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)
| September 30, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Property, plant and equipment | $ | 29,062 | $ | 27,413 | |||||||
| Accumulated depreciation | (6,426) | (6,329) | |||||||||
| Property, plant and equipment, net | 22,636 | 21,084 | |||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | 77 | 116 | |||||||||
| Restricted funds | 27 | 20 | |||||||||
| Accounts receivable, net of allowance for uncollectible accounts of $64 and $75, respectively | 358 | 271 | |||||||||
| Unbilled revenues | 273 | 248 | |||||||||
| Materials and supplies | 93 | 57 | |||||||||
| Assets held for sale | — | 683 | |||||||||
| Other | 189 | 159 | |||||||||
| Total current assets | 1,017 | 1,554 | |||||||||
| Regulatory and other long-term assets: | |||||||||||
| Regulatory assets | 1,075 | 1,051 | |||||||||
| Seller promissory note from the sale of the Homeowner Services Group | 720 | 720 | |||||||||
| Operating lease right-of-use assets | 90 | 92 | |||||||||
| Goodwill | 1,143 | 1,139 | |||||||||
| Postretirement benefit assets | 208 | 193 | |||||||||
| Other | 237 | 242 | |||||||||
| Total regulatory and other long-term assets | 3,473 | 3,437 | |||||||||
| Total assets | $ | 27,126 | $ | 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)
| September 30, 2022 | December 31, 2021 | ||||||||||
| CAPITALIZATION AND LIABILITIES | |||||||||||
| Capitalization: | |||||||||||
| Common stock ($0.01 par value; 500,000,000 shares authorized; 187,169,722 and 186,880,413 shares issued, respectively) | $ | 2 | $ | 2 | |||||||
| Paid-in-capital | 6,813 | 6,781 | |||||||||
| Retained earnings | 1,359 | 925 | |||||||||
| Accumulated other comprehensive loss | (39) | (45) | |||||||||
| Treasury stock, at cost (5,342,477 and 5,269,324 shares, respectively) | (377) | (365) | |||||||||
| Total common shareholders' equity | 7,758 | 7,298 | |||||||||
| Long-term debt | 10,940 | 10,341 | |||||||||
| Redeemable preferred stock at redemption value | 3 | 3 | |||||||||
| Total long-term debt | 10,943 | 10,344 | |||||||||
| Total capitalization | 18,701 | 17,642 | |||||||||
| Current liabilities: | |||||||||||
| Short-term debt | 634 | 584 | |||||||||
| Current portion of long-term debt | 265 | 57 | |||||||||
| Accounts payable | 220 | 235 | |||||||||
| Accrued liabilities | 610 | 701 | |||||||||
| Accrued taxes | 69 | 176 | |||||||||
| Accrued interest | 116 | 88 | |||||||||
| Liabilities related to assets held for sale | — | 83 | |||||||||
| Other | 216 | 217 | |||||||||
| Total current liabilities | 2,130 | 2,141 | |||||||||
| Regulatory and other long-term liabilities: | |||||||||||
| Advances for construction | 306 | 284 | |||||||||
| Deferred income taxes and investment tax credits | 2,372 | 2,421 | |||||||||
| Regulatory liabilities | 1,614 | 1,600 | |||||||||
| Operating lease liabilities | 78 | 80 | |||||||||
| Accrued pension expense | 250 | 285 | |||||||||
| Other | 186 | 180 | |||||||||
| Total regulatory and other long-term liabilities | 4,806 | 4,850 | |||||||||
| Contributions in aid of construction | 1,489 | 1,442 | |||||||||
| Commitments and contingencies (See Note 11) | |||||||||||
| Total capitalization and liabilities | $ | 27,126 | $ | 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 September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Operating revenues | $ | 1,082 | $ | 1,092 | $ | 2,861 | $ | 2,979 | |||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Operation and maintenance | 416 | 436 | 1,156 | 1,286 | |||||||||||||||||||
| Depreciation and amortization | 164 | 161 | 485 | 476 | |||||||||||||||||||
| General taxes | 63 | 78 | 208 | 241 | |||||||||||||||||||
| Total operating expenses, net | 643 | 675 | 1,849 | 2,003 | |||||||||||||||||||
| Operating income | 439 | 417 | 1,012 | 976 | |||||||||||||||||||
| Other income (expense): | |||||||||||||||||||||||
| Interest expense | (111) | (101) | (317) | (300) | |||||||||||||||||||
| Interest income | 14 | — | 39 | — | |||||||||||||||||||
| Non-operating benefit costs, net | 19 | 20 | 58 | 59 | |||||||||||||||||||
| Other, net | 6 | 4 | 38 | 11 | |||||||||||||||||||
| Total other (expense) income | (72) | (77) | (182) | (230) | |||||||||||||||||||
| Income before income taxes | 367 | 340 | 830 | 746 | |||||||||||||||||||
| Provision for income taxes | 70 | 62 | 157 | 128 | |||||||||||||||||||
| Net income attributable to common shareholders | $ | 297 | $ | 278 | $ | 673 | $ | 618 | |||||||||||||||
| Basic earnings per share: | |||||||||||||||||||||||
| Net income attributable to common shareholders | $ | 1.63 | $ | 1.53 | $ | 3.70 | $ | 3.40 | |||||||||||||||
| Diluted earnings per share: | |||||||||||||||||||||||
| Net income attributable to common shareholders | $ | 1.63 | $ | 1.53 | $ | 3.70 | $ | 3.40 | |||||||||||||||
| Weighted-average common shares outstanding: | |||||||||||||||||||||||
| Basic | 182 | 182 | 182 | 182 | |||||||||||||||||||
| Diluted | 182 | 182 | 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 September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Net income attributable to common shareholders | $ | 297 | $ | 278 | $ | 673 | $ | 618 | |||||||||||||||
| Other comprehensive income, net of tax: | |||||||||||||||||||||||
| Defined benefit pension plan actuarial loss, net of tax of $1 and $0 for the three months ended September 30, 2022 and 2021, respectively, and $1 and $1 for the nine months ended September 30, 2022 and 2021, respectively | — | 1 | 2 | 3 | |||||||||||||||||||
| Unrealized gain on cash flow hedges, net of tax of $0 and $0 for the three months ended September 30, 2022 and 2021, respectively, and $1 and $0 for the nine months ended September 30, 2022 and 2021, respectively | 1 | — | 4 | 1 | |||||||||||||||||||
