filings.toolsItem 1. CONSOLIDATED FINANCIAL STATEMENTS
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Item 1. CONSOLIDATED FINANCIAL STATEMENTS
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Balance Sheets (Unaudited)
(In millions, except share and per share data)
| March 31, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Property, plant and equipment | $ | 27,781 | $ | 27,413 | |||||||
| Accumulated depreciation | (6,383) | (6,329) | |||||||||
| Property, plant and equipment, net | 21,398 | 21,084 | |||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | 75 | 116 | |||||||||
| Restricted funds | 21 | 20 | |||||||||
| Accounts receivable, net of allowance for uncollectible accounts of $72 and $75, respectively | 266 | 271 | |||||||||
| Unbilled revenues | 254 | 248 | |||||||||
| Materials and supplies | 71 | 57 | |||||||||
| Assets held for sale | — | 683 | |||||||||
| Other | 166 | 159 | |||||||||
| Total current assets | 853 | 1,554 | |||||||||
| Regulatory and other long-term assets: | |||||||||||
| Regulatory assets | 1,049 | 1,051 | |||||||||
| Seller promissory note from the sale of the Homeowner Services Group | 720 | 720 | |||||||||
| Operating lease right-of-use assets | 91 | 92 | |||||||||
| Goodwill | 1,139 | 1,139 | |||||||||
| Postretirement benefit assets | 203 | 193 | |||||||||
| Other | 241 | 242 | |||||||||
| Total regulatory and other long-term assets | 3,443 | 3,437 | |||||||||
| Total assets | $ | 25,694 | $ | 26,075 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Balance Sheets (Unaudited)
(In millions, except share and per share data)
| March 31, 2022 | December 31, 2021 | ||||||||||
| CAPITALIZATION AND LIABILITIES | |||||||||||
| Capitalization: | |||||||||||
| Common stock ($0.01 par value; 500,000,000 shares authorized; 187,095,267 and 186,880,413 shares issued, respectively) | $ | 2 | $ | 2 | |||||||
| Paid-in-capital | 6,796 | 6,781 | |||||||||
| Retained earnings | 1,083 | 925 | |||||||||
| Accumulated other comprehensive loss | (44) | (45) | |||||||||
| Treasury stock, at cost (5,342,229 and 5,269,324 shares, respectively) | (377) | (365) | |||||||||
| Total common shareholders' equity | 7,460 | 7,298 | |||||||||
| Long-term debt | 10,347 | 10,341 | |||||||||
| Redeemable preferred stock at redemption value | 3 | 3 | |||||||||
| Total long-term debt | 10,350 | 10,344 | |||||||||
| Total capitalization | 17,810 | 17,642 | |||||||||
| Current liabilities: | |||||||||||
| Short-term debt | 321 | 584 | |||||||||
| Current portion of long-term debt | 57 | 57 | |||||||||
| Accounts payable | 175 | 235 | |||||||||
| Accrued liabilities | 538 | 701 | |||||||||
| Accrued taxes | 285 | 176 | |||||||||
| Accrued interest | 102 | 88 | |||||||||
| Liabilities related to assets held for sale | — | 83 | |||||||||
| Other | 170 | 217 | |||||||||
| Total current liabilities | 1,648 | 2,141 | |||||||||
| Regulatory and other long-term liabilities: | |||||||||||
| Advances for construction | 300 | 284 | |||||||||
| Deferred income taxes and investment tax credits | 2,381 | 2,421 | |||||||||
| Regulatory liabilities | 1,577 | 1,600 | |||||||||
| Operating lease liabilities | 78 | 80 | |||||||||
| Accrued pension expense | 276 | 285 | |||||||||
| Other | 175 | 180 | |||||||||
| Total regulatory and other long-term liabilities | 4,787 | 4,850 | |||||||||
| Contributions in aid of construction | 1,449 | 1,442 | |||||||||
| Commitments and contingencies (See Note 11) | |||||||||||
| Total capitalization and liabilities | $ | 25,694 | $ | 26,075 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Statements of Operations (Unaudited)
(In millions, except per share data)
| For the Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Operating revenues | $ | 842 | $ | 888 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Operation and maintenance | 364 | 419 | |||||||||||||||||||||
| Depreciation and amortization | 158 | 157 | |||||||||||||||||||||
| General taxes | 74 | 83 | |||||||||||||||||||||
| Total operating expenses, net | 596 | 659 | |||||||||||||||||||||
| Operating income | 246 | 229 | |||||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense | (100) | (98) | |||||||||||||||||||||
| Interest income | 13 | — | |||||||||||||||||||||
| Non-operating benefit costs, net | 19 | 20 | |||||||||||||||||||||
| Other, net | 15 | 4 | |||||||||||||||||||||
| Total other (expense) income | (53) | (74) | |||||||||||||||||||||
| Income before income taxes | 193 | 155 | |||||||||||||||||||||
| Provision for income taxes | 35 | 22 | |||||||||||||||||||||
| Net income attributable to common shareholders | $ | 158 | $ | 133 | |||||||||||||||||||
| Basic earnings per share: | |||||||||||||||||||||||
| Net income attributable to common shareholders | $ | 0.87 | $ | 0.73 | |||||||||||||||||||
| Diluted earnings per share: | |||||||||||||||||||||||
| Net income attributable to common shareholders | $ | 0.87 | $ | 0.73 | |||||||||||||||||||
| Weighted-average common shares outstanding: | |||||||||||||||||||||||
| Basic | 182 | 181 | |||||||||||||||||||||
| Diluted | 182 | 182 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Statements of Comprehensive Income (Unaudited)
(In millions)
| For the Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Net income attributable to common shareholders | $ | 158 | $ | 133 | |||||||||||||||||||
| Other comprehensive income, net of tax: | |||||||||||||||||||||||
| Defined benefit pension plan actuarial loss, net of tax of $0 for each of the three months ended March 31, 2022 and 2021 | 1 | 1 | |||||||||||||||||||||
| Net other comprehensive income | 1 | 1 | |||||||||||||||||||||
| Comprehensive income attributable to common shareholders | $ | 159 | $ | 134 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Statements of Cash Flows (Unaudited)
(In millions)
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net income | $ | 158 | $ | 133 | |||||||
| Adjustments to reconcile to net cash flows provided by operating activities: | |||||||||||
| Depreciation and amortization | 158 | 157 | |||||||||
| Deferred income taxes and amortization of investment tax credits | (61) | 26 | |||||||||
| Provision for losses on accounts receivable | 4 | 11 | |||||||||
| Pension and non-pension postretirement benefits | (12) | (10) | |||||||||
| Other non-cash, net | (3) | (41) | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Receivables and unbilled revenues | (6) | 26 | |||||||||
| Pension and non-pension postretirement benefit contributions | (19) | (9) | |||||||||
| Accounts payable and accrued liabilities | (110) | (57) | |||||||||
| Other assets and liabilities, net | 45 | (57) | |||||||||
| Net cash provided by operating activities | 154 | 179 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Capital expenditures | (424) | (342) | |||||||||
| Acquisitions, net of cash acquired | (5) | (3) | |||||||||
| Net proceeds from sale of assets | 608 | — | |||||||||
| Removal costs from property, plant and equipment retirements, net | (20) | (18) | |||||||||
| Net cash provided by (used in) investing activities | 159 | (363) | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Proceeds from long-term debt | 11 | 2 | |||||||||
| Repayments of long-term debt | (5) | (25) | |||||||||
| Repayments of term loan | — | (500) | |||||||||
| Net short-term (repayments) borrowings with maturities less than three months | (263) | 334 | |||||||||
| Remittances from issuances of employee stock plans and direct stock purchase plan, net of taxes paid of $12 and $15 for the three months ended March 31, 2022 and 2021, respectively | (8) | (11) | |||||||||
| Advances and contributions in aid of construction, net of refunds of $3 and $6 for the three months ended March 31, 2022 and 2021, respectively | 21 | 7 | |||||||||
| Dividends paid | (109) | (100) | |||||||||
| Net cash used in financing activities | (353) | (293) | |||||||||
| Net decrease in cash, cash equivalents and restricted funds | (40) | (477) | |||||||||
| Cash, cash equivalents and restricted funds at beginning of period | 136 | 576 | |||||||||
| Cash, cash equivalents and restricted funds at end of period | $ | 96 | $ | 99 | |||||||
| Non-cash investing activity: | |||||||||||
| Capital expenditures acquired on account but unpaid as of the end of period | $ | 315 | $ | 223 |
The accompanying notes are an integral part of these Consolidated Financial Statements.
