Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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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 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 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 2019 compared to fiscal 2018, 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, 2019, filed with the SEC on February 18, 2020.

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 7,000 professionals who provide drinking water, wastewater and other related services to over 15 million people in 46 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 over 1,700 communities in 16 states in the United States, with 3.5 million active customers with services provided by its water and wastewater networks. Services provided by the Company’s utilities are subject to regulation by PUCs. The Company also operates market-based businesses that provide water, wastewater and other services to residential and smaller commercial customers, the U.S. government on military installations, as well as municipalities and utility customers, collectively presented as the “Market-Based Businesses.” These Market-Based Businesses are not subject to economic regulation by state PUCs. See Item 1—Business for additional information.

Novel Coronavirus (COVID-19) Pandemic Update

American Water has been monitoring the global impact of COVID-19 pandemic and has taken steps to mitigate adverse impacts to the Company. The Company has three main areas of focus as part of its response to COVID-19: the care and safety of its employees; the safety of its customers and the communities it serves; and the execution of its business continuity plan. American Water continues to work with its vendors to prevent disruptions in its supply chain, and, at this time, has not experienced, and does not anticipate, any material negative impacts. The Company has also been monitoring the impacts of the pandemic on its access to the capital markets, and to the extent such access is adversely affected, American Water may need to consider alternative sources of funding for its operations and for working capital, any of which could increase its cost of capital.

This pandemic continues to evolve, and American Water continues to monitor developments affecting its employees, customers, contractors and vendors and will take additional actions as warranted. To date, the Company has experienced COVID-19 financial impacts, including an increase in uncollectible accounts expense, additional debt costs, and certain incremental operation and maintenance (“O&M”) expenses. The Company has also experienced decreased revenues as a result of the suspension of late fees and foregone reconnect fees. These impacts are collectively referred to as “financial impacts.” See Note 3—Impact of Novel Coronavirus (COVID-19) Pandemic in the Notes to Consolidated Financial Statements for additional information. The extent to which COVID-19 may further impact American Water, including without limitation, its liquidity, financial condition, and results of operations, will depend on future developments, which presently cannot be predicted.

As of February 24, 2021, American Water has commission orders authorizing deferred accounting for COVID-19 financial impacts in 11 of 14 jurisdictions, with proceedings in two jurisdictions pending. In addition to approving deferred accounting, to date, two regulatory jurisdictions have also approved cost recovery mechanisms for specified COVID-19 financial impacts. Regulatory actions to date are presented in the table below:


Commission Actions	Description	States
Orders issued	Allows the Company to establish regulatory assets to record certain financial impacts related to the COVID-19 pandemic.	CA, HI, IA, IL, IN, MD, MO, NJ, PA, VA, WV
Cost recovery mechanisms	California’s Catastrophic Event Memorandum Account allows the Company to track and recover certain financial impacts related to the COVID-19 pandemic. Illinois has authorized cost recovery of COVID-19 financial impacts through a special purpose rider over a 24-month period, which was implemented by the Company’s Illinois subsidiary effective October 1, 2020. Additionally, Illinois approved a bad debt rider tariff on December 16, 2020. This rider will allow the Company to collect actual bad debt expense over last authorized beginning March 2021 over a 24-month period.	CA, IL
Proceedings pending	Pending proceedings considering deferred accounting authorization for the future recovery of COVID-19 financial impacts.	NY, TN

Consistent with these regulatory orders, the Company has recorded $30 million in regulatory assets and $4 million of regulatory liabilities for the financial impacts related to the COVID-19 pandemic on the Consolidated Balance Sheets as of December 31, 2020. On December 30, 2020, the Company’s Kentucky subsidiary received an order denying its request to defer to a regulatory asset the financial impacts related to the COVID-19 pandemic.

As of February 24, 2021, six states have ordered active moratoria on the suspension of service disconnections due to non-payment. The moratoria on disconnects have expired in eight states. The Company continues to monitor the evolving COVID-19 pandemic and will continue to comply with the current ordered moratoria and any future moratoria implemented.

Financing Activities

To ensure adequate liquidity given the impacts of the COVID-19 pandemic on debt and capital markets, on March 20, 2020, parent company and American Water Capital Corp. (“AWCC”), parent company’s wholly owned finance subsidiary, entered into a Term Loan Credit Agreement that provides for a 364-day term loan facility of up to $750 million (the “Term Loan Facility”). On March 20, 2020, AWCC borrowed $500 million under the Term Loan Facility, the proceeds of which were used for general corporate purposes of AWCC and American Water, and to provide additional liquidity. The Term Loan Facility allowed for a single additional borrowing of up to $250 million, which expired unused on June 19, 2020. See Note 13—Short-Term Debt in the Notes to Consolidated Financial Statements for additional information.

On April 14, 2020, AWCC completed a $1.0 billion debt offering which included the sale of $500 million aggregate principal amount of its 2.80% senior notes due 2030 and $500 million aggregate principal amount of its 3.45% senior notes due 2050. Net proceeds of this offering were used to lend funds to parent company and its regulated subsidiaries, repay various senior notes and regulated subsidiary debt obligations at maturity, repay commercial paper obligations and short-term indebtedness under AWCC’s unsecured revolving credit facility, and for general corporate purposes. See Note 12—Long-Term Debt in the Notes to Consolidated Financial Statements for additional information.

The Company sought to take advantage of lower interest rates available in the capital markets in 2020 by refinancing long-term debt, where possible. In 2020, AWCC and the Company’s regulated subsidiaries issued in the aggregate $311 million of private activity bonds and government funded debt in multiple transactions with annual interest rates ranging from 0.60% to 1.20%, maturing in 2023 to 2027. The Company used these proceeds to retire an aggregate of $311 million of long-term debt issues at maturity with annual interest rates ranging from 4.45% to 5.60%.

Financial Results

For the years ended December 31, 2020, 2019 and 2018, diluted earnings per share (GAAP) were $3.91, $3.43 and $3.15, respectively. In 2020, as compared to 2019, diluted earnings per share increased $0.48. This increase was primarily driven by continued growth in the Regulated Businesses from infrastructure investment, acquisitions and organic growth, as well as the benefit from depreciation expense related to the assets of the Company’s New York subsidiary, as required by assets held for sale accounting. Revenues increased as a result of warmer and drier than normal weather during the third quarter of 2020 across several of the Company’s subsidiaries, contributing a benefit of $0.07 per diluted share for 2020. Revenues from the Company’s residential customers increased from many states experiencing work from home activities due to the COVID-19 pandemic, which were largely offset by decreased revenues from the Company’s commercial and industrial customers as a result of the COVID-19 pandemic. Partially offsetting these increases were estimated impacts from the COVID-19 pandemic on HOS from increased claims that likely have resulted from more work from home activity. During the fourth quarter of 2019, the Company recognized a loss of $0.19 per diluted share, relating to the sale of its Keystone operations. Additionally, during the first quarter of 2019, the Company recorded a benefit of $0.01 per diluted share from the reduction of the liability related to the Freedom Industries chemical spill settlement in West Virginia.