| Net other comprehensive income | 1 | 1 | 6 | 4 | |||||||||||||||||||
| Comprehensive income attributable to common shareholders | $ | 298 | $ | 279 | $ | 679 | $ | 622 |
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 Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net income | $ | 673 | $ | 618 | |||||||
| Adjustments to reconcile to net cash flows provided by operating activities: | |||||||||||
| Depreciation and amortization | 485 | 476 | |||||||||
| Deferred income taxes and amortization of investment tax credits | 13 | 121 | |||||||||
| Provision for losses on accounts receivable | 17 | 28 | |||||||||
| Pension and non-pension postretirement benefits | (37) | (31) | |||||||||
| Other non-cash, net | (31) | (34) | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Receivables and unbilled revenues | (129) | (103) | |||||||||
| Pension and non-pension postretirement benefit contributions | (40) | (31) | |||||||||
| Accounts payable and accrued liabilities | (9) | 28 | |||||||||
| Accrued taxes | (148) | 25 | |||||||||
| Other assets and liabilities, net | (30) | (68) | |||||||||
| Net cash provided by operating activities | 764 | 1,029 | |||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Capital expenditures | (1,597) | (1,205) | |||||||||
| Acquisitions, net of cash acquired | (288) | (78) | |||||||||
| Net proceeds from sale of assets | 608 | — | |||||||||
| Removal costs from property, plant and equipment retirements, net | (85) | (70) | |||||||||
| Net cash used in investing activities | (1,362) | (1,353) | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Proceeds from long-term debt | 822 | 1,113 | |||||||||
| Repayments of long-term debt | (14) | (370) | |||||||||
| Repayments of term loan | — | (500) | |||||||||
| Net short-term borrowings (repayments) with maturities less than three months | 50 | (97) | |||||||||
| Advances and contributions in aid of construction, net of refunds of $13 and $17 for the nine months ended September 30, 2022 and 2021, respectively | 64 | 50 | |||||||||
| Debt issuance costs and make-whole premium on early debt redemption | (7) | (26) | |||||||||
| Dividends paid | (348) | (318) | |||||||||
| Other, net | (1) | (4) | |||||||||
| Net cash provided by (used in) financing activities | 566 | (152) | |||||||||
| Net decrease in cash, cash equivalents and restricted funds | (32) | (476) | |||||||||
| Cash, cash equivalents and restricted funds at beginning of period | 136 | 576 | |||||||||
| Cash, cash equivalents and restricted funds at end of period | $ | 104 | $ | 100 | |||||||
| Non-cash investing activity: | |||||||||||
| Capital expenditures acquired on account but unpaid as of the end of period | $ | 347 | $ | 238 |
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 | |||||||||||||||||||||||||||||||||
| Net income attributable to common shareholders | — | — | — | 218 | — | — | — | 218 | |||||||||||||||||||||||||||||||||||||||
| Common stock issuances (a) | — | — | 8 | — | — | — | — | 8 | |||||||||||||||||||||||||||||||||||||||
| Net other comprehensive income | — | — | — | — | 4 | — | — | 4 | |||||||||||||||||||||||||||||||||||||||
| Dividends ($0.6550 declared per common share) | — | — | — | (120) | — | — | — | (120) | |||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | 187.1 | $ | 2 | $ | 6,804 | $ | 1,181 | $ | (40) | (5.3) | $ | (377) | $ | 7,570 | |||||||||||||||||||||||||||||||||
| Net income attributable to common shareholders | — | — | — | 297 | — | — | — | 297 | |||||||||||||||||||||||||||||||||||||||
| Common stock issuances (a) | 0.1 | — | 9 | — | — | — | — | 9 | |||||||||||||||||||||||||||||||||||||||
| Net other comprehensive income | — | — | — | — | 1 | — | — | 1 | |||||||||||||||||||||||||||||||||||||||
| Dividends ($0.6550 declared per common share) | — | — | — | (119) | — | — | — | (119) | |||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | 187.2 | $ | 2 | $ | 6,813 | $ | 1,359 | $ | (39) | (5.3) | $ | (377) | $ | 7,758 |
(a)Includes stock-based compensation, employee stock purchase plan and dividend reinvestment and direct stock 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 | |||||||||||||||||||||||||||||||||
| Net income attributable to common shareholders | — | — | — | 207 | — | — | — | 207 | |||||||||||||||||||||||||||||||||||||||
| Common stock issuances (a) | 0.1 | — | 8 | — | — | — | — | 8 | |||||||||||||||||||||||||||||||||||||||
| Net other comprehensive income | — | — | — | — | 2 | — | — | 2 | |||||||||||||||||||||||||||||||||||||||
| Dividends ($0.6025 declared per common share) | — | — | — | (110) | — | — | — | (110) | |||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | 186.8 | $ | 2 | $ | 6,765 | $ | 332 | $ | (46) | (5.3) | $ | (363) | $ | 6,690 | |||||||||||||||||||||||||||||||||
| Net income attributable to common shareholders | — | — | — | 278 | — | — | — | 278 | |||||||||||||||||||||||||||||||||||||||
| Common stock issuances (a) | — | — | 7 | — | — | — | — | 7 | |||||||||||||||||||||||||||||||||||||||
| Net other comprehensive income | — | — | — | — | 1 | — | — | 1 | |||||||||||||||||||||||||||||||||||||||
| Dividends ($0.6025 declared per common share) | — | — | — | (110) | — | — | — | (110) | |||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2021 | 186.8 | $ | 2 | $ | 6,772 | $ | 500 | $ | (45) | (5.3) | $ | (363) | $ | 6,866 |
(a)Includes stock-based compensation, employee stock purchase plan and dividend reinvestment and direct stock purchase plan activity.
The accompanying notes are an integral part of these Consolidated Financial Statements.