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
(In millions)
| Common Stock | Paid-in-Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | At Cost | ||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | 186.9 | $ | 2 | $ | 6,781 | $ | 925 | $ | (45) | (5.3) | $ | (365) | $ | 7,298 | |||||||||||||||||||||||||||||||||
| Net income attributable to common shareholders | — | — | — | 158 | — | — | — | 158 | |||||||||||||||||||||||||||||||||||||||
| Common stock issuances (a) | 0.2 | — | 15 | — | — | — | (12) | 3 | |||||||||||||||||||||||||||||||||||||||
| Net other comprehensive income | — | — | — | — | 1 | — | — | 1 | |||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | 187.1 | $ | 2 | $ | 6,796 | $ | 1,083 | $ | (44) | (5.3) | $ | (377) | $ | 7,460 | |||||||||||||||||||||||||||||||||
(a)Includes stock-based compensation, employee stock purchase plan and direct stock reinvestment and purchase plan activity.
| Common Stock | Paid-in-Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | At Cost | ||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | 186.5 | $ | 2 | $ | 6,747 | $ | 102 | $ | (49) | (5.2) | $ | (348) | $ | 6,454 | |||||||||||||||||||||||||||||||||
| Net income attributable to common shareholders | — | — | — | 133 | — | — | — | 133 | |||||||||||||||||||||||||||||||||||||||
| Common stock issuances (a) | 0.2 | — | 10 | — | — | (0.1) | (15) | (5) | |||||||||||||||||||||||||||||||||||||||
| Net other comprehensive income | — | — | — | — | 1 | — | — | 1 | |||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | 186.7 | $ | 2 | $ | 6,757 | $ | 235 | $ | (48) | (5.3) | $ | (363) | $ | 6,583 | |||||||||||||||||||||||||||||||||
(a)Includes stock-based compensation, employee stock purchase plan and direct stock reinvestment and purchase plan activity.
The accompanying notes are an integral part of these Consolidated Financial Statements.
American Water Works Company, Inc. and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited)
(Unless otherwise noted, in millions, except per share data)
Note 1: Basis of Presentation
The unaudited Consolidated Financial Statements included in this report include the accounts of American Water Works Company, Inc. and all of its subsidiaries (the “Company” or “American Water”), in which a controlling interest is maintained after the elimination of intercompany balances and transactions. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting, and the rules and regulations for reporting on Quarterly Reports on Form 10-Q (“Form 10-Q”). Accordingly, they do not contain certain information and disclosures required by GAAP for comprehensive financial statements. In the opinion of management, all adjustments necessary for a fair statement of the financial position as of March 31, 2022, and the results of operations and cash flows for all periods presented, have been made. All adjustments are of a normal, recurring nature, except as otherwise disclosed.
The unaudited Consolidated Financial Statements and Notes included in this report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (“Form 10-K”), which provides a more complete discussion of the Company’s accounting policies, financial position, operating results and other matters. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the year, primarily due to the seasonality of the Company’s operations.
Note 2: Significant Accounting Policies
New Accounting Standards
Presented in the table below are new accounting standards that were adopted by the Company in 2022:
| Standard | Description | Date of Adoption | Application | Effect on the Consolidated Financial Statements | ||||||||||||||||||||||
| Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity | Simplification of financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. The standard reduced the number of accounting models for convertible debt instruments and convertible preferred stock. This will result in fewer embedded conversion features being separately recognized from the host contract. Earnings per share (“EPS”) calculations have been simplified for certain instruments. | January 1, 2022 | Either modified retrospective or fully retrospective | The standard did not have a material impact on its Consolidated Financial Statements. | ||||||||||||||||||||||
| Disclosures by Business Entities about Government Assistance | The amendments in this update require additional disclosures regarding government grants and contributions. These disclosures require information on the following three items about government transactions to be provided: information on the nature of transactions and related accounting policy used to account for transactions, the line items on the balance sheet and income statement affected by these transactions including amounts applicable to each line, and significant terms and conditions of the transactions, including commitments and contingencies. | January 1, 2022 | Either prospective or retrospective | The standard did not have a material impact on its Consolidated Financial Statements. |
Presented in the table below are recently issued accounting standards that have not yet been adopted by the Company as of March 31, 2022:
| Standard | Description | Date of Adoption | Application | Estimated Effect on the Consolidated Financial Statements | ||||||||||||||||||||||
| Accounting for Contract Assets and Contract Liabilities from Contracts with Customers | The guidance requires an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Codification Topic 606, as if it had originated the contracts. The amendments in this update also provide certain practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts in a business combination. | January 1, 2023; early adoption permitted | Prospective | The Company is evaluating any impact on its Consolidated Financial Statements, as well as the timing of adoption. | ||||||||||||||||||||||
| Troubled debt restructurings and vintage disclosures | The main provisions of this standard eliminate the receivables accounting guidance for troubled debt restructurings (“TDRs”) by creditors while enhancing disclosure requirements when a borrower is experiencing financial difficulty. Entities must apply the loan refinancing and restructuring guidance for receivables to determine whether a modification results in a new loan or a continuation of an existing loan. Additionally, the amendments in this update require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases. | January 1, 2023; early adoption permitted | Prospective, with a modified retrospective option for amendments related to the recognition and measurement of TDRs. | The Company is evaluating any impact on its Consolidated Financial Statements, as well as the timing of adoption. |
Allowance for Uncollectible Accounts
Allowances for uncollectible accounts are maintained for estimated probable losses resulting from the Company’s inability to collect receivables from customers. Accounts that are outstanding longer than the payment terms are considered past due. A number of factors are considered in determining the allowance for uncollectible accounts, including the length of time receivables are past due, previous loss history, current economic and societal conditions and reasonable and supportable forecasts that affect the collectability of receivables from customers. The Company generally writes off accounts when they become uncollectible or are over a certain number of days outstanding.
Presented in the table below are the changes in the allowance for uncollectible accounts for the three months ended March 31:
| 2022 | 2021 | ||||||||||
| Balance as of January 1 | $ | (75) | $ | (60) | |||||||
| Amounts charged to expense | (4) | (11) | |||||||||
| Amounts written off | 7 | — | |||||||||
| Less: Allowance for uncollectible accounts included in assets held for sale (a) | — | 4 | |||||||||
| Balance as of March 31 | $ | (72) | $ | (67) |
(a)This portion of the allowance for uncollectible accounts is related to the sale of the Company’s New York subsidiary, which was completed on January 1, 2022, and is included in assets held for sale on the Consolidated Balance Sheets as of December 31, 2021. See Note 5—Acquisitions and Divestitures for additional information.
Reclassifications
Certain reclassifications have been made to prior periods in the Consolidated Financial Statements and Notes to conform to the current presentation.
Note 3: Regulatory Matters
General Rate Cases and Infrastructure Surcharges
Presented in the table below are annualized incremental revenues, excluding reductions for the amortization of excess accumulated deferred income tax (“EADIT”) that are generally offset in income tax expense, assuming a constant water sales volume, resulting from general rate case authorizations and infrastructure surcharge authorizations that became effective in the current period:
| During the Three Months Ended March 31, | |||||||||||||||||||||||
| (In millions) | 2022 | 2021 | |||||||||||||||||||||
| General rate cases by state: | |||||||||||||||||||||||
| West Virginia (effective February 25, 2022) | $ | 15 | $ | — | |||||||||||||||||||
| California (effective January 1, 2022 and January 1, 2021) | 13 | 22 | |||||||||||||||||||||
| Pennsylvania (effective January 1, 2022 and January 28, 2021) | 20 | 70 | |||||||||||||||||||||
| Total general rate cases | $ | 48 | $ | 92 | |||||||||||||||||||
| Infrastructure surcharges by state: | |||||||||||||||||||||||
| Indiana (effective March 21, 2022 and March 17, 2021) | $ | 8 | $ | 8 | |||||||||||||||||||
| West Virginia (effective March 1, 2022 and January 1, 2021) | 3 | 5 | |||||||||||||||||||||
| Missouri (effective February 1, 2022) | 12 | — | |||||||||||||||||||||
| Illinois (effective January 1, 2022 and January 1, 2021) | 6 | 7 | |||||||||||||||||||||
| Pennsylvania (effective January 1, 2021) | — | 8 | |||||||||||||||||||||
| Tennessee (effective January 1, 2021) | — | 3 | |||||||||||||||||||||
| Total infrastructure surcharges | $ | 29 | $ | 31 |
Effective April 1, 2022, the Company’s Pennsylvania subsidiary implemented infrastructure surcharges for annualized incremental revenues of $2 million.