Growth—through capital investment in infrastructure and regulated acquisitions, as well as strategic growth opportunities in the Market-Based Businesses

The Company expects to continue 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 2020, the Company invested $1.9 billion, primarily in the Regulated Businesses, as discussed below:

Regulated Businesses Growth and Optimization

$1.8 billion capital investment in the Regulated Businesses, the majority for infrastructure improvements and replacements; and
$135 million to fund acquisitions in the Regulated Businesses, which added approximately 37,800 water and wastewater customers during 2020, in addition to approximately 14,500 customers added through organic growth during 2020.

During 2021, the Company closed on the acquisition of two regulated water and wastewater systems adding approximately 600 customers, for a total aggregate purchase price of $3 million. As of February 24, 2021, the Company has entered into agreements for pending acquisitions in the Regulated Businesses to add approximately 30,000 additional customers.

Sale of New York American Water Company, Inc.

On November 20, 2019, the Company and the Company’s New York subsidiary entered into a Stock Purchase Agreement with Liberty, pursuant to which Liberty will purchase all of the capital stock of the New York subsidiary for an aggregate purchase price of approximately $608 million in cash, subject to adjustment as provided in the Stock Purchase Agreement. The Company’s regulated New York operations have approximately 125,000 customers in the State of New York. See Item 1—Business—Regulated Businesses—Sale of New York American Water Company, Inc. for additional information. The assets and related liabilities of the New York subsidiary were classified as held for sale on the Consolidated Balance Sheets as of December 31, 2020. See Note 6—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional information.

Market-Based Businesses Growth

MSG was awarded the contract for ownership, operation and maintenance of the water and wastewater systems at Joint Base Lewis-McChord in Washington state, effective September 24, 2020. Joint Base Lewis-McChord is comprised of Fort Lewis and McChord Air Force Base. The joint base has a population of approximately 115,000, comprised of 40,000 active personnel, 60,000 family members and 15,000 civilian and contract employees. The total contract award includes estimated revenues of approximately $771 million over a 50-year period, subject to an annual economic price adjustment.

Future Growth

Looking forward, the Company expects to invest between $10.3 billion to $10.5 billion from 2021 to 2025, and between $22 billion to $25 billion from 2021 to 2030, including $1.9 billion in 2021. The Company’s expected future investments include:

capital investment for infrastructure improvements in the Regulated Businesses of $8.9 billion over the next five years, and between $19 billion and $21 billion over the next 10 years, including $1.6 billion expected in 2021; and
growth from acquisitions in the Regulated Businesses to expand the Company’s water and wastewater customer base of between $1.4 billion to $1.6 billion over the next five years, and between $3 billion to $4 billion over the next 10 years, including $300 million expected in 2021.

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:

Operational Excellence

The Company’s adjusted regulated O&M efficiency ratio, which is used as a measure of the operating performance of the Regulated Businesses, was 34.3% for the year ended December 31, 2020, compared to 34.5% and for the year ended December 31, 2019. The improvement in this ratio reflects the continued focus on operating costs, as well as an increase in operating revenues for the Regulated Businesses.

The Company’s adjusted regulated 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 operating revenues from the Regulated Businesses, where both operation and maintenance expenses and operating revenues were adjusted to eliminate purchased water expense. Also excluded from operation and maintenance expenses are the allocable portion of non-operation and maintenance support services costs, mainly depreciation and general taxes, which are reflected in the Regulated Businesses segment as operation and maintenance expenses, but for consolidated financial reporting purposes, are categorized within other line items in the accompanying Consolidated Statements of Operations. Additionally, the Company excluded the impact of certain Freedom Industries chemical spill settlement activities recognized in 2018 and 2019 from operation and maintenance expenses (see Note 17—Commitments and Contingencies in the Notes to Consolidated Financial Statements for additional information). The items discussed above were excluded from the 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 supplements and should be read in conjunction with the Company’s 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; (ii) is not based on a standard, objective industry definition or method of calculation; (iii) may not be comparable to other companies’ operating measures; and (iv) should not be used in place of the GAAP information provided elsewhere in this 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)	2020			2019			2018
Total operation and maintenance expenses	$	1,622		$	1,544		$	1,479
Less:
Operation and maintenance expenses—Market-Based Businesses	389			393			362
Operation and maintenance expenses—Other	(25)			(31)			(42)
Total operation and maintenance expenses—Regulated Businesses	1,258			1,182			1,159
Less:
Regulated purchased water expenses	149			135			133
Allocation of non-operation and maintenance expenses	41			31			31
Impact of Freedom Industries settlement activities (a)	—			(4)			(20)
Adjusted operation and maintenance expenses—Regulated Businesses (i)	$	1,068		$	1,020		$	1,015

Total operating revenues	$	3,777		$	3,610		$	3,440
Less:
Operating revenues—Market-Based Businesses	540			539			476
Operating revenues—Other	(18)			(23)			(20)
Total operating revenues—Regulated Businesses	3,255			3,094			2,984
Less:
Regulated purchased water revenues (b)	149			135			133
Other revenue	(7)			—			—
Adjusted operating revenues—Regulated Businesses (ii)	$	3,113		$	2,959		$	2,851

Adjusted O&M efficiency ratio—Regulated Businesses (i) / (ii)	34.3		%	34.5		%	35.6		%

(a) Includes the impact of a settlement in 2018 with one 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.

(b) 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, assuming a constant water sales volume, resulting from general rate cases authorizations that became effective during 2018 through 2020:


(In millions)	2020		2019		2018
General rate cases by state:
New Jersey (a)	$	39	$	—	$	40
Indiana (b)	13		4		—
California (c)	5		4		10
Virginia (d)	(1)		—		—
Kentucky (effective June 28, 2019)	—		13		—
New York (e)	—		4		5
West Virginia (effective February 25, 2019)	—		19		—
Maryland (effective February 5, 2019)	—		1		—
Missouri (effective May 28, 2018)	—		—		33
Pennsylvania (effective January 1, 2018)	—		—		62
Total general rate case authorizations	$	56	$	45	$	150

(a)The $39 million base rate increase was effective on November 1, 2020, which is net of excess accumulated deferred income taxes (“EADIT”) of $15 million being returned to customers. The unprotected EADIT balance of $133 million is being returned to customers over 15 years. The $39 million rate increase was further reduced by a bill credit, for a 10-month period beginning November 1, 2020 for both the protected and unprotected catch up period EADIT of $32.5 million. The catch up period of January 1, 2018 through October 31, 2020 covers the period from when the lower federal tax rate went into effect until new base rates went into effect. The $40 million rate increase was effective on June 15, 2018. As part of the resolution of the general rate case in 2018, the Company’s New Jersey subsidiary’s customers received refunds for the amount of provisional rates implemented as of June 15, 2018 that exceeded the final rate increase plus interest.