American Water Works Company, Inc. and Subsidiary Companies
Notes to Consolidated Financial Statements (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 September 30, 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 September 30, 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 nine months ended September 30:
| 2022 | 2021 | ||||||||||
| Balance as of January 1 | $ | (75) | $ | (60) | |||||||
| Amounts charged to expense | (17) | (28) | |||||||||
| Amounts written off | 19 | 22 | |||||||||
| Other, net (a) | 9 | (10) | |||||||||
| Balance as of September 30 | $ | (64) | $ | (76) |
(a)This portion of the allowance for uncollectible accounts is primarily related to COVID-19 related regulatory asset activity. The 2021 activity also includes the portion of the allowance related to the Company’s New York subsidiary, which was sold 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 respective period:
| During the Three Months Ended September 30, | During the Nine Months Ended September 30, | ||||||||||||||||||||||
| (In millions) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||
| General rate cases by state (a): | |||||||||||||||||||||||
| New Jersey (effective September 1, 2022) | $ | 61 | $ | — | $ | 61 | $ | — | |||||||||||||||
| Hawaii (effective July 1, 2022) | 2 | — | 2 | — | |||||||||||||||||||
| 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 | |||||||||||||||||||
| Missouri (effective May 28, 2021) | — | — | — | 22 | |||||||||||||||||||
| Total general rate cases | $ | 63 | $ | — | $ | 111 | $ | 114 | |||||||||||||||
| Infrastructure surcharges by state: | |||||||||||||||||||||||
| Missouri (effective August 11, 2022 and February 1, 2022) | $ | 18 | $ | — | $ | 30 | $ | — | |||||||||||||||
| Tennessee (effective August 8, 2022 and January 1, 2021) | 3 | — | 3 | 3 | |||||||||||||||||||
| Pennsylvania (effective July 1, 2022, April 1, 2022 and January 1, 2021) | 9 | — | 11 | 8 | |||||||||||||||||||
| Kentucky (effective July 1, 2022 and July 1, 2021) | 3 | 1 | 3 | 1 | |||||||||||||||||||
| New Jersey (effective June 27, 2022 and June 28, 2021) | — | — | 10 | 14 | |||||||||||||||||||
| Indiana (effective March 21, 2022 and March 17, 2021) | — | — | 8 | 8 | |||||||||||||||||||
| West Virginia (effective March 1, 2022 and January 1, 2021) | — | — | 3 | 5 | |||||||||||||||||||
| Illinois (effective January 1, 2022 and January 1, 2021) | — | — | 6 | 7 | |||||||||||||||||||
| Total infrastructure surcharges | $ | 33 | $ | 1 | $ | 74 | $ | 46 |
(a)Excludes authorized increase of $7 million for the nine months ended September 30, 2021, for the Company’s New York subsidiary, which was sold on January 1, 2022. See Note 5—Acquisitions and Divestitures for additional information.
Effective October 1, 2022, the Company’s Pennsylvania subsidiary implemented an infrastructure surcharge for annualized incremental revenues of $8 million.
On August 17, 2022, the Company’s New Jersey subsidiary was authorized additional annual revenues of $61 million in its general rate case, effective September 1, 2022, excluding agreed to reductions for EADIT as a result of the Tax Cuts and Jobs Act of 2017 (the “TCJA”) ($46 million including EADIT reductions). The order incorporated updated estimates of production costs, including chemicals, fuel and power costs. Beginning January 1, 2023, the Company’s New Jersey subsidiary will defer as a regulatory asset or liability, as appropriate, the difference between its pension expense and other post-employment benefits expense and those amounts included in base rates. The deferral period for this regulatory asset or liability will be two years or, if earlier, will end at the conclusion of the Company’s New Jersey subsidiary’s next general rate case. The Company’s New Jersey subsidiary also withdrew its request, without prejudice, to recover its existing authorized COVID-19-related regulatory asset in the general rate case and will seek recovery in a separate proceeding within the process established in the New Jersey Board of Public Utilities’ (the “NJBPU”) generic COVID-19-related proceeding.
On February 24, 2022, the Company’s West Virginia subsidiary (“WVAWC”) was authorized additional annual revenues of $15 million in its general rate case, effective February 25, 2022, excluding agreed to reductions for EADIT as a result of the TCJA. The EADIT reduction in revenues is $2 million and the exclusion for infrastructure surcharges is $10 million. Staff of the Public Service Commission of West Virginia moved for reconsideration of the final order on several grounds. WVAWC filed its response to the Staff's Petition for Reconsideration on March 28, 2022, in support of the authorized revenue requirement. On October 21, 2022, the Public Service Commission of West Virginia denied the motion for reconsideration.
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 was 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 was 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 NJBPU that recommended denial of a petition filed by the Company’s New Jersey subsidiary, which sought approval of acquisition adjustments in rate base of $29 million associated with the acquisitions of Shorelands Water Company, Inc. in 2017 and the Borough of Haddonfield’s water and wastewater systems in 2015. On July 29, 2021, the NJBPU issued an order adopting the ALJ’s initial decision without modification. The Company’s New Jersey subsidiary filed a Notice of Appeal with the New Jersey Appellate Division on September 10, 2021. The Company’s New Jersey subsidiary filed its brief in support of the appeal on March 4, 2022. Response and Reply briefs were filed on June 22, 2022, and August 4, 2022, respectively. There is no financial impact to the Company as a result of the NJBPU’s order, since the acquisition adjustments are currently recorded as goodwill on the Consolidated Balance Sheets.
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 July 1, 2022, the Company’s California subsidiary filed a general rate case requesting an increase in 2024 revenue of $57 million and a total increase in revenue over the 2024 to 2026 period of $99 million. The requested increase excludes proposed reductions for EADIT of $1 million as a result of TCJA.
On July 1, 2022, the Company’s Missouri subsidiary filed a general rate case requesting $116 million in additional annualized revenues excluding proposed reductions for EADIT as a result of TCJA ($105 million including EADIT reductions) and infrastructure surcharges.
On April 29, 2022, the Company’s Pennsylvania subsidiary filed a general rate case requesting $185 million in additional annualized water and wastewater revenues excluding proposed reductions for EADIT as a result of TCJA and infrastructure surcharges. On October 11, 2022, the Company’s Pennsylvania subsidiary, the Pennsylvania Public Utility Commission’s (the “PaPUC”) Bureau of Investigation and Enforcement, the Pennsylvania Office of Consumer Advocate, and certain other parties to the general rate case jointly filed a petition for settlement with the PaPUC providing for a total annualized revenue increase of $138 million. The petition for settlement provides for an annualized revenue increase of $150 million excluding agreed to reductions for EADIT as a result of the TCJA ($138 million including EADIT reductions). In addition, the petition for settlement incorporates updated estimates of pension and other post-employment benefits expense, as well as increases in chemicals, fuel and power costs. Furthermore, the petition for settlement includes recovery of the COVID-19 deferral balance. An ALJ will review the petition for settlement and render a recommended decision to the PaPUC on whether it should approve the settlement. After its review of the matter, the PaPUC will issue a final order, which the Company expects to occur by January 2023, with new rates to be effective as of January 28, 2023.