On February 24, 2022, the Company’s West Virginia subsidiary (“WVAWC”) was authorized additional annual revenues of $15 million in its general rate case, effective February 25, 2022, excluding agreed to reductions for EADIT as a result of the Tax Cuts and Jobs Act of 2017 (the “TCJA”). The EADIT reduction in revenues is $2 million and the exclusion for infrastructure surcharges is $10 million. Staff of the WV Public Service Commission moved for reconsideration of the Commission's final order on several grounds. The Company filed its response to the Staff's Petition for Reconsideration on March 28, 2022 in support of the Commission authorized revenue requirement. The matter is currently pending before the Commission for its consideration.
On November 18, 2021, the California Public Utilities Commission (the “CPUC”) unanimously approved a final decision in the test year 2021 general rate case filed by the Company’s California subsidiary, which is retroactive to January 1, 2021. The Company’s California subsidiary received authorization for additional annualized water and wastewater revenues of $22 million, excluding agreed to reductions for EADIT as a result of the TCJA. The EADIT reduction in revenues is $4 million and is offset by a like reduction in income tax expense. On February 16, 2022, the Company’s California subsidiary received approval to increase rates by $13 million in 2022 escalation increases, excluding $4 million of reductions related to the TCJA, which is retroactive to January 1, 2022.
On March 2, 2021, an administrative law judge (“ALJ”) in the Office of Administrative Law of New Jersey filed an initial decision with the New Jersey Board of Public Utilities (the “NJBPU”) that recommended denial of a petition filed by the Company’s New Jersey subsidiary, which sought approval of acquisition adjustments in rate base of $29 million associated with the acquisitions of Shorelands Water Company, Inc. in 2017 and the Borough of Haddonfield’s water and wastewater systems in 2015. On July 29, 2021, the NJBPU issued an order adopting the ALJ’s initial decision without modification. The Company’s New Jersey subsidiary filed a Notice of Appeal with the New Jersey Appellate Division on September 10, 2021. The Company filed its brief in support of the appeal on March 4, 2022. Response briefs are due by May 23, 2022. There is no financial impact to the Company as a result of the NJBPU’s order, since the acquisition adjustments are currently recorded as goodwill on the Consolidated Balance Sheets.
On February 25, 2021, the Company’s Pennsylvania subsidiary was authorized additional annualized revenues of $90 million, effective January 28, 2021, excluding agreed to reductions in revenues of $19 million for EADIT as a result of the TCJA. The overall increase, net of TCJA reductions, is $71 million in revenues combined over two steps. The first step was effective January 28, 2021 in the amount of $70 million ($51 million including TCJA reductions) and the second step was effective January 1, 2022 in the amount of $20 million. The protected EADIT balance of $200 million is being returned to customers using the average rate assumptions method, and the unprotected EADIT balance of $116 million is being returned to customers over 20 years. The $19 million annual reduction to revenue is comprised of both the protected and unprotected EADIT amortizations and a portion of catch-up period EADIT. A bill credit of $11 million annually for two years returns to customers the remainder of the EADIT catch-up period amortization. The catch-up period of January 1, 2018 through December 31, 2020 covers the period from when the lower federal corporate income tax rate went into effect until new base rates went into effect and will be amortized over two years.
Pending General Rate Case Filings
On February 10, 2022, the Company’s Illinois subsidiary filed a general rate case requesting $71 million in additional annualized revenues excluding proposed reductions for EADIT as a result of TCJA and infrastructure surcharges.
On January 14, 2022, the Company’s New Jersey subsidiary filed a general rate case requesting $110 million in additional annualized revenues excluding proposed reductions for EADIT as a result of TCJA and infrastructure surcharges. Public hearings were held on April 6, 2022. Settlement conferences are scheduled to commence in May 2022 with evidentiary hearings expected to begin in September 2022.
On December 1, 2021, the Company’s Kentucky subsidiary filed a wastewater rate case requesting additional revenues of $1 million, excluding proposed reductions for EADIT as a result of TCJA. The Company’s Kentucky subsidiary requested a four-step rate increase for their wastewater operations with effective dates of June 1, 2022, June 1, 2023, June 1, 2024 and June 1, 2025 for annual amounts of less than $1 million each year. The Company’s Kentucky subsidiary filed their wastewater case under the alternative rate filing process for smaller utilities which calculates an operating ratio of 88% rather than a return on equity.
On November 15, 2021, the Company’s Virginia subsidiary filed a general rate case requesting $15 million in additional annualized revenues excluding proposed reductions for EADIT as a result of TCJA.
On August 18, 2021, the Company’s Hawaii subsidiary filed a general rate case requesting $2 million in additional annualized revenues excluding proposed reductions for EADIT as a result of TCJA. On April 11, 2022, the Company and the Division of Consumer Advocacy submitted a joint letter to the Hawaii Public Utilities Commission indicating that the parties had, in principle, reached a settlement that would resolve all disputed issues in the case. In the joint letter, the parties also requested revisions to the procedural schedule.
The Company’s California subsidiary submitted its application on May 3, 2021 to set its cost of capital for 2022 through 2024. According to the CPUC’s procedural schedule, a decision setting the authorized cost of capital is expected to be issued in the fourth quarter of 2022.
Pending Infrastructure Surcharge Filings
On March 4, 2022, the Company’s Missouri subsidiary filed an infrastructure surcharge proceeding requesting $19 million in additional annualized revenues.
On March 1, 2022, the Company’s Kentucky subsidiary filed an infrastructure surcharge proceeding requesting $3 million in additional annualized revenues.
Other Regulatory Matters
In September 2020, the CPUC released a decision under its Low-Income Rate Payer Assistance program rulemaking that 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 and following the CPUC’s denial of its rehearing application in September 2021, the Company’s California subsidiary filed a petition for writ of review with the California Supreme Court on October 27, 2021.
Note 4: Revenue Recognition
Disaggregated Revenues
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 also operates other market-based businesses that provide water and wastewater services to the U.S. government on military installations, as well as municipalities, and utility customers, collectively included within “Market-Based Businesses and Other.”
Presented in the table below are operating revenues disaggregated for the three months ended March 31, 2022:
| Revenues from Contracts with Customers | Other Revenues Not from Contracts with Customers (a) | Total Operating Revenues | |||||||||||||||
| Regulated Businesses: | |||||||||||||||||
| Water services: | |||||||||||||||||
| Residential | $ | 428 | $ | — | $ | 428 | |||||||||||
| Commercial | 153 | — | 153 | ||||||||||||||
| Fire service | 36 | — | 36 | ||||||||||||||
| Industrial | 36 | — | 36 | ||||||||||||||
| Public and other | 57 | — | 57 | ||||||||||||||
| Total water services | 710 | — | 710 | ||||||||||||||
| Wastewater services: | |||||||||||||||||
| Residential | 41 | — | 41 | ||||||||||||||
| Commercial | 10 | — | 10 | ||||||||||||||
| Industrial | 1 | — | 1 | ||||||||||||||
| Public and other | 3 | — | 3 | ||||||||||||||
| Total wastewater services | 55 | — | 55 | ||||||||||||||
| Miscellaneous utility charges | 9 | — | 9 | ||||||||||||||
| Alternative revenue programs | — | 2 | 2 | ||||||||||||||
| Lease contract revenue | — | 2 | 2 | ||||||||||||||
| Total Regulated Businesses | 774 | 4 | 778 | ||||||||||||||
| Market-Based Businesses and Other | 64 | — | 64 | ||||||||||||||
| Total operating revenues | $ | 838 | $ | 4 | $ | 842 |
(a)Includes revenues associated with provisional rates, alternative revenue programs, lease contracts and intercompany rent, which are outside the scope of Accounting Standards Codification Topic 606, Revenue From Contracts With Customers (“ASC 606”), and accounted for under other existing GAAP.