(b)The Company’s Indiana subsidiary received an order approving a joint settlement agreement with all major parties with respect to its 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 May 1, 2020.

(c)The Company’s California subsidiary received approval for the third year (2020) step increase associated with its most recent general rate case authorization, effective January 1, 2020. In 2019, the step increase was 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.

(d)The Company’s Virginia subsidiary received an order approving increased water revenues by $1 million, inclusive of Water & Wastewater Infrastructure Service Charge (“WWISC”) revenues of $1 million, and decreased wastewater revenue by $1 million, for a net zero award including WWISC, or an overall decrease of $1 million excluding WWISC. Unprotected EADIT is being returned to customers over eight years, and base rates include a reduction of $1 million for EADIT.

(e)The Company’s New York subsidiary implemented its third step increase associated with its most recent general rate case authorization, effective April 1, 2019.

Due in part to the COVID-19 pandemic, the NYSPSC approved, through a series of orders, the Company’s New York subsidiary’s request to postpone the previously approved step increase, originally scheduled to go into effect April 1, 2020 until May 1, 2021. The orders provided a make whole provision to recover the delayed revenues with no earnings impact. These delays impact rates for all metered and fire customers, which the Company is authorized to recover in a make-whole surcharge beginning May 1, 2021.

Pending General Rate Case Filings

On August 28, 2020, the Company’s Iowa subsidiary filed a general rate case requesting $3 million in annualized incremental revenues. Office of Consumer Advocate (“OCA”) and intervenor direct testimony was filed on December 17, 2020 and cross-reply testimony was filed on December 31, 2020. The Company’s Iowa subsidiary reply testimony was filed on January 14, 2021, and OCA rebuttal testimony was filed on February 8, 2021. Evidentiary hearings are scheduled to start March 3, 2021. An order is anticipated by April 30, 2021 with new rates effective by July 1, 2021.

On June 30, 2020, the Company’s Missouri subsidiary filed a general rate case requesting $78 million in annualized incremental revenues. On August 26, 2020, the Missouri Public Service Commission (the “MPSC”) issued an order setting the test year and adopting a procedural schedule. Revenue requirement direct testimony was submitted on November 24, 2020 for all non-Company parties, and a technical conference was held on December 3, 2020. Cost of service and rate design direct testimony was submitted on December 9, 2020 for all non-Company parties. Rebuttal testimony was submitted on January 15, 2021 for revenue requirement and on January 22, 2021 for rate design, and true-up data was filed on January 29, 2021, which included known and measurable changes through December 31, 2020. Settlement conferences commenced on February 16, 2021. A Motion to Suspend Procedural Schedule was filed on February 23, 2021 with the MPSC by all parties to the proceeding. The MPSC issued an order effective February 24, 2021 suspending the procedural schedule to allow for either a stipulation and agreement or a status report to be filed no later than February 26, 2021.

On April 29, 2020, the Company’s Pennsylvania subsidiary filed a general rate case requesting $92 million and $46 million in annualized incremental revenues for rate year 1 and rate year 2, respectively. On October 30, 2020, the Company’s Pennsylvania subsidiary and the Bureau of Investigation and Enforcement entered into a settlement agreement providing for a total annualized revenue increase of $71 million over a two-year period. In November 2020, the Company’s Pennsylvania subsidiary and the remaining active parties in the case presented their positions in briefs to the Administrative Law Judge, who issued to the Pennsylvania Public Utility Commission (the “PaPUC”) a recommended decision approving the settlement. The procedural schedule in this case was extended to March 15, 2021. The Company expects the PaPUC to issue a final order in the near term, and once approved by the PaPUC, new water and wastewater rates will be effective January 28, 2021.

On July 1, 2019, the Company’s California subsidiary filed a general rate case requesting $26 million in annualized incremental revenues for 2021 and increases of $10 million and $11 million in the escalation year of 2022 and the attrition year of 2023, respectively. On October 11, 2019, the Company filed its 100 day update for the same proceeding and updated the request to $27 million in annualized incremental revenues for 2021, and increases of $10 million and $10 million in the escalation year of 2022 and the attrition year of 2023, respectively. On September 10, 2020, the CPUC approved the Company’s California subsidiary’s motion for interim rates, establishing a memorandum account to track the difference between interim and final rates adopted by the CPUC in this proceeding, which were effective on January 1, 2021. Following settlement discussions among all parties to the proceeding, on January 22, 2021 and January 25, 2021, the Company’s California subsidiary filed with the CPUC a comprehensive settlement entered into among the Company’s California subsidiary, the Public Advocates Office, and other intervenors. These settlement agreements resolved all matters in dispute among the parties to the settlements. These settlements as well as resolution of issues raised by non-settling parties are now before the CPUC for approval.

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. On March 12, 2020, the CPUC granted the request for a one year extension of the cost of capital filing to May 1, 2021, to set its authorized cost of capital beginning January 1, 2022. On January 5, 2021, the Company’s California subsidiary submitted a request to further delay by one year its cost of capital filing and maintain the authorized cost of capital through 2022. On February 22, 2021, the CPUC denied the request to further delay the cost of capital filing. The Company’s California subsidiary will submit a cost of capital application by May 1, 2021, with a new authorized cost of capital beginning January 1, 2022.

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, resulting from infrastructure surcharge authorizations that became effective during 2018 through 2020:


(In millions)	2020		2019		2018
Infrastructure surcharges by state:
Missouri (a)	$	12	$	14	$	6
Pennsylvania (b)	27		11		—
Kentucky (effective July 1, 2020)	1		—		—
New Jersey (c)	20		15		—
Tennessee (effective January 1, 2020, September 1, 2019 and April 10, 2018)	2		1		1
Illinois (effective January 1, 2020, January 1, 2019 and January 1, 2018)	7		8		3
West Virginia (effective January 1, 2020, January 1, 2019 and January 1, 2018)	3		2		3
New York (effective August 1, 2019)	—		2		—
Indiana (effective March 14, 2018)	—		—		7
Virginia (effective March 1, 2018)	—		—		1
Total infrastructure surcharge authorizations	$	72	$	53	$	21

(a)In 2020, $2 million was effective December 14 and $10 million was effective June 27. In 2019, $5 million was effective December 21 and $9 million was effective June 24. In 2018, the effective date was December 15.

