Washington, D.C. 20549
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date: Common Stock, $0.01 par value per share—180,974,719181,858,619 shares as of February 13, 2020.January 31, 2023.
Portions of the American Water Works Company, Inc. definitive proxy statement for the 20202023 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission within 120 days after December 31, 20192022 are incorporated by reference into Part III of this report.
TABLE OF CONTENTS
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Item 1. | | |
Item 1A. | | |
Item 1B. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
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Item 5. | | |
Item 6. | | |
Item 7. | | |
Item 7A. | | |
Item 8. | | |
Item 9. | | |
Item 9A. | | |
Item 9B. | | |
Item 9C. | | |
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Item 10. | | |
Item 11. | | |
Item 12. | | |
Item 13. | | |
Item 14. | | |
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Item 15. | | |
Item 16. | | |
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FORWARD-LOOKING STATEMENTS
Statements included in Item 1—Business, Item 1A—Risk Factors, and Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations, and in other sections of this Annual Report on Form 10-K, or incorporated by reference into this Form 10-K,therein, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. In some cases, these forward-looking statements can be identified by words with prospective meanings such as “intend,” “plan,” “estimate,” “believe,” “anticipate,” “expect,” “predict,” “project,” “propose,” “assume,” “forecast,” “likely,” “uncertain,” “outlook,” “future,” “pending,” “goal,” “objective,” “potential,” “continue,” “seek to,” “may,” “can,” “should,” “will” and “could” or the negative of such terms or other variations or similar expressions. Forward-looking statements may relate to, among other things: the Company’s future financial performance;performance, liquidity and future cash flows; the timing and amount of rate and revenue adjustments, including through general rate case filings, filings for infrastructure surcharges and other governmental agency authorizations and proceedings, and filings to address regulatory lag; the Company’s growth and portfolio optimization strategies, including the timing and outcome of pending or future acquisition activity,activity; the completionability of the announced saleCompany’s California subsidiary to obtain adequate alternative water supplies in lieu of New York American Water Company, Inc. anddiversions from the amount of proceeds anticipated to be received therefrom;Carmel River; the amount and allocation of projected capital expenditures and related funding requirements; the Company’s ability to repay or refinance debt; the future impacts of increased or increasing financing costs, inflation and interest rates; the Company’s ability to execute its current and long-term business, operational and capital expenditures strategies; itsthe Company’s ability to finance current operations, capital expenditures and growth initiatives by accessing the debt and equity capital markets; the outcome and impact on the Company of legal and similar governmental and regulatory proceedings and related potential fines, penalties and other sanctions; the ability to meet or exceed the Company’s stated environmental and sustainability goals, including its greenhouse gas (“GHG”) emission reduction, water delivery efficiency and water system resiliency goals; the ability to complete, and the timing and efficacy of, the design, development, implementation and improvement of technology and other strategic initiatives; the impacts to the Company of the ongoing COVID-19 pandemic; the ability to capitalize on existing or future utility privatization opportunities; trends in the water and wastewater industries in which the Company operates, including macro trends with respect to the Company’s efforts related to customer, technology and work execution; regulatory, legislative, tax policy or legal developments; and projected impacts that the Tax Cuts and Jobs Act (the “TCJA”)future significant tax legislation may have on the Company and on its business, results of operations, cash flows and liquidity.
Forward-looking statements are predictions based on the Company’s current expectations and assumptions regarding future events. They are not guarantees or assurances of any outcomes, financial results, levels of activity, performance or achievements, and readers are cautioned not to place undue reliance upon them. These forward-looking statements are subject to a number of estimates, assumptions, known and unknown risks, uncertainties and other factors. The Company’s actual results may vary materially from those discussed in the forward-looking statements included herein as a result of the factors discussed under Item 1A—Risk Factors, and the following important factors:
•the decisions of governmental and regulatory bodies, including decisions to raise or lower customer rates;
•the timeliness and outcome of regulatory commissions’ and other authorities’ actions concerning rates, capital structure, authorized return on equity, capital investment, system acquisitions and dispositions, taxes, permitting, water supply and management, and other decisions;
•changes in customer demand for, and patterns of use of, water and energy, such as may result from conservation efforts;efforts, or otherwise;
•limitations on the availability of the Company’s water supplies or sources of water, or restrictions on its use thereof, resulting from allocation rights, governmental or regulatory requirements and restrictions, drought, overuse or other factors;
•a loss of one or more large industrial or commercial customers due to adverse economic conditions, or other factors;
•changes in laws, governmental regulations and policies, including with respect to environmental, health and safety, data and consumer privacy, security and protection, water quality and water quality accountability, contaminants of emerging contaminants,concern, public utility and tax regulations and policies, and impacts resulting from U.S., state and local elections;elections and changes in federal, state and local executive administrations;
•the Company’s ability to collect, distribute, use, secure and store consumer data in compliance with current or future governmental laws, regulations and policies with respect to data and consumer privacy, security and protection;
•weather conditions and events, climate variability patterns, and natural disasters, including drought or abnormally high rainfall, prolonged and abnormal ice or freezing conditions, strong winds, coastal and intercoastal flooding, pandemics (including COVID-19) and epidemics, earthquakes, landslides, hurricanes, tornadoes, wildfires, electrical storms, sinkholes and solar flares;
•the outcome of litigation and similar governmental and regulatory proceedings, investigations or actions;
•the risks associated with the Company’s aging infrastructure, and its ability to appropriately improve the resiliency of or maintain and replace, current or future infrastructure and systems, including its operationaltechnology and technology systems,other assets, and manage the expansion of its businesses;
•exposure or infiltration of the Company’s technology and critical infrastructure systems, including the disclosure of sensitive, personal or confidential information contained therein, through physical or cyber attacks or other means;
•the Company’s ability to obtain permits and other approvals for projects;projects and construction of various water and wastewater facilities;
•changes in the Company’s capital requirements;
•the Company’s ability to control operating expenses and to achieve operating efficiencies;
•the intentional or unintentional actions of a third party, including contamination of the Company’s water supplies or the water provided to its customers;
•the Company’s ability to obtain and have delivered adequate and cost-effective supplies of pipe, equipment (including personal protective equipment), chemicals, electricity,power and other fuel, water and other raw materials;materials, and to address or mitigate supply chain constraints that may result in delays or shortages in, as well as increased costs of, supplies, products and materials that are critical to or used in the Company’s business operations;
•the Company’s ability to successfully meet its operational growth projections, for the Regulated Businesses and the Market-Based Businesses (each as defined in this Form 10-K), either individually or in the aggregate, and capitalize on growth opportunities, including, among other things, with respect to:
•acquiring, closing and successfully integrating regulated operations and market-based businesses;operations;
•the Company’s Military Services Group (“MSG”) entering into new military installation contracts, price redeterminations, and other agreements and contracts, with or otherwise obtaining, new customers or partnerships in the Market-Based Businesses;U.S. government; and
•realizing anticipated benefits and synergies from new acquisitions;
•risks and uncertainties following the completion of the sale of the Company’s Homeowner Services Group (“HOS”), including:
•the Company’s ability to receive any contingent consideration provided for in the HOS sale, as well as amounts due, payable and owing to the Company under the seller note when due; and
•the ability of the Company to redeploy successfully and timely the net proceeds of this transaction into the Company’s Regulated Businesses;
•risks and uncertainties associated with contracting with the U.S. government, including ongoing compliance with applicable government procurement and security regulations;
•cost overruns relating to improvements in or the expansion of the Company’s operations;
•the Company’s ability to successfully develop and implement new technologies and to protect related intellectual property;
•the Company’s ability to maintain safe work sites;
•the Company’s exposure to liabilities related to environmental laws and similar matters resulting from, among other things, water and wastewater service provided to customers;
•the ability of energy providers, state governments and other third parties to achieve or fulfill their GHG emission reduction goals, including without limitation through stated renewable portfolio standards and carbon transition plans;
•changes in general economic, political, business and financial market conditions;
•access to sufficient debt and/or equity capital on satisfactory terms and when and as needed to support operations and capital expenditures;
•fluctuations in inflation or interest rates;rates, and the Company’s ability to address or mitigate the impacts thereof;
restrictive•the ability to comply with affirmative or negative covenants in the current or changes to the credit ratings onfuture indebtedness of the Company or any of its subsidiaries, or onthe issuance of new or modified credit ratings or outlooks by credit rating agencies with respect to the Company or any of theirits subsidiaries (or any current or future indebtedness thatthereof), which could increase the Company’s financing costs or funding requirements orand affect the Company’s or its subsidiaries’ ability to borrow,issue, repay or redeem debt, pay dividends or make payments on debt or pay dividends;distributions;
•fluctuations in the value of, or assumptions and estimates related to, its benefit plan assets and liabilities, including with respect to its pension and other post-retirement benefit plans, that could increase the Company’s costexpenses and plan funding
requirements;
•changes in federal or state general, income and other tax laws, including any further rules, regulations, interpretations(i) future significant tax legislation, and guidance by the U.S. Department of the Treasury and state or local taxing authorities (collectively, the “Related Interpretations”) related to the enactment of the TCJA,(ii) the availability of, or the Company’s compliance with, the terms of applicable tax credits and tax abatement programs, and the Company’s ability to utilize its U.S. federal and state income tax net operating loss (“NOL”) carryforwards;programs;
•migration of customers into or out of the Company’s service territories;territories and changes in water and energy consumption resulting therefrom;
•the use by municipalities of the power of eminent domain or other authority to condemn the systems of one or more of the Company’s utility subsidiaries, or the assertion by private landowners of similar rights against such utility subsidiaries;
•any difficulty or inability to obtain insurance for the Company, its inability to obtain insurance at acceptable rates and on acceptable terms and conditions, or its inability to obtain reimbursement under existing or future insurance programs and coverages for any losses sustained;
•the incurrence of impairment charges, changes in fair value and other adjustments related to the Company’s goodwill or the value of its other assets;
•labor actions, including work stoppages and strikes;
•the Company’s ability to retain and attract highly qualified employees;and skilled employees and/or diverse talent;
•civil disturbances or unrest, or terrorist threats or acts, or public apprehension about future disturbances, unrest, or terrorist threats or acts; and
•the impact of new, and changes to existing, accounting standards.
These forward-looking statements are qualified by, and should be read together with, the risks and uncertainties set forth above and the risk factors included in Item 1A—Risk Factors and other statements contained in this Annual Report on Form 10-K, and readers should refer to such risks, uncertainties and risk factors in evaluating such forward-looking statements. Any forward-looking statements the Company makes shall speak only as of the date this Annual Report on Form 10-K was filed with the U.S. Securities and Exchange Commission (“SEC”). Except as required by the federal securities laws, the Company does not have any obligation, and it specifically disclaims any undertaking or intention, to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or otherwise. New factors emerge from time to time, and it is not possible for the Company to predict all such factors. Furthermore, it may not be possible to assess the impact of any such factor on the Company’s businesses, either viewed independently or together, or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. The foregoing factors should not be construed as exhaustive.
PART I
ITEM 1. BUSINESS
The Company
With a history dating back to 1886, American Water is the largest and most geographically diverse, publicly-traded water and wastewater utility company in the United States, as measured by both operating revenues and population served. A holding company originally incorporated in Delaware in 1936, the Company employs approximately 6,8006,500 professionals who provide drinking water, wastewater and other related services to approximately 15over 14 million people in 4624 states. The Company conducts the majority of its business through regulated utilities that provide water and wastewater services, collectively presented as the “Regulated Businesses.” The Company also operates other market-based businesses that provide complementary services.water and wastewater services to the U.S. government on military installations, as well as municipalities. Individually, these market-based businesses do not meet the criteria of a reportable segment in accordance with generally accepted accounting principles in the United States (“GAAP”), and are collectively presented as the “Market-Based Businesses,throughout this Annual Report on Form 10-K within “Other,” which is consistent with how management assesses the results of these businesses.
On December 9, 2021 (the “Closing Date”), the Company sold all of the equity interests of the HOS subsidiaries. See Item 1—Business—Other—Sale of Homeowner Services Group below and Note 5—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional information.
On January 1, 2022, the Company completed the sale of its New York subsidiary, see Item 1—Business—Regulated Businesses—Sale of New York American Water Company, Inc. below and Note 5—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional information.
Throughout this Annual Report on Form 10-K, unless the context otherwise requires, references to “we,” “us,” “our,” the “Company,” and “American Water” mean American Water Works Company, Inc. and its subsidiaries, taken together as a whole. References to “parent company” mean American Water Works Company, Inc., without its subsidiaries.
Regulated Businesses
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. The Company’s utilities operate in approximately 1,7001,600 communities in 1614 states in the United States, with over 3.4 million active customers in its water and wastewater networks. Services provided by the Company’s utilities are subject to regulation by multiple state utility commissions or other entities engaged in utility regulation, collectively referred to as public utility commissions (“PUCs”). Federal, state and local governments also regulate environmental, health and safety, and water quality and water accountability matters. The Company reports the results of the services provided by its utilities in the Regulated Businesses segment. Operating revenues for the Regulated Businesses were $3,094$3,505 million for 2019, $2,9842022, $3,384 million for 20182021 and $2,958$3,255 million for 2017,2020, accounting for 86%92%, 87%86% and 88%86%, respectively, of the Company’s total operating revenues for the same periods.
Presented in the table below is a geographic summary of the Regulated Businesses’ operating revenues and the number of customers the Company serves, by type of service, for and as of the year ended December 31, 2019:2022:
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| Operating Revenues (in millions) | | Number of Customers (in thousands) |
| Water (a) | | Wastewater | | Total | | % of Total | | Water | | Wastewater | | Total | | % of Total |
New Jersey | $ | 858 | | | $ | 51 | | | $ | 909 | | | 25.9 | % | | 663 | | | 59 | | | 722 | | | 20.9 | % |
Pennsylvania | 714 | | | 105 | | | 819 | | | 23.4 | % | | 679 | | | 97 | | | 776 | | | 22.5 | % |
Missouri | 367 | | | 16 | | | 383 | | | 10.9 | % | | 480 | | | 22 | | | 502 | | | 14.6 | % |
Illinois | 310 | | | 39 | | | 349 | | | 10.0 | % | | 297 | | | 71 | | | 368 | | | 10.7 | % |
California | 281 | | | 4 | | | 285 | | | 8.1 | % | | 189 | | | 3 | | | 192 | | | 5.6 | % |
Total—Top Five States (b) | 2,530 | | | 215 | | | 2,745 | | | 78.3 | % | | 2,308 | | | 252 | | | 2,560 | | | 74.2 | % |
Other (c) | 733 | | | 27 | | | 760 | | | 21.7 | % | | 853 | | | 36 | | | 889 | | | 25.8 | % |
Total Regulated Businesses | $ | 3,263 | | | $ | 242 | | | $ | 3,505 | | | 100.0 | % | | 3,161 | | | 288 | | | 3,449 | | | 100.0 | % |
(a)Includes other operating revenues consisting primarily of miscellaneous utility charges, fees and rents.
(b)The Company’s “Top Five States” are determined based upon operating revenues.
(c)Includes the Company’s utility operations in the following states: Georgia, Hawaii, Indiana, Iowa, Kentucky, Maryland, Tennessee, Virginia and West Virginia and other revenue attributable collectively to the Regulated Businesses. The Company completed the sale of its New York subsidiary on January 1, 2022 and the sale of its Michigan subsidiary on February 4, 2022.
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| Operating Revenues (in millions) | | Number of Customers (in thousands) |
| Water (a) | | Wastewater | | Total | | % of Total | | Water | | Wastewater | | Total | | % of Total |
New Jersey | $ | 718 |
| | $ | 42 |
| | $ | 760 |
| | 24.6 | % | | 651 |
| | 51 |
| | 702 |
| | 20.4 | % |
Pennsylvania | 627 |
| | 62 |
| | 689 |
| | 22.3 | % | | 666 |
| | 74 |
| | 740 |
| | 21.6 | % |
Missouri | 314 |
| | 11 |
| | 325 |
| | 10.5 | % | | 470 |
| | 15 |
| | 485 |
| | 14.1 | % |
Illinois | 281 |
| | 24 |
| | 305 |
| | 9.9 | % | | 286 |
| | 51 |
| | 337 |
| | 9.8 | % |
California | 228 |
| | 4 |
| | 232 |
| | 7.5 | % | | 177 |
| | 3 |
| | 180 |
| | 5.2 | % |
Indiana | 223 |
| | 1 |
| | 224 |
| | 7.2 | % | | 314 |
| | 2 |
| | 316 |
| | 9.2 | % |
West Virginia | 158 |
| | 1 |
| | 159 |
| | 5.1 | % | | 166 |
| | 1 |
| | 167 |
| | 4.9 | % |
Total—Top Seven States (b) | 2,549 |
| | 145 |
| | 2,694 |
| | 87.1 | % | | 2,730 |
| | 197 |
| | 2,927 |
| | 85.2 | % |
Other states (c) | 378 |
| | 22 |
| | 400 |
| | 12.9 | % | | 475 |
| | 32 |
| | 507 |
| | 14.8 | % |
Total Regulated Businesses | $ | 2,927 |
| | $ | 167 |
| | $ | 3,094 |
| | 100.0 | % | | 3,205 |
| | 229 |
| | 3,434 |
| | 100.0 | % |
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(a) | Includes other operating revenues consisting primarily of miscellaneous utility charges, fees and rents. |
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(b) | The Company’s “Top Seven States” are determined based upon operating revenues. |
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(c) | Includes the Company’s utilities in the following states: Georgia, Hawaii, Iowa, Kentucky, Maryland, Michigan, New York, Tennessee and Virginia. |
Customers
The Company’s Regulated Businesses have a large and geographically diverse customer base. A customer is defined as a person, business, municipality or any other entity that purchases the Company’s water or wastewater services as of the last business day of a reporting period. One single customer may purchase the Company’s services for use by multiple individuals or businesses, such asbusinesses. Examples of these customers are homes, apartment complexes, businesses and governmental entities.
The vast majority of the Company’s regulated water customers are metered, which allows the Company to measure and bill for its customers’ water usage, typically on a monthly basis. The Company employs a variety of methods of customer meter reading to monitor consumption. These methods range from meters with mechanical registers where consumption is manually recorded by meter readers, to meters with electronic registers capable of transmitting consumption data to proximity devices or via radio frequency to mobile or fixed network data collectors. The Company’s wastewater customers are billed either a flat rate or based upon their water consumption.
Residential customers make up a substantial portion of the Company’s customer base in all of the states in which it operates. The Company also serves (i) commercial customers, such as food and beverage providers, commercial property developers and proprietors, and energy suppliers, (ii) fire service customers, where the Company supplies water through its distribution systems to public fire hydrants for firefighting purposes and to private fire customers for use in fire suppression systems in office buildings and other facilities, (iii) industrial customers, such as large-scale manufacturers, mining and production operations, (iv) public authorities, such as government buildings and other public sector facilities, including schools and universities, and (v) other utilities and community water and wastewater systems in the form of bulk contracts for the supply of water or the treatment of wastewater for their own customers.
The following chart depicts the allocation of the Company’s Regulated Businesses’ operating revenue of $3,094$3,505 million by type, including a breakout of the total water services revenues by class of customer, for the year ended December 31, 2019:2022:
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(a) | Includes water revenues from public authorities and other utilities and community water systems under bulk contracts. |
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(b) | Includes other operating revenues consisting primarily of miscellaneous utility charges, fees and rents. |
(a)Includes water revenues from public authorities and other utilities and community water systems under bulk contracts.
(b)Includes other operating revenues consisting primarily of miscellaneous utility charges, fees and rents.
Presented in the table below is the number of water and wastewater customers the Company served by class as of December 31:31, 2022, 2021 and 2020, which represents approximately 14 million people served as of December 31, 2022:
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| 2022 | | 2021 | | 2020 |
(In thousands) | Water | | Wastewater | | Water | | Wastewater | | Water | | Wastewater |
Residential | 2,870 | | | 270 | | | 2,972 | | | 245 | | | 2,948 | | | 236 | |
Commercial | 219 | | | 17 | | | 225 | | | 15 | | | 225 | | | 15 | |
Fire service | 51 | | | — | | | 52 | | | — | | | 50 | | | — | |
Industrial | 4 | | | — | | | 4 | | | — | | | 4 | | | — | |
Public and other (a) | 17 | | | 1 | | | 16 | | | 1 | | | 17 | | | 1 | |
Total (b) | 3,161 | | | 288 | | | 3,269 | | | 261 | | | 3,244 | | | 252 | |
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| | | | | | | | | | | | | | | | | |
| 2019 | | 2018 | | 2017 |
(In thousands) | Water | | Wastewater | | Water | | Wastewater | | Water | | Wastewater |
Residential | 2,914 |
| | 215 |
| | 2,892 |
| | 188 |
| | 2,872 |
| | 182 |
|
Commercial | 222 |
| | 13 |
| | 222 |
| | 11 |
| | 221 |
| | 11 |
|
Fire service | 49 |
| | — |
| | 48 |
| | — |
| | 47 |
| | — |
|
Industrial | 4 |
| | — |
| | 4 |
| | — |
| | 4 |
| | — |
|
Public and other (a) | 16 |
| | 1 |
| | 16 |
| | 1 |
| | 16 |
| | — |
|
Total | 3,205 |
| | 229 |
| | 3,182 |
| | 200 |
| | 3,160 |
| | 193 |
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(a) Includes public authorities and other utilities and community water and wastewater systems under bulk contracts. Bulk contracts, which are accounted for as a single customer in the table above, generally result in service to multiple customers. | |
(a) | Includes public authorities and other utilities and community water and wastewater systems under bulk contracts. Bulk contracts, which are accounted for as a single customer in the table above, generally result in service to multiple customers. |
(b)The Company completed the sale of its New York subsidiary on January 1, 2022 and the sale of its Michigan subsidiary on February 4, 2022.
Customer growth in the Company’s Regulated Businesses is primarily from (i) adding new customers to its customer base through acquisitions of water and/or wastewater utility systems, (ii) population growth in its authorized service areas, and (iii) sale of water to other water utilities and community water systems.
Capital Investment
Excluding acquisitions, theThe Company plans to invest $8.2 billion over the next five years and between $18$30 billion and $19$34 billion over the next 10 years including $1.6 billion in 2020, for capital improvements, including acquisitions, to its Regulated Businesses’ water and wastewater infrastructure, largely for pipe replacement and upgrading aging water and wastewater treatment facilities. The Company has proactively improved its pipe renewal rate from a 250-year replacement cycle in 2009 to an expected 115-year110-year replacement cycle by 2024,2027, which it anticipates will enable the Company to replace nearly 2,0002,100 miles of mains and collection pipes between 20202023 and 2024.2027. In addition, from 20202023 to 2024,2027, the Company’s capital investment in treatment plants, storage tanks and other key, above-ground facilities is expected to increase, further addressingseeking to address infrastructure renewal, resiliency, water quality, operational efficiency, technology and innovation, and emerging regulatory compliance needs. Additionally, the Company is investingcontinues to invest significantly in resiliency projects to address the impacts of climate and weather variability by hardening its assets. Recently completed projects include the $25 million raised floodwall project at New Jersey’s Raritan Millstone Water Treatment Plant which provides protection against a 500 year flood, and the $15 million Bel Air, Maryland Reservoir project which provides 90 million gallons of drought mitigation water storage for the region.
Regulation and Rate Making
The operations of the Company’s Regulated Businesses are generally subject to regulation by PUCs in the states in which they operate, with the primary responsibility of the PUCs to promotebeing the promotion of the overall public interest by balancing the interest of customers and utility investors. Specific authority might differ from state to state, but in most states, PUCs review and approve rates charged to customers, accounting treatments, long-term financing programs and cost of capital, operation and maintenance (“O&M”) expenses, capital expenditures, taxes, affiliated transactions and relationships, reorganizations, and mergers and acquisitions, and dispositions, along with imposing certain penalties or granting certain incentives. Regulatory policies vary from state to state and could potentiallycan change over time. These policies will affect the timing, as well as the extent, of recovery of expenses and the realized return on invested capital.
Periodic changes in customer rates generally occur through the filing of a rate case by the utility with the PUC. The timing of rate case filings is typically determined by either periodic requirements in the regulatory jurisdiction or by the utility’s need to increase its revenue requirement to recover capital investment costs, changes in operating revenues, operating costs or other market conditions. The Company attempts to minimize “regulatory lag,” which is the time between the occurrence of an event that triggers a change in the utility’s revenue requirement and itsthe recognition in rates.rates of that change.
The Company’s Regulated Businesses support regulatory practices at the PUCs and state legislatures that mitigate the adverse impact of regulatory lag. Presented in the table below are examples of approved regulatory practices:
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Regulatory Practices | | Description | | States Allowed |
Infrastructure replacement surchargessurcharge mechanisms | | Allows rates to change periodically, outside a general rate case proceeding, to reflect recovery of capital investments made to replace infrastructure necessary to sustain safe and reliable services for the Company’s customers. These mechanisms typically involve periodic filings and reviews to ensure transparency. | | IA, IL, IN, KY, MO, NJ, NY, PA, TN, VA, WV |
Future test year | | A test“test year” is a period used for setting rates, which begins withand a future test year describes the datefirst 12 months that new rates are proposed to be effective. ThisThe use of a future test year allows current or projected revenues, expenses and capital investments to be collected on a more timely basis. | | CA, HI, IA, IL, IN, KY, NY, PA, TN, VA |
Hybrid test year | | AllowsA historical test year sets rates using data from a 12-month period that ends prior to a general rate case filing. A hybrid test year allows an update to historical data for “known and measurable” changes that occur subsequent to the historical test year. | | MD, MO, NJ, WV |
Utility plant recovery mechanisms | | Allows recovery of the full return on utility plant costs during the construction period, instead of capitalizing an allowance for funds used during construction.construction (“AFUDC”). In addition, some states allow the utility to seek pre-approval of certain capital projects and associated costs. In this pre-approval process, the PUC may assess the prudency of such projects. | | CA, IL, KY, NY, PA, TN, VA |
Expense mechanisms | | Allows changes in certain operating expenses, which may fluctuate based on conditions beyond the utility’s control, to be recovered outside of a general rate case proceeding or deferred until the next general rate case proceeding. | | CA, HI, IL, IN, MD, MO, NJ, NY, PA, TN, VA |
Revenue stability mechanisms | | Separates a utility’s cost recovery from the amount of water it sells to recover its fixed costs and ongoing infrastructure investment needs. Such a mechanism adjustsAdjusts rates periodically to ensure that a utility’s revenue will be sufficient to coverutility recovers the revenues authorized in its costs,general rate case, regardless of sales volume, including recognition of declining sales resulting from reduced consumption, while providing an incentive for customers to use water more efficiently. | | CA, IL NY |
Consolidated tariffs | | Use of a unified rate structure for water systems owned and operated by a single utility, which may or may not be physically interconnected. The consolidated tariff pricing structure may be used fully or partially in a state, and is generally used to prioritize capital investments and moderate the price impact of periodic fluctuations in local costs, while lowering administrative costs for customers. Pennsylvania and West Virginia also permitspermit a blending of water and wastewater revenue requirements. | | CA, IA, IL, IN, KY, MD, MO, NJ, NY, PA, VA, WV |
Deferred accounting | | A regulator’s willingness to defer recognition of financial impacts when setting rates for utilities. | | All |
The Company pursues enhancementenhancements to these regulatory practices to facilitate efficient recovery of its costs and capital investments in orderand to continue to provide safe, clean, reliable and affordable services to its customers. The ability to seek regulatory treatment asusing the regulatory practices described above does not guarantee that the PUCs will accept the Company’s proposal in the context of a particular rate case, and these regulatory practices may reduce, but not eliminate, regulatory lag associated with traditional rate making processes. It is also the Company’s strategy to expand the use of these mechanisms in areas where they may not currently apply.apply and enhance certain mechanisms where they already exist.
Acquisitions and Strategic Growth
The U.S. water and wastewater industries include investor-owned systems as well as municipal systems that are owned and operated by local governments or governmental subdivisions. According to the U.S. Environmental Protection Agency (“EPA”), as of 2017, approximately 84% of the water market is served by municipal systems and approximately 98% of the country’s wastewater systems are government owned. The EPA also estimates, as of 2017, that there are approximatelyover 50,000 community water systems and approximatelyover 15,000 community wastewater systems in the United States, with approximately 80% of the community water systems serving a population of 3,000 or less.
A fundamental aspect of the Company’s growth strategy is to pursue acquisitions of small and medium water and/or wastewater systems in geographic proximity to areas where the Company operates its Regulated Businesses.Businesses, see Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations for additional information. The proximity of acquisition opportunities to the Company’s regulated footprint allows it to integrate and manage the acquired systems and operations primarily using itsthe Company’s existing management although(although the Company typically retains the majority, if not all, of the employees of the acquired systems) and to achieve operational efficiencies and prioritize capital investment needs. The Company’s current customer mix of 93%92% water and 7%8% wastewater also presents strategic opportunities for wastewater growth and systems consolidation, allowing itthe Company to add wastewater customers where the Companyit already serves water customers. The Company intends to continue to expand its regulated footprint geographically by acquiring water and wastewater systems in its existing markets and, if appropriate, pursuing acquisition opportunities in certain domestic markets where the Company does not currently operate its Regulated Businesses. Before entering new regulated markets, the Company will evaluate the business and regulatory climates to ensure that it will have the opportunity to achieve an appropriate rate of return on its investment while maintaining its high standards for providing safe, reliable and affordable services to its customers, as well ascustomers. The Company will also evaluate whether there is a line of sight to grow the Company’s base customers to sufficient scale in a new regulated market so that it can attain efficiencies after entering thea new domestic market.
Increasingly stringent environmental, health and safety, cybersecurity and water quality and water accountability regulations, the amount of infrastructure in need of significant capital investment, financial challenges and industry legislation are several elements, among others, that may drive more municipalities to consider selling their water and wastewater assets.
Sale of New York American Water Company, Inc.
On January 1, 2022, the Company completed the sale of its New York subsidiary to Liberty Utilities (Eastern Water Holdings) Corp. (“Liberty”), an indirect, wholly owned subsidiary of Algonquin Power & Utilities Corp. Under the terms of the Stock Purchase Agreement, dated November 20, 2019, as amended, by and among the Company, the Company’s New York subsidiary and Liberty (the “Stock Purchase Agreement”), Liberty purchased from the Company all of the capital stock of the Company’s New York subsidiary for a purchase price of $608 million in 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 had approximately 127,000 customers in the State of New York. See Note 5—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional information.
Industry Legislation
On November 15, 2021, the Infrastructure Investment and Jobs Act (the “IIJA”) was signed into law and provides for up to $55 billion to aid in improving the country’s ailing water infrastructure, including $23.4 billion for drinking water and wastewater, $15 billion for lead service line replacement (through the drinking water state revolving fund), and $10 billion for the treatment of per- and polyfluoroalkyl substances (“PFAS”) and other contaminants of emerging concern. The IIJA also included a low-income assistance program, in which eligible low-income customers who receive their water from public and private entities may participate. The Company has leveraged these funds throughout its service areas to benefit its customers.
In December 2020, Congress passed, and the President signed into law, a $900 billion COVID-19 relief and $1.4 trillion U.S. government appropriations package for 2021, which included $638 million for a low-income water assistance program and $2.8 billion for capitalization grants under the Clean Water and Drinking Water state revolving funds.
In 2017, New Jersey enacted the Water Quality Accountability Act (the “WQAA”), which sets operational standards for all water utilities in New Jersey, including municipal and investor-owned utilities with more than 500 service connections. This law imposes requirements in areas such as cybersecurity, asset management, water quality reporting, remediation of notices of violation, and hydrant and valve maintenance. The WQAA requires the most senior water manager, or either the executive director for municipal utility authorities or the mayor or chief executive officer for municipally owned public water systems, to certify that the system meets the requirements under the WQAA. In 2019,Enhanced WQAA legislation includes additional enforcement requirements for disclosure of results, requires the New Jersey Senate held three hearings onsale of systems for prolonged violations and imposes new cybersecurity requirements and asset management plans. The new amendments, which provide for both civil and criminal penalties for falsification of documents, were signed by the WQAA and is expected to introduce legislation in the new 2020 legislative session that would strengthen accountability for obligations under the WQAA.Governor with an effective date of November 8, 2021.
In 2018, similar legislation wasIndiana passed in Indiana thata law to set newminimum operational requirementsexpectations for all water and wastewater treatment plants as part ofutilities in the permitting process for construction, installation, or modification of sources, facilities, equipment or devices. These requirements includestate, including municipal and investor-owned utilities. The law requires water and wastewater utilities to conduct rate analyses, develop capital asset management plans that include annual reviews of infrastructure needs, engineering analysis of useful life, and a rate analysis to support the capital asset management plan. A life cycle cost-benefit analysis must be done comparing owningconduct cybersecurity and operating a plant to other alternatives to supply water or wastewater services. Cybersecurity plans must also be developed. loss audits.
In 2019, additional legislation was passed which set requirements for access to loans or grants such as participation in regional planning events, use of current capital asset management programs, and elimination of the causes of non-revenue water. The finance authority was also required to establish project prioritization that included consideration of project effects on public health and safety, user rates and charges, plans for collaboration, plans to manage non-revenue water and use of best practices.
Also, in 2018, America’s Water Infrastructure Act of 2018 was signed into law. The legislation includes policies intended to improve water and wastewater system management and authorization for states to assess consolidation options for systems that do not comply with the federal Safe Drinking Water Act and its rules and regulations. The legislation increases funding to water system funding programs, including the State Revolving Loan Fund program and2020, Missouri enacted the Water Infrastructure FinanceSafety and InnovationSecurity Act, of 2014 (“WIFIA”).which requires small and medium-sized water providers to create cybersecurity, valve inspection and hydrant inspection programs.
The Company’s regulated subsidiaries in California, Illinois, Indiana, Iowa, Kentucky, Maryland, Missouri, New Jersey, Pennsylvania, Tennessee, Virginia and PennsylvaniaWest Virginia have access to fair market valueutility valuation legislation and regulation for private sector investment in public sector water and wastewater systems. The Company supports full optionality for municipalities, including state legislation that enables the consolidation of the largely fragmented water and wastewater industries through third-party fair market valuations of purchased property. Fair market value assessment of water and wastewater systems is an alternative to the traditional depreciated original cost method of valuation, providingwhich allows the Company to offer municipalities with a purchase price for their system assets that is reflective of the assets’ fair market value, while providing the utility hasCompany with increased assurance of recoveringopportunity to recover the purchase price over the life of the purchased system assets, subject to state regulatory commissionPUC approval. In 2021, the Tennessee Public Utility Commission implemented acquisition valuation rules that include a methodology to value water and wastewater assets based upon the new replacement cost of the assets less the depreciation, in addition to other valuation methodology options.
Consolidated tariffs use a unified rate structure for systems owned and operated by a single utility, which may or may not be physically interconnected. Consolidated tariff pricing moderates the impact of periodic fluctuations in local costs and promotes a more universal water infrastructure investment in the state.a jurisdiction. As a result, consolidated tariffs can make it easier to incorporate new systems into an existing utility, and can ensuresupport economies of scale for even the smallest of systems and prioritize capital needs across the state.jurisdiction. Overall, this bringsthe Company believes that consolidated tariffs bring cost-effective, higher qualityhigh-quality services to a larger number of citizens. Twelvecustomers. Eleven of the Company’s regulated jurisdictions currently have some form of consolidated tariff pricing, including California, Illinois, Indiana, Iowa, Kentucky, Maryland, Missouri, New Jersey, New York, Pennsylvania, Virginia and West Virginia.
In 2018, legislation was enacted in the Company’s Missouri and California subsidiaries changing the public vote requirement for the sale
Competition
The Company’s Regulated Businesses generally do not face direct competition in their existing markets because (i) the Company operates in those markets pursuant to franchises, charters, certificates of public convenience and necessity or similar authorizations (collectively, “CPCNs”) issued by state PUCs or other authorities, and (ii) the high cost of constructing a new water and wastewater system in an existing market creates a significant barrier to market entry. However, the Company’s Regulated Businesses do face competition from governmental agencies, other investor-owned utilities, large industrial customers with the ability to provide their own water supply/treatment process and strategic buyers that are entering new markets and/or making strategic acquisitions. When pursuing acquisitions, the Company’s largest investor-owned competitors, based on a comparison of operating revenues and population served, areinclude Essential Utilities, Inc. (formerly known as Aqua America, Inc.), Suez North America, American States Water Company and California Water Service Group. From time to time, the Company also faces competition from infrastructure funds, multi-utility companies and others, such as Algonquin Power and Utilities Corp., Eversource Energy, SouthWest Water Company and Corix.
Corix Infrastructure, Inc.
Condemnation and Eminent Domain
All or portions of the Regulated Businesses’ utility assets could be acquired by state, municipal or other government entities through one or more of the following methods: (i) eminent domain (also known as condemnation); (ii) the right of purchase given or reserved by a municipality or political subdivision when the original CPCN was granted; and (iii) the right of purchase given or reserved under the law of the state in which the utility subsidiary was incorporated or from which it received its CPCN. The acquisition consideration related to such a proceeding initiated by a local government may be determined consistent with applicable eminent domain law, or may be negotiated or fixed by appraisers as prescribed by the law of the state or inthe jurisdiction of the particular CPCN.
As such, the Regulated Businesses are periodically subject to condemnation proceedings in the ordinary course of business. For example, a citizens group in Monterey, California successfully added “Measure J” to the November 2018 election ballot asking voters to decide whether the Monterey Peninsula Water Management District (the “MPWMD”) should conduct a feasibility study concerning the potential purchase of the Monterey water service system assets (the “Monterey system assets”) of the Company’s California subsidiary and, if feasible, to proceed with(“Cal Am”) are the subject of a purchase of those assets without an additional public vote. This service territory represents approximately 40,000 customers. Inpotential condemnation action by the Monterey Peninsula Water Management District (the “MPWMD”) stemming from a November 2018 Measure J was certified to have passed.