Presented in the table below are operating revenues disaggregated for the three months ended March 31, 2021:
| Revenues from Contracts with Customers | Other Revenues Not from Contracts with Customers (a) | Total Operating Revenues | |||||||||||||||
| Regulated Businesses: | |||||||||||||||||
| Water services: | |||||||||||||||||
| Residential | $ | 430 | $ | — | $ | 430 | |||||||||||
| Commercial | 144 | — | 144 | ||||||||||||||
| Fire service | 37 | — | 37 | ||||||||||||||
| Industrial | 32 | — | 32 | ||||||||||||||
| Public and other | 44 | — | 44 | ||||||||||||||
| Total water services | 687 | — | 687 | ||||||||||||||
| Wastewater services: | |||||||||||||||||
| Residential | 36 | — | 36 | ||||||||||||||
| Commercial | 9 | — | 9 | ||||||||||||||
| Industrial | 1 | — | 1 | ||||||||||||||
| Public and other | 4 | — | 4 | ||||||||||||||
| Total wastewater services | 50 | — | 50 | ||||||||||||||
| Miscellaneous utility charges | 8 | — | 8 | ||||||||||||||
| Alternative revenue programs | — | 9 | 9 | ||||||||||||||
| Lease contract revenue | — | 1 | 1 | ||||||||||||||
| Total Regulated Businesses | 745 | 10 | 755 | ||||||||||||||
| Market-Based Businesses and Other | 133 | — | 133 | ||||||||||||||
| Total operating revenues | $ | 878 | $ | 10 | $ | 888 |
(a)Includes revenues associated with provisional rates, alternative revenue programs, lease contracts and intercompany rent, which are outside the scope of ASC 606, and accounted for under other existing GAAP.
Contract Balances
Contract assets and contract liabilities are the result of timing differences between revenue recognition, billings and cash collections. In Market-Based Businesses and Other, certain contracts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Contract assets are recorded when billing occurs subsequent to revenue recognition and are reclassified to accounts receivable when billed and the right to consideration becomes unconditional. Contract liabilities are recorded when the Company receives advances from customers prior to satisfying contractual performance obligations, particularly for construction contracts and home warranty protection program contracts, and are recognized as revenue when the associated performance obligations are satisfied.
Contract assets of $78 million and $71 million are included in unbilled revenues on the Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021, respectively. There were $18 million of contract assets added during the three months ended March 31, 2022, and $11 million of contract assets were transferred to accounts receivable during the same period. There were $19 million of contract assets added during the three months ended March 31, 2021, and $8 million of contract assets were transferred to accounts receivable during the same period.
Contract liabilities of $20 million and $19 million are included in other current liabilities on the Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021, respectively. There were $36 million of contract liabilities added during the three months ended March 31, 2022, and $35 million of contract liabilities were recognized as revenue during the same period. There were $57 million of contract liabilities added during the three months ended March 31, 2021, and $48 million of contract liabilities were recognized as revenue during the same period.
Remaining Performance Obligations
Remaining performance obligations (“RPOs”) represent revenues the Company expects to recognize in the future from contracts that are in progress. The Company enters into agreements for the provision of services to water and wastewater facilities for the U.S. military, municipalities and other customers. As of March 31, 2022, the Company’s operation and maintenance (“O&M”) and capital improvement contracts in Market-Based Businesses and Other have RPOs. Contracts with the U.S. government for work on various military installations expire between 2051 and 2071 and have RPOs of $6.2 billion as of March 31, 2022, as measured by estimated remaining contract revenue. Such contracts are subject to customary termination provisions held by the U.S. government, prior to the agreed-upon contract expiration. Contracts with municipalities and commercial customers expire between 2022 and 2038 and have RPOs of $580 million as of March 31, 2022, as measured by estimated remaining contract revenue. Some of the Company’s long-term contracts to operate and maintain the federal government’s, a municipality’s or other party’s water or wastewater treatment and delivery facilities include responsibility for certain maintenance for some of those facilities, in exchange for an annual fee. Unless specifically required to perform certain maintenance activities, the maintenance costs are recognized when the maintenance is performed.
Note 5: Acquisitions and Divestitures
Regulated Businesses
During the three months ended March 31, 2022, the Company closed on the acquisition of four regulated water and wastewater systems for a total aggregate purchase price of $5 million. Assets acquired from these acquisitions consisted principally of utility plant.
On April 6, 2021, the Company’s Pennsylvania subsidiary entered into an Asset Purchase Agreement with the York City Sewer Authority (the “Seller”) and the City of York, with respect to the purchase of the Seller’s public wastewater collection and treatment system assets (the “System Assets”). On April 14, 2022, the Pennsylvania Public Utility Commission (“PaPUC”) approved the Company’s Pennsylvania subsidiary’s application to acquire the System Assets from the Seller for a purchase price of $235 million, plus an amount of average daily revenue calculated for the period between the final meter reading and the date of closing. The System Assets serve, directly and indirectly through bulk contracts, more than 45,000 customers. Assuming no successful contest of the PaPUC’s approval occurs within 30 days thereafter, this approval would satisfy a significant remaining condition to the closing of the transaction, which is expected to occur by or before mid-June 2022.
On March 29, 2021, the Company’s New Jersey subsidiary entered into an agreement to acquire the water and wastewater assets of Egg Harbor City for $22 million. The water and wastewater systems currently serve approximately 1,500 customers each, or 3,000 combined, and are being sold through the New Jersey Water Infrastructure Protection Act process. The Company expects to close this acquisition in the second half of 2022, pending regulatory approval.
Sale of New York American Water Company, Inc.
On January 1, 2022, the Company completed the previously disclosed sale of its regulated utility operations in New York to Liberty Utilities (Eastern Water Holdings) Corp. (“Liberty”), an indirect, wholly owned subsidiary of Algonquin Power & Utilities Corp. Liberty purchased from the Company all of the capital stock of the Company’s New York subsidiary for a purchase price of $608 million in cash. During the first quarter of 2022, the Company recognized a loss on sale of $2 million.
Sale of Michigan American Water Company
On February 4, 2022, the Company completed the sale of its operations in Michigan for $6 million.
Sale of Homeowner Services Group
On December 9, 2021, the Company sold all of the equity interests in subsidiaries that comprised the Company’s Homeowner Services Group (“HOS”) to a wholly owned subsidiary of funds advised by Apax Partners LLP, a global private equity advisory firm (the “Buyer”), for total consideration of approximately $1.275 billion, resulting in pre-tax gain on sale of $748 million during the fourth quarter of 2021. The consideration was comprised of $480 million in cash, a seller promissory note issued by the Buyer in the principal amount of $720 million, and a contingent cash payment of $75 million payable upon satisfaction of certain conditions on or before December 31, 2023. See Note 13—Fair Value of Financial Information for additional information relating to the seller promissory note and contingent cash payment. During the first quarter of 2022, the Company recorded a post-close adjustment totaling approximately $10 million pre-tax, which is included in Other, net on the Consolidated Statements of Operations.
The seller note has a five-year term, is payable in cash, and bears interest at a rate of 7.00% per year during the term. The Company recognized $13 million of interest income during the first quarter of 2022 from the seller note.
The Company and the Buyer also entered into a revenue share agreement, pursuant to which the Company is to receive 10% of the revenue generated from customers who are billed for home warranty services through an applicable Company subsidiary (an “on-bill” arrangement), and 15% of the revenue generated from any future on-bill arrangements entered into after the closing. Unless earlier terminated, this agreement has a term of up to 15 years, which may be renewed for up to two five-year periods. The Company recognized $2 million of income during the first quarter of 2022 from the revenue share agreement, which is included in Other, net on the Consolidated Statements of Operations.
The pro forma impact of the Company’s acquisitions was not material to the Consolidated Statements of Operations for the periods ended March 31, 2022 and 2021.