(b)In 2020, $8 million was effective October 1, $4 million was effective July 1, $5 million was effective April 1 and $10 million was effective January 1. In 2019, $6 million was effective October 1, $3 million was effective July 1 and $2 million was effective April 1.

(c)In 2020, $10 million was effective June 29 and $10 million was effective January 1. In 2019, the effective date was July 1.

Presented in the table below are annualized incremental revenues, assuming a constant water sales volume, resulting from infrastructure surcharge authorizations that became effective after January 1, 2020:


(In millions)	Amount
Infrastructure surcharge filings by state:
Pennsylvania (effective January 1, 2021)	$	8
Illinois (effective January 1, 2021)	7
West Virginia (effective January 1, 2021)	5
Tennessee (effective January 1, 2021)	3
Total infrastructure surcharge filings	$	23

Pending Infrastructure Surcharge Filings

On January 15, 2021, the Company’s Indiana subsidiary filed for an infrastructure surcharge requesting $8 million in additional annualized revenues.

On May 29, 2020, the Company’s New York subsidiary filed for an infrastructure surcharge requesting $1 million in additional annualized revenues. New rates related to this infrastructure surcharge were first deferred until January 1, 2021. Thereafter, on December 30, 2020, the NYSPSC ordered the postponement of rate changes until May 1, 2021, which will be recoverable, with interest, through a separate, make-whole recovery mechanism commencing May 1, 2021 through March 31, 2022.

Tax Matters

CARES Act

In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act includes certain tax relief provisions applicable to the Company including: (i) the immediate refund of the corporate alternative minimum tax credit; (ii) the ability to carryback net operating losses for five years for tax years 2018 through 2020; and (iii) delayed payment of employer payroll taxes. The CARES Act did not have a material impact on the Company’s Consolidated Financial Statements.

Tax Cuts and Jobs Act

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 federal corporate income tax rate from 35% to 21% as of January 1, 2018. The enactment of the TCJA required a re-measurement of the Company’s deferred income taxes. The portion of this re-measurement related to the Regulated Businesses was substantially offset by a regulatory liability as EADIT will be used to benefit the Company’s regulated customers in future rates. Nine 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 five remaining regulated subsidiaries to be addressed in pending or future rate cases or other proceedings. When crediting EADIT to the customer, the Company records both a reduction to revenue and a reduction to income tax expense, having no material impact on net income.

Federal Net Operating Loss

The Company had a federal NOL carryover balance of $366 million as of December 31, 2020 that is expected to be fully utilized during 2021, after which time the Company expects that it will become a cash taxpayer for federal income tax purposes.

Legislative Updates

During 2020, the Company’s regulatory jurisdictions enacted the following legislation that has been approved and is effective as of February 24, 2021:

Indiana House Enrolled Act 1131 establishes an appraisal process for non-municipal utilities to establish fair value and creates a presumption that the appraised value is a reasonable purchase price. Additionally, all new municipal systems will now be regulated for 10 years.
Indiana Senate Enrolled Act 254 authorizes recovery without a full rate case for service enhancements for health, safety or environmental concerns for above ground infrastructure, and exempts relocation from distribution system improvement charge recovery caps.
West Virginia Senate Bill 551 allows for expanded asset valuation, combined water and wastewater ratemaking and the expansion of how municipalities can utilize proceeds from the sale of a water or wastewater system.
West Virginia Senate Bill 739 allows the Public Service Commission of West Virginia to force utility management changes up to and including an acquisition of a distressed or failing water or wastewater system, based on financial, managerial and technical ability among other factors, by a neighboring system that has the ability to assume control and protect consumers. The bill also includes guidance for customer notification, commission orders, and new rate mechanisms for cost recovery of these acquisitions.
Iowa amended HF2452 legislation, which gives the Iowa Utilities Board 180 days to approve acquisitions and allows systems to qualify as a distressed system when they do not have a certified operator.
Missouri House Bill 2120 requires most small community water utilities to establish a cyber security plan and valve and hydrant inspection program with reporting to the Department of Natural Resources certifying compliance with these provisions upon request.
Virginia Senate Bill 831 directs the Virginia State Corporation Commission to establish fair market value for the state, and the legislation authorizes a water or sewer public utility acquiring a water or sewer system to elect to have its rate base established by using the fair market value. The Virginia State Corporation Commission issued an order on August 27, 2020 adopting the proposed rules governing Water or Wastewater Utility Applications Seeking Fair Valuation of Acquisitions of Municipal Water or Wastewater Systems effective as of October 1, 2020.

In September 2020, the CPUC released a decision under its Low-Income Rate Payer Assistance program rulemaking that will require 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.

Consolidated Results of Operations

Presented in the table below are the Company’s consolidated results of operations:


	For the Years Ended December 31,
	2020		2019		2018
(In millions)
Operating revenues	$	3,777	$	3,610	$	3,440
Operating expenses:
Operation and maintenance	1,622		1,544		1,479
Depreciation and amortization	604		582		545
General taxes	303		280		277
Loss (gain) on asset dispositions and purchases	—		34		(20)
Impairment charge	—		—		57
Total operating expenses, net	2,529		2,440		2,338
Operating income	1,248		1,170		1,102
Other income (expense):
Interest, net	(395)		(382)		(350)
Non-operating benefit costs, net	49		16		20
Other, net	22		29		15
Total other income (expense)	(324)		(337)		(315)
Income before income taxes	924		833		787
Provision for income taxes	215		212		222
Consolidated net income	709		621		565
Net loss attributable to noncontrolling interest	—		—		(2)
Net income attributable to common shareholders	$	709	$	621	$	567

Segment Results of Operations

The Company’s operating segments are comprised of the revenue-generating components of its business for which separate financial information 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, do not meet the criteria of a reportable segment in accordance with GAAP, and are collectively presented as the Market-Based Businesses, which is consistent with how management assesses the results of these businesses. For a discussion and analysis of the Company’s financial statements for fiscal 2019 compared to fiscal 2018, 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, 2019, filed with the SEC on February 18, 2020.

Regulated Businesses Segment

Presented in the table below is financial information for the Regulated Businesses:


	For the Years Ended December 31,
	2020		2019		2018
(In millions)
Operating revenues	$	3,255	$	3,094	$	2,984
Operation and maintenance	1,258		1,182		1,159
Depreciation and amortization	562		529		500
General taxes	285		262		261
(Gain) on asset dispositions and purchases	(3)		(10)		(7)
Other income (expenses)	(221)		(262)		(247)
Income before income taxes	932		869		826
Provision for income taxes	217		215		224
Net income attributable to common shareholders	715		654		602

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,
	2020		2019		2018
(In millions)
Water services:
Residential	$	1,895	$	1,735	$	1,663
Commercial	627		639		616
Fire service	147		142		137
Industrial	133		138		136
Public and other	226		230		216
Total water services	3,028		2,884		2,768
Wastewater services:
Residential	134		119		115
Commercial	34		31		30
Industrial	3		3		2
Public and other	14		14		14
Total water services	185		167		161
Other (a)	42		43		55
Total operating revenues	$	3,255	$	3,094	$	2,984

(a)Includes other operating revenues consisting primarily of miscellaneous utility charges, fees and rents.