On August 19, 2019, the MPWMD’s General Manager issued a report that recommends that the MPWMD board (1) develop criteria to determine which water systems should be considered for acquisition, (2) examine the feasibility of acquiring the Monterey system assets and consider public ownership of smaller systems only if the MPWMD becomes the owner of a larger system, (3) evaluate whether it is in the public interest to acquire the Monterey system assets and sufficiently satisfy the criterion of “feasible” as provided in Measure J, (4) ensure there is significant potential for cost savings before agreeing to commence an acquisition, and (5) develop more fully alternate operating plans before deciding whether to consider a Resolution of Necessity.
On November 6,ballot initiative. In 2019, the MPWMD issued a preliminary valuation and cost of service analysis report, finding in part that (1) an estimate of the Monterey system assets’ total value plus adjustments would be approximately $513 million, (2) the cost of service modeling results indicate significant annual reductions in revenue requirements and projected monthly water bills, and (3) the acquisition of the Monterey system assets by the MPWMD would be economically feasible. The MPWMD will hold public hearings regarding the findings contained in this preliminary report. IfIn 2020, the MPWMD were to makecertified a final determination thatenvironmental impact report, analyzing the environmental impacts of the MPWMD’s project to (1) acquire the Monterey system assets through the power of eminent domain, if necessary, and (2) expand its geographic boundaries to include all parts of this system.
In February 2021, the MPWMD filed an application with the Local Agency Formation Commission of Monterey County (“LAFCO”) seeking approval to become a retail water provider and annex approximately 58 parcels of land into the MPWMD’s boundaries. In June 2021, LAFCO’s commissioners voted to require a third-party independent financial study as to the feasibility of an acquisition by the MPWMD of the Monterey system assets is feasible, thenassets. In December 2021, LAFCO’s commissioners denied the MPWMD’s application to become a retail water provider, determining that the MPWMD would commencedoes not have the authority to proceed with a multi-year eminent domain proceedingcondemnation of the Monterey system assets. On April 1, 2022, the MPWMD filed a lawsuit against the Company’s California subsidiaryLAFCO challenging its decision to first establishdeny the MPWMD’s rightapplication seeking approval to takebecome a retail water provider. For more information on the lawsuit against LAFCO, see Item 3—Legal Proceedings—Proposed Acquisition of Monterey System Assets — Local Area Formation Commission Litigation. By letter dated October 3, 2022, the MPWMD notified Cal Am of a decision to appraise the Monterey system assets and ifrequesting access to a number of Cal Am’s properties and documents to assist the MPWMD with such an appraisal. Cal Am responded by letter on October 24, 2022, denying the request for access, stating that the MPWMD does not have the right is established, to determine the amount of just compensationappraise Cal Am’s system without LAFCO approval to be paid to the California subsidiary for such assets.become a retail water provider.
Also, five municipalities in the Chicago, Illinois area (approximately 30,300 customers in total) formed a water agency and filed an eminent domain lawsuit against the Company’s Illinois subsidiaryCompany in January 2013, seeking to condemn the water pipeline that serves those five municipalities. Before filing its eminent domainDuring a valuation trial held in January 2023, the parties settled the lawsuit and the water agency made an offer of $38 million fordismissed the eminent domain case, and as a result the Company will retain the pipeline. A jury trial will take place to establish the valueAs part of the pipeline. The parties have fileddismissal, the Company’s Illinois subsidiary and another subsidiary entered into a settlement agreement with the court updated valuation reports. Althoughwater agency agreeing to, among other things, maintain through December 31, 2027 the dateutility-specific wholesale water rate passed through to customers of the valuation trial has not currently been scheduled, it is not likely to commence beforepipeline, such that the second quarterrate, exclusive of 2020.other pass-through charges, remains no higher than the current rate.
Furthermore, the law in certain jurisdictions in which the Regulated Businesses operate provides for eminent domain rights allowing private property owners to file a lawsuit to seek just compensation against a public utility, if a public utility’s infrastructure has been determined to be a substantial cause of damage to that property. In these actions, the plaintiff would not have to prove that the public utility acted negligently. In California, for example, lawsuits have been filed in connection with large-scale natural events such as wildfires. Some of these lawsuits have included allegations that infrastructure of certain utilities triggered the natural event that resulted in damage to the property. In some cases, the PUC has allowed certain costs or losses incurred by the utility to be recovered from customers in rates, but in other cases such recovery in rates has been disallowed. Also, the utility may have obtained insurance that could respond to some or all of such losses, although the utility would be at risk for any losses not ultimately subject to rate or insurance recovery or losses that exceed the limits of such insurance.
Water Supply and Wastewater Services
The Company’s Regulated Businesses generally own the physical assets used to store, pump, treat and deliver water to its customers and collect, treat, transport and recycle wastewater. Typically, the Company does not own the water, which is held in public trust and is allocated to the Company through contracts, permits and allocation rights granted by federal and state or multi-state agencies or through the ownership of water rights pursuant to local law. The Company is dependent on defined sources of water supply and obtains its water supply from surface water sources such as reservoirs, lakes, rivers and streams; from groundwater sources, such as wells and aquifers; and water purchased from third-party water suppliers. The level of water treatment the Company applies varies significantly depending upon the quality of the water source and customer stipulations. Surface water sources typically generally require significant treatment, while groundwater sources often require chemical treatment only.
Presented in the chart below are the Company’s sources of water supply as of December 31, 2019:2022:
Presented in the table below are the percentages of water supply by source type for the Company’s top seven statesTop Five States for 2019:the year ended December 31, 2022:
| | | | | | | | | | | | | | | | | |
| Surface Water | | Ground Water | | Purchased Water |
New Jersey | 74% | | 22% | | 4% |
Pennsylvania | 91% | | 7% | | 2% |
Missouri | 78% | | 21% | | 1% |
Illinois | 54% | | 35% | | 11% |
California | — | | 68% | | 32% |
|
| | | | | |
| Surface Water | | Ground Water | | Purchased Water |
New Jersey | 72% | | 24% | | 4% |
Pennsylvania | 91% | | 7% | | 2% |
Missouri | 77% | | 22% | | 1% |
Illinois | 55% | | 35% | | 10% |
California | — | | 64% | | 36% |
Indiana | 44% | | 56% | | — |
West Virginia | 100% | | — | | — |
The Company’s ability to meet the existing and future water demands of its customers depends on an adequate water supply. Drought, governmental restrictions, overuse of sources of water, the protection of threatened species or habitats, contamination or other factors may limit the availability of ground and surface water. The Company employs a variety of measures in an effort to obtain adequate sources of water supply, both in the short-term and over the long-term. The geographic diversity of the Company’s service areas may mitigate some of the economic effects on the water supply associated with weather extremes itthe Company might encounter in any particular service territory. For example, in any given summer, some areas may experience drier than average weather, which may reduce the amount of source water available, while other areas the Company serves may experience wetter than average weather.
The Company evaluates quality, quantity, growth needs and alternate sources of water supply as well as transmission and distribution capacity.capacity to provide water service to its customers. Water supply is seasonal in nature and weather conditions can have a pronounced effect on supply. In order to ensure that the Company has adequate water supply, it uses long-term planning processes and maintains contingency plans to minimize the potential impact on service caused by climate variability and a wide range of weather fluctuations. The Company reviews current climate science and global models related to temperature, precipitation and sea level rise on an ongoing basis. Where actionable forecasts are available, the Company will use this information in its comprehensive planning studies and asset management plans. These studies and plans, which are used by the Company to develop its asset management and system reliability strategies, assess the climate risk and resiliency of the Company’s water and wastewater systems over short-, medium- and long-term time horizons, and include evaluations of the availability of water supplies and system capacity against a number of different factors, projections and estimates.
In connection with supply planning for most surface or groundwater sources, the Company employs models to determine safe yields under different rainfall and drought conditions. Surface and ground water levels are routinely monitored so that supply capacity deficits may, to the extent possible, be predicted and mitigated through demand management and additional supply development. In California, where the state has been experiencing a multi-year drought, the Company utilizes multiple water supply options including numerous ground water wells in multiple aquifers as well as various long-term purchase water agreements with regional water suppliers to optimize supplies while assuring resiliency during dry years. An example of the Company’s use of long-term planning to ensure that it has adequate water supply is its involvement in the Monterey Peninsula Water Supply Project (the “Water Supply Project”) in California. The Water Supply Project includes the construction of a desalination plant, to be owned by the Company’s California subsidiary, and the construction of wells that would supply water to the desalination plant. In addition, the Water Supply Project also includes the California subsidiary’s purchase of water from a groundwater replenishment project (the “GWR Project”) between Monterey One Water (formerly known as the Monterey Regional Water Pollution Control Agency) and the MPWMD. The Water Supply Project is intended, among other things, to fulfill obligations of the California subsidiary to eliminate unauthorized diversions from the Carmel River as required under orders of the California State Water Resources Control Board (the “SWRCB”). For more information, see Item 3—Legal Proceedings—Alternative Water Supply in Lieu of Carmel River Diversions.Diversions and Note 16—Commitments and Contingencies—Contingencies—Alternative Water Supply in Lieu of Carmel River Diversions, in the Notes to the Consolidated Financial Statements.
Wastewater services involve the collection of wastewater from customers’ premises through sewer lines. The wastewater is then transported through a sewer network to a treatment facility, where it is treated to meet required regulatory standards for wastewater before being returned to the environment. The solid waste by-product of the treatment process is disposed of or recycled in accordance with applicable standards and regulations.
Seasonality
Customer demand for the Company’s water service is affected by weather and tends to vary with temperature and amount and frequency of rainfall. Customer demand is generally greater during the warmer months, primarily due to increased water usage for irrigation systems and other outdoor water use. As such, the Company typically expects its operating revenues to be the highest in the third quarter of each year. Weather that is hotter and/or drier than average generally increases operating revenues, whereas, weather that is cooler and/or wetter than average generally serves to suppresssuppresses customer water demand and can reduce water operating revenues. ThreeTwo of the Company’s jurisdictions, California Illinois and New York,Illinois, have adopted revenue stability mechanisms which permit the Company to collect state PUC-authorized revenue for a given period whichthat is not tied to the volume of water sold during that period, thereby lessening the impact of weather variability. See “Regulation—Regulation and Rate Making” for additional information regarding revenue stability mechanisms.
Market-Based Businesses11
The Company’s Market-Based Businesses provide complementary home services
Other
Other primarily to residential and smaller commercial customers and water and wastewater services toincludes the U.S. government on military installations, as well as municipalities, utilities and industrial customers. These businesses are not subject to regulation by state PUCs and the services provided generally do not require significant capital investment. Operating revenues for the Company’s Market-Based Businesses were $539 million for 2019, $476 million for 2018 and $422 million for 2017, accounting for 15%, 14% and 13%, respectively, of the Company’s total operating revenues for the same periods.
The Company’s primary Market-Based Businesses include the following operating segments:
Homeowner Services Group (“HOS”),MSG business, which provides various warranty protection programs and other home services to residential customers;
Military Services Group (“MSG”), which enters into long-term contracts with the U.S. government to provide water and wastewater services on various military installations.
The Company also has fivefour contracts with municipal customers to operate and manage water and wastewater facilities and provide other related services through its Contract Services Group (“CSG”).
Other also includes CSG, corporate costs that are not allocated to the Company’s Regulated Businesses, 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. Previously, the Company provided customized water transferhome services for shale natural gas explorationprimarily to residential and production companiessmaller commercial customers through its Keystone Clearwater Solutions, LLC (“Keystone”) operations. On December 12, 2019,former HOS business, which was sold on the Closing Date. As a result of the sale of HOS, the categories which were previously shown as part“Market-Based Businesses” and “Other” have been combined and are shown as Other. The businesses included withinOther are not subject to regulation by state PUCs and the services provided generally do not require significant capital investment. Operating revenues for Other were $287 million for 2022, $546 million for 2021 and $522 million for 2020, accounting for 8%, 14% and 14%, respectively, of a strategic review undertaken by the Company,Company’s total operating revenues for the Company sold all of its interest in Keystone to a natural gas and oil industry investment group. See Note 4—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional information.
Homeowner Services Group
The Company’s Homeowner Services Group, which includes the operations of Pivotal Home Solutions (“Pivotal”) acquired in June 2018, provides warranty protection programs and other home services to residential customers for interior and exterior water and sewer lines, interior gas and electric lines, heating and cooling systems, water heaters and other home appliances, as well as power surge protection and other related services. The Company develops partnerships with municipalities, utilities and other organizations to offer protection programs to customers serviced by, or affiliated with, those municipalities, utilities and organizations. The term of these partnership agreements with the municipalities, utilities and other organizations is typically three to five years, with mutual optional renewals. As of December 31, 2019, HOS had approximately 3 million customer contracts in 43 states.same periods.
Military Services Group
The Company’s Military Services GroupMSG operates on 1618 military installations under 50-year contracts with the U.S. government as part of its UtilityUtilities Privatization Program. The scope of these contracts generally includes the operation and maintenance of the installation’s water and wastewater systems and a capital program focused on asset replacement and, in certain instances, systems expansion. The replacement of assets assumed when a contract is awarded to the CompanyMSG is completed either through a discrete set of projects executed in the first five years of the contract or through the long termlong-term recapitalization program performed over the life of the contract. Traditionally, both of these programs are funded from the contract fee. At times, new assets are required to support the installation’s mission, and the construction of these assets areis funded by the U.S. government as separate modifications or amendments to the contract. The capital programfor these assets historically has not usedbeen funded through the Company’s debt or equity or debt borrowings;issuances; rather, the Company has used limited working capital for short-term needs under these contracts. In April 2018, the U.S. Army instituted a requirement that a bidder must offer financing in its proposal for these new capital projects. However,projects under existing contracts, but the U.S. Army’s implementation of this requirement on existing contracts has limited the need for such financing. However, recent U.S. Army and Navy Utilities Privatization solicitations have included requirements for the successful bidder to finance discrete initial capital projects over either a five- or ten-year period after project completion. Four of MSG’s current contracts require such capital project financing, of these projects andwhich the Company has been awarded several projects without any requirement to provide financing.is currently addressing through internal sources of liquidity.
The contract price for ninefour of the Company’sMSG’s contracts with the U.S. government is subject to redetermination two years after commencement of operations, and every three years thereafter. Price redetermination is a contract mechanism to periodically adjust the service fee in the next period, to reflect changes in contract obligations and anticipated market conditions. The remaining seven14 contracts with the U.S. government are subject to annual price adjustments under a mechanism similar to price redetermination called “Economic Price Adjustment.” All of these18 contracts could be terminated, in whole or in part, prior to the end of the 50-year term for convenience of the U.S. government, or as a result of default or non-performance by the MSG subsidiary performing the contract. In either event, pursuant to termination provisions applicable to all of these contracts, the CompanyMSG would be entitled to recover allowable costs that it may have incurred under the contract, plus the contract profit margin on incurred costs. The Company’sMSG’s backlog of revenue associated with its contracts with the U.S. government is approximately $5.4$6.9 billion, with an average remaining contract term of 4240 years.
Sale of Homeowner Services Group
Prior to the Closing Date, the Company provided various warranty protection programs and other home services primarily to residential and smaller commercial customers through its HOS operations. On the Closing Date, the Company sold all of the equity interests in its HOS subsidiaries to an indirect, 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. See Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 5—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional information.
Competition
The Company’s Market-Based Businesses faceMSG faces competition from a number of service providers, including HomeServe USA and Cinch Home Services in HOS, and American States Water Company Suez North America, and Veolia Environnement S.A. in MSG.
Environmental, Health and Safety, Water Quality and Other Regulation
The Company’s water and wastewater operations, including the services provided by both its Regulated Businesses, MSG and Market-Based Businesses,CSG, are subject to extensive federal, state and local laws and regulations governing the protection of the environment, health and safety, the provision of water and wastewater services, particularly with respect to the quality of water the Company delivers to its customers, and the manner in which it collects, treats, discharges, recycles and disposes of wastewater. In the United States, these regulations are developed under federal legislation including the Safe Drinking Water Act, the Reduction of Lead in Drinking Water Act and the Clean Water Act.Act, and under a variety of applicable state laws. Environmental, health and safety, and water quality regulations are complex and may vary from state to state in those instances where a state has adopted a standard that is more stringent than the Federalfederal standard. For example, while the EPA has issued a non-enforceable Health Advisoryannounced the intention to propose drinking water regulations for the combined level of two perfluorinatedPFAS compounds (perfluorooctanoic acid, or PFOA, and perfluorooctane sulfonate,sulfonic acid, or PFOS), and issued non-enforceable lifetime Health Advisory Levels for PFOA, PFOS and two other PFAS compounds, the New Jersey Department of Environmental Protection is developinghas already established enforceable drinking water standards for these twothree PFAS compounds (PFOA, PFOS, and has adopted a standard for a third compound, perfluorononanoic acid, or PFNA, as well as other perfluoroalkylPFNA) and polyfluoroalkyl substances, or PFAS.the Pennsylvania Department of Environmental Protection also recently announced enforceable drinking water standards for PFOA and PFOS in advance of the federal EPA proposed regulations. The Company is also subject to various federal, state, and local laws and regulations governing the storage of hazardous materials, the management and disposal of hazardous and solid wastes, discharges to air and water, the cleanup of contaminated sites, dam safety and other matters relating to the protection of the environment and health and safety. PUCs also set conditions and standards for the water and wastewater services the Company delivers.
The Company maintains an environmental program that includes responsible business practices focused on compliance with environmental laws and regulations and the effective use of natural resources, which is important given the overall trendrecognizing that drinking water standards have generally, over time, increased in number and become increasingly more stringent over time.stringent. As newer or stricter standards are introduced, the Company’s capital and operating costs couldneeded to comply with them will likely increase. The Company incurs substantial costs associated with compliance with the environmental, health and safety, and water quality standards to which its operations are subject and the Company invests in technology solutions for enhanced detection and monitoring.monitoring of water quality issues. The Company estimates that it will make capital expenditures of approximately $600$800 million over the next five years, and $195 million in 2023 for environmental control facilities, which the Company defines for this purpose as any project (or portion thereof) that involves the preservation of air, water or land. The Company believes that its operations are materially in compliance with, and in many cases surpass, minimum standards required by applicable environmental laws and regulations.
The Company’s operations also involve the use, storage and disposal of hazardous substances and wastes. For example, the Company’s water and wastewater treatment facilities store and use chlorine and other chemicals that generate wastes that require proper handling and disposal under applicable environmental requirements. The Company also could incur remedial costs in connection with any contamination relating to its operations or facilities or its off-site disposal of wastes.waste. The Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (“CERCLA”), authorizes the EPA, and comparable state laws authorize state environmental authorities, to issue orders and bring enforcement actions to compel responsible parties to investigate and take remedial actions at any site that is determined to present an actual or potential threat to human health or the environment because of an actual or threatened release of one or more hazardous substances. Parties that generated or transported hazardous substances to such sites, as well as current and former owners and operators of such sites, may be deemed liable, without regard to fault, under CERCLA or comparable state laws. Although the Company is not aware of any material cleanup or decontamination obligations, the discovery of contamination or the imposition of such obligations in the future could result in additional costs.costs to the Company. The Company’s facilities and operations are also subject to requirements under the U.S. Occupational Safety and Health Act and inspections thereunder. Certain of the Company’s subsidiaries are involved in pending legal proceedings relating to environmental matters. See Item 3—Legal Proceedings for additional information.
Safe Drinking Water Act
The Safe Drinking Water Act and related regulations establish national quality standards for drinking water. The EPA has issued rules governing the levels of numerous, naturally occurring and man-mademanufactured chemical and microbial contaminants and radionuclides allowable in drinking water, and continues to propose new rules. These rules also prescribe testing requirements for detecting regulated contaminants, the treatment systems that may be used for removing those contaminants, and other requirements. To date, the EPA has set standards for approximatelyover 90 contaminants and water quality indicators for drinking water, and there is a process in place to make a regulatory determination on at least five additional compounds every five years.
To help formulate the basis for future regulations, the EPA has the authority to require monitoring for additional, unregulated contaminants under the Unregulated Contaminant Monitoring Rule (the “Monitoring Rule”). The Company’s facilities have participated in the data gathering effort for the Monitoring Rule in previous rounds, which occurs every five years, and are also a participant in the ongoing fourth round, which is scheduled for completion by the end of 2020. There are millions of other chemical compounds that are not regulated, many of which are lacking a testing methodology, occurrence data, health effects information and/or treatment technology. The process of developing new drinking water standards is long and complex, but the Company actively participates with the EPA and other water industry groups by sharing research and water quality operational knowledge. See “Research—Research and Development—Contaminants of Emerging Containments”Concern for additional information.
To effect the removal or inactivation
The Company is within the EPA’s time frame for compliance with these standards and rules developed under the regulation of the Safe Drinking Water Act, which includes sample collection, data analysis, and, in some instances engineering planning and system implementation. Recent monitoring under the Long-Term 2 Rule has resulted in the need for more than 30implementation of the Company’s surface water systems to provide additional protection against cryptosporidium. In many cases, this will involve installing UV disinfection, and although several plants have already completed assessments and upgrades, an estimated $150 million to $250 million of investment will still be required for the remaining facilities.treatment enhancements. Further, the EPA is actively considering regulations for a number of contaminants, including strontium, hexavalent chromium, fluoride, nitrosamines, perchlorate, some pharmaceuticals and certain volatile organic compounds. The Company does not anticipate that any such regulations, if enacted, will require implementation in 2020.
The Company conducts over one million water quality tests each year at its laboratory facilities and plant operations, including continuous online instrumentations such as monitoring turbidity levels, disinfectant residuals and adjustments to chemical treatment based on changes in incoming water. The Company participates in the Partnership for Safe Water, the EPA’s voluntary program to meet more stringent goals for reducing microbial contaminants. With 69 of the Company’s 80 surface water treatment plants receiving the EPA program’s prestigious “Director” award, which recognizes utilities that (i) have completed a comprehensive self-assessment report, (ii) created an action plan for continuous improvement, and (iii) produced high-quality drinking water, the Company accounts for approximately one-third of the plants receiving such awards nationwide. In addition, 67 of the Company’s surface water treatment plants have received the “Five-Year Phase III” award, 62 plants have received the “Ten-Year Phase III” award, 58 plants have received the “Fifteen-Year Phase III” award, and three plants have received the “Twenty-Year Phase III” award; these awards recognize plants that have met the Director award status for five, 10, 15 and 20 years, respectively. Further, nine of the Company’s surface water plants have received the “Presidents” award, which recognizes treatment plants that achieve the Partnership’s rigorous individual filter effluent turbidity standards.2023.
Although it is difficult to project the ultimate costs of complying with the above or other pending or future requirements, the Company expects current cost requirements under the Safe Drinking Water Act and other similar laws to be recoverable through the regulatory process and therefore compliance costs are not expected to have a material impact on its operations or financial condition. In addition, capital expenditures and operating costs to comply with environmental mandates have been traditionally recognized by PUCs as appropriate for inclusion in establishing rates. As a result, the Company expects to recover the operating and capital costs resulting from these pending or future requirements.
Lead and Copper Rule and Reduction of Lead in Drinking Water Act
In 1991, the EPA published the Lead and Copper Rule (“LCR”) to control lead and copper in drinking water and, since that time, has issued minor revisions in 2000, 2004 and 2007, enhancing monitoring, reporting and public education requirements. In 2011, Congress enacted the Reduction of Lead in Drinking Water Act regarding the use and introduction into commerce of lead pipes, plumbing fittings for fixtures, solder and flux. While these advances have made an impact in reducing lead exposure in drinking water, legacy lead plumbing materials, primarily in building plumbing, still remain in many communities. The failure of certain water systems in the United States to comply with the requirements of the LCR has received recent media attention and scrutiny, and in certain cases, has led to a number of investigations and the imposition of significant penalties and sanctions against the operators of those systems and others. As part of its ongoing water main replacement and service line renewal projects, the Company has started to replace LSLslead service lines (“LSLs”) in accordance with current scientific guidance. Also, the Company utilizes appropriate corrosion control techniques as necessary to comply with current water quality regulatory requirements. TheOn December 21, 2021, the EPA proposed revisionsannounced next steps to strengthen the LCR in November 2019 designed to provide more effective protection of public health by reducing exposure toregulatory framework on lead and copper in drinking water.water, including implementing the Lead and Copper Rule Revisions (“LCRR”) and indicated their intent to finalize a forthcoming Lead and Copper Rule Improvements (“LCRI”) prior to October 16, 2024, the initial compliance date in the LCRR. The Company continues to review the implications of the LCR and comments on the proposed revisions to the rule were due to the EPA by February 12, 2020. The Company will developis executing an implementation strategy to comply with the new requirements, if and when adopted, priorinitial LCRR requirement to the compliance effective dates in the final rule.complete a lead service line inventory. Capital expenditures and operating costs associated with compliance with any of these rule revisions cannotthe LCRI will be determined untilonce the finalEPA finalizes the rule, is promulgated, but as previously noted, costs associated with compliance with federal water quality regulations have been traditionally recognized by PUCs as appropriate for inclusion in establishing rates.
The Company currently estimates that approximatelyless than 5% of the service lines within its regulated service territories contain lead on either the Company or customer portion of the service line (“LSLs”).line. The Company is replacing LSLs as part of its ongoing water main replacement and service line renewal projects. The Company’s goal is to work with the communities it currently serves to replace a significant majority of presently known LSLs in most of its service areas by the end of 2030, at an estimated cost ranging fromadditional investment range of $600 million to $1.2 billion. The Company believes this will be attainable for most of its service areas where public policy is supportive of this goal. The IIJA was signed into law in November 2021 and provides for up to $15 billion for lead service line replacement through drinking water state revolving funds. The Company is awaiting further guidance on eligibility, the application process and the distribution of these funds. With regard to future acquisitions, the Company will work with those communities as part of the acquisition process to set LSL removal goals appropriate for those systems. The prioritization of LSL removal plan is dependent on several factors, including the Company’s planned water main and service line renewal projects, adjacent projects by municipalities or other utilities, LCR compliance monitoring results, and cooperation with its customers with respect to replacing the customer-owned portion of the LSL as necessary. In certain cases, these and other factors may result in a shorter or longer time frame for replacement. Because replacing the external LSL in its entirety is advised by several water industry organizations including the U.S. National Drinking Water Advisory Council, the Lead Service Line Replacement Collaborative, and the American Water Works Association, the Company’s preferred approach is to replace the entire external LSL if lead is found on either the Company or customer portion of the service line.line; full LSL replacement is also consistent with the LCRR. The Lead Service Line Replacement Collaborative is a diverse group of public health, water utility, environmental, labor, consumer and housing organizations from across the country working together to encourage communities to accelerate the full replacement of LSLs through collaborative efforts at the local level.
Clean Water Act
The Clean Water Act regulates discharges from drinking water and wastewater treatment facilities into lakes, rivers, streams and groundwater. In addition to requirements applicable to the Company’s wastewater collection systems, its operations require discharge permits under the National Pollutant Discharge Elimination System (“NPDES”) permit program established under the Clean Water Act, which must be renewed every five years. Pursuant to the NPDES permit program, the EPA and implementing states set maximum discharge limits for wastewater effluents and overflows from wastewater collection systems. Discharges that exceed the limits specified under NPDES permits can lead to the imposition of fines and penalties, and persistent non-compliance could lead to significant fines and penalties and other compliance costs. In addition, the difficulty of obtaining and complying with NPDES permits, and renewing expiring permits, may impose time and cost burdens on the Company’s operations. From time to time, discharge violations occur at the Company’s facilities, some of which result in fines. The Company does not expect any such violations or fines to have a material impact on its results of operations or financial condition.
Environmental, Social Responsibility The EPA has identified leveraging wastewater discharge permitting and Governance
The Company considersapplication of biosolids, or sewage sludge, containing PFAS as areas of focus in its PFAS Strategic Roadmap. Individual states may also take action in these areas. As indicated previously, capital expenditures and operating costs to comply with environmental social responsibility and governance(“ESG”) to include: environmental leadership and sustainability; operational excellence; employee engagement, safety and equality; active community engagement, civic and charitable involvement; and transparency and good governance. Integration of these principles into the Company’s daily operations emphasizes its belief that “how”mandates have been traditionally recognized by PUCs as appropriate for inclusion in establishing rates. As a company operates is just as important as “what” a company does.
This focus is derived from the Company’s vision statement, “clean water for life,” and its core values: (i) safety; (ii) trust; (iii) environmental leadership; (iv) teamwork; and (v) high performance, which are the principles by which it operates. The Company’s vision and values drive its company strategy, which is centered on five central themes:
Safety—The safety of the Company’s employees and its customers is the number one focus for American Water.
Customers—The Company’s customers are at the center of everything it does, helpingresult, the Company expects to shape its strategic priorities. The Company challenges itself so that if its regulated utility customers were to have a choice of providers,recover the Company would want them to choose American Water.
People—Maintaining an environment which is open, transparent, diverse and inclusive, and where the Company’s people feel valued, included and accountable, is critical to the Company’s ability to serve its customers every day.
Operational Excellence—The Company’s operational excellence strategy helps it to find better and more efficient ways to do business, and to provide safe, clean and affordable water services for its customers.
Growth—The Company believes that when companies grow, they can invest more in creating stable jobs, training, benefits, infrastructure and their communities. The Company’s growth benefits all of its stakeholders, including its shareholders.
In 2019, the Company issued its fifth biennial Sustainability Report, covering its sustainability performance for calendar years 2018 and 2017. This report can be accessed on the Company’s website, https://amwater.com, and was prepared in accordance with the GRI Standards: Core Option, as well as standards from the Sustainability Accounting Standards Board and Edison Electric Institute. The Company’s first report was issued in 2011, making American Water the first large water services company to measure its performance against the Global Reporting Index. In addition, the Company’s sustainability practices have supported its inclusion in the Euronext Vigeo® U.S. 50 index, FTSE4Good index series, 2018 NAACP Equity Inclusion and Empowerment Index, 2019 Constituent MSCI ESG Leaders Indexes, 2020 Bloomberg Gender-Equality Index, and ranked 16th on the Corporate Knights’ 2020 Global 100 Most Sustainable Corporations in the World.
The following highlights the Company’s commitment to its ESG policies and practices:
Environmental and Sustainability Practices
Energy Use
The Company lowered its greenhouse gas emissions through December 31, 2018 by approximately 31% since its base year of 2007 with a goal of achieving a 40% reduction by 2025.
The Company’s headquarters building in Camden, New Jersey attained LEED Platinum certification, and earned all possible points within the sustainable site credit category.
Design, construct, operate and maintain the Company’s systems for efficiency and best practices.
Water Supply
Constructed a new 90 million gallon reservoir and intake in Bel Air, Maryland in response to water supply demands during times of drought and in order to meet levels required by Maryland regulators. The new reservoir provides a long-term, safe and reliable water supply and economic opportunity in that region.
Water Policy Leadership
Expect to spend between $8.8 billion and $9.4 billion from 2020 to 2024 and between $20 billion and $22 billion from 2020 to 2029 on capital investments to address aging infrastructure, reduce or eliminate leaks, improve cyber and physical security, and increase resiliency of critical assets against the impacts of climate variability. Approximately 8% of the Company’s total projected capital investment is dedicated to resiliency.
More than $1.5 billion per year is allocated to renewing and improving regulated assets through a long-term perspective.
Scientists dedicated to research and partnering with water research foundations, on water quality and technology-water source monitoring.
Collaboration and partnerships with federal and state agencies to support effective environmental, health and safety and water quality standards and regulations.
Social Responsibility
People
During 2019, nearly 96,000 hours of safety training were completed by the Company’s employees.
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• | As a result of the Company’s continued focus on safety, the Company has made significant progress towards its zero injuries goal, reducing workplace injuries by 61% over the past five years, and the Company’s 2019 safety performance was the best in its recorded history. Through year end 2019, the Company has further reduced its recordable injury rate to 1.13, approximately 62% better than the industry average.
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During 2019, approximately 86% of the Company’s job requisitions had a diverse candidate pool, with approximately 57% of transfers or promotions filled by minority, female, veteran or disabled individuals.
Customers
Achieved a customer satisfaction rating in the top quartile among the Company’s industry peer group.
Communities
More than 5,000 hours of Company-sponsored community service performed during 2019 by its employees.
Company-sponsored workplace giving campaigns with the United Way and Water For People.
Through annual contributions from the American Water Charitable Foundation, the Company focused on supporting its employees in their own charitable endeavors, providing support for disaster relief efforts, and providing funding for initiatives related to clean water, conservation, education and community sustainability.
Governance
Board and Committees
The Board of Directors and each of its committees are led by an independent, non-executive chairperson.
The Board of Directors met 12 times in 2019.
In July 2019, the Board of Directors added three additional directors, increasing its size from eight to 11 members. The three new directors represent gender, racial and experiential diversity, and all three have extensive regulated utility backgrounds.
Diversity
With the addition of three new directors in 2019, the percentage of women on the Board of Directors increased to 54.5% as of December 31, 2019.
The Company’s average director tenure was approximately 5.8 years as of December 31, 2019.
Demonstrated and Representative Expertise
The Company’s Board of Directors has demonstrated expertise, including experience in utility and finance operations, customer service, cybersecurity, the military, financial servicesoperating and capital markets, service as a public company CEO and board member, and management of global operations.costs resulting from any new requirements in these areas.
Research and Development
The Company’s Research and Development Program
The Company maintains an industry-leading Researchresearch and Developmentdevelopment (“R&D”) program that is designed to enhance its services, help ensuresupport its compliance activities, improve service quality and operational effectiveness, and provide environmental leadership. For more than three decades from its inception, American Water’s R&D program has evolved into an industry leadingindustry-leading effort and has achieved numerous advancements in the science of drinking water, wastewater, and desalination. Through laboratory and industry resources and the team’s expertise, efforts are focused on contaminants of emerging concern, including but not limited to COVID-19, PFAS, Legionella, cyanotoxin-forming algal blooms, a variety of pathogens (for example, Cryptosporidium, Giardia, enteric viruses, and various bacteria), microbial indicators and disinfection byproducts. The Company’s R&D personnel are located at the Company’s corporate headquarters and at two laboratory testing facilities in New Jersey and Illinois, the latter housing its quality control and testing laboratory, which supports the Company’s R&D activities through testing and analysis.
The Company continues to leverage its expertise and collaboratecollaborates with the EPA and state agencies to help establish effective environmental, health and safety, and water quality standards and regulation.regulations. This relationship includes the sharing of the Company’s research, such as its treatment and distribution system optimization research and its national water quality monitoring data. The Company’s engagement with the EPA provides it with early insight into emerging regulatory issues and initiatives, thereby allowing the Company to anticipate and to accommodate its future compliance requirements. The Company also frequently engages with the Centers for Disease Control and Prevention, other state environmental agencies, and national and international water research foundations. The Company believes that continued R&D activities are critical for providing safe, reliable and affordable services, as well as maintaining its leadership position in the industry, which provides the Company with a competitive advantage as it seeks additional business with new and existing customers.operational growth.
Contaminants of Emerging ContaminantsConcern
Emerging contaminantsContaminants of emerging concern include numerous chemicals such as PFAS, pharmaceuticals, personal care products, pesticides, herbicides, andantibiotic resistant bacteria (ARB), antibiotic resistant genes (ARG), endocrine disrupting compounds, microplastics and industrial chemicals, as well as somecertain naturally occurring microbes, such as bacteria, viruses and parasites, which have been detected in drinking water supplies, for which the risk to the public’s health is not fully understood and/or has not been quantified. While these contaminants have been present in drinking water for as long as they have been in use, technologicalassessed. Technological advances have only recently made it possible to detect many of them.these contaminants at trace levels. The ability to detect contaminants, even at trace levels, has raised questionsinvited discussion about these contaminants among regulators and government agencies, further affectingwhich in turn shapes the public’s perception of drinking water quality.
The Chemicals Abstract Service Registry contains over 159203 million registered chemicals, with an estimated 1,400 species of disease-causing microbes that can affect humans. The Company is continually investigating new substances and contaminants, employing a team of scientists, engineers and public health professionals to identify threats to its water supply, to act on emerging regulations and new health advisories, and to evaluate the benefits of alternative or advanced treatment technologies. The Company maintains state-of-the-artutilizes water quality testing equipment and implements new and emerging technologies to help predict and managedetect potential water supply contamination issues. Examples of the Company’s efforts include:
•monitoring impacts of environmental pathogen loads and removal through wastewater systems;
•characterizing factors that contribute to the formation of potentially carcinogenic disinfection by-products to define best practices for their mitigation;
•advancing the science on holistic management strategies to improve distribution system water quality further;
•using its research findings to communicate information to its customers onregarding potential actions to limit occurrences of Legionella in their buildings; in this regard, the actions they can take to manage Legionella (the Centers for Disease Control and Prevention statistics indicate that water-associated disease from Legionella is on the rise, with exposure typically associated with customer-owned plumbing systems in large buildings);buildings;
aerial drone testing•defining a framework to support management or possible future regulation of opportunistic pathogens;
•developing expanded monitoring methods for short-chain and fluorinated replacement PFAS and piloting treatment techniques;
•systematically investigating PFAS removal by treatment processes in a wide range of water matrices;
•leading a PFAS risk communication strategy for the water sector;
•using innovative technologies to detect harmfuland manage algal blooms and testing ultrasonic technology to help prevent taste and odor events and to eliminate cyanotoxins before they get to the water treatment plant;
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• | the implementation of water source assessment tools, including sensors and analytics, to evaluate and track chemical storage and aid in the detection of source water contamination events;
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development•monitoring of taste and odor issues that impact customer satisfaction using expanded analytical methods to detect compounds, and evaluating and recommending treatment practices;
•implementing water source assessment tools, including sensors and data analytics, to evaluate and track chemical storage and aid in the identification of source water contamination events;
•developing methodology and advanced measurement techniques for contaminants of emerging contaminantsconcern to investigate transport, occurrence and treatment; and
the implementation of•implementing activated carbon, biofiltration and ion exchange for thetreatment to seek to control contaminants of emerging contaminants.
concern.