Note 6: Shareholders’ Equity
Accumulated Other Comprehensive Loss
Presented in the table below are the changes in accumulated other comprehensive loss by component, net of tax, for the three months ended March 31, 2022 and 2021, respectively:
| Defined Benefit Pension Plans | Loss on Cash Flow Hedges | Accumulated Other Comprehensive Loss | |||||||||||||||||||||||||||
| Employee Benefit Plan Funded Status | Amortization of Prior Service Cost | Amortization of Actuarial Loss | |||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | (107) | $ | 1 | $ | 67 | $ | (6) | $ | (45) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | — | — | 1 | — | 1 | ||||||||||||||||||||||||
| Net other comprehensive income | — | — | 1 | — | 1 | ||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | (107) | $ | 1 | $ | 68 | $ | (6) | $ | (44) | |||||||||||||||||||
| Balance as of December 31, 2020 | $ | (106) | $ | 1 | $ | 63 | $ | (7) | $ | (49) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | — | — | 1 | — | 1 | ||||||||||||||||||||||||
| Net other comprehensive income | — | — | 1 | — | 1 | ||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | (106) | $ | 1 | $ | 64 | $ | (7) | $ | (48) |
The Company does not reclassify the amortization of defined benefit pension cost components from accumulated other comprehensive loss directly to net income in its entirety, as a portion of these costs have been deferred as a regulatory asset. These accumulated other comprehensive loss components are included in the computation of net periodic pension cost.
The amortization of the gain (loss) on cash flow hedges is reclassified to net income during the period incurred and is included in interest, net in the accompanying Consolidated Statements of Operations.
Dividends
On March 1, 2022, the Company paid a quarterly cash dividend of $0.6025 per share to shareholders of record as of February 8, 2022.
On April 27, 2022, the Company’s Board of Directors declared a quarterly cash dividend payment of $0.6550 per share, payable on June 1, 2022 to shareholders of record as of May 10, 2022. Future dividends, when and as declared at the discretion of the Board of Directors, will be dependent upon future earnings and cash flows, compliance with various regulatory, financial and legal requirements, and other factors. See Note 10—Shareholders' Equity in the Notes to Consolidated Financial Statements in the Company’s Form 10-K for additional information regarding the payment of dividends on the Company’s common stock.
Note 7: Long-Term Debt
During the three months ended March 31, 2022, American Water Capital Corp. (“AWCC”) and the Company’s regulated subsidiaries issued in the aggregate $11 million of private activity bonds and government funded debt in multiple transactions with annual interest rates of 0.74%, maturing in 2041. During the three months ended March 31, 2022, AWCC and the Company’s regulated subsidiaries made sinking fund payments for, or repaid at maturity, $5 million in aggregate principal amount of outstanding long-term debt, with annual interest rates ranging from 0.00% to 12.25%, a weighted average interest rate of 3.06%, and maturity dates ranging from 2022 to 2048.
In April 2022, the Company entered into several 10-year treasury lock agreements, with notional amounts totaling $375 million, to reduce interest rate exposure on debt expected to be issued in 2022. These treasury lock agreements have an average fixed interest rate of 2.89%. The Company designated these treasury lock agreements as cash flow hedges, with their fair value recorded in accumulated other comprehensive gain or loss. Upon termination, the cumulative gain or loss recorded in accumulated other comprehensive gain or loss will be amortized through interest, net over the term of the new debt.
Note 8: Short-Term Debt
Liquidity needs for capital investment, working capital and other financial commitments are generally funded through cash flows from operations, public and private debt offerings, commercial paper markets and, if and to the extent necessary, borrowings under the AWCC revolving credit facility. Additionally, proceeds from the aforementioned sales of HOS and the Company’s New York subsidiary will be used primarily for capital investment in the Regulated Businesses. The revolving credit facility provides $2.25 billion in aggregate total commitments from a diversified group of financial institutions. The termination date of the credit agreement with respect to AWCC’s revolving credit facility is March 21, 2025. The facility is used principally to support AWCC’s commercial paper program, to provide additional liquidity support and to provide a sub-limit of up to $150 million for letters of credit. As of March 31, 2022 and December 31, 2021, there were no borrowings outstanding under the revolving credit facility.
Short-term debt consists of commercial paper and credit facility borrowings totaling $321 million and $584 million as of March 31, 2022 and December 31, 2021, respectively. The weighted-average interest rate on AWCC’s outstanding short-term borrowings was approximately 0.26% and 0.25% at March 31, 2022 and December 31, 2021, respectively. As of March 31, 2022 and December 31, 2021, there were no commercial paper or credit facility borrowings outstanding with maturities greater than three months.
Presented in the tables below is 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 March 31, 2022 | |||||||||||||||||
| Commercial Paper Limit | Letters of Credit | Total (a) | |||||||||||||||
| (In millions) | |||||||||||||||||
| Total availability | $ | 2,100 | $ | 150 | $ | 2,250 | |||||||||||
| Outstanding debt | (321) | (76) | (397) | ||||||||||||||
| Remaining availability as of March 31, 2022 | $ | 1,779 | $ | 74 | $ | 1,853 |
(a)Total remaining availability of $1.85 billion as of March 31, 2022 may be accessed through revolver draws.
| As of December 31, 2021 | |||||||||||||||||
| Commercial Paper Limit | Letters of Credit | Total (a) | |||||||||||||||
| (In millions) | |||||||||||||||||
| Total availability | $ | 2,100 | $ | 150 | $ | 2,250 | |||||||||||
| Outstanding debt | (584) | (76) | (660) | ||||||||||||||
| Remaining availability as of December 31, 2021 | $ | 1,516 | $ | 74 | $ | 1,590 |
(a)Total remaining availability of $1.59 billion as of December 31, 2021 may be accessed through revolver draws.
Presented in the table below is the Company’s total available liquidity as of March 31, 2022 and December 31, 2021, respectively:
| Cash and Cash Equivalents | Availability on Revolving Credit Facility | Total Available Liquidity | |||||||||||||||
| (In millions) | |||||||||||||||||
| Available liquidity as of March 31, 2022 | $ | 75 | $ | 1,853 | $ | 1,928 | |||||||||||
| Available liquidity as of December 31, 2021 | $ | 116 | $ | 1,590 | $ | 1,706 |
Note 9: Income Taxes
The Company’s effective income tax rate was 18.1% and 14.2% for the three months ended March 31, 2022 and 2021, respectively. The Company’s effective income tax rate reflects the amortization of EADIT pursuant to regulatory orders.
Note 10: Pension and Other Postretirement Benefits
Presented in the table below are the components of net periodic benefit credit:
| For the Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Components of net periodic pension benefit credit: | |||||||||||||||||||||||
| Service cost | $ | 8 | $ | 9 | |||||||||||||||||||
| Interest cost | 16 | 17 | |||||||||||||||||||||
| Expected return on plan assets | (31) | (32) | |||||||||||||||||||||
| Amortization of prior service credit | (1) | (1) | |||||||||||||||||||||
| Amortization of actuarial loss | 5 | 7 | |||||||||||||||||||||
| Net periodic pension benefit credit | $ | (3) | $ | — | |||||||||||||||||||
| Components of net periodic other postretirement benefit credit: | |||||||||||||||||||||||
| Service cost | $ | 1 | $ | 1 | |||||||||||||||||||
| Interest cost | 3 | 2 | |||||||||||||||||||||
| Expected return on plan assets | (5) | (5) | |||||||||||||||||||||
| Amortization of prior service credit | (8) | (8) | |||||||||||||||||||||
| Net periodic other postretirement benefit credit | $ | (9) | $ | (10) |
The Company contributed $9 million for the funding of its defined benefit pension plans for each of the three months ended March 31, 2022 and 2021. There were $10 million of contributions for the funding of the Company’s other postretirement benefit plans for the three months ended March 31, 2022 and no such contributions for the three months ended March 31, 2021. The Company expects to make pension contributions to the plan trusts of $28 million during the remainder of 2022.
Note 11: Commitments and Contingencies
Contingencies
The Company is routinely involved in legal actions incident to the normal conduct of its business. As of March 31, 2022, the Company has accrued approximately $6 million of probable loss contingencies and has estimated that the maximum amount of losses associated with reasonably possible loss contingencies that can be reasonably estimated is $3 million. For certain matters, claims and actions, the Company is unable to estimate possible losses. The Company believes that damages or settlements, if any, recovered by plaintiffs in such matters, claims or actions, other than as described in this Note 11—Commitments and Contingencies, will not have a material adverse effect on the Company.
West Virginia Elk River Freedom Industries Chemical Spill
On June 8, 2018, the U.S. District Court for the Southern District of West Virginia granted final approval of a settlement class and global class action settlement (the “Settlement”) for all claims and potential claims by all class members (collectively, the “West Virginia Plaintiffs”) arising out of the January 2014 Freedom Industries, Inc. chemical spill in West Virginia. The effective date of the Settlement was July 16, 2018. Under the terms and conditions of the Settlement, WVAWC and certain other Company-affiliated entities did not admit, and will not admit, any fault or liability for any of the allegations made by the West Virginia Plaintiffs in any of the actions that were resolved.