	For the Years Ended December 31,
	2020	2019	2018
(Gallons in millions)
Billed water services volumes:
Residential	178,753	167,470	172,827
Commercial	75,875	81,268	82,572
Industrial	34,875	37,242	38,432
Fire service, public and other	49,031	50,501	50,651
Total billed water services volumes	338,534	336,481	344,482

In 2020, as compared to 2019, operating revenues increased $161 million primarily due to: (i) $122 million increase from authorized rate increases, including infrastructure surcharges, principally from infrastructure investment in various states; (ii) $36 million increase from water and wastewater acquisitions, as well as organic growth in existing systems; (iii) $16 million increase in demand, primarily driven by (a) weather, including warmer and drier than normal weather in the third quarter of 2020 and unusually wet weather conditions experienced in the Northeast and Midwest during the second quarter of 2019, and (b) increases in demand from the Company’s residential customers in several states due to an increase in work from home activities resulting from the COVID-19 pandemic, substantially offset by decreases in demand from the Company’s commercial and industrial customers due to the COVID-19 pandemic; and (iv) $13 million decrease in other operating revenues due to EADIT being returned to customers, including in the Company’s New Jersey subsidiary as part of the general rate case which became effective on November 1, 2020.

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:


	For the Years Ended December 31,
	2020		2019		2018
(In millions)
Employee-related costs	$	495	$	462	$	451
Production costs	335		317		313
Operating supplies and services	242		237		227
Maintenance materials and supplies	84		74		81
Customer billing and accounting	58		55		60
Other	44		37		27
Total	$	1,258	$	1,182	$	1,159

Employee-Related Costs


	For the Years Ended December 31,
	2020		2019		2018
(In millions)
Salaries and wages	$	382	$	363	$	349
Group insurance	65		60		57
Pensions	20		12		19
Other benefits	28		27		26
Total	$	495	$	462	$	451

In 2020, as compared to 2019, employee-related costs increased $33 million primarily due to: (i) $19 million increase in salaries and wages from higher headcount and related compensation expense supporting growth in the businesses; (ii) $5 million increase in group insurance due to higher premiums in 2020; and (iii) $8 million increase in pension service costs.

Production Costs


	For the Years Ended December 31,
	2020		2019		2018
(In millions)
Purchased water	$	149	$	135	$	133
Fuel and power	88		90		91
Chemicals	57		54		52
Waste disposal	41		38		37
Total	$	335	$	317	$	313

In 2020, as compared to 2019, production costs increased $18 million primarily due to an increase in purchased water.

Operating Supplies and Services

In 2020, as compared to 2019, operating supplies and services increased $5 million primarily due to technology services.

Maintenance Materials and Supplies

In 2020, as compared to 2019, maintenance materials and supplies increased $10 million primarily due to an increase in planned deferred maintenance and tank painting projects in the Company’s New Jersey subsidiary and an increase in other maintenance costs across several of the Company’s subsidiaries.

Other (Operation and Maintenance)

In 2020, as compared to 2019, other (operation and maintenance) increased $7 million primarily due to a $4 million reduction to the liability related to the Freedom Industries chemical spill, recorded in the first quarter of 2019 and higher property insurance premiums during 2020.

Depreciation and Amortization

In 2020, as compared to 2019, depreciation and amortization increased $33 million primarily due to additional utility plant placed in service, partially offset by the pre-tax benefit of $14 million for the year ended December 31, 2020, from depreciation expense not recorded related to the assets of the Company’s New York subsidiary, as required by assets held for sale accounting.

Other Income (Expenses)

In 2020, as compared to 2019, other income (expenses) increased $41 million primarily due to the reduction in the non-service cost components of pension and other postretirement benefits expense resulting from higher asset returns.

Market-Based Businesses

Presented in the table below is information for the Market-Based Businesses, with explanations for material variances provided in the ensuing discussions:


	For the Years Ended December 31,
	2020		2019		2018
(In millions)
Operating revenues	$	540	$	539	$	476
Operation and maintenance	389		393		362
Depreciation and amortization	26		37		29
Loss (gain) on asset dispositions and purchases	1		44		(13)
Impairment charge	—		—		57
Income before income taxes	120		66		41
Provision for income taxes	29		20		11
Net loss attributable to noncontrolling interest	—		—		(2)
Net income attributable to common shareholders	91		46		32

Operating Revenues

In 2020, as compared to 2019, operating revenues increased $1 million primarily due to: (i) $49 million increase in MSG from increased capital upgrades, and the addition of two new military contracts in 2019 (Joint Base San Antonio and the United States Military Academy at West Point, New York); (ii) $14 million increase in HOS primarily from price increases for existing customers and contract growth; (iii) $48 million decrease from the sale of the Company’s Keystone operations in the fourth quarter of 2019; (iv) $9 million decrease from the expiration of the Company’s contract with the Township of Edison, New Jersey in 2019; and (v) $5 million decrease from the sale and termination of several of CSG’s O&M contracts during 2019.

Operation and Maintenance

Presented in the table below is information regarding the main components of the Market-Based Businesses’ operating and maintenance expense:


	For the Years Ended December 31,
	2020		2019		2018
(In millions)
Operating supplies and services	$	148	$	128	$	142
Maintenance materials and supplies	114		109		69
Employee-related costs	90		109		104
Production costs	21		29		32
Other	16		18		15
Total	$	389	$	393	$	362

Depreciation and Amortization

In 2020, as compared to 2019, depreciation and amortization decreased $11 million primarily due to the sale of the Company’s Keystone operations in the fourth quarter of 2019.

Loss (Gain) on Asset Dispositions and Purchases

During the fourth quarter of 2019, the Company recognized a pre-tax loss on sale of $44 million, or $35 million after-tax, relating to the sale of its Keystone operations. See Note 6—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional information.

Provision for Income Taxes

In 2020, as compared to 2019, provision for income taxes increased $9 million primarily due to an increase in pre-tax income.

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 2025 with aggregate bank commitments of $2.25 billion. The facility is used principally to fulfill the Company’s 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, 2020, AWCC had no outstanding borrowings and $76 million of outstanding letters of credit under its revolving credit facility, with $1.39 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 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.

