the following forms: incentive stock options, nonqualified stock options, stock appreciation rights, stock units, stock awards, other stock-based awards and dividend equivalents. Dividend equivalents which may be granted only on stock units or other stock-based awards. FollowingThe 2017 Omnibus Plan expires in 2027.
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.