The aggregate pre-tax amount contributed by WVAWC of the $126 million portion of the Settlement with respect to the Company, net of insurance recoveries, is $19 million. As of March 31, 2022, $0.5 million of the aggregate Settlement amount of $126 million has been reflected in accrued liabilities, and $0.5 million in offsetting insurance receivables have been reflected in other current assets on the Consolidated Balance Sheets. The amount reflected in accrued liabilities as of March 31, 2022 reflects reductions in the liability and appropriate reductions to the offsetting insurance receivable reflected in other current assets, associated with payments made to the Settlement fund, the receipt of a determination by the Settlement fund’s appeal adjudicator on all remaining medical claims and the calculation of remaining attorneys’ fees and claims administration costs. The Company funded WVAWC’s contributions to the Settlement through existing sources of liquidity.
Dunbar, West Virginia Water Main Break Class Action Litigation
On the evening of June 23, 2015, a 36-inch pre-stressed concrete transmission water main, installed in the early 1970s, failed. The water main is part of the West Relay pumping station located in the City of Dunbar, West Virginia and owned by WVAWC. The failure of the main caused water outages and low pressure for up to approximately 25,000 WVAWC customers. In the early morning hours of June 25, 2015, crews completed a repair, but that same day, the repair developed a leak. On June 26, 2015, a second repair was completed and service was restored that day to approximately 80% of the impacted customers, and to the remaining approximately 20% by the next morning. The second repair showed signs of leaking, but the water main was usable until June 29, 2015 to allow tanks to refill. The system was reconfigured to maintain service to all but approximately 3,000 customers while a final repair was being completed safely on June 30, 2015. Water service was fully restored by July 1, 2015 to all customers affected by this event.
On June 2, 2017, a complaint captioned Jeffries, et al. v. West Virginia-American Water Company was filed in West Virginia Circuit Court in Kanawha County on behalf of an alleged class of residents and business owners who lost water service or pressure as a result of the Dunbar main break. The complaint alleges breach of contract by WVAWC for failure to supply water, violation of West Virginia law regarding the sufficiency of WVAWC’s facilities and negligence by WVAWC in the design, maintenance and operation of the water system. The Jeffries plaintiffs seek unspecified alleged damages on behalf of the class for lost profits, annoyance and inconvenience, and loss of use, as well as punitive damages for willful, reckless and wanton behavior in not addressing the risk of pipe failure and a large outage.
In February 2020, the Jeffries plaintiffs filed a motion seeking class certification on the issues of breach of contract and negligence, and to determine the applicability of punitive damages and a multiplier for those damages if imposed. In July 2020, the Circuit Court entered an order granting the Jeffries plaintiffs’ motion for certification of a class regarding certain liability issues but denying certification of a class to determine a punitive damages multiplier. In August 2020, WVAWC filed a Petition for Writ of Prohibition in the Supreme Court of Appeals of West Virginia seeking to vacate or remand the Circuit Court’s order certifying the issues class. On January 28, 2021, the Supreme Court of Appeals remanded the case back to the Circuit Court for further consideration in light of a decision issued in another case relating to the class certification issues raised on appeal. On July 16, 2021, oral argument was heard by the Circuit Court on the issue of addressing the Supreme Court of Appeals’ remand. This matter remains pending.
The Company and WVAWC believe that WVAWC has valid, meritorious defenses to the claims raised in this class action complaint. WVAWC is vigorously defending itself against these allegations. The Company cannot currently determine the likelihood of a loss, if any, or estimate the amount of any loss or a range of such losses related to this proceeding.
Chattanooga, Tennessee Water Main Break Class Action Litigation
On September 12, 2019, the Company’s Tennessee subsidiary (“TAWC”), experienced a leak in a 36-inch water transmission main, which caused service fluctuations or interruptions to TAWC customers and the issuance of a boil water notice. TAWC repaired the main by early morning on September 14, 2019, and restored full water service by the afternoon of September 15, 2019, with the boil water notice lifted for all customers on September 16, 2019.
On September 17, 2019, a complaint captioned Bruce, et al. v. American Water Works Company, Inc., et al. was filed in the Circuit Court of Hamilton County, Tennessee against TAWC, the Company and American Water Works Service Company, Inc. (“Service Company” and, together with TAWC and the Company, collectively, the “Tennessee-American Water Defendants”), on behalf of a proposed class of individuals or entities who lost water service or suffered monetary losses as a result of the Chattanooga incident (the “Tennessee Plaintiffs”). The complaint alleged breach of contract and negligence against the Tennessee-American Water Defendants, as well as an equitable remedy of piercing the corporate veil. In the complaint as originally filed, the Tennessee Plaintiffs were seeking an award of unspecified alleged damages for wage losses, business and economic losses, out-of-pocket expenses, loss of use and enjoyment of property and annoyance and inconvenience, as well as punitive damages, attorneys’ fees and pre- and post-judgment interest. In September 2020, the court dismissed all of the Tennessee Plaintiffs’ claims in their complaint, except for the breach of contract claims against TAWC, which remain pending. In October 2020, TAWC answered the complaint, and the parties have been engaging in discovery. The court has entered an agreed scheduling order, which sets a hearing in October 2022 to address the question of class certification.
TAWC and the Company believe that TAWC has meritorious defenses to the claims raised in this class action complaint, and TAWC is vigorously defending itself against these allegations. The Company cannot currently determine the likelihood of a loss, if any, or estimate the amount of any loss or a range of such losses related to this proceeding.
Alternative Water Supply in Lieu of Carmel River Diversions
Compliance with Orders to Reduce Carmel River Diversions—Monterey Peninsula Water Supply Project
Under a 2009 order (the “2009 Order”) of the State Water Resources Control Board (the “SWRCB”), the Company’s California subsidiary (“Cal Am”) is required to decrease significantly its yearly diversions of water from the Carmel River according to a set reduction schedule. In 2016, the SWRCB issued an order (the “2016 Order”) approving a deadline of December 31, 2021 for Cal Am’s compliance with these prior orders.
Cal Am is currently involved in developing the Monterey Peninsula Water Supply Project (the “Water Supply Project”), which includes the construction of a desalination plant, to be owned by Cal Am, and the construction of wells that would supply water to the desalination plant. In addition, the Water Supply Project also includes Cal Am’s purchase of water from a groundwater replenishment project (the “GWR Project”) between Monterey One Water and the Monterey Peninsula Water Management District (the “MPWMD”). The Water Supply Project is intended, among other things, to fulfill Cal Am’s obligations under the 2009 Order and the 2016 Order.
Cal Am’s ability to move forward on the Water Supply Project is subject to administrative review by the CPUC and other government agencies, obtaining necessary permits, and intervention from other parties. In September 2016, the CPUC unanimously approved a final decision to authorize Cal Am to enter into a water purchase agreement for the GWR Project and to construct a pipeline and pump station facilities and recover up to $50 million in associated incurred costs plus an allowance for funds used during construction (“AFUDC”), subject to meeting certain criteria.
In September 2018, the CPUC unanimously approved another final decision finding that the Water Supply Project meets the CPUC’s requirements for a certificate of public convenience and necessity and an additional procedural phase was not necessary to consider alternative projects. The CPUC’s 2018 decision concludes that the Water Supply Project is the best project to address estimated future water demands in Monterey, and, in addition to the cost recovery approved in its 2016 decision, adopts Cal Am’s cost estimates for the Water Supply Project, which amounted to an aggregate of $279 million plus AFUDC at a rate representative of Cal Am’s actual financing costs. The 2018 final decision specifies the procedures for recovery of all of Cal Am’s prudently incurred costs associated with the Water Supply Project upon its completion, subject to the frameworks included in the final decision related to cost caps, operation and maintenance costs, financing, ratemaking and contingency matters. The reasonableness of the Water Supply Project costs will be reviewed by the CPUC when Cal Am seeks cost recovery for the Water Supply Project. Cal Am has incurred $192 million in aggregate costs as of March 31, 2022 related to the Water Supply Project, which includes $50 million in AFUDC.
