Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read together with the unaudited Consolidated Financial Statements and the Notes thereto included elsewhere in this Form 10-Q, and in the Company’s Form 10-K for the year ended December 31, 2021. 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-Q should be read as applying to all related forward-looking statements whenever they appear in this Form 10-Q. 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” and elsewhere in this Form 10-Q. The Company has a disclosure committee consisting of members of senior management and other key employees involved in the preparation of the Company’s SEC reports. The disclosure committee is actively involved in the review and discussion of the Company’s SEC filings.

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’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.” Services provided by the Company’s utilities are subject to regulation by multiple state utility commissions or other entities engaged in utility regulation, collectively referred to as public utility commissions (“PUCs”). The Company also operates other market-based businesses not subject to economic regulation by state PUCs 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.” See Part I, Item 1—Business in the Company’s Form 10-K for additional information.

Financial Results

For the three months ended March 31, 2022, diluted earnings per share, prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), were $0.87, an increase of $0.14 per diluted share, as compared to the same period in the prior year. This increase was primarily driven by continued growth in the Regulated Businesses from infrastructure investment, acquisitions and organic growth. Also, included in 2022 results is $0.06 per share from interest income earned on the seller note and income earned on the revenue share agreement from the sale of HOS. See Note 5—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional information.

Growth Through Capital Investment in Infrastructure and Regulated Acquisitions

The Company continues 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 plans to invest approximately $2.5 billion across its footprint in 2022. During the first three months of 2022, the Company invested $437 million, primarily in the Regulated Businesses, as discussed below:

Regulated Businesses - Growth and Optimization

• $430 million capital investment in the Regulated Businesses, the majority for infrastructure improvements and replacements; and

• $5 million to fund acquisitions in the Regulated Businesses, which added approximately 1,800 water and wastewater customers, in addition to approximately 3,700 customers added through organic growth.

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.

As of March 31, 2022, the Company has entered into agreements for pending acquisitions in the Regulated Businesses, including the York City Sewer Authority and Egg Harbor City agreements discussed above, to add approximately 77,300 additional customers.

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.

Sale of Michigan American Water Company

On February 4, 2022, the Company completed the sale of its operations in Michigan for $6 million.

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 33.9% for the twelve months ended March 31, 2022, as compared to 34.1% for the twelve months ended March 31, 2021. The ratio reflects the continued focus on operating costs, as well as an increase in operating revenues for the Regulated Businesses after considering the adjustment for the amortization of the excess accumulated deferred income taxes (“EADIT”) shown in the table below.

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. Operating revenues were further adjusted to exclude reductions for the amortization of the EADIT. Also excluded from operation and maintenance expenses is the allocable portion of non-O&M support services costs, mainly depreciation and general taxes, which is reflected in the Regulated Businesses segment as operation and maintenance expenses, but for consolidated financial reporting purposes, is categorized within other line items in the accompanying Consolidated Statements of Operations. The items discussed above were excluded from the O&M efficiency ratio calculation as they are not reflective of management’s ability to increase the efficiency of the Regulated Businesses.

The Company evaluates its operating performance using this ratio, and believes it is useful to investors because it directly measures improvement in the operating performance and efficiency of the Regulated Businesses. This information is derived from the Company’s consolidated financial information but is not presented in its financial statements prepared in accordance with GAAP. This information 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-Q.

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 Twelve Months Ended March 31,
(Dollars in millions)			2022						2021
Total operation and maintenance expenses			$	1,723					$	1,658
Less:
Operation and maintenance expenses—Market-Based Businesses and Other			403						378
Total operation and maintenance expenses—Regulated Businesses			1,320						1,280
Less:
Regulated purchased water expenses			155						152
Allocation of non-operation and maintenance expenses			29						43
Adjusted operation and maintenance expenses—Regulated Businesses (i)			$	1,136					$	1,085
Total operating revenues			$	3,881					$	3,822
Less:
Operating revenues—Market-Based Businesses and Other			474						532
Total operating revenues—Regulated Businesses			3,407						3,290
Less:
Regulated purchased water revenues (a)			155						152
Revenue reductions from the amortization of EADIT			(102)						(46)
Adjusted operating revenues—Regulated Businesses (ii)			$	3,354					$	3,184
Adjusted O&M efficiency ratio—Regulated Businesses (i) / (ii)			33.9		%				34.1		%

(a)The calculation assumes regulated purchased water revenues approximate regulated purchased water expenses.