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. The requested increase was subsequently updated in the Illinois subsidiary’s June 29, 2022, rebuttal filing, with the request adjusted to $85 million in additional annualized revenues excluding proposed reductions for EADIT as a result of TCJA ($83 million including EADIT reductions) and infrastructure surcharges. The request was increased in the rebuttal filing to capture higher production costs and expected higher pension and other post-employment benefit costs. Evidentiary hearings were held on August 10, 2022, and on October 28, 2022, the ALJs issued a proposed order recommending $69 million in additional annualized revenues, excluding proposed reductions for EADIT as a result of TCJA and infrastructure surcharges ($67 million including EADIT reductions), on a proposed return on equity of 9.78%. The final order is expected in late 2022 or early January 2023, with rates effective in January 2023.
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. Interim rates were effective on May 1, 2022, and the difference between interim and final approved rates is subject to refund. On September 26, 2022, a settlement agreement, supported by all parties except one, was filed with the Virginia State Corporation Commission for a $12 million annual revenue increase excluding agreed to reductions for EADIT as a result of TCJA ($11 million including EADIT reductions). Public hearings were held on September 27 and 28, 2022. A final decision on this matter is expected in the first quarter of 2023.
The Company’s California subsidiary submitted its application on May 3, 2021, to set its cost of capital for 2022 through 2024. According to the CPUC’s procedural schedule, a decision setting the authorized cost of capital is expected to be issued in the fourth quarter of 2022.
Pending Infrastructure Surcharge Filings
On September 9, 2022, the Company’s Missouri subsidiary filed an infrastructure surcharge proceeding requesting $13 million in additional annualized revenues.
On June 30, 2022, WVAWC filed an infrastructure surcharge proceeding requesting $8 million in additional annualized revenues.
Other Regulatory Matters
In September 2020, the CPUC released a decision under its Low-Income Rate Payer Assistance program rulemaking that required the Company’s California subsidiary to file a proposal to alter its water revenue adjustment mechanism in its next general rate case filing in 2022, which would become effective in January 2024. On October 5, 2020, the Company’s California subsidiary filed an application for rehearing of the decision and following the CPUC’s denial of its rehearing application in September 2021, the Company’s California subsidiary filed a petition for writ of review with the California Supreme Court on October 27, 2021. On May 18, 2022, the California Supreme Court issued a writ of review for the Company’s California subsidiary’s petition and the petitions filed by other entities challenging the decision. Independent of the judicial challenge, California passed Senate Bill 1469, which allows the CPUC to consider and authorize the implementation of a mechanism that separates the water corporation’s revenue and its water sales. Legislation was signed by the Governor on September 30, 2022, and will become effective on January 1, 2023. In response to the legislation, on October 10, 2022, the Company’s California subsidiary filed a request for the CPUC to consider the continuation of its decoupling mechanism in its pending 2022 general rate case, which would be effective 2024 through 2026.
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 September 30, 2022:
| Revenues from Contracts with Customers | Other Revenues Not from Contracts with Customers (a) | Total Operating Revenues | |||||||||||||||
| Regulated Businesses: | |||||||||||||||||
| Water services: | |||||||||||||||||
| Residential | $ | 556 | $ | 1 | $ | 557 | |||||||||||
| Commercial | 207 | 1 | 208 | ||||||||||||||
| Fire service | 36 | — | 36 | ||||||||||||||
| Industrial | 41 | 1 | 42 | ||||||||||||||
| Public and other | 82 | — | 82 | ||||||||||||||
| Total water services | 922 | 3 | 925 | ||||||||||||||
| Wastewater services: | |||||||||||||||||
| Residential | 45 | 1 | 46 | ||||||||||||||
| Commercial | 12 | — | 12 | ||||||||||||||
| Industrial | 1 | — | 1 | ||||||||||||||
| Public and other | 7 | — | 7 | ||||||||||||||
| Total wastewater services | 65 | 1 | 66 | ||||||||||||||
| Miscellaneous utility charges | 9 | — | 9 | ||||||||||||||
| Alternative revenue programs | — | 1 | 1 | ||||||||||||||
| Lease contract revenue | — | 2 | 2 | ||||||||||||||
| Total Regulated Businesses | 996 | 7 | 1,003 | ||||||||||||||
| Market-Based Businesses and Other | 80 | (1) | 79 | ||||||||||||||
| Total operating revenues | $ | 1,076 | $ | 6 | $ | 1,082 |
(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 September 30, 2021:
| Revenues from Contracts with Customers | Other Revenues Not from Contracts with Customers (a) | Total Operating Revenues | |||||||||||||||
| Regulated Businesses: | |||||||||||||||||
| Water services: | |||||||||||||||||
| Residential | $ | 545 | $ | — | $ | 545 | |||||||||||
| Commercial | 197 | — | 197 | ||||||||||||||
| Fire service | 38 | — | 38 | ||||||||||||||
| Industrial | 39 | — | 39 | ||||||||||||||
| Public and other | 72 | — | 72 | ||||||||||||||
| Total water services | 891 | — | 891 | ||||||||||||||
| Wastewater services: | |||||||||||||||||
| Residential | 38 | — | 38 | ||||||||||||||
| Commercial | 10 | — | 10 | ||||||||||||||
| Industrial | 1 | — | 1 | ||||||||||||||
| Public and other | 4 | — | 4 | ||||||||||||||
| Total wastewater services | 53 | — | 53 | ||||||||||||||
| Miscellaneous utility charges | 2 | — | 2 | ||||||||||||||
| Alternative revenue programs | — | (4) | (4) | ||||||||||||||
| Lease contract revenue | — | 2 | 2 | ||||||||||||||
| Total Regulated Businesses | 946 | (2) | 944 | ||||||||||||||
| Market-Based Businesses and Other | 148 | — | 148 | ||||||||||||||
| Total operating revenues | $ | 1,094 | $ | (2) | $ | 1,092 |
(a)Includes revenues associated with provisional rates, alternative revenue programs, lease contracts and intercompany rent, which are outside the scope of ASC 606, and accounted for under other existing GAAP.