In September 2021, Cal Am, Monterey One Water and the MPWMD reached an agreement on Cal Am’s purchase of additional water from an expansion to the GWR Project, which is not expected to produce additional water until 2024 at the earliest. The amended and restated water purchase agreement for the GWR Project expansion is subject to review and approval of the CPUC, and on November 29, 2021, Cal Am filed an application with the CPUC seeking review and approval of the amended and restated water purchase agreement. Cal Am is also requesting rate base treatment of the additional capital investment for certain Cal Am facilities required to maximize the water supply from the expansion to the GWR Project and a related Aquifer Storage and Recovery Project, totaling approximately $81 million. This amount is in addition to, and consistent in regulatory treatment with, the prior $50 million of cost recovery for facilities associated with the original water purchase agreement, which was approved by the CPUC in its 2016 final decision.
While Cal Am believes that its expenditures to date have been prudent and necessary to comply with the 2009 Order and the 2016 Order, as well as the CPUC’s 2016 and 2018 final decisions, Cal Am cannot currently predict its ability to recover all of its costs and expenses associated with the Water Supply Project and there can be no assurance that Cal Am will be able to recover all of such costs and expenses in excess of the $50 million in construction costs previously approved by the CPUC in its 2016 final decision.
Coastal Development Permit Application
In June 2018, Cal Am submitted a coastal development permit application to the City of Marina (the “City”) for those project components of the Water Supply Project located within the City’s coastal zone. Members of the City’s Planning Commission, as well as City councilpersons, have publicly expressed opposition to the Water Supply Project. In May 2019, the City issued a notice of final local action based upon the denial by the Planning Commission of Cal Am’s coastal development permit application. Thereafter, Cal Am appealed this decision to the California Coastal Commission (the “Coastal Commission”), as permitted under the City’s code and the California Coastal Act. At the same time, Cal Am submitted an application to the Coastal Commission for a coastal development permit for those project components located within the Coastal Commission’s original jurisdiction. In October 2019, staff of the Coastal Commission issued a report recommending a denial of Cal Am’s application for a coastal development permit with respect to the Water Supply Project, largely based on a memorandum prepared by the general manager of the MPWMD that contradicted findings made by the CPUC in its final decision approving the Water Supply Project. In November 2019, discussions between staffs of the Coastal Commission and the CPUC took place regarding the Coastal Commission staff recommendation, at which time the CPUC raised questions about the Coastal Commission staff’s findings on water supply and demand, groundwater impacts and the viability of a project that the Coastal Commission staff believes may be a possible alternative to the Water Supply Project.
In August 2020, the staff of the Coastal Commission released a report again recommending denial of Cal Am’s application for a coastal development permit. Although the report concluded that the Water Supply Project would have a negligible impact on groundwater resources, the report also concluded it would impact other coastal resources, such as environmentally sensitive habitat areas and wetlands, and that the Coastal Commission staff believes that a feasible alternative project exists that would avoid those impacts. The staff’s report also noted disproportionate impacts to communities of concern. In September 2020, Cal Am withdrew its original jurisdiction application to allow additional time to address the Coastal Commission staff’s environmental justice concerns. The withdrawal of the original jurisdiction application did not impact Cal Am’s appeal of the City’s denial, which remains pending before the Coastal Commission. Cal Am refiled the original jurisdiction application in November 2020. In December 2020, the Coastal Commission sent to Cal Am a notice of incomplete application, identifying certain additional information needed to consider the application complete. In March 2021, Cal Am provided responses to the Coastal Commission’s notice of incomplete application. On June 18, 2021, the Coastal Commission responded, acknowledging the responses and requesting certain additional information before the application could be considered complete. Cal Am responded with the requested additional information on January 11, 2022, and on February 8, 2022, the Coastal Commission requested additional information. The original jurisdiction application remains pending.
Cal Am continues to work constructively with all appropriate agencies to provide necessary information in connection with obtaining required approvals for the Water Supply Project. However, there can be no assurance that the Water Supply Project in its current configuration will be completed on a timely basis, if ever. Beginning in January 2022, Cal Am expects to be able to comply with the diversion reduction requirements contained in the 2016 Order, but continued compliance with the diversion reduction requirements for 2023 and future years will depend on successful development of alternate water supply sources, sufficient to meet customer demand. The 2009 Order and the 2016 Order remain in effect until Cal Am certifies to the SWRCB, and the SWRCB concurs, that Cal Am has obtained a permanent supply of water to substitute for past unauthorized Carmel River diversions. While the Company cannot currently predict the likelihood or result of any adverse outcome associated with these matters, further attempts to comply with the 2009 Order and the 2016 Order may result in material additional costs and obligations to Cal Am, including fines and penalties against Cal Am in the event of noncompliance with the 2009 Order and the 2016 Order.
Note 12: Earnings per Common Share
Presented in the table below is a reconciliation of the numerator and denominator for the basic and diluted EPS calculations:
| For the Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income attributable to common shareholders | $ | 158 | $ | 133 | |||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average common shares outstanding—Basic | 182 | 181 | |||||||||||||||||||||
| Effect of dilutive common stock equivalents | — | 1 | |||||||||||||||||||||
| Weighted-average common shares outstanding—Diluted | 182 | 182 |
The effect of dilutive common stock equivalents is related to outstanding stock options, restricted stock units (“RSUs”) and performance stock units (“PSUs”) granted under the Company’s 2007 Omnibus Equity Compensation Plan and outstanding RSUs and PSUs granted under the Company’s 2017 Omnibus Equity Compensation Plan, as well as estimated shares to be purchased under the Company’s 2017 Nonqualified Employee Stock Purchase Plan. Less than one million share-based awards were excluded from the computation of diluted EPS for the three months ended March 31, 2022 and 2021, because their effect would have been anti-dilutive under the treasury stock method.
Note 13: Fair Value of Financial Information
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Current assets and current liabilities—The carrying amounts reported on the Consolidated Balance Sheets for current assets and current liabilities, including revolving credit debt, due to the short-term maturities and variable interest rates, approximate their fair values.
Seller promissory note from the sale of HOS — The carrying amount reported on the Consolidated Balance Sheets for the seller promissory note from the sale of HOS is $720 million as of March 31, 2022 and December 31, 2021. This amount represents the principal amount owed under the loan. The fair values of the seller note, including any impact of interest rates, approximated $700 million and $720 million as March 31, 2022 and December 31, 2021, respectively. The seller note is classified as Level 3 within the fair value hierarchy.
Preferred stock with mandatory redemption requirements and long-term debt—The fair values of preferred stock with mandatory redemption requirements and long-term debt are categorized within the fair value hierarchy based on the inputs that are used to value each instrument. The fair value of long-term debt classified as Level 1 is calculated using quoted prices in active markets. Level 2 instruments are valued using observable inputs and Level 3 instruments are valued using observable and unobservable inputs.
Presented in the tables below are the carrying amounts, including fair value adjustments previously recognized in acquisition purchase accounting, and the fair values of the Company’s financial instruments:
| As of March 31, 2022 | |||||||||||||||||||||||||||||
| Carrying Amount | At Fair Value | ||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||
| Preferred stock with mandatory redemption requirements | $ | 3 | $ | — | $ | — | $ | 3 | $ | 3 | |||||||||||||||||||
| Long-term debt (excluding finance lease obligations) | 10,404 | 9,104 | 55 | 1,522 | 10,681 | ||||||||||||||||||||||||
| As of December 31, 2021 | |||||||||||||||||||||||||||||
| Carrying Amount | At Fair Value | ||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||
| Preferred stock with mandatory redemption requirements | $ | 4 | $ | — | $ | — | $ | 6 | $ | 6 | |||||||||||||||||||
| Long-term debt (excluding finance lease obligations) | 10,396 | 10,121 | 60 | 1,637 | 11,818 |
Recurring Fair Value Measurements
Presented in the tables below are assets and liabilities measured and recorded at fair value on a recurring basis and their level within the fair value hierarchy:
| As of March 31, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Restricted funds | $ | 21 | $ | — | $ | — | $ | 21 | |||||||||||||||
| Rabbi trust investments | 22 | — | — | 22 | |||||||||||||||||||
| Deposits | 27 | — | — | 27 | |||||||||||||||||||
| Other investments | 19 | — | — | 19 | |||||||||||||||||||
| Contingent cash payment from the sale of HOS | — | — | 72 | 72 | |||||||||||||||||||
| Total assets | 89 | — | 72 | 161 | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Deferred compensation obligations | 25 | — | — | 25 | |||||||||||||||||||
| Total liabilities | 25 | — | — | 25 | |||||||||||||||||||
| Total assets | $ | 64 | $ | — | $ | 72 | $ | 136 |
| As of December 31, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Restricted funds | $ | 21 | $ | — | $ | — | $ | 21 | |||||||||||||||
| Rabbi trust investments | 23 | — | — | 23 | |||||||||||||||||||
| Deposits | 27 | — | — | 27 | |||||||||||||||||||
| Other investments | 17 | — | — | 17 | |||||||||||||||||||
| Contingent cash payment from the sale of HOS | — | — | 72 | 72 | |||||||||||||||||||
| Total assets | 88 | — | 72 | 160 | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Deferred compensation obligations | 27 | — | — | 27 | |||||||||||||||||||
| Total liabilities | 27 | — | — | 27 | |||||||||||||||||||
| Total assets | $ | 61 | $ | — | $ | 72 | $ | 133 |
Restricted funds—The Company’s restricted funds primarily represent proceeds received from financings for the construction and capital improvement of facilities and from customers for future services under operation, maintenance and repair projects.