Regulatory Matters

General Rate Cases and Infrastructure Surcharges

Presented in the table below are annualized incremental revenues, excluding reductions for the amortization of 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 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.

Legislative Updates

During 2022, the Company’s regulatory jurisdictions enacted the following legislation that has been approved but is not yet effective as of April 27, 2022:

• Indiana passed Senate Enrolled Act 272, which requires public reporting of a non-jurisdictional utility’s asset management programs and creates a water and wastewater research and extension program at a state university to serve as a repository for data collected from utilities. Additionally, the legislation establishes oversight and a receivership program in the Indiana Utility Regulatory Commission for non-jurisdictional utilities with violations that create environmental or human health and safety issues. Legislation was signed by the Governor on March 7, 2022 and becomes effective on July 1, 2022.

• Indiana passed water and wastewater utility asset financing legislation, Senate Enrolled Act 273, which authorizes the recovery of property tax in Distribution System Improvement Charge filings. The legislation also permits the Indiana Utility Regulatory Commission to allow recovery through tracking mechanisms for changes in property tax and for costs attributable to referenda or action by elected or appointed individuals. Legislation was signed by the Governor on March 10, 2022 and becomes effective on July 1, 2022.

• Virginia passed Senate Bill 500 and House Bill 182 which requires the Virginia State Corporation Commission, in any future ratemaking proceeding for an investor-owned water/wastewater utility, to evaluate the utility on a stand-alone basis and utilize the utility’s actual end-of-test period capital structure and cost of capital without regard to the cost of capital, capital structure, or investments of any other entities with which the utility may be affiliated. Legislation was signed by the Governor on April 11, 2022 and becomes effective on July 1, 2022.

Condemnation and Eminent Domain

All or portions of the Regulated Businesses’ utility assets could be acquired by state, municipal or other government entities through one or more of the following methods: (i) eminent domain (also known as condemnation); (ii) the right of purchase given or reserved by a municipality or political subdivision when the original certificate of public convenience and necessity (a “CPCN”) was granted; and (iii) the right of purchase given or reserved under the law of the state in which the utility subsidiary was incorporated or from which it received its CPCN. The acquisition consideration related to such a proceeding initiated by a local government may be determined consistent with applicable eminent domain law, or may be negotiated or fixed by appraisers as prescribed by the law of the state or in the particular CPCN.

As such, the Regulated Businesses are periodically subject to condemnation proceedings in the ordinary course of business. For example, a citizens group in Monterey, California successfully added “Measure J” to the November 2018 election ballot asking voters to decide whether the Monterey Peninsula Water Management District (the “MPWMD”) should conduct a feasibility study concerning the potential purchase of the Monterey water service system assets (the “Monterey system assets”) of the Company’s California subsidiary, and, if feasible, to proceed with a purchase of those assets without an additional public vote. This service territory represents approximately 40,000 customers. In November 2018, Measure J was certified to have passed.

In August 2019, the MPWMD’s General Manager issued a report that recommends that the MPWMD board (1) develop criteria to determine which water systems should be considered for acquisition; (2) examine the feasibility of acquiring the Monterey system assets and consider public ownership of smaller systems only if the MPWMD becomes the owner of a larger system; (3) evaluate whether the acquisition of the Monterey system assets by the MPWMD is in the public interest and sufficiently satisfies the criterion of “feasible” as provided in Measure J; (4) ensure there is significant potential for cost savings before agreeing to commence an acquisition; and (5) develop more fully alternate operating plans before deciding whether to consider a Resolution of Necessity.