To ensure adequate liquidity given the impacts of the COVID-19 pandemic on debt and capital markets, on March 20, 2020, AWCC entered into a Term Loan Credit Agreement, by and among parent company, AWCC and the lenders party thereto, which provided for the Term Loan Facility of up to $750 million. On March 20, 2020, AWCC borrowed $500 million under the Term Loan Facility, the proceeds of which were used for general corporate purposes of AWCC and American Water, and to provide additional liquidity. The Term Loan Facility allowed for a single additional borrowing of up to $250 million, which expired unused on June 19, 2020. The Term Loan Facility commitments terminate on March 19, 2021. As of December 31, 2020, $500 million of principal was outstanding under the Term Loan Facility.

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 2021, 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. 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.

Cash Flows Provided by Operating Activities

Cash flows provided by 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 by operating activities will be affected by, among other things: the Company’s customers’ ability to pay for service in a timely manner, economic utility regulation inflation; compliance with environmental, health and safety standards; production costs; maintenance costs; customer growth; declining customer usage of water; employee-related costs, including pension funding; weather and seasonality; taxes; and overall economic conditions.

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 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. The Company addresses cash timing differences through the aforementioned liquidity funding mechanisms.

Presented in the table below is a summary of the major items affecting the Company’s cash flows provided by operating activities:


	For the Years Ended December 31,
(In millions)	2020		2019		2018
Net income	$	709	$	621	$	565
Add (less):
Depreciation and amortization	604		582		545
Deferred income taxes and amortization of investment tax credits	207		208		195
Non-cash impairment charge	—		—		57
Other non-cash activities (a)	—		38		56
Changes in working capital (b)	(49)		(1)		30
Settlement of cash flow hedges	(6)		(30)		—
Pension and postretirement healthcare contributions	(39)		(31)		(22)
Impact of Freedom Industries settlement activities	—		(4)		(40)
Net cash flows provided by operating activities	$	1,426	$	1,383	$	1,386

(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 2020, cash flows provided by operating activities increased $43 million, primarily due to an increase in net income and the decrease in cash paid for the settlement of cash flow hedges in 2020 compared to the prior year in connection with AWCC’s 2020 and 2019 debt offerings. The main factors contributing to the increase in net income are described in “Consolidated Results of Operations” and “Segment Results of Operations” above. Partially offsetting these increases was a change in working capital, primarily resulting from the following: (i) an increase in accounts receivable, net due to increased revenues compared to the same period in the prior year and the impact of the COVID-19 pandemic in 2020; (ii) an increase in unbilled revenues as a result of MSG achieving significant capital project milestones during 2020; (iii) a decrease in accounts payable and accrued liabilities due to the timing of both capital projects and invoices; and (iv) a partial offset due to the change in other current assets.

The Company expects to make pension contributions to the plan trusts of $37 million in 2021. In addition, the Company estimates that contributions will amount to $37 million, $35 million, $33 million and $30 million in 2022, 2023, 2024 and 2025, respectively. Actual amounts contributed could change materially from these estimates as a result of changes in assumptions and actual investment returns, among other factors.

Cash Flows Used in Investing Activities

Presented in the table below is a summary of the major items affecting the Company’s cash flows used in investing activities:


	For the Years Ended December 31,
(In millions)	2020		2019		2018
Capital expenditures	$	(1,822)	$	(1,654)	$	(1,586)
Acquisitions, net of cash acquired	(135)		(235)		(398)
Proceeds from sale of assets	2		48		35
Removal costs from property, plant and equipment retirements, net	(106)		(104)		(87)
Net cash flows used in investing activities	$	(2,061)	$	(1,945)	$	(2,036)

In 2020, cash flows used in investing activities increased $116 million primarily due to continued investment across all infrastructure categories, mainly replacement and renewal of transmission and distribution and treatment and pumping infrastructure in the Company’s Regulated Businesses, as discussed below. Additionally, proceeds from the sale of assets were higher in 2019 compared to 2020, due to the sale of Keystone for $31 million, in the fourth quarter of 2019. Partially offsetting these increases was a decrease in acquisitions in 2020 compared to 2019.

The Company’s infrastructure investment plan consists of both infrastructure renewal programs, where the Company replaces infrastructure, 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 capital expenditures by category:


	For the Years Ended December 31,
(In millions)	2020		2019		2018
Transmission and distribution	$	704	$	661	$	572
Treatment and pumping	306		190		231
Services, meter and fire hydrants	333		346		303
General structure and equipment	299		234		371
Sources of supply	54		83		26
Wastewater	126		140		83
Total capital expenditures	$	1,822	$	1,654	$	1,586

In 2020, the Company’s capital expenditures increased $168 million primarily due to investment in transmission and distribution and treatment and pumping infrastructure.

The Company also grows its business primarily through acquisitions of water and wastewater systems, as well as other water-related services. These acquisitions are generally located in geographic proximity to the Company’s existing Regulated 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, once reflected in rate base. During 2020, the Company paid $135 million for the acquisition of 23 water and wastewater systems, representing in the aggregate approximately 37,800 customers.

As previously noted, the Company expects to invest between $10.3 billion to $10.5 billion from 2021 to 2025, with $8.9 billion of this range for infrastructure improvements in the Regulated Businesses, and between $22 billion to $25 billion from 2021 to 2030. In 2021, the Company expects to invest $1.9 billion, with $1.6 billion for infrastructure improvements and $300 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 by financing activities:


	For the Years Ended December 31,
	2020		2019		2018
(In millions)
Proceeds from long-term debt	$	1,334	$	1,530	$	1,358
Repayments of long-term debt	(342)		(495)		(526)
Proceeds from term loan	500		—		—
Net repayments of short-term borrowings	(5)		(178)		60
Proceeds from issuance of common stock	—		—		183
Dividends paid	(389)		(353)		(319)
Anti-dilutive stock repurchases	—		(36)		(45)
Other financing activities, net (a)	22		26		15
Net cash flows provided by financing activities	$	1,120	$	494	$	726

(a)Includes proceeds from issuances of common stock under various employee stock plans and the Company’s dividend reinvestment plan, net of taxes paid, advances and contributions in aid of construction, net of refunds, and debt issuance costs and make-whole premiums on early debt redemption.

In 2020, cash flows provided by financing activities increased $626 million, primarily due to the $500 million borrowed under the Term Loan Facility during the first quarter of 2020, lower net repayments of commercial paper borrowings and no anti-dilutive stock repurchases in 2020, partially offset by higher dividends paid in 2020.