Presented in the table below are operating revenues disaggregated for the nine months ended September 30, 2022:
| Revenues from Contracts with Customers | Other Revenues Not from Contracts with Customers (a) | Total Operating Revenues | |||||||||||||||
| Regulated Businesses: | |||||||||||||||||
| Water services: | |||||||||||||||||
| Residential | $ | 1,467 | $ | 2 | $ | 1,469 | |||||||||||
| Commercial | 534 | 1 | 535 | ||||||||||||||
| Fire service | 109 | — | 109 | ||||||||||||||
| Industrial | 115 | 1 | 116 | ||||||||||||||
| Public and other | 195 | — | 195 | ||||||||||||||
| Total water services | 2,420 | 4 | 2,424 | ||||||||||||||
| Wastewater services: | |||||||||||||||||
| Residential | 128 | 1 | 129 | ||||||||||||||
| Commercial | 33 | — | 33 | ||||||||||||||
| Industrial | 3 | — | 3 | ||||||||||||||
| Public and other | 14 | — | 14 | ||||||||||||||
| Total wastewater services | 178 | 1 | 179 | ||||||||||||||
| Miscellaneous utility charges | 27 | — | 27 | ||||||||||||||
| Alternative revenue programs | — | 10 | 10 | ||||||||||||||
| Lease contract revenue | — | 6 | 6 | ||||||||||||||
| Total Regulated Businesses | 2,625 | 21 | 2,646 | ||||||||||||||
| Market-Based Businesses and Other | 216 | (1) | 215 | ||||||||||||||
| Total operating revenues | $ | 2,841 | $ | 20 | $ | 2,861 |
(a)Includes revenues associated with provisional rates, alternative revenue programs, lease contracts and intercompany rent, which are outside the scope of ASC 606, and accounted for under other existing GAAP.
Presented in the table below are operating revenues disaggregated for the nine months ended September 30, 2021:
| Revenues from Contracts with Customers | Other Revenues Not from Contracts with Customers (a) | Total Operating Revenues | |||||||||||||||
| Regulated Businesses: | |||||||||||||||||
| Water services: | |||||||||||||||||
| Residential | $ | 1,466 | $ | — | $ | 1,466 | |||||||||||
| Commercial | 511 | — | 511 | ||||||||||||||
| Fire service | 112 | — | 112 | ||||||||||||||
| Industrial | 105 | — | 105 | ||||||||||||||
| Public and other | 172 | — | 172 | ||||||||||||||
| Total water services | 2,366 | — | 2,366 | ||||||||||||||
| Wastewater services: | |||||||||||||||||
| Residential | 112 | — | 112 | ||||||||||||||
| Commercial | 28 | — | 28 | ||||||||||||||
| Industrial | 3 | — | 3 | ||||||||||||||
| Public and other | 12 | — | 12 | ||||||||||||||
| Total wastewater services | 155 | — | 155 | ||||||||||||||
| Miscellaneous utility charges | 18 | — | 18 | ||||||||||||||
| Alternative revenue programs | — | 12 | 12 | ||||||||||||||
| Lease contract revenue | — | 5 | 5 | ||||||||||||||
| Total Regulated Businesses | 2,539 | 17 | 2,556 | ||||||||||||||
| Market-Based Businesses and Other | 424 | (1) | 423 | ||||||||||||||
| Total operating revenues | $ | 2,963 | $ | 16 | $ | 2,979 |
(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 are recognized as revenue when the associated performance obligations are satisfied.
Contract assets of $76 million and $71 million are included in unbilled revenues on the Consolidated Balance Sheets as of September 30, 2022, and December 31, 2021, respectively. There were $124 million of contract assets added during the nine months ended September 30, 2022, and $119 million of contract assets were transferred to accounts receivable during the same period. There were $60 million of contract assets added during the nine months ended September 30, 2021, and $31 million of contract assets were transferred to accounts receivable during the same period.
Contract liabilities of $75 million and $19 million are included in other current liabilities on the Consolidated Balance Sheets as of September 30, 2022, and December 31, 2021, respectively. There were $150 million of contract liabilities added during the nine months ended September 30, 2022, and $94 million of contract liabilities were recognized as revenue during the same period. There were $141 million of contract liabilities added during the nine months ended September 30, 2021, and $137 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 September 30, 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 2073 and have RPOs of $7.0 billion as of September 30, 2022, as measured by estimated remaining contract revenue. Such contracts are subject to customary termination provisions held by the U.S. government, prior to the agreed-upon contract expiration. Contracts with municipalities and commercial customers expire between 2026 and 2038 and have RPOs of $542 million as of September 30, 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
Acquisitions
On May 27, 2022, the Company’s Pennsylvania subsidiary acquired the public wastewater collection and treatment system assets from the York City Sewer Authority and the City of York for a purchase price of $235 million, in cash, $20 million of which was funded as a deposit to the seller in April 2021 in connection with the execution of the acquisition agreement. The system assets serve, directly and indirectly through bulk contracts, more than 45,000 customers. The acquisition was accounted for as a business combination and the preliminary purchase price allocation will be finalized once the valuation of assets acquired has been completed, no later than one year after the acquisition date. The preliminary purchase price allocation consisted primarily of $231 million of utility plant and $4 million of goodwill, which is reported in the Company’s Regulated Businesses segment.
In addition to the acquisition of the York wastewater system assets noted above, during the nine months ended September 30, 2022, the Company closed on the acquisition of 14 regulated water and wastewater systems for an aggregate purchase price of $73 million. Two of these acquisitions were accounted for as a business combination. Assets acquired from these acquisitions consisted principally of utility plant.
The pro forma impact of the Company’s acquisitions was not material to the Consolidated Statements of Operations for the periods ended September 30, 2022 and 2021.
Pending Acquisitions
On October 11, 2022, the Company’s Pennsylvania subsidiary entered into an agreement to acquire the wastewater assets of the Butler Area Sewer Authority for a total purchase price of $232 million in cash, subject to adjustment as provided for in the Asset Purchase Agreement. This system provides wastewater service for approximately 14,700 customer connections. The Company expects to close this acquisition by the end of 2023, pending regulatory approval.