Service Company and Security
American Water Works Service Company, Inc. (the “Service(“Service Company”) is a wholly owned subsidiary of the Company that provides support and operational services to the Company’s operating subsidiaries.Company and its affiliates. These services are predominantly provided to the Company’s Regulated Businesses under contracts that have been approved by PUCs, where necessary, and are also provided to its Market-Based Businesses organized under American Water Enterprises, LLC, the Company’s wholly owned subsidiary (“AWE”)MSG and CSG businesses as requested or may otherwise be necessary. Services provided by the Service Company may include accounting and finance, administration, business development, communications, compliance, education and training, engineering, health and safety, human resources, information systems, internal audit, investor relations, legal and governance, operations, procurement, R&D, rates and regulatory support, security, risk management and insurance, treasury, and water quality. The Service Company also operates two nationalprovides customer service centers located in Alton, Illinois and Pensacola, Florida, which provide customer relations, field service and operational support to the Company’s Regulated Businesses.Businesses, which includes call handling, billing, a major accounts program and other related services. Services are provided by the Service Company at cost, enabling the Company’s operating subsidiaries to fulfill their responsibilities in a cost-effective manner, while providing them access to in-depth, functional expertise.
The Company’s security team provides oversight and policy guidance on physical, cyber and information security, as well as business continuity, throughout its operations. It is responsible for designing, implementing, monitoring and supporting effective physical and technical security controls for the Company’s physical assets, business systems and operational technologies. Risk assessments are conducted periodically to evaluate the effectiveness of existing security controls and serve as the basis for additional safeguards, security controls and measures. Operational and technical security controls are deployed and integrated as safeguards against unauthorized access to the Company’s information systems. These controls (i) are aimed at (i) assuring the continuity of business processes that are dependent upon automation, (ii) seek to maintainmaintaining the integrity of the Company’s data, (iii) supportsupporting regulatory and legislative compliance requirements, and (iv) are aimed at maintaining safe and reliable service to the Company’s customers. The Company engages in partnerships with U.S. federal, state and local law enforcement agencies to coordinate and improve the security of its water delivery systems and to safeguard its water supply and operations.
Environmental, Social Responsibility and Governance
The Company considers environmental, social responsibility and governance(“ESG”) principles fundamental to its corporate strategy and values. Integration of these principles into the Company’s daily operations emphasizes its belief that “how” a company operates is just as important as “what” a company does.
Delivering a reliable supply of safe, clean and affordable water to customers and treating wastewater has been fundamental to the Company’s business for decades. Within every community in which the Company operates, there is an opportunity to make a sustainable positive impact on the community, reflect the communities served with diverse and skilled employees, and maintain the governance and diligence to meet or exceed service expectations for decades to come.
Key Highlights
Demonstrated ESG Leadership
•The Company’s values and actions have achieved prestigious recognition by many leading firms devoted to recognizing companies that demonstrate ESG leadership.
•The Company was ranked fifth in the Energy and Utilities industry category within Newsweek’s 2023 list of America’s Most Responsible Companies and ranked 19th within Barron’s list of the 100 Most Sustainable Companies in 2022.
•The Company was included in the Bloomberg Gender Equality Index for the fifth consecutive year, was recognized as a top-scoring company, for the fourth consecutive year, on the Disability Equality Index (DEI)®, as well as a Military Friendly Employer and Supplier.
•The Company earned the U.S. Department of Homeland Security SAFETY Act Designation for its internal enterprise security program, which includes risk management processes, personnel training and emergency exercises, and security oversight activities. The Company was the first U.S. water and wastewater company and third utility to earn this designation.
Environmental and Sustainability
•Emissions for the Company’s Regulated Businesses
•The Company established medium- and long-term goals that are science-based and aligned with the Paris Agreement, for scope 1 (direct) and scope 2 (indirect, derived from the Company’s purchase of power) greenhouse gas emissions reductions.
•The goals aim to reduce absolute scope 1 and 2 emissions by 50% by 2035 (from a 2020 baseline year) and achieve net zero scope 1 and scope 2 emissions by 2050.
•These goals complement the Company’s existing short-term goal of reducing absolute scope 1 and 2 greenhouse gas emissions by more than 40% by 2025 (from a 2007 baseline year).
•The Company has also estimated certain of its scope 3 greenhouse gas emissions, including Categories 1 (Purchased Goods and Services), 2 (Capital Goods), 3 (Fuel and Energy Related Activities) and 6 (Business Travel).
•Water Quality & Wastewater
•The Company employs a team of R&D scientists dedicated to partnering with water research organizations on water quality and technology-based source water monitoring.
•The Company received 11 drinking water Notices of Violation (“NOVs”) in 2022, two of which were related to water quality and maximum contaminant level exceedances. These metrics are determined by counting the overall number of drinking water NOVs and drinking water NOVs related to maximum contaminant level exceedances received by the Company in accordance with internally established procedures, which may exclude NOVs related to newly-acquired systems and associated with third-party violations, among others.
•The Company invested approximately $2.3 billion in renewing and improving assets of the Regulated Businesses in 2022 and expects to invest between $12.5 billion to $13 billion over the next five years. Nearly 70% of the Company’s capital plan is dedicated to infrastructure renewal and improvement, 10% to 12% is allocated to resiliency, and the balance is invested in water quality, operational efficiency, system expansion and other categories.
•Policy Leadership
•The Company collaborates and partners with federal and state agencies to support effective environmental, health and safety, and water quality and affordability standards and regulations.
•The Company participates in many industry organizations at the local, state and national level, including: The National Association of Water Companies (NAWC), American Water Works Association (AWWA) and Edison Electric Institute (EEI).
Social Responsibility
•Customers
•The Company’s average monthly residential water bills were approximately $57 in 2022, or 0.77% of the median household income, based on data from the U.S. Census Bureau’s American Community Survey. The Company is focused on keeping customer bills affordable compared to income, driving a culture of continuous improvement, diligent cost management, and technology enhancements that help drive affordability.
•The Company supports low-income customer assistance programs across 12 states: California, Illinois, Indiana, Iowa, Kentucky, Maryland, Missouri, New Jersey, Pennsylvania, Tennessee, Virginia and West Virginia.
•To better reflect the customers that the Company serves, the Company increased spend with diverse suppliers and small businesses in 2022 by more than 35% compared to last year.
•For 2022, the Company achieved an aggregate residential customer satisfaction rating in the top half among the Company’s industry peer group. We measure performance on Customer Experience through our performance on the J.D. Power U.S. Water Utility Residential Customer Satisfaction Study. The study measures the satisfaction of residential water customers of the 90 largest water utilities in the United States and considers six factors to score companies on a 1,000-point scale: quality and reliability; price; conservation; billing and payment; communications; and customer service.
•Employees
•During 2022, over 117,000 hours of safety training, including physical security and cybersecurity training, were completed by the Company’s employees, as well as a mandatory Code of Ethics training requirement.
•The Company has made significant progress toward its zero injuries goal, reducing workplace injuries by 52% since 2017. Through year-end 2022, the Company has further reduced its OSHA recordable injury rate (“ORIR”) to 0.85, the lowest in the Company’s recorded history, which is approximately two times better than the water industry average.
•During 2022, approximately 83% of the Company’s job requisitions had a diverse candidate pool, with approximately 46% of transfers or promotions filled by diverse individuals.
•Communities
•More than $900,000 was donated in 2022 by the Company’s employees and the American Water Charitable Foundation (AWCF), a 501(c)(3) private foundation established by American Water in 2010, of which over $430,000 was provided by employees through workplace giving campaigns including the United Way, Water For People and other volunteering giving campaigns that supported more than 1,600 public charities nationwide. These efforts were in addition to the $2.3 million given by the AWCF through the Keep Communities Flowing Grant Program - more than $3 million combined.
•Stakeholder Engagement
•In 2022, the Company completed a materiality assessment to align ESG efforts with stakeholder priorities. Participants included, among others, regulators, investors, customers, employees, and a member of the Company’s Board of Directors. The results of the assessment will be included in the Company’s 2021-2022 Sustainability Report, which will be published in 2023.
Governance
•Board and Committees
•The Board of Directors and each of its standing committees are led by an independent, non-executive chair.
•The Board of Directors met 15 times in 2022.
•The Board of Directors’ Safety, Environmental, Technology and Operations (SETO) Committee, which oversees several key ESG matters, met four times in 2022.
•The Board of Directors reflects gender, racial and experiential diversity. As of December 31, 2022, approximately 64% of the Company’s directors voluntarily self-identified as diverse based on gender, race, disability and military veteran status.
•The Company’s average director tenure was approximately 7 years as of December 31, 2022.
•The members of the Company’s Board of Directors have demonstrated expertise, including, among others, experience in utility operations, regulatory matters, sustainability, customer service, cybersecurity, the military, financial services and capital markets, service as a public company CEO, CFO and/or board member, and management of global operations.
•ESG-Related Disclosures and Transparency
•The Company issued its annual ESG Data Summary on its website, covering sustainability performance for key metrics within the 2022 calendar year.
•In addition, the Company issued its second annual Inclusion, Diversity & Equity Report and launched a new diversity website, which describes the Company’s inclusion and diversity strategies, practices, policies and programs from across the business. New disclosures include:
•EEO-1 data for 2020 and 2021;
•Summary of results and conclusions from the Company’s third-party pay equity studies and internal labor market analyses; and
•Two new people-related goals in the 2022 Annual Performance Plan (“APP”) meant to increase representation of women and increase ethnic and racial diversity among employees at American Water, adding to existing APP sustainability goals.
•The Company discloses on its website its Political Contributions Policy, and, on an annual basis, information related to its political contributions, payments to tax-exempt organizations and trade associations, and lobbying expenditures.
Human Capital Resources
Overview
The Company’s people are a critical part of its business, and the Company’s investment in its people begins with the recruitment of qualified and diverse talent and continues throughout employment. The Company’s employee value proposition, called weCARE, is a central part of the Company’s human capital resources mission and focuses on employee experience as an influencer of an employee’s opinions and emotional response about the Company as an employer.
Additionally, the Company believes that representing the communities in which it serves plays a key role in its ability to serve its customers and improves its talent. To support this proposition, the Company promotes an inclusive culture where its employees are given the opportunity to develop to their fullest potential and understand that they directly contribute to the Company’s ability to operate, grow, and serve its customers. The Company also believes that investing in the safety, health and well-being of its employees is a key component of its people and culture goals, and that these investments allow employees to generate great ideas, provide quality customer service and make a difference in the lives of the Company’s customers.
Employee MattersHealth and Safety
A longstanding value and strategy of the Company is safety. In this regard, the Company continues to focus on the safety of its employees and contractors so that they may return home from work in the same, or better, condition than when they arrived. The Company strives for all employees to feel emotionally safe, live a healthy lifestyle and be physically safe at work and at home. The Company assesses occupational health and safety to measure performance across the entire organization, with the ultimate goal of achieving zero incidents, injuries and fatalities for the Company’s employees and contractors.
To uphold the Company’s commitment to safety, the Company’s employees completed over 117,000 hours of employee safety training, including physical security and cybersecurity training, during 2022. Additionally, through frequent labor-management meetings, the Company encourages open exchanges to explore new ways to further enhance safety on the job. All employees are empowered to demonstrate safety leadership by taking the time they need to complete a task safely and to use “Stop Work Authority” — the power to stop working immediately whenever they believe a task is unsafe — to personally mitigate the hazard or issue or collaborate with management to create a safe situation. The Company believes that this Stop Work Authority is so important that it is stated on the back of every employee’s identification badge.
For 2022, the Company had its lowest ORIR injury rate in its recorded history, achieving an 18.8% reduction in injuries compared to 2021, taking into account a 7% decrease in labor hours due to the sales of HOS and the Company’s New York subsidiary. Also, the number of Days Away Restricted or Transferred (“DART”) injuries decreased by 36.1% compared to 2021. This decrease shows a significant improvement in those injuries that have a higher severity. For 2022, the Company’s ORIR was 0.85 (52 injuries) and its DART rate was 0.37 (23 injuries), compared to an ORIR of 0.97 (64 injuries) and a DART rate of 0.54 (36 injuries) in 2021.
In 2022, American Water teams led by promoting safety leading indicator activities, including pre-job safety briefings and near miss reporting, and by achieving internal Certified Safe Worker designations. Near miss reports, where employees report potential hazards or incidents in a safe and secure manner, increased by 20% in 2022 over 2021, and 97% of near miss incident corrective actions were completed, with nearly 90% completed within 30 days. The Company utilizes near miss reporting and timely corrective actions as key measurements of employee engagement and safety performance.
The commitment to safety as a strategic imperative also includes building a culture of well-being where all employees can feel emotionally safe and live a healthy lifestyle. Through well-being education, the Company is able to encourage employees to take preventative actions and increase participation in annual well-care exams and cancer screenings, which increased by over 4% during 2022, compared to 2021.
Employee and Workplace Reintegration
As an essential business that provides water and wastewater services, during 2022, the Company continued to focus on the care and safety of its employees, contractors, vendors and others who work at or visit the Company’s worksites. The Company launched its employee and workplace reintegration plan to bring its employees safely back to the workplace and in its field operations in the wake of easing of COVID-19-related restrictions by federal, state and local governmental and health authorities. The Company instituted greater workplace flexibility, including hybrid work opportunities, where feasible. The Company supported these reintegration efforts by keeping employees’ safety, health and emotional well-being as a top priority and by continuing to follow guidance from the U.S. Centers for Disease Control and Prevention, as well as federal, state and local health authorities. The Company also continued to provide employees with temporary medical and emotional health benefits as needed during 2022. To keep employees informed on the changing conditions during reintegration and to support their emotional well-being, the Company held several all-employee podcasts featuring medical and emotional health speakers who discussed the status of the pandemic, provided updates on vaccine and booster activity, and led sessions focused on workforce and personal change management related to reintegration.
Inclusion, Diversity and Equity
During 2022, the Company continued to focus on creating a culture through its promotion of inclusion, diversity and equity. At all levels, the Company strives to understand, respect, value and provide equal opportunity to each employee, and to foster an environment where employees’ differences are embraced and celebrated. The Company holds as an essential concept the right of employees to proudly share their ideas and unique perspectives in an environment built on mutual respect, equity and inclusion. The Company is committed to diversity among its workforce, executive and senior management leadership teams, by reflecting the diversity of the communities in which the Company serves. The Company expects all leaders to lead with inclusion, diversity and equity.
In 2022, the Company included in its APP new workforce diversity performance goals designed to increase the representation of women and ethnic and racial diversity in the Company’s workplace. The goals measure the percentage of female and racial/ethnic diversity among the Company’s workforce based on voluntary self-identification. In addition, the Company continues to hold its leaders accountable for developing a diverse workforce by maintaining management level representation goals.
In addition, in 2022, the Company introduced its DiversityatAW.com website to provide transparency and communicate progress on the Company’s workforce diversity initiatives. This web site currently includes, among other information, the Company’s ID&E report, its EEO-1 data for 2021, key employee diversity metrics (which are updated quarterly), and a discussion of the Company’s pay equity study and internal labor market analysis.
During 2022, 83.1% of the Company’s hiring candidate pools were diverse. Additionally, for 2022, approximately 46.4% of the Company’s internal employee transfers and promotions were filled with a diverse individual, reflecting the Company’s commitment to employee development and career growth as well as the Company’s focus on diversity, inclusion and equity. For purposes of these metrics, diversity refers to gender, race, ethnicity, disability, veteran/military spouse status, and LGBTQ+ status, all based on voluntary, self-identified employee information.
The Company maintains active memberships with groups such as Hiring our Heroes, Military Spouse Employment Partnership, American Corporate Partners, CEO Action for Diversity and Inclusion, Disability: IN, Paradigm for Parity, and Out and Equal, to further enhance its ability to recruit and retain diverse employees. Among this year’s recognitions, the Company was designated as a 2022 Military Friendly® Silver Employer and recognized by Military Times for its industry-leading efforts on hiring and supporting U.S. military veterans.
The Company was also a top scorer in the 2022 Disability Equality Index for the fourth consecutive year and was recognized by U.S. Veterans Magazine as a veteran-friendly company and as an organization with a veteran-friendly supplier diversity program. The Company also received the 2022 DiversityInc Top Utility recognition for 2022.
In keeping with the Company’s values, the Company does not tolerate discrimination, harassment or retaliation by or toward any employee, vendor, customer or other person in its workplace. All employees are required to complete anti-harassment, workplace respect and dignity, unconscious bias and inclusion and diversity training. In addition, annual Code of Ethics training is provided to all employees, which includes instructions on using the Company’s anonymous hotline for reporting potential Code of Ethics violations.
The Company’s four Employee Business Resource Groups (“EBRGs”), which represent diverse employee demographics (Women, African American/Black, LGBTQ+ and Disabilities/Caregivers), strive to create measurable and long-lasting positive impacts on employees’ careers, as well as the Company’s culture and communities in which it serves. EBRG members participate in community events throughout the year, which highlight the importance of supporting community partnerships. For example, employees participated in the annual Juneteenth Unity Walk that supported the National Alliance on Mental Illness, an organization that provides advocacy, education, and support for, and public awareness of, mental illness.
Total Rewards
American Water’s health and well-being programs are approached holistically by offering the following benefits, among others: medical, prescription, dental, vision, disability, a retirement savings plan, and life insurance coverage, as well as a health and wellness program and a menu of additional voluntary benefits. The Company’s Total Rewards programs are designed to reflect many aspects of employee health and well-being, cultivate an inclusive workforce, and motivate, attract and retain talent to seek to achieve the Company’s strategic business priorities.
As part of Total Rewards, the Company provides a comprehensive compensation and benefit program designed to recognize the vital roles the Company’s employees play. Further, all the Company’s employees, including those who are union-represented, participate in the APP, to promote alignment between performance-based compensation and the Company’s short-term performance goals. As part of its commitment to providing an inclusive and equitable culture for all employees, the Company regularly reviews pay equity to make sure pay decisions are based on the responsibilities, talents and skills of our employees, rather than, factors such as gender, race or ethnicity.
All employees who average 30 hours or more per week receive full-time benefits. Approximately 90% of all benefit eligible employees are enrolled in the Company’s healthcare benefits. Full-time employees pay approximately 16% of the total cost of medical, dental and vision coverage. Additional medical benefits include coverage for applied behavior analysis, autism treatment, transgender services and hearing aids, as well as a fertility assistance benefit. The Company also offers additional employment benefits, including holiday, vacation and sick time, which are at levels generally greater than or equal to those offered by other companies in the utility industry.
Every five years, the Company negotiates national health and welfare benefits with its union-represented employees. On November 30, 2022, a five-year extension of the Company’s national benefits agreement with its union-represented employees was reached and ratified, effective through July 2028. See —Workforce Data below for more information. The extension agreement includes, among other things, a revised benefit cost sharing allocation, six weeks of paid family leave, an increase in the target payout under the APP for covered employees, and coverage for infertility treatment beginning in plan year 2025.
Talent Development
The Company partners with business leaders to understand the key behaviors and competencies required to operate safely and effectively, and to foster professional growth with the goal to create and deploy programs designed to attract, motivate, develop and retain talented employees, and foster a learning culture. The Company also requires every employee, including its union-represented employees, to complete a minimum of 25 hours of training each year. Approximately 96.7% of activefull-time employees hired before October 1, 2022, met this requirement for 2022, with over 302,000 hours of total training completed during the year. In addition to required role-based training, managers assist employees to identify professional development opportunities, utilizing a framework of on-the-job learning, social learning, and formal learning, to help them reach their full potential and grow their careers.
Developing talent to provide a pathway to executive leadership is a critical priority for the Company. During 2022, the Company engaged in succession planning activities for the Company’s business-critical and business-impact positions. These succession plans aid in providing continued leadership for the growth and future of the Company’s business, while also seeking to promote diversity, retention and development. In addition to succession of executive and senior leadership roles, in 2022, the Company initiated talent reviews, which served to identify critical skills and competency areas as well as top and emerging talent with a focus on diversity, and supported a discussion of strengths, gaps and development plans. Talent reviews were conducted for a select group of employees, including employees who are being assessed for senior leadership or other critical roles.
Employee Experience
The Company has established its weCARE employee value proposition that focuses on employee experience as an influencer of an employee’s opinions and emotional response about the Company as an employer. weCARE is composed of five elements: deeper connections; personal growth; shared purpose; flexibility; and well-being. weCARE represents the Company’s commitment to value its employees and build a safe, healthy and inclusive culture where every employee knows their value and is appreciated for their talents and commitment to supporting the Company’s success. The Company offers employees programs covering each of the five components of weCARE. The Company is committed to improving the employee experience by listening to employees through focus group discussions and employee surveys, among other tools. To that end, the Company captures employee feedback, which helps the Company understand how employees are feeling and permits appropriate refinement of the Company’s employee programs, benefits and support.
In early 2022, the Company introduced a new development role of Culture Champion. Each Culture Champion is responsible for partnering with their local leadership and managing and communicating local activities and actions that seek to advance the Company’s culture.
Workforce Data
As of December 31, 2019,2022, the Company had approximately 46%6,500 employees. For 2022, the Company’s employee turnover rate, which the Company defines as the ratio of the number of separated employees to the 12-month average headcount during 2022, was 12.3%, down from 13.1% in 2021. American Water seeks to reduce regrettable employee turnover by assessing the effectiveness of weCARE and through its efforts to foster the Company’s employee experience.
As of December 31, 2022, approximately 47% of the Company’s workforce was represented by unions, which include 7175 collective bargaining agreements with 14 different unions. Additionally, as of December 31, 2019In 2022, the Company had fourentered into three new collective bargaining agreement beyond expiration, affectingagreements that cover approximately 371215 employees, and renegotiated all of which are actively working under the terms of the existing agreement, and another21 collective bargaining agreement in its initial stage of renegotiation, affecting approximately 66 employees.agreements that were set to expire during the year. During 2020, 142023, 18 of the Company’s collective bargaining agreements will be expiringexpire in accordance with their terms and the Company expects to be able to negotiate these agreements during the courseyear. In addition, on November 30, 2022, a five-year extension of the year.Company’s national benefits agreement was ratified through July 31, 2028. This agreement covers approximately 3,000 of the Company’s union-represented employees and their families and provides them with healthcare and other benefits. The Company also collaborates with union leadership on topics such as safety, customer, technology and employee benefits in forums such as the Joint Healthcare Committee, National Labor Management Committee and the annual Labor Management Conference.
Board Oversight
The Executive Development and Compensation Committee (ED&CC) of the Board of Directors establishes and reviews the Company’s overall compensation philosophy and oversees the compensation and benefits plans and programs for its executive officers. The ED&CC oversees the process of planning for executive officer succession. It also provides oversight of the Company’s inclusion, diversity and equity programs and initiatives. Further, the ED&CC is responsible for reviewing and assessing, at least annually, the Company’s culture and related culture engagement, its organizational and leadership development plans and programs, and its programs designed to identify, attract and retain high-potential employees.
Information About Our Executive Officers
Presented in the table below isare the name, age, offices held and business experience for each of the Company’s executive officers, as of February 18, 2020:
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Name | | Age | | Office and Experience |
M. Susan N. StoryHardwick | | 60 | | President and Chief Executive Officer. Ms. StoryHardwick has served as President and Chief Executive Officer of the Company and a director since May 2014,February 2, 2022. She joined the Company in June 2019 as the Company's Executive Vice President—Finance and has announced her retirement from these positions, effective April 1, 2020. Ms. Story served as Senior Vice President andthe Company's Chief Financial Officer of the Company from April 2013July 2019 until May 2014. Prior to joining American Water, she served as President and Chief Executive Officer of Southern Company Services, a subsidiary of Southern Company, from16, 2022. From December 7, 2021 until January 2011 until March 2013 and President and Chief Executive Officer of Gulf Power Company, also a subsidiary of Southern Company, from 2003 until December 2010. Since 2008,31, 2022, Ms. Story has served as a member of the Board of Directors of Raymond James Financial, Inc., a diversified financial services company, and as lead director since 2016. Since January 2017, Ms. Story has also served on the Board of Directors of Dominion Energy, Inc., a producer and transporter of energy. |
Brian Chin | | 46 | | Senior Vice President, Strategic Financial Planning. Mr. Chin joined the Company as its Senior Vice President, Planning and Strategy Integration in June 2017. He has had his current title since February 15, 2019, and heHardwick also served as Interim Treasurer from October 26, 2018 until February 15, 2019.Chief Executive Officer. Prior to joining the Company, from May 2013 to April 2017, Mr. Chin served as the lead utility analyst for the North America research function at Bank of America Merrill Lynch. From 2001 to 2013, Mr. Chin worked in Electric Utilities Research at Citigroup. Within that period, Mr. Chin was the global head of Electric Utilities Research for Citigroup.
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M. Susan Hardwick | | 57 | | Executive Vice President and Chief Financial Officer.Ms. Hardwick joined American Water on June 3, 2019 as its Executive Vice President—Finance and became its Executive Vice President and Chief Financial Officer on July 1, 2019. Ms. Hardwick previously served as the Executive Vice President and Chief Financial Officer of Vectren Corporation, which was sold to CenterPoint Energy, Inc., an electric and natural gas utility, on February 1, 2019. Ms. Hardwick joined Vectren Corporation in January 2000 and served in a variety of positions, includingincluding: Vice President, Controller and Assistant Treasurer; Senior Vice President, Finance; Senior Vice President, Chief Financial Officer; and Executive Vice President and Chief Financial Officer. Prior to joining Vectren, Ms. Hardwick was Assistant Corporate Comptroller at Cinergy Corp. She began her career with Arthur Andersen & Co., leaving there as a senior manager to join Cinergy Corp. Ms. Hardwick is a Certified Public Accountant. Since September 2020, Ms. Hardwick has served on the Board of Directors of New Jersey Resources Corporation, a diversified energy services company, where she is currently serving a three-year term expiring in 2024, and since January 1, 2021, she has served as a member of its Audit Committee.
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Melanie M. KennedyJames H. Gallegos | | 4662 | | Executive Vice President and General Counsel. Mr. Gallegos joined the Company on April 1, 2022 as its Executive Vice President and General Counsel. Prior to joining the Company, since February 2020, Mr. Gallegos served as the Executive Vice President, General Counsel and Corporate Secretary of Alliant Energy Corporation, a regulated, investor-owned public utility holding company, and its two utility subsidiaries (collectively, “Alliant Energy”). From February 2015 to February 2020, Mr. Gallegos served as Senior Vice President, General Counsel and Corporate Secretary of Alliant Energy. Prior to that, Mr. Gallegos served in various positions with U S WEST, Inc., which merged with Qwest Communications International Inc. in 2000. |
John C. Griffith | | 56 | | Executive Vice President and Chief Financial Officer. Mr. Griffith joined the Company on May 16, 2022 as its Executive Vice President and Chief Financial Officer. Prior to joining the Company, since 2014, Mr. Griffith served as Managing Director, Mergers and Acquisitions, for Bank of America Securities’ Global Regulated Utilities and Renewable Energy practice. Prior to joining Bank of America Securities, from 2008 to 2014, Mr. Griffith served as the Chief Executive Officer of HighWave Energy, a renewable fuels start-up company, and from 1995 to 2008, he served in various capacities of increasing responsibility with Merrill Lynch & Co. |
Melanie M. Kennedy | | 49 | | Executive Vice President, Chief Human Resources.Resources Officer. Since March 2017, Ms. Kennedy has served as the Company’s Executive Vice President, Chief Human Resources Officer since December 2021, and as Senior Vice President, Chief Human Resources Officer from December 2020 to December 2021. Prior to that, she served as the Company’s Senior Vice President, Human Resources.Resources from March 2017 to December 2020. From August 2014 until Marchthrough February 2017, Ms. Kennedy served as the Company's Vice President, Human Resources, of the Company, and from August 2012 to August 2014, she served as Director, Human Resources in the Company’s Northeast Division. Ms. Kennedy initially joined the Company in 2007, and before that time, she practiced law for nine years. |
Walter J. LynchCheryl Norton | | 5758 | | Executive Vice President and Chief Operating Officer.Mr. Lynch Ms. Norton has over 2030 years of experienceemployment with the Company serving in the watervarious roles, including operational leadership, environmental stewardship, laboratory management and wastewater industry. Heresearch. She has servedbeen serving as the Company’s Executive Vice President and Chief Operating Officer since January 2016,March 2021 and served as its Senior Vice President, Chief OperatingEnvironmental Officer of Regulated Operations from February 2010March 2020 to December 2015,March 2021. She was also the Company’s Senior Vice President, Eastern Division and President of Regulated Operationsits New Jersey subsidiary from July 2008March 2019 to DecemberMarch 2021. Prior to that, Ms. Norton served as President of the Company’s Missouri subsidiary from November 2015 to March 2019, and President of its Kentucky subsidiary from January 2011 until November 2015. Mr. Lynch joined the Company in 2001. Mr. Lynch is onIn addition, Ms. Norton also serves as a member of the Board of Directors of the National Association of Water Companies and serves on its Executive Committee. In addition, Mr. Lynch also serves on the Water Research Foundation Board of Trustees. Effective April 1, 2020, Mr. Lynch will succeed Ms. Story as President and Chief Executive Officer of the Company and a member of the Board of Directors. |
James S. Merante | | 45 | | Vice President and Treasurer. Mr. Merante was appointed as the Company’s Vice President and Treasurer on February 15, 2019. Prior to that, Mr. Merante was Vice President, Internal Audit from February 2018 to February 15, 2019, and served as Divisional Chief Financial Officer for the Company’s Mid-Atlantic Division from July 2014 until February 2018. Prior to joining American Water, Mr. Merante served as Vice President of Operations for FSM, Inc., a private digital media company, from February 2010 until July 2014. Mr. Merante is licensed as a Certified Public Accountant in Pennsylvania.
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Michael A. Sgro | | 61 | | Executive Vice President, General Counsel and Secretary. Mr. Sgro has 25 years of experience in the water and wastewater industry. He has served as the Company’s Executive Vice President, General Counsel and Secretary since January 2016 and its Senior Vice President, General Counsel and Secretary from February 2015 until January 2016. Prior to that, he served as the Company’s Interim General Counsel and Secretary from January 2015 until February 2015 and as Vice President, General Counsel and Secretary of American Water’s Northeast Division from 2002 to 2015.
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Loyd “Aldie” Warnock | | 60 | | Senior Vice President, Chief External Affairs and Corporate Business Development Officer. Mr. Warnock has served as the Company’s Senior Vice President, Chief External Affairs and Corporate Business Development Officer since January 1, 2020 and as the Company's Senior Vice President of External Affairs and Business Development from August 1, 2017 to December 31, 2019. From April 2014 until August 2017, Mr. Warnock served as the Company’s Senior Vice President of External Affairs, Communications and Public Policy. Prior to joining the Company, he served as Senior Vice President of External Affairs at Midwest Independent System Operator, Inc., a non-profit, self-governing organization, from March 2011 to April 2014. Prior to that, he served as Vice President of External Affairs for Allegheny Energy, Inc. from December 2005 to February 2011 and Senior Vice President of Governmental and Regulatory Affairs at Mirant Corporation from July 2004 to November 2005. Mr. Warnock serves on the Board of Directors of the National Association of Water Companies and on the Executive Advisory Board of the Mississippi State University College of Business.
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Melissa K. Wikle | | 54 | | Vice President and Controller. Ms. Wikle joined the Company in July 2016 as its Vice President and Controller, and assumed the duties of the Company’s principal accounting officer in August 2016. Prior to joining the Company, Ms. Wikle served as Corporate Controller and Chief Accounting Officer of Columbus McKinnon Corporation, a publicly-traded worldwide designer, manufacturer and marketer of material handling products, systems and services, since April 2011. Ms. Wikle is a Certified Public Accountant.Foundation.
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Each executive officer is elected annually by the Board of Directors and serves until his or hertheir respective successor has been elected and qualified or his or hertheir earlier death, resignation or removal.
Available Information
The Company is subject to the reporting requirements of the Exchange Act. The Company files or furnishes annual, quarterly and current reports, proxy statements and other information with the SEC. Readers may obtain a copy of the Company’s annual reportsAnnual Reports on Form 10-K, its quarterly reportsQuarterly Reports on Form 10-Q or its current reportsCurrent Reports on Form 8-K, or any amendments to them, that are filed with or furnished to the SEC, free of charge, from the Investor Relations section of the Company’s website, https://ir.amwater.com, as soon as reasonably practicable after the Company files or furnishes the information to the SEC.
The Company maintains a website at https://amwater.com. Information contained on the Company’s website, including its Sustainability Report, its Inclusion, Diversity & Equity Annual Report, and other reports or documents, including the information and data on the Company’s diversity website https://Diversityataw.com, shall not be deemed incorporated into, or to be a part of, this report, and any website references included herein are not intended to be made through active hyperlinks. The Company recognizes its website as a key channel of distribution to reach public investors and as a means of disclosing information to comply with SEC Regulation FD.
The American Water corporate governance guidelines and the charters for each of the standing committees of the Board of Directors, together with the American Water Code of Ethics and additional information regarding the Company’s corporate governance, are available on its Investor Relations website, https://ir.amwater.com, and will be made available, without charge, in print to any shareholder who requests such documents from its Investor Relations Department, American Water Works Company, Inc., 1 Water Street, Camden, NJ, 08102.
ITEM 1A. RISK FACTORS
We operate in a market and regulatory environment that involves significant risks, many of which are beyond our control. In addition to the other information included or incorporated by reference in this Annual Report on Form 10-K, the following material factors should be considered in evaluating our business and future prospects. Any of the following risks, either alone or taken together, could materially and adversely affect our business, financial position, results of operations, cash flows and liquidity.
Risks Related to Our Industry and Business Operations
Our utility operationsRegulated Businesses are subject to extensive regulation by state PUCs and other regulatory agencies, which significantly affects our business, financial condition, results of operations and cash flows. Our utility operationsRegulated Businesses also may be subject to fines, penalties and other sanctions for thean inability to meet these regulatory requirements.
Our Regulated Businesses provide water and wastewater services to our customers through subsidiaries that are subject to regulation by state PUCs. This regulation affects the rates we charge our customers and has a significant impact on our business and results of operations. Generally, the state PUCs authorize us to charge rates that they determine are sufficient to recover our prudently incurred operating expenses, including, but not limited to, operating and maintenance costs, depreciation, financing costs and taxes, and provide us with the opportunity to earn an appropriate rate of return on invested capital.
Our ability to successfully implement our business plan and strategy depends on the rates authorized by the various state PUCs. We periodically file rate increase applications with state PUCs. The ensuing administrative process may be lengthy and costly. Our rate increase requests may or may not be approved, or may be partially approved, and any approval may not occur in a timely manner. Moreover, a PUC may not approve a rate request toin an extentamount that is sufficient to:
•cover our expenses, includingcost of operations, including: purchased waterwater; chemicals; and costs of chemicals, fuel, power and other commodities used in our operations;
•cover our operational labor and labor-related expenses, including without limitation costs and expenses associated with our pension and other post-employment benefits;
•enable us to recover our investment; and
•provide us with an opportunity to earn an appropriate rate of return on our investment.
Approval ofby the PUCs is also required in connection with other aspects of our utilities’ operations.Regulated Businesses, which are required to have numerous permits, approvals and certificates from the PUCs that regulate their businesses and authorize acquisitions, dispositions, debt and/or equity financing, and, in certain cases, affiliated transactions. Some state PUCs are empowered to impose financial penalties, fines and other sanctions for non-compliance with applicable rules and regulations. Our utilities are also required to have numerous permits, approvals and certificates from the PUCs that regulate their businesses and authorize acquisitions, dispositions, and, in certain cases, affiliated transactions. Although we believe that each utility subsidiary has obtained or sought renewal of the material permits, approvals and certificates necessary for its existing operations, we are unable to predict the impact that future regulatory activities may have on our business.
In any of these cases, our business, financial condition, results of operations, cash flows and liquidity may be adversely affected. Even if the rates approved are sufficient, we face the risk that we will not achieve the rates of return on our invested capital to the extent permitted by state PUCs. This could occur if certain conditions exist, including, but not limited to, if(i) water usage is less than the level anticipated in establishing rates, (ii) customers increase their conservation efforts, (iii) we experience unusual or ifemergent situations, events or conditions (including with respect to the COVID-19 pandemic), or (iv) our investments or expenses prove to be higher than the levellevels estimated in establishing rates.
It may be difficult to predict the outcome or impact of these events on us or the actions that may be taken by the PUCs or other governmental authorities in response thereto.
Our operations and the quality of water we supply are subject to extensive and increasingly stringent environmental, water quality and health and safety laws and regulations, including with respect to contaminants of emerging contaminants,concern, compliance with which could impact both our operating costs and capital expenditures, and violations of which could subject us to substantial liabilities and costs, as well as damage to our reputation.
Our regulated water and wastewater operations and the operations of our Market-Based Businesses are subject to extensive federal, state and local laws and regulations. These requirements include, among others, CERCLA, the Clean Water Act, the Safe Drinking Water Act, the LCRLCRR and CERCLA. EPA requirements and similarother federal and state laws and regulations.requirements. For example, state PUCs and environmental regulators set conditions and standards for the water and wastewater services we deliver. If we deliver water or wastewater services to our customers that do not comply with regulatory standards, or otherwise violate environmental laws, regulations or permits, or other health and safety and water quality regulations, we could incur substantial fines, penalties or other sanctions or costs, as well as damage to our reputation. In the most serious cases, regulators could reduce requested rate increases or force us to discontinue operations and sell our operating assets to another utility or to a municipality. Given the nature of our business which, in part, involves supplyingproviding water service for human consumption, any potential non-compliance with, or violation of, environmental, water quality and health and safety laws or regulations would likely pose a more
significant risk to us than to a company not similarly involved in the water and wastewater industry.