In November 2019, the MPWMD issued a preliminary valuation and cost of service analysis report, finding in part that (1) an estimate of the Monterey system assets’ total value plus adjustments would be approximately $513 million, (2) the cost of service modeling results indicate significant annual reductions in revenue requirements and projected monthly water bills, and (3) the acquisition of the Monterey system assets by the MPWMD would be economically feasible. In November 2020, the MPWMD certified a final environmental impact report (“FEIR”), analyzing the environmental impacts of the MPWMD’s project to (1) acquire the Monterey system assets through the power of eminent domain, if necessary, and (2) expand its geographic boundaries to include all parts of this system. In February 2021, the MPWMD filed an application with the Local Agency Formation Commission of Monterey County (“LAFCO”) seeking approval to become a retail water provider and annex approximately 58 parcels of land into the MPWMD’s boundaries. In June 2021, LAFCO’s commissioners voted to require a third-party independent financial study as to the feasibility of an acquisition by the MPWMD of the Monterey system assets. On December 6, 2021, LAFCO’s commissioners denied the MPWMD’s application to become a retail water provider, determining that the MPWMD does not have the authority to proceed with a condemnation of the Monterey system assets, and on January 5, 2022, LAFCO’s commissioners confirmed the denial. On February 28, 2022, LAFCO’s commissioners voted to deny the MPWMD’s application for reconsideration of LAFCO’s confirmation of denial. On April 1, 2022, the MPWMD filed a lawsuit against LAFCO challenging its decision to deny the MPWMD’s application seeking approval to become a retail water provider.

Also, five municipalities in the Chicago, Illinois area (approximately 30,300 customers in total) formed a water agency and filed an eminent domain lawsuit against the Company in January 2013, seeking to condemn the water pipeline that serves those five municipalities. Before filing its eminent domain lawsuit, the water agency made an offer of $38 million for the pipeline. The parties have filed with the court updated valuation reports. A valuation trial was originally scheduled for October 2021 but has been continued to June 2022.

Furthermore, the law in certain jurisdictions in which the Regulated Businesses operate provides for eminent domain rights allowing private property owners to file a lawsuit to seek just compensation against a public utility, if a public utility’s infrastructure has been determined to be a substantial cause of damage to that property. In these actions, the plaintiff would not have to prove that the public utility acted negligently. In California, lawsuits have been filed in connection with large-scale natural events such as wildfires. Some of these lawsuits have included allegations that infrastructure of certain utilities triggered the natural event that resulted in damage to the property. In some cases, the PUC has allowed certain costs or losses incurred by the utility to be recovered from customers in rates, but in other cases such recovery in rates has been disallowed. Also, the utility may have obtained insurance that could respond to some or all of such losses, although the utility would be at risk for any losses not ultimately subject to rate or insurance recovery or losses that exceed the limits of such insurance.

Consolidated Results of Operations

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

									For the Three Months Ended March 31,
															2022						2021
(In millions)
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 income (expense)															(53)						(74)
Income before income taxes															193						155
Provision for income taxes															35						22
Net income attributable to common shareholders															$	158					$	133

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 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. This presentation is consistent with how management assesses the results of these businesses.

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.

Regulated Businesses Segment

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

									For the Three Months Ended March 31,
															2022						2021
(In millions)
Operating revenues															$	778					$	755
Operation and maintenance															315						320
Depreciation and amortization															155						147
General taxes															68						76
Other income (expenses)															(44)						(48)
Income before income taxes															196						163
Provision for income taxes															36						28
Net income attributable to common shareholders															160						135

Operating Revenues

Presented in the tables below is information regarding the main components of the Regulated Businesses’ operating revenues:

									For the Three Months Ended March 31,
															2022						2021
(In millions)
Water services:
Residential															$	428					$	430
Commercial															153						144
Fire service															36						37
Industrial															36						32
Public and other															59						53
Total water services															712						696
Wastewater services:
Residential															41						36
Commercial															10						9
Industrial															1						1
Public and other															3						4
Total wastewater services															55						50
Other (a)															11						9
Total operating revenues															$	778					$	755

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

									For the Three Months Ended March 31,
															2022						2021
(Gallons in millions)
Billed water services volumes:
Residential															34,160						36,859
Commercial															16,339						15,898
Industrial															8,619						8,069
Fire service, public and other															11,756						10,863
Total billed water services volumes															70,874						71,689

Included in operating revenues for the three months ended March 31, 2021 was $23 million related to the Company’s New York operations. Excluding the Company’s New York operations, for the three months ended March 31, 2022, operating revenues increased $46 million, primarily due to a $40 million increase from authorized rate increases, including infrastructure surcharges, principally to fund infrastructure investment in various states and a $5 million increase from water and wastewater acquisitions, as well as organic growth in existing systems.

Operation and Maintenance

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

									For the Three Months Ended March 31,
															2022						2021
(In millions)
Employee-related costs															$	126					$	130
Production costs															84						78
Operating supplies and services															57						57
Maintenance materials and supplies															22						24
Customer billing and accounting															13						17
Other															13						14
Total															$	315					$	320

Included in operation and maintenance expense for the three months ended March 31, 2021 was $12 million related to the Company’s New York operations. Excluding the Company’s New York operations, operation and maintenance expense increased $7 million primarily due to higher purchased water usage in the Company’s California subsidiary and increased chemicals costs across several subsidiaries.

Depreciation and Amortization

For the three months ended March 31, 2022, depreciation and amortization increased $8 million, primarily due to additional utility plant placed in service from capital infrastructure investments and acquisitions.

General Taxes

Included in general taxes for the three months ended March 31, 2021 was $12 million related to the Company’s New York operations. Excluding the Company’s New York operations, general taxes increased $4 million primarily due to increased capital investments, including acquisitions and an increase in the New Jersey Gross Receipts Tax.

Provision for Income Taxes

For the three months ended March 31, 2022, the Regulated Businesses’ provision for income taxes increased $8 million. The Regulated Businesses’ effective income tax rate was 18.4% and 17.2% for the three months ended March 31, 2022 and 2021, respectively. The Regulated Businesses’ effective income tax rate for the three months ended March 31, 2022 reflects the amortization of EADIT pursuant to regulatory orders.

Market-Based Businesses and Other

Presented in the table below is information for Market-Based Businesses and Other:

									For the Three Months Ended March 31,
															2022						2021
(In millions)
Operating revenues															$	64					$	133
Operation and maintenance															50						99
Depreciation and amortization															3						10
Interest expense															(30)						(27)
Interest income															13						—
Income before income taxes															(3)						(8)
Provision for income taxes															(1)						(6)
Net income attributable to common shareholders															(2)						(2)

Operating Revenues

For the three months ended March 31, 2022, operating revenues decreased $69 million, due primarily to the sale of HOS.

Operation and Maintenance

For the three months ended March 31, 2022, operation and maintenance expense decreased $49 million primarily due to the sale of HOS.

Depreciation and Amortization

For the three months ended March 31, 2022, depreciation and amortization decreased $7 million primarily due to the sale of HOS.

Interest Income

For the three months ended March 31, 2022, interest income increased $13 million due to interest recognized on the seller note related to the sale of HOS. See Note 5—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional information.

Liquidity and Capital Resources

For a general overview of the sources and uses of capital resources, see the introductory discussion in Part II, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources in the Company’s Form 10-K.

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 AWCC’s revolving credit facility, and, in the future, issuances of equity.

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 in addition to the proceeds from the sales of HOS and the Company’s New York subsidiary. 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.