On March 29, 2021, the Company’s New Jersey subsidiary entered into an agreement to acquire the water and wastewater assets of Egg Harbor City for $22 million. The water and wastewater systems currently serve approximately 1,500 customers each, or 3,000 combined, and are being sold through the New Jersey Water Infrastructure Protection Act process. The Company expects to close this acquisition in late 2022 or early 2023.
Sale of New York American Water Company, Inc.
On January 1, 2022, the Company completed the previously disclosed sale of its regulated utility operations in New York to Liberty Utilities (Eastern Water Holdings) Corp. (“Liberty”), an indirect, wholly owned subsidiary of Algonquin Power & Utilities Corp. Liberty purchased from the Company all of the capital stock of the Company’s New York subsidiary for a purchase price of $608 million in cash. 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. For the nine months ended September 30, 2022, the Company recorded post-closing adjustments, primarily related to working capital, of pre-tax income of $20 million, 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 and $38 million of interest income during the three and nine months ended September 30, 2022, respectively, from the seller note.
The Company and the Buyer also entered into revenue share agreements, pursuant to which the Company is to receive 10% of the revenue generated from customers who are billed for home warranty services through an applicable Company subsidiary (an “on-bill” arrangement), and 15% of the revenue generated from any future on-bill arrangements entered into after the closing. Unless earlier terminated, this agreement has a term of up to 15 years, which may be renewed for up to two five-year periods. The Company recognized $2 million and $6 million of income during the three and nine months ended September 30, 2022, respectively, from the revenue share agreements, which is included in Other, net on the Consolidated Statements of Operations.
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 nine months ended September 30, 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) | |||||||||||||||||||
| Other comprehensive income before reclassifications | — | — | — | 4 | 4 | ||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | — | — | 2 | — | 2 | ||||||||||||||||||||||||
| Net other comprehensive income | — | — | 2 | 4 | 6 | ||||||||||||||||||||||||
| Balance as of September 30, 2022 | $ | (107) | $ | 1 | $ | 69 | $ | (2) | $ | (39) | |||||||||||||||||||
| Balance as of December 31, 2020 | $ | (106) | $ | 1 | $ | 63 | $ | (7) | $ | (49) | |||||||||||||||||||
| Other comprehensive loss before reclassifications | — | — | — | 1 | 1 | ||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | — | — | 3 | — | 3 | ||||||||||||||||||||||||
| Net other comprehensive income | — | — | 3 | 1 | 4 | ||||||||||||||||||||||||
| Balance as of September 30, 2021 | $ | (106) | $ | 1 | $ | 66 | $ | (6) | $ | (45) |
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 September 1, 2022, the Company paid a quarterly cash dividend of $0.6550 per share to shareholders of record as of August 9, 2022.
On October 27, 2022, the Company’s Board of Directors declared a quarterly cash dividend payment of $0.6550 per share, payable on December 1, 2022, to shareholders of record as of November 8, 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
On May 5, 2022, American Water Capital Corp. (“AWCC”), issued $800 million aggregate principal amount of 4.45% senior notes due 2032. At closing, AWCC received, after deduction of underwriting discounts and before deduction of offering expenses, net proceeds of approximately $792 million. AWCC used the net proceeds of the offering: (i) to lend funds to the Company and its subsidiaries in its Regulated Businesses segment; (ii) to repay AWCC’s commercial paper obligations; and (iii) for general corporate purposes.
In April 2022, the Company entered into several 10-year treasury lock agreements, with notional amounts totaling $400 million, and an average fixed interest rate of 2.89%. The Company designated these treasury lock agreements as cash flow hedges, with their fair value recorded in accumulated other comprehensive gain or loss. In May 2022, the Company terminated the treasury lock agreements, realizing a net gain of approximately $4 million, to be amortized through interest, net over a 10-year period, in accordance with the tenor of the debt issuance on May 5, 2022. No ineffectiveness was recognized on hedging instruments for the three and nine months ended September 30, 2022.
In addition to the senior notes issued by AWCC as described above, during the nine months ended September 30, 2022, the Company’s regulated subsidiaries issued in the aggregate $22 million of private activity bonds and government funded debt in multiple transactions with annual interest rates ranging from 0.00% to 1.75%, with a weighted average interest rate of 1.05%, maturing in 2027 through 2042. During the nine months ended September 30, 2022, AWCC and the Company’s regulated subsidiaries made sinking fund payments for, or repaid at maturity, $14 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 2.18%, and maturity dates ranging from 2022 to 2051.
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, and, in the future, issuances of equity. 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 Company maintains an unsecured revolving credit facility with a diversified group of financial institutions. AWCC’s revolving credit facility is used principally to support its commercial paper program, to provide additional liquidity support, and to provide a sublimit for the issuance of up to $150 million in letters of credit. On October 26, 2022, AWCC and certain lenders amended and restated the credit agreement with respect to the revolving credit facility to, among other things, increase the maximum commitments under the facility to $2.75 billion from $2.25 billion and to extend the expiration date of the facility to October 2027 from March 2025. Subject to satisfying certain conditions, the credit agreement also permits AWCC to increase the maximum commitment under the facility by up to an aggregate of $500 million and to request extensions of its expiration date for up to two one-year periods. Also, effective October 26, 2022, the maximum aggregate principal amount of short-term borrowings authorized for issuance under AWCC’s commercial paper program was increased to $2.60 billion from $2.10 billion.
Short-term debt consists of commercial paper borrowings totaling $634 million and $584 million as of September 30, 2022, and December 31, 2021, respectively. The weighted-average interest rate on AWCC’s outstanding short-term borrowings was approximately 3.22% and 0.20% at September 30, 2022 and December 31, 2021, respectively. As of September 30, 2022, and December 31, 2021, there were no borrowings outstanding under the revolving credit facility, and there were no commercial paper 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 September 30, 2022 | |||||||||||||||||
| Commercial Paper Limit | Letters of Credit | Total (a) | |||||||||||||||
| (In millions) | |||||||||||||||||
| Total availability | $ | 2,100 | $ | 150 | $ | 2,250 | |||||||||||
| Outstanding debt | (634) | (75) | (709) | ||||||||||||||
| Remaining availability as of September 30, 2022 | $ | 1,466 | $ | 75 | $ | 1,541 |
(a)Total remaining availability of $1.54 billion as of September 30, 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 September 30, 2022 and December 31, 2021, respectively:
| Cash and Cash Equivalents | Availability on Revolving Credit Facility | Total Available Liquidity | |||||||||||||||
| (In millions) | |||||||||||||||||
| Available liquidity as of September 30, 2022 | $ | 77 | $ | 1,541 | $ | 1,618 | |||||||||||
| Available liquidity as of December 31, 2021 | $ | 116 | $ | 1,590 | $ | 1,706 |
Note 9: Income Taxes
The Company’s effective income tax rate was 19.1% and 18.2% for the three months ended September 30, 2022 and 2021, respectively, and 18.9% and 17.2% for the nine months ended September 30, 2022 and 2021, respectively. The increase in the Company’s effective income tax rate for the three and nine months ended September 30, 2022, was primarily due to a decrease in the amortization of EADIT pursuant to regulatory orders.