In addition, CERCLA authorizes the EPA to issue orders and bring enforcement actions to compel responsible parties to investigate and take remedial actions with respect to actual or threatened releases of hazardous substances, and can impose joint and several liability, without regard to fault, on responsible parties for the costs thereof. We are also required to obtain various environmental permits from regulatory agencies for our operations.
We incur substantial operating and capital costs on an ongoing basis to comply with environmental, water quality and health and safety laws and regulations. These laws and regulations and their enforcement, generally have become more stringent over time, and new or stricter requirements could increase our costs. Although we may seek to recover ongoing compliance costs in our Regulated Businesses through customer rates, there can be no guarantee that the various state PUCs or similar regulatory bodies that govern our Regulated Businesses would approve rate increases that would enable us to recover such costs or that such costs will not materially and adversely affect our financial condition, results of operations, cash flows and liquidity.
We may also incur liabilities if, under environmental laws and regulations, we are required to investigate and clean up environmental contamination, including potential releases of hazardous chemicals, such as chlorine, which we use to treat water, or at off-site locations where we have disposed of residual waste or caused an adverse environmental impact. The discovery of previously unknown conditions, or the imposition of cleanup obligations in the future, could result in significant costs and could adversely affect our financial condition, results of operations, cash flows and liquidity. Such remediation costs may not be covered by insurance and may make it difficult for us to secure insurance at acceptable rates in the future.
Attention is being given to contaminants of emerging contaminants,concern, including, without limitation, chemicals and other substances that currently do not have any regulatory standard in drinking water or have been recently created or discovered (including by means of scientific achievements in the analysis and detection of trace amounts of substances). Examples of sources of emerging contaminants include, but are not limited to, newly created chemical compounds (including, for example, manufactured nanomaterials); human and veterinary products; perfluorinated and polyfluorinated compounds; bacteria, microbes, viruses (including COVID-19), amoebae and other pathogens; and residual by-products of disinfection. We rely upon governmental agencies to set appropriate regulatory standards to protect the public from these and other contaminants, and our role is to provide service that meets these standards, if any. In some of our states, PUCs may disapprove of cost recovery, in whole or in part, for implementation of treatment infrastructure for an emerginga contaminant in the absence of a regulatory standard. Furthermore, given the rapid pace at which emergingthese contaminants are being created and/or discovered, we may not be able to detect and/or mitigate all such substances in our drinking water system or supplies, which could have a material adverse impact on our financial condition, results of operations and reputation. In addition, we believe emergingthese contaminants may form the basis for additional or increased federal or state regulatory initiatives and requirements in the future, which could significantly increase the cost of our operations.
Limitations on availability of water supplies or restrictions on our use of water supplies as a resultbecause of government regulation or action may adversely affect our access to sources of water, our ability to supply water to customers or the demand for our water services.
Our ability to meet the existing and future demand of our customers depends on the availability of an adequate supply of water. As a general rule, sources of public water supply, including rivers, lakes, streams, and groundwater aquifers and recycled water sources, are held in the public trust and are not generally owned by private interests. As a result, we typically do not own the source water that we use in our operations, and the availability of our water supply is established through allocation rights (determined by legislation or court decisions) and passing-flow requirements set by governmental entities. Passing-flow requirements set minimum volumes ofentities or by entering into water that must pass through specified water sources, such as rivers and streams, in order to maintain environmental habitats and meet water allocation rights of downstream users. Allocation rights are imposed to ensure sustainability of major water sources and passing-flow requirements are most often imposed on source waters from smaller rivers, lakes and streams.purchase agreements. These requirements, which can change from time to time, and vary by state or region, may adversely impact our water supply. Supply issues, such as drought, overuse of sources of water, the protection of threatened species or habitats, contamination or other factors may limit the availability of ground and surface water. If we are unable to secure available or alternative sources of water, our business, financial condition, results of operations and cash flows could be adversely affected.
For example, in our Monterey County, California operations, we are seeking to augment our sources of water supply, principally to comply with an October 20, 2009the cease and desist orderorders issued by the SWRCB in July 1995 and October 2009 (the “1995 Order,” the “2009 Order”), and, as amended by an order in July 2016, (thethe “2016 Order”), of and, collectively, the SWRCB“Orders”) that requires California-American Water Company, our wholly owned subsidiary (“require Cal Am”),Am to significantly decrease its diversions from the Carmel River in accordance with a reduction schedule that terminatesterminated on December 31, 2021 (the “2021 Deadline”).2021. See Item 3—Legal Proceedings—Alternative Water Supply in Lieu of Carmel River Diversions, which includes additional information regarding this matter. We are also required to augment our Monterey County sources of water supply to comply with the requirements of the Endangered Species Act. We cannot predict whetherFor 2022, Cal Am willcomplied with the diversion limitations contained in the 2016 Order, but continued compliance with these limitations in 2023 and future years may be able to secure alternative sourcesimpacted by a number of factors, including without limitation continued drought conditions in California and the exhaustion of water supply reserves, and will require successful development of alternate water supply sources sufficient to meet customer demand. While the Company cannot currently predict the likelihood or if Cal Am will be exposedresult of any adverse outcome associated with these matters, further attempts to liabilities,comply with the Orders may result in material
additional costs or obligations, including fines and penalties if it is unable to meet the 2021 Deadline under the 2016 Order. Furthermore,against Cal Am continues to work constructively with all appropriate agencies to provide necessary information to obtain the required approvals for the Water Supply Project; however, due to the delay in the approval schedule, Cal Am currently does not believe that it will be able to fully complyevent of noncompliance with the diversion reduction requirementsOrders, which could have a material adverse effect upon us and other remaining requirements under the 2009 Order and the 2016 Order, including the 2021 Deadline. If Cal Am or any of our other subsidiaries are unable to secure an alternative source of water, or if other adverse consequences result from the events described above, our business, financial condition, results of operations and cash flows could be adversely affected. See Item 3—Legal Proceedings—Alternative Water Supply in Lieu of Carmel River Diversions, which includes additional information regarding this matter.
Climate variability may cause increased volatility in weather and may impact water usage and related revenue or require additional expenditures, all of which may not be fully recoverable in rates or otherwise.
The issue of climate variability is receiving increasing attention nationally and worldwide. Some scientific experts are predicting a worsening of weather volatility in the future associated with climate variability. Many climate variability predictions, if true, present several potential challenges to water and wastewater utilities, including us, such as:
increased frequency and duration of droughts;
increased precipitation and flooding;
increased frequency and severity of storms and other weather events;
challenges associated with changes in temperature or increases in ocean levels;
potential degradation of water quality;
decreases in available water supply and changes in water usage patterns;
increases in disruptions in service;
increased costs to repair damaged facilities; or
increased costs to reduce risks associated with the increasing frequency of natural events, including to improve the resiliency and reliability of our water production and delivery facilities and systems.
Because of the uncertainty of weather volatility related to climate variability, we cannot predict its potential impact on our business, financial condition, results of operations, cash flows and liquidity. Although some or all potential expenditures and costs with respect to our Regulated Businesses could be recovered through rates, infrastructure replacement surcharges or other regulatory mechanisms, there can be no assurance that state PUCs would authorize rate increases to enable us to recover such expenditures and costs, in whole or in part.
The current regulatory rate setting process may result in a significant delay, also known as “regulatory lag,” from the time that we invest in infrastructure improvements, incur increased operating expenses or experience declining water usage, to the time at which we can seek to address these events in rate case applications; our inability to minimize regulatory lag could adversely affect our business.
There is typically a delay, known as “regulatory lag,” between the time one of our regulated subsidiaries makes a capital investment or incurs an operating expense increase and the time when those costs are reflected in rates. In addition, billings permitted by state PUCs typically are, to a considerable extent, based on the volume of water usage in addition to a minimum base rate. Thus, we may experience regulatory lag between the time our revenues are affected by declining usage and the time we are able to adjust the rate per gallon of usage to address declining usage. Our inability to reduce regulatory lag could have an adverse effect on our financial condition, results of operations, cash flows and liquidity.
We endeavor to reduce regulatory lag by pursuing constructive regulatory policies. For example, three of our states have approved revenue stability mechanisms that adjust rates periodically to ensure that a utility’s revenue will be sufficient to cover its costs regardless of sales volume, including recognition of declining sales resulting from reduced consumption, while providing an incentive for customers to use water more efficiently. In addition, 11 of our state PUCs permit rates to be adjusted outside of the general rate case application process through surcharges that address certain capital investments, such as replacement of aging infrastructure. These surcharges are adjusted periodically based on factors such as project completion or future budgeted expenditures, and specific surcharges are eliminated once the related capital investment is incorporated in new PUC approved rates. Furthermore, in setting rates, ten of our state PUCs allow us to use future test years, which extend beyond the date a rate request is filed to allow for current or projected revenues, expenses and investments to be reflected in rates on a more timely basis. Other examples of such programs include states that allow us to increase rates for certain cost increases that are beyond our control, such as purchased water costs, property or other taxes, or power, conservation, chemical or other expenditures. These surcharge mechanisms enable us to adjust rates in less time after costs have been incurred than would be the case under the general rate case application process.
While these programs have reduced regulatory lag in several of our regulated states, we continue to seek expansion of programs to reduce regulatory lag in those jurisdictions that have not approved such programs. Furthermore, PUCs may fail to adopt new surcharge programs and existing programs may not continue in their current form, or at all. Although we intend to continue our efforts to expand state PUC approval of surcharges to address issues of regulatory lag, our efforts may not be successful, or even if successful they may not completely address our regulatory lag, in which case our business, financial condition, results of operations, cash flows and liquidity may be materially and adversely affected.
Changes in laws and regulations and changes in certain agreements can significantly affect our business, financial condition, results of operations, cash flows and liquidity.
New legislation, regulations, government policies or court decisions, including, without limitation with respect to federal and state income and other tax laws, can materially affect our operations, results of operations and cash flows. The individuals who serve as regulators are elected or political appointees. Therefore, elections which result in a change of political administration or new appointments may also result in changes in the individuals who serve as regulators and the policies of the regulatory agencies that they serve. New laws or regulations, new interpretations of existing laws or regulations, changes in agency policy, including those made in response to shifts in public opinion, or conditions imposed during the regulatory hearing process could have the following consequences, among others:
making it more difficult for us to increase our rates and, as a consequence, to recover our costs or earn our expected rates of return;
changing the determination of the costs, or the amount of costs, that would be considered recoverable in rate cases;
restricting our ability to terminate our services to customers who owe us money for services previously provided or limiting our bill collection efforts;
requiring us to provide water or wastewater services at reduced rates to certain customers;
limiting or restricting our ability to acquire water or wastewater systems, purchase or dispose of assets or issue securities, or making it less cost-effective for us to do so;
negatively impacting the deductibility of expenses under federal or state tax laws, the amount of tax credits or tax abatement benefits that may be available, the amount of taxes owed, the timing of tax effects on rates, or the ability to utilize our net operating loss carryforwards;
changing regulations that affect the benefits we expected to receive when we began offering services in a particular area;
increasing the associated costs of, or difficulty complying with, environmental, health, safety, consumer privacy, water quality, and water quality accountability laws and regulations to which our operations are subject;
changing or placing additional limitations on change in control requirements relating to any concentration of ownership of our common stock;
making it easier for governmental entities to convert our assets to public ownership via condemnation, eminent domain or other similar process, or for governmental agencies or private plaintiffs to assess liability against us for damages under these or similar processes;
placing limitations, prohibitions or other requirements with respect to the sharing of information and participation in transactions by or between a regulated subsidiary and us or our other affiliates, including Service Company and any of our other subsidiaries;
restricting or prohibiting our extraction of water from rivers, streams, reservoirs or aquifers; and
revoking or altering the terms of a CPCN issued to us by a state PUC.
Any of the foregoing consequences could have an adverse effect on our business, financial condition, results of operations, cash flows and liquidity.
In addition, new Federal, state and local laws, changes in existing laws, rules or regulations, or administrative interpretations thereof, could impact us. In December 2017, the TCJA was signed into law, which, among other things, enacted significant and complex changes to the Internal Revenue Code of 1986, as amended (the “Code”), including a reduction in the maximum U.S. federal corporate income tax rate from 35% to 21% as of January 1, 2018, and certain other provisions related specifically to the public utility industry, including the normalization of our deferred income taxes. The enactment of the TCJA required re-measurement of our deferred income taxes, which materially impacted our 2017 results of operations and financial position and had a lesser impact on our 2018 results of operations and financial position. Following enactment of the TCJA, the Company adjusted its customer rates and deferred income taxes to reflect the lower income tax rate as mandated by PUCs in jurisdictions that have addressed the issue. We expect that further impacts to our deferred income taxes will continue to occur through pending or future rate cases or other proceedings in the remaining jurisdictions. At this time, we cannot predict the impacts on us of the regulatory treatment of the TCJA in these remaining proceedings, or of the enactment or adoption of any Related Interpretations, if and when issued. Moreover, we are unable to determine or predict the potential impacts, if any, of any other new or amended laws, rules or regulations, or interpretations thereof, including, without limitation, further amendments to the Code or applicable Treasury regulations, to the extent they may be ultimately enacted, adopted or issued, on us or our businesses, financial condition, results of operations, cash flows and liquidity.
Service disruptions caused by severe weather conditions, climate variability patterns or natural or other disasters may disrupt our operations or reduce the demand for our water services, which could adversely affect our financial condition, results of operations, cash flows and liquidity.
Service interruptions due to severe weather, climate variability patterns and natural or other natural events are possible across all our businesses. These include, among other things, storms, freezing conditions, high wind conditions, hurricanes, tornadoes, earthquakes, landslides, drought, wildfires, coastal and intercoastal floods or high water conditions, including those in or near designated flood plains, pandemics (including COVID-19) and epidemics, severe electrical storms, sinkholes and solar flares. Weather and other natural events such as these may affect the condition or operability of our facilities, limiting or preventing us from delivering water or wastewater services to our customers, or requiring us to make substantial capital expenditures to repair any damage. Tariffs in place or cost recovery proceedings with respect to our Regulated Businesses may not provide reimbursement to us, in whole or in part, for any of these impacts.
Government restrictions on water use may also result in decreased use of water services, even if our water supplies are sufficient to serve our customers, which may adversely affect our financial condition, results of operations and cash flows. Seasonal and other drought conditions, including, for example, those currently being experienced in California, that may impact our water services are possible across all of our service areas. Governmental restrictions imposed in response to a drought may apply to all systems within a region independent of the supply adequacy of any individual system. Responses may range from voluntary to mandatory water use restrictions, rationing restrictions, water conservation regulations, and requirements to minimize water system leaks. While expenses incurred in implementing water conservation and rationing plans may generally be recoverable provided the relevant PUC determines they were reasonable and prudent, we cannot assurebe certain that any such expenses incurred will, in fact, be fully recovered. Moreover, reductions in water consumption, including those resulting from installation of equipment or changed consumer behavior, may persist even after a drought has ended and restrictions are repealed and the drought has ended,lifted, which could adversely affect our business, financial condition, results of operations and cash flows.
Climate variability may cause increased volatility in weather and may impact water usage and related revenue or require additional expenditures, all of which may not be fully recoverable in rates or otherwise.
The issue of climate variability is receiving increasing attention nationally and worldwide. There is consensus among climate scientists that there will be worsening of weather volatility in the future associated with climate variability. Many climate variability predictions present several potential challenges to water and wastewater utilities, including us, such as:
•increased frequency and duration of droughts;
•increased precipitation and flooding;
•increased frequency and severity of storms and other weather events;
•challenges associated with changes in temperature or increases in ocean levels;
•potential degradation of water quality;
•decreases in available water supply and changes in water usage patterns;
•increases in disruptions in service;
•increased costs to repair damaged facilities; or
•increased costs to reduce risks associated with the increasing frequency and severity of natural events, including to improve the resiliency and reliability of our water and wastewater treatment and conveyance facilities and systems.
Because of the uncertainty of weather volatility related to climate variability, we cannot predict its potential impact on our business, financial condition, results of operations, cash flows and liquidity. Furthermore, laws and regulations have been enacted or proposed that seek to reduce or limit greenhouse gas emissions and require or would require additional reporting and monitoring, and these regulations may become more pervasive or stringent in light of changing governmental agendas and priorities, although the exact nature and timing of these changes is uncertain. Although some or all potential expenditures and costs associated with the impact of climate variability and related laws and regulations on our Regulated Businesses could be recovered through rates, infrastructure replacement surcharges or other regulatory mechanisms, there can be no assurance that state PUCs would authorize rate increases to enable us to recover such expenditures and costs, in whole or in part.
The current regulatory rate setting process may result in a significant delay, also known as “regulatory lag,” from the time that we invest in infrastructure improvements, incur increased operating expenses as a result of inflation or other factors, incur increased cost of capital, including as a result of increasing short- and long-term rates, or experience declining water usage, to the time at which we can seek to address these events in rate case applications; our inability to mitigate or minimize regulatory lag could adversely affect our business.
There is typically a delay, known as “regulatory lag,” between the time our Regulated Businesses make a capital investment or incur an operating expense increase and the time when those costs are reflected in rates. In addition, billings permitted by state PUCs typically are, to a considerable extent, based on the volume of water usage in addition to a minimum base rate. Thus, we may experience regulatory lag between the time our revenues are affected by declining usage and the time we are able to adjust the rate per gallon of usage to address declining usage. Our inability to mitigate or reduce regulatory lag could have an adverse effect on our financial condition, results of operations, cash flows and liquidity.
We endeavor to mitigate or reduce regulatory lag by pursuing constructive regulatory practices. For example, two of our states have approved revenue stability mechanisms that adjust rates periodically to ensure that a utility’s revenue will be sufficient to cover its costs regardless of sales volume, including recognition of declining sales resulting from reduced consumption, while providing an incentive for customers to use water more efficiently. In addition, 10 of our state PUCs permit rates to be adjusted outside of the general rate case application process through surcharges that address certain capital investments, such as replacement of aging infrastructure. These surcharges are adjusted periodically based on factors such as project completion or future budgeted expenditures, and specific surcharges are eliminated once the related capital investment is incorporated in new PUC approved rates. Furthermore, in setting rates, nine of our state PUCs allow us to use future test years, which extend beyond the date a rate request is filed to allow for current or projected revenues, expenses and investments to be reflected in rates on a more timely basis. Other examples of such regulatory practices include expense mechanisms that allow us to increase rates for certain cost increases that are beyond our control, such as purchased water costs, property or other taxes, or power, conservation, chemical or other expenditures. These mechanisms enable us to adjust rates in less time after costs have been incurred than would be the case under a general rate case application process without the mechanisms.
While these mechanisms have mitigated or reduced regulatory lag in several of our regulated states, we continue to seek approval of regulatory practices to mitigate or reduce regulatory lag in those jurisdictions that have not approved them. Furthermore, PUCs may fail to adopt new surcharges and existing mechanisms may not continue in their current form, or at all, or we may be unable or become ineligible to continue to utilize certain of these mechanisms in the future. Although we intend to continue our efforts to seek state PUC approval of constructive regulatory practices to mitigate or reduce regulatory lag, our efforts may not be successful, or even if partially successful, our business, financial condition, results of operations, cash flows and liquidity may be materially and adversely affected.
Changes in laws and regulations can significantly and materially affect our business, financial condition, results of operations, cash flows and liquidity.
The impact of any future revisions or changes in interpretations of existing regulations or the adoption of new laws and regulations applicable to our Regulated Businesses is uncertain. Changes in laws or regulations, the imposition of additional laws and regulations, changes in enforcement practices of regulators, government policies or court decisions can materially affect our operations, results of operations and cash flows. Certain of the individuals who serve as regulators are elected or political appointees. Therefore, elections which result in a change of political administration or new appointments may also result in changes of the individuals who serve as regulators and changes in the policies of the regulatory agencies that they serve. New laws or regulations, new interpretations of existing laws or regulations, changes in agency policy, including those made in response to shifts in public opinion, or conditions imposed during the regulatory hearing process could have the following consequences, among others:
•making it more difficult for us to increase our rates and, as a consequence, to recover our costs or earn our expected rates of return;
•changing the determination of the costs, or the amount of costs, that would be considered recoverable in rate cases and other regulatory proceedings;
•restricting our ability to terminate our services to customers who owe us money for services previously provided or limiting our bill collection efforts;
•requiring us to provide water or wastewater services at reduced rates to certain customers;
•limiting or restricting our ability to acquire water or wastewater systems, purchase or dispose of assets, or issue long-term debt or equity, or making it less cost-effective for us to do so;
•negatively impacting, among other things: (i) tax rates or positions or the deductibility of expenses under federal or state tax laws, (ii) the availability or amount of, or our ability to comply with the terms and conditions of, tax credits or tax
abatement benefit, (iii) the amount of taxes owed, (iv) the timing of tax effects on rates or (v) the ability to utilize our net operating loss carryforwards;
•changing regulations that affect the benefits we expected to receive when we began offering services in a particular area;
•increasing the associated costs of, or difficulty complying with, environmental, health, safety, consumer privacy, water quality, and water quality accountability laws and regulations to which our operations are subject;
•changing or placing additional limitations on change in control requirements relating to any concentration of ownership of our common stock;
•making it easier for governmental entities to convert our assets to public ownership via condemnation, eminent domain or other similar process, or for governmental agencies or private plaintiffs to assess liability against us for damages under these or similar processes;
•increasing the costs or difficulty of complying with proposed changes to federal contractor affirmative action audits;
•placing limitations, prohibitions or other requirements with respect to the sharing of information and participation in transactions by or between a regulated subsidiary and us or our other affiliates, including Service Company and any of our other subsidiaries;
•restricting or prohibiting our extraction of water from rivers, streams, reservoirs or aquifers; and
•revoking or altering the terms of a CPCN issued to us by a state PUC or other governmental authority.
Regulatory and environmental risks associated with the collection, treatment and disposal of wastewater may impose significant costs and liabilities.
The wastewater collection, treatment and disposal operations of our subsidiaries are subject to substantial regulation and involve environmental risks. If collection, treatment or disposal systems fail, overflow, or do not operate properly, untreated or inadequately treated wastewater or other contaminants could spill onto nearby properties or into nearby streams and rivers, causing damage to persons or property, injury to aquatic life and economic damages. This risk is most acute during periods of substantial rainfall or flooding, which are the main causes of sewer overflow and system failure. Liabilities resulting from such damage could adversely and materially affect our business, financial condition, results of operations and cash flows. Certain of our wastewater systems have commercial and industrial customers that are subject to specific limitations on the type, character and strength of the wastewater they are permitted to discharge into our systems. The failure by these commercial and industrial customers to comply with their respective discharge requirements could, in turn, negatively impact our operations, damage our facilities or cause us to exceed applicable discharge limitations and requirements. Liabilities resulting from such exceedance events could adversely and materially affect our business, financial condition, results of operations and cash flows.
A loss of one or more large industrial or commercial customers could have a material adverse impact upon the results of operations of one or more of our Regulated Businesses.
Adverse economic conditions or other factors canmay cause our customers, particularly industrial and large commercial customers, to curtail operations. A curtailment of operations by an industrialsuch a customer would typically resultresults in reduced water usage by that customer. In more severe circumstances, the decline in usage could be permanent. Any decrease in demand resulting from difficult economic conditions affecting these industrial customers could adversely affect our financial condition and results of operations. Tariffs in place with respect to our Regulated Businesses may not reimburse us, in whole or in part, for any of these impacts.
Our Regulated Businesses require significant capital expenditures and may suffer if we fail to secure appropriate funding to make investments, experience increases in short- and long-term interest rates or if we experience delays in completing major capital expenditure projects.
The water and wastewater utility business is capital intensive. We invest significant amounts of capital to add, replace and maintain property, plant and equipment, and to improve aging infrastructure. In 2019,2022, we invested $1.7$2.3 billion in net Company-funded capital improvements. The level of capital expenditures necessary to maintain the integrity of our systems will continue into the future and, maywe believe, will increase. We expect to fund capital improvement projects using cash generated from operations (including, among other things, a portion of the net proceeds from the sale of HOS) borrowings under our revolving credit facility and commercial paper programs and issuances of long-term debt and equity. We may not be able to access our revolving credit facility or the commercial paper, long-term debt and equity capital markets, when necessary or desirable to fund capital improvements on favorable terms or at all. If we are not able to obtain sufficient financing, we may be unable to maintain our existing property, plant and equipment, fund our capital investment strategies meet our growth targets andor expand our rate base to enable us to earn satisfactory future returns onmeet our investments.growth targets. Even with adequate financial resources to make required capital expenditures, we face the additional risk that we will not complete our major capital projects on time, as a result of supply chain interruptions, construction delays, permitting delays, labor shortages or other disruptions, environmental restrictions, legal and regulatory challenges, or other obstacles. Each of these outcomes could adversely affect our business, financial condition, results of operations and cash flows.
Aging infrastructure may lead to service disruptions, property damage and increased capital expenditures and O&M expenses and other costs, all of which could negatively impact our financial results.
We have risks associated with aging infrastructure, including water and sewer mains, pumping stations and water and wastewater treatment facilities. Additionally, the nature ofwe may have limited information available onregarding buried and newly acquired assets, may be limited, which maycould challenge our ability to conduct efficient asset management and maintenance practices. Assets that have aged beyond their expected useful lives may experience a higher rate of failure. Failure of aging infrastructure could result in increased capital expenditures and O&M expenses and other costs, and negatively impact our future O&M efficiency ratio. In addition, failure of aging infrastructure may result in property damage, and in safety, environmental and public health impacts. To the extent that any increased costs or expenditures are not fully recovered in rates, our results of operations, liquidity and cash flows could be negatively impacted.
Seasonality could adversely affect the volume of water sold and our revenues.
The volume of water we sell during the warmer months, typically in the summer, is generally greater than during other months, due primarily to increased water usage for irrigation systems, swimming pools, cooling systems and other applications. Throughout the year, and particularly during typically warmer months, the volume of water sold tends to vary with temperature, rainfall levels and rainfall frequency. In the event that temperatures during the typically warmer months are cooler than normal, or if there is more rainfall than normal, the amount of water we sell may decrease and adversely affect our revenues.
Three Two of our jurisdictions, California and Illinois, and New York,currently have adopted revenue stability mechanisms that permit us to collect state PUC-authorized revenue forrecover the revenues authorized in a given period, which is not tied to the volumegeneral rate case, regardless of water sold during that period.sales volume. Revenue stability mechanisms are designed to allow utilitiesrecognize declining sales resulting from reduced consumption, while providing an incentive for customers to recover the fixed cost of operations while supportinguse water conservation goals.more efficiently. In those jurisdictions that have not adopted a revenue stability mechanism, our operating results could continue to be affected by seasonality.
Regulatory and environmental risks associated with the collection, treatment and disposal of wastewater may impose significant costs.
The wastewater collection, treatment and disposal operations of our subsidiaries are subject to substantial regulation and involve environmental risks. If collection, treatment or disposal systems fail, overflow, or do not operate properly, untreated wastewater or other contaminants could spill onto nearby properties or into nearby streams and rivers, causing damage to persons or property, injury to aquatic life and economic damages. This risk is most acute during periods of substantial rainfall or flooding, which are the main causes of sewer overflow and system failure. Liabilities resulting from such damage could adversely and materially affect our business, financial condition, results of operations and cash flows.
Contamination of water supplies or our water service provided to our customers could result in service limitations and interruptions and exposure to substances not typically found in potable water supplies, and could subject us and our subsidiaries to reductions in usage and other responsive obligations, government enforcement actions, damage to our reputation and private litigation.
The water supplies that flow into our treatment plants or are delivered through our distribution system, or the water service that is provided to our customers, may be subject to contamination, including, among other items, contamination from naturally-occurring compounds, chemicals in groundwater systems, pollution resulting from man-mademanufactured sources (such as perchlorate, perfluorinated and polyfluorinated compounds, methyl tertiary butyl ether, 1,4-dioxane, lead and other materials, or chemical spills or other accidentsincidents that result in contaminants entering the water source), and possible terrorist attacks.attacks or other similar incidents. In addition, new categories of these substancescontaminants continue to emerge in the water industry. If one of our water supplies or the water service provided to our customers is contaminated, depending on the nature of the contamination, we may have to take responsive actions that could include, among other things (1) continuing limitedlimiting use of the water supply under a “Do Not Use” protective order that enables continuation of basic sanitation and essential fire protection, or (2) interrupting the use of that water supply.supply, in whole or in part, potentially impacting basic sanitation and fire protection needs. If service is disrupted, our financial condition, results of operations, cash flows, liquidity and reputation may be adversely affected. In addition, we may incur significant costs in order to treat the contaminated source through the expansion of our current treatment facilities or the development of new sources of supply or new treatment methods. We may be unable to recover costs associated with treating or decontaminating water supplies through insurance, customer rates, tariffs or contract terms. Anyterms, and any recovery of these costs that we are able to obtain through regulatory proceedings or otherwise may not occur in a timely manner. Moreover, we could be subject to claims for damages arising from government enforcement actions or toxic tort or other lawsuits arising out of an interruption of service or human exposure to hazardous substances in our drinking water and water supplies. See Item 3—Legal Proceedings for information on certain pending lawsuits related to interruptions of water service.
Since we engageare engaged in the business of providing water service to our customers, contamination of the water supply, or the water service provided to our customers, could result in substantial injury or damage to our customers, employees or others and we could be exposed to substantial claims and litigation. Such claims could relate to, among other things, personal injury, loss of life, business interruption, property damage, pollution, and environmental damage and may be brought by our customers or third parties. Litigation and regulatory proceedings are subject to inherent uncertainties and unfavorable rulings can and do occur, and weoccur. We may not be protected from these claims or negative impacts therefromof these claims in whole or in part by tariffs or other contract terms. Negative impacts to our reputation may occur even if we are not liable for any contamination or other environmental damage or the consequences arising out of human exposure to contamination or hazardous substances inwithin the water supply or water supplies.distributed finished drinking water. In addition, insurance coverage may not cover all or a portion of these losses, and are subject to deductibles and other limitations. Pending or future claims against us could have a material adverse impact on our business, financial condition, results of operations and cash flows.
We may sustain losses that exceed or are excluded from our insurance coverage or for which we are self-insured.
We maintain insurance coverage as part
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Table of our overall legal and risk management strategy to minimize potential liabilities arising from our utility operations, as well as the operations of our Market-Based Businesses. Our insurance programs have varying coverage limits, exclusions and maximums, and insurance companies may seek to deny claims we might make. Generally, our insurance policies cover property damage, worker’s compensation, employer’s liability, general liability, cybersecurity, terrorism risks and automobile liability. Each policy includes deductibles or self-insured retentions and policy limits for covered claims. As a result, we may sustain losses that exceed or that are excluded from our insurance coverage or for which we are self-insured.Contents Although in the past we have been generally able to obtain insurance coverage related to our business, there can be no assurance that we can secure all necessary or appropriate insurance in the future, or that such insurance can be economically secured. For example, catastrophic events can result in decreased coverage limits, more limited coverage, increased premium costs or deductibles.
We are subject to adverse publicity and reputational risks, which make us vulnerable to negative customer perception and could lead to increased regulatory oversight or sanctions.
Our business and operations have a large direct and indirect customer base and, as a result, we are exposed to public criticism regarding, among other things, the reliability of their water service, wastewater and related or ancillary services, the quality of water provided, and the amount, timeliness, content, accuracy and format of bills that are provided for such services. Adverse publicity and negative consumer sentiment arising out of our operations may render legislatures and other governing bodies, state PUCs and other regulatory authorities, and government officials less likely to view us in a favorable light, and may cause us to be susceptible to less favorable legislative, regulatory and economic outcomes, as well as increased regulatory or other oversight and more stringent regulatory or economic requirements. Unfavorable regulatory and economic outcomes may include the enactment of more stringent laws and regulations governing our operations and less favorable economic terms in our agreements related to our Market-Based Businesses, asMSG, as well as fines, penalties or other sanctions or requirements. The imposition of any of the foregoing could have a material negative impact on us and our financial condition, results of operations and cash flows.
For example, New York American Water Company, Inc. (“NYAW”) has been the subject of a New York State Public Service Commission (“NYSPSC”) investigation related to the unintentional provision of incorrect data to a taxing authority that resulted in an over-assessment of real property taxes. NYAW self-reported this issue to the NYSPSC promptly after NYAW’s senior leadership became aware of it. Neither NYAW nor any of its employees received any financial benefit as a result of this matter, as all customer overpayments were provided to the local taxing authorities. The NYSPSC investigation also related to the failure of a few employees working on NYAW’s 2016 general rate case to properly disclose these issues in that rate case. In September 2018, a settlement of these matters was approved by the Supreme Court of the State of New York, Albany County, and NYAW has been working with the New York State Department of Public Service to implement its terms. While the settlement resolves the NYSPSC’s investigation involving NYAW and those matters set forth above, there can be no assurance that NYAW will not be subject to additional federal, state or local proceedings regarding these and other related matters, and these proceedings could result in increased oversight and civil, administrative and/or criminal sanctions, which may have a material adverse effect upon our reputation and perception.
The failure of, or the requirement to repair, upgrade or dismantle, any of our dams may adversely affect our financial condition, results of operations, cash flows and liquidity.
The properties of our Regulated Businesses segment include 7673 dams, the majority of which are earthen dams, and thedams. The failure of any of whichthese dams could result in personal injury and property damage, including without limitation downstream property damage, for which we may be liable. The failure of a dam would also adversely affect our ability to supply water in sufficient quantities to our customers and could adversely affect our financial condition and results of operations. Any losses or liabilities incurred due to a failure of one of our dams might not be covered by insurance policies or be recoverable in rates, and such losses may make it difficult for us to secure insurance at acceptable rates in the future.
We also are required from time to time to decommission, repair or upgrade the dams that we own. The cost of such repairs or upgrades can be and has been material. The federal and state agencies that regulate our operations may adopt rules and regulations requiring us to dismantle our dams, which also could entail material costs. Although in most cases the PUC has permitted recovery of expenses and capital investment related to dam rehabilitation, we might not be able to recover costs of repairs, upgrades or dismantling through rates in the future. The inability to recover these costs or delayed recovery of the costs as a result of regulatory lag can affect our financial condition, results of operations, cash flows and liquidity.
Any failure of our network of water and wastewater pipes, water mains and water reservoirs could result in losses and damages that may affect our financial condition and reputation.
Our operating subsidiaries distribute water and collect wastewater through an extensive network of pipes, water mains and storage systems located across the United States. A failure of major pipes, mains or reservoirs could result in injuries, property and other damage for which we may be liable. The failure of major pipes, mains and reservoirs may also result in the need to shut down some facilities or parts of our network in order to conduct repairs. Such failures and shutdowns may limit our ability to supply water in sufficient quantities to our customers and to meet the water and wastewater delivery requirements prescribed by government regulators, including state PUCs with jurisdiction over our operations, and adversely affect our financial condition, results of operations, cash flows, liquidity and reputation. Any business interruption or other losses might not be covered by insurance policies or be recoverable in rates, and such losses may make it difficult for us to secure insurance at acceptable rates in the future. Moreover, to the extent such business interruptions or other losses are not covered by insurance, they may not be recovered through rate adjustments.
An important part of our growth strategy is the acquisition of water and wastewater systems, which involves risks, including competition for acquisition opportunities from other regulated utilities, governmental entities and other buyers, thatwhich may hinder or limit our ability to grow our business.
An important element of our growth strategy is the acquisition and optimization of water and wastewater systems in order to broaden our current, and move into new, service areas. We may not be able to acquire other systems or businesses if we cannot identify suitable acquisition opportunities or reach mutually agreeable terms with acquisition candidates. candidates, and whether or not any particular acquisition is successfully completed, these activities are expensive and time consuming and are subject to the availability of capital and personnel resources to complete such acquisitions.
Further, competition for acquisition opportunities from other regulated utilities, governmental entities and other strategic and financial buyers may hinder our ability to expand our business. As consolidation activity increases in the water and wastewater industries and competition for acquisitions continues to increase, the prices for suitable acquisition candidates may increase and limit our ability to expand through acquisitions.
The negotiation and execution of potential acquisitions as well as the integration of acquired systems or businesses with our existing operations could require us to incur significant costs, and cause diversion of our management’s time and resources.resources and have a material adverse impact on our results of operations. Future acquisitions by us could result in, among other things:
•unanticipated capital expenditures;
•unanticipated acquisition-related expenses;
•incurrence or assumption of debt, contingent liabilities and environmental liabilities of or with respect to an acquired business,and obligations, including liabilities that were unknown or undisclosed at the time of acquisition;
•failure to recover acquisition premiums;adjustments or premiums due to unfavorable decisions by PUCs and other governmental authorities;
unanticipated capital expenditures;
•failure to maintain effective internal control over financial reporting;
the need to successfully integrate the acquired systems’ cybersecurity and infrastructure protection measures with those of the Company’s;
•recording goodwill and other intangible assets at values that ultimately may be subject to impairment charges;
•fluctuations in quarterly and/or annual results;
unanticipated acquisition-related expenses;
•failure to realize anticipated benefits and synergies, such as cost savings and revenue enhancements; and
•difficulties in integrating or assimilating acquired systems’ operations, personnel, benefits, services and systems.systems and water quality, cybersecurity and infrastructure protection measures.
Some or all of these items could have a material adverse effect on our business. The systems and businesses we acquire in the future may not achieve anticipated sales andrevenue, return on equity or profitability, or other perceived synergies, and any difficulties we encounter in the integration process could interfere with our operations, reduce our operating marginsnet income and profitability or adversely affect our internal control over financial reporting.