The Company’s financing activities, 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, an equity issuance to fund approximately 50% of the purchase price of the Pivotal acquisition. 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, 2020, AWCC has made long-term fixed rate loans and commercial paper loans to the Regulated Businesses amounting to $5.4 billion and $718 million, respectively, in addition to the $500 million outstanding on the Term Loan Facility. Additionally, as of December 31, 2020, AWCC has made long-term fixed rate loans and commercial paper loans to parent company amounting $2.8 billion and $68 million, respectively. As of December 31, 2020, 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.

On April 14, 2020, AWCC completed a $1.0 billion debt offering which included the sale of $500 million aggregate principal amount of its 2.80% Senior Notes due 2030 and $500 million aggregate principal amount of its 3.45% Senior Notes due 2050. At the closing of the offering, AWCC received, after deduction of underwriting discounts and before deduction of offering expenses, net proceeds of $989 million. AWCC used the net proceeds to: (i) lend funds to parent company and its regulated subsidiaries; (ii) fund sinking fund payments for, and to repay at maturity, $28 million in aggregate principal amount of outstanding long-term debt of AWCC and certain of the Company’s regulated subsidiaries; (iii) repay AWCC’s commercial paper obligations and short-term indebtedness under AWCC’s $2.25 billion unsecured revolving credit facility; and (iv) for general corporate purposes.

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. The Company reduces exposure to interest rates by managing commercial paper and debt maturities. The Company does not enter into derivative contracts for speculative purposes and does not use leveraged instruments. The derivative contracts entered into are for periods consistent with the related underlying exposures. The Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations. The Company minimizes the counterparty credit risk on these transactions by only dealing with leading, credit-worthy financial institutions, having long-term credit ratings of “A” or better.

On April 8, 2020, the Company terminated four treasury lock agreements with an aggregate notional amount of $400 million, realizing a net loss of $6 million, to be amortized through interest, net over a ten-year period, in accordance with the terms of the new debt issued on April 14, 2020. No ineffectiveness was recognized on hedging instruments for the years ended December 31, 2020 and 2019.

In May 2018, 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. During 2020, 2019 and 2018, $1.00 billion, $1.10 billion, and $1.33 billion, respectively, of debt securities were issued under this 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.

Presented in the table below are the issuances of long-term debt in 2020:


Company	Type	Rate	Weighted Average Rate	Maturity	Amount (in millions)
AWCC (a)	Senior notes—fixed rate	2.80%-3.45%	3.13%	2030-2050	$	1,000
AWCC (a) (b)	Private activity bonds and government funded debt—fixed rate	0.60%-0.70%	0.42%	2023-2023	86
Other American Water subsidiaries	Private Activity Mortgage Bonds	0.85%-1.20%	1.10%	2023-2027	225
Other American Water subsidiaries	Private activity bonds and government funded debt—fixed rate	0.00%-5.00%	0.16%	2021-2048	23
Total issuances					$	1,334

(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. See “—Issuer and Guarantor of Senior Notes” below.

(b)This indebtedness has a mandatory redemption provision callable in 2023.

Presented in the table below are the retirements and redemptions of long-term debt in 2020 through sinking fund provisions, optional redemption or payment at maturity:


Company	Type	Rate	Weighted Average Rate	Maturity	Amount (in millions)
AWCC	Private activity bonds and government funded debt—fixed rate	1.79%-5.38%	5.29%	2020-2031	$	87
Other American Water subsidiaries	Private activity mortgage bonds	4.45%-5.60%	5.19%	2020	225
Other American Water subsidiaries	Private activity bonds and government funded debt—fixed rate	0.00%-5.60%	2.08%	2020-2048	15
Other American Water subsidiaries	Mortgage bonds	3.92%-9.71%	7.83%	2020-2021	13
Other American Water subsidiaries	Mandatory redeemable preferred stock	8.49%-9.18%	8.64%	2031-2036	2
Total retirements and redemptions					$	342

From time to time and as market conditions warrant, the Company may engage in long-term debt retirements through tender offers, open market repurchases or other viable alternatives.

Issuer and Guarantor of Senior Notes

The outstanding senior notes issued by AWCC, the wholly owned finance subsidiary of parent company, have been issued under two indentures, each by and between AWCC and Wells Fargo Bank, National Association, as trustee, providing for the rights and obligations of the parties thereto and the holders of the notes issued thereunder. The senior notes also have been issued with the benefit of a support agreement, as amended, between parent company and AWCC, which serves as the functional equivalent of a full and unconditional guarantee by parent company of AWCC’s payment obligations under the senior notes. No other subsidiary of parent company provides guarantees for any of the outstanding senior notes. If AWCC is unable to make timely payment of any interest, principal or premium, if any, on such senior notes, parent company will provide to AWCC, at its request or the request of any holder of such senior notes, funds to make such payment in full. If AWCC fails or refuses to take timely action to enforce certain rights under the support agreement or if AWCC defaults in the timely payment of any amounts owed to any holder of such senior notes, when due, the support agreement provides that the holder may proceed directly against parent company to enforce such rights or to obtain payment of the defaulted amounts owed to that holder.

As a wholly owned finance subsidiary of parent company, AWCC has no significant assets other than obligations of parent company and certain of its subsidiaries 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 its ability to issue indebtedness or otherwise obtain loans in the future, the proceeds of which would be used to fund the repayment of the senior notes.

Because parent company is a holding company and substantially all of its operations are conducted through its subsidiaries other than AWCC, parent company’s ability to fulfill its obligations under the support agreement will be dependent upon its receipt of sufficient cash dividends or distributions from its operating subsidiaries. See Note 10—Shareholders’ Equity—Dividends and Distributions, in the Notes to the Consolidated Financial Statements for a summary of the limitations on parent company and its subsidiaries to pay dividends or make distributions. Furthermore, parent company’s operating subsidiaries are separate and distinct legal entities and, other than AWCC, have no obligation to make any payments on the senior notes or to make available or provide any funds for such payment, other than through their repayment obligations under intercompany loans, if any, with AWCC. Based on the foregoing, 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 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 2025. In April 2020, 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 2024 to March 2025. 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.

Interest rates on advances under the facility are based on a credit spread to the LIBOR rate (or applicable market replacement rate) or base rate in accordance with Moody Investors Service’s and Standard & Poor’s Financial Services’ 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 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 the credit facility.

Presented in the tables below are the aggregate credit facility commitments, commercial paper limit and letter of credit availability under the revolving credit facility, as well as the available capacity for each, as of December 31,:


	2020
	Commercial Paper Limit		Letters of Credit		Total (a)
(In millions)
Total availability	$	2,100	$	150	$	2,250
Outstanding debt	(786)		(76)		(862)
Remaining availability as of December 31, 2020	$	1,314	$	74	$	1,388

(a)Total remaining availability of $1.39 billion as of December 31, 2020 may be accessed through revolver draws.