Rabbi trust investments—The Company’s rabbi trust investments consist of equity and index funds from which supplemental executive retirement plan benefits and deferred compensation obligations can be paid. The Company includes these assets in other long-term assets on the Consolidated Balance Sheets.
Deposits—Deposits include escrow funds and certain other deposits held in trust. The Company includes cash deposits in other current assets on the Consolidated Balance Sheets.
Deferred compensation obligations—The Company’s deferred compensation plans allow participants to defer certain cash compensation into notional investment accounts. The Company includes such plans in other long-term liabilities on the Consolidated Balance Sheets. The value of the Company’s deferred compensation obligations is based on the market value of the participants’ notional investment accounts. The notional investments are comprised primarily of mutual funds, which are based on observable market prices.
Mark-to-market derivative assets and liabilities—The Company employs derivative financial instruments in the form of variable-to-fixed interest rate swaps and treasury lock agreements, classified as economic hedges and cash flow hedges, respectively, in order to fix the interest cost on existing or forecasted debt. The Company may use fixed-to-floating interest rate swaps, typically designated as fair-value hedges, to achieve a targeted level of variable-rate debt as a percentage of total debt. The Company uses a calculation of future cash inflows and estimated future outflows, which are discounted, to determine the current fair value. Additional inputs to the present value calculation include the contract terms, counterparty credit risk, interest rates and market volatility. The Company had no significant mark-to-market derivatives outstanding as of March 31, 2022.
Other investments—Other investments primarily represent money market funds used for active employee benefits. The Company includes other investments in other current assets on the Consolidated Balance Sheets.
Contingent cash payment from the sale of HOS—The Company’s contingent cash payment derivative included as part of the consideration from the sale of HOS is included in other long-term assets on the Consolidated Balance Sheets. The fair value of the contingent cash payment is estimated using the probability of the outcome of receipt of the $75 million, a Level 3 input.
Note 14: Leases
The Company has operating and finance leases involving real property, including facilities, utility assets, vehicles, and equipment. Certain operating leases have renewal options ranging from one to 60 years. The exercise of lease renewal options is at the Company’s sole discretion. Renewal options that the Company was reasonably certain to exercise are included in the Company’s right-of-use (“ROU”) assets. Certain operating leases contain the option to purchase the leased property. The operating leases for real property, vehicles and equipment will expire over the next 38 years, five years, and five years, respectively.
The Company participates in a number of arrangements with various public entities (“Partners”) in West Virginia. Under these arrangements, the Company transferred a portion of its utility plant to the Partners in exchange for an equal principal amount of Industrial Development Bonds (“IDBs”) issued by the Partners under the Industrial Development and Commercial Development Bond Act. The Company leased back the utility plant under agreements for a period of 30 to 40 years. The Company has recorded these agreements as finance leases in property, plant and equipment, as ownership of the assets will revert back to the Company at the end of the lease term. The carrying value of the finance lease assets was $146 million as of March 31, 2022 and December 31, 2021. The Company determined that the finance lease obligations and the investments in IDBs meet the conditions for offsetting, and as such, are reported net on the Consolidated Balance Sheets and excluded from the finance lease disclosure presented below.
The Company also enters into O&M agreements with the Partners. The Company pays an annual fee for use of the Partners’ assets in performing under the O&M agreements. The O&M agreements are recorded as operating leases, and future annual use fees of $3 million in 2022 and $4 million in 2023 through 2026, and $48 million thereafter, are included in operating lease ROU assets and operating lease liabilities on the Consolidated Balance Sheets.
Rental expenses under operating and finance leases were $3 million for the three months ended March 31, 2022 and March 31, 2021, respectively.
For the three months ended March 31, 2022, cash paid for amounts in lease liabilities, which includes operating and financing cash flows from operating and finance leases, was $3 million. For the three months ended March 31, 2022, there were ROU assets obtained in exchange for new operating lease liabilities of $1 million.
As of March 31, 2022, the weighted-average remaining lease term of the finance lease and operating leases were four years and 18 years, respectively, and the weighted-average discount rate of the finance lease and operating leases were 12% and 4%, respectively.
The future maturities of lease liabilities at March 31, 2022 are $9 million in 2022, $9 million in 2023, $8 million in 2024, $8 million in 2025, $7 million in 2026 and $88 million thereafter. At March 31, 2022, imputed interest was $43 million.
Note 15: Segment Information
The Company’s operating segments are comprised of the revenue-generating components of its businesses 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 businesses primarily through one reportable segment, the Regulated Businesses segment. “Market-Based Businesses and Other” includes market-based businesses that, individually, do not meet the criteria of a reportable segment in accordance with GAAP, corporate costs that are not allocated to the Company’s operating segments, eliminations of inter-segment transactions and fair value adjustments and associated income and deductions related to acquisitions that have not been allocated to the operating segments for evaluation of performance and allocation of resource purposes. The adjustments related to the acquisitions are reported in Market-Based Businesses and Other as they are excluded from segment performance measures evaluated by management.
As a result of the sale of HOS, the categories which were previously shown as “Market-Based Businesses” and “Other” have been combined and shown as “Market-Based Businesses and Other.” Segment results for the three months ended March 31, 2021 have been adjusted retrospectively to reflect this change.
Presented in the tables below is summarized segment information:
| As of or for the Three Months Ended March 31, 2022 | |||||||||||||||||
| Regulated Businesses | Market-Based Businesses and Other | Consolidated | |||||||||||||||
| Operating revenues | $ | 778 | $ | 64 | $ | 842 | |||||||||||
| Depreciation and amortization | 155 | 3 | 158 | ||||||||||||||
| Total operating expenses, net | 538 | 58 | 596 | ||||||||||||||
| Interest expense | (70) | (30) | (100) | ||||||||||||||
| Interest income | — | 13 | 13 | ||||||||||||||
| Income before income taxes | 196 | (3) | 193 | ||||||||||||||
| Provision for income taxes | 36 | (1) | 35 | ||||||||||||||
| Net income attributable to common shareholders | 160 | (2) | 158 | ||||||||||||||
| Total assets | 22,973 | 2,721 | 25,694 | ||||||||||||||
| Cash paid for capital expenditures | 422 | 2 | 424 |
| As of or for the Three Months Ended March 31, 2021 | |||||||||||||||||
| Regulated Businesses | Market-Based Businesses and Other | Consolidated | |||||||||||||||
| Operating revenues | $ | 755 | $ | 133 | $ | 888 | |||||||||||
| Depreciation and amortization | 147 | 10 | 157 | ||||||||||||||
| Total operating expenses, net | 543 | 116 | 659 | ||||||||||||||
| Interest expense | (71) | (27) | (98) | ||||||||||||||
| Interest income | — | — | — | ||||||||||||||
| Income before income taxes | 163 | (8) | 155 | ||||||||||||||
| Provision for income taxes | 28 | (6) | 22 | ||||||||||||||
| Net income attributable to common shareholders | 135 | (2) | 133 | ||||||||||||||
| Total assets | 22,032 | 2,493 | 24,525 | ||||||||||||||
| Cash paid for capital expenditures | 338 | 4 | 342 |
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