The Company’s revolving credit facility provides $2.25 billion in aggregate total commitments from a diversified group of financial institutions. The revolving credit facility is used principally to support AWCC’s commercial paper program, to provide additional liquidity support, and to provide for the issuance of up to $150 million in letters of credit. The maximum aggregate principal amount of short-term borrowings authorized for issuance under AWCC’s commercial paper program is $2.10 billion. 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. As of March 31, 2022 and December 31, 2021, there were no borrowings outstanding under the revolving credit facility. 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.

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

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 be 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 Note 8—Short-Term Debt in the Notes to Consolidated Financial Statements for additional information.

Cash Flows from Operating Activities

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

			For the Three Months Ended March 31,
			2022						2021
(In millions)
Net income			$	158					$	133
Add (less):
Depreciation and amortization			158						157
Deferred income taxes and amortization of investment tax credits			(61)						26
Other non-cash activities (a)			(11)						(40)
Changes in working capital (b)			(71)						(88)
Pension and non-pension postretirement benefit contributions			(19)						(9)
Net cash provided by operating activities			$	154					$	179

(a)Includes provision for losses on accounts receivable, pension and non-pension postretirement benefits and other non-cash, net. Details of each component can be found on the Consolidated Statements of Cash Flows.

(b)Changes in working capital include changes to receivables and unbilled revenues, accounts payable and accrued liabilities and other current assets and liabilities, net.

For the three months ended March 31, 2022, cash provided by operating activities decreased $25 million, primarily due to changes in working capital including the contribution of $45 million to the American Water Charitable Foundation which was authorized and accrued in the fourth quarter of 2021 and paid in the first quarter of 2022, partially offset by an increase in net income. The decrease in deferred income taxes from the sale of the Company's New York operations is offset in current taxes payable within other assets and liabilities.

Cash Flows from 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 Three Months Ended March 31,
			2022						2021
(In millions)
Net capital expenditures			$	(424)					$	(342)
Acquisitions			(5)						(3)
Net proceeds from sale of assets			608						—
Other investing activities, net (a)			(20)						(18)
Net cash provided by (used in) investing activities			$	159					$	(363)

(a)Includes removal costs from property, plant and equipment retirements.

For the three months ended March 31, 2022, cash provided by investing activities increased $522 million, primarily due to proceeds of $608 million received from the sale of the Company's New York operations offset by increased payments for capital expenditures. The Company plans to invest approximately $2.5 billion across its footprint in 2022.

Cash Flows from Financing Activities

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

			For the Three Months Ended March 31,
			2022						2021
(In millions)
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
Dividends paid			(109)						(100)
Other financing activities, net (a)			13						(4)
Net cash used in financing activities			$	(353)					$	(293)

(a)Includes proceeds from issuances of common stock under various employee stock plans and the Company’s dividend reinvestment plan, net of taxes paid, and advances and contributions in aid of construction, net of refunds.

For the three months ended March 31, 2022, cash used in financing activities increased $60 million, primarily due to net repayments of commercial paper borrowings during the first quarter of 2022 offset by the repayment in full at maturity of the $500 million term loan during the first quarter of 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 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 March 31, 2022, the Company’s ratio was 0.59 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 April 27, 2022 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 mortgage bonds and tax-exempt securities or borrowings under state revolving funds, to lower the overall cost of debt.

Dividends

For discussion of the Company’s dividends, see Note 6—Shareholders’ Equity in the Notes to Consolidated Financial Statements for additional information.

Application of Critical Accounting Policies and Estimates

Financial condition of the Company, results of operations and cash flows are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. See Part II, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates in the Company’s Form 10-K for a discussion of its critical accounting policies. Additionally, see Note 2—Significant Accounting Policies in the Notes to Consolidated Financial Statements for updates, if any, to the significant accounting policies previously disclosed in the Company’s Form 10-K.

Recent Accounting Standards

See Note 2—Significant Accounting Policies in the Notes to Consolidated Financial Statements for a description of new accounting standards recently adopted or pending adoption.