Other Tax Matters
On July 8, 2022, Pennsylvania Governor Tom Wolf signed into law Act 53 of 2022, which reduces the Pennsylvania state corporate income tax rate in yearly increments starting January 1, 2023, with a new rate of 8.99% and ending effective January 1, 2031, with a rate of 4.99%. Under Accounting Standards Codification Topic 740, Income Taxes (“ASC 740”), the tax effects of changes in tax laws must be recognized in the period in which the law is enacted. ASC 740 also requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. As such, the Company’s accumulated deferred income tax (“ADIT”) balances for their Pennsylvania subsidiary were remeasured during the quarter ended September 30, 2022, to estimate the impacts of the recently enacted tax rate. The remeasurement reduces the ADIT liability by $132 million and creates a corresponding regulatory liability since the EADIT is expected to be returned to customers in a future rate case. However, since the rate is declining in yearly increments, the total EADIT will be subject to change. The rate change impacts to the non-regulated companies have been deemed immaterial.
On September 27, 2022, Iowa’s Department of Revenue announced a reduction in the state’s top corporate rate from 9.8% to 8.4% effective January 1, 2023. The remeasurement reduces the ADIT liability for the Company’s Iowa subsidiary by $1 million and creates a corresponding regulatory liability since the EADIT balance is expected to be returned to customers in a future rate case. The rate impacts to the non-regulated companies have been deemed immaterial.
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 September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Components of net periodic pension benefit credit: | |||||||||||||||||||||||
| Service cost | $ | 8 | $ | 9 | $ | 23 | $ | 27 | |||||||||||||||
| Interest cost | 16 | 16 | 48 | 49 | |||||||||||||||||||
| Expected return on plan assets | (31) | (31) | (92) | (95) | |||||||||||||||||||
| Amortization of prior service credit | (1) | (1) | (3) | (2) | |||||||||||||||||||
| Amortization of actuarial loss | 5 | 7 | 15 | 20 | |||||||||||||||||||
| Net periodic pension benefit credit | $ | (3) | $ | — | $ | (9) | $ | (1) | |||||||||||||||
| Components of net periodic other postretirement benefit credit: | |||||||||||||||||||||||
| Service cost | $ | 1 | $ | 1 | $ | 3 | $ | 3 | |||||||||||||||
| Interest cost | 3 | 2 | 8 | 6 | |||||||||||||||||||
| Expected return on plan assets | (5) | (5) | (15) | (15) | |||||||||||||||||||
| Amortization of prior service credit | (8) | (8) | (24) | (24) | |||||||||||||||||||
| Net periodic other postretirement benefit credit | $ | (9) | $ | (10) | $ | (28) | $ | (30) |
The Company contributed $9 million and $27 million for the funding of its defined benefit pension plans for the three and nine months ended September 30, 2022, respectively, and contributed $10 million and $28 million for the funding of its defined benefit pension plans for the three and nine months ended September 30, 2021, respectively. There were no material contributions and $13 million of contributions for the funding of the Company’s other postretirement benefit plans for the three and nine months ended September 30, 2022, respectively, and $3 million of contributions for each of the three and nine months ended September 30, 2021. The Company expects to make pension contributions to the plan trusts of $9 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 September 30, 2022, the Company has accrued approximately $4 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 September 30, 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 September 30, 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 5, 2022, the Circuit Court entered an order again certifying a class to address at trial certain liability issues but not to consider damages. On August 26, 2022, WVAWC filed another Petition for Writ of Prohibition in the Supreme Court of Appeals challenging this latest class certification order. The Writ Petition has been supported by an amicus brief filed by certain water and utility industry trade groups. The Supreme Court of Appeals will decide whether to accept the Writ Petition by issuing a Rule to Show Cause.
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. A hearing that had been originally scheduled for October 2022 to address the question of class certification has been postponed to January 2023.
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 weighted average cost of capital. 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 $206 million in aggregate costs as of September 30, 2022 related to the Water Supply Project, which includes $55 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. In September 2022, the parties completed testimony related to this CPUC proceeding, and the parties are now meeting and conferring to set hearing dates during the fourth quarter of 2022.
On September 30, 2022, a CPUC-assigned ALJ issued a proposed decision that would, if adopted by the CPUC, authorize Cal Am to enter into the amended water purchase agreement, and specifically to increase pumping capacity and reliability of groundwater extraction from the Seaside Groundwater Basin. The proposed decision sets the cost cap for the proposed facilities at approximately $45 million, and the remaining $36 million of costs initially requested have been deferred to a subsequent filing. Under the proposed decision, Cal Am may seek recovery of amounts above the cost cap in a subsequent rate filing or general rate case. Additionally, the proposed decision recommended AFUDC be authorized at Cal Am’s actual weighted average cost of debt. On October 20, 2022, the parties filed their comments to the proposed decision. Cal Am currently expects a CPUC ruling to be issued by the end of 2022. After that, this matter will remain open as part of a Phase 2 proceeding to update supply and demand amounts for the Water Supply Project and to address certain of the deferred capital requests.
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. In June 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, and Cal Am responded with additional information. On September 1, 2022, the Coastal Commission deemed Cal Am’s application complete. A hearing on the application is expected in November 2022.
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 September 30, | For the Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income attributable to common shareholders | $ | 297 | $ | 278 | $ | 673 | $ | 618 | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted-average common shares outstanding—Basic | 182 | 182 | 182 | 182 | |||||||||||||||||||
| Effect of dilutive common stock equivalents | — | — | — | — | |||||||||||||||||||
| Weighted-average common shares outstanding—Diluted | 182 | 182 | 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 and nine months ended September 30, 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 September 30, 2022 and December 31, 2021. This amount represents the principal amount owed under the seller note, for which the Company expects to receive full payment. The accounting fair value measurement of the seller note approximated $681 million and $720 million as of September 30, 2022 and December 31, 2021, respectively. The accounting fair value measurement is an estimate that is reflective of changes in benchmark interest rates. 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 September 30, 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) | 11,205 | 8,378 | 47 | 1,397 | 9,822 | ||||||||||||||||||||||||
| 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 September 30, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Restricted funds | $ | 28 | $ | — | $ | — | $ | 28 | |||||||||||||||
| Rabbi trust investments | 20 | — | — | 20 | |||||||||||||||||||
| Deposits | 7 | — | — | 7 | |||||||||||||||||||
| Other investments | 23 | — | — | 23 | |||||||||||||||||||
| Contingent cash payment from the sale of HOS | — | — | 72 | 72 | |||||||||||||||||||
| Total assets | 78 | — | 72 | 150 | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Deferred compensation obligations | 23 | — | — | 23 | |||||||||||||||||||
| Total liabilities | 23 | — | — | 23 | |||||||||||||||||||
| Total assets | $ | 55 | $ | — | $ | 72 | $ | 127 |
| 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 mark-to-market derivatives outstanding as of September 30, 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 $72 million, which is reflective of changes in the benchmark interest rate and 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 37 years, six years, and four 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 September 30, 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 $1 million in 2022, $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 each of the three months ended September 30, 2022 and September 30, 2021, and $9 million and $10 million for the nine months ended September 30, 2022 and September 30, 2021, respectively.
For the three and nine months ended September 30, 2022, cash paid for amounts in lease liabilities, which includes operating and financing cash flows from operating and finance leases, were $3 million and $9 million, respectively. For the nine months ended September 30, 2022, there were ROU assets obtained in exchange for new operating lease liabilities of $4 million.
As of September 30, 2022, the weighted-average remaining lease term of the finance lease and operating leases were four years and 17 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 as of September 30, 2022 were $3 million in 2022, $10 million in 2023, $9 million in 2024, $9 million in 2025, $8 million in 2026, and $88 million thereafter. As of September 30, 2022, imputed interest was $42 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 and nine months ended September 30, 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 September 30, 2022 | |||||||||||||||||
| Regulated Businesses | Market-Based Businesses and Other | Consolidated | |||||||||||||||
| Operating revenues | $ | 1,003 | $ | 79 | $ | 1,082 | |||||||||||
| Depreciation and amortization | 161 | 3 | 164 | ||||||||||||||
| Total operating expenses, net | 574 | 69 | 643 | ||||||||||||||
| Interest expense | (81) | (30) | (111) | ||||||||||||||
| Interest income | 1 | 13 | 14 | ||||||||||||||
| Income before income taxes | 373 | (6) | 367 | ||||||||||||||
| Provision for income taxes | 71 | (1) | 70 | ||||||||||||||
| Net income (loss) attributable to common shareholders | 302 | (5) | 297 | ||||||||||||||
| Total assets | 24,366 | 2,760 | 27,126 | ||||||||||||||
| Cash paid for capital expenditures | 598 | 4 | 602 |
| As of or for the Three Months Ended September 30, 2021 | |||||||||||||||||
| Regulated Businesses | Market-Based Businesses and Other | Consolidated | |||||||||||||||
| Operating revenues | $ | 944 | $ | 148 | $ | 1,092 | |||||||||||
| Depreciation and amortization | 151 | 10 | 161 | ||||||||||||||
| Total operating expenses, net | 563 | 112 | 675 | ||||||||||||||
| Interest expense | (73) | (28) | (101) | ||||||||||||||
| Interest income | — | — | — | ||||||||||||||
| Income (loss) before income taxes | 332 | 8 | 340 | ||||||||||||||
| Provision for income taxes | 60 | 2 | 62 | ||||||||||||||
| Net income (loss) attributable to common shareholders | 273 | 5 | 278 | ||||||||||||||
| Total assets | 22,818 | 2,515 | 25,333 | ||||||||||||||
| Cash paid for capital expenditures | 447 | 6 | 453 |
| As of or for the Nine Months Ended September 30, 2022 | |||||||||||||||||
| Regulated Businesses | Market-Based Businesses and Other | Consolidated | |||||||||||||||
| Operating revenues | $ | 2,646 | $ | 215 | $ | 2,861 | |||||||||||
| Depreciation and amortization | 473 | 12 | 485 | ||||||||||||||
| Total operating expenses, net | 1,658 | 191 | 1,849 | ||||||||||||||
| Interest expense | (227) | (90) | (317) | ||||||||||||||
| Interest income | 1 | 38 | 39 | ||||||||||||||
| Income before income taxes | 835 | (5) | 830 | ||||||||||||||
| Provision for income taxes | 154 | 3 | 157 | ||||||||||||||
| Net income (loss) attributable to common shareholders | 681 | (8) | 673 | ||||||||||||||
| Total assets | 24,366 | 2,760 | 27,126 | ||||||||||||||
| Cash paid for capital expenditures | 1,588 | 9 | 1,597 |
| As of or for the Nine Months Ended September 30, 2021 | |||||||||||||||||
| Regulated Businesses | Market-Based Businesses and Other | Consolidated | |||||||||||||||
| Operating revenues | $ | 2,556 | $ | 423 | $ | 2,979 | |||||||||||
| Depreciation and amortization | 449 | 27 | 476 | ||||||||||||||
| Total operating expenses, net | 1,658 | 345 | 2,003 | ||||||||||||||
| Interest expense | (216) | (84) | (300) | ||||||||||||||
| Interest income | — | — | — | ||||||||||||||
| Income (loss) before income taxes | 752 | (6) | 746 | ||||||||||||||
| Provision (benefit) for income taxes | 130 | (2) | 128 | ||||||||||||||
| Net income (loss) attributable to common shareholders | 623 | (5) | 618 | ||||||||||||||
| Total assets | 22,818 | 2,515 | 25,333 | ||||||||||||||
| Cash paid for capital expenditures | 1,191 | 14 | 1,205 |
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