We compete with governmental entities, other regulated utilities, and strategic and financial buyers for acquisition opportunities. If consolidation becomes more prevalent in the water and wastewater industries and competition for acquisitions increases, the prices for suitable acquisition candidates may increase and limit our ability to expand through acquisitions.
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. A 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.
For example, in November 2018, Monterey, California ballot Measure J, which was added by a citizens group, was certified as having been approved by a public vote, requiring the MPWMD to conduct a study and submit a written plan concerning the feasibility of a potential purchase of the Monterey system assets without an additional public vote. On November 6, 2019,The public vote led to the issuance by the MPWMD issuedof (i) a preliminary report finding, among other things, that the acquisition of the Monterey system assets by the MPWMD would be economically feasible. Also, five municipalities infeasible, and (ii) a final environmental impact report analyzing the Chicago, Illinois area formed a water agency that filedenvironmental impacts of such an acquisition through the power of eminent domain lawsuit against our Illinois subsidiary in January 2013, seeking to condemn a water pipeline that serves those five municipalities. This lawsuit remains pending, and a valuation trial is likely to be held in the near future.domain. See Item 1—Business—Regulated Businesses—Condemnation and Eminent Domain and Item 3—Legal Proceedings—Proposed Acquisition of Monterey System Assets — Local Area Formation Commission Litigation, which includes additional information regarding these matters.
Furthermore, the law in certain jurisdictions in which our Regulated Businesses operate provides 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. In California, lawsuits have been filed in connection with large-scale natural events such as 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. Moreover, our efforts to resist the condemnation, eminent domain or other process may not be successful, which may require us to sell the operations at issue in a condemnation proceeding or to pay a private property owner compensation for the property damage suffered. If a municipality or other government subdivision succeeds in acquiring the assets of one or more of our Regulated Businesses through eminent domain or other process, there is a risk that we will not receive adequate compensation for the business, that we will not be able to keep the compensation, or that we will not be able to divest the business without incurring significant charges. Any of these outcomes may have a material adverse effect on our business, results of operations, financial condition, cash flows and liquidity.
We rely on operational and technology systems to facilitate the management of our business and customer and supplier relationships, and a disruption of these systems could adversely affect our business.
Our operational and technology systems are an integral part of our business, and any disruption of these systems could significantly limit our ability to manage and operate our business efficiently, which, in turn, could cause our business and competitive position to suffer and adversely affect our results of operations. For example, we depend on these systems to bill customers, process orders, provide customer service, manage certain plant operations and construction projects, manage our financial records, track assets, remotely monitor certain of our plants and facilities and manage human resources, supply chain, inventory and accounts receivable collections.
Although we do not believe that these systems are at a materially greater risk of failure than other similar organizations, our technology systems remain vulnerable to damage or interruption from:
power loss, computer systems failures, and internet, telecommunications or data network failures;
operator error or improper operation by, the negligent or improper supervision of, or the intentional acts of, employees and contractors;
physical and electronic loss of customer or employee data due to security breaches, cyber attacks, hacking, denial of services action, misappropriation of data or other property and similar events;
computer viruses; and
severe weather and other events, including without limitation, hurricanes, tornadoes, fires, floods, earthquakes and other disasters.
These events may result in physical and electronic loss of customer, employee or financial data, security breaches, misappropriation of property and other adverse consequences. In addition, a lack of or inadequate levels of redundancy for certain of these systems, including billing systems, could exacerbate the impact of any of these events on us. We may not be successful in developing or acquiring technology that is competitive and responsive to the needs of our business, and we might lack sufficient resources to make the necessary upgrades or replacements of outdated existing technology to enable us to continue to operate at our current level of efficiency. Any or all of these events could have a material adverse impact on our business, results of operations, financial condition and cash flows.
We may be subject to physical and/orand cyber attacks.
As operators of critical infrastructure, we may face a heightened risk of physical and/orand cyber attacks from internal or 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 and technology 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.access to their operational or technology systems. While we have instituted safeguards to protect our operational and technology 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.
In addition, in the ordinary course of business, we collect and retain sensitive information, including personally identifiable information, about our customers and employees. In many cases, we outsource administration of certain functions to vendors that couldhave been and will continue to be targets of cyber attacks. Any theft, loss and/or fraudulent use of customer, employee or proprietary data as a result of a cyber attack on us or a vendor could also subject us to significant litigation, liability and costs, as well as adversely impact our reputation with customers and regulators, among others.
We have obtained cyber insurance to provide coverage for a portion of the losses and damages that may result from a physical attack, cyber attack or a security breach, but such insurance is subject to a number of exclusions and may not cover the total loss or damage caused by an attack or a breach. TheFurthermore, the market for cybersecurity insurance is relatively new and coverage available for cybersecurity events maywill likely evolve as the industry matures. In the future, adequate insurance may not be available at rates that we believe are reasonable, and the costs of responding to and recovering from a physical attack, cyber attack or security breach incident may not be covered by insurance or recoverable in rates.
Our business is subject to complex and evolving federal, state and local laws and regulations regarding consumer privacy and the protection or transfer of data relating to individuals, which could result in, among other things, public disclosure of incidents, private or governmental claims or litigation against us, changes to our business practices, monetary penalties, reputational harm and increased cost of operations.
Laws and regulations are changing and increasing rapidly with respect to data and consumer privacy, security and protection. We are subject to an increasing number of complex and continually evolving data and consumer privacy, security and protection laws and regulations administered by various federal, state and local governments, including, for example, the California Consumer Privacy Act of 2018, together with its amendments and implementing regulations, the Virginia Consumer Data Protection Act and the Cyber Incident Reporting for Critical Infrastructure Act of 2022. New laws and regulations may require us to disclose incidents to authorities, regulators and/or the public, when we otherwise may not have been required to disclose such incidents under previous laws and regulations, and such disclosures could negatively and materially impact our reputation, customers, employees, suppliers and other third parties. Federal and state governments have also adopted or are proposing other limitations on, or requirements regarding, the collection, distribution, use, security and storage of personally identifiable information. In addition, the Federal Trade Commission and state attorneys general are applying federal and state consumer protection laws to impose standards on the collection, use and dissemination of data. Moreover, we expect that current laws, regulations and industry standards concerning privacy, data protection and information security in the United States will continue to evolve and increase, and we cannot determine the impact that compliance with such future laws, regulations or standards will have on us or on our business. Any failure or perceived failure by us to comply with current or future federal, state, or local data or consumer privacy or security laws, regulations, policies, guidance, industry standards, or legal obligations, or any incident resulting in unauthorized access to, or the acquisition, release, or transfer of, personally identifiable information or other data relating to our customers, employees and others, may result in private or governmental enforcement actions, litigation or other claims against us, fines and penalties, or adverse perception or publicity about us and our businesses, which could have a material adverse effect on our reputation and business and could result in us incurring substantial costs. These events could also require us to change our business practices, and the events or such changes may result in significant diversions of resources, distract management and divert the focus and attention of our security and technical personnel from other critical activities. Any of the foregoing consequences could have a material adverse effect on our business, financial
condition, results of operations, cash flows and liquidity.
We may sustain losses that exceed or are excluded from our insurance coverage or for which we are self-insured.
We maintain insurance coverage, some of which may be self-insured, as part of our overall legal and risk management strategy to minimize potential liabilities arising from our Regulated Businesses, as well as the operations of MSG and CSG. Our insurance programs have varying coverage limits, exclusions and maximums, and insurance companies may seek to deny claims we might make. Generally, our insurance policies cover property damage, worker’s compensation, employer’s liability, general liability, cybersecurity, terrorism risks and automobile liability. Each policy includes deductibles or self-insured retentions and policy limits for covered claims. As a result, we may sustain losses that exceed or that are excluded from our insurance coverage, or for which we are self-insured and must therefore utilize our own financial resources to cover such losses. Although in the past we have been generally able to obtain insurance coverage related to our business, there can be no assurance that we can secure all necessary or appropriate insurance in the future, or that such insurance can be economically secured. For example, catastrophic events can result in decreased coverage limits, more limited coverage, increased premium costs or deductibles.
We rely on technology to facilitate the management of our business as well as our customer and supplier relationships, and a failure or disruption of implemented technology could materially and adversely affect our business.
Technology is an integral part of our business and operations, and any failure or disruption of the technology or related systems we implement could significantly limit our ability to manage and operate our business effectively and efficiently, which, in turn, could cause our business and competitive position to suffer and adversely affect our results of operations. We use technology systems to, among other things, bill customers, process orders, provide customer service, manage certain plant operations and construction projects, create and manage our financial records and other operational data, track assets, remotely monitor our plants and facilities, and manage human resources, supply chain, inventory, and accounts receivable collections. As a specific example, we depend on water meters to record and communicate the amount of water our customers use, which information in turn is used to generate customer bills, and in recent years, we have experienced greater than expected performance failures with certain water meters used in the Regulated Businesses. When failures occur, we work with meter manufacturers to determine and address the cause of such failures. While these and other failures that we have experienced have not to date had a material adverse effect on our operations, there can be no assurance that efforts to address performance failures or other issues we may experience with water meters or other implemented technology will be successful in the future and that these or future failures of water meters or other technological issues will not have a material adverse effect on us.
Although we do not believe that the technology we have implemented or may in the future implement is at a materially greater risk of failure than that used by other similar organizations, our technology and operations that use or rely on technology remain vulnerable to damage or interruption from, among other things: failure or interruption of the technology or its related systems; loss or failure of power, internet, telecommunications or data network systems; and operator error or improper operation by, the negligent or improper supervision of, or the intentional acts of, employees, contractors and other third parties. Any or all of these events could have a material adverse impact on our business, results of operations, financial condition and cash flows.
An inability to successfully develop and implement new technologies poses substantial risks to our business and operational excellence strategies, which could have a material adverse effect on our business and financial results.
A significant part of our long-term strategic plan focuses on safety, operational excellence, cost and expense efficiency (including O&M expense efficiency), water quality and affordability, asset and capital management and the customer experience. For example, we have made and plan to continue to make significant investments in developing, deploying, integrating and maintaining customer-facing technologies, applications to support field service and customer service operations, water source sensor and evaluation technologies, meter data management and analytics, and intelligent automation technologies. There can be no assurance that we will be successful in designing, developing, deploying, integrating or maintaining these new technologies. Because these efforts can be long-term in nature, these new technologies may be more costly or time-consuming than expected to design, develop, integrate and complete and may not ultimately deliver the expected or desired benefits upon completion. While we have and will continue to seek to recover costs and earn a return on capital expenditures with respect to the costs and expenses of development and deployment of these new technologies in our Regulated Businesses, there can be no assurance that we will be able to do so in every instance or at all, and our inability to do so may adversely affect our ability to achieve intended cost and expense, including O&M expense, efficiencies or other key performance results and, ultimately, could materially and adversely impact our business, financial condition, results of operations and cash flows.
Our inability to efficiently upgrade and improve our operational and technology systems, or implement new systems, could result in higher than expected costs or otherwise adversely impact our internal controls environment, operations and profitability.
Upgrades and improvements to computer systems and networks, or the implementation of new systems, may require substantial amounts of management’s time and financial resources to complete, and may also result in system or network defects or operational errors due to multiple factors, including employees’ ability to effectively use the new or upgraded system. We continue to implement technology to improve our business processes and customer interactions, and have installed new, and upgraded existing, technology
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.
AnDisruptions in our supply chain related to goods, such as pipe, chemicals, power and other fuel, equipment, water and other raw materials, and services, could adversely impact our operations and our ability to serve our customers, as well as our financial results.
Our ability to serve our customers and operate our business in compliance with regulatory requirements is dependent upon purchasing or securing necessary goods and services from our suppliers and vendors. These items include but are not limited to contracted services, chemicals, pipe, valves, hydrants, fittings, equipment (including personal protective equipment), water, and power and other fuel. Examples of supply chain disruptions include reduced quantities of goods available in the marketplace, delays in manufacturing or shipping goods, labor shortages at our suppliers or vendors, natural or other disasters and operational impacts to some of our suppliers or vendors. Disruptions in our supply chain related to goods and services have occurred and we anticipate will continue to occur into the foreseeable future. For example, a recent fire at a plant owned by the sole supplier of permanganate in the Western Hemisphere has severely limited the U.S. supply of potassium and sodium permanganate, two chemicals used by water utilities to treat water. The Company is seeking to utilize alternative methods of treatment and to manage its existing supplies of permanganate, but any inability to successfully develop and implement new technologies poses substantial risks to our business and operational excellence strategies, which couldsource sufficient quantities of these chemicals or utilize alternative chemicals may have a material adverse effect on our businessthe Company’s ability to comply with applicable environmental and financial results.regulatory requirements.
A significant part of our long-term strategic focus on safety, operational excellence, O&M expense efficiency, water quality, asset and capital management and the customer experience includes the development and implementation of new technologies
Supply chain disruptions may cause us to be used for, among other things: customer service and support; environmental compliance; water metering; water quality and source monitoring; cybersecurity; business development and growth; data analysis; employee development and training; and other initiatives. For example, we have made and planunable to continue to make significant investments in developing, deploying and maintaining customer-facing technologies, applications to support field service and customer service operations, water source sensor and evaluation technologies, and data analysis and artificial intelligence technologies. Where appropriate, we also seek to align these new technologies with existing technology infrastructure and systems.
There can be no assurance that we will be successful in designing, developing, deploying, integratingpurchase or maintaining these new technologies, and if they do not perform effectivelyotherwise obtain needed goods or adequately serve their respective business objectives, their value to us and our business and operations may be negatively and materially impacted. Because these efforts can be long-term in nature, these new technologies may be more costlyservices at a reasonable price or time-consuming than expected to design, develop, integrate and completeat all, and may not ultimately deliversignificantly increase the expected or desired benefits upon completion. Technologies that do not perform as intended or desiredprice of goods and services we may need to be redesigned, redeveloped or abandoned. While we haveobtain from suppliers and will continue to seek to recover costs and earn a return on capital expenditures with respect to the costs and expenses of development and deployment of these new technologiesvendors. This, in our Regulated Businesses, there can be no assurance that we will be able to do so in every instance or at all. Our failure to timely and effectively invest in, develop, deploy and implement improvements to, and properly maintain the operation and integrity of, our new technologies, including related data and other related systems, and/or adequately obtain recovery in rates of the costs and expenses associated with such activities,turn, may adversely affectimpact our operations and our ability to achieve intended O&M expense efficiencies or other key performance results and, ultimately, could materially and adversely impactserve our business, financial condition,customers in compliance with regulatory requirements, as well as our associated results of operations, and cash flows.
All of the intellectual property that has been or is being used or developed in connection with these technologies, we believe we own, or have valid licenses to use. However, competitors, contracting parties or other third parties may bring claims against us to challenge our right to use, license, sub-license, market or monetize, in whole or in part, such intellectual property or derivatives thereof or works made therefrom, and the assertion, defense or protection of our intellectual property rights could be expensive, time-consuming and ultimately unsuccessful. If we are unable to do so, or it is determined that we do not own or have valid licenses or other rights to any of the intellectual property used in our technologies, we may lose valuable rights to what we regard as our intellectual property, the carrying values of the affected technologies may need to be decreased significantly, and we may be required to obtain or purchase licenses at significant cost from third parties to use the intellectual property. In any of these cases, we may be unable to execute our long-term strategy, and our financial condition, results of operations and cash flows and financial condition. While we attempt to plan for and have contingencies in place to address supply chain disruptions, our mitigation efforts may not be materially and adversely impacted.successful or may have further negative impacts on us.
Our business has inherently dangerous workplaces.work sites. If we fail to maintain safe work sites, we may experience workforce or customer injuries or loss of life, and be exposed to financial losses, including penalties and other liabilities.
Safety is a core value and a strategy at American Water. Our safety performance and continual progress to our ultimate desired goal of zero injuries isare critical to our ability to carry out our operations effectively and to serve our customers, and thereby, to support our reputation. We maintain health and safety standardspractices to protect our employees, customers, contractors, vendors and the public. Although we intendEliminating all hazards all of the time is extremely challenging, but through strict adherence to adhere to suchour health and safety standards with a goal of achieving zero injuries, it is extremely challengingpractices, and empowering employees to eliminate allbe safety incidents at all times.
leaders who are instructed to and expected to stop work if deemed “unsafe,” we believe we can achieve an injury-free workplace.
At our business sites, including construction and maintenance sites, our employees, contractors and others are often in close proximity to large pieces ofmechanical operating equipment, moving vehicles, pressurized water, undergroundelectric and gas utility lines, below grade trenches and vaults, electrical and pneumatic hazards, fall from height hazards, suspended loads, hazardous chemicals and other regulated materials. On many sites, we are responsible for safety and, accordingly, must implement important safety procedures and practices above what governmental regulations require.regulatory requirements. As an essential business that provides water and wastewater services, we are focused on the health and safety of our employees, contractors, vendors, customers and others who work at or visit our worksites. If we fail to implement such procedures or if the procedures we implement are ineffective or are not followed by our employees or others, or we fail to implement procedures, our employees, contractors and others may experience illness, or minor, serious or fatal injuries. Unsafe work sites have the potential to increase employee turnover, expose us to litigation and raise our operating costs. Any of the foregoing could result in financial losses, which could have a material adverse impact on our business, financial condition, results of operations and cash flows.
In addition, our operations can involve the delivery, handling, storage, use and storagedisposal of hazardous chemicals, which, if improperly delivered, handled, stored, used or disposed of, could result in serious injury, death, environmental damage or property damage, and could subject us to penalties or other liabilities. We are also subject to regulations dealing withvarious environmental, transportation and occupational health and safety.safety regulations. Although we maintain functional employee groups whose primary purpose is to ensure we implement effective environmental health and safety work procedures and practices throughout our organization, including construction sites and maintenance sites,operating facilities, the failure to comply with suchthese regulations or procedures could subject us to liability.
Work stoppages and other labor relations matters could adversely affect our results of operations.operations and the ability to serve our customers.
As of December 31, 2019,2022, approximately 46%47% of our workforce was represented by unions, and we had 7175 collective bargaining agreements in place with 14 different unions representing our unionized employees. These collective bargaining agreements, including four which are beyond expiration and 1418 of which will expire during 2020,2023, are subject to periodic renewal and renegotiation. We may not be able to successfully renew or renegotiate these labor contracts, or enter into new agreements, on terms that are fairacceptable to us. Any negotiations or dispute resolution processes undertaken in connection with our labor contracts could be delayed or affected by labor actions or work stoppages. Labor actions, work stoppages or the threat of work stoppages, and our failure to obtain favorable labor contract terms during renegotiations, may disrupt our operations, negatively impact the ability to serve our customers, and result in higher labor costs, which could adversely affect our reputation, financial condition, results of operations, cash flows and liquidity. While we have developed contingency plans to be implemented as necessary if a work stoppage or strike does occur, a strike or work stoppage may have a material adverse impact on our financial position, results of operations and cash flows.
Our continued success is dependent upon our ability to hire, retain, and utilize qualified personnel.
The success of our business is dependent upon our ability to hire, retain, and utilize qualified personnel, including engineers, licensed operators, water quality and other operating and craft personnel, and management professionals who have the required experience and expertise. From time to time, it may be difficult to attract and retain qualified individuals with the expertise and in the timeframe demanded for our business needs. In certain geographic areas, for example, we may not be able to satisfy the demand for our services because of our inability to successfully hire and retain qualified personnel.
In addition, as key personnel approach retirement age, we need to have appropriate succession plans in place and to successfully implement such plans. If we cannot attract and retain qualified personnel or effectively implement appropriate succession plans, our business, financial condition, results of operations and cash flows may be materially and adversely impacted.
Financial, Economic and Market-Related Risks
Our indebtedness could adversely affect our business adversely and limit our ability to plan for or respond to changes in our business, and we may be unable to generate sufficient cash flows to satisfy our liquidity needs.
As of December 31, 2019,2022, our aggregate long-term and short-term debt balance (including preferred stock with mandatory redemption requirements) was $9.5$12.4 billion, and our working capital (defined as current assets less current liabilities) was in a deficit position. Our indebtedness could have important consequences, including:
•limiting our ability to obtain additional financing to fund future working capital requirements or capital expenditures;
•exposing us to interest rate risk with respect to the portion of our indebtedness that bears interest at variable rates;
•limiting our ability to pay dividends on our common stock or make payments in connection with our other obligations;
•impairing our access to the capital markets for debt and equity;
•requiring that an increasing portion of our cash flows from operations be dedicated to the payment of the principal and interest on our debt, thereby reducing funds available for future operations, dividends on our common stock or capital expenditures;
•limiting our ability to take advantage of significant business opportunities, such as acquisition opportunities, and to react to changes in market or industry conditions; and
•placing us at a competitive disadvantage compared to those of our competitors that have less debt.
During 2022, we utilized existing sources of liquidity, such as our current cash balances, cash flows from operations and borrowings under our commercial paper program, to meet our short-term liquidity requirements. We believe that existing sources of liquidity will be sufficient to meet our cash requirements for the foreseeable future. In order to meet our capital expenditure and other operational needs, however, we may be required to makeborrow additional borrowingsfunds under ourthe revolving credit facility or issuefacility. In the event of a combinationsustained market deterioration, we may need to obtain additional sources of new short-termliquidity, which would require us to evaluate available alternatives and long-term debt securities and equity.take appropriate actions. Moreover, additional borrowings may be required to repay or refinance outstanding indebtedness. Debt maturities and sinking fund payments in 2020, 20212023, 2024 and 20222025 will be $28$281 million, $310$476 million and $14$598 million, respectively. We can provide no assurance that we will be able to access the debt or equity capital markets on favorable terms, if at all.all, to repay or refinance this debt. Moreover, ifas new debt is added to our current debt levels, the related risks we now face could intensify, limiting our ability to repay or refinance existing debt on favorable terms.
In an attempt to manage our exposure to interest rate risk associated with our issuance of variable and fixed rate debt, weWe have in the past entered into, and in the future may enter into, financial derivative instruments, including without limitation, interest rate swaps, forward starting swaps swaptions and U.S. Treasury lock agreements. See Item 7A—Quantitative and Qualitative Disclosures About Market Risk. However, these efforts may not be effective to fully mitigate interest rate risk, and may expose us to other risks and uncertainties, including quarterly “mark to market” valuation risk associated with these instruments, that could negatively and materially affect our financial condition, results of operations and cash flows.
Our ability to pay our expenses and satisfy our debt service obligations depends in significant part on our future performance, which will be affected by the financial, business, economic, competitive, legislative (including tax initiatives and reforms, and other similar legislation or regulation), regulatory and other risk factors described in this section, many of which are beyond our control. If we do not have sufficient cash flows to pay the principal and interest on our outstanding debt, we may be required to refinance all or part of our existing debt, reduce capital investments, sell assets, borrow additional funds or sell additional equity. In addition, if our business does not generate sufficient cash flows from operations, or if we are unable to incur indebtedness sufficient to enable us to fund our liquidity needs, we may be unable to plan for or respond to changes in our business, which could cause our financial condition, operating results and prospects to be affected materially and adversely.
Our inability to access the debt or equity capital or financial markets or other events could affect our ability to meet our long-term commitments or liquidity needs at reasonable cost, and our ability to meet long-term commitments, which could adversely affect our financial condition and results of operations.
In addition to cash from operations, during 2022, we relyrelied primarily on oura revolving credit facility, which was increased from $2.25 billion to $2.75 billion in October 2022, a commercial paper program, which was increased from $2.10 billion to $2.60 billion in October 2022, and the debt capital markets, to satisfy our liquidity needs. In this regard, our principal external sources of short-term liquidity are our $2.10 billion commercial paper program and our $2.25 billion revolving credit facility. OurThe revolving credit facility currently expires in accordance with its terms in March 2024, although under those termsOctober 2027. Historically, we may request to extend the expiration date for up to one year. Wehave regularly useused our commercial paper program under thisrather than the revolving credit facility as a principal source of short-term borrowing due to the generally more attractive rates we generally cancould obtain in the commercial paper market. As of December 31, 2019, American Water Capital Corp. (“AWCC”), our wholly owned financing subsidiary, had2022, there were no outstanding borrowings under the revolving credit facility, and had $786$1,177 million of commercial paper outstanding and $76$78 million in outstanding letters of credit. There can be no assurance that AWCCwe will be able to continue to access itsthis commercial paper program or its revolving credit facility, when, as and if desired, or that the amount of capital available thereunder will be sufficient to meet all of our liquidity needs at a reasonable, or any, cost.
UnderOur ability to comply with covenants in our revolving credit facility and our other consolidated indebtedness is subject to various risks and uncertainties, including events beyond our control. For example, under the terms of ourthe revolving credit facility, our consolidated debt cannot exceed 70% of our consolidated capitalization, as determined under the terms of the credit facility. If our equity were to decline or debt were to increase to a level that caused our debtcauses us to exceed this limit, lenders under the credit facility would be entitled to refuse any further extension of credit and to declare all of the outstanding debt under the credit facilitythereunder immediately due and payable. Events that could cause a reduction in equity include, without limitation, a significant write-down of our goodwill. To avoid such a default, a waiver or renegotiation of this covenant would be required, which would likely increase funding costs and could result in additional covenants that would restrict our operational and financing flexibility.
Our ability to comply with this and other covenants contained in the revolving credit facility and our other consolidated indebtedness is subject to various risks and uncertainties, including events beyond our control. For example, events that could cause a reduction in equity include, without limitation, a significant write-down of our goodwill. Even if we are able to comply with this or other covenants, the limitations on our operational and financial flexibility could harm our business by, among other things, limiting our ability to incur indebtedness or reduce equity in connection with financings or other corporate opportunities that we may believe would be in our best interests or the interests of our shareholders to complete.
In order to meet our capital expenditure needs, we intend to issue a combination of short-term and long-term debt securities and/or additional equity shares of common stock. Disruptions in the debt or equity capital markets or changes in our credit ratings or other events could also limit our ability to access capital on terms favorable to us or at all. For example, on April 1, 2019, Moody’s Investors Service changed the Company’s senior unsecured debt rating to Baa1, from A3, with a stable outlook. While the lending banks that participate in ourthe revolving credit facility have met all ofto date honored their obligations,commitments under those facilities, disruptions in the credit markets, changes in our credit ratings, or deterioration of the banking industry’s financial condition could discourage or prevent lenders from meeting their existing lending commitments, extending the terms of such commitments, or agreeing to new commitments. These or other occurrences may cause our lenders to not meet their existing commitments, andIn such a case, we may not be able to access the commercial paper, debt or loan orequity capital markets, or other sources of potential liquidity, in the future on terms acceptable to us or at all. Furthermore, our inability to maintain, renew or replace commitments under thisour revolving credit facility could materially increase our cost of capital and adversely affect our financial condition, results of operations and liquidity. Longer-termShort- or long-term disruptions or volatility in the debt or equity capital and credit markets as a result of economic, legislative, political or other uncertainty,uncertainties, including as a result of changes in U.S. tax and other laws, reduced financing alternatives, or failures of significant financial institutions could adversely affect our access to the capital necessary to provide adequate liquidity needed for our business. Any significant disruptionSignificant volatility or disruptions in the debt or equity capital debt or credit markets, or financial institution failures, could require us to take measures to conserve cash until the market stabilizes or until alternative financing can be arranged. Such measures could include delaying or deferring capital expenditures, reducing or suspending dividend payments, and reducing other discretionary expenditures. Finally, even absent significant volatility or disruptions in the capital markets, there iscan be no assurance that we will be able to access the equity capital markets to obtain capital or financing when necessary or desirable and on terms that are reasonable or acceptable to us.
Any of the foregoing events that impede our access to the capital markets, or the failureThe occurrence of any of our lenders to meet their commitments that result from financial market disruptions,these circumstances could expose us to increased interest or other expense, require us to institute cash or liquidity conservation measures or otherwise adversely and materially affect our business, financial condition, results of operations, cash flows and liquidity.liquidity, which may limit or impair our ability to achieve our strategic, business and operational goals and objectives.
Parent company may be unable to meet its ongoing and future financial obligations and to pay dividends on its common stock if its subsidiaries are unable to pay upstream dividends or repay funds.
Parent company is a holding company and, as such, it has no substantive operations of its own. Substantially all of our consolidated assets are held by subsidiaries. Parent company’s ability to meet its financial obligations and to pay dividends on its common stock is primarily dependent on the net income and cash flows of its subsidiaries and their ability to pay upstream dividends or repay indebtedness to parent company. Prior to paying dividends to parent company, our regulated subsidiaries must comply with applicable regulatory restrictions and financial obligations, including, for example, debt service and preferred and preference stock dividends, as well as applicable corporate, tax and other laws and regulations and agreements, and our covenants and other agreements. Our subsidiaries are separate legal entities and have no obligation to pay or upstream dividends to parent company. A failure or inability of any of these subsidiaries to pay such dividends or repay intercompany obligations could have a material adverse impact on our liquidity and parent company’s ability to pay dividends on its common stock and meet its other obligations.
We may not be able to fully utilize our U.S. and state net operating loss carryforwards.
Our federal NOL carryforwards will begin to expire in 2028, and our state NOL carryforwards began to expire in 2019 and will continue to expire through 2038. We expect to fully utilize our federal NOL balance before it expires, and our ability to do so 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 $1.5as of December 31, 2022 included $1.1 billion of goodwill and $347 million of total assets measured and recorded at December 31, 2019.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, the acquisition of E’town Corporation by a predecessor to our previous owner in 2001 and our acquisition of Pivotal in 2018.2003. 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 other circumstances. For example, in the third quarter of 2018, prior to our sale of Keystone, we strategically narrowed the scope of that business and, as a result, we recorded a non-cash, pre-tax impairment charge of $57 million. See Note 8—Goodwill and Other Intangible Assets in the Notes to Consolidated Financial Statements for further information.
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 non-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 adversely affect our or AWCC’s ability to access the capital markets.
Additional Risks RelatedOur continued success is dependent upon our ability to Our Market-Based Businessesattract, hire and retain highly qualified, skilled and/or diverse talent.
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, primarily related to MSG. 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 American Water (excluding our regulated subsidiaries) 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.
At December 31, 2019, we had remaining performance commitments as measuredaffected by remaining contract revenue totaling approximately $5.4 billion related to MSG’s contracts,the intentional misconduct of our employees and this amount is likely to increase if the number of 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.contractors.
Our Market-Based Businesses’ operations under MSGCode of Ethics requires employees and contractors to make decisions ethically and in compliance with applicable law and regulatory requirements, and our Code of Ethics and its underlying policies, practices and procedures. All employees are subjectrequired to various risks associated with doing business withcomplete training on and review the U.S. government.
MSG enters 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 either an annual economic price adjustment, or a 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 anticipated market conditions. Any early contract termination or unfavorable annual economic price adjustment or 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
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ITEM 1B. | UNRESOLVED STAFF COMMENTS |
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company’s properties consist primarily of (i) water and wastewater treatment plants, (ii) mains and pipes used for transmission, distribution and collection of water and wastewater, (iii) wells and other sources of water supply, such as reservoirs, (iv) water and wastewater pumping stations, (v) meters and fire hydrants, (vi) general structures, including buildings, dams and treated water storage facilities, (vii) land and easements, (viii) vehicles, (ix) software rights, and (x) other equipment and facilities, the majority of which are used directly in the operation of its systems. Substantially all of the Company’s properties are owned by its subsidiaries, with a large percentage subject to liens of its mortgage bonds. A wholly owned subsidiary of parent company owns the Company’s corporate headquarters, located in Camden, New Jersey, and it leasesthe Company and its operating subsidiaries lease office space, equipment and furniture from certain of itsthe Company’s wholly owned subsidiaries. These properties are utilized by the Company’s directors, officers and staff in the conduct of the business.
The properties of the Company’s Regulated Businesses consist mainly of approximately:
•80 surface water treatment plants;
520•490 groundwater treatment plants;
140•175 wastewater treatment plants;
52,500•53,500 miles of transmission, distribution and collection mains and pipes;
1,000•1,100 groundwater wells;
1,500•1,700 water and wastewater pumping stations;
1,300•1,100 treated water storage facilities; and
76•73 dams.
The Company has ongoing infrastructure renewal programs in all states in which its 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 its Market-Based Businesseswithin Other consist mainly of office furniture and IT equipment. Approximately 51% of all properties that the Company owns are located in New Jersey and Pennsylvania.
The Company maintains property insurance against loss or damage to its properties by fire or other perils, subject to certain exceptions. For insured losses, the Company is self-insured to the extent that any losses are within the policy deductible or exceed the amount of insurance maintained.
The Company believes that its 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 order ofOrder 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 deadline of December 31, 2021 for Cal Am’s compliance with the 2021 Deadline.2009 Order.
The 2009 Order includes a condition prohibiting Cal Am from diverting water from the Carmel River for new service connections or for any increased use of water at existing service addresses resulting from a change in zoning or use. In 2011, the California Public Utilities Commission (the “CPUC”) issued a decision directing modifications in Cal Am’s tariffs to recognize the moratorium mandated by the 2009 Order, and directing Cal Am to seek written guidance from the SWRCB with respect to any unresolved issues of interpretation or implementation of this condition. In 2012, the Deputy Director of the SWRCB sent a 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 2018, Cal Am notified the MPWMD and the SWRCB that it intends to seek declaratory relief concerning the conflicting regulatory interpretations under the 2009 Order. In an attempt to resolve these conflicting interpretations prior to seeking judicial intervention, Cal Am has met with the MPWMD and the 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 MPWMD’s resolution or the SWRCB’s written interpretation, despite these conflicting interpretations, could potentially result in fines, penalties and other actions against Cal Am.
The 2016 Order provides that ifFollowing issuance by the CPUC authorizes Cal Am to acquire more than 1,000 acre-feet per yearCoastal Commission in November 2022 of water from a source other than the Water Supply Project, proponents of the alternative water source could submit revised milestones to the SWRCB for consideration. In May 2018, certain parties to the Water Supply Project proceeding submitted a petition to the SWRCB to add parallel milestones to the 2009 Order for 2019, 2020, and 2021, based on the proposed expansion of the Pure Water Monterey project, another groundwater replenishment project under construction on the Monterey peninsula. Petitioners claim that compliance with the alternate milestones would still provide for cessation of Cal Am’s unauthorized diversions from the Carmel River by 2021. A preliminary report on feasibility concluded that the expanded Pure Water Monterey project could provide an additional 2,250 acre-feet of water per year. Cal Am believes that (i) the petition is premature, (ii) the expanded Pure Water Monterey project is not yet a sufficiently certain or reliable water supply and, even if construction is successfully completed, would provide an insufficient quantity of water to allow full compliance with the 2009 Order, and (iii) the imposition of parallel milestones would distract from completion of the Water Supply Project. On December 13, 2019, the SWRCB dismissed the petition without prejudice.
coastal development permit, as described below, Cal Am continues to work constructively with all appropriate agencies to provide necessary information in connection with obtainingobtain the remaining required approvalspermits for the Water Supply Project. However, based on the matters discussed below in “Monterey Peninsula Water Supply Project,” there can be no assurance that the Water Supply Project in its current configuration will be completed on a timely basis, if ever. Due toFor the delay in the approval schedule,year ended December 31, 2022, Cal Am currently does not believe that it will be able to fully complyhas complied with the diversion reduction requirementslimitations contained in the 2016 Order. Continued compliance with the diversion limitations in 2023 and other remaining requirements underfuture years may be impacted by a number of factors, including without limitation continued drought conditions in California and the exhaustion of water supply reserves, and will require successful development of alternate water supply sources sufficient to meet customer demand. The 2009 Order and the 2016 Order including the 2021 Deadline. The CPUC’s final decision approving the Water Supply Project permits recovery of all ofremain in effect until Cal Am’s prudently incurred costs associated therewith, subjectAm certifies to the frameworks set forth inSWRCB, and the final decision related to cost caps, O&M costs, financing, ratemaking and contingency matters.SWRCB concurs, that Cal Am has obtained a permanent supply of water to substitute for past unauthorized Carmel River diversions. While the Company cannot currently believes that its expenditures to date have been prudent and necessary to complypredict the likelihood or result of any adverse outcome associated with the 2009 Order and the 2016 Order. Furtherthese matters, further attempts to comply with the 2009 Order and the 2016 Order orin the 2021 Deadline,future may result in material additional costs orand obligations to Cal Am, and failure to comply could lead toincluding fines and penalties against Cal Am.
Regional Desalination Project Litigation
Review of CPUC-Approved Settlement Agreement
The Regional Desalination Project (the “RDP”) involved the construction of a desalination facilityAm in the Cityevent of Marina, north of Monterey. The RDP was intended to, among other things, eliminate unauthorized diversions from the Carmel River as required undernoncompliance with 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, MCWRAOrder and the County of Monterey to resolve these matters among the parties signing the agreement. In March 2016 the Supreme Court of California granted MCWD’s petition for review of the CPUC approval, and following the court’s disposition of a related issue in another case, MCWD’s petition for review of the CPUC-approved settlement agreement was remanded to the CPUC. On September 19, 2019, the CPUC issued a decision affirming its prior decisions with respect to the settlement agreement that resolved matters among the parties thereto associated with the termination of the RDP agreements, after considering the issue remanded by the California Supreme Court.
Cal Am’s Action for Damages Following RDP Termination
In October 2012, Cal Am filed a Complaint for Declaratory Relief against MCWRA and MCWD, which was ultimately transferred to the San Francisco County Superior Court, seeking a determination as to whether the Agreements are void as a result of the alleged conflict of interest. In June 2015, 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, discussed below, to determine the amount of damages that may be awarded in the proceeding.
In July 2015, Cal Am and MCWRA filed a Complaint in San Francisco County Superior Court against MCWD and RMC Water and Environment (“RMC”), a private engineering consulting firm which has since been acquired by a national engineering, science and operations company, 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, the court consolidated all of these complaints into a single action. On February 15, 2019, the court granted Cal Am’s motion for summary judgment, and as a result, no claims remain pending against Cal Am in this action. On February 25, 2019, the court granted RMC’s motion for judgment on the pleadings as to certain of Cal Am’s tort claims against it. On June 20, 2019, the court granted MCWD’s motion for summary judgment related to Cal Am’s tort claims against MCWD, which Cal Am appealed to the California Court of Appeal, and on January 14, 2020, this appeal was denied. On January 17, 2019, a motion filed by MCWD for summary judgment against Cal Am relating to the contract claims in Cal Am’s complaint was denied.
Trial in this lawsuit had been scheduled to take place in January 2020. On January 27, 2020, the parties to this lawsuit reached a tentative agreement, which was entered into the court record and would resolve the litigation in part without trial. Under the terms of this tentative agreement, MCWD and RMC would pay Cal Am an aggregate of $5.2 million in settlement of Cal Am’s contract claims against MCWD and all claims against RMC relating to the RDP. Under this agreement, Cal Am’s and MCWRA’s right to appeal the dismissal of their tort claims against MCWD would be expressly reserved. A draft settlement agreement is being reviewed and negotiated by the parties. Once executed, the settlement agreement would be subject to approval of the San Francisco County Superior Court.Order.
Monterey Peninsula Water Supply Project
CPUC Final Approval of Water Supply Project
Cal Am’s ability to move forward on the Water Supply Project is and has been subject to extensive administrative review by the CPUC and other government agencies, obtaining necessary permits, and intervention from other parties. In September 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 construction costs exceed $50 million, Cal Am would be allowed to seek additional cost recovery.
In September 2018, the CPUC unanimously adopted aapproved another final decision finding that (i) the Water Supply Project based on Cal Am’s request for a 6.4 million gallons per day desalination plant, meets the CPUC’s requirements for a CPCN (ii) the issuance of the final decision should not be delayed, and (iii) an additional procedural phase was not necessary to consider alternative projects. The CPUC’s 2018 decision directs Cal Am to enter into negotiations regarding expansion of the GWR Project between Monterey One Water and the MPWMD and to indicate whether Cal Am plans to file an application for approval of an agreement to purchase additional water from the GWR Project. The decision notes, however, that the CPUC will only consider such an application if the Water Supply Project is delayed such that Cal Am would not be able to meet the 2021 Deadline. The decision accepts Cal Am’s estimates of future water demand in Monterey and concludes that the Water Supply Project is the best project to address those needs,estimated future water demands in Monterey, and, in addition to the cost recovery approved in its 2016 decision, adopts Cal Am’s most recent cost estimates. The decision also allows Cal Amestimates for the Water Supply Project, which amounted to earn an allowance for funds used during construction, oraggregate of $279 million plus AFUDC at a rate representative of itsCal Am’s actual financing costs. The 2018 final decision adoptedspecifies 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 asincluded in the final decision related to cost caps, O&M costs, financing, ratemaking and contingency matters.
In addition, the CPUC final decision imposes numerous reporting and filing requirements to ensure the expenditures for the Water Supply Project are reasonable, including that the financing is the lowest cost and most beneficial for ratepayers, and that construction is progressing in a timely manner and within the authorized cost caps. The reasonableness of the Water Supply Project costs will be reviewed inby the first general rate case filed byCPUC when Cal Am afterseeks cost recovery for the Water Supply Project becomes operational.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 February 2019, the City of Marina and MCWD filed petitions for writ of review before the Supreme Court of California challenging the sufficiency of the final Environmental Impact Report/Environmental Impact Statement adopted by the CPUC in September 2018, which the court declined to consider on August 28, 2019.
On July 2, 2019,2021, Cal Am, notified MPWMD and Monterey One Water (collectively,and the “Agencies”) thatMPWMD reached an eventagreement on Cal Am’s purchase of default occurred underadditional 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 becauseexpansion is subject to review and approval of the Agencies failed to deliver toCPUC, and in November 2021, Cal Am by July 1, 2019 advanced treated recycledfiled an application with the CPUC that sought review and approval of the amended and restated water produced bypurchase 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. UnderProject 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, uponwhich was approved by the occurrenceCPUC in its unanimous 2016 final decision.
On December 5, 2022, the CPUC issued a final decision that authorizes Cal Am hadto enter into the right to terminate theamended water purchase agreement, immediately.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 has electedmay 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 exercisethe 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 rightcustomers in Monterey. This application remains pending.
While Cal Am believes that its expenditures to terminatedate have been prudent and necessary to comply with the water purchase agreement at this time, but2009 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, plus applicable AFUDC, previously approved by the CPUC in its notification2016 and December 2022 final decisions. See Note 16—Commitments and Contingencies in the Notes to the Agencies, Cal Am expressly reserved its right to terminate the water purchase agreement until such time as the Agencies commence their required delivery of water from the GWR Project. On July 16, 2019, MPWMD and Monterey One Water responded to Cal Am’s event of default notice and estimated that water delivery would begin by mid-October 2019. On December 12, 2019, Cal Am sent a letter to the Agencies requesting a status update with respect to the event of default. On January 2, 2020, Cal Am notified the Agencies that a second event of default occurred under the water purchase agreement because the Agencies failed to achieve the Performance Start Date (the date upon which MPWMD’s performance obligations under the water purchase agreement were to commence) by January 1, 2020. Under the water purchase agreement, upon the occurrence of this event of default, Cal Am had the right to terminate the water purchase agreement immediately. Cal Am has elected not to exercise its right to terminate the water purchase agreement at this time, but in its notification to the Agencies, Cal Am expressly reserved its right to terminate the water purchase agreement until such time as the Performance Start Date has occurred. On January 9, 2020, the Agencies responded to Cal Am’s December 12, 2019 and January 2, 2020 letters. In the response, the Agencies acknowledged they remain in default under the water purchase agreement but indicated that corrective action is being taken to attain the Performance Start Date in the near future.
On April 17, 2019, Water Ratepayers Association of the Monterey Peninsula (“WRAMP”), a citizens’ advocacy group, filed an amended complaint in Monterey County Superior Court asserting a “qui tam” claim under the California False Claims Act on behalf of itself and the State of California against Cal Am and certain environmental consultants who worked on the CPUC’s environmental analysis of the MPWSP. The State Attorney General declined to proceed with this action after it was originally filed in 2016. On July 10, 2019, defendants filed a joint demurrer challenging the legal sufficiency of the allegations of the amended complaint. At an August 27, 2019 hearing on the demurrer, the court dismissed the petition without leave to amend. On October 17, 2019, WRAMP filed motions seeking clarification and a reconsideration of the court’s ruling. A hearing on these motions was setConsolidated Financial Statements for December 3, 2019, but on November 26, 2019, WRAMP abandoned its motions and instead filed an appeal of the court’s dismissal. This appeal remains pending.further discussion.
Coastal Development Permit Application
In June 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 of Marina’sCity’s coastal zone. Members of the City’s Planning Commission, as well as City councilpersons, have publicly expressed opposition to the Water Supply Project. On March 7, 2019, the City of Marina Planning Commission adopted a resolution denying Cal Am’s coastal development permit application. Cal Am appealed the Marina Planning Commission's decision to the City Council, which set a public hearing on the appeal for April 30, 2019. On April 25, 2019, Cal Am submitted a letter to the City challenging the impartiality of the City and three of its council members with respect to the Water Supply Project. On April 29, 2019, the City informed Cal Am that it intended to proceed with the hearing with the participation of the challenged City Council members. As a result, on April 29, 2019, Cal Am notified the City that it was withdrawing its appeal, as Cal Am believes it could not receive a fair and impartial hearing before the City Council.
OnIn May 10, 2019, the City issued a notice of final local action based upon the denial by the Planning Commission of the Marina Planning Commission’s decision. On May 22, 2019,Application. Thereafter, Cal Am appealed this decision to the California Coastal Commission, (the “Coastal Commission”), as permitted under the City’s code and the California Coastal Act. On October 28, 2019, staff ofAt the same time, Cal Am submitted an application (the “Original Jurisdiction Application”) to the Coastal Commission issued a report recommending a denial of Cal Am’s application for a coastal development permit with respect to the Water Supply Project, largely based on a memorandum prepared by the general manager of the MPWMD that contradicted findings made by the CPUC in its final decision approving the Water Supply Project. Staffs of the CPUC and the Coastal Commission met to discuss the Coastal Commission’s staff recommendation, at which time the CPUC raised questions about the Coastal Commission staff’s findings on water supply and demand, groundwater impacts and other matters. On November 4, 2019, Coastal Commission staff released an addendum to the staff report, concluding that additional groundwater modeling was needed before staff could find that the Water Supply Project would not prevent depletion of groundwater supplies. At its November 14, 2019 hearing on both the appeal from the City of Marina’s denial and Cal Am’s application for a coastal development permitthose project components located within the Coastal Commission’s original jurisdiction,jurisdiction. After Coastal Commission staff advised that no vote would be taken at the meeting and that further investigation was required in lightissued reports recommending denial of the CPUC staff’s questions. The hearing was continuedOriginal Jurisdiction Application, noting potential impacts on environmentally sensitive habitat areas and wetlands and possible disproportionate impacts to a later date. On January 28,communities of concern, in September 2020, Coastal Commission staff recommended to Cal Am that it withdraw its application for a coastal development permit withinwithdrew the Coastal Commission’s original jurisdiction and resubmit such application at a later date, asOriginal Jurisdiction Application in order to address the staff believes that its additional investigation couldstaff’s environmental justice concerns.The withdrawal of the Original Jurisdiction Application did not be completed in time for a vote on Cal Am’s existing application. The staff indicated that such a withdrawal would not affectimpact Cal Am’s appeal of the CityCity’s denial of Marin’s denial,the Marina Application, which would remain pending. Cal Am has declined to withdraw its application, and instead, on February 12,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 expanded 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 entered intoapproved the Marina Application and the Original Jurisdiction Application with respect to the phased development of the proposed desalination plant, subject to compliance with a stipulation extending by 90 days,number of conditions, all of which Cal Am expects to July 24, 2020,satisfy. Cal Am continues to seek the deadlineremaining 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 vote on Cal Am’s original jurisdiction application.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 theMonterey County of Monterey prior to commencement of construction. OnIn April 24, 2019, theMonterey County’s Planning Commission voted to approve the permit. OnIn July 15, 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. OnIn August 21, 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. OnIn October 9, 2019, after a hearing, the court denied, without prejudice, MCWD’s motion for a preliminary injunction, but issued a stay of theMonterey County’s approval of the combined development permit, precluding commencement of physical construction of the desalination plant, until November 19, 2019, at which time the parties were to advise the court of the Coastal Commission’s decision onbut allowing Cal Am’s application for a coastal development permit for the slant wells needed to source water for the desalination plant. In the interim, Cal Am is allowed to continue to obtain permits needed for the desalination plant’s construction. On November 19, 2019, the parties informedIn 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 Coastal Commission had continuedrequirements necessary to approve the combined development permit and set aside its public hearing on the slant wells and had not yet made a determination about permitting the slant wells. In response, theapproval so that Monterey County could come into compliance. The court continueddenied all of MCWD’s other claims. The court also lifted its stay until March 24, 2020.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'sCity’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 Coastal Commission approved coastal development permits for the test slant well, enabling Cal Am to construct and operate the test slant well. Effective February 28, 2018, test slant well pumping ceased, except for minimal maintenance pumping activities, in accordance with Cal Am’s coastal development permits. Because Cal Am may use the test slant well as one of the slant wells for the Water Supply Project, Cal Am sought and obtained from the Coastal Commission permit amendments to allow the test slant well to remain in place and be maintained until February 28, 2020. On November 27, 2019, Cal Am filed an application with the Coastal Commission for a permit amendment to allow the test slant well to remain in place and be maintained until February 28, 2021.2024. A required lease obtained from the California State Lands Commission, as amended, will expireexpired on December 16, 2022. Effective February 28, 2018, test slant well pumping ceased, except for minimal maintenance pumping activities, in accordance with Cal Am’s coastal development permits.
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 amendmenthas filed an applications for extension of the coastal development permits and seeking an injunction against further test well pumping. In orders issued in September 2016 and October 2017, the court denied MCWD’s challenges. In January 2018, MCWD filed a notice of appeal of the court’s judgment. On June 28, 2019, the California Court of Appeal dismissed MCWD’s appeal. On July 15, 2019, MCWD filed a petition for rehearing with the Court of Appeal, which was denied on July 19, 2019.State Lands Commission lease. This decision is now final.application remains pending.
Water Supply Project Land Acquisition and Slant Well Site Use
In July 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. A permanent easement granted by CEMEX to Cal Am was recorded in June 2018 to allow Cal Am access to the property and to construct, operate and maintain the Water Supply Project intake wells. Onin November 26, 2019, the City of Marina 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 extraction 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. The City has requested a meeting with CEMEX as part of a mandatory dispute resolution process under the annexation agreement prior to filing a lawsuit. 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 located, as well as claims of water rights, nuisance and unreasonable water use, and seeking additional declaratory relief. Following various rulings on demurrers filed by Cal Am, CEMEX 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 managed by a groundwater sustainability agency (“GSA”)GSA by 2020 in accordance with an approved groundwater sustainability plan (“GSP”) designed to achieve 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 (“SVBGSA”(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 of Marina filed a notice to become the GSA for the CEMEX site, creating an overlap with the SVBGSA’s filing for the 180/400 Subbasin. In 2016, the 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 site. The State Department of Water Resources (“SDWR”) has taken the position that until the overlap is resolved, it will not accept the GSP from either agency, placing the subbasin at risk of being placed in a probationary status and subject to state management. In December 2019, the County 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 theMonterey County’s filing onin December 18, 2019, and now lists theMonterey County as the exclusive GSA for the site.
OnIn December 30, 2019, the City of Marina filed a lawsuit in the SupremeMonterey County Superior Court of California challenging theMonterey County’s filing, and SDWR’s acceptance of the filing, as the exclusive GSA for the CEMEX site. The City has named theMonterey County and its Board of Supervisors, the Countyits GSA, and SDWR and its director as defendants, and the SVBGSA and its Board of Directors as real parties. The City seeks to invalidate theMonterey County’s filing, as well as injunctive relief to preserve the City’s status as a GSA for the site. To protect its interest in the matter, Cal Am filed an application to intervene in this lawsuit, which is scheduledwas 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 be heardthe 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 groundwater 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 system 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 more information on this matter.
In February 18, 2020.2021, 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 to intervene in the MPWMD’s lawsuit against LAFCO. On December 13, 2022, the court sustained in part, and denied in part, demurrers that had been filed by LAFCO seeking to dismiss the MPWMD’s lawsuit. This matter remains pending.
West Virginia Elk River Freedom Industries Chemical Spill
See Note 16—Commitments and Contingencies—Contingencies—West Virginia Elk River Freedom Industries Chemical Spill in the Notes to Consolidated Financial Statements for information regarding the final court approval of the global settlement with respect to the January 2014 Freedom Industries, Inc. chemical spill.
Dunbar, West Virginia Water Main Break Class Action Litigation
On the evening of June 23, 2015, a 36-inch pre-stressed concrete transmission water main, installed in the early 1970s, failed. The water main is part of WVAWC’sthe West Relay pumping station located in the City of Dunbar.Dunbar, West Virginia and owned by West Virginia-American Water Company, the Company’s West Virginia subsidiary (“WVAWC”). The failure of the main caused water outages and low pressure tofor up to approximately 25,000 WVAWC customers. In the early morning hours of June 25, 2015, crews completed a repair, but that same day, the repair developed a leak. On June 26, 2015, a second repair was completed and service was restored that day to approximately 80% of the impacted customers, and to the remaining approximately 20% by the next morning. The second repair showed signs of leaking but the water main was usable until June 29, 2015, to allow tanks to refill. The system was reconfigured to maintain service to all but approximately 3,000 customers while a final repair was being completed safely on June 30, 2015. Water service was fully restored on July 1, 2015, to all customers affected by this event.
On June 2, 2017, a complaint captioned Jeffries, et al. v. West Virginia-American Water Company was filed in West Virginia Circuit Court in Kanawha County on behalf of an 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 Jeffries plaintiffs 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 October 2017, WVAWC filed with the court a motion seeking to dismiss all of the Jeffries plaintiffs’ counts alleging statutory and common law tort claims. Furthermore, WVAWC asserted that the Public Service Commission of West Virginia, and not the court, has primary jurisdiction over allegations involving violations of the applicable tariff, the public utility code and related rules. In May 2018, the court, at a hearing, denied WVAWC’s motion to apply the primary jurisdiction doctrine, and in October 2018, the court issued a written order to that effect. On February 21, 2019, the court issued an order denying WVAWC’s motion to dismiss the Jeffries plaintiffs’ tort claims. On August 21, 2019, the court set a procedural schedule in this case, including a trial date of September 21, 2020. Discovery in this case is ongoing. On February 4, 2020, the Jeffriesplaintiffs 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. A hearing onIn 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 is currently scheduledissues 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 March 11, 2020.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 meritorious defenses to the claims raised in this class action complaint and WVAWC will continue to vigorously defend itself against these allegations.
Chattanooga, Tennessee Water Main Break Class Action Litigation
On September 12, 2019, Tennessee-American Water Company, a wholly ownedthe Company’s Tennessee subsidiary of the Company (“TAWC”), experienced a break ofleak 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 break by early morning on September 14, 2019, and restored full water service by the afternoon onof 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 the Service Company (collectively, the “Tennessee-American Water Defendants”), on behalf of an allegeda proposed class of individuals or entities who lost water service or suffered monetary losses as a result of the Chattanooga main breakincident (the “Tennessee Plaintiffs”). The complaint allegesalleged breach of contract and negligence against the Tennessee-American Water Defendants, as well as an equitable remedy of piercing the corporate veil. TheIn the complaint as originally filed, the Tennessee Plaintiffs seekwere 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.
On November 22, 2019, In September 2020, the Tennessee-American Water Defendants filed a motion to dismisscourt dismissed all of the Tennessee 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 the parties have been engaging in discovery. On January 12, 2023, after hearing oral argument, the court issued an oral ruling denying the Tennessee Plaintiffs’ motion for failure to state a claim upon which relief may be granted,class certification. On February 9, 2023, the Tennessee Plaintiffs sought reconsideration of the ruling by the court, and with respectany final ruling is appealable to the Company, for lackTennessee Court of personal jurisdiction. A hearing on this motion is scheduled for February 18, 2020.Appeals, as allowed under Tennessee law.
The Tennessee-American Water DefendantsTAWC and the Company believe that they haveTAWC has meritorious defenses to the claims raised in this class action complaint, and they areTAWC is vigorously defending themselvesitself against these allegations.
CSG — East Palo Alto Water System Voluntary ReportOther Matters
In April 2017, AWE, the parent entity of CSG, voluntarily reported2021, American Water Resources, LLC (“AWR”), which, prior to the Division of Drinking WaterDecember 9, 2021 sale of the SWRCB potential violationsCompany’s former HOS business was one 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 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.
In October 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 2017 citation.subpoena (collectively, the “Covered Matters”). The Company, on behalf of AWR, is required to defend any Covered Matter, using commercially reasonable efforts to resolve it on a reasonably expedient basis. Further, the Company is required to consult with the 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 February 2018,addition, until March 9, 2025, the SWRCB referred this matterCompany 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 San Mateo County, California District Attorney’s office for further investigation. AWE continuesextent directly arising in connection with, or directly resulting from, any Covered Matter.
While it is not possible at this time to cooperate withpredict 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 applicable.
PART II
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ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Since April 23, 2008, the Company’s common stock has traded on the New York Stock Exchange (“NYSE”) under the symbol “AWK.” As of February 13, 2020,January 31, 2023, there were 180,974,719181,858,619 shares of common stock outstanding held by approximately 2,5462,234 record holders. Holders of the Company’s common stock are entitled to receive dividends when they are declared by its Board of Directors. See Note 9—Shareholders’ Equity in the Notes to Consolidated Financial Statements for additional information regarding the Company’s dividends.
In February 2015, the Board of Directors authorized an anti-dilutive stock repurchase program to mitigate the dilutive effect of shares issued through the Company’s dividend reinvestment, employee stock purchase and executive compensation activities. The program allows the Company to purchase up to 10 million shares of its outstanding common stock from time to time 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, the Company enters into Rule 10b5-1 stock repurchase plans with a third-party broker, which allow the Company to repurchase shares of its common stock at times when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. Subject to applicable regulations, the Company may elect to amend or cancel the program or the stock repurchase parameters at its discretion to manage dilution.
From April 1, 2015, the date repurchases under the anti-dilutive stock repurchase program commenced, through December 31, 2019,2022, the Company repurchased an aggregate of 4,860,000 shares of its common stock under the program, including 350,000leaving an aggregate of 5,140,000 shares repurchased during the first quarter of 2019.available for repurchase under this program. There were no repurchases of common stock in the last three quarters2022.
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) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Statement of Operations data: | | | | | | | | | |
Operating revenues | $ | 3,610 |
| | $ | 3,440 |
| | $ | 3,357 |
| | $ | 3,302 |
| | $ | 3,159 |
|
Net income attributable to common shareholders | 621 |
| | 567 |
| | 426 |
| | 468 |
| | 476 |
|
Net income attributable to common shareholders per basic common share | $ | 3.44 |
| | $ | 3.16 |
| | $ | 2.39 |
| | $ | 2.63 |
| | $ | 2.66 |
|
Net income attributable to common shareholders per diluted common share | 3.43 |
| | 3.15 |
| | 2.38 |
| | 2.62 |
| | 2.64 |
|
Balance Sheet data: | | | | | | | | | |
Total assets | $ | 22,682 |
| | $ | 21,223 |
| | $ | 19,482 |
| | $ | 18,482 |
| | $ | 17,241 |
|
Long-term debt and redeemable preferred stock at redemption value | 8,644 |
| | 7,576 |
| | 6,498 |
| | 5,759 |
| | 5,874 |
|
Other data: | | | | | | | | | |
Cash dividends declared per common share | $ | 2.00 |
| | $ | 1.82 |
| | $ | 1.66 |
| | $ | 1.50 |
| | $ | 1.36 |
|
Net cash provided by operating activities (a) (b) | 1,383 |
| | 1,386 |
| | 1,449 |
| | 1,289 |
| | 1,195 |
|
Net cash used in investing activities (b) | (1,945 | ) | | (2,036 | ) | | (1,672 | ) | | (1,590 | ) | | (1,459 | ) |
Net cash provided by financing activities (a) (b) | 494 |
| | 726 |
| | 207 |
| | 328 |
| | 290 |
|
Capital expenditures included in net cash used in investing activities | (1,654 | ) | | (1,586 | ) | | (1,434 | ) | | (1,311 | ) | | (1,160 | ) |
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(a) | The information for the years ended December 31, 2016 and 2015, has been revised to reflect the retrospective application of Accounting Standards 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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(b) | The information for the years ended December 31, 2016 and 2015, has been revised to reflect the retrospective application of Accounting Standards Update 2016-18, 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 Notes 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 the 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. The 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 that 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 20182021 compared to fiscal 2017,2020, 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, 2018,2021, filed with the SEC on February 19, 2019.16, 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. The Company employs approximately 6,8006,500 professionals who provide drinking water, wastewater and other related services to approximately 15over 14 million people in 4624 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 the “Regulated Businesses.” The Company’s utilities operate in approximately 1,7001,600 communities in 1614 states in the United States, with over 3.4 million active customers with services provided by its water and wastewater networks. Services provided by the Company’s utilities are generally subject to regulation by PUCs. The Company also operates market-basedother businesses not subject to economic regulation by state PUCs that provide complementarywater and wastewater services to residential and smaller commercial customers, the U.S. government on military installations, as well as municipalities, utilities and industrial customers, collectively presented as the “Market-Based Businesses.throughout this Form 10-K within “Other.” These Market-Based Businesses are not subject to regulation by state PUCs. 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 well as the remainder of this Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
(In millions, except per share data) | 2022 | | 2021 | | 2020 | | 2019 | | 2018 |
Statement of Operations data: | | | | | | | | | |
Operating revenues | $ | 3,792 | | | $ | 3,930 | | | $ | 3,777 | | | $ | 3,610 | | | $ | 3,440 | |
Net income attributable to common shareholders | 820 | | | 1,263 | | | 709 | | | 621 | | | 567 | |
Net income attributable to common shareholders per basic common share | 4.51 | | | 6.96 | | | 3.91 | | | 3.44 | | | 3.16 | |
Net income attributable to common shareholders per diluted common share | 4.51 | | | 6.95 | | | 3.91 | | | 3.43 | | | 3.15 | |
Balance Sheet data: | | | | | | | | | |
Total assets | $ | 27,787 | | | $ | 26,075 | | | $ | 24,766 | | | $ | 22,682 | | | $ | 21,223 | |
Long-term debt and redeemable preferred stock at redemption value | 10,929 | | | 10,344 | | | 9,333 | | | 8,644 | | | 7,576 | |
Other data: | | | | | | | | | |
Cash dividends declared per common share | $ | 2.62 | | | $ | 2.41 | | | $ | 2.20 | | | $ | 2.00 | | | $ | 1.82 | |
Net cash provided by operating activities | 1,108 | | | 1,441 | | | 1,426 | | | 1,383 | | | 1,386 | |
Net cash used in investing activities | (2,127) | | | (1,536) | | | (2,061) | | | (1,945) | | | (2,036) | |
Net cash provided by (used in) financing activities | 1,000 | | | (345) | | | 1,120 | | | 494 | | | 726 | |
Capital expenditures included in net cash used in investing activities | (2,297) | | | (1,764) | | | (1,822) | | | (1,654) | | | (1,586) | |
Financial Results
Presented in the table below are the Company’s diluted earnings per share, as determined in accordance with GAAP, and the Company’s adjusted diluted earnings per share (a non-GAAP measure):
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
Diluted earnings per share (GAAP): | | | | | |
Net income attributable to common shareholders | $ | 3.43 |
| | $ | 3.15 |
| | $ | 2.38 |
|
Adjustments: | | | | | |
Loss on sale of Keystone operations | 0.24 |
| | — |
| | — |
|
Income tax impact | (0.05 | ) | | — |
| | — |
|
Net adjustment | 0.19 |
| | — |
| | — |
|
| | | | | |
Freedom Industries settlement activities | (0.02 | ) | | (0.11 | ) | | (0.12 | ) |
Income tax impact | 0.01 |
| | 0.03 |
| | 0.05 |
|
Net adjustment | (0.01 | ) | | (0.08 | ) | | (0.07 | ) |
| | | | | |
Gain on sale of Contract Services Group contracts | — |
| | (0.08 | ) | | — |
|
Income tax impact | — |
| | 0.02 |
| | — |
|
Net adjustment | — |
| | (0.06 | ) | | — |
|
| | | | | |
Keystone impairment charge | — |
| | 0.31 |
| | — |
|
Income tax impact | — |
| | (0.08 | ) | | — |
|
Net loss attributable to noncontrolling interest | — |
| | (0.01 | ) | | — |
|
Net adjustment | — |
| | 0.22 |
| | — |
|
| | | | | |
Early extinguishment of debt at parent company | — |
| | — |
| | 0.03 |
|
Income tax impact | — |
| | — |
| | (0.01 | ) |
Net adjustment | — |
| | — |
| | 0.02 |
|
| | | | | |
Impact of re-measurement from the TCJA | — |
| | 0.07 |
| | 0.70 |
|
Total net adjustments | 0.18 |
| | 0.15 |
| | 0.65 |
|
Adjusted diluted earnings per share (non-GAAP) | $ | 3.61 |
| | $ | 3.30 |
| | $ | 3.03 |
|
For the yearyears ended December 31, 2019,2022, 2021 and 2020, diluted earnings per share (GAAP) were $3.43, an increase$4.51, $6.95 and $3.91, respectively. The 2021 financial results included a pre-tax gain of $0.28 per diluted share compared$748 million relating to the prior year, which includessale of HOS and a $45 million pre-tax contribution to the American Water Charitable Foundation, a consolidated net adjustments presentedimpact of $2.70 diluted earnings per share. After excluding the gain related to the sale of HOS and charitable contribution in the table above and discussed in greater detail in the “Adjustments to GAAP” section below.
Excluding the net adjustments presented in the table above, adjusted2021, diluted earnings per share (non-GAAP) were $3.61 for the year ended December 31, 2019, anincreased $0.26 in 2022 as compared to 2021. This increase of $0.31 per diluted share compared to the prior year.
These results werewas primarily driven by continued growth in the Regulated Businesses from infrastructure investment and acquisitions, andas well as organic growth, offset somewhat by impacts from inflationary pressures on production costs and higher interest costs along with higher depreciation expenses from the growth inof the Market-Based Businesses, primarily from HOS’s 2018 acquisitionbusiness. Results for 2022 also reflect the favorable impact of Pivotal and from MSG’s addition of two new military contracts in 2018 (Wright-Patterson Air Force Base and Fort Leonard Wood).
Adjustments to GAAP
Adjusted diluted earningsweather, estimated at $0.06 per share, represents a non-GAAP financial measureprimarily due to hot and as shown in the table above, is calculated as GAAP diluted earnings per share, excluding the impact of one or more of the following events: (i) a loss on the sale in the fourth quarter of 2019 of the Keystone operations; (ii) previously reported settlement activities related to the Freedom Industries chemical spill in West Virginia; (iii) a gain recognizeddry weather in the third quarter of 20182022 as compared to a $0.02 per share favorable impact in 2021. Also, included in the results for 2022 are $0.24 per share from interest income earned on the saleseller note and income earned on revenue share agreements, which compares to HOS operating results for 2021 of $0.31 per share. Lastly, the majority of CSG’s O&M contracts; (iv) a goodwilloperating results for the Company’s New York subsidiary, which was sold on January 1, 2022, were $0.12 per share in 2021. See Note 5—Acquisitions and intangible impairment chargeDivestitures in the third quarter of 2018 relatedNotes to the Keystone operations; (v) an early extinguishment of debt charge at parent companyConsolidated Financial Statements for additional information.
Growth Through Capital Investment in the third quarter of 2017;Infrastructure and (vi) non-cash re-measurement charges recorded in the fourth quarters of 2017 and 2018 resulting from the impact of the change in the federal corporate income tax rate on the Company’s deferred income taxes from the enactment of the TCJA.
The Company believes that this non-GAAP measure provides investors with useful information by excluding certain matters that may not be indicative of its ongoing operating results, and that providing this non-GAAP measure will allow investors to better understand the businesses’ operating performance and facilitate a meaningful year-to-year comparison of the Company’s results of operations. Although management uses this non-GAAP financial measure internally to evaluate its results of operations, the Company does not intend results reflected by this non-GAAP measure 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 the Company’s consolidated financial information but is not presented in the financial statements prepared in accordance with GAAP. This measure 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, may have significant limitations on its use.
Growth—through capital investment in infrastructure and regulated acquisitions, as well as strategic growth opportunities in the Market-Based BusinessesRegulated Acquisitions
The Company expects to continuecontinues to grow its businesses, with the majority of its growth to be achieved in the Regulated Businesses through (i) continued capital investment in the Company’s infrastructure to provide safe, clean, reliable and affordable water and wastewater services to its customers, and (ii) regulated acquisitions to expand the Company’s services to new customers. The Company also expects to continue to grow the Market-Based Businesses, which leverages its core water and wastewater competencies. In 2019,2022, the Company invested $1.9$2.6 billion, primarily in the Regulated Businesses, as discussed below:
Regulated Businesses Growth and Optimization
•$1.72.3 billion capital investment in the Regulated Businesses, the substantial majority for infrastructure improvements and replacements.replacements; and
•$235315 million to fund acquisitions in the Regulated Businesses, which added approximately 53,100 water70,000 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 wastewater customers.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.
The Company has entered into agreements for pending acquisitions inOn October 11, 2022, the Regulated Businesses to add approximately 44,200 customers.
On November 20, 2019, the Company and its New YorkCompany’s Pennsylvania subsidiary entered into a Stock Purchase Agreement with Liberty Utilities Co. (“Liberty”), pursuantan agreement to which Liberty will purchase allacquire the wastewater assets of the capital stock of the New York subsidiary (the “Stock Purchase”)Butler Area Sewer Authority for an aggregatea total purchase price of approximately $608$232 million in cash, subject to adjustment as provided for in that agreement.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 YorkJersey subsidiary includes all ofentered 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.
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 New York regulated utility operations, withHOS 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 125,000 customer connections$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 Stateprincipal amount of New York. Algonquin Power & Utilities Corp., Liberty’s parent company, executed$720 million, and delivered an absolutea 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 unconditional guarantycontingent 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 performance of all of Liberty’s obligations under the stock purchase agreement.
The Stock Purchase is subject to various conditions, including obtaining regulatory approval, the expiration or terminationrevenue generated from customers who are billed for home warranty services through an applicable Company subsidiary (an “on-bill” arrangement), and 15% of the applicable waiting period underrevenue generated from any future on-bill arrangements entered into after the U.S. Hart-Scott-Rodino antitrust law and other customary closing conditions. The stock purchaseclosing. Unless earlier terminated, this agreement has a term of up to 15 years, which may be terminated by either party if the Stock Purchase is not completed by June 30, 2021, subject to extensionrenewed for up to six months if all of the conditions to closing have been met, other than obtaining regulatory approvals. Liberty may also terminate the stock purchase agreement if any governmental authority initiates a condemnation or eminent domain proceeding against a majority of the consolidated properties of the New York subsidiary, taken as a whole.two five-year periods. The Company currently estimates thatrecognized $9 million of income during the Stock Purchaseyear ended December 31, 2022, from the revenue share agreements, which is to be completed by early 2021. Accordingly, the assets and related liabilities of the New York subsidiary were classified as held for saleincluded in Other, net on the Consolidated Balance Sheets asStatements of December 31, 2019.Operations. See Note 4—5—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional information.
Sale of New York American Water Company, Inc.
Market-Based Businesses Growth and Optimization
DuringOn January 2020, HOS was selected by1, 2022, the San Francisco PublicCompany completed the previously disclosed sale of its regulated utility operations in New York to Liberty Utilities Commission(Eastern Water Holdings) Corp. (“SFPUC”Liberty”) to offer optional water line and sewer line protection services to homeowners across the City and County, an indirect, wholly owned subsidiary of San Francisco. This arrangement provides over 100,000 eligible San Francisco homeowners, served by the SFPUC, the opportunity to purchase optional protection plansAlgonquin Power & Utilities Corp. Liberty purchased from the Company for the water line that runs from a residential property to the connection with the water meter and the sewer line that runs from the residential property to the sewer main.
MSG was awarded contracts for ownership, operation and maintenanceall of the water and wastewater systems at Joint Base San Antonio in Texas, effective September 26, 2019, andcapital stock of the United States Military Academy at West Point,Company’s New York effective September 30, 2019. Highlightssubsidiary for a purchase price of these contract awards are detailed below:
Joint Base San Antonio is comprised of Randolph Air Force Base, Fort Sam Houston, Camp Bullis and Lackland Air Force Base. The installation spans 46,539 acres, across 11 geographically separated parcels of land. The contract award includes estimated revenues of approximately $448$608 million over a 50-year period, subject to an annual economic price adjustment.
The United States Military Academy is located at West Point, New York, the oldest continuously operated Army post in the United States. The institution’s campus, central post and training areas expand across nearly 16,000 acres, and is home to a student body of approximately 4,400 cadets. The total contract award includes estimated revenues of approximately $519 million over a 50-year period, subject to an annual economic price adjustment.
On December 12, 2019, as part of a strategic review undertaken by the Company, the Company sold all of its interest in its Keystone operations to a natural gas and oil industry investment group, for total cash consideration of $31 million, subject to adjustment based on post-closing working capital. As a result of the sale, the Company recorded a pre-tax loss on sale of $44 million, or $35 million after-tax, during the fourth quarter of 2019, as discussed above.cash. See Note 4—5—Acquisitions and Divestitures in the Notes 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
Looking forward, theThe Company expects to invest between $8.8$14 billion to $9.4$15 billion from 2020 to 2024,over the next five years, and between $20$30 billion to $22$34 billion from 2020 to 2029,over the next 10 years, including a range of $1.7 billion to $1.9$2.9 billion in 2020.2023. The Company’s expected future investments include:
•capital investment for infrastructure improvements in the Regulated Businesses of $8.2between $12.5 billion to $13 billion over the next five years, and between $18.2$27 billion and $19.2to $30 billion over the next 10 years, including $1.6$2.5 billion expected in 2020;2023; and
•growth from acquisitions in the Regulated Businesses to expand the Company’s water and wastewater customer base of between $600 million$1.5 billion to $1.2$2 billion over the next five years, and between $2$3 billion to $3$4 billion over the next 10 years, including a range of $100 million to $300$400 million expected in 2020.
2023.
Presented in the following chart is the estimated allocation of the Company’s expected capital investment for infrastructure improvements in its Regulated Businesses over the next five years, by purpose:
Other Matters
Military Services Group
On June 30, 2022, MSG was awarded a contract for the ownership, operation, maintenance and replacement of the wastewater utility system assets at Naval Station Mayport in Jacksonville, Florida. The contract was effective July 1, 2022, and its total revenue is approximately $341 million over a 50-year period, subject to an annual economic price adjustment. The 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 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 U.S. Navy installation.
Permanganate Supply Disruption
In January 2023, a fire occurred at a plant owned by the sole 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 material adverse effect on the Company’s ability to comply with applicable environmental and regulatory requirements.
Operational Excellence
The Company continues to strive for industry-leading operational efficiency, driven largely by technology. The Company’s technology investments are aimed at enhancing its customer experience and operational efficiency.
In 2019:
the Regulated Businesses achieved an adjusted regulated O&M efficiency ratio (a non-GAAP measure) of 34.5%was 33.7% for the year ended December 31, 2019,2022, compared to 35.6% and 35.3%34.1% for the yearsyear ended December 31, 2018 and 2017, respectively.2021. The improvement in the Company’s adjusted O&M efficiency ratio in 2019, when compared to 2018, was due toreflects an increase in operating revenues for the Regulated Businesses, after considering the adjustment for the amortization of the excess accumulated deferred income taxes (“EADIT”) shown in the table below, as well as the continued focus on operating costs of the Regulated Businesses;costs.
the Company worked to decrease costs and deploy capital efficiently, including using trenchless technologies for pipeline rehabilitation and leveraging its buying power and strategic sourcing to drive cost savings;
the Company continued its commitment to water quality and the environment by leveraging new technologies; the Company now has advanced water quality sensors at all of its major drinking water intake sites and is automating its environmental reporting and compliance systems; and
the Company implemented other technology tools that will enhance communication, collaboration and mobility, enable further business insights and process automation, and increase self-service capabilities, to help its employees work safely and efficiently, and enhance the customer experience.
Looking forward, the Company will focus on technology and efficiency to:
be the leader in optimizing technology across the water and wastewater industry, with a focus on specific, innovative projects that will set it apart from other utilities; aiding the Company in serving its customers with greater ease, making the Company’s employees safer and helping the Company operate more efficiently; and
further improve theThe Company’s adjusted O&M efficiency ratio.
The Company’s adjustedregulated O&M efficiency ratio is a non-GAAP measure and is defined by the Company as its operation and maintenance expenses from the Regulated Businesses, divided by the pro forma operating revenues from the Regulated Businesses, where both operation and maintenance expenses and pro forma operating revenues were adjusted to eliminate purchased water expense. Operating revenues were further adjusted to exclude reductions for the amortization of the EADIT. Also excluded from operation and maintenance expenses areis the allocable portion of non-operation and maintenancenon-O&M support services costs, mainly depreciation and general taxes, which areis reflected in the 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.
In addition to the adjustments discussed above, for period-to-period comparability purposes, the estimated impact of the TCJA on operating revenues for the Regulated Businesses has been presented on a pro forma basis for all periods prior to January 1, 2018, as if the lower federal corporate income tax rate was in effect for these periods. The Company also made the following adjustments to the O&M efficiency ratio: (i) excluded from operation and maintenance expenses is the impact of certain Freedom Industries chemical spill settlement activities recognized in 2017, 2018 and 2019 (see Note 16—Commitments and Contingencies in the Notes to Consolidated Financial Statements for additional information); and (ii) excluded from operation and maintenance expenses is the impact of the Company’s January 1, 2018 adoption of Accounting Standards Update 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-Retirement Benefit Cost (“ASU 2017-07”), for 2017, 2018 and 2019. The items discussed above were excluded from the O&M efficiency ratio calculation as they are not reflective of management’s ability to increase the efficiency of the Regulated Businesses.
The Company evaluates its operating performance using this ratio, and believes it is useful to investors because it directly measures improvement in the operating performance and efficiency of the Regulated Businesses. This information is derived from the Company’s consolidated financial information but is not presented in its financial statements prepared in accordance with GAAP. This information is intended to enhance an investor’s overall understanding ofsupplements and should be read in conjunction with the Company’s operating performance.GAAP disclosures, and should be considered as an addition to, and 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,GAAP; (ii) is not based on a standard, objective industry definition or method of calculation; (iii) may not be comparable to other companies’ operating measuresmeasures; and (iv) should not be used in place of the GAAP information provided elsewhere in this Annual Report on Form 10-K.
Presented in the table below is the calculation of the Company’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 its 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) | 2019 | | 2018 | | 2017 |
Total operation and maintenance expenses (a) | $ | 1,544 |
| | $ | 1,479 |
| | $ | 1,369 |
|
Less: | | | | | |
Operation and maintenance expenses—Market-Based Businesses | 393 |
| | 362 |
| | 337 |
|
Operation and maintenance expenses—Other (a) | (31 | ) | | (42 | ) | | (44 | ) |
Total operation and maintenance expenses—Regulated Businesses (a) | 1,182 |
| | 1,159 |
| | 1,076 |
|
Less: | | | | | |
Regulated purchased water expenses | 135 |
| | 133 |
| | 128 |
|
Allocation of non-operation and maintenance expenses | 31 |
| | 31 |
| | 29 |
|
Impact of Freedom Industries settlement activities (b) | (4 | ) | | (20 | ) | | (22 | ) |
Adjusted operation and maintenance expenses—Regulated Businesses (i) | $ | 1,020 |
| | $ | 1,015 |
| | $ | 941 |
|
| | | | | |
Total operating revenues | $ | 3,610 |
| | $ | 3,440 |
| | $ | 3,357 |
|
Less: | | | | | |
Pro forma adjustment for impact of the TCJA (c) | — |
| | — |
| | 166 |
|
Total pro forma operating revenues | 3,610 |
| | 3,440 |
| | 3,191 |
|
Less: | | | | | |
Operating revenues—Market-Based Businesses | 539 |
| | 476 |
| | 422 |
|
Operating revenues—Other | (23 | ) | | (20 | ) | | (23 | ) |
Total operating revenues—Regulated Businesses | 3,094 |
| | 2,984 |
| | 2,792 |
|
Less: | | | | | |
Regulated purchased water revenues (d) | 135 |
| | 133 |
| | 128 |
|
Adjusted operating revenues—Regulated Businesses (ii) | $ | 2,959 |
| | $ | 2,851 |
| | $ | 2,664 |
|
| | | | | |
Adjusted O&M efficiency ratio—Regulated Businesses (i) / (ii) | 34.5 | % | | 35.6 | % | | 35.3 | % |
| |
(a) | Includes the impact of the Company’s adoption of ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-Retirement Benefit, on January 1, 2018.
|
| |
(b) | Includes the impact of settlements in 2017 and 2018 with two of the Company’s general liability insurance carriers, and a reduction in the first quarter of 2019 of a liability, each related to the Freedom Industries chemical spill. |
| |
(c) | Includes the estimated impact of the TCJA on operating revenues for the Regulated Businesses for all periods presented prior to January 1, 2018, as if the lower federal corporate income tax rate was in effect for these periods. |
| |
(d) | The calculation assumes regulated purchased water revenues approximate regulated purchased water expenses. |
Regulatory Matters
General Rate Cases
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 during 2017 through 2019:2022:
|
| | | | | | | | | | | |
(In millions) | 2019 | | 2018 | | 2017 |
General rate cases by state: | |
| | |
| | |
|
Indiana (a) | $ | 4 |
| | $ | — |
| | $ | — |
|
Kentucky (effective June 28, 2019) | 13 |
| | — |
| | — |
|
California (b) | 4 |
| | 10 |
| | 5 |
|
New York (c) | 4 |
| | 5 |
| | 4 |
|
West Virginia (effective February 25, 2019) | 19 |
| | — |
| | — |
|
Maryland (effective February 5, 2019) | 1 |
| | — |
| | — |
|
New Jersey (d) | — |
| | 40 |
| | — |
|
Missouri (effective May 28, 2018) | — |
| | 33 |
| | — |
|
Pennsylvania (effective January 1, 2018) | — |
| | 62 |
| | — |
|
Virginia (e) | — |
| | — |
| | 5 |
|
Iowa (effective March 27, 2017) | — |
| | — |
| | 4 |
|
Illinois (effective January 1, 2017) | — |
| | — |
| | 25 |
|
Total general rate case authorizations | $ | 45 |
| | $ | 150 |
| | $ | 43 |
|
| | | | | | | | | | | |
(a)(In millions) | The Company’s Indiana subsidiary received an order approving a joint settlement agreement with all major parties with respect to itsEffective 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 filing, authorizing annualized incremental revenues of $4 million in the first rate year, effective July 1, 2019, and $13 million in the second rate year, effective approximately May 1, 2020.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:
| | | | | | | | | | | |
(b)(In millions) | The Company’s Effective Date | | Amount |
General rate cases by state: | | | |
Pennsylvania | January 28, 2023 | | $ | 138 | |
Illinois | January 1, 2023 | | 67 | |
California, subsidiary received approval for the second rate year (2019) step increase associated with its most recentStep Increase | January 1, 2023 | | 13 | |
Total general rate case authorization, effective May 11, 2019. On December 13, 2018, a settlement in this subsidiary’s general rate case filing was approved, authorizing rates effective January 1, 2018. In 2017, step rates were effective January 13 through February 2.authorizations |
| |
(c)$ | The Company’s New York subsidiary implemented its third step increase associated with its most recent general rate case authorization, effective April 1, 2019. |
218 | |
(d) | The effective date was June 15, 2018. As part of the resolution of the general rate case, the Company’s New Jersey subsidiary’s customers received refunds for the amount of provisional rates implemented as of June 15, 2018 and collected, to the extent that such rates exceeded the final rate increase plus interest. |
| |
(e) | The effective date was May 24, 2017, authorizing the implementation of interim rates as of April 1, 2016. |
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, 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
There is no assurance that all or any portion of the following requests will be granted.
On December 16, 2019, the Company’s New Jersey subsidiary filed a general rate case requesting $88 million annualized incremental revenues.
On November 12, 2019, the Company’s California subsidiary filed for the third year (2020) step increase requesting $5 million associated with its most recent general case authorization. Step rates became effective on January 1, 2020, subject to refund. As of February 14, 2020, five of the seven districts’ step increases were approved representing $4 million of the $5 million request.
On July 1, 2019,2022, the Company’s California subsidiary filed a general rate case requesting $26an 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 incremental revenues for 2021,the test year 2024 is now $37 million, compared against 2023 revenues. This excludes the proposed step rate and increasesattrition rate increase for 2025 and 2026 of $10$20 million and $11$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 the escalation year of 2022 and the attrition year of 2023, respectively. additional annualized revenues.
On January 22, 2020, the Company’s California subsidiary submitted a request to delay by one year its cost of capital filing and maintain its current authorized cost of capital through 2021. If the extension is not granted, the subsidiary may file the cost of capital application by May 1, 2020 to adjust its authorized cost of capital beginning January 1, 2021.
In 2018,November 15, 2021, the Company’s Virginia subsidiary filed a general rate case requesting $5$14 million in additional annualized incremental revenues. OnInterim rates were effective on May 1, 2019,2022, and the difference between interim and final approved rates under bond andis subject to refundrefund. 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 implementedheld on September 27 and will remain in effect until a28, 2022. A final decision on this matter is receivedexpected in this general rate case.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 2017 through 2019:2022:
|
| | | | | | | | | | | |
(In millions) | 2019 | | 2018 | | 2017 |
Infrastructure surcharges by state: | | | | | |
Missouri (a) | $ | 14 |
| | $ | 6 |
| | $ | 6 |
|
Pennsylvania (b) | 11 |
| | — |
| | 1 |
|
Tennessee (effective September 1, 2019, April 10, 2018 and March 14, 2017) | 1 |
| | 1 |
| | 2 |
|
New York (effective August 1, 2019) | 2 |
| | — |
| | — |
|
New Jersey (c) | 15 |
| | — |
| | 14 |
|
Illinois (effective January 1, 2019 and January 1, 2018) | 8 |
| | 3 |
| | — |
|
West Virginia (effective January 1, 2019, January 1, 2018 and January 1, 2017) | 2 |
| | 3 |
| | 2 |
|
Indiana (effective March 14, 2018 and March 22, 2017) | — |
| | 7 |
| | 8 |
|
Virginia (effective March 1, 2018) | — |
| | 1 |
| | — |
|
Total infrastructure surcharge authorizations | $ | 53 |
| | $ | 21 |
| | $ | 33 |
|
| | | | | | | | | | | |
(a)(In millions) | In 2019, $5 million was effective December 21 and $9 million was effective June 24. In 2018, the effective date was December 15. In 2017, the effective date was December 15.Effective Date | | Amount |
Infrastructure surcharges by state: | | | |
(b)New Jersey | In 2019, $6 million was effective October 1, $3 million was effective July 1 and $2 million was effective April 1. In 2017, the effective date was January 1.(a) |
| $ | 11 | |
(c)Pennsylvania | In 2019, the effective date was (b) | | 19 | |
Missouri | (c) | | 30 | |
Tennessee | August 8, 2022 | | 3 | |
Kentucky | July 1. In 2017, $4 million was effective December 10 and $10 million was effective June 1.1, 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, 2020:2023:
|
| | | |
(In millions) | Amount |
Infrastructure surcharge filings by state: | |
Pennsylvania (effective January 1, 2020) | $ | 10 |
|
New Jersey (effective January 1, 2020) | 10 |
|
Illinois (effective January 1, 2020) | 7 |
|
West Virginia (effective January 1, 2020) | 3 |
|
Total infrastructure surcharge filings | $ | 30 |
|
| | | | | | | | | | | |
(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 November 15, 2019,January 20, 2023, the Company’s TennesseeIndiana subsidiary filed for an infrastructure surcharge proceeding requesting $2$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 assurance that all or any portion of this request will be granted.
Tax Matters
Tax Cuts and Jobs Act
On December 22, 2017, the TCJA was signed into law, which, among other things, enacted significant and complex changesfinancial impact to the Code, includingCompany as a reduction in the federal corporate income tax rate from 35% to 21% 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 taxes. In 2018, the Company’s 14 regulatory jurisdictions began to seek to address the impactsresult of the TCJA. The Company has adjusted customer rates to reflectNJBPU’s order, since the lower income tax rate in 11 states. In one of those 11 states, a portion of the tax savings is being used to reduce certain regulatory assets. In one additional state, the Company is using the tax savings to offset additional capital investment and to reduce a regulatory asset. Proceedings in the other two regulatory jurisdictions remain pending.
The enactment of the TCJA required a re-measurement of the Company’s deferred income taxes that materially impacted its 2017 results of operations and financial position. The portion of this re-measurement related to the Regulated Businesses was substantially offset by a regulatory liability,acquisition adjustments are currently recorded as the Company believes it is probable that the excess accumulated deferred income taxes (“EADIT”) created by the TCJA will be used to benefit its regulated customers in future rates. Six of the Company’s regulated subsidiaries are amortizing EADIT and crediting customers, including one which is using the EADIT to offset future infrastructure investments. The Company expects the timing of the amortization of EADIT credits by the eight remaining regulated subsidiaries to be addressed in pending or future rate cases or other proceedings.
On March 23, 2018,goodwill on the Consolidated Appropriations ActBalance Sheets.
Legislative Updates
In Illinois, the Governor signed a 10-year extension of the Water Systems Viability Act, Illinois’ fair market value legislation, in 2018, which became effective in 2019. In addition to extending the act, the updated law removes the previous restriction on the size of water or wastewater systems that can be acquired and allows all municipalities to take advantage of the benefits of the program.
During 2019, the Company’s regulatory jurisdictions enacted the following legislation that has been approved and is effective as of December 31, 2019:
Indiana Senate Enrolled Act 472 allows non-municipal utilities to benefit from full appraisal recovery of their assets in a sale.
Indiana House Enrolled Act 1406 established the first state appropriation for water infrastructure investment at $20 million per year.
Indiana Senate Enrolled Act 4 extends leveling legislation to require biannual water loss audits and establishes the state revolving fund administrator as the central coordinator for water issues in the state.
In Pennsylvania, House Bill 751, now Act 53 of 2019, allows water and wastewater utilities responsible for funding the income taxes on taxable contributions and advances to record the income taxes paid in accumulated deferred income taxes for accounting and ratemaking purposes.
In West Virginia, House Bill 117 allows qualified low income customers to apply for a 20% discount on their wastewater bill.
Consolidated Results of Operations
Presented in the table below are the Company’s consolidated results of operations:
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
(In millions) | | | | | |
Operating revenues | $ | 3,792 | | | $ | 3,930 | | | $ | 3,777 | |
Operating expenses: | | | | | |
Operation and maintenance | 1,589 | | | 1,777 | | | 1,622 | |
Depreciation and amortization | 649 | | | 636 | | | 604 | |
General taxes | 281 | | | 321 | | | 303 | |
Total operating expenses, net | 2,519 | | | 2,734 | | | 2,529 | |
Operating income | 1,273 | | | 1,196 | | | 1,248 | |
Other income (expense): | | | | | |
Interest expense | (433) | | | (403) | | | (397) | |
Interest income | 52 | | | 4 | | | 2 | |
Non-operating benefit costs, net | 77 | | | 78 | | | 49 | |
Gain on sale of businesses | 19 | | | 747 | | | — | |
Other, net | 20 | | | 18 | | | 22 | |
Total other income (expense) | (265) | | | 444 | | | (324) | |
Income before income taxes | 1,008 | | | 1,640 | | | 924 | |
Provision for income taxes | 188 | | | 377 | | | 215 | |
Net income attributable to common shareholders | $ | 820 | | | $ | 1,263 | | | $ | 709 | |
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
(Dollars in millions) | | | | | |
Operating revenues | $ | 3,610 |
| | $ | 3,440 |
| | $ | 3,357 |
|
Operating expenses: | | | | | |
Operation and maintenance | 1,544 |
| | 1,479 |
| | 1,369 |
|
Depreciation and amortization | 582 |
| | 545 |
| | 492 |
|
General taxes | 280 |
| | 277 |
| | 259 |
|
Loss (gain) on asset dispositions and purchases | 34 |
| | (20 | ) | | (16 | ) |
Impairment charge | — |
| | 57 |
| | — |
|
Total operating expenses, net | 2,440 |
| | 2,338 |
| | 2,104 |
|
Operating income | 1,170 |
| | 1,102 |
| | 1,253 |
|
Other income (expense): | | | | | |
Interest, net | (382 | ) | | (350 | ) | | (342 | ) |
Non-operating benefit costs, net | 16 |
| | 20 |
| | (9 | ) |
Loss on early extinguishment of debt | (4 | ) | | (4 | ) | | (7 | ) |
Other, net | 33 |
| | 19 |
| | 17 |
|
Total other income (expense) | (337 | ) | | (315 | ) | | (341 | ) |
Income before income taxes | 833 |
| | 787 |
| | 912 |
|
Provision for income taxes | 212 |
| | 222 |
| | 486 |
|
Consolidated net income | 621 |
| | 565 |
| | 426 |
|
Net loss attributable to noncontrolling interest | — |
| | (2 | ) | | — |
|
Net income attributable to common shareholders | $ | 621 |
| | $ | 567 |
| | $ | 426 |
|
The main factors contributing to the $54 million increase in net income attributable to common shareholders for the year ended December 31, 2019 are described in “Segment Results of Operations” below.
Segment Results of Operations
The Company’s operating segments are comprised of the revenue-generating components of its business forbusinesses which generate revenue, incur expense and have separate financial information which is internally produced and regularly used by management to make operating decisions, assess performance and allocate resources. The Company operates its business primarily through one reportable segment, the Regulated Businesses segment. The Company also operates market-based businesses that, individually, doOther primarily includes MSG, which does not meet the criteria of a reportable segment in accordance with GAAP,GAAP. Other also includes corporate costs that are not allocated to the Regulated Businesses segment, interest income related to the seller promissory note and are collectively presented asincome from the Market-Basedrevenue 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 whichsegment.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
Presented in the table below is financial information for the Regulated Businesses:
| | | | | | | | | | For the Years Ended December 31, |
| For the Years Ended December 31, | | 2022 | | 2021 | | 2020 |
| 2019 | | 2018 | | 2017 | |
(Dollars in millions) | |
| | |
| | |
| |
(In millions) | | (In millions) | | | | | |
Operating revenues | $ | 3,094 |
| | $ | 2,984 |
| | $ | 2,958 |
| Operating revenues | $ | 3,505 | | | $ | 3,384 | | | $ | 3,255 | |
Operation and maintenance | 1,182 |
| | 1,159 |
| | 1,076 |
| Operation and maintenance | 1,345 | | | 1,325 | | | 1,258 | |
Depreciation and amortization | 529 |
| | 500 |
| | 462 |
| Depreciation and amortization | 633 | | | 601 | | | 562 | |
General taxes | 262 |
| | 261 |
| | 244 |
| General taxes | 264 | | | 301 | | | 285 | |
(Gain) on asset dispositions and purchases | (10 | ) | | (7 | ) | | (16 | ) | |
Other income (expenses) | (262 | ) | | (247 | ) | | (266 | ) | |
Other operating expenses | | Other operating expenses | — | | | 1 | | | (3) | |
Other income (expense) | | Other income (expense) | (220) | | | (195) | | | (221) | |
Income before income taxes | 869 |
| | 826 |
| | 925 |
| Income before income taxes | 1,042 | | | 962 | | | 932 | |
Provision for income taxes | 215 |
| | 224 |
| | 367 |
| Provision for income taxes | 188 | | | 172 | | | 217 | |
Net income attributable to common shareholders | 654 |
| | 602 |
| | 559 |
| Net income attributable to common shareholders | $ | 854 | | | $ | 789 | | | $ | 715 | |
Operating Revenues
Presented 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 with explanations for the material variances provided in the ensuing discussions:consisting primarily of miscellaneous utility charges, fees and rents.
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
(Dollars in millions) | | | | | |
Water services: | | | | | |
Residential | $ | 1,735 |
| | $ | 1,663 |
| | $ | 1,644 |
|
Commercial | 639 |
| | 616 |
| | 601 |
|
Fire service | 142 |
| | 137 |
| | 139 |
|
Industrial | 138 |
| | 136 |
| | 137 |
|
Public and other | 230 |
| | 216 |
| | 244 |
|
Total water services | 2,884 |
| | 2,768 |
| | 2,765 |
|
Wastewater services | 167 |
| | 161 |
| | 142 |
|
Other (a) | 43 |
| | 55 |
| | 51 |
|
Total operating revenues | $ | 3,094 |
| | $ | 2,984 |
| | $ | 2,958 |
|
| |
(a) | Includes other operating revenues consisting primarily of miscellaneous utility charges, fees and rents. |
| | | | | | | | | | | | | | | | | |
| 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 | |
|
| | | | | | | | |
| For the Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
(Gallons in millions) | | | | | |
Billed water services volumes: | | | | | |
Residential | 167,470 |
| | 172,827 |
| | 174,420 |
|
Commercial | 81,268 |
| | 82,572 |
| | 82,147 |
|
Industrial | 37,242 |
| | 38,432 |
| | 39,404 |
|
Fire service, public and other | 50,501 |
| | 50,651 |
| | 51,341 |
|
Total billed water services volumes | 336,481 |
| | 344,482 |
| | 347,312 |
|
In 2019,Included in operating revenues for 2021, was $127 million related to the Company’s New York operations. Excluding the Company’s New York operations, for 2022, operating revenues increased $110$248 million, primarily due to a:
$132to: (i) a $180 million increase from authorized rate increases, including infrastructure surcharges, principally to fund infrastructure investment in various states; (ii) a
$20 $36 million increase from 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 $13 million estimated net increase primarily due to warmer and drier than normal weather in the third quarter of 2022 in the Company’s New Jersey and Missouri service territories, which was partially offset by a
$24 million decrease from lower water services demand, including $10 million primarily driven by unusually wetwarmer and drier than normal weather conditions experienced in the Northeast and Midwest during the second quarter of 2019 and ongoing customer usage reductions from conservation, partially offset by balancing accounts, primarily2021 in the Company’s California subsidiary; and a
$17 million decrease from the impacts of the TCJA, including the Company’s Missouri subsidiary’s 2018 general rate case decision which authorized the adjustment of customer rates, effective May 28, 2018, to reflect the income tax savings resulting from the TCJA.Northeast.
Operation and Maintenance
Presented in the table below is information regarding the main components of the Regulated Businesses’ operating and maintenance expense, with explanations for material variances provided in the ensuing discussions:expense:
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
(Dollars in millions) | | | | | |
Production costs | $ | 317 |
| | $ | 313 |
| | $ | 298 |
|
Employee-related costs | 462 |
| | 451 |
| | 431 |
|
Operating supplies and services | 237 |
| | 227 |
| | 209 |
|
Maintenance materials and supplies | 74 |
| | 81 |
| | 70 |
|
Customer billing and accounting | 55 |
| | 60 |
| | 51 |
|
Other | 37 |
| | 27 |
| | 17 |
|
Total | $ | 1,182 |
| | $ | 1,159 |
| | $ | 1,076 |
|
Production Costs
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
(Dollars in millions) | | | | | |
Purchased water | $ | 135 |
| | $ | 133 |
| | $ | 128 |
|
Fuel and power | 90 |
| | 91 |
| | 89 |
|
Chemicals | 54 |
| | 52 |
| | 47 |
|
Waste disposal | 38 |
| | 37 |
| | 34 |
|
Total | $ | 317 |
| | $ | 313 |
| | $ | 298 |
|
| | | | | | | | | | | | | | | | | |
| 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 | |
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
(Dollars in millions) | | | | | |
Salaries and wages | $ | 363 |
| | $ | 349 |
| | $ | 334 |
|
Pensions | 12 |
| | 19 |
| | 14 |
|
Group insurance | 60 |
| | 57 |
| | 57 |
|
Other benefits | 27 |
| | 26 |
| | 26 |
|
Total | $ | 462 |
| | $ | 451 |
| | $ | 431 |
|
In 2019,Included in employee-related costs increased $11for 2021, was $16 million primarily duerelated to a $17 millionthe Company’s New York operations. After excluding the Company’s New York operations, for 2022, employee-related costs remained consistent compared to 2021. In 2022, the Regulated Businesses experienced an increase in salaries and wages due to merit increases and group insurance from higher headcount to support growth, which was offset by higher capitalized labor and related compensation expense supporting growth in the businesses,overhead rates, as well as the union-represented employees’ first full year participationlower 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 the Company’s cash-based annual performance plan during 2019; partially offset by a $7New York operations. Excluding the Company’s New York operations, for 2022, production costs increased $42 million, decrease in pension expense primarily due to lower serviceinflationary pressures which resulted in increased fuel, power and chemical costs.
Operating SuppliesCustomer Billing and ServicesAccounting
In 2019, operating supplies2022, as compared to 2021, customer billing and servicesaccounting decreased $7 million primarily due to the sale of the Company’s New York operations and lower uncollectible customer accounts expense.
Other
In 2022, as compared to 2021, other increased $10 million primarily due to higher costs for technology services, including higher software licensing costs and technical support, and expenses related to various projects in the Company’s California subsidiary, as well as an increase in other operating expenses.
Maintenance Materials and Supplies
In 2019, maintenance materials and supplies decreased $7 million primarily due to higher volume of main breaks and paving costs, driven by the colder weather experienced during the first quarter of 2018.
Customer Billing and Accounting
In 2019, customer billing and accounting decreased $5 million from a decrease in customer uncollectible expense.
Other (Operation and Maintenance)
In 2019, other (operation and maintenance) increased $10 million primarily due to a $20 million benefit recorded in the second quarter of 2018, resulting from an insurance settlement related to the Freedom Industries chemical spill in West Virginia, offset in part by (i) a $4 million reductioninsurance other than group reserve which had an unfavorable claims experience compared to the liability related to the Freedom Industries chemical spill, recorded in the first quarter of 2019, and (ii) an increase in operating revenues and O&M expense during 2018 resulting from the authorization for the Company’s West Virginia subsidiary to use a portion of the income tax savings resulting from the TCJA for accelerated recovery of certain regulatory assets.prior year.
Depreciation and Amortization
In 2019,2022, as compared to 2021, depreciation and amortization increased $29$32 million primarily due to additional utility plant placed in service from investments.capital infrastructure investments and acquisitions.
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 (Expenses)(Expense)
In 2019,2022, as compared to 2021, other income (expenses) decreased $15expenses increased $25 million primarily due to an increase inhigher interest expense from the issuanceas a result of incrementalan $800 million long-term debt issuance in the second quarter of 2019May 2022 and the third quarter of 2018higher interest rates on short-term debt due to support growth of the business, partially offset by interest savings from early debt redemptions and tax-exempt bond refinancings during 2019.macroeconomic market conditions.
Provision for Income Taxes
ForIn 2022, as compared to 2021, the year ended December 31, 2019, the Company’sRegulated Businesses’ provision for income taxes decreasedincreased $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 a lower effective income tax rate.the decrease in the amortization of EADIT due to the completion of stub period amortization, pursuant to regulatory orders. The amortization of EADIT is generally offset with reductions in revenue.
Other
Presented in the table below is information for the Market-Based Businesses, with explanations for material variances provided in the ensuing discussions:Other:
| | | | | | | | | | For the Years Ended December 31, |
| For the Years Ended December 31, | | 2022 | | 2021 | | 2020 |
| 2019 | | 2018 | | 2017 | |
(Dollars in millions) | |
| | |
| | |
| |
(In millions) | | (In millions) | | | | | |
Operating revenues | $ | 539 |
| | $ | 476 |
| | $ | 422 |
| Operating revenues | $ | 287 | | | $ | 546 | | | $ | 522 | |
Operation and maintenance | 393 |
| | 362 |
| | 337 |
| Operation and maintenance | 244 | | | 452 | | | 364 | |
Depreciation and amortization | 37 |
| | 29 |
| | 18 |
| Depreciation and amortization | 16 | | | 35 | | | 42 | |
Loss (gain) on asset dispositions and purchases | 44 |
| | (13 | ) | | — |
| |
Impairment charge | — |
| | 57 |
| | — |
| |
Gain on sale of businesses | | Gain on sale of businesses | 19 | | | 748 | | | 3 | |
Income before income taxes | 66 |
| | 41 |
| | 66 |
| Income before income taxes | (34) | | | 678 | | | (8) | |
Provision for income taxes | 20 |
| | 11 |
| | 28 |
| Provision for income taxes | — | | | 205 | | | (2) | |
Net loss attributable to noncontrolling interest | — |
| | (2 | ) | | — |
| |
Net income attributable to common shareholders | 46 |
| | 32 |
| | 38 |
| |
Net (loss) income attributable to common shareholders | | Net (loss) income attributable to common shareholders | $ | (34) | | | $ | 474 | | | $ | (6) | |
Operating Revenues
In 2019,2022, operating revenues increased $63decreased $259 million primarily due to a:
$74 million increase in HOS from contract growth and from the acquisition of Pivotal, which occurred in the second quarter of 2018; and a
$20 million increase in MSG from the addition of two new contracts in 2018 (Wright-Patterson Air Force Base and Fort Leonard Wood); partially offset by a
$18 million decrease in CSG from the sale of HOS, which had operating revenues of $293 million in 2021. Excluding the majority of itsCompany’s HOS operations, for 2022, operating revenues increased $34 million, largely driven by an increase in capital and O&M contractsprojects in MSG, primarily at Joint Base Lewis-McChord and the third quarter of 2018; and a
$15 million decreaseUnited States Military Academy at Keystone from the exit of the construction business in the third quarter of 2018.West Point, New York.
Operation and Maintenance
Presented in the table below is information regarding the main components of the Market-Based Businesses’Other’s operating and maintenance expense, with explanationsexpense:
| | | | | | | | | | | | | | | | | |
| 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 operating supplies and services for 2021, was $39 million related to the material variances provided inCompany’s HOS operations and a $45 million pre-tax contribution to the ensuing discussions:
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
(Dollars in millions) | | | | | |
Production costs | $ | 29 |
| | $ | 32 |
| | $ | 37 |
|
Employee-related costs | 109 |
| | 104 |
| | 97 |
|
Operating supplies and services | 128 |
| | 142 |
| | 121 |
|
Maintenance materials and supplies | 109 |
| | 69 |
| | 67 |
|
Other | 18 |
| | 15 |
| | 15 |
|
Total | $ | 393 |
| | $ | 362 |
| | $ | 337 |
|
In 2019, operationAWCF. Excluding the Company’s HOS operations and maintenance expenseAWCF contribution, for 2022, operating supplies and services increased $31$13 million, primarily due to a:driven by costs associated with increased capital and O&M projects in MSG, as discussed above.
$40 million increaseMaintenance Materials and Supplies
Included in maintenance materials and supplies primarily duefor 2021, was $96 million related to contract growth and increased claims expense in HOS; and a
$5 million increase in employee-related costs primarily inthe Company’s HOS and MSG due to growth inoperations. Excluding the business, partially offset by lower costs resulting from the sale of the majority of CSG’s O&M contracts and the exit of the construction business at Keystone, both occurring during the third quarter of 2018; partially offset by a
$14 million decrease inCompany’s HOS operations, for 2022, operating supplies and services primarily due to the exit of the construction business in the third quarter of 2018 at Keystone, higher advertising and marketing expense in HOS in 2018, and lower expenses due to the sale of the majority of CSG’s O&M contracts during the third quarter of 2018, as discussed above.
Depreciation and Amortization
In 2019, depreciation and amortization increased $8 million, primarily due to an increase in CSG costs related to contract with the acquisitionCity of Pivotal inCamden, New Jersey.
Employee-Related Costs
In 2022, as compared to 2021, employee-related costs decreased $36 million primarily due to the second quartersale of 2018.HOS.
Loss (Gain)Depreciation and Amortization
In 2022, as compared to 2021, depreciation and amortization decreased $19 million primarily due to the sale of HOS.
Gain on Asset Dispositions and PurchasesSale of Businesses
During the fourth quarter of 2019,2021, the Company recognized a pre-tax loss on salegain of $44$748 million or $35 million after-tax, relating to the sale of its Keystone operations.HOS. In 2022, the Company recorded post-closing adjustments, primarily related to working capital, of pre-tax income of $20 million, which increased the total gain related to the sale of HOS. See Note 4—5—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional information. Additionally, during the third quarter of 2018, the Company recognized a pre-tax gain of $14
Provision for Income Taxes
In 2022, as compared to 2021, provision for income taxes decreased $205 million onprimarily due to the sale of the majority of CSG’s O&M contracts.
Impairment Charge
During the third quarter of 2018, a goodwill and intangible asset impairment charge of $57 million was recorded for Keystone, the result of operational and financial challenges encountered in the construction business, and the Company’s determination to narrow the scope of the Keystone operations to focus on its core operations of providing water transfer services.HOS. See Note 8—Goodwill5—Acquisitions and Other Intangible AssetsDivestitures in the Notes to Consolidated Financial Statements for additional information.
ProvisionTax 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 as of December 31, 2022 and created a corresponding regulatory liability since the EADIT is expected to be returned to customers in a future rate case. However, since the rate is declining in yearly increments, the total EADIT will be subject to change.
In 2019, provisionOn 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 incomeits 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 created a corresponding regulatory liability since the EADIT is expected to be returned to customers in a 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 the IURC for non-jurisdictional utilities with violations that create environmental or human health and safety 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 Distribution System Improvement Charge filings. The legislation also permits the IURC to allow recovery through tracking mechanisms for changes in property tax and for costs attributable to referenda 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 any future ratemaking proceeding for an investor-owned water/wastewater utility, to evaluate 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 what was actually paid in state or local property taxes increased $9 million primarily dueand what was used to an increaseset the revenue requirement in pre-tax income.the utility’s most recently completed general rate case. Legislation was signed by the Governor on June 29, 2022, and became effective on August 28, 2022.
•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. Liquidity and Capital Resources
The 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. When necessary, the Company also obtains funds from external sources, primarily in the debt markets and through short-term commercial paper borrowings. The Company may also access the equity capital markets to support its capital funding requirements, as needed. The Company’s access to external financing on reasonable terms depends on its credit ratings and current business conditions, including that of the utility and water utility industry in general, as well as conditions in the debt or equity capital markets, and 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 business, market, financial and other conditions deteriorate to the extent that the Company is no longer able to access the capital markets on reasonable terms, AWCC has access to an unsecured revolving credit facility that expires in March 2024 with aggregate bank commitments of $2.25 billion. The facility is used principally to fulfill its short-term liquidity needs by supporting AWCC’s $2.10 billion commercial paper program and to provide a sublimit of up to $150 million for letters of credit. Subject to satisfying certain conditions, the credit agreement permits AWCC to increase the maximum commitment under the facility by up to $500 million.
In order to meet short-term liquidity needs, AWCC issues commercial paper that is supported by its revolving credit facility. As of December 31, 2019, AWCC had no outstanding borrowings and $76 million of outstanding letters of credit under its revolving credit facility, with $2.25 billion available to fulfill its short-term liquidity needs, to issue letters of credit, and to provide support for $786 million in outstanding commercial paper. 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 ability to manage its expenditures, should there be a disruption of the capital and credit markets. However, there can no assurance that the lenders will be able to meet 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 on acceptable terms or at all. See “Credit Facilities and Short-Term Debt” below for additional information.
In addition, the Regulated Businesses 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.
The Company uses its capital resources, including cash, primarily to (i) fund operating and capital requirements, (ii) pay interest and meet debt maturities, (iii) pay dividends, (iv) fund acquisitions, (v) fund pension and postretirement benefit obligations, and (vi) the Company estimates, during 2020, to begin to pay federal income taxes. The Company invests a significant amount of cash on regulated capital projects where it expects to earn a long-term return on investment. Additionally, the 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—Regulation and Rate Making 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 the Company expects its capital investments over the next few years to be greater than its cash flows from operating activities, the Company currently plans to fund 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 and equity.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, the Company may delay certain capital investments or other funding requirements or pursue financing from other sources to preserve liquidity. In this event, the Company believes it can rely upon cash flows from operations to meet its obligations and fund its 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%,meet existing commitments to AWCC under the Company anticipates a decrease in future revenue authorizations associated withrevolving credit facility, or that AWCC will be able to access the Regulated Businesses, initially leading to lower cash flows. The Company expects this cash flow impact to decline over time, as the 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.
One component of WIFIA is a federal credit program administered by the EPA for eligible water and wastewater infrastructure projects. The WIFIA program accelerates investmentcommercial paper or loan markets in the U.S.’s water infrastructure by providing long-term, low-cost supplemental loans for regionally and nationally significant projects. The Company is currently pursuing WIFIA financing of approximately $80 million for a project in the Company’s Missouri subsidiary.future on 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. The 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;inflation, compliance with environmental, health and safety standards;standards, production costs;costs, maintenance costs;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.
The enactment of the TCJA is accretive to the Company’s 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 its deferred income tax assets and liabilities, (ii) increased earnings in the Market-Based Businesses due to the lower U.S. federal corporate income tax rate, all partially offset by (iii) the lower tax shield on interest expense at parent company, as well as increased debt levels from lower cash flows from operations as the Company passes the lower tax rate benefits to its regulated customers. The Company believes that it will likely begin paying federal income taxes during 2020, when the Company expects its federal NOL carryforwards balance will be fully used, although this timing could be impacted by any significant changes in its 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 and fund the majority of the Company’s capital investments. The Company expects to seek access to debt and equity capital markets to meet the balance of its capital investment, if any, and fund its dividend payments, as needed. Operating cash flows can be negatively affected by changes in the Company’s rate regulated environments, changes in the Market-Based Businesses, changes in the economy, interest rates, the timing of tax payments, and the Company’s customers’ ability to pay for service in a timely manner, among other items. The Company can provide no assurance that its customers’ historical payment pattern will continue in the future. The Company’s current liabilities may exceed current assets mainly 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.business and other factors. The Company addresses cash timing differences primarily through the aforementionedits short-term liquidity funding mechanisms.
Presented in the table below is a summary of the major items affecting the 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) | 2019 | | 2018 | | 2017 |
Net income | $ | 621 |
| | $ | 565 |
| | $ | 426 |
|
Add (less): | | | | | |
Depreciation and amortization | 582 |
| | 545 |
| | 492 |
|
Deferred income taxes and amortization of investment tax credits | 208 |
| | 195 |
| | 462 |
|
Non-cash impairment charge | — |
| | 57 |
| | — |
|
Other non-cash activities (a) | 38 |
| | 56 |
| | 16 |
|
Changes in working capital (b) | (1 | ) | | 30 |
| | 123 |
|
Settlement of cash flow hedges | (30 | ) | | — |
| | — |
|
Pension and postretirement healthcare contributions | (31 | ) | | (22 | ) | | (48 | ) |
Impact of Freedom Industries settlement activities | (4 | ) | | (40 | ) | | (22 | ) |
Net cash flows provided by operating activities | $ | 1,383 |
| | $ | 1,386 |
| | $ | 1,449 |
|
| |
(a) | Includes provision for losses on accounts receivable, loss (gain) on asset dispositions and purchases, 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, accounts payable and accrued liabilities, and other current assets and liabilities, net, less the settlement of cash flow hedges. |
In 2019,2022, cash flows provided by operating activities decreased $3$333 million. The changes were driven by $338 million of estimated tax payments primarily for taxable gains on the sales of the Company’s HOS business and its New York regulated operations, as well as the contribution of $45 million to the American Water Charitable Foundation. Partially offsetting these changes was a decrease due to the settlementgain recognized from the sale of cash flow hedges and increased interest costsHOS in connection with the Company’s $1.10 billion debt offering that closed on May 13, 2019 and an increase in pension contributions. Partially offsetting these decreases was an increase in net income. The main factors contributing to the increase in net income are described in “Consolidated Results of Operations” and “Segment Results of Operations” above.2021.
The Company expects to make pension contributions to the plan trusts of $38$39 million in 2020. In addition, the Company estimates that contributions will amount to $33 million, $34 million, $34 million and $32 million in 2021, 2022, 2023 and 2024, 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
Presented in the table below is a summary of the major items affecting the Company’s cash flows used infrom investing activities:
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
(In millions) | 2019 | | 2018 | | 2017 |
Capital expenditures | $ | (1,654 | ) | | $ | (1,586 | ) | | $ | (1,434 | ) |
Acquisitions, net of cash acquired | (235 | ) | | (398 | ) | | (177 | ) |
Proceeds from sale of assets | 48 |
| | 35 |
| | 15 |
|
Removal costs from property, plant and equipment retirements, net | (104 | ) | | (87 | ) | | (76 | ) |
Net cash flows used in investing activities | $ | (1,945 | ) | | $ | (2,036 | ) | | $ | (1,672 | ) |
| | | | | | | | | | | | | | | | | |
| For the Years Ended December 31, |
(In millions) | 2022 | | 2021 | | 2020 |
Capital expenditures | $ | (2,297) | | | $ | (1,764) | | | $ | (1,822) | |
Acquisitions, net of cash acquired | (315) | | | (135) | | | (135) | |
Proceeds from sale of assets, net of cash on hand | 608 | | | 472 | | | 2 | |
Removal costs from property, plant and equipment retirements, net | (123) | | | (109) | | | (106) | |
Net cash used in investing activities | $ | (2,127) | | | $ | (1,536) | | | $ | (2,061) | |
In 2019,2022, cash flows used in investing activities decreased $91increased $591 million primarily due to the acquisition of Pivotalincreased payments for $365 million on June 4, 2018,capital expenditures and acquisitions partially offset by an increase in capital expenditures, principallyproceeds 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 the Company’s transmission and distribution and services, meter and fire hydrants infrastructure in the Company’s Regulated Businesses, as discussed below. The Company also had an increase of proceeds from sale of assets due to the sale of Keystone for $31 million, in the fourth quarter of 2019.
The Company’s infrastructure investment plan consists of both infrastructure renewal programs, where the Company replaces infrastructure,mains, services, meters, hydrants and valves, as needed, and major capital investment projects, where the Company constructs new water and wastewater treatment and delivery facilities to meet new customer growth and water quality regulations. The Company’s projected capital expenditures and other investments are subject to periodic review and revision to reflect changes in economic conditions and other factors.
Presented in the table below is a summary of the Company’s historical capital expenditures related to the upgrading of its infrastructure and systems:by category:
| | | For the Years Ended December 31, | | For the Years Ended December 31, |
(In millions) | 2019 | | 2018 | | 2017 | (In millions) | 2022 | | 2021 | | 2020 |
Transmission and distribution | $ | 661 |
| | $ | 572 |
| | $ | 551 |
| Transmission and distribution | $ | 901 | | | $ | 749 | | | $ | 704 | |
Treatment and pumping | 190 |
| | 231 |
| | 171 |
| Treatment and pumping | 190 | | | 197 | | | 306 | |
Services, meter and fire hydrants | 346 |
| | 303 |
| | 281 |
| Services, meter and fire hydrants | 546 | | | 366 | | | 333 | |
General structure and equipment | 234 |
| | 371 |
| | 281 |
| General structure and equipment | 380 | | | 251 | | | 299 | |
Sources of supply | 83 |
| | 26 |
| | 54 |
| Sources of supply | 95 | | | 64 | | | 54 | |
Wastewater | 140 |
| | 83 |
| | 96 |
| Wastewater | 185 | | | 137 | | | 126 | |
Total capital expenditures | $ | 1,654 |
| | $ | 1,586 |
| | $ | 1,434 |
| Total capital expenditures | $ | 2,297 | | | $ | 1,764 | | | $ | 1,822 | |
In 2019,2022, the Company’s capital expenditures increased $68$533 million primarily due to investment in transmission and distribution infrastructure.an increase across most infrastructure categories.
The Company also grows 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 the Company’s existing businessRegulated Businesses and support continued geographical diversification and growth of its 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, once reflected in rate base.
The following is a summary of the acquisitions and dispositions affecting the Company’s cash flows from investing activities during 2019:
Paid $235Company paid $315 million for 21the acquisition of 26 water and wastewater systems, representing in the aggregate approximately 53,10070,000 customers.
Received $48 million for the sale of assets, including $31 million from the sale of the Keystone operations.
As previously noted, over the next five years the Company expects to invest between $8.8$14 billion to $9.4$15 billion, from 2020with $12.5 billion to 2024, with $8.2$13 billion of this range for infrastructure improvements in the Regulated Businesses, and between $20 billion to $22 billion from 2020 to 2029. In 2020, the Company expects to invest between a range of $1.7$30 billion to $1.9$34 billion in 2020, with $1.6 billion for infrastructure improvements inover the Regulated Businesses. Also in 2020,next 10 years. In 2023, the Company expects to invest between $100 million to $300$2.9 billion, consisting of $2.5 billion for infrastructure improvements and $400 million for acquisitions in the Regulated Businesses.
Cash Flows from Financing Activities
Presented in the table below is a summary of the major items affecting the Company’s cash flows provided byfrom 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 | |
|
| | | | | | | | | | | |
| For the Years Ended December 31, |
| 2019 | | 2018 | | 2017 |
(In millions) | | | | | |
Proceeds from long-term debt | $ | 1,530 |
| | $ | 1,358 |
| | $ | 1,395 |
|
Repayments of long-term debt | (495 | ) | | (526 | ) | | (896 | ) |
Net short-term borrowings | (178 | ) | | 60 |
| | 55 |
|
Proceeds from issuance of common stock | — |
| | 183 |
| | — |
|
Dividends paid | (353 | ) | | (319 | ) | | (289 | ) |
Anti-dilutive stock repurchases | (36 | ) | | (45 | ) | | (54 | ) |
Other financing activities, net (a) | 26 |
| | 15 |
| | (4 | ) |
Net cash flows provided by financing activities | $ | 494 |
| | $ | 726 |
| | $ | 207 |
|
(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. | |
(a) | Includes proceeds from issuances of common stock under various employee stock plans and the dividend reinvestment plan, net of taxes paid, advances and contributions for construction, net of refunds, and debt issuance costs and make-whole premiums on early debt redemption. |
In 2019,2022, cash flows provided by financing activities decreased $232increased $1,345 million, primarily due to the issuance of common stock in 2018, the proceeds of which were used to finance a portion of the 2018 acquisition of Pivotal, as well as an increase in cash used for dividend paymentscommercial paper borrowings, the repayment in 2019. AWCC issued $1.10 billionfull at maturity of the $500 million term loan in 2021 and repayments of long-term debt as partdue to the prepayment of its May 13, 2019 debt offering,$327 million in aggregate principal amount of which $51 million of the net proceeds was used to repay long-term debt obligations at maturity. NetAWCC’s outstanding senior notes in 2021, with no comparable repayments in 2022. These changes were partially offset by lower proceeds from the debt offering were also used to repay pre-existing short-term borrowings, which resulted in a net cash outflow for 2019 of $178 million.long-term debt.
The Company’s financing activities are primarily focused on funding regulated infrastructure expenditures, regulated and market-based acquisitions and payment of dividends. These activities included the issuance of long-term and short-term debt, primarily through AWCC and in 2018, included an equity issuance for approximately 50% of the Pivotal acquisition. In addition, new infrastructure may be funded with customer advances and contributions in aid of construction, net of refunds, which amounted to $26 million, $21 million and $28 million for the years ended December 31, 2019, 2018 and 2017, respectively.AWCC. Based on the needs of the 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 parent company. The Regulated Businesses and 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. Parent company’s borrowings are not a source of capital for the Regulated Businesses, therefore, parent company is not able to recover the interest charges on its debt through regulated water and wastewater rates. As of December 31, 2019,2022, AWCC has made long-term fixed rate loans and commercial paper loans to the Regulated Businesses amounting to $4.8 billion and $675 million, respectively.$7.6 billion. Additionally, as of December 31, 2019,2022, AWCC has made long-term fixed rate loans and commercial paper loans to parent company amounting $2.4 billion and $111 million, respectively. As of December 31, 2019, parent company has made long-term fixed rate loans to the Market-Based Businesses amounting to $183 million related to the acquisition of Pivotal on June 4, 2018.
$3.6 billion.
On May 13, 2019,5, 2022, AWCC completed a $1.10 billion senior unsecured debt offering which included the sale of $550issued $800 million aggregate principal amount of its 3.45% Senior Notes4.45% senior notes due 2029 and $550 million aggregate principal amount of its 4.15% Senior Notes due 2049.2032. At the closing, of the offering, AWCC received, after deduction of underwriting discounts and before deduction of offering expenses, net proceeds of approximately $1.09 billion.$792 million. AWCC used the net proceeds to:of the offering: (i) to lend funds to parent company and its regulated subsidiaries; (ii) repay $25 million principal amount of AWCC’s 7.21% Series I Senior Notes at maturity on May 19, 2019; (iii) repay $26 million aggregate principal amount of subsidiary debt at maturity during the second quarter of 2019; and (iv)to repay AWCC’s commercial paper obligations,obligations; and (iii) for general corporate purposes.
On May 6, 2019, the Company terminated five forward starting swap agreements with an aggregate notional amount of $510 million, realizing a net loss of $30 million, to be amortized through interest, net over 10 and 30 year periods, in accordance with the terms of the new debt issued on May 13, 2019. No ineffectiveness was recognized on hedging instruments for the years ended December 31, 2019 and 2018.
During 2019, AWCC and certain of the Company’s subsidiaries also issued tax-exempt bonds at various dates with a total principal amount of $417 million and a weighted average interest rate of 2.5%. The bonds are scheduled to mature in 2039 and contain optional or mandatory redemption dates in 2029. The proceeds from these bonds were used to repay $417 million of tax-exempt bonds with a weighted average interest rate of 5.8% and original maturities in 2039.
One of the principal market risks to which the Company is exposed is changes in interest rates. In order to manage the exposure, the Company follows risk management policies and procedures, including the use of derivative contracts such as swaps.treasury lock agreements. The Company also reduces exposure to interest rates by managing commercial paper and debt maturities. The Company does not enter into derivative contracts (through AWCC) for speculative purposes and does not use leveraged instruments. The derivative contracts entered into are for periods consistent with the related underlying exposures. The Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. The 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.
In April 2022, the Company entered into several 10-year treasury lock agreements, with notional amounts totaling $400 million, and an average fixed interest rate of 2.89%. The Company designated these treasury lock agreements as cash flow hedges, with their fair value recorded in accumulated other comprehensive gain or loss. In May 2018,2022, the Company terminated the treasury lock agreements, realizing a net gain of approximately $4 million, to be amortized through interest, net over a 10-year period, in accordance with the tenor of the debt issuance on May 5, 2022.
In November and December 2022, the Company entered into four 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 3.56%. In January 2023, the Company entered into three additional 10-year treasury lock agreements, with notional amounts totaling $100 million, to reduce interest rate exposure on debt expected to be issued in 2023. These treasury lock agreements terminate in January 2024, and have an average fixed rate of 3.35%. The Company designated these treasury lock agreements as cash flow hedges, with their fair value 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.
No ineffectiveness was recognized on hedging instruments for the years ended December 31, 2022, 2021 or 2020.
In February 2021, parent company and AWCC filed with the SEC a universal shelf registration statement that enables the Company to meet its 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 2021.February 2024. During 2019, 20182022, 2021 and 2017,2020, $800 million, $1.10 billion, $1.33 billion, and $1.35$1.00 billion, respectively, of debt securities were issued pursuant tounder this and the Company’s predecessor registration statement. Additionally, during 2018 under this registration statement, the Company issued 2.32 million shares of its common stock for aggregate net proceeds of $183 million.statements.
Presented in the table below are the issuances of long-term debt in 2019:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
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| | | | | | | | | | |
Company | | Type | | Rate | | Maturity | | Amount (in millions) |
AWCC (a) | | Senior notes—fixed rate | | 3.45%-4.15% | | 2029-2049 | | $ | 1,100 |
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AWCC (a) (b) | | Private activity bonds and government funded debt—fixed rate | | 2.45% | | 2039 | | 100 |
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Other American Water subsidiaries | | Private activity bonds and government funded debt—fixed rate | | 0.00%-5.00% | | 2021-2048 | | 330 |
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Total issuances | | | | | | | | $ | 1,530 |
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(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 guarantee by parent company of AWCC’s payment obligations under such indebtedness. |
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(b) | This indebtedness has a mandatory redemption provision callable in 2029. |
(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.
Presented in the table below are the retirements and redemptions of long-term debt in 20192022 through sinking fund provisions, optional redemption or payment at maturity:
| | Company | | Type | | Rate | | Maturity | | Amount (in millions) | Company | | Type | | Rate | | Weighted Average Rate | | Maturity | | Amount (in millions) |
AWCC | | Private activity bonds and government funded debt—fixed rate | | 1.79%-6.25% | | 2021-2031 | | $ | 101 |
| AWCC | | Private activity bonds and government funded debt—fixed rate | | 1.79%-2.31% | | 2.24% | | 2024-2031 | | $ | 1 | |
AWCC | | Senior notes—fixed rate | | 7.21% | | 2019 | | 25 |
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Other American Water subsidiaries | | Private activity bonds and government funded debt—fixed rate | | 0.00%-6.20% | | 2019-2048 | | 333 |
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Other American Water subsidiaries | | Mortgage bonds—fixed rate | | 5.48%-9.13% | | 2019-2021 | | 28 |
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Other American Water subsidiaries | | Mandatorily redeemable preferred stock | | 8.49%-9.18% | | 2031-2036 | | 2 |
| Other American Water subsidiaries | | Private activity bonds and government funded debt—fixed rate | | 0.00%-5.50% | | 1.50% | | 2022-2051 | | 13 | |
Other American Water subsidiaries | | Term loan | | 5.76%-5.81% | | 2021 | | 6 |
| Other American Water subsidiaries | | Mandatorily redeemable preferred stock | | 8.49% | | 8.49% | | 2022 | | 1 | |
Total retirements and redemptions | | | | | | | | $ | 495 |
| Total retirements and redemptions | | | | | | | | $ | 15 | |
From time to time and as market conditions warrant, the Company may engage in long-term debt retirements through make-whole redemptions, tender offers, open market repurchases or other viable alternatives.
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 Wells Fargo Bank, National Association, as trustee, providing for the Boardrights and obligations of Directors authorized an anti-dilutive stock repurchase programthe 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 mitigatemake 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 dilutive effectrequest of shares issued throughany 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 Company’s dividend reinvestment, employee stock purchasesupport 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.
As a wholly owned finance subsidiary of parent company, AWCC has no significant assets other than obligations of parent company and executive compensation activities. The program allows the Company to purchase up to 10 million sharescertain of its outstanding common stocksubsidiaries in its Regulated Businesses segment to repay certain intercompany loans made to them by AWCC. AWCC’s ability to make payments of 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 timeits ability to time over an unrestricted period of timeissue 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 to facilitate these repurchases, the Company enters into Rule 10b5-1 stock repurchase plans with a third-party broker, which allow the Company to repurchase sharessubstantially all of its common stock at times when it otherwise mightoperations are conducted through its subsidiaries other than AWCC, parent company’s ability to fulfill its obligations under the support agreement will be preventeddependent upon its receipt of sufficient cash dividends or distributions from doing so under insider trading lawsits 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 because of self-imposed trading blackout periods. Subjectmake distributions. Furthermore, parent company’s operating subsidiaries are separate and distinct legal entities and, other than AWCC, have no obligation to applicable regulations,make any payments on the Company may, at its discretion, elect to enter into repurchase transactionssenior notes or to amendmake available or cancelprovide any funds for such payment, other than through their repayment obligations under intercompany loans, if any, with AWCC. Based on the programforegoing, parent company’s obligations under the support agreement will be effectively subordinated to all indebtedness and other liabilities, including trade payables, lease commitments and moneys borrowed or the stock repurchase parameters, all to manage dilution from the issuance of shares as described above. As of December 31, 2019, the Company has repurchased an aggregate of 4,860,000 shares of common stock under this program.other indebtedness incurred or issued by parent company’s subsidiaries other than AWCC.
Credit Facilities and Short-Term Debt
AWCC has an unsecured revolving credit facility of $2.25 billion that expires in March 2024. In April 2019, AWCC and its lenders agreed to extend the termination date of the credit agreement with respect to AWCC’s revolving credit facility pursuant to its terms from March 2023 to March 2024. Subject to satisfying certain conditions, the credit agreement also permits AWCC to increase the maximum commitment under the facility by up to an aggregate of $500 million, and to request extensions of its expiration date for up to two, one-year periods, as to which one such extension request remains.
Interest rates on advances under the Company’s revolving credit facility are based on a credit spread to the LIBORSecured Overnight Financing Rate (“SOFR”) rate (or applicable market replacement rate) or base rate, each determined in accordance with Moody Investors Service’s and Standard & Poor’s Financial Services’S&P Global Ratings’ then applicable credit 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 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 the credit facility.
In March 2018, AWCC increased the maximum aggregate outstanding amount under its commercial paper program from $1.60 billion to $2.10 billion.thereunder.
Presented in the tabletables below isare the aggregate credit facility commitments, commercial paper limit and letter of credit sublimitavailability under the revolving credit facility, and commercial paper limit, as well as the available capacity for each, as of December 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, 2019 and 2018:2022, may be accessed through revolver draws.
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(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, 2019 | $ | 2,250 |
| | $ | 2,174 |
| | $ | 150 |
| | $ | 74 |
| | $ | 2,100 |
| | $ | 1,314 |
|
December 31, 2018 | 2,262 |
| | 2,177 |
| | 150 |
| | 69 |
| | 2,100 |
| | 1,146 |
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| 2021 |
| Commercial Paper Limit | | Letters of Credit | | Total (a) |
(In millions) | | | | | |
Total availability | $ | 2,100 | | | $ | 150 | | | $ | 2,250 | |
Outstanding debt | (584) | | | (76) | | | (660) | |
Remaining availability as of December 31, 2021 | $ | 1,516 | | | $ | 74 | | | $ | 1,590 | |
(a)Total remaining availability of $1.59 billion as of December 31, 2021, may be accessed through revolver draws.
Presented in the table below is the Company’s total available liquidity as of December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | |
| 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 average interest rate on AWCCAWCC’s outstanding short-term borrowings was approximately 4.41% and 0.20%, for the years ended December 31, 20192022 and 2018 was approximately 2.54% and 2.28%,2021, respectively.
Capital Structure
Presented in the table below is the percentage of the Company’s capitalization represented by the components of its capital structure as of December 31:
| | | 2019 | | 2018 | | 2017 | | 2022 | | 2021 | | 2020 |
Total common shareholders’ equity | 39.2 | % | | 40.4 | % | | 41.0 | % | Total common shareholders’ equity | 38.3 | % | | 39.9 | % | | 37.1 | % |
Long-term debt and redeemable preferred stock at redemption value | 55.6 | % | | 52.4 | % | | 49.6 | % | 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 | 5.2 | % | | 7.2 | % | | 9.4 | % | 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 inthe impacts 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
The Company’s debt agreements contain financial and non-financial covenants. To the extent that the Company is not in compliance with these covenants, an event of default may occur under one or more debt agreements and the Company, or its subsidiaries, may be restricted in its ability to pay dividends, issue new debt or access the revolving credit facility. The 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. Failure to comply with any of these covenants could accelerate repayment obligations.
Covenants in certain long-term notes and the revolving credit facility require the 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, 2019,2022, the Company’s ratio was 0.610.62 to 1.00 and therefore the Company was in compliance with the covenants.
Security Ratings
Presented in the table below are long-term and short-term credit ratings and rating outlooks as of February 18, 202015, 2023, as issued by the following rating agencies:
Moody’s Investors Service on December 19, 2022, and S&P Global Ratings on February 6, 2023: |
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Securities | | Moody’s Investors Service | | Standard & Poor’sS&P Global Ratings Service |
Rating Outlookoutlook | | Stable | | Stable |
Senior unsecured debt | | Baa1 | | A |
Commercial paper | | P-2 | | A-1 |
On June 7, 2019, Standard & Poor’s Ratings Service affirmed the Company’s long-term ‘A’ and short-term ‘A-1’ credit ratings, with a stable outlook.
On April 1, 2019, Moody’s Investors Service changed the Company’s senior unsecured debt rating to Baa1, from A3, with a stable outlook. The Company’s commercial paper rating remained unchanged.
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 the ability to generate cash flows in an amount sufficient to service debt and meet investment plans. The Company can provide no assurances that its ability to generate cash flows is sufficient to maintain its existing ratings. None of the 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 its credit facility.
As part of its normal course of business, the Company routinely enters 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 the Company and its 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 the 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 the Company must provide collateral to secure its obligations. The 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.
Access to the capital markets, including the commercial paper market, and respective financing costs in those markets, may be directly affected by the Company’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 mortgage bonds and tax exempt securities or borrowings under state revolving funds, to lower the overall cost of debt.
Dividends and Regulatory Restrictions
For discussion of the Company’s dividends, dividend restrictions and dividend policy, see Note 9—Shareholders’ Equity in the Notes to Consolidated Financial Statements for additional information.
Insurance Coverage
The Company carries various property, casualty, cyber and financial insurance policies with limits, deductibles and exclusions that it 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-forward basis. The 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 the Company’s short-term and long-term financial condition and its results of operations and cash flows.
Contractual Obligations and Commitments
The Company enters into contractual obligations with third parties in the ordinary course of business. Presented in the table below is information related to its contractual obligations as of December 31, 2019:
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| | | | | | | | | | | | | | | | | | | |
(In millions) | Total | | 1 year or less | | 2-3 years | | 4-5 years | | More than 5 years |
Long-term debt obligations (a) | $ | 8,692 |
| | $ | 28 |
| | $ | 324 |
| | $ | 632 |
| | $ | 7,708 |
|
Interest on long-term debt (b) | 6,064 |
| | 375 |
| | 726 |
| | 685 |
| | 4,278 |
|
Operating lease obligations (c) | 152 |
| | 14 |
| | 24 |
| | 14 |
| | 100 |
|
Purchase water obligations (d) | 912 |
| | 65 |
| | 130 |
| | 112 |
| | 605 |
|
Other purchase obligations (e) | 915 |
| | 915 |
| | — |
| | — |
| | — |
|
Pension plan obligations (f) | 171 |
| | 38 |
| | 67 |
| | 66 |
| | — |
|
Other obligations (g) | 1,055 |
| | 465 |
| | 245 |
| | 69 |
| | 276 |
|
Total | $ | 17,961 |
| | $ | 1,900 |
| | $ | 1,516 |
| | $ | 1,578 |
| | $ | 12,967 |
|
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NOTE | The above table reflects only financial obligations and commitments. Therefore, performance obligations associated with the Company’s Market-Based Businesses are not included in the above amounts. Also, uncertain tax positions of $110 million are not reflected in this table as the Company cannot predict when open tax years will close with completed examinations. See Note 14—Income Taxes in the Notes to Consolidated Financial Statements. |
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(a) | Represents sinking fund obligations, debt maturities, finance lease obligations and preferred stocks with mandatory redemption requirements. |
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(b) | Represents expected interest payments on outstanding long-term debt and interest on preferred stock with mandatory redemption requirements. 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 public-private partnerships. For discussion of the Company’s public-private partnerships, see Note 19—Leases in the Notes to Consolidated Financial Statements. |
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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, 2019 for goods and services purchased in the ordinary course of business. |
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(f) | Represents contributions expected to be made to the Company’s pension plans for the years 2020 through 2024. |
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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. |
Performance Obligations
The Company has entered into agreements for the provision of services to water and wastewater facilities for the U.S. military, municipalities and other customers. These obligations are not included in the table above. For discussion of the Company’s performance obligations see Note 3—Revenue Recognition in the Notes to Consolidated Financial Statements for additional information.
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 affect the 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 the Company’s financial condition, results of operations and cash flows, as reflected in the Company’s Consolidated Financial Statements. Management has reviewed the critical accounting polices described below with 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 Consolidated Financial Statements.
Regulation and Regulatory Accounting
The Company’s regulated utilities are subject to regulation by PUCs and, as such, the Company follows the authoritative accounting principles required for rate regulated utilities, which requires the Company to reflect the effects of rate regulation in its 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, 2019,2022, the Company concluded that the operations of its utilities met the criteria.
Application of this authoritative guidance has a further effect on the Company’s financial statements as it pertains to allowable costs used in the ratemaking process. The 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 a 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.
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. If subsequent events indicate that the regulatory assets or liabilities no longer meet the criteria for probable future recovery or probable future settlement, the Company’s Consolidated Statements of Operations and financial position could be materially affected. In addition, if the Company concludes in a future period that a separable portion of the business no longer meets the criteria, the 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 the 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 Code, 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, the Company recorded these amounts as regulatory liabilities.
As of December 31, 20192022 and 2018,2021, the Company’s regulatory asset balance was $1.1$1.0 billion and $1.2$1.1 billion, respectively, and its regulatory liability balance was $1.8$1.6 billion and $1.9$1.6 billion, respectively. See Note 7—3—Regulatory Assets and LiabilitiesMatters in the Notes to Consolidated Financial Statements for further information regarding the Company’s significant regulatory assets and liabilities.
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, 2019 and 2018 was $142 million and $144 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 Homeowner Services Group is generated through various protection programs in which the Company provides fixed fee services to domestic homeowners and smaller commercial customers for interior and external 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 have a one-year term and each service is a separate performance obligation, satisfied over time, as the customers simultaneously receive and consume the benefits provided from the service. Customers are 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 these services. Advances from customers are deferred until the performance obligation is 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 and industrial customers, and prior to the sale of Keystone, the Company had shorter-term contracts that provided customized water transfer services for shale natural gas companies and 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 as unbilled revenues, with billings in excess of revenues 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. Unbilled revenue for the Market-Based Businesses as of December 31, 2019 and 2018 was $30 million and $42 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 NOL carryforwards.
In accordance with applicable authoritative guidance, the 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.
The Company evaluates the probability of realizing deferred tax assets quarterly by reviewing a forecast of future taxable income and its intent and ability to implement tax planning strategies, if necessary, to realize deferred tax assets. The Company also assesses 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. The Company records valuation allowances for deferred tax assets when it concludes that it is more-likely-than-not such benefit will not be realized in future periods.
Under GAAP, specifically Accounting Standards Codification TopicASC 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. Thus, at the date of enactment of the TCJA, the Company’s deferred taxes were re-measured based upon the new tax rate. For the Company’s 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 the Company’s unregulated operations, the change in deferred taxes are recorded as a non-cash re-measurement adjustment to earnings.
Actual income taxes could vary from estimated amounts due to the future impacts of various items, including changes in income tax laws, the 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 the Regulated Businesses, as well as results of audits and examinations of filed tax returns by taxing authorities. The resulting tax balances as of December 31, 20192022 and 20182021 are appropriately accounted for in accordance with the applicable authoritative guidance; however, the ultimate outcome of tax matters could result in favorable or unfavorable adjustments to the Consolidated Financial Statements and such adjustments could be material. See Note 14—Income Taxes in the Notes to Consolidated Financial Statements for additional information regarding income taxes.
Accounting for Pension and Postretirement Benefits
The Company maintains noncontributory defined benefit pension plans covering eligible employees of its regulated utility and shared service operations. The Company also maintains other postretirement benefit plans providing medical and life insurance to eligible retirees. See Note 2—Significant Accounting Policies and Note 15—Employee Benefits in the Notes to Consolidated Financial Statements for additional 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.
•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 the Company records currently.
•Rate of Compensation Increase—Management projects employees’ pay increases, which are used to project employees’ pension benefits at retirement.
•Health Care Cost Trend Rate—Management projects the expected increases in the cost of health care.
•Mortality—Management retainedadopted the Society of Actuaries RP-2014Pri-2012 mortality base table, the most recent table developed from private pension plan experience, which provides rates of mortality in 2006, but2012 and adopted the new MP-2018MP-2021 mortality improvement scale to gradually adjust future mortality rates 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. The 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. 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 3.44%5.58%, 4.38%2.94% and 3.75%2.74% at December 31, 2019, 20182022, 2021 and 2017,2020, respectively. The weighted-average discount rate assumption for determining other postretirement benefit obligations was 3.36%5.60%, 4.32%2.90% and 3.73%2.56% at December 31, 2019, 20182022, 2021 and 2017,2020, respectively.
In selecting an EROA, the 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 6.20%6.50% for 2019, 5.95%2022, 6.50% for 2018,2021, and 6.49%6.50% for 2017.2020. The weighted averageweighted-average EROA assumption used in calculating other postretirement benefit costs was 3.56%3.60% for 2019, 4.77%2022, 3.67% for 20182021 and 5.09%3.68% for 2017.2020.
Presented in the table below are the allocations of the pension plan assets by asset category:
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| | 2020 Target Allocation | | Percentage of Plan Assets as of December 31, |
Asset Category | | | 2019 | | 2018 |
Equity securities | | 43 | % | | 45 | % | | 42 | % |
Fixed income | | 50 | % | | 48 | % | | 52 | % |
Real Estate | | 5 | % | | 7 | % | | 5 | % |
Real estate investment trusts (“REITs”) | | 2 | % | | — | % | | 1 | % |
Total | | 100 | % | | 100 | % | | 100 | % |
Postretirement Medical Bargaining Plan Changes
On July 31, 2018, a new, five-year national benefits agreement was ratified, covering approximately 3,200 of the Company’s union-represented employees. Most of the benefits under this new agreement became effective on January 1, 2019, and include, among other things, union-represented employees’ participation in the Company’s cash-based annual performance plan, additional medical plan options and changes to certain retiree medical benefits, which required the Company to remeasure its other postretirement benefit plan obligation during the third quarter of 2018.
For those eligible union retirees and dependents over age 65, the current supplemental retiree medical plan will be replaced with a Health Reimbursement Arrangement (“HRA”) similar to the cap currently in place for non-union retirees. The Company is providing a subsidy allowing the post-65 retirees to purchase a Medicare supplemental plan on a private exchange network. The pre-65 coverage plan was also amended to provide a cap on future employer costs designed to limit the employer costs to 2018 levels. For pre-65 union members retiring early in 2019-2021 a supplemental benefit will be provided to alleviate the effect of the cap.
On August 31, 2018, the Postretirement Medical Benefit Plan was remeasured to reflect this plan change. The plan change resulted in a $175 million reduction in future benefits payable to plan participants, and, in combination with other experience reflected as of the remeasurement date, resulted in a $227 million reduction to the net accumulated postretirement benefit obligation. The plan amendment will be amortized over 10.2 years, the average future working lifetime to full eligibility age for all plan participants.
After the remeasurement, the Retirement and Benefit Plans Investment Committee (the “Investment Committee”), which is responsible for overseeing the investment of the Company’s pension and other postretirement benefit plans’ assets, determined that the funded status of the Postretirement Medical Bargaining Plan was in excess of that needed to pay current and future benefits.
Given the change in funded status in 2018, the Investment Committee commissioned an asset-liability study for the Postretirement Medical Bargaining Plan. This study concluded that it was prudent to decrease the investment risk in the plan due to its current funded status. The study also recommended reducing its exposure to changes in interest rates by matching the assets of the plan to the projected cash flows for future benefit payments of the liability. The Investment Committee approved the recommendations. Plan assets in excess of those securities designed to match the long-term liabilities are invested in shorter duration fixed income securities and equities. | | | | | | | | | | | | | | | | | | | | |
| | 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 table below are the allocations of the other postretirement benefit plan 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 | % |
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| | 2020 Target Allocation (a) | | Percentage of Plan Assets as of December 31, |
Asset Category | | | 2019 | | 2018 |
Equity securities | | 17 | % | | 17 | % | | 17 | % |
Fixed income | | 83 | % | | 83 | % | | 83 | % |
Total | | 100 | % | | 100 | % | | 100 | % |
(a)Refer to Note 15—Employee Benefits in the Notes to Consolidated Financial Statements for additional details on the allocations of assets and the trusts which fund the other postretirement benefit plansThe investments of the pension and postretirement welfare plan trusts include debt and equity securities held either directly or through mutual funds, commingled 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.
In selecting a rate of compensation increase, the Company considers past experience in light of movements in inflation rates. The Company’s rate of compensation increase was 2.97%3.51% for 2019, 3.00%2022, 3.51% for 20182021 and 3.02%3.51% for 2017.2020.
The 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 management’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 limited 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. The Company provides disclosures for material contingencies when management deems there is a reasonable possibility that a loss or an additional loss may be incurred. The 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. See Note 16—Commitments and Contingencies in the Notes to Consolidated Financial Statements for additional information regarding contingencies.
See Note 2—Significant Accounting Policies in the Notes to Consolidated Financial Statements for a description of recent accounting standards.
The Company is exposed to market risk associated with changes in commodity prices, equity prices and interest rates. The Company is exposed to risks from changes in interest rates as a result of its issuance of variable and fixed rate debt and commercial paper. The Company manages its interest rate exposure by limiting its variable rate exposure and by monitoring the effects of market changes in interest rates. The Company also has 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, 2019,2022, a hypothetical increase of interest rates by 1% associated with the Company’s short-term borrowings would result in a $7$6 million increase in short-term interest expense.
The Company’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 the Company’s results of operations, financial position and cash flows.
The market price of the Company’s common stock may experience fluctuations, which may be unrelated to its operating performance. In particular, the 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 the Company to access the capital markets in the future through additional offerings of its common stock or other equity securities, regardless of its financial performance, and such difficulty may preclude the Company from being able to take advantage of certain business opportunities or meet business obligations.
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. The 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 its pension liabilities, seeking to hedge some of the interest rate sensitivity of its liabilities. That way, if interest rates fall and liabilities increase, the Company expects that the fixed-income assets in its retirement trust will also increase in value. The Company also expects its risk to be reduced through its ability to recover pension and other benefit costs through rates.
The Company is also exposed to a potential national economic recession or deterioration in local economic conditions in the markets in which it operates. The credit quality of the Company’s customer accounts receivable is dependent on the economy and the ability of its 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, the Company’s ability to fully recover operating expense, recover its investment and provide an appropriate return on invested capital made in the Regulated Businesses may be adversely impacted.
American Water Works Company, Inc.
Opinions on the Financial Statements and 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.
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.
The principal considerations for our determination that performing procedures relating to accounting for the effects of rate regulation is a critical audit matter are there wasthe significant judgment by management related to thein accounting for regulatory assets and liabilities including assessingrelative to 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 as a result of 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 jurisdictions, 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.
We have served as the Company’s auditor since 1948.
The accompanying notes are an integral part of these Consolidated Financial Statements.
American Water Works Company, Inc. and Subsidiary Companies