	2019
	Commercial Paper Limit		Letters of Credit		Total (a)
(In millions)
Total availability	$	2,100	$	150	$	2,250
Outstanding debt	(786)		(76)		(862)
Remaining availability as of December 31, 2019	$	1,314	$	74	$	1,388

(a)Total remaining availability of $1.39 billion as of December 31, 2019 may be accessed through revolver draws.

Presented in the table below is the Company’s total available liquidity as of December 31, 2020 and 2019:


	Cash and Cash Equivalents		Availability on Revolving Credit Facility		Total Available Liquidity
(In millions)
Available liquidity as of December 31, 2020	$	547	$	1,388	$	1,935
Available liquidity as of December 31, 2019	60		1,388		1,448

The weighted average interest rate on AWCC short-term borrowings for the years ended December 31, 2020 and 2019 was approximately 1.16% and 2.54%, 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:


	2020		2019		2018
Total common shareholders’ equity	37.1	%	39.2	%	40.4	%
Long-term debt and redeemable preferred stock at redemption value	53.6	%	55.6	%	52.4	%
Short-term debt and current portion of long-term debt	9.3	%	5.2	%	7.2	%
Total	100	%	100	%	100	%

The changes in the capital structure between periods were mainly attributable to an increase in long-term debt, and the $500 million borrowed under the Term Loan Facility during 2020, which is scheduled to terminate on March 19, 2021.

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, the Term Loan Facility 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, 2020, the Company’s ratio was 0.63 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 24, 2021 as issued by the following rating agencies:


Securities	Moody’s Investors Service	Standard & Poor’s Ratings Service
Rating outlook	Stable	Stable
Senior unsecured debt	Baa1	A
Commercial paper	P-2	A-1

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, 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 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 10—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.

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, 2020, 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.

As of December 31, 2020 and 2019, the Company’s regulatory asset balance was $1.1 billion and $1.1 billion, respectively, and its regulatory liability balance was $1.8 billion and $1.8 billion, respectively. See Note 4—Regulatory Matters in the Notes to Consolidated Financial Statements for further information regarding the Company’s significant regulatory assets and liabilities..

Accounting for Income Taxes

Significant management judgment is required in determining the provision for income taxes, primarily due to the uncertainty related to tax positions taken, as well as deferred tax assets and liabilities, valuation allowances and the utilization of 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 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. 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 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, 2020 and 2019 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 15—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. See Note 16—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 adopted the Society of Actuaries Pri-2012 mortality base table, the most recent table developed from private pension plan experience, which provides rates of mortality in 2012 and adopted the new MP-2020 mortality improvement scale to gradually adjust future mortality rates downward due to increased longevity in each year after 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 discount rate for determining pension benefit obligations was 2.74%, 3.44% and 4.38% at December 31, 2020, 2019 and 2018, respectively. The discount rate for determining other postretirement benefit obligations was 2.56%, 3.36% and 4.32% at December 31, 2020, 2019 and 2018, 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-term EROA assumption used in calculating pension cost was 6.50% for 2020, 6.20% for 2019, and 5.95% for 2018. The weighted average EROA assumption used in calculating other postretirement benefit costs was 3.68% for 2020, 3.56% for 2019 and 4.77% for 2018.

Presented in the table below are the allocations of the pension plan assets by asset category:


	2021 Target Allocation			Percentage of Plan Assets as of December 31,
Asset Category			2020			2019
Equity securities	43	%		49	%		45	%
Fixed income	50	%		45	%		48	%
Real Estate	5	%		6	%		7	%
Real estate investment trusts (“REITs”)	2	%		—	%		—	%
Total	100	%		100	%		100	%

Postretirement Medical Bargaining Plan Changes

On July 31, 2018, a five-year national benefits agreement was ratified, covering, as of July 31, 2018, 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. As of December 31, 2020, the remaining amortization period of the impact of the plan amendment is 7.9 years. As a result of the remeasurement and change in funded status, the Company decreased the investment risk in the plan and reduced 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. Plan assets in excess of those securities designed to match the long-term liabilities are invested in shorter duration fixed income securities and equities.

Presented in the table below are the allocations of the other postretirement benefit plan assets by asset category:


	2021 Target Allocation (a)			Percentage of Plan Assets as of December 31,
Asset Category			2020			2019
Equity securities	18	%		18	%		17	%
Fixed income	82	%		82	%		83	%
Total	100	%		100	%		100	%

(a)Includes the American Water Postretirement Medical Benefits Bargaining Plan, the New York Water Service Corporation Postretirement Medical Benefits Bargaining Plan, the American Water Postretirement Medical Benefits Non-Bargaining Plan, and the American Water Life Insurance Trust.

The 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 3.51% for 2020, 2.97% for 2019 and 3.00% for 2018.

In selecting health care cost trend rates, the Company considers past performance and forecasts of increases in health care costs. As of January 1, 2020, the Company’s health care cost trend rate assumption used to calculate the periodic cost was 6.50% in 2020 gradually declining to 5.00% in 2026 and thereafter. As of December 31, 2020, the Company projects that medical inflation will be 6.25% in 2021 gradually declining to 5.00% in 2026 and thereafter.

The Company will use a discount rate and EROA of 2.74% and 6.50%, respectively, for estimating its 2021 pension costs. Additionally, the Company will use a discount rate and expected blended return based on weighted assets of 2.56% and 3.68%, respectively, for estimating its 2021 other postretirement benefit costs. A decrease in the discount rate or the EROA would increase the Company’s pension expense. The Company’s 2020 pension and postretirement benefit credit was $14 million and the 2019 pension and postretirement benefit cost was $17 million. The Company expects to make pension contributions to the plan trusts of $37 million in 2021, and $37 million, $35 million, $33 million and $30 million in 2022, 2023, 2024 and 2025, respectively. Actual amounts contributed could change significantly from these estimates. The assumptions are reviewed annually and at any interim re-measurement of the plan obligations. The impact of assumption changes is reflected in the recorded pension and postretirement benefit amounts as they occur, or over a period of time if allowed under applicable accounting standards.

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, 2020 and 2019 was $150 million and $142 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 exterior water and sewer lines, interior electric and gas lines, heating and cooling systems, water heaters, power surge protection and other related services. Most of the contracts 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 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, 2020 and 2019 was $56 million and $30 million, respectively.

Accounting for Contingencies

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 17—Commitments and Contingencies in the Notes to Consolidated Financial Statements for additional information regarding contingencies.

New Accounting Standards

See Note 2—Significant Accounting Policies in the Notes to Consolidated Financial Statements for a description of recent accounting standards.

Previous: Item 6. SELECTED FINANCIAL DATA · Next: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK