UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20172021
OR
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from______to ______
Commission file numbernumber: 001-34028
AMERICAN WATER WORKS COMPANY, INC.
(Exact name of registrant as specified in its charter)
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| | | | |
| Delaware | 51-0063696 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1025 Laurel Oak Road, Voorhees, NJ | 08043 |
(Address of principal executive offices) | (Zip Code) |
1 Water Street, Camden, NJ 08102-1658
(Address of principal executive offices) (Zip Code)
(856) 346-8200955-4001
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: |
| | | | | | | | | | | | | |
| Title of each class | | Trading Symbol | | Name of each exchange on which registered |
| Common stock, par value $0.01 per share | | AWK | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | ☒ | | Accelerated filer | ☐ | | Non-accelerated filer | ☐ |
Non-accelerated filerSmaller reporting company | ☐ | Smaller reporting company | ☐ |
| (Do not check if a smaller reporting company) | Emerging growth company | ☐ | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.). ☐ Yes ☒ No
Indicate the number of shares outstanding of each of the issuer’sregistrant’s classes of common stock, as of the latest practicable date.
| | | | | | | | | | | | | | | | | |
| Class | | Shares Outstanding as of October 27, 2021 |
| Common Stock, par value $0.01 per share | | 181,537,748 |
TABLE OF CONTENTS
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| Item 1. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
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| Item 1. | | |
| Item 1A. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| Item 5. | | |
| Item 6. | | |
| | |
| | Outstanding as of October 26, 2017 |
Common Stock, $0.01 par value per share | | 178,375,400 shares
(excludes 4,064,010 treasury shares as of October 26, 2017)55 |
* * *
Throughout this Quarterly Report on Form 10-Q (“Form 10-Q”), unless the context otherwise requires, references to the “Company” and “American Water” mean American Water Works Company, Inc. and all of its subsidiaries, taken together as a whole. References to the “parent company” mean American Water Works Company, Inc., without its subsidiaries.
TABLE OF CONTENTS
AMERICAN WATER WORKS COMPANY, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2017
INDEX
FORWARD-LOOKING STATEMENTS
We have made statementsStatements included in Part I, Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations and in other sections of this Quarterly Report on Form 10-Q (“Form 10-Q”), that are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. In some cases, these forward-looking statements can be identified by words with prospective meanings such as “intend,” “plan,” “estimate,” “believe,” “anticipate,” “expect,” “predict,” “project,” “propose,” “assume,” “forecast,” “likely,” “uncertain,” “outlook,” “future,” “pending,” “goal,” “objective,” “potential,” “continue,” “seek to,” “may,” “can,” “should,” “will” and “could” or the negative of such terms or other variations or similar expressions. Forward-looking statements may relate to, among other things, ourthings: the Company’s future financial performance, including our adjusted operationliquidity and maintenance (“O&M”) efficiency ratio, cash flows, our growthflows; the timing and portfolio optimization strategies, our projected capital expendituresamount of rate and related funding requirements, our ability to repay debt, our projected strategy to finance current operations and growth initiatives, the impact of legal proceedings and potential fines and penalties, business process and technology improvement initiatives, trends in our industry, regulatory, legislative, political, tax policy or legal developments or raterevenue adjustments, including through general rate case filings, filings for infrastructure surcharges and other governmental agency authorizations and proceedings, and filings to address regulatory lag.lag; the Company’s growth and portfolio optimization strategies, including the timing and outcome of pending or future acquisition activity; the ability to complete the announced sales of the Company’s New York subsidiary and its Homeowner Services Group (“HOS”) (including the ability to obtain required regulatory approvals and required consents), the accounting, financial and other impacts of each of these transactions (including impacts on the Company’s current and short- and long-term expectations, guidance and plans with respect to its current and future debt and equity capital needs, capital expenditures, dividends, earnings, earnings per share, growth, future regulatory outcomes, rate base growth, and other financial and operational plans), the amount and timing of proceeds anticipated to be received therefrom, and the ability to achieve the Company’s regulatory and other strategies, benefits, plans and goals related to the transactions; the ability of the Company’s California subsidiary to obtain adequate alternative water supplies in lieu of diversions from the Carmel River and to comply with certain regulatory orders and interpretations thereof with respect to such diversions; the amount and allocation of projected capital expenditures and related funding requirements; the Company’s ability to repay or refinance debt; the ability to execute its current and long-term business, operational and capital expenditures strategies; its ability to finance current operations, capital expenditures and growth initiatives by accessing the debt and equity capital markets; the outcome and impact on the Company of governmental and regulatory investigations and proceedings and related potential fines, penalties and other sanctions; the ability to complete, and the timing and efficacy of, the design, development, implementation and improvement of technology and other strategic initiatives; the impacts to the Company of the pandemic health event resulting from COVID-19; the ability to capitalize on existing or future utility privatization opportunities; trends in the industries in which the Company operates, including macro trends with respect to the Company’s efforts related to customer, technology and work execution; regulatory, legislative, tax policy or legal developments; and impacts that future significant tax legislation may have on the Company and on its business, results of operations, cash flows and liquidity.
Forward-looking statements are predictions based on ourthe Company’s current expectations and assumptions regarding future events. They are not guarantees or assurances of any outcomes, financial results, or levels of activity, performance or achievements, and youreaders are cautioned not to place undue reliance upon them. These forward-looking statements are subject to a number of estimates, and assumptions, and known and unknown risks, uncertainties and other factors. OurThe Company’s actual results may vary materially from those discussed in the forward-looking statements included herein as a result of the following important factors:
•the decisions of governmental and regulatory bodies, including decisions to raise or lower rates;customer rates and regulatory responses to the COVID-19 pandemic;
•the timeliness and outcome of regulatory commissions’ and other authorities’ actions concerning rates, capital structure, authorized return on equity, capital investment, system acquisitions and dispositions, taxes, permitting, water supply and management, and other decisions;
•changes in customer demand for, and patterns of use of, water, such as may result from conservation efforts;efforts, impacts of the COVID-19 pandemic, or otherwise;
•limitations on the availability of the Company’s water supplies or sources of water, or restrictions on its use thereof, resulting from allocation rights, governmental or regulatory requirements and restrictions, drought, overuse or other factors;
•a loss of one or more large industrial or commercial customers due to adverse economic conditions, the COVID-19 pandemic, or other factors;
•changes in laws, governmental regulations and policies, including environmental,with respect to the environment, health and safety, consumer and data privacy, water quality and water quality accountability, contaminants of emerging concern, public utility and tax regulations and policies, and impacts resulting from U.S., state and local elections;elections and changes in federal, state and local executive administrations;
•weather conditions and events, climate changevariability patterns, and natural disasters, including drought or abnormally high rainfall, prolonged and abnormal ice or freezing conditions, strong winds, coastal and intercoastal flooding, pandemics (including COVID-19) and epidemics, earthquakes, landslides, hurricanes, tornadoes, wildfires, electrical storms, sinkholes and solar flares;
•the outcome of litigation and similar government actions, including matters related to governmental and regulatory proceedings, investigations or actions;
•the Freedom Industries chemical spill in West Virginiarisks associated with the Company’s aging infrastructure, and the preliminarily approved global class action settlement agreement related to this chemical spill;
ourits ability to appropriately improve the resiliency of, or maintain and replace, current or future infrastructure and systems, including our operationalits technology and information technology (“IT”) systems,other assets, and manage the expansion of our business;its businesses;
•exposure or infiltration of ourthe Company’s technology and critical infrastructure operational technology and IT systems, including the disclosure of sensitive, personal or confidential information contained therein, through physical or cyber attacks or other disruptions;means;
our•the Company’s ability to obtain permits and other approvals for projects;projects and construction of various water and wastewater facilities;
•changes in ourthe Company’s capital requirements;
our•the Company’s ability to control operating expenses and to achieve efficiencies in our operations;operating efficiencies;
•the intentional or unintentional actions of a third party, including contamination of ourthe Company’s water supplies or the water provided to ourits customers;
our•the Company’s ability to obtain adequate and cost-effective supplies of equipment (including personal protective equipment), chemicals, electricity, fuel, water and other raw materials that are needed for our operations;materials;
our•the Company’s ability to successfully meet growth projections for our businessthe Regulated Businesses and the Market-Based Businesses (each as defined in this Form 10-Q), either individually or in the aggregate, and capitalize on growth opportunities, including, our ability to, among other things, acquirewith respect to:
•acquiring, closing and integrate water and wastewater systems into oursuccessfully integrating regulated operations and entermarket-based businesses;
•entering into contracts and other agreements with, or otherwise obtain,obtaining, new customers or partnerships in our market-based businesses;the Market-Based Businesses; and
•realizing anticipated benefits and synergies from new acquisitions;
•risks and uncertainties associated with the Company’s potential sale of HOS, including:
•the ability to obtain the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”)), and other required consents, and to make timely all required closing deliveries;
•closing and post-closing adjustments to the consideration to be received in the transaction, as well as the tax impacts thereof;
•the Company’s ability to receive any contingent consideration provided for in the transaction, as well as amounts due, payable and owing to the Company from time to time under the seller note to be issued pursuant thereto;
•the ability to redeploy successfully and timely the net proceeds of the transaction into the Company’s Regulated Businesses;
•unexpected costs, liabilities or delays associated with this transaction; and
•regulatory, legislative, local or municipal actions affecting the home warranty services and the water and wastewater industries;
•risks and uncertainties associated with contracting with the U.S. government, including ongoing compliance with applicable government procurement and security regulations;
•cost overruns relating to improvements in or the expansion of ourthe Company’s operations;
our•the Company’s ability to successfully develop and implement new technologies and to protect related intellectual property;
•the Company’s ability to maintain safe work sites;
our•the Company’s exposure to liabilities related to environmental laws and similar matters resulting from, among other things, water and wastewater service provided to customers, including, for example, our water management solutions that are focused on customers in the natural gas exploration and production market;customers;
•changes in general economic, political, business and financial market conditions;conditions, including without limitation conditions and collateral consequences associated with the COVID-19 pandemic health event;
•access to sufficient debt and/or equity capital on satisfactory terms and when and as needed to support operations and capital expenditures;
•fluctuations in interest rates;
restrictive•the ability to comply with affirmative or negative covenants in or changes to the credit ratings on our current or future debt thatindebtedness of the Company or any of its subsidiaries, or the issuance of new or modified credit ratings or outlooks or other communications by credit rating agencies with respect to the Company or any of its subsidiaries (or any current or future indebtedness thereof), which could increase our financing costs or funding requirements and affect the Company’s or affect ourits subsidiaries’ ability to borrow,issue, repay or redeem debt, pay dividends or make payments on debt or pay dividends;distributions;
•fluctuations in the value of benefit plan assets and liabilities that could increase ourthe Company’s cost and funding requirements;
•changes in federal or state general, income and other tax laws, including (i) future significant tax reform,legislation, (ii) further rules, regulations, interpretations and guidance by the U.S. Department of the Treasury and state or local taxing authorities related to the enactment of the Tax Cuts and Jobs Act of 2017 (the “TCJA”), (iii) the availability of, or the Company’s compliance with, the terms of applicable tax credits and tax abatement programs, and our(iv) the Company’s ability to utilize ourits U.S. federal and state income tax net operating loss carryforwards;
•migration of customers into or out of ourthe Company’s service territories;
•the use by municipalities of the power of eminent domain or other authority to condemn our systems;
difficulty in obtaining,the systems of one or more of the Company’s utility subsidiaries, or the assertion by private landowners of similar rights against such utility subsidiaries;
•any difficulty or inability to obtain insurance for the Company, its inability to obtain insurance at acceptable rates and on acceptable terms and conditions, or anits inability to obtain reimbursement under existing or future insurance programs and coverages for any losses sustained;
•the incurrence of impairment charges related to ourthe Company’s goodwill or other assets;
•labor actions, including work stoppages and strikes;
•the Company’s ability to retain and attract qualified employees;
•civil disturbances or unrest, or terrorist threats or acts, or public apprehension about future disturbances, unrest, or terrorist threats or acts; and
•the impact of new, and changes to existing, accounting standards.
These forward-looking statements are qualified by, and should be read together with, the risks and uncertainties set forth above, and the risk factors and other statements contained in ourthe Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (“Form2020 (the “Form 10-K”), and in this Form 10-Q, and youreaders should refer to such risks, uncertainties and risk factors in evaluating such forward-looking statements. Any forward-looking statements we makethe Company makes shall speak only as of the date this Form 10-Q was filed with the U.S. Securities and Exchange Commission (“SEC”). Except as required by the federal securities laws, we dothe Company does not have any obligation, and weit specifically disclaimdisclaims any undertaking or intention, to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or otherwise. New factors emerge from time to time, and it is not possible for usthe Company to predict all such factors. Furthermore, it may not be possible to assess the impact of any such factor on ourthe Company’s businesses, either viewed independently or together, or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. The foregoing factors should not be construed as exhaustive.
PART I. FINANCIAL INFORMATION
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, 2017 | | December 31, 2016 | | September 30, 2021 | | December 31, 2020 |
| ASSETS | ASSETS | ASSETS |
| Property, plant and equipment | $ | 20,946 |
| | $ | 19,954 |
| Property, plant and equipment | $ | 26,877 | | | $ | 25,614 | |
| Accumulated depreciation | (5,265 | ) | | (4,962 | ) | Accumulated depreciation | (6,292) | | | (5,904) | |
| Property, plant and equipment, net | 15,681 |
| | 14,992 |
| Property, plant and equipment, net | 20,585 | | | 19,710 | |
| Current assets: | |
| | |
| Current assets: | | | |
| Cash and cash equivalents | 93 |
| | 75 |
| Cash and cash equivalents | 70 | | | 547 | |
| Restricted funds | 28 |
| | 20 |
| Restricted funds | 30 | | | 29 | |
| Accounts receivable, net | 312 |
| | 269 |
| |
| Accounts receivable, net of allowance for uncollectible accounts of $76 and $60, respectively | | Accounts receivable, net of allowance for uncollectible accounts of $76 and $60, respectively | 348 | | | 321 | |
| Unbilled revenues | 234 |
| | 263 |
| Unbilled revenues | 249 | | | 206 | |
| Materials and supplies | 42 |
| | 39 |
| Materials and supplies | 53 | | | 47 | |
| Assets held for sale | | Assets held for sale | 678 | | | 629 | |
| Other | 151 |
| | 118 |
| Other | 162 | | | 127 | |
| Total current assets | 860 |
| | 784 |
| Total current assets | 1,590 | | | 1,906 | |
| Regulatory and other long-term assets: | |
| | |
| Regulatory and other long-term assets: | | | |
| Regulatory assets | 1,374 |
| | 1,289 |
| Regulatory assets | 1,128 | | | 1,127 | |
| Operating lease right-of-use assets | | Operating lease right-of-use assets | 95 | | | 95 | |
| Goodwill | 1,373 |
| | 1,345 |
| Goodwill | 1,511 | | | 1,504 | |
| Postretirement benefit assets | | Postretirement benefit assets | 175 | | | 173 | |
| Intangible assets | | Intangible assets | 47 | | | 55 | |
| Other | 73 |
| | 72 |
| Other | 202 | | | 196 | |
| Total regulatory and other long-term assets | 2,820 |
| | 2,706 |
| Total regulatory and other long-term assets | 3,158 | | | 3,150 | |
| TOTAL ASSETS | $ | 19,361 |
| | $ | 18,482 |
| |
| Total assets | | Total assets | $ | 25,333 | | | $ | 24,766 | |
The accompanying notes are an integral part of these consolidated financial statements.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, 2017 | | December 31, 2016 | | September 30, 2021 | | December 31, 2020 |
| CAPITALIZATION AND LIABILITIES | CAPITALIZATION AND LIABILITIES | CAPITALIZATION AND LIABILITIES |
| Capitalization: | | | | Capitalization: | | | |
| Common stock ($0.01 par value, 500,000,000 shares authorized, 182,437,980 and 181,798,555 shares issued, respectively) | $ | 2 |
| | $ | 2 |
| |
| Common stock ($0.01 par value; 500,000,000 shares authorized; 186,795,975 and 186,466,707 shares issued, respectively) | | Common stock ($0.01 par value; 500,000,000 shares authorized; 186,795,975 and 186,466,707 shares issued, respectively) | $ | 2 | | | $ | 2 | |
| Paid-in-capital | 6,423 |
| | 6,388 |
| Paid-in-capital | 6,772 | | | 6,747 | |
| Accumulated deficit | (573 | ) | | (873 | ) | |
| Retained earnings | | Retained earnings | 500 | | | 102 | |
| Accumulated other comprehensive loss | (87 | ) | | (86 | ) | Accumulated other comprehensive loss | (45) | | | (49) | |
| Treasury stock, at cost (4,064,010 and 3,701,867 shares, respectively) | (247 | ) | | (213 | ) | |
| Total common stockholders' equity | 5,518 |
| | 5,218 |
| |
| Treasury stock, at cost (5,260,279 and 5,168,215 shares, respectively) | | Treasury stock, at cost (5,260,279 and 5,168,215 shares, respectively) | (363) | | | (348) | |
| Total common shareholders' equity | | Total common shareholders' equity | 6,866 | | | 6,454 | |
| Long-term debt | 6,672 |
| | 5,749 |
| Long-term debt | 10,349 | | | 9,329 | |
| Redeemable preferred stock at redemption value | 9 |
| | 10 |
| Redeemable preferred stock at redemption value | 3 | | | 4 | |
| Total long-term debt | 6,681 |
| | 5,759 |
| Total long-term debt | 10,352 | | | 9,333 | |
| Total capitalization | 12,199 |
| | 10,977 |
| Total capitalization | 17,218 | | | 15,787 | |
| Current liabilities: | |
| | |
| Current liabilities: | | | |
| Short-term debt | 103 |
| | 849 |
| Short-term debt | 684 | | | 1,282 | |
| Current portion of long-term debt | 687 |
| | 574 |
| Current portion of long-term debt | 48 | | | 329 | |
| Accounts payable | 144 |
| | 154 |
| Accounts payable | 175 | | | 189 | |
| Accrued liabilities | 498 |
| | 609 |
| Accrued liabilities | 520 | | | 591 | |
| Taxes accrued | 61 |
| | 31 |
| |
| Interest accrued | 103 |
| | 63 |
| |
| Accrued taxes | | Accrued taxes | 73 | | | 50 | |
| Accrued interest | | Accrued interest | 103 | | | 88 | |
| Liabilities related to assets held for sale | | Liabilities related to assets held for sale | 78 | | | 137 | |
| Other | 151 |
| | 112 |
| Other | 163 | | | 215 | |
| Total current liabilities | 1,747 |
| | 2,392 |
| Total current liabilities | 1,844 | | | 2,881 | |
| Regulatory and other long-term liabilities: | |
| | |
| Regulatory and other long-term liabilities: | | | |
| Advances for construction | 279 |
| | 300 |
| Advances for construction | 284 | | | 270 | |
| Deferred income taxes, net | 2,862 |
| | 2,596 |
| |
| Deferred investment tax credits | 23 |
| | 23 |
| |
| Deferred income taxes and investment tax credits | | Deferred income taxes and investment tax credits | 2,285 | | | 2,113 | |
| Regulatory liabilities | 408 |
| | 403 |
| Regulatory liabilities | 1,660 | | | 1,770 | |
| Operating lease liabilities | | Operating lease liabilities | 81 | | | 81 | |
| Accrued pension expense | 421 |
| | 419 |
| Accrued pension expense | 346 | | | 388 | |
| Accrued postretirement benefit expense | 84 |
| | 87 |
| |
| Other | 74 |
| | 67 |
| Other | 180 | | | 83 | |
| Total regulatory and other long-term liabilities | 4,151 |
| | 3,895 |
| Total regulatory and other long-term liabilities | 4,836 | | | 4,705 | |
| Contributions in aid of construction | 1,264 |
| | 1,218 |
| Contributions in aid of construction | 1,435 | | | 1,393 | |
| Commitments and contingencies (see Note 9) |
|
| |
|
| |
| TOTAL CAPITALIZATION AND LIABILITIES | $ | 19,361 |
| | $ | 18,482 |
| |
| Commitments and contingencies (See Note 12) | | Commitments and contingencies (See Note 12) | 0 | | 0 |
| Total capitalization and liabilities | | Total capitalization and liabilities | $ | 25,333 | | | $ | 24,766 | |
The accompanying notes are an integral part of these consolidated financial statements.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, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Operating revenues | $ | 1,092 | | | $ | 1,079 | | | $ | 2,979 | | | $ | 2,854 | |
| Operating expenses: | | | | | | | |
| Operation and maintenance | 436 | | | 419 | | | 1,286 | | | 1,193 | |
| Depreciation and amortization | 161 | | | 154 | | | 476 | | | 451 | |
| General taxes | 78 | | | 73 | | | 241 | | | 225 | |
| Total operating expenses, net | 675 | | | 646 | | | 2,003 | | | 1,869 | |
| Operating income | 417 | | | 433 | | | 976 | | | 985 | |
| Other income (expense): | | | | | | | |
| Interest, net | (101) | | | (99) | | | (300) | | | (296) | |
| Non-operating benefit costs, net | 20 | | | 12 | | | 59 | | | 37 | |
| Other, net | 4 | | | 6 | | | 11 | | | 17 | |
| Total other (expense) income | (77) | | | (81) | | | (230) | | | (242) | |
| Income before income taxes | 340 | | | 352 | | | 746 | | | 743 | |
| Provision for income taxes | 62 | | | 88 | | | 128 | | | 179 | |
| Net income attributable to common shareholders | $ | 278 | | | $ | 264 | | | $ | 618 | | | $ | 564 | |
| | | | | | | |
Basic earnings per share: (a) | | | | | | | |
| Net income attributable to common shareholders | $ | 1.53 | | | $ | 1.46 | | | $ | 3.40 | | | $ | 3.11 | |
Diluted earnings per share: (a) | | | | | | | |
| Net income attributable to common shareholders | $ | 1.53 | | | $ | 1.46 | | | $ | 3.40 | | | $ | 3.11 | |
| Weighted-average common shares outstanding: | | | | | | | |
| Basic | 182 | | | 181 | | | 182 | | | 181 | |
| Diluted | 182 | | | 182 | | | 182 | | | 181 | |
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Operating revenues | $ | 936 |
| | $ | 930 |
| | $ | 2,536 |
| | $ | 2,500 |
|
| Operating expenses: | | | | | | | |
| Operation and maintenance | 324 |
| | 432 |
| | 1,010 |
| | 1,131 |
|
| Depreciation and amortization | 128 |
| | 119 |
| | 378 |
| | 350 |
|
| General taxes | 61 |
| | 65 |
| | 192 |
| | 195 |
|
| Gain on asset dispositions and purchases | (7 | ) | | (5 | ) | | (9 | ) | | (8 | ) |
| Total operating expenses, net | 506 |
| | 611 |
| | 1,571 |
| | 1,668 |
|
| Operating income | 430 |
| | 319 |
| | 965 |
| | 832 |
|
| Other income (expense): | | | | | | | |
| Interest, net | (89 | ) | | (81 | ) | | (259 | ) | | (242 | ) |
| Loss on early extinguishment of debt | (6 | ) | | — |
| | (6 | ) | | — |
|
| Other, net | 5 |
| | 5 |
| | 11 |
| | 14 |
|
| Total other income (expense) | (90 | ) | | (76 | ) | | (254 | ) | | (228 | ) |
| Income before income taxes | 340 |
| | 243 |
| | 711 |
| | 604 |
|
| Provision for income taxes | 137 |
| | 95 |
| | 284 |
| | 237 |
|
| Net income attributable to common stockholders | $ | 203 |
| | $ | 148 |
| | $ | 427 |
| | $ | 367 |
|
| | | | | | | | |
Basic earnings per share: (a) | | | | | | | |
| Net income attributable to common stockholders | $ | 1.14 |
| | $ | 0.83 |
| | $ | 2.39 |
| | $ | 2.06 |
|
| Diluted earnings per share: | | | | | | | |
| Net income attributable to common stockholders | $ | 1.13 |
| | $ | 0.83 |
| | $ | 2.39 |
| | $ | 2.05 |
|
| Weighted-average common shares outstanding: | | | | | | | |
| Basic | 178 |
| | 178 |
| | 178 |
| | 178 |
|
| Diluted | 179 |
| | 178 |
| | 179 |
| | 179 |
|
| Dividends declared per common share | $ | 0.415 |
| | $ | 0.375 |
| | $ | 0.83 |
| | $ | 0.75 |
|
| |
(a) | Amounts may not calculate due to rounding. |
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 (Loss) (Unaudited)
(In millions)
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Net income attributable to common stockholders | $ | 203 |
| | $ | 148 |
| | $ | 427 |
| | $ | 367 |
|
| Other comprehensive income (loss), net of tax: | | | | | | | |
| Pension amortized to periodic benefit cost: | | | | | | | |
| Actuarial loss, net of tax of $1 for the three months and $3 for the nine months ended September 30, 2017 and 2016, respectively | 1 |
| | 1 |
| | 5 |
| | 4 |
|
| Foreign currency translation adjustment | — |
| | — |
| | (1 | ) | | — |
|
| Unrealized loss on cash flow hedges, net of tax of $(3) and $(3) for the three months and $(4) and $(10) for the nine months ended September 30, 2017 and 2016, respectively | (3 | ) | | (4 | ) | | (5 | ) | | (15 | ) |
| Net other comprehensive income (loss) | (2 | ) | | (3 | ) | | (1 | ) | | (11 | ) |
| Comprehensive income (loss) attributable to common stockholders | $ | 201 |
| | $ | 145 |
| | $ | 426 |
| | $ | 356 |
|
The accompanying notes are an integral part of these consolidated financial statements.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, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Net income attributable to common shareholders | $ | 278 | | | $ | 264 | | | $ | 618 | | | $ | 564 | |
| Other comprehensive income (loss), net of tax: | | | | | | | |
| Defined benefit pension plan actuarial loss, net of tax of $0 and $1 for the three months ended September 30, 2021 and 2020, respectively and $1 and $1 for the nine months ended September 30, 2021 and 2020, respectively | 1 | | | 1 | | | 3 | | | 2 | |
| Unrealized gain (loss) on cash flow hedges, net of tax of $0 and $0 for the three months ended September 30, 2021 and 2020, respectively and $0 and $(1) for the nine months ended September 30, 2021 and 2020, respectively | — | | | — | | | 1 | | | (4) | |
| Net other comprehensive income (loss) | 1 | | | 1 | | | 4 | | | (2) | |
| Comprehensive income attributable to common shareholders | $ | 279 | | | $ | 265 | | | $ | 622 | | | $ | 562 | |
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, |
| | 2021 | | 2020 |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | |
| Net income | $ | 618 | | | $ | 564 | |
| Adjustments to reconcile to net cash flows provided by operating activities: | | | |
| Depreciation and amortization | 476 | | | 451 | |
| Deferred income taxes and amortization of investment tax credits | 121 | | | 174 | |
| Provision for losses on accounts receivable | 28 | | | 22 | |
| Pension and non-pension postretirement benefits | (31) | | | (10) | |
| Other non-cash, net | (34) | | | (37) | |
| Changes in assets and liabilities: | | | |
| Receivables and unbilled revenues | (103) | | | (121) | |
| Pension and postretirement benefit contributions | (31) | | | (31) | |
| Accounts payable and accrued liabilities | 28 | | | (17) | |
| Other assets and liabilities, net | (43) | | | (7) | |
| Net cash provided by operating activities | 1,029 | | | 988 | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | |
| Capital expenditures | (1,205) | | | (1,314) | |
| Acquisitions, net of cash acquired | (78) | | | (59) | |
| Proceeds from sale of assets | — | | | 2 | |
| Removal costs from property, plant and equipment retirements, net | (70) | | | (75) | |
| Net cash used in investing activities | (1,353) | | | (1,446) | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | |
| Proceeds from long-term debt | 1,113 | | | 1,250 | |
| Repayments of long-term debt | (370) | | | (266) | |
| (Repayments of) proceeds from term loan | (500) | | | 500 | |
| Net short-term borrowings with maturities less than three months | (97) | | | (242) | |
| Proceeds from issuances of employee stock plans and direct stock purchase plan, net of taxes paid of $15 and $17 for the nine months ended September 30, 2021 and 2020, respectively | (4) | | | 6 | |
| Advances and contributions for construction, net of refunds of $17 and $20 for the nine months ended September 30, 2021 and 2020, respectively | 50 | | | 20 | |
| Debt issuance costs and make-whole premium on early debt redemption | (26) | | | (12) | |
| Dividends paid | (318) | | | (290) | |
| Net cash (used in) provided by financing activities | (152) | | | 966 | |
| Net (decrease) increase in cash, cash equivalents and restricted funds | (476) | | | 508 | |
| Cash, cash equivalents and restricted funds at beginning of period | 576 | | | 91 | |
| Cash, cash equivalents and restricted funds at end of period | $ | 100 | | | $ | 599 | |
| Non-cash investing activity: | | | |
| Capital expenditures acquired on account but unpaid as of the end of period | $ | 238 | | | $ | 236 | |
|
| | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2017 | | 2016 |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | |
| Net income | $ | 427 |
| | $ | 367 |
|
| Adjustments to reconcile to net cash flows provided by operating activities: | | | |
| Depreciation and amortization | 378 |
| | 350 |
|
| Deferred income taxes and amortization of investment tax credits | 264 |
| | 243 |
|
| Provision for losses on accounts receivable | 21 |
| | 18 |
|
| Gain on asset dispositions and purchases | (9 | ) | | (8 | ) |
| Pension and non-pension postretirement benefits | 44 |
| | 43 |
|
| Other non-cash, net | (39 | ) | | (48 | ) |
| Changes in assets and liabilities: | | | |
| Receivables and unbilled revenues | (34 | ) | | (83 | ) |
| Pension and non-pension postretirement benefit contributions | (36 | ) | | (42 | ) |
| Accounts payable and accrued liabilities | (22 | ) | | 184 |
|
| Other assets and liabilities, net | (8 | ) | | (79 | ) |
| Net cash provided by operating activities | 986 |
| | 945 |
|
| CASH FLOWS FROM INVESTING ACTIVITIES | | | |
| Capital expenditures | (964 | ) | | (928 | ) |
| Acquisitions | (10 | ) | | (29 | ) |
| Proceeds from sale of assets and securities | 9 |
| | 5 |
|
| Removal costs from property, plant and equipment retirements, net | (51 | ) | | (62 | ) |
| Net funds restricted | (5 | ) | | — |
|
| Net cash used in investing activities | (1,021 | ) | | (1,014 | ) |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | |
| Proceeds from long-term debt | 1,382 |
| | 2 |
|
| Repayments of long-term debt | (334 | ) | | (20 | ) |
| Net short-term borrowings with maturities less than three months | (746 | ) | | 322 |
|
| Proceeds from issuances of employee stock plans and DRIP | 21 |
| | 22 |
|
| Advances and contributions for construction, net of refunds of $16 and $17, respectively | 23 |
| | 16 |
|
| Debt issuance costs | (13 | ) | | (1 | ) |
| Dividends paid | (215 | ) | | (194 | ) |
| Anti-dilutive stock repurchase | (54 | ) | | (65 | ) |
| Taxes paid related to employee stock plans | (11 | ) | | (12 | ) |
| Net cash provided by financing activities | 53 |
| | 70 |
|
| Net increase in cash and cash equivalents | 18 |
| | 1 |
|
| Cash and cash equivalents as of beginning of period | 75 |
| | 45 |
|
| Cash and cash equivalents as of end of period | $ | 93 |
| | $ | 46 |
|
| Non-cash investing activity: | | | |
| Capital expenditures acquired on account but unpaid as of end of period | $ | 175 |
| | $ | 182 |
|
| Acquisition financed by treasury stock | $ | 33 |
| | $ | — |
|
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, 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 loss | — | | | — | | | — | | | — | | | 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 loss | — | | | — | | | — | | | — | | | 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 loss | — | | | — | | | — | | | — | | | 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 direct stock reinvestment and purchase plan activity.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Paid-in-Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Shareholders' Equity |
| | Shares | | Par Value | | | | | Shares | | At Cost | |
| Balance as of December 31, 2019 | 185.9 | | | $ | 2 | | | $ | 6,700 | | | $ | (207) | | | $ | (36) | | | (5.1) | | | $ | (338) | | | $ | 6,121 | |
| Net income attributable to common shareholders | — | | | — | | | — | | | 124 | | | — | | | — | | | — | | | 124 | |
| Common stock issuances (a) | 0.3 | | | — | | | 13 | | | — | | | — | | | (0.1) | | | (10) | | | 3 | |
| Net other comprehensive loss | — | | | — | | | — | | | — | | | (5) | | | — | | | — | | | (5) | |
| Balance as of March 31, 2020 | 186.2 | | | $ | 2 | | | $ | 6,713 | | | $ | (83) | | | $ | (41) | | | (5.2) | | | $ | (348) | | | $ | 6,243 | |
| Net income attributable to common shareholders | — | | | — | | | — | | | 176 | | | — | | | — | | | — | | | 176 | |
| Common stock issuances (a) | 0.2 | | | — | | | 17 | | | — | | | — | | | — | | | — | | | 17 | |
| Net other comprehensive loss | — | | | — | | | — | | | — | | | 2 | | | — | | | — | | | 2 | |
| Dividends ($0.55 declared per common share) | — | | | — | | | — | | | (100) | | | — | | | — | | | — | | | (100) | |
| Balance as of June 30, 2020 | 186.4 | | | $ | 2 | | | $ | 6,730 | | | $ | (7) | | | $ | (39) | | | (5.2) | | | $ | (348) | | | $ | 6,338 | |
| Net income attributable to common shareholders | — | | | — | | | — | | | 264 | | | — | | | — | | | — | | | 264 | |
| Common stock issuances (a) | — | | | — | | | 9 | | | — | | | — | | | — | | | — | | | 9 | |
| Net other comprehensive loss | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | 1 | |
| Dividends ($0.55 declared per common share) | — | | | — | | | — | | | (100) | | | — | | | — | | | — | | | (100) | |
| Balance as of September 30, 2020 | 186.4 | | | $ | 2 | | | $ | 6,739 | | | $ | 157 | | | $ | (38) | | | (5.2) | | | $ | (348) | | | $ | 6,512 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
(a)Includes stock-based compensation, employee stock purchase plan and direct stock reinvestment and purchase plan activity.
The accompanying notes are an integral part of these consolidated financial statements.
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
(In millions)Financial Statements.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Paid-in-Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Stockholders' Equity |
| | Shares | | Par Value | | | | | Shares | | At Cost | |
| Balance as of December 31, 2016 | 181.8 |
| | $ | 2 |
| | $ | 6,388 |
| | $ | (873 | ) | | $ | (86 | ) | | (3.7 | ) | | $ | (213 | ) | | $ | 5,218 |
|
| Cumulative effect of change in accounting principle | — |
| | — |
| | — |
| | 21 |
| | — |
| | — |
| | — |
| | 21 |
|
| Net income attributable to common stockholders | — |
| | — |
| | — |
| | 427 |
| | — |
| | — |
| | — |
| | 427 |
|
| Direct stock reinvestment and purchase plan | 0.1 |
| | — |
| | 6 |
| | — |
| | — |
| | — |
| | — |
| | 6 |
|
| Employee stock purchase plan | — |
| | — |
| | 5 |
| | — |
| | — |
| | — |
| | — |
| | 5 |
|
| Stock-based compensation activity | 0.5 |
| | — |
| | 18 |
| | — |
| | — |
| | (0.1 | ) | | (7 | ) | | 11 |
|
| Acquisitions via treasury stock | — |
| | — |
| | 6 |
| | — |
| | — |
| | 0.4 |
| | 27 |
| | 33 |
|
| Repurchases of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | (0.7 | ) | | (54 | ) | | (54 | ) |
| Net other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | (1 | ) |
| Dividends | — |
| | — |
| | — |
| | (148 | ) | | — |
| | — |
| | — |
| | (148 | ) |
| Balance as of September 30, 2017 | 182.4 |
| | $ | 2 |
| | $ | 6,423 |
| | $ | (573 | ) | | $ | (87 | ) | | (4.1 | ) | | $ | (247 | ) | | $ | 5,518 |
|
| | | | | | | | | | | | | | | | |
| | Common Stock | | | | | | Accumulated Other Comprehensive Loss | | Treasury Stock | | Total Stockholders' Equity |
| | Shares | | Par Value | | Paid-in-Capital | | Accumulated Deficit | | | Shares | | At Cost | |
| Balance as of December 31, 2015 | 180.9 |
| | $ | 2 |
| | $ | 6,351 |
| | $ | (1,073 | ) | | $ | (88 | ) | | (2.6 | ) | | $ | (143 | ) | | $ | 5,049 |
|
| Net income attributable to common stockholders | — |
| | — |
| | — |
| | 367 |
| | — |
| | — |
| | — |
| | 367 |
|
| Direct stock reinvestment and purchase plan | — |
| | — |
| | 4 |
| | — |
| | — |
| | — |
| | — |
| | 4 |
|
| Employee stock purchase plan | — |
| | — |
| | 5 |
| | — |
| | — |
| | — |
| | — |
| | 5 |
|
| Stock-based compensation activity | 0.8 |
| | — |
| | 28 |
| | — |
| | — |
| | (0.1 | ) | | (6 | ) | | 22 |
|
| Repurchases of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | (1.0 | ) | | (65 | ) | | (65 | ) |
| Net other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (11 | ) | | — |
| | — |
| | (11 | ) |
| Dividends | — |
| | — |
| | — |
| | (133 | ) | | — |
| | — |
| | — |
| | (133 | ) |
| Balance as of September 30, 2016 | 181.7 |
| | $ | 2 |
| | $ | 6,388 |
| | $ | (839 | ) | | $ | (99 | ) | | (3.7 | ) | | $ | (214 | ) | | $ | 5,238 |
|
The accompanying notes are an integral part
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 providedConsolidated Financial Statements included in this report include the accounts of American Water Works Company, Inc. and all of its subsidiaries (collectively,(the “Company” or “American Water” or the “Company”), in which a controlling interest is maintained after the elimination of intercompany accountsbalances and transactions. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting, and with the rules and regulations for reporting on Quarterly Reports on Form 10-Q.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, 20172021, 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 Balance Sheet as of December 31, 2016 is derived from the Company’s audited consolidated financial statements as of December 31, 2016. The unaudited consolidated financial statementsFinancial Statements and notesNotes 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, 20162020 (“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 primarily to the seasonality of the Company’s operations.
Note 2: Significant Accounting Policies
New Accounting Standards
ThePresented in the table below are new accounting standards that were adopted by the Company adopted the following accounting standard on January 1, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Standard | | Description | | Date of Adoption | | Application | | Effect on the Consolidated Financial Statements (or Other Significant Matters)
|
SimplificationFacilitation of Employee Share-Based Payment Accountingthe Effects of Reference Rate Reform on Financial Reporting | | SimplifiedProvided optional guidance for a limited time to ease the potential accounting burden associated with the transition from London Interbank Offered Rate (“LIBOR”). The guidance contains optional expedients and disclosure requirementsexceptions for share-based payment awards.contract modifications, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued. The updated guidance addresses simplification in areas such as: (i)expedients elected must be applied for all eligible contracts or transactions, with the recognitionexception of excess tax benefitshedging relationships, which can be applied on an individual basis.
| | March 12, 2020 through December 31, 2022 | | Prospective for contract modifications and deficiencies; (ii) the classificationhedging relationships; applied as of excess tax benefits and taxes paidJanuary 1, 2020. | | The standard did not have a material impact on the Consolidated StatementsFinancial Statements. |
| Simplifying the Accounting for Income Taxes | | The guidance removes exceptions related to the incremental approach for intraperiod tax allocation, the requirement to recognize a deferred tax liability for changes in ownership of Cash Flows; (iii) election of an accounting policya foreign subsidiary or equity method investment, and the general methodology for forfeitures; and (iv) the amount an employer can withhold to covercalculating income taxes in an interim period when the year-to-date loss exceeds the anticipated loss. The guidance adds requirements to reflect changes to tax laws or rates in the annual effective tax rate computation in the interim period in which the changes were enacted, to recognize franchise or other similar taxes that are partially based on income as an income-based tax and still qualify for equity classification.
any incremental amounts as non-income-based tax, and to evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction. | | January 1, 20172021 | | Modified retrospective for the recognitionamendments related to changes in ownership of excess tax benefits and deficiencies; fulla foreign subsidiary or equity method investment; modified retrospective or retrospective for the classification of excess tax benefits andamendments related to taxes paidpartially based on income; prospective for all other amendments. | | The standard did not have a material impact on the Consolidated Statements of Cash Flows
| | The cumulative effect of adoption increased retained earnings by $21, with an offsetting decrease to deferred income taxes, net. Adoption also increased cash flows from operating activities and decreased cash flows from financing activities by $17 and $20 for the nine months ended September 30, 2017 and 2016, respectively, on the Consolidated Statements of Cash Flows.
Financial Statements. |
The followingPresented in the table below are recently issued accounting standards arethat have not yet required to bebeen adopted by the Company as of September 30, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Standard | | Description | | Date of Adoption | | Permitted Application | | Estimated Effect on the Consolidated Financial Statements (or Other Significant Matters)
|
RevenueAccounting 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; early adoption is not permitted before fiscal years beginning after December 15, 2020 | | Either modified retrospective or fully retrospective. | | The Company is evaluating any impact on its Consolidated Financial Statements, as well as the timing of adoption. |
| Accounting for Contract Assets and Contract Liabilities from Contracts with Customers | | ChangesEnhances the criteriaaccounting for recognizingacquired revenue from a contract with a customer. Replaces existing guidance on revenue recognition, including most industry specific guidance. The objective is to provide a single, comprehensive revenue recognition model for all contracts with customers in a business combination by addressing diversity in practice and inconsistency related to improve comparability within industries, across industriesthe recognition of an acquired contract liability, and across capital markets. The underlying principle is that an entity will recognizepayment terms and their effect on subsequent revenue to depictrecognized by the transfer of goods and services to customers at an amount the entity expects to be entitled to in exchange for those goods or services. The guidance also requires a number of disclosures regarding the nature, amount, timing and uncertainty of revenue and the related cash flows.
acquirer. | | January 1, 2018;2023; early adoption permitted | | FullProspective to business combinations occurring on or modified retrospective | | The Company has substantially completed its evaluation and does not expect a material change. The Company continues to monitor for new interpretative guidance, which could impact the current evaluation. The Company plans to adopt using the modified retrospective method.
|
Classification of Certain Cash Receipts and Cash Payments on the Statement of Cash Flows | | Provides guidance on the presentation and classification in the statement of cash flows for the following cash receipts and payments: (i) debt prepayment or debt extinguishment costs; (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation toafter the effective interest ratedate of the borrowing; (iii) contingent consideration payments made after a business combination; (iv) proceeds from the settlement of insurance claims; (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (vi) distributions received from equity method investees; (vii) beneficial interests in securitization transactions and (viii) separately identifiable cash flows and application of the predominance principle.amendments | | January 1, 2018; early adoption permitted | | Retrospective | | The Company will reclassify a $34 make-whole premium payment from operating activities to financing activities on its Consolidated Statements of Cash Flows upon adoption. See Note 6: Long-Term Debt in the Notes to Consolidated Financial Statements for further information regarding this make-whole premium payment.
|
Presentation of Changes in Restricted Cash on the Statement of Cash Flows | | Updates the accounting and disclosure guidance for the classification and presentation of changes in restricted cash on the statements of cash flows. The amended guidance requires that the statements of cash flows explain the change during the period in the total of cash, cash equivalents and amounts described as restricted cash or restricted cash equivalents. Restricted cash and restricted cash equivalents will now be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. | | January 1, 2018; early adoption permitted | | Retrospective | | The Company does not anticipate significant impacts on its Consolidated Statements of Cash Flows. |
Clarifying the Definition of a Business | | Updates the accounting guidance to clarify the definition of a business with the objective of assisting entities with evaluating whether transactions should be accounted for as acquisitions, or disposals, of assets or businesses. | | January 1, 2018; early adoption permitted | | Prospective | | The update could result in more acquisitions being accounted for as asset acquisitions. The effect on the Company’s consolidated financial statements will be dependent on the acquisitions that close subsequent to adoption. |
Gains and Losses from the Derecognition of Nonfinancial Assets | | Updated the guidance to clarify the accounting for gains and losses resulting from the derecognition of nonfinancial assets and partial sale of nonfinancial assets. The guidance also clarifies the definition of an in-substance nonfinancial asset. | | January 1, 2018; early adoption permitted | | Full or modified retrospective | | The Company does not expect the adoption to have a material impact on its consolidated financial statements. The Company plans to adopt using the modified retrospective method.
|
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost | | Updated authoritative guidance requires the service cost component of net periodic benefit cost to be presented in the same income statement line item(s) as other employee compensation costs arising from services rendered during the period. The remaining components of net periodic benefit cost are required to be presented separately from the service cost component in an income statement line item outside of operating income. Also, the guidance only allows for the service cost component to be eligible for capitalization. The updated guidance does not impact the accounting for net periodic benefit costs as regulatory assets or liabilities. | | January 1, 2018; early adoption permitted | | Retrospective for the presentation of net periodic benefit cost components in the income statement; prospective for the capitalization of net periodic benefit costs components in total assets
| | The Company will reclassify net periodic benefit cost components, other than the service cost component, to other, net in the Consolidated Statements of Operations. The Company will continue to capitalize and will record net periodic benefit costs probable of recovery from customers as a regulatory asset or liability, other than the service cost components. |
Accounting for Leases
| | Updated the accounting and disclosure guidance for leasing arrangements. Under this guidance, a lessee will be required to recognize the following for all leases, excluding short-term leases, at the commencement date: (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the guidance, lessor accounting is largely unchanged.
| | January 1, 2019; early adoption permitted
| | Modified retrospective
| | The Company is evaluating the effectany impact on its consolidated financial statements.
Consolidated Financial Statements, as well as the timing of adoption. |
Cash, Cash Equivalents and Restricted Funds
Presented in the table below is a reconciliation of the cash and cash equivalents and restricted funds amounts as presented on the Consolidated Balance Sheets to the sum of such amounts presented on the Consolidated Statements of Cash Flows for the periods ended September 30:
| | | | | | | | | | | |
| | 2021 | | 2020 |
| Cash and cash equivalents (a) | $ | 70 | | | $ | 560 | |
| Restricted funds | 30 | | | 39 | |
| Cash, cash equivalents and restricted funds as presented on the Consolidated Statements of Cash Flows | $ | 100 | | | $ | 599 | |
(a)The majority of the change in the cash and cash equivalents balance is due to the repayment, at maturity, of the $500 million in outstanding principal under the Term Loan Facility (as defined below). See Note 9—Short-Term Debt for additional information.
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. An increase in the allowance for uncollectible accounts for the period ending September 30, 2021 reflects the impacts from the COVID-19 pandemic, including an increase in uncollectible accounts expense and a reduction in amounts written off due to shutoff moratoria in place in certain of the Company’s subsidiaries.
Presented in the table below are the changes in the allowance for uncollectible accounts for the nine months ended September 30:
| | | | | | | | | | | |
| 2021 | | 2020 |
| Balance as of January 1 | $ | (60) | | | $ | (41) | |
| Amounts charged to expense | (28) | | | (22) | |
| Amounts written off | 7 | | | 9 | |
| Less: Allowance for uncollectible accounts included in assets held for sale (a) | 5 | | | 2 | |
| Balance as of September 30 | $ | (76) | | | $ | (52) | |
(a)This portion of the allowance for uncollectible accounts is related to the pending transactions contemplated by the Stock Purchase Agreement among the Company, the Company’s New York subsidiary and Liberty (as defined below), and is included in assets held for sale on the Consolidated Balance Sheets. See Note 6—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: Impact of the COVID-19 Pandemic
American Water continues to monitor the COVID-19 pandemic and has experienced financial impacts since the start of the pandemic resulting from lower revenues from the suspension of late fees and foregone reconnect fees in certain states, certain incremental operation and maintenance (“O&M”) expenses, an increase in uncollectible accounts expense and additional debt costs. These impacts are collectively referred to as “financial impacts.”
As of November 2, 2021, American Water has commission orders authorizing deferred accounting or cost recovery for COVID-19 financial impacts in 11 of 14 jurisdictions, with proceedings in New York and Tennessee pending. NaN jurisdiction, Kentucky, issued an order denying a request to defer to a regulatory asset the financial impacts related to the COVID-19 pandemic. Other regulatory actions to date are presented in the table below:
|
| | | | | | | | | | | | | |
StandardCommission Actions | | Description | | Date of
Adoption
| | Permitted Application | | Estimated Effect on the Consolidated Financial Statements
(or Other Significant Matters)States |
Accounting for Hedging Activities
Orders issued with deferred accounting | | UpdatedAllows the accounting and disclosure guidance for hedging activities, which allows for moreCompany to establish regulatory assets to record certain financial and nonfinancial hedging strategies to be eligible for hedge accounting. Under this guidance, a qualitative effectiveness assessment is permitted for certain hedges if an entity can reasonably support an expectation of high effectiveness throughout the term of the hedge, provided that an initial quantitative test establishes that the hedge relationship is highly effective. Also, for cash flow hedges determined to be highly effective, all changes in the fair value of the hedging instrument will be recorded in other comprehensive income with a subsequent reclassification to earnings when the hedged item impacts earnings.
| | January 1, 2019; early adoption permitted
| | Modified retrospective for adjustments related to the measurementCOVID-19 pandemic.
| | HI, IN, MD, NJ, PA, VA, WV |
| Orders issued with cost recovery | | California’s Catastrophic Event Memorandum Account allows the Company’s California subsidiary to track certain financial impacts related to the COVID-19 pandemic for future recovery requests. Iowa issued a base rate case order on June 28, 2021, authorizing recovery in rates of ineffectiveness for cash flow hedges; prospectivethe COVID-19 financial impacts deferred within its annual non-recurring expense rider. Illinois has authorized cost recovery of the COVID-19 financial impacts through a special purpose rider over a 24-month period, which was implemented effective October 1, 2020. Additionally, Illinois approved a bad debt rider tariff on December 16, 2020, allowing collection of actual bad debt expense over last authorized beginning April 2021 through February 2023. Illinois approved a stipulation in March 2021 to allow the rider to be extended through the end of 2023. Missouri issued a base rate case order on April 7, 2021, authorizing recovery in rates of the COVID-19 financial impacts deferred through March 31, 2021 over a three-year period. | | CA, IA, IL, MO |
| Proceedings pending | | Pending proceedings considering deferred accounting authorization for the updated presentation and disclosure requirements
future recovery of COVID-19 financial impacts. | | The Company does not expect the adoption to have a material impact on its consolidated financial statements based on the hedges held as of the balance sheet date. The Company is evaluating the timing of adoption.
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Simplification of Goodwill Impairment Testing | | Updated authoritative guidance which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under the amendments in the update, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying value exceeds the reporting unit’s fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. | | January 1, 2020; early adoption permitted | | Prospective | | The Company is evaluating the impact on its consolidated financial statements, as well as the timing of adoption.
|
Measurement of Credit Losses | | Updated the accounting guidance on reporting credit losses for financial assets held at amortized cost basis and available-for-sale debt securities. Under this guidance, expected credit losses are required to be measured based on historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount of financial assets. Also, this guidance requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a direct write-down. | | January 1, 2020; early adoption permitted | | Modified retrospective | | The Company is evaluating the impact on its consolidated financial statements, as well as the timing of adoption.NY, TN |
The Company’s Pennsylvania subsidiary filed for a request with the Pennsylvania Public Utility Commission (the “PaPUC”) to defer as a regulatory asset all identified COVID-19 financial impacts. On September 15, 2021, the PaPUC issued an order approving the request to defer, with carrying costs, incremental uncollectible expense and other incremental costs net of savings attributed to the COVID-19 pandemic. The PaPUC order denied the request to include lost revenues attributed to the waiver of late fees and reconnect fees and expenses associated with additional interest costs. Additionally, the PaPUC order approved the request to allow for the continuation of the deferral of financial impacts, rejecting proposals from the intervening parties to define an end date to the deferral in 2021. As a result of the order discussed above, the Company recorded a net $7 million reduction to its regulatory assets and corresponding impacts to revenue, interest expense and uncollectible expense during the third quarter of 2021. The Company continues to evaluate options within its next base rate case to address these denied items and the resulting financial impact.
On July 28, 2021, the Company’s Tennessee subsidiary filed a stipulation and settlement agreement with the Consumer Advocate Unit in the Financial Division of the Office of the Tennessee Attorney General, which reflected agreement on the deferral of COVID-19-related financial impacts through April 30, 2021. On August 9, 2021, the Tennessee Public Utility Commission denied the stipulation and settlement agreement and moved to address the Company’s Tennessee subsidiary’s petition to defer the COVID-19 financial impacts in a future hearing. On August 26, 2021, the Company’s Tennessee subsidiary filed a motion to withdraw its pending petition, preserving its right to seek recovery of the COVID-19 financial impacts in a future proceeding.
Consistent with these regulatory orders, the Company has recorded $39 million in regulatory assets and $6 million of regulatory liabilities for the financial impacts related to the COVID-19 pandemic on the Consolidated Balance Sheets as of September 30, 2021.
As of November 2, 2021, 3 states continue moratoria on the suspension of service disconnections due to non-payment. The moratoria on disconnects have expired in 11 states.
Note 3:4: Regulatory Matters
General Rate Cases and Infrastructure Surcharges
Presented in the table below are annualized incremental revenues, excluding reductions for the amortization of excess accumulated deferred income tax (“EADIT”) that are generally offset in income tax expense, assuming a constant water sales volume, resulting from general rate case authorizations and infrastructure surcharge authorizations that became effective in the current period:
| | | | | | | | | | | | | | | | | | | | | | | |
| During the Three Months Ended September 30, | | During the Nine Months Ended September 30, |
| (In millions) | 2021 | | 2020 | | 2021 | | 2020 |
| General rate cases by state: | | | | | | | |
| Missouri (effective May 28, 2021) | $ | — | | | $ | — | | | $ | 22 | | | $ | — | |
| New York (effective May 1, 2021) | — | | | — | | | 7 | | | — | |
| Pennsylvania (effective January 28, 2021) | — | | | — | | | 70 | | | — | |
| Indiana (effective May 1, 2020) | — | | | — | | | — | | | 13 | |
| California (effective January 1, 2020) | — | | | — | | | — | | | 5 | |
| Total general rate cases | $ | — | | | $ | — | | | $ | 99 | | | $ | 18 | |
| | | | | | | |
| Infrastructure surcharges by state: | | | | | | | |
| Kentucky (effective July 1, 2021 and July 1, 2020) | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 1 | |
| New Jersey (effective June 28, 2021, June 29, 2020 and January 1, 2020) | — | | | — | | | 14 | | | 20 | |
| Indiana (effective March 17, 2021) | — | | | — | | | 8 | | | — | |
| Pennsylvania (effective January 1, 2021, July 1, 2020, April 1, 2020 and January 1, 2020) | — | | | 4 | | | 8 | | | 19 | |
| Illinois (effective January 1, 2021 and January 1, 2020) | — | | | — | | | 7 | | | 7 | |
| West Virginia (effective January 1, 2021 and January 1, 2020) | — | | | — | | | 5 | | | 3 | |
| Tennessee (effective January 1, 2021 and January 1, 2020) | — | | | — | | | 3 | | | 2 | |
| Missouri (effective June 27, 2020) | — | | | — | | | — | | | 10 | |
| Total infrastructure surcharges | $ | 1 | | | $ | 5 | | | $ | 46 | | | $ | 62 | |
Effective October 7, 2021, the Company’s Missouri subsidiary implemented infrastructure surcharges for annualized incremental revenues of $7 million.
On August 28, 2020, the Company’s Iowa subsidiary filed a general rate case requesting $3 million in annualized incremental revenues. An order was issued on June 28, 2021 authorizing an increase of $1 million. On July 9, 2021, the Company’s Iowa subsidiary filed a Motion for Clarification with respect to the required accelerated flow back of unprotected EADIT over a three-year period to recognize the increase to rate base and incremental revenues as the unprotected EADIT is amortized. On September 21, 2021, that motion was denied. The Company’s Iowa subsidiary filed tariffs consistent with the order on September 23, 2021. Effective October 11, 2021, the Iowa Utilities Board approved the tariffs and implemented the new rates.
On April 7, 2021, the Company’s Missouri subsidiary was authorized additional annualized revenues of $22 million, effective May 28, 2021, excluding agreed to reductions for EADIT as a result of the Tax Cuts and Jobs Act of 2017 (the “TCJA”). The EADIT reduction in revenues is $25 million and is offset by a like reduction in income tax expense. The protected EADIT balance of $72 million is being returned to customers using the average rate assumption method (“ARAM”), and the unprotected EADIT balance of $74 million is being returned to customers over 10 years. The $25 million EADIT reduction includes both the protected and unprotected catch-up period EADIT of $13 million. The catch-up period of January 1, 2018 through May 31, 2021 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 2.5 years.
On March 2, 2021, an administrative law judge (“ALJ”) in the Office of Administrative Law of New Jersey filed an initial decision with the New Jersey Board of Public Utilities (the “NJBPU”) that recommended denial of a petition filed by the Company’s New Jersey subsidiary, which sought approval of acquisition adjustments in rate base of $29 million associated with the acquisitions of Shorelands Water Company, Inc. in 2017 and the Borough of Haddonfield’s water and wastewater systems in 2015. On July 29, 2021, the NJBPU issued an order adopting the ALJ’s initial decision without modification. The Company’s New Jersey subsidiary filed a Notice of Appeal with the New Jersey Appellate Division on September 10, 2021. A scheduling order was issued on October 18, 2021 establishing a briefing schedule through January 2022. There is no financial impact to the Company as a result of the NJBPU’s order, since the acquisition adjustments are currently recorded as goodwill on the Consolidated Balance Sheets.
On February 25, 2021, the Company’s Pennsylvania subsidiary was authorized additional annualized revenues of $90 million, effective January 28, 2021, excluding agreed to reductions for EADIT as a result of the TCJA, over two steps. The EADIT reduction in revenues is $19 million. 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 will be effective January 1, 2022 in the amount of $20 million. The protected EADIT balance of $200 million is being returned to customers using the ARAM, and the unprotected EADIT balance of $116 million is being returned to customers over 20 years. The $19 million annually includes 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 August 18, 2021, the Company’s Hawaii subsidiary filed a general rate case requesting $2 million in additional annualized revenues.
On April 30, 2021, the Company’s West Virginia subsidiary filed a general rate case requesting $32 million in annualized incremental revenues excluding proposed reductions for EADIT as a result of TCJA and infrastructure surcharges. The proposed EADIT reduction in revenues is $1 million and the exclusion for infrastructure surcharges is $10 million. Intervenor testimony was received on September 20, 2021. The Company’s rebuttal testimony was filed on October 5, 2021. Hearings are scheduled to start November 3, 2021.
On July 1, 2019, the Company’s California subsidiary filed a general rate case requesting $29 million in annualized incremental revenues for 2021, and increases of $10 million and $11 million in the escalation year of 2022 and the attrition year of 2023, respectively. On October 11, 2019, the Company filed its 100-day update for the same proceeding and updated the request to $27 million in annualized incremental revenues for 2021, and increases of $10 million in both the escalation year of 2022 and the attrition year of 2023, respectively. On September 10, 2020, the California Public Utilities Commission (the “CPUC”) approved the Company’s California subsidiary’s motion for interim rates, establishing a memorandum account to track the difference between interim and final rates adopted by the CPUC in this proceeding, which were effective on January 1, 2021. Following settlement discussions among all parties to the proceeding, on January 22, 2021, January 25, 2021, and February 11, 2021, the Company’s California subsidiary filed with the CPUC comprehensive settlements entered into among the Company’s California subsidiary, the Public Advocates Office, and other intervenors. These settlement agreements resolved all matters in dispute among the parties to the settlements, with the exception of a few disputed items between the Company’s California subsidiary and the Monterey Peninsula Water Management District (the “MPWMD”). On October 19, 2021, the CPUC issued a proposed decision in the general rate case proceeding for rates effective January 1, 2021. With minor exceptions, the proposed decision would adopt the comprehensive settlements reached with the Public Advocates Office, and other intervenors. Comments on the proposed decision are due November 8, 2021 and reply comments are due November 15, 2021. The earliest the decision could be adopted is November 18, 2021 at the CPUC’s voting meeting. The Company expects a final decision by December 31, 2021.
On January 5, 2021, the Company’s California subsidiary submitted a request to delay by one year its cost of capital filing and maintain the authorized cost of capital through 2022. On February 22, 2021, the CPUC denied the request to further delay the cost of capital filing. The Company’s California subsidiary submitted its cost of capital application on May 3, 2021. Once approved by the CPUC, the new authorized cost of capital will be effective January 1, 2022.
Pending Infrastructure Surcharge Filings
On September 3, 2021, the Company’s Missouri subsidiary filed for an infrastructure surcharge requesting $11 million in additional annualized revenues.
On June 30, 2021, the Company’s West Virginia subsidiary filed for an infrastructure surcharge requesting $3 million in additional annualized revenues.
Note 5: 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 market-based businesses that provide water, wastewater and other services to residential and smaller commercial customers, the U.S. government on military installations, as well as municipalities and utility customers, collectively presented as the “Market-Based Businesses.”
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 | 152 | | | — | | | 152 | |
| Other | (4) | | | — | | | (4) | |
| 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 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 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 | 435 | | | — | | | 435 | |
| Other | (11) | | | (1) | | | (12) | |
| 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 the Company’s Market-Based Businesses, certain contracts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Contract assets are recorded when billing occurs subsequent to revenue recognition and are reclassified to accounts receivable when billed and the right to consideration becomes unconditional. Contract liabilities are recorded when the Company receives advances from customers prior to satisfying contractual performance obligations, particularly for construction contracts and home warranty protection program contracts, and are recognized as revenue when the associated performance obligations are satisfied.
Contract assets of $68 million and $39 million are included in unbilled revenues on the Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020, respectively. Contract assets of $27 million and $13 million are included in unbilled revenues on the Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, respectively. 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. There were $43 million of contract assets added during the nine months ended September 30, 2020, and $29 million of contract assets were transferred to accounts receivable during the same period.
Contract liabilities of $39 million and $35 million are included in other current liabilities on the Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020, respectively. Contract liabilities of $36 million and $27 million are included in other current liabilities on the Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, respectively. 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. There were $91 million of contract liabilities added during the nine months ended September 30, 2020, and $82 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, 2021, the Company’s O&M and capital improvement contracts in the Market-Based Businesses have RPOs. Contracts with the U.S. government for work on various military installations expire between 2051 and 2071 and have RPOs of $6.4 billion as of September 30, 2021, as measured by estimated remaining contract revenue. Such contracts are subject to customary termination provisions held by the U.S. government, prior to the agreed-upon contract expiration. Contracts with municipalities and commercial customers expire between 2022 and 2038 and have RPOs of $603 million as of September 30, 2021, 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 6: Acquisitions and Divestitures
During the nine months ended September 30, 2017,2021, the Company closed on 14 acquisitionsthe acquisition of various13 regulated water and wastewater systems for a total aggregate purchase price of $43. Included in this total was$56 million, including the Company’s acquisition of all the outstanding capital stock of the ShorelandsEast Pasadena Water Company Inc.in California on April 3, 2017,September 23, 2021 for total consideration of $33, in the form of approximately 0.4 shares of the Company’s common stock.$34 million. Assets acquired in the aforementionedfrom these acquisitions, principally utility plant, totaled $40. Liabilities$57 million and liabilities assumed totaled $23, including $10$1 million. NaN of contributions in aid of construction and assumed debt of $7. The Company recorded additional goodwill of $28 associated with three of thethese acquisitions which is reported in the Company’s Regulated Businesses segment, and recognizedwere accounted for as a bargain purchase gain of $2 associated with one of the acquisitions.business combination. The preliminary purchase price allocations related to these acquisitionsan acquisition accounted for as a business combination will be finalized once the valuation of assets acquired has been completed, no later than one year after theirits acquisition date.
DuringOn April 6, 2021, the first quarter of 2017, the Company made a non-escrowed deposit of $2 related to the asset purchaseCompany’s Pennsylvania subsidiary entered into an agreement to acquire substantially all of the wastewater collection and treatment system assets of the MunicipalYork City Sewer Authority for $235 million, plus an amount of average daily revenue calculated for the period between the final meter reading and the date of closing. This system, directly and indirectly through bulk contracts, serves more than 45,000 customers. In connection with the execution of the City of McKeesport,acquisition agreement, the Company’s Pennsylvania for approximately $159. On October 26, 2017,subsidiary paid a joint petition for settlement of this acquisition was approved by$20 million deposit to the Pennsylvania Public Utility Commission. Theseller on April 30, 2021, which is refundable in the event the agreement is terminated prior to closing of this acquisition is subject to the satisfaction of various conditions and covenants.acquisition. The Company expects to close this acquisition in the first half of 2022, 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 the first half of 2022, pending regulatory approval.
Assets Held for Sale
On November 20, 2019, the Company and the Company’s New York subsidiary, entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Liberty Utilities Co., which it subsequently assigned to its indirect, wholly owned subsidiary Liberty Utilities (Eastern Water Holdings) Corp. (“Liberty”), pursuant to which Liberty will purchase all of the capital stock of the New York subsidiary (the “Stock Purchase”) for an aggregate purchase price of approximately $608 million in cash, subject to adjustment as provided in the Stock Purchase Agreement. The Company’s regulated New York operations have approximately 125,000 customers in the State of New York. Algonquin Power & Utilities Corp., Liberty’s ultimate parent company, executed and delivered an absolute and unconditional guaranty of the performance of all of the obligations of Liberty under the Stock Purchase Agreement. The Stock Purchase is subject to various conditions, including obtaining approvals and satisfying or waiving other closing conditions. The Stock Purchase Agreement as originally executed provided for an initial termination date of June 30, 2021 (the “Closing End Date”). On June 29, 2021, the parties mutually agreed to extend the Closing End Date to December 31, 2021 in accordance with the terms of the Stock Purchase Agreement, and agreed to extend further the Closing End Date to January 3, 2022 as December 31, 2021 is a federal holiday. No other provision of the Stock Purchase Agreement was modified by this mutual agreement. Liberty may also terminate the endStock Purchase Agreement if any governmental authority initiates a condemnation or eminent domain proceeding against a majority of 2017.
the consolidated properties of the Company’s New York subsidiary, taken as a whole. The assets and related liabilities of the Company’s New York subsidiary were classified as held for sale on the Consolidated Balance Sheets as of September 30, 2021.
Presented in the table below are the components of assets held for sale and liabilities related to assets held for sale of the New York subsidiary as of September 30, 2021:
| | | | | |
| September 30, 2021 |
| Property, plant and equipment | $ | 546 | |
| Current assets | 20 | |
| Regulatory assets | 78 | |
| Goodwill | 27 | |
| Other assets | 7 | |
| Assets held for sale | $ | 678 | |
| Current liabilities | $ | 16 | |
| Regulatory liabilities | 46 | |
| Other liabilities | 16 | |
| Liabilities related to assets held for sale | $ | 78 | |
Note 4: Stockholders’7: Shareholders' Equity
Accumulated Other Comprehensive Loss
The followingPresented in the table presentsbelow are the changes in accumulated other comprehensive loss by component, net of tax, for the nine months ended September 30, 20172021 and 2016,2020, respectively:
| | | | | | | | | | | | | | | | Defined Benefit Pension Plans | | Gain (Loss) on Cash Flow Hedges | | Accumulated Other Comprehensive Loss |
| | Defined Benefit Plans | | Foreign Currency Translation | | Gain (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, 2020 | | Balance as of December 31, 2020 | $ | (106) | | | $ | 1 | | | $ | 63 | | | $ | (7) | | | $ | (49) | |
| Other comprehensive income before reclassifications | | Other comprehensive income before reclassifications | — | | | — | | | — | | | 1 | | | 1 | |
| Amounts reclassified from accumulated other comprehensive loss | | Amounts reclassified from accumulated other comprehensive loss | — | | | — | | | 3 | | | — | | | 3 | |
| Net other comprehensive income (loss) | | Net other comprehensive income (loss) | — | | | — | | | 3 | | | 1 | | | 4 | |
| Balance as of September 30, 2021 | | Balance as of September 30, 2021 | $ | (106) | | | $ | 1 | | | $ | 66 | | | $ | (6) | | | $ | (45) | |
| | Employee
Benefit Plan
Funded Status | | Amortization
of Prior
Service Cost | | Amortization
of Actuarial
Loss | | Foreign Currency Translation | | Gain (Loss) on Cash Flow Hedges | | Accumulated Other Comprehensive Loss | | | | | | | | | | |
| Beginning balance as of December 31, 2016 | $ | (147 | ) | | $ | 1 |
| | $ | 42 |
| | |
| Balance as of December 31, 2019 | | Balance as of December 31, 2019 | $ | (94) | | | $ | 1 | | | $ | 60 | | | $ | (3) | | | $ | (36) | |
| Other comprehensive loss before reclassifications | — |
| | — |
| | — |
| | (1 | ) | | (5 | ) | | (6 | ) | Other comprehensive loss before reclassifications | — | | | — | | | — | | | (4) | | | (4) | |
| Amounts reclassified from accumulated other comprehensive loss | — |
| | — |
| | 5 |
| | — |
| | — |
| | 5 |
| Amounts reclassified from accumulated other comprehensive loss | — | | | — | | | 2 | | | — | | | 2 | |
| Net other comprehensive income (loss) | — |
| | — |
| | 5 |
| | (1 | ) | | (5 | ) | | (1 | ) | Net other comprehensive income (loss) | — | | | — | | | 2 | | | (4) | | | (2) | |
| Ending balance as of September 30, 2017 | $ | (147 | ) | | $ | 1 |
| | $ | 47 |
| | $ | 1 |
| | $ | 11 |
| | $ | (87 | ) | |
| | | | | | | | | | | | | |
| Beginning balance as of December 31, 2015 | $ | (126 | ) | | $ | 1 |
| | $ | 36 |
| | $ | 2 |
| | $ | (1 | ) | | $ | (88 | ) | |
| Other comprehensive loss before reclassifications | — |
| | — |
| | — |
| | — |
| | (15 | ) | | (15 | ) | |
| Amounts reclassified from accumulated other comprehensive loss | — |
| | — |
| | 4 |
| | — |
| | — |
| | 4 |
| |
| Net other comprehensive income (loss) | — |
| | — |
| | 4 |
| | — |
| | (15 | ) | | (11 | ) | |
| Ending balance as of September 30, 2016 | $ | (126 | ) | | $ | 1 |
| | $ | 40 |
| | $ | 2 |
| | $ | (16 | ) | | $ | (99 | ) | |
| Balance as of September 30, 2020 | | Balance as of September 30, 2020 | $ | (94) | | | $ | 1 | | | $ | 62 | | | $ | (7) | | | $ | (38) | |
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 capitalizeddeferred as a regulatory asset. These accumulated other comprehensive income loss components are included in the computation of net periodic pension cost. See Note 8— Pension and Other Postretirement Benefits.
The amortization of the lossgain (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.
Anti-dilutive Stock Repurchase ProgramDividends
During the nine months endedOn September 30, 2017,1, 2021, the Company repurchased 0.7 sharespaid a quarterly cash dividend of common stock in the open market at an aggregate cost$0.6025 per share to shareholders of $54 under the anti-dilutive stock repurchase program authorized byrecord as of August 10, 2021.
On October 28, 2021, the Company’s Board of Directors declared a quarterly cash dividend payment of $0.6025 per share, payable on December 1, 2021 to shareholders of record as of November 10, 2021. 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 2015. Asthe Notes to Consolidated Financial Statements in the Company’s Form 10-K for additional information regarding the payment of September 30, 2017, there were 6.1 shares ofdividends on the Company’s common stock available for repurchase under the program.stock.
Note 5: Stock Based Compensation8: Long-Term Debt
On May 12, 2017, the Company’s stockholders approved the10, 2021, American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan (the “2017 Omnibus Plan”). A total of 7.2 shares of common stock may be issued under the 2017 Omnibus Plan. The 2017 Omnibus Plan provides that grants of awards may be in any of the following forms: incentive stock options, nonqualified stock options, stock appreciation rights, stock units, stock awards, other stock-based awards and dividend equivalents, which may be granted only on stock units or other stock-based awards.
Note 6: Long-Term Debt
The following long-term debt was issued during the nine months ended September 30, 2017:
|
| | | | | | | | | | |
| Company | | Type | | Rate | | Maturity | | Amount |
American Water Capital Corp. (a) | | Senior Notes | | 2.95%-3.75% | | 2027-2047 | | $ | 1,350 |
|
| Other American Water subsidiaries | | Private activity bonds and government
funded debt—fixed rate | | 0.00%-3.92% | | 2020-2036 | | 21 |
|
| Other American Water subsidiaries | | Term Loan | | 4.48%-4.98% | | 2021 | | 11 |
|
| Total issuances | | | | | | | | $ | 1,382 |
|
| |
(a) | American Water Capital Corp. (“AWCC”), which is a wholly owned subsidiary of the Company, has a support agreement with the Company that, under certain circumstances, is the functional equivalent of a parent company guarantee. This indebtedness is considered “debt” for purposes of this support agreement. |
The following long-term debt was retired through sinking fund provisions, optional redemptions or payment at maturity during the nine months ended September 30, 2017:
|
| | | | | | | | | | |
| Company | | Type | | Rate | | Maturity | | Amount |
| American Water Capital Corp. | | Senior Notes | | 5.62%-5.77% | | 2018-2021 | | $ | 319 |
|
| American Water Capital Corp. | | Private activity bonds and government
funded debt—fixed rate | | 1.79%-2.90% | | 2021-2031 | | 1 |
|
| Other American Water subsidiaries | | Private activity bonds and government
funded debt—fixed rate | | 0.00%-5.38% | | 2017-2041 | | 12 |
|
| Other American Water subsidiaries | | Term Loan | | 4.48%-4.98% | | 2021 | | 1 |
|
| Other American Water subsidiaries | | Mandatorily redeemable preferred stock | | 8.49% | | 2036 | | 1 |
|
| Total retirements and redemptions | | | | | | | | $ | 334 |
|
On August 10, 2017, AWCC completed a $1,350$1.1 billion debt offering, which included the sale of $600$550 million aggregate principal amount of its 2.95% Senior Notes2.30% senior notes due in 20272031 and $750$550 million aggregate principal amount of its 3.75% Senior Notes3.25% senior notes due in 2047.2051. At the closing of the offering, AWCC received, after deduction of underwriting discounts and debt issuance costs, $1,333. On September 13, 2017,before deduction of offering expenses, net proceeds of $1,086 million. AWCC used the net proceeds from the offering to:of this offering: (i) to lend funds to parent company and its regulated subsidiaries; (ii) to prepay $138$251 million aggregate principal amount of its outstanding 5.62% Series C Senior Notes due December 21, 2018 (“Series C Senior Notes”) and $181 of itsAWCC’s outstanding 5.77% Series D Senior Notes due December 21, 2021 (“(the “Series D Notes”) and $76 million aggregate principal amount of AWCC’s outstanding 6.55% Series H Senior Notes due May 15, 2023 (the “Series H Notes,” and together with the Series D SeniorNotes, the “Series Notes”); (ii)(iii) to repay AWCC’s commercial paper obligations; and (iii)(iv) for general corporate purposes. Subsequently, AWCC used proceeds fromAfter the offering to repay at maturity, $524prepayments described above, none of its 6.085% Seniorthe Series D Notes, on October 15, 2017. In addition,and approximately $14 million aggregate principal amount of the Company repaid $33 of 7.08% subsidiary debt at maturity on November 1, 2017.
Series H Notes, remain outstanding. As a result of AWCC’s prepayment of the Series C and Series D Senior Notes, and payment of a make-whole premium of $15 million was paid to the holders thereof of $34, the Company recorded an early debt extinguishment charge of $6, which was associated with the portion of the debt allocable to the Company’s parent.on June 14, 2021. Substantially all of the early debt extinguishment costs were allocable to the Company’s utility subsidiaries wereand recorded as regulatory assets, thatas the Company believes they are probable of recovery in future rates.
On August 7, 2017,May 6, 2021, the Company terminated four forward starting swapentered into 2 10-year treasury lock agreements, with an aggregate notional amountamounts of $300, realizing a gain of $19 to be amortized through interest, net over 30 years. The Company has one remaining forward starting swap agreement, which was entered into on February 8, 2017, with a notional amount of $100$125 million and $150 million, to reduce interest rate exposure for a portion of the expected refinancing of AWCC’s Series C Senior Notes. This forward starting swap agreement terminates in November 2018 and hason debt, which was subsequently issued on May 10, 2021. These treasury lock agreements had an average fixed rate of 2.67%1.58%. The Company has designated this forward starting swap agreementthese treasury lock agreements as a cash flow hedgehedges, with itstheir fair value recorded in accumulated other comprehensive gain or loss. Upon termination,On May 10, 2021, the cumulativeCompany terminated these 2 treasury lock agreements with an aggregate notional amount of $275 million, realizing a net gain or loss recorded in accumulated other comprehensive gain or loss willof less than $1 million, to be amortized through interest, net over a 10-year period, in accordance with the termterms of the $1.1 billion new debt.
The Company has an interest rate swap to hedge $100 of its 6.085% Senior Notes maturing in the fourth quarter of 2017. The Company pays variable interest of six-month LIBOR plus 3.422% and has designated this interest rate swap as a fair value hedge accounted for at fair value with gains or losses, as well as the offsetting gains or lossesdebt issued on the hedged item, recognized in interest, net. The net gain and loss recognized by the Company for the three and nine months ended September 30, 2017 and 2016 was de minimis. This interest rate swap matured on October 15, 2017.
The Company has employed interest rate swaps to fix the interest cost on a portion of its variable-rate debt with an aggregate notional amount of $6. The Company has designated these interest rate swaps as economic hedges accounted for at fair value with gains or losses deferred as a regulatory asset or regulatory liability. The net gain recognized by the Company for the three and nine months ended September 30, 2017 and 2016 was de minimis.
May 10, 2021. No ineffectiveness was recognized on hedging instruments for the three and nine months ended September 30, 20172021 and 2016.2020.
In addition to the senior notes issued and retired by AWCC as described above, during the nine months ended September 30, 2021, the Company’s regulated subsidiaries issued in the aggregate $13 million of private activity bonds and government funded debt in multiple transactions with annual interest rates ranging from 0.00% to 5.00%, with a weighted average interest rate of 0.05%, maturing in 2022 through 2047. During the nine months ended September 30, 2021, AWCC and the Company’s regulated subsidiaries made sinking fund payments for, or repaid at maturity, $43 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 7.37%, and maturity dates ranging from 2021 to 2048.
Note 9: Short-Term Debt
Liquidity needs for capital investment, working capital and other financial commitments are 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. The following tablerevolving credit facility provides $2.25 billion in aggregate total commitments from a summarydiversified group of financial institutions. The termination date of the gross fair valuecredit agreement with respect to AWCC’s revolving credit facility is March 21, 2025. The facility is used principally to support AWCC’s commercial paper program, to provide additional liquidity support and to provide a sub-limit of up to $150 million for letters of credit. As of September 30, 2021 and December 31, 2020, there were noborrowings outstanding under the Company’s derivative assetrevolving credit facility.
On March 20, 2020, AWCC entered into a Term Loan Credit Agreement, by and liabilities,among parent company, AWCC and the lenders party thereto (the “Term Loan Facility”). As of December 31, 2020, $500 million of principal was outstanding under the Term Loan Facility. The Term Loan Facility commitments terminated at maturity on March 19, 2021 and the Term Loan Facility was repaid in full. Borrowings under the Term Loan Facility bore interest at a variable annual rate based on LIBOR, plus a margin of 0.80%.
Short-term debt consists of commercial paper and credit facility borrowings totaling $684 million and $786 million as of September 30, 2021 and December 31, 2020, respectively. The weighted-average interest rate on AWCC’s outstanding short-term borrowings, including as of December 31, 2020, $500 million of outstanding principal on the Term Loan Facility, was approximately 0.13% and 0.53% at September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021 and December 31, 2020, there were no commercial paper or credit facility borrowings outstanding with maturities greater than three months.
Presented in the tables below is the aggregate credit facility commitments, commercial paper limit and letter of credit availability under the revolving credit facility, as well as the locationavailable capacity for each:
| | | | | | | | | | | | | | | | | |
| As of September 30, 2021 |
| Commercial Paper Limit | | Letters of Credit | | Total (a) |
| (In millions) | | | | | |
| Total availability | $ | 2,100 | | | $ | 150 | | | $ | 2,250 | |
| Outstanding debt | (684) | | | (76) | | | (760) | |
| Remaining availability as of September 30, 2021 | $ | 1,416 | | | $ | 74 | | | $ | 1,490 | |
(a)Total remaining availability of the asset and liability balances$1.49 billion as of September 30, 2021 may be accessed through revolver draws.
| | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Commercial Paper Limit | | Letters of Credit | | Total (a) |
| (In millions) | | | | | |
| Total availability | $ | 2,100 | | | $ | 150 | | | $ | 2,250 | |
| Outstanding debt | (786) | | | (76) | | | (862) | |
| Remaining availability as of December 31, 2020 | $ | 1,314 | | | $ | 74 | | | $ | 1,388 | |
(a)Total remaining availability may be accessed through revolver draws.
Presented in the Consolidated Balance Sheets:table below is the Company’s total available liquidity as of September 30, 2021 and December 31, 2020, respectively:
| | | | | | | | | | | | | | | | | |
| Cash and Cash Equivalents | | Availability on Revolving Credit Facility | | Total Available Liquidity |
| (In millions) | | | | | |
| Available liquidity as of September 30, 2021 | $ | 70 | | | $ | 1,490 | | | $ | 1,560 | |
| Available liquidity as of December 31, 2020 | $ | 547 | | | $ | 1,388 | | | $ | 1,935 | |
|
| | | | | | | | | | | | |
| Derivative Instruments | | Derivative Designation | | Balance Sheet Classification | | September 30, 2017 | | December 31, 2016 |
| Asset Derivative | | | | | | |
| | |
|
| Forward starting swaps | | Cash flow hedge | | Other current assets | | $ | — |
| | $ | 27 |
|
| Interest rate swap | | Fair value hedge | | Other current assets | | — |
| | 1 |
|
| | | | | | | | | |
| Liability Derivative | | | | | | |
| | |
|
| Interest rate swap | | Fair value hedge | | Current portion of long-term debt | | $ | — |
| | $ | 1 |
|
| Forward starting swaps | | Cash flow hedge | | Other long-term liabilities | | 2 |
| | — |
|
Note 7:10: Income Taxes
The Company’s effective income tax rate was 40.3%18.2% and 39.1%25.0% for the three months ended September 30, 20172021 and 2016,2020, respectively, and 39.9%17.2% and 39.2%24.1% for the nine months ended September 30, 20172021 and 2016,2020, respectively.
On April 11, 2017,The decrease in the State of New York enacted legislation that increased the stateCompany’s effective income tax rate onfor the Company’s taxable income attributablethree and nine months ended September 30, 2021 was primarily due to New York. This legislation eliminated the production of water as a qualified manufacturing activity in New York, which effectively increased the state income tax rate in New York. As a result of the legislative change, the Company was required to re-measure its cumulative deferred tax balances using the higher state income tax rate in the second quarter of 2017. This change in legislation was the primary cause of an increase to the Company’s unitary deferred tax liability of $11. The portion of this increase related to the Company’s New York subsidiary calculated on a stand-alone basis was $7, and was offset by a regulatory asset, as the Company believes it is probable of recovery in future rates. The remaining increase in the deferred tax liability was calculated through state tax apportionment rates and recorded atamortization of EADIT resulting from the consolidated level, resulting in a non-cash, cumulative chargeTCJA, pursuant to earningsregulatory orders.
On July 7, 2017, the State of Illinois enacted legislation that increased, effective July 1, 2017, the state income tax rate on the Company’s taxable income attributable to Illinois from 7.75% to 9.5%. As a result of the legislative change, the Company was required to re-measure its cumulative deferred tax balances using the higher state income tax rate in the third quarter of 2017. This change in legislation was the primary cause of the increase to the Company’s unitary deferred tax liability of $7. The portion of this increase related to the Company’s Illinois subsidiary calculated on a stand-alone basis was $4, and was offset by a regulatory asset, as the Company believes it is probable of recovery in future rates. The remaining increase in the deferred tax liability was recorded at the consolidated level, resulting in a non-cash, cumulative charge of $3 during the third quarter of 2017.
Note 8:11: Pension and Other Postretirement Benefits
The followingPresented in the table providesbelow are the components of net periodic benefit costs:cost (credit):
| | | | | | | | | | | | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | 2021 | | 2020 | | 2021 | | 2020 |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| Components of net periodic pension benefit cost | | | | | | | | |
| Service cost | $ | 8 |
| | $ | 8 |
| | $ | 25 |
| | $ | 24 |
| |
| Interest cost | 20 |
| | 20 |
| | 60 |
| | 60 |
| |
| Expected return on plan assets | (23 | ) | | (24 | ) | | (70 | ) | | (72 | ) | |
| Amortization of actuarial loss | 9 |
| | 7 |
| | 27 |
| | 21 |
| |
| Net periodic pension benefit cost | $ | 14 |
| | $ | 11 |
| | $ | 42 |
| | $ | 33 |
| |
| | | | | | | | | |
| Components of net periodic other postretirement benefit cost | | | | | | | | |
| Components of net periodic pension benefit cost: | | Components of net periodic pension benefit cost: | | | | | | | |
| Service cost | $ | 3 |
| | $ | 3 |
| | $ | 8 |
| | $ | 9 |
| Service cost | $ | 9 | | | $ | 8 | | | $ | 27 | | | $ | 24 | |
| Interest cost | 7 |
| | 7 |
| | 20 |
| | 22 |
| Interest cost | 16 | | | 18 | | | 49 | | | 55 | |
| Expected return on plan assets | (7 | ) | | (7 | ) | | (20 | ) | | (20 | ) | Expected return on plan assets | (31) | | | (28) | | | (95) | | | (84) | |
| Amortization of prior service credit | (5 | ) | | (3 | ) | | (14 | ) | | (4 | ) | Amortization of prior service credit | (1) | | | (1) | | | (2) | | | (3) | |
| Amortization of actuarial loss | 3 |
| | 1 |
| | 8 |
| | 3 |
| Amortization of actuarial loss | 7 | | | 7 | | | 20 | | | 23 | |
| Net periodic other postretirement benefit cost | $ | 1 |
| | $ | 1 |
| | $ | 2 |
| | $ | 10 |
| |
| Net periodic pension benefit (credit) cost before settlements | | Net periodic pension benefit (credit) cost before settlements | — | | | 4 | | | (1) | | | 15 | |
| Settlements | | Settlements | — | | | — | | | — | | | 1 | |
| Net periodic pension benefit (credit) cost | | Net periodic pension benefit (credit) cost | $ | — | | | $ | 4 | | | $ | (1) | | | $ | 16 | |
| | Components of net periodic other postretirement benefit credit: | | Components of net periodic other postretirement benefit credit: | |
| Service cost | | Service cost | $ | 1 | | | $ | 1 | | | $ | 3 | | | $ | 3 | |
| Interest cost | | Interest cost | 2 | | | 3 | | | 6 | | | 9 | |
| Expected return on plan assets | | Expected return on plan assets | (5) | | | (5) | | | (15) | | | (14) | |
| Amortization of prior service credit | | Amortization of prior service credit | (8) | | | (9) | | | (24) | | | (25) | |
| Amortization of actuarial loss | | Amortization of actuarial loss | — | | | — | | | — | | | 1 | |
| Net periodic other postretirement benefit credit | | Net periodic other postretirement benefit credit | $ | (10) | | | $ | (10) | | | $ | (30) | | | $ | (26) | |
The Company made contributionscontributed $10 million and $28 million for the funding of its defined benefit pension plans of $11 and $8 for the three months ended September 30, 2017 and 2016, respectively, and $31 and $25 for the nine months ended September 30, 2017 and 2016,2021, respectively, and expects to contributecontributed $9 duringmillion and $31 million for the remainderfunding of 2017. In addition,its defined benefit pension plans for the three and nine months ended September 30, 2020, respectively. The Company contributed $3 million for the funding of its other postretirement benefit plans for the three and nine months ended September 30, 2021, and the Company made no contributions for the funding of its other postretirement benefit plans for the three and nine months ended and September 30, 2020. The Company expects to make pension contributions to the plan trusts of $2 and $6 for$9 million during the remainder of 2021. No postretirement contributions to the plan trusts are expected to be made during the remainder of 2021.
No settlement charges were recorded during the three months ended September 30, 2017 and 2016, respectively, and $5 and $17 for2021. Due to the amount of lump sum payment distributions from the Company’s New York Water Service Corporation Pension Plan, a settlement charge of less than $1 million was recorded during the nine months ended September 30, 20172021, and 2016, respectively,settlement charges of less than $1 million and expects to contribute $1 million were recorded during the remainder of 2017.three and nine months ended September 30, 2020, respectively. In accordance with existing regulatory accounting treatment, the Company has maintained the settlement charge in regulatory assets. The amount is being amortized in accordance with existing regulatory practice.
Note 9:12: Commitments and Contingencies
Contingencies
The Company is routinely involved in legal actions incident to the normal conduct of its business. As of September 30, 2017,2021, the Company has accrued approximately $139approximately $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 $27.$2 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 9,12—Commitments and Contingencies, will not have a material adverse effect on the Company.
West Virginia Elk River Freedom Industries Chemical Spill
Background
On January 9, 2014, a chemical storage tank owned by Freedom Industries, Inc. leaked two substances, 4-methylcyclohexane methanol, or “MCHM”, and PPH/DiPPH, a mix of polyglycol ethers, into the Elk River near the West Virginia-American Water Company (“WVAWC”) treatment plant intake in Charleston, West Virginia. After having been alerted to the leak of MCHM by the West Virginia Department of Environmental Protection (“DEP”), WVAWC took immediate steps to gather more information about MCHM, augment its treatment process as a precaution, and begin consultations with federal, state and local public health officials. As soon as possible after it was determined that the augmented treatment process would not fully remove the MCHM, a joint decision was reached in consultation with the West Virginia Bureau for Public Health to issue a “Do Not Use” order for all of its approximately 93,000 customer accounts in parts of nine West Virginia counties served by the Charleston treatment plant. By January 18, 2014, none of WVAWC’s customers were subject to the Do Not Use order.
Following the Freedom Industries chemical spill, numerous lawsuits were filed against WVAWC and certain other Company affiliated entities (collectively, the “American Water Defendants”) with respect to this matter inJune 8, 2018, the U.S. District Court for the Southern District of West Virginia or West Virginia Circuit Courts in Kanawha, Boone and Putnam counties, and to date, 74 cases remain pending. Four of the cases pending before the U.S. district court were consolidated for purposes of discovery, and an amended consolidated class action complaint for those cases (the “Federal action”) was filed in December 2014 by several plaintiffs. On January 28, 2016, all of the then-filed state court cases were referred to West Virginia’s Mass Litigation Panel for further proceedings, which have been stayed pending the negotiation by the parties and approval by the court in the Federal action of a global agreement to settle all of such cases, as described below. On July 7, 2016, the court in the Federal action scheduled trial to begin on October 25, 2016, but the court has granted several continuances of the trial, which is currently postponed indefinitely in light of the preliminarily approved global settlement agreement described below. The Mass Litigation Panel has also stayed its proceedings until January 23, 2018.
Preliminary Approval of WVAWC Global Class Action Litigation Settlement
On October 31, 2016, the court in the Federal action approved the preliminary principles, terms and conditions of a binding global agreement in principle to settle claims among the American Water Defendants, and all class members, putative class members, claimants and potential claimants, arising out of the Freedom Industries chemical spill. On April 27, 2017, the parties filed with the court in the Federal action a proposed settlement agreement providing details of the terms of the settlement of these matters and requesting that the court in the Federal action grant preliminary approval of such settlement. On July 6, 2017, the court in the Federal action issued an opinion denying without prejudice the joint motion for preliminary approval of the Settlement. On August 25, 2017, the parties filed a proposed amended settlement agreement and related materials addressing the matters set forth in the July 6, 2017 order.
On September 21, 2017, the court in the Federal action issued an order granting preliminaryfinal approval of a settlement class and proposedglobal class action settlement (the “Settlement”) with respect to claims against the American Water Defendants by all putative class members (collectively, the “Plaintiffs”) 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.spill in West Virginia. The effective date of the Settlement proposes a global resolution of all federal and state litigation and potential claims against the American Water Defendants and their insurers.was July 16, 2018. Under the terms and conditions of the Settlement, the Company’s West Virginia subsidiary (“WVAWC”) and the proposed amended settlement agreement, the American Water Defendants havecertain other Company-affiliated entities did not admitted,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 to bethat were resolved. Under federal class action rules, a claimant may elect to opt out of the final Settlement, in which case such claimant will not receive any benefit from or be bound by the terms of the Settlement. The American Water Defendants would have the right to withdraw from the Settlement if more than a certain number of putative class members opt out of the Settlement. The deadline imposed by the court in the Federal action for any Plaintiff to opt out of the Settlement or file an objection to the Settlement is December 8, 2017.
The proposed aggregate pre-tax amount of the Settlement is $126, of which $43 would be contributed by WVAWC and the remainder would be contributed by certain of the Company’s general liability insurance carriers. The WVAWC contribution was reduced from $65 to $43 ($26 after tax) due to a settlement in the third quarter of 2017 with another$126 million portion of the Company’s general liability insurance carriers, as discussed below. The Company has general liability insurance under a series of policies underwritten by a number of individual carriers. Two of these insurance carriers, which provide an aggregate of $50 in insurance coverage to the Company under these policies, had been originally requested to participate in the Settlement at the time of the initial filing of the binding agreement in principle with the court in the Federal action, but did not agree to do so at that time. WVAWC filed a lawsuit against one of these carriers alleging that the carrier’s failure to agree to participate in the Settlement constituted a breach of contract. On September 19, 2017, the Company and the insurance carrier settled this lawsuit for $22, out of a maximum of $25 in potential coverage under the terms of the relevant policy, in exchange for a full release by the Company and WVAWC of all claims against the insurance carrier related to the Freedom Industries chemical spill. WVAWC and the settling insurer have agreed to stay this litigation pending final approval of the Settlement. The Company and WVAWC continue to pursue vigorously their rights to insurance coverage for contributions by WVAWC to the Settlement in mandatory arbitration with the remaining non-participating carrier. This arbitration proceeding remains pending.
The proposed Settlement would establish a two-tier settlement fund for the payment of claims, comprised of (i) a simple claim fund, which is also referred to as the “guaranteed fund,” of $76, of which $29 will be contributed by WVAWC, including insurance deductibles, and $47 would be contributed by two of the Company’s general liability insurance carriers, and (ii) an individual review claim fund of up to $50, of which up to $14 would be contributed by WVAWC and up to $36 would be contributed by a number of the Company’s general liability insurance carriers. Separately, up to $25 would be contributed to the guaranteed fund by another defendant to the Settlement. If any final approval order by the court in the Federal action with respect to the Settlement is appealed and such appeal would delay potential payment to claimants under the Settlement, WVAWC and the other defendant to the Settlement will contribute up to $50 and $25, respectively, to the Settlement (not including, in the case of WVAWC, any contributions by the Company’s general liability insurance carriers which would not be made until such time as a final, non-appealable order is issued) into an escrow account during the pendency of such appeals. For certain claims, WVAWC and the other defendant to the Settlement may, in lieu of these escrowed contributions, make advance payments of such claims if agreed to by the parties. All administrative expenses of the Settlement and attorneys’ fees of class counsel related thereto would be paid from the funds designated to pay claims covered by the Settlement.
As a result of these events, in the third quarter of 2016, the Company, recorded a charge to earnings, net of insurance receivables,recoveries, is $19 million. As of $65 ($39 after-tax). Additionally, inSeptember 30, 2021, $0.5 million of the third quarter of 2017, the Company recorded a benefit of $22 ($13 after-tax) as an additional insurance receivable reflecting the settlement with the insurance carrier described above. The settlementaggregate Settlement amount of $126 ismillion has been reflected in Accrued Liabilitiesaccrued liabilities, and the$0.5 million in offsetting insurance receivables arehave been reflected in Other Current Assets inother current assets on the Consolidated Balance SheetSheets. The amount reflected in accrued liabilities as of September 30, 2017.2021 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 intends to fundfunded WVAWC’s contributions to the Settlement through existing sources of liquidity, although no contribution by WVAWC will be required unless and until the terms of the Settlement are finally approved by the court in the Federal action. Furthermore, under the terms of the Settlement, WVAWC has agreed that it will not seek rate recovery from the Public Service Commission of West Virginia for approximately $4 in direct response costs expensed in 2014 by WVAWC relating to the Freedom Industries chemical spill as well as for amounts paid by WVAWC under the Settlement.
The Company’s insurance policies operate under a layered structure where coverage is generally provided in the upper layers after claims have exhausted lower layers of coverage. The $36 to be contributed by a number of the Company’s general liability insurance carriers to the individual review claim fund, as noted above, is from higher layers of the insurance structure than the insurance carrier that was requested, but presently has not agreed, to participate in the Settlement. Any recovery by WVAWC or the Company from the remaining non-participating carrier would reimburse WVAWC for its contributions to the guaranteed fund.
Other Related Proceedings
Additionally, investigations with respect to the matter have been initiated by the U.S. Chemical Safety and Hazard Investigation Board (the “CSB”), the U.S. Attorney’s Office for the Southern District of West Virginia, the West Virginia Attorney General, and the Public Service Commission of West Virginia (the “PSC”). As a result of the U.S. Attorney’s Office investigation, Freedom Industries and six former Freedom Industries employees (three of whom also were former owners of Freedom Industries), pled guilty to violations of the federal Clean Water Act.
In May 2014, the PSC issued an Order initiating a General Investigation into certain matters relating to WVAWC’s response to the Freedom Industries chemical spill. Three parties intervened in the proceeding, including the Consumer Advocate Division of the PSC and two attorney-sponsored groups, including one sponsored by some of the plaintiffs’ counsel involved in the civil litigation described above. On January 26, 2017, WVAWC and the other parties agreed to resolve the General Investigation and filed a joint stipulation with the PSC containing the terms of the settlement. The parties to the joint stipulation filed a proposed order with the PSC on February 8, 2017. On June 15, 2017, the PSC entered an order accepting the joint stipulation that had been filed by the parties in January 2017 as a reasonable basis for resolving the General Investigation and removing the proceeding from the docket. The PSC’s order did not require WVAWC to take any further action with respect to the matters covered by the General Investigation. The PSC order concludes the General Investigation.
The CSB is an independent investigatory agency with no regulatory mandate or ability to issue fines or citations; rather, the CSB can only issue recommendations for further action. In response to the Freedom Industries chemical spill, the CSB commenced an investigation shortly thereafter. On September 28, 2016, the CSB issued and adopted its investigation report in which it recommended that the Company conduct additional source water protection activities. The Company provided written comments to the CSB’s report suggesting that the recommendation made to the Company would be better directed to the U.S. Environmental Protection Agency in order to promote industry-wide implementation of the CSB’s recommendation. On February 15, 2017, the Company filed a response to the CSB’s recommendation. On April 4, 2017, the CSB indicated that the implementation by the Company of source water protection activities resolved the first two parts of the CSB’s recommendation. The CSB also noted that compliance by the Company with the third part of its recommendation is ongoing and that closure of this part is contingent upon completion of updated contingency planning for the Company’s water utilities outside of West Virginia. In light of public response to its original September 2016 investigation report, on May 11, 2017, the CSB issued a new version of this report. The primary substantive change addressed CSB’s factual evaluation of the duration and volume of contamination from the leaking tank, decreasing its estimate of the leak time but increasing the volume estimate by 10%. No substantive changes were made to the conclusions and recommendations in the original report.
On March 16, 2017, the Lincoln County (West Virginia) Commission (the “LCC”) passed a county ordinance entitled the “Lincoln County, WV Comprehensive Public Nuisance Investigation and Abatement Ordinance.” The ordinance establishes a mechanism that Lincoln County believes will allow it to pursue criminal or civil proceedings for the “public nuisance” it alleges was caused by the Freedom Industries chemical spill. On April 20, 2017, the LCC filed a complaint in Lincoln County state court against WVAWC and certain other defendants not affiliated with the Company, alleging that the Freedom Industries chemical spill caused a public nuisance in Lincoln County. On June 12, 2017, the Mass Litigation Panel entered an order granting a motion to transfer this case to its jurisdiction and stayed the case consistent with the existing stay order. The complaint seeks an injunction against WVAWC that would require the creation of various databases and public repositories of documents related to this chemical spill, as well as further study and risk assessments regarding the alleged exposure by Lincoln County residents to the released chemicals. WVAWC believes that the lawsuit is without merit and intends to vigorously contest the claims and allegations raised in the complaint.
California Public Utilities Commission Residential Rate Design Proceeding
In December 2016, the California Public Utilities Commission (the “CPUC”) issued a final decision in a proceeding involving California-American Water Company, the Company’s wholly owned subsidiary (“Cal Am”), adopting a new residential rate design for Cal Am’s Monterey District. The decision allowed for recovery by Cal Am of $32 in under-collections in the water revenue adjustment mechanism/modified cost balancing account (“WRAM/MCBA”) over a five-year period, plus interest, and modified existing conservation and rationing plans. In its decision, the CPUC noted concern regarding Cal Am’s residential tariff administration, specifically regarding the lack of verification of customer-provided information about the number of residents per household. This information was used for generating billing determinants under the tiered rate system. As a result, the CPUC kept this proceeding open to address several issues, including whether Cal Am’s residential tariff administration violated a statute, rule or CPUC decision, and if so, whether a penalty should be imposed.
On February 24, 2017, Cal Am, the Monterey Peninsula Water Management District, the CPUC’s Office of Ratepayer Advocates, and the Coalition of Peninsula Businesses filed for CPUC approval of a joint settlement agreement (the “Joint Settlement Agreement”), which among other things, proposed to resolve the CPUC’s residential tariff administration concerns by providing for a waiver by Cal Am of $0.5 of cost recovery for residential customers through the WRAM/MCBA in lieu of a penalty. Approval of the Joint Settlement Agreement, which is required for it to take effect, remains pending before the CPUC.
On March 28, 2017, the administrative law judge assigned to the proceeding issued a ruling stating there was sufficient evidence to conclude, on a preliminary basis, that Cal Am’s administration of the residential tariff violated certain provisions of the California Public Utilities Code and a CPUC decision. The ruling ordered Cal Am to show cause why it should not be penalized for these administrative violations and directed the settling parties to address whether the cost recovery waiver in the Joint Settlement Agreement was reasonable compared to a potential penalty range described by the administrative law judge. During hearings held on April 13-14, 2017, the administrative law judge clarified that this potential penalty range is $3 to $179 (calculated as a continuing violation dating back to 2000 and applying penalties of up to $20 thousand per day until January 1, 2012 and penalties of up to $50 thousand per day thereafter, reflecting a 2012 change to the relevant statute). The administrative law judge also noted that a per diem penalty may not be appropriate, as Cal Am’s monthly billing practices did not allow Cal Am to update customer-provided information for billing purposes on a daily basis. Hearings before the administrative law judge in this matter occurred in August and September 2017. Cal Am also submitted additional testimony on the issue of whether Cal Am should be penalized, and if so, the reasonable amount of any such penalty. A subsequent hearing in this proceeding is currently scheduled for November 27, 2017.
As of September 30, 2017, the portions of this loss contingency that are probable and/or reasonable possible have been determined to be immaterial to the Company and have been included in the aggregate maximum amounts described above in the first paragraph of “Contingencies” in this Note 9.
Missouri Infrastructure System Replacement Surcharge Litigation
In March 2016, the Western District of the Missouri Court of Appeals ruled that the Missouri Public Service Commission (“MoPSC”) did not have statutory authority to issue an order in June 2015 approving an infrastructure system replacement surcharge (“ISRS”) for Missouri-American Water Company (“MAWC”), a wholly owned subsidiary of the Company. The court held that the MoPSC’s June 2015 order authorizing the ISRS increase was invalid because St. Louis County did not have a population of at least one million residents, as required by the statute. MAWC believes that the MoPSC’s June 2015 order authorizing the collection of ISRS revenues is lawful. In June 2016, the Missouri Supreme Court granted MAWC’s application to transfer the case from the Court of Appeals to the Missouri Supreme Court, and as a result of that order, the March 2016 ruling of the Court of Appeals was vacated.
On March 14, 2017, in a unanimous decision, the Missouri Supreme Court dismissed the case as moot, finding that there were no longer any ISRS funds in dispute because MAWC had completed a rate case during the appellate process and the disputed charges were now incorporated in base rates. On May 30, 2017, the Missouri Supreme Court denied a Motion for Rehearing filed by the Missouri Office of Public Counsel, which action concluded the litigation in this matter.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 WVAWC’sthe West Relay pumping station located in the City of Dunbar.Dunbar, West Virginia and owned by WVAWC. The failure of the main caused water outages and low pressure tofor up to approximately 25,000 WVAWC customers. In the early morning hours of June 25, 2015, crews completed a repair, but that same day, the repair developed a leak. On June 26, 2015, a second repair was completed and service was restored that day to approximately 80% of the impacted customers, and to the remaining approximately 20% by the next morning. The second repair showed signs of leaking, but the water main was usable until June 29, 2015 to allow tanks to refill. The system was reconfigured to maintain service to all but approximately 3,000 customers while a final repair was being completed safely on June 30, 2015. Water service was fully restored onby July 1, 2015 to all customers affected by this event.
On June 2, 2017, a class action complaint captioned Jeffries, et al. v. West Virginia-American Water Company was filed in West Virginia Circuit Court in Kanawha County against WVAWC on behalf of a purportedan 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.
On October 12, 2017, WVAWCFebruary 4, 2020, the Jeffries plaintiffs filed with the court a motion seeking class certification on the issues of breach of contract and negligence, and to dismiss alldetermine the applicability of punitive damages and a multiplier for those damages if imposed. On July 14, 2020, the Circuit Court entered an order granting the Jeffriesplaintiffs’ counts alleging statutory and common law tort claims. Furthermore,motion for certification of a class regarding certain liability issues but denying certification of a class to determine a punitive damages multiplier. On August 31, 2020, WVAWC asserts thatfiled a Petition for Writ of Prohibition in the Public Service CommissionSupreme Court of Appeals of West Virginia and notseeking to vacate or remand the court, has primary jurisdiction over allegations involving violationsCircuit Court order certifying the issues class. At the request of the applicable tariff,parties, on September 10, 2020, the public utility codeCircuit Court ordered the stay of all matters in the class proceeding pending consideration of this petition. On December 3, 2020, the Supreme Court of Appeals issued an order to show cause stating that there are sufficient grounds for oral argument to consider prohibiting the class certification order. On January 28, 2021, the Supreme Court of Appeals granted a motion by the Jeffries plaintiffs to remand the case back to the Circuit Court for further consideration in light of a recent Supreme Court of Appeals decision issued in another case relating to the class certification issues raised. A briefing schedule has been set and, related rules.following briefing by all parties, oral argument on the issue of class certification was heard on July 16, 2021. This motionmatter remains pending.
The Company and WVAWC believe that WVAWC has valid, meritorious defenses to the claims raised in this class action complaint. WVAWC is vigorously defending itself against these allegations. Given the current stage of this proceeding, theThe Company cannot reasonablycurrently determine the likelihood of a loss, if any, or estimate the amount of any reasonably possible lossesloss or a range of such losses related to this proceeding.
Chattanooga, Tennessee Water Main Break Class Action Litigation Note 10: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.
On November 22, 2019, the Tennessee-American Water Defendants filed a motion to dismiss the complaint for failure to state a claim upon which relief may be granted, and, with respect to the Company, for lack of personal jurisdiction. Oral argument on the motion to dismiss took place on September 9, 2020. On September 18, 2020, the court (i) granted the motion to dismiss the Tennessee Plaintiffs’ negligence claim against all Tennessee-American Water Defendants, (ii) denied the motion to dismiss the breach of contract claim against TAWC, (iii) held in abeyance the motion to dismiss the breach of contract claims against the Company and Service Company pending a further hearing and (iv) held in abeyance the Company’s motion to dismiss the complaint for lack of personal jurisdiction. On September 24, 2020, at the request of the Tennessee Plaintiffs, the court dismissed without prejudice all claims in the Bruce complaint against the Company and Service Company. The impact of the September 2020 court orders was that all of the Tennessee Plaintiffs’ claims in this complaint were dismissed, other than the breach of contract claims against TAWC. On October 16, 2020, TAWC answered the complaint, and the parties are conducting discovery.
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 (the “2021 Deadline”).
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 MPWMD. The Water Supply Project is intended, among other things, to fulfill Cal Am’s obligations under the 2009 Order and the 2016 Order. 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 California Public Utilities Commission (the “CPUC”).
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 the incurred $50 million in associated 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 (i) the Water Supply Project meets the CPUC’s requirements for a certificate of public convenience and necessity, (ii) the issuance of the final decision should not be delayed, and (iii) an additional procedural phase was not necessary to consider alternative projects. The CPUC’s 2018 decision concludes that the Water Supply Project is the best project to address estimated future water demands in Monterey, and, in addition to the cost recovery approved in its 2016 decision, adopts Cal Am’s cost estimates for the Water Supply Project, which amounted to an aggregate of $279 million plus AFUDC at a rate representative of Cal Am’s actual financing costs. The 2018 final decision specifies the procedures for recovery of all of Cal Am’s prudently incurred costs associated with the Water Supply Project upon its completion, subject to the frameworks included in the final decision related to cost caps, operation and maintenance costs, financing, ratemaking and contingency matters. The reasonableness of the Water Supply Project costs will be reviewed by the CPUC when Cal Am seeks cost recovery for the Water Supply Project. Cal Am has incurred $176 million in aggregate costs as of September 30, 2021 related to the Water Supply Project, which includes $44 million in AFUDC. While Cal Am believes that its expenditures to date have been prudent and necessary to comply with the 2009 Order and the 2016 Order, as well as the CPUC’s 2016 and 2018 final decisions, Cal Am cannot currently predict its ability to recover all of its costs and expenses associated with the Water Supply Project and there can be no assurance that Cal Am will be able to recover all of such costs and expenses in excess of the $50 million in construction costs previously approved by the CPUC in its 2016 final decision.
Coastal Development Permit Application
In June 2018, Cal Am submitted a coastal development permit application to the City of Marina (the “City”) for those project components of the Water Supply Project located within the City’s coastal zone. Members of the City’s Planning Commission, as well as City councilpersons, have publicly expressed opposition to the Water Supply Project. In May 2019, the City issued a notice of final local action based upon the denial by the Planning Commission of Cal Am’s coastal development permit application. Thereafter, Cal Am appealed this decision to the California Coastal Commission (the “Coastal Commission”), as permitted under the City’s code and the California Coastal Act. At the same time, Cal Am submitted an application to the Coastal Commission for a coastal development permit for those project components located within the Coastal Commission’s original jurisdiction. In October 2019, staff of the Coastal Commission issued a report recommending a denial of Cal Am’s application for a coastal development permit with respect to the Water Supply Project, largely based on a memorandum prepared by the general manager of the MPWMD that contradicted findings made by the CPUC in its final decision approving the Water Supply Project. In November 2019, discussions between staffs of the Coastal Commission and the CPUC took place regarding the Coastal Commission staff recommendation, at which time the CPUC raised questions about the Coastal Commission staff’s findings on water supply and demand, groundwater impacts and the viability of a project that the Coastal Commission staff believes may be a possible alternative to the Water Supply Project.
In August 2020, the staff of the Coastal Commission released a report again recommending denial of Cal Am’s application for a coastal development permit. Although the report concluded that the Water Supply Project would have a negligible impact on groundwater resources, the report also concluded it would impact other coastal resources, such as environmentally sensitive habitat areas and wetlands, and that the Coastal Commission staff believes that a feasible alternative project exists that would avoid those impacts. The staff’s report also noted disproportionate impacts to communities of concern. In September 2020, Cal Am withdrew its original jurisdiction application to allow additional time to address the Coastal Commission staff’s environmental justice concerns. The withdrawal of the original jurisdiction application did not impact Cal Am’s appeal of the City’s denial, which remains pending before the Coastal Commission. Cal Am refiled the original jurisdiction application in November 2020. In December 2020, the Coastal Commission sent to Cal Am a notice of incomplete application, identifying certain additional information needed to consider the application complete. In March 2021, Cal Am provided responses to the Coastal Commission’s notice of incomplete application. On June 18, 2021, the Coastal Commission responded, acknowledging the responses and requesting certain additional information before the application could be considered complete. The original jurisdiction application remains pending.
Cal Am continues to work constructively with all appropriate agencies to provide necessary information in connection with obtaining required approvals for the Water Supply Project. However, based on the foregoing, there can be no assurance that the Water Supply Project in its current configuration will be completed on a timely basis, if ever. Due to the delay in the approval schedule for the Water Supply Project, Cal Am currently does not expect that it will be able to comply with the diversion reduction requirement schedule contained in the 2016 Order until January 2022. 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, or the 2021 Deadline, 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 13: Earnings per Common Share
The followingPresented in the table below is a reconciliation of the numerator and denominator for the basic and diluted earnings per shareEPS calculations:
| | | | | | | | | | | | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | 2021 | | 2020 | | 2021 | | 2020 |
| Numerator: | | Numerator: | | | | | | | |
| Net income attributable to common shareholders | | Net income attributable to common shareholders | $ | 278 | | | $ | 264 | | | $ | 618 | | | $ | 564 | |
| | 2017 | | 2016 | | 2017 | | 2016 | | | | | | | | |
| Numerator | | | | | | | | |
| Net income attributable to common stockholders | $ | 203 |
| | $ | 148 |
| | $ | 427 |
| | $ | 367 |
| |
| | | | | | | | | |
| Denominator | |
| | |
| | |
| | |
| |
| Denominator: | | Denominator: | |
| Weighted-average common shares outstanding—Basic | 178 |
| | 178 |
| | 178 |
| | 178 |
| Weighted-average common shares outstanding—Basic | 182 | | | 181 | | | 182 | | | 181 | |
| Effect of dilutive common stock equivalents | 1 |
| | — |
| | 1 |
| | 1 |
| Effect of dilutive common stock equivalents | — | | | 1 | | | — | | | — | |
| Weighted-average common shares outstanding—Diluted | 179 |
| | 178 |
| | 179 |
| | 179 |
| Weighted-average common shares outstanding—Diluted | 182 | | | 182 | | | 182 | | | 181 | |
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 Plans,Plan, as well as estimated shares to be purchased under the Company’s 2017 Nonqualified Employee Stock Purchase Plan. Less than 1000000 share-based awards were excluded from the computation of diluted EPS for the three and nine months ended September 30, 2021 and 2020, because their effect would have been anti-dilutive under the treasury stock method.
Note 11:14: Fair Value of Financial Assets and LiabilitiesInformation
Fair Value of Financial Instruments
The Company used the following methods and assumptions to estimatewere used by the Company in estimating its fair value disclosures for financial instruments:
Current assets and current liabilities—The carrying amounts reported inon the accompanying 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.
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. The fair values
Presented in the tables below are determined by a valuation model that is based on a conventional discounted cash flow methodology and utilizes assumptions of current market rates. As a portion of the Company’s debts do not trade in active markets, the Company calculated a base yield curve using a risk-free rate (a U.S. Treasury securities yield curve) plus a credit spread that is based on the following two factors: (i) an average of the Company’s own publicly-traded debt securities and (ii) the current market rates for U.S. Utility A debt securities. The Company used these yield curve assumptions to derive a base yield for the Level 2 and Level 3 securities. Additionally, the Company adjusted the base yield for specific features of the debt securities including call features, coupon tax treatment and collateral for the Level 3 instruments.
The carrying amounts, including fair value adjustments previously recognized in acquisition purchase accounting, and a fair value adjustment related to the Company’s interest rate swap fair value hedge (which is classified as Level 2 in the fair value hierarchy), and fair values of the Company’s financial instruments were as follows:instruments:
| | | | | | | | | | | | | | As of September 30, 2021 |
| | Carrying Amount | | At Fair Value as of September 30, 2017 | | Carrying Amount | | At Fair Value |
| | | Level 1 | | Level 2 | | Level 3 | | Total | | | Level 1 | | Level 2 | | Level 3 | | Total |
| Preferred stock with mandatory redemption requirements | $ | 11 |
| | $ | — |
| | $ | — |
| | $ | 15 |
| | $ | 15 |
| Preferred stock with mandatory redemption requirements | $ | 4 | | | $ | — | | | $ | — | | | $ | 6 | | | $ | 6 | |
| Long-term debt (excluding capital lease obligations) | 7,357 |
| | 5,375 |
| | 990 |
| | 1,867 |
| | 8,232 |
| |
| Long-term debt (excluding finance lease obligations) | | Long-term debt (excluding finance lease obligations) | 10,395 | | | 10,241 | | | 61 | | | 1,657 | | | 11,959 | |
| | | | | | | | | | | | | As of December 31, 2020 |
| | Carrying Amount | | At Fair Value as of December 31, 2016 | | Carrying Amount | | At Fair Value |
| | | Level 1 | | Level 2 | | Level 3 | | Total | | | Level 1 | | Level 2 | | Level 3 | | Total |
| Preferred stock with mandatory redemption requirements | $ | 12 |
| | $ | — |
| | $ | — |
| | $ | 15 |
| | $ | 15 |
| Preferred stock with mandatory redemption requirements | $ | 5 | | | $ | — | | | $ | — | | | $ | 7 | | | $ | 7 | |
| Long-term debt (excluding capital lease obligations) | 6,320 |
| | 3,876 |
| | 1,363 |
| | 1,805 |
| | 7,044 |
| |
| Long-term debt (excluding finance lease obligations) | | Long-term debt (excluding finance lease obligations) | 9,656 | | | 9,639 | | | 415 | | | 1,753 | | | 11,807 | |
Recurring Fair Value Measurements
The following table presentsPresented in the tables below are assets and liabilities measured and recorded at fair value on a recurring basis and their level inwithin the fair value hierarchy:
| | | | | | | | | | | | | | | | | | | | | | | |
| As of September 30, 2021 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
| Restricted funds | $ | 30 | | | $ | — | | | $ | — | | | $ | 30 | |
| Rabbi trust investments | 23 | | | — | | | — | | | 23 | |
| Deposits | 26 | | | — | | | — | | | 26 | |
| Other investments | 14 | | | — | | | — | | | 14 | |
| Total assets | 93 | | | — | | | — | | | 93 | |
| | | | | | | |
| Liabilities: | | | | | | | |
| Deferred compensation obligations | 27 | | | — | | | — | | | 27 | |
| Total liabilities | 27 | | | — | | | — | | | 27 | |
| Total assets | $ | 66 | | | $ | — | | | $ | — | | | $ | 66 | |
| | | | At Fair Value as of September 30, 2017 | | As of December 31, 2020 |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | | Assets: | | | | | | | |
| Restricted funds | $ | 29 |
| | $ | — |
| | $ | — |
| | $ | 29 |
| Restricted funds | $ | 29 | | | $ | — | | | $ | — | | | $ | 29 | |
| Rabbi trust investments | 14 |
| | — |
| | — |
| | 14 |
| Rabbi trust investments | 19 | | | — | | | — | | | 19 | |
| Deposits | 4 |
| | — |
| | — |
| | 4 |
| Deposits | 4 | | | — | | | — | | | 4 | |
| Other investments | 4 |
| | — |
| | — |
| | 4 |
| Other investments | 11 | | | — | | | — | | | 11 | |
| Total assets | 51 |
| | — |
| | — |
| | 51 |
| Total assets | 63 | | | — | | | — | | | 63 | |
| | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | Liabilities: | | | | | | | |
| Deferred compensation obligations | 16 |
| | — |
| | — |
| | 16 |
| Deferred compensation obligations | 24 | | | — | | | — | | | 24 | |
| Mark-to-market derivative liabilities | — |
| | 2 |
| | — |
| | 2 |
| |
| Total liabilities | 16 |
| | 2 |
| | — |
| | 18 |
| Total liabilities | 24 | | | — | | | — | | | 24 | |
| Total net assets (liabilities) | $ | 35 |
| | $ | (2 | ) | | $ | — |
| | $ | 33 |
| |
| Total assets | | Total assets | $ | 39 | | | $ | — | | | $ | — | | | $ | 39 | |
|
| | | | | | | | | | | | | | | |
| | At Fair Value as of December 31, 2016 |
| | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets: | | | | | | | |
| Restricted funds | $ | 24 |
| | $ | — |
| | $ | — |
| | $ | 24 |
|
| Rabbi trust investments | 12 |
| | — |
| | — |
| | 12 |
|
| Deposits | 3 |
| | — |
| | — |
| | 3 |
|
| Mark-to-market derivative assets | — |
| | 28 |
| | — |
| | 28 |
|
| Other investments | 1 |
| | — |
| | — |
| | 1 |
|
| Total assets | 40 |
| | 28 |
| | — |
| | 68 |
|
| | | | | | | | |
| Liabilities: | | | | | | | |
| Deferred compensation obligations | 13 |
| | — |
| | — |
| | 13 |
|
| Total liabilities | 13 |
| | — |
| | — |
| | 13 |
|
| Total net assets (liabilities) | $ | 27 |
| | $ | 28 |
| | $ | — |
| | $ | 55 |
|
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 operationsoperation, maintenance and maintenancerepair projects. The proceeds of these financings are held in escrow until the designated expenditures are incurred. Long-term restricted funds of $1 and $4 were included in other long-term assets as of September 30, 2017 and December 31, 2016, respectively.
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.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.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 assetassets and liability—liabilities—The Company utilizes 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 also employs derivative financial instruments in the form of variable-to-fixed interest rate swaps and forward starting interest rate swaps,treasury lock agreements, classified as economic hedges and cash flow hedges, respectively, in order to fix the interest cost on existing or forecasted debt. The Company may use fixed-to-floating interest rate swaps, typically designated as fair-value hedges, to achieve a targeted level of variable-rate debt as a percentage of total debt. The Company uses a calculation of future cash inflows and estimated future outflows, which are discounted, to determine the current fair value. Additional inputs to the present value calculation include the contract terms, counterparty credit risk, interest rates and market volatility. The Company had no significant mark-to-market derivatives outstanding as of September 30, 2021.
Other investments—Other investments primarily represent money market funds used for active employee benefits. The Company includes other investments in other current assets.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.
Note 15: Leases
The Company includes such planshas 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 other long-term liabilities.the Company’s right-of-use (“ROU”) assets. Certain operating leases contain the option to purchase the leased property. The operating leases for real property, vehicles and equipment will expire over the next 38 years, six years, and five years, respectively.
The Company participates in a number of arrangements with various public entities (“Partners”) in West Virginia. Under these arrangements, the Company transferred a portion of its utility plant to the Partners in exchange for an equal principal amount of Industrial Development Bonds (“IDBs”) issued by the Partners under the Industrial Development and Commercial Development Bond Act. The Company leased back the utility plant under agreements for a period of 30 to 40 years. The Company has recorded these agreements as finance leases in property, plant and equipment, as ownership of the assets will revert back to the Company at the end of the lease term. The carrying value of the Company’s deferred compensationfinance lease assets was $146 million and $147 million as of September 30, 2021 and December 31, 2020, respectively. The Company determined that the finance lease obligations is basedand the investments in IDBs meet the conditions for offsetting, and as such, are reported net on the market valueConsolidated 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 participants’ notional investment accounts.Partners’ assets in performing under the O&M agreements. The notional investmentsO&M agreements are comprised primarilyrecorded as operating leases, and future annual use fees of mutual funds,$1 million in 2021 and $4 million in 2022 through 2025, and $52 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 and $3 million for the three months ended September 30, 2021 and September 30, 2020, respectively, and $10 million and $10 million for the nine months ended September 30, 2021 and September 30, 2020, respectively.
For the three and nine months ended September 30, 2021, cash paid for amounts in lease liabilities, which includes operating and financing cash flows from operating and finance leases, were $3 million and $10 million, respectively. For the three months ended September 30, 2021, there were $4 million ROU assets obtained in exchange for new operating lease liabilities. For the nine months ended September 30, 2021, there were ROU assets obtained in exchange for new operating lease liabilities of $10 million.
As of September 30, 2021, the weighted-average remaining lease term of the finance lease and operating leases were five years and 18 years, respectively, and the weighted-average discount rate of the finance lease and operating leases were 12% and 4%, respectively.
The future maturities of lease liabilities at September 30, 2021 are based on observable market prices.$3 million in 2021, $12 million in 2022, $9 million in 2023, $8 million in 2024, $8 million in 2025 and $96 million thereafter. At September 30, 2021, imputed interest was $46 million.
Note 12:16: 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 conductsoperates its businessbusinesses primarily through one1 reportable segment, the Regulated Businesses segment. The Company also operates severalmarket-based businesses that provide a broad range of related and complementary water and wastewater services in four operating segments that, individually, do not meet the criteria of a reportable segment in accordance with GAAP. These four non-reportable operating segmentsGAAP, and are collectively presented as the Company’s “Market-BasedMarket-Based Businesses.” “Other” includes corporate costs that are not allocated to the Company’s operating segments, eliminations of inter-segment transactions, fair value adjustments and associated income and deductions related to the acquisitions that have not been allocated to the operating segments for evaluation of performance and allocation of resource purposes. The followingadjustments related to the acquisitions are reported in Other as they are excluded from segment performance measures evaluated by management.
Presented in the tables include the Company’sbelow is summarized segment information:
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of or for the Three Months Ended September 30, 2021 |
| | Regulated Businesses | | Market-Based Businesses | | Other | | Consolidated |
| Operating revenues | $ | 944 | | | $ | 152 | | | $ | (4) | | | $ | 1,092 | |
| Depreciation and amortization | 151 | | | 6 | | | 4 | | | 161 | |
| Total operating expenses, net | 563 | | | 121 | | | (9) | | | 675 | |
| Interest, net | (73) | | | (1) | | | (27) | | | (101) | |
| Income before income taxes | 332 | | | 31 | | | (23) | | | 340 | |
| Provision for income taxes | 60 | | | 8 | | | (6) | | | 62 | |
| Net income attributable to common shareholders | 273 | | | 23 | | | (18) | | | 278 | |
| Total assets | 22,818 | | | 900 | | | 1,615 | | | 25,333 | |
| Cash paid for capital expenditures | 447 | | | 3 | | | 3 | | | 453 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of or for the Three Months Ended September 30, 2020 |
| | Regulated Businesses | | Market-Based Businesses | | Other | | Consolidated |
| Operating revenues | $ | 945 | | | $ | 139 | | | $ | (5) | | | $ | 1,079 | |
| Depreciation and amortization | 138 | | | 7 | | | 9 | | | 154 | |
| Total operating expenses, net | 543 | | | 108 | | | (5) | | | 646 | |
| Interest, net | (72) | | | — | | | (27) | | | (99) | |
| Income before income taxes | 346 | | | 31 | | | (25) | | | 352 | |
| Provision for income taxes | 85 | | | 7 | | | (4) | | | 88 | |
| Net income attributable to common shareholders | 261 | | | 23 | | | (20) | | | 264 | |
| Total assets | 21,946 | | | 1,110 | | | 1,338 | | | 24,394 | |
| Cash paid for capital expenditures | 442 | | | 1 | | | 1 | | | 444 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | As of or for the Nine Months Ended September 30, 2021 |
| | Regulated Businesses | | Market-Based Businesses | | Other | | Consolidated |
| Operating revenues | $ | 2,556 | | | $ | 435 | | | $ | (12) | | | $ | 2,979 | |
| Depreciation and amortization | 449 | | | 17 | | | 10 | | | 476 | |
| Total operating expenses, net | 1,658 | | | 354 | | | (9) | | | 2,003 | |
| Interest, net | (216) | | | (3) | | | (81) | | | (300) | |
| Income before income taxes | 752 | | | 79 | | | (85) | | | 746 | |
| Provision for income taxes | 130 | | | 20 | | | (22) | | | 128 | |
| Net income attributable to common shareholders | 623 | | | 59 | | | (64) | | | 618 | |
| Total assets | 22,818 | | | 900 | | | 1,615 | | | 25,333 | |
| Cash paid for capital expenditures | 1,191 | | | 7 | | | 7 | | | 1,205 | |
| | | | As of or for the Three Months Ended September 30, 2017 | | As of or for the Nine Months Ended September 30, 2020 |
| | Regulated
Businesses | | Market-Based
Businesses | | Other | | Consolidated | | Regulated Businesses | | Market-Based Businesses | | Other | | Consolidated |
| Operating revenues | $ | 842 |
| | $ | 100 |
| | $ | (6 | ) | | $ | 936 |
| Operating revenues | $ | 2,468 | | | $ | 399 | | | $ | (13) | | | $ | 2,854 | |
| Depreciation and amortization | 121 |
| | 5 |
| | 2 |
| | 128 |
| Depreciation and amortization | 417 | | | 20 | | | 14 | | | 451 | |
| Total operating expenses, net | 433 |
| | 80 |
| | (7 | ) | | 506 |
| Total operating expenses, net | 1,558 | | | 309 | | | 2 | | | 1,869 | |
| Interest, net | (67 | ) | | 1 |
| | (23 | ) | | (89 | ) | Interest, net | (218) | | | 1 | | | (79) | | | (296) | |
| Income before income taxes | 347 |
| | 21 |
| | (28 | ) | | 340 |
| Income before income taxes | 744 | | | 91 | | | (92) | | | 743 | |
| Provision for income taxes | 135 |
| | 7 |
| | (5 | ) | | 137 |
| Provision for income taxes | 183 | | | 23 | | | (27) | | | 179 | |
| Net income attributable to common stockholders | 212 |
| | 14 |
| | (23 | ) | | 203 |
| |
| Net income attributable to common shareholders | | Net income attributable to common shareholders | 561 | | | 68 | | | (65) | | | 564 | |
| Total assets | 17,390 |
| | 600 |
| | 1,371 |
| | 19,361 |
| Total assets | 21,946 | | | 1,110 | | | 1,338 | | | 24,394 | |
| Cash paid for capital expenditures | | Cash paid for capital expenditures | 1,303 | | | 7 | | | 4 | | | 1,314 | |
Note 17: Subsequent Events
Sale of Homeowner Services Group
On October 28, 2021, the Company and the subsidiaries comprising its Homeowner Services Group (“HOS”) entered into a purchase agreement with a wholly owned subsidiary of funds advised by Apax Partners LLP (the “Buyer”), to sell all of the equity interests of the HOS subsidiaries to the Buyer for total estimated consideration of approximately $1.275 billion. Apax Partners LLP is a global private equity advisory firm. The consideration is comprised of $480 million in cash (subject to customary closing and post-closing adjustments and tax withholdings), a five-year secured seller promissory note to be issued at closing 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. Closing of the sale is subject to certain customary conditions, including, among others, the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”). The Company and the Buyer may terminate the purchase agreement under certain circumstances, including if the closing does not occur by December 27, 2021, subject to an extension by either the Company or the Buyer for up to an additional nine months in the event of any law or order preventing the closing or if the expiration or termination of the applicable waiting period under the HSR Act has not occurred.
|
| | | | | | | | | | | | | | | |
| | As of or for the Three Months Ended September 30, 2016 |
| | Regulated
Businesses | | Market-Based
Businesses | | Other | | Consolidated |
| Operating revenues | $ | 826 |
| | $ | 109 |
| | $ | (5 | ) | | $ | 930 |
|
| Depreciation and amortization | 111 |
| | 4 |
| | 4 |
| | 119 |
|
| Total operating expenses, net | 521 |
| | 98 |
| | (8 | ) | | 611 |
|
| Interest, net | (64 | ) | | — |
| | (17 | ) | | (81 | ) |
| Income before income taxes | 246 |
| | 12 |
| | (15 | ) | | 243 |
|
| Provision for income taxes | 94 |
| | 5 |
| | (4 | ) | | 95 |
|
| Net income attributable to common stockholders | 152 |
| | 7 |
| | (11 | ) | | 148 |
|
| Total assets | 16,020 |
| | 545 |
| | 1,406 |
| | 17,971 |
|
|
| | | | | | | | | | | | | | | |
| | As of or for the Nine Months Ended September 30, 2017 |
| | Regulated
Businesses | | Market-Based
Businesses | | Other | | Consolidated |
| Operating revenues | $ | 2,247 |
| | $ | 306 |
| | $ | (17 | ) | | $ | 2,536 |
|
| Depreciation and amortization | 357 |
| | 13 |
| | 8 |
| | 378 |
|
| Total operating expenses, net | 1,327 |
| | 263 |
| | (19 | ) | | 1,571 |
|
| Interest, net | (200 | ) | | 2 |
| | (61 | ) | | (259 | ) |
| Income before income taxes | 731 |
| | 46 |
| | (66 | ) | | 711 |
|
| Provision for income taxes | 285 |
| | 17 |
| | (18 | ) | | 284 |
|
| Net income attributable to common stockholders | 446 |
| | 29 |
| | (48 | ) | | 427 |
|
| Total assets | 17,390 |
| | 600 |
| | 1,371 |
| | 19,361 |
|
|
| | | | | | | | | | | | | | | |
| | As of or for the Nine Months Ended September 30, 2016 |
| | Regulated
Businesses | | Market-Based
Businesses | | Other | | Consolidated |
| Operating revenues | $ | 2,176 |
| | $ | 338 |
| | $ | (14 | ) | | $ | 2,500 |
|
| Depreciation and amortization | 328 |
| | 11 |
| | 11 |
| | 350 |
|
| Total operating expenses, net | 1,385 |
| | 300 |
| | (17 | ) | | 1,668 |
|
| Interest, net | (191 | ) | | 1 |
| | (52 | ) | | (242 | ) |
| Income before income taxes | 610 |
| | 44 |
| | (50 | ) | | 604 |
|
| Provision for income taxes | 236 |
| | 18 |
| | (17 | ) | | 237 |
|
| Net income attributable to common stockholders | 374 |
| | 26 |
| | (33 | ) | | 367 |
|
| Total assets | 16,020 |
| | 545 |
| | 1,406 |
| | 17,971 |
|
| |
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read together with the unaudited consolidated financial statementsConsolidated Financial Statements and the notesNotes thereto included elsewhere in this Form 10-Q.10-Q, and in the Company’s Form 10-K for the year ended December 31, 2020. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about ourthe Company’s business, operations and financial performance. The cautionary statements made in this Form 10-Q should be read as applying to all related forward-looking statements whenever they appear in this Form 10-Q. OurThe Company’s actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those we discussthat are discussed under “Forward-Looking Statements,”Statements” and elsewhere in this Form 10-Q. The Company has a disclosure committee consisting of members of senior management and other key employees involved in the preparation of the Company’s SEC reports. The disclosure committee is actively involved in the review and discussion of the Company’s SEC filings.
GeneralOverview
Through its subsidiaries, American Water Works Company, Inc. (“American Water” or the “Company”) is the largest and most geographically diverse, investor-owned publicly-tradedpublicly traded water and wastewater utility company in the United States, as measured by both operating revenuerevenues and population served. OurThe Company’s primary business involves the ownership of utilities that provide water and wastewater services to residential, commercial, industrial, public authority, fire service and other customers, including sale for resale and public authority customers. Ourcustomers, collectively presented as the “Regulated Businesses.” Services provided by the Company’s utilities are generally subject to economic regulation by certainmultiple state utility commissions or other entities engaged in utility regulation. We report the results of our utilities in our Regulated Businesses segment. Weregulation, collectively referred to as public utility commissions (“PUCs”). The Company also operate severaloperates market-based businesses that provide a broad range of relatedwater, wastewater and complementary waterother services to residential and wastewater services thatsmaller commercial customers, the U.S. government on military installations, as well as municipalities and utility customers, collectively presented as the “Market-Based Businesses.” These Market-Based Businesses are not subject to economic regulation by state utility commissions or other entities engaged in utility regulation. We present the results of these businesses as our “Market-Based Businesses.” For further description of our businesses, seePUCs. See Part I, Item 1—Business in ourthe Company’s Form 10-K.10-K for additional information.
You should readCOVID-19 Pandemic Update
American Water continues to monitor the following discussionCOVID-19 pandemic and has taken steps since the beginning of the pandemic to mitigate adverse impacts to the Company. The Company has three main areas of focus as part of its response to COVID-19: the care and safety of its employees; the safety of its customers and the communities it serves; and the execution of its business continuity plan. American Water continues to work with its vendors to prevent disruptions in conjunction with ourits supply chain, and, at this time, has not experienced, and does not anticipate, any material negative impacts. The Company also continues to monitor the impacts of the COVID-19 pandemic on the capital markets, including impacts that could increase its cost of capital.
The Company has experienced financial impacts since the beginning of the pandemic resulting from lower revenues from the suspension of late fees and foregone reconnect fees in certain states, certain incremental operation and maintenance (“O&M”) expenses, an increase in uncollectible accounts expense and additional debt costs.These impacts are collectively referred to as “financial impacts.” See Note 3—Impact of the COVID-19 Pandemic in the Notes to Consolidated Financial Statements for additional information. The extent to which the COVID-19 pandemic may further impact American Water, including without limitation, its liquidity, financial condition, and results of operations, will depend on future developments, which presently cannot be predicted.
As of November 2, 2021, American Water has commission orders authorizing deferred accounting or cost recovery for COVID-19 financial impacts in 11 of 14 jurisdictions, with proceedings in New York and Tennessee pending. One jurisdiction, Kentucky, issued an order denying a request to defer to a regulatory asset the financial impacts related to the COVID-19 pandemic. Other regulatory actions to date are presented in the table below:
| | | | | | | | | | | | | | |
| Commission Actions | | Description | | States |
| Orders issued with deferred accounting | | Allows the Company to establish regulatory assets to record certain financial impacts related to the COVID-19 pandemic. | | HI, IN, MD, NJ, PA, VA, WV |
| Orders issued with cost recovery | | California’s Catastrophic Event Memorandum Account allows the Company’s California subsidiary to track certain financial impacts related to the COVID-19 pandemic for future recovery requests. Iowa issued a base rate case order on June 28, 2021, authorizing recovery in rates of the COVID-19 financial impacts deferred within its annual non-recurring expense rider. Illinois has authorized cost recovery of the COVID-19 financial impacts through a special purpose rider over a 24-month period, which was implemented effective October 1, 2020. Additionally, Illinois approved a bad debt rider tariff on December 16, 2020, allowing collection of actual bad debt expense over last authorized beginning April 2021 through February 2023. Illinois approved a stipulation in March 2021 to allow the rider to be extended through the end of 2023. Missouri issued a base rate case order on April 7, 2021, authorizing recovery in rates of the COVID-19 financial impacts deferred through March 31, 2021 over a three-year period. | | CA, IA, IL, MO |
| Proceedings pending | | Pending proceedings considering deferred accounting authorization for the future recovery of COVID-19 financial impacts. | | NY, TN |
The Company’s Pennsylvania subsidiary filed for a request with the Pennsylvania Public Utility Commission (the “PaPUC”) to defer as a regulatory asset all identified COVID-19 financial impacts. On September 15, 2021, the PaPUC issued an order approving the request to defer, with carrying costs, incremental uncollectible expense and other incremental costs net of savings attributed to the COVID-19 pandemic. The PaPUC order denied the request to include lost revenues attributed to the waiver of late fees and reconnect fees and expenses associated with additional interest costs. Additionally, the PaPUC order approved the request to allow for the continuation of the deferral of financial impacts, rejecting proposals from the intervening parties to define an end date to the deferral in 2021. As a result of the order discussed above, the Company recorded a net $7 million reduction to its regulatory assets and corresponding impacts to revenue, interest expense and uncollectible expense during the third quarter of 2021. The Company continues to evaluate options within its next base rate case to address these denied items and the resulting financial impact.
On July 28, 2021, the Company’s Tennessee subsidiary filed a stipulation and settlement agreement with the Consumer Advocate Unit in the Financial Division of the Office of the Tennessee Attorney General, which reflected agreement on the deferral of COVID-19-related financial impacts through April 30, 2021. On August 9, 2021, the Tennessee Public Utility Commission denied the stipulation and settlement agreement and moved to address the Company’s Tennessee subsidiary’s petition to defer the COVID-19 financial impacts in a future hearing. On August 26, 2021, the Company’s Tennessee subsidiary filed a motion to withdraw its pending petition, preserving its right to seek recovery of the COVID-19 financial impacts in a future proceeding.
Consistent with these regulatory orders, the Company has recorded $39 million in regulatory assets and $6 million of regulatory liabilities for the financial impacts related to the COVID-19 pandemic on the Consolidated Balance Sheets as of September 30, 2021.
As of November 2, 2021, three states continue moratoria on the suspension of service disconnections due to non-payment. The moratoria on disconnects have expired in 11 states. The Company continues to monitor the COVID-19 pandemic and will continue to comply with the current ordered moratoria and any future moratoria implemented.
Sale of Homeowner Services Group
On October 28, 2021, the Company and the subsidiaries comprising HOS entered into a purchase agreement with a wholly owned subsidiary of funds advised by Apax Partners LLP (the “Buyer”), to sell all of the equity interests of the HOS subsidiaries to the Buyer for total estimated consideration of approximately $1.275 billion (an estimated $1.0 billion net of tax). Apax Partners LLP is a global private equity advisory firm. The consideration is comprised of $480 million in cash (subject to customary closing and post-closing adjustments and tax withholdings), a seller promissory note to be issued by the Buyer at closing 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. Closing of the sale is subject to certain customary conditions, including, among others, the expiration or termination of the waiting period under the HSR Act. The Company and/or the Buyer may terminate the purchase agreement under certain circumstances, including if the closing does not occur by December 27, 2021, subject to an extension by either the Company or the Buyer for up to an additional nine months in the event of any law or order preventing the closing or if the expiration or termination of the applicable waiting period under the HSR Act has not occurred. The Company expects the closing to occur in the fourth quarter of 2021. The structure of the transaction enables the initial cash proceeds to be redeployed into the Regulated Businesses to fund near-term incremental capital investments, while interest on the seller note will provide a stream of earnings during its term. Upon maturity, the proceeds from the repayment of the seller note are expected to be used to fund capital investment in the Regulated Businesses. This proposed sale further narrows the focus of the Company’s Market-Based Businesses primarily to its Military Services Group (“MSG”).
The seller note will have a five-year term, will be payable in cash, and will bear interest at a rate of 7.00% per year during the term. The repayment obligations of the Buyer under the seller note will be secured by a first priority security interest in certain property of the Buyer and the HOS subsidiaries, including their cash and securities accounts, as well as a pledge of the equity interests in each of those subsidiaries, subject to certain limitations and exceptions. The seller note will require compliance with affirmative and negative covenants (subject to certain conditions, limitations and exceptions), including a covenant limiting the incurrence by the Buyer and certain affiliates of additional indebtedness in excess of certain thresholds, but will not include any financial maintenance covenants.
Beginning on the 36th month after closing, the Company has a put right pursuant to which it may require the seller note to be repaid in full at par, plus accrued and unpaid interest, except that upon the occurrence of a disruption event in the broadly syndicated term loan “B” debt financing market, repayment by the Buyer pursuant to the Company’s exercise of the put right will be delayed until the market disruption event ends.
The seller note may not be prepaid at the Buyer’s election except in certain limited circumstances before the fourth anniversary of the closing date. If the Buyer seeks to repay the seller note in breach of this non-call provision, an event of default will occur under the seller note and the Company may, among other actions, demand repayment in full together with a premium ranging from 105.5% to 107.5% of the outstanding principal amount of the loan and a customary “make-whole” payment.
The Company and the Buyer will enter into, at closing, a revenue share agreement, pursuant to which the Company will 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.
Financing Activities
On May 10, 2021, American Water Capital Corp. (“AWCC”) completed a $1.1 billion debt offering, which included the sale of $550 million aggregate principal amount of its 2.30% senior notes due 2031 and $550 million aggregate principal amount of its 3.25% senior notes due 2051. Net proceeds of this offering were used to lend funds to parent company and its regulated subsidiaries, to prepay $327 million in aggregate principal amount of AWCC’s outstanding senior notes, to repay AWCC’s commercial paper obligations and for general corporate purposes. See Note 8—Long-Term Debt in the Notes included elsewhereto Consolidated Financial Statements for additional information.
As a result of AWCC’s prepayment of the various senior notes, a make-whole premium of $15 million was paid to the holders thereof on June 14, 2021. Substantially all of the early debt extinguishment costs were allocable to the Company’s utility subsidiaries and recorded as regulatory assets, as the Company believes they are probable of recovery in this Form 10-Q and in our Form 10-K.future rates.
Financial Results
Highlights of ourFor the three and nine months ended September 30, 2021, diluted earnings per share, prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), were $1.53 and adjusted$3.40, respectively, an increase of $0.07 and $0.29 per diluted earnings per share, (a non-GAAP measure)respectively, as compared to the same periods in the prior year. These increases were primarily driven by continued growth in the Regulated Businesses from infrastructure investment, acquisitions and organic growth. These increases were offset somewhat by the impacts from weather in both 2021 and 2020, which decreased revenue by an estimated $17 million and $11 million for the three and nine months ended September 30, 2017 are as follows:2021, respectively.
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Diluted earnings per share (GAAP): | | | | | | | |
| Net income attributable to common stockholders | $ | 1.13 |
| | $ | 0.83 |
| | $ | 2.39 |
| | $ | 2.05 |
|
| Non-GAAP adjustments: | | | | | | | |
| Impact of Freedom Industries settlement activities | (0.12 | ) | | 0.36 |
| | (0.12 | ) | | 0.36 |
|
| Income tax impact | 0.05 |
| | (0.14 | ) | | 0.05 |
| | (0.14 | ) |
| Net non-GAAP adjustment | (0.07 | ) | | 0.22 |
| | (0.07 | ) | | 0.22 |
|
| | | | | | | | |
| Early debt extinguishment at the parent company | 0.03 |
| | — |
| | 0.03 |
| | — |
|
| Income tax impact | (0.01 | ) | | — |
| | (0.01 | ) | | — |
|
| Net non-GAAP adjustment | 0.02 |
| | — |
| | 0.02 |
| | — |
|
| | | | | | | | |
| Total net non-GAAP adjustments | (0.05 | ) | | 0.22 |
| | (0.05 | ) | | 0.22 |
|
| | | | | | | | |
| Adjusted diluted earnings per share (non-GAAP) | $ | 1.08 |
| | $ | 1.05 |
| | $ | 2.34 |
| | $ | 2.27 |
|
ForThe Company expects to continue to grow its businesses, with the three months ended September 30, 2017, net income attributablemajority of its growth to common stockholders was $1.13 per diluted share, an increase of $0.30 per diluted share, or 36.1%, over the same period in 2016. Includedbe achieved in the 2017 amount was an after-tax benefit of $13 million, or $0.07 per diluted share, resulting from an insurance settlement with one of our general liability insurance carriers related to the Freedom Industries matter and an after-tax charge of $4 million, or $(0.02) per diluted share, resulting from an early debt extinguishment charge at the parent company. IncludedRegulated Businesses through (i) continued capital investment in the 2016 amount was an after-tax chargeCompany’s infrastructure to provide safe, clean, reliable and affordable water and wastewater services to its customers, and (ii) regulated acquisitions to expand the Company’s services to new customers. The Company plans to invest approximately $1.9 billion across its footprint in 2021. During the first nine months of $39 million, or $(0.22) per diluted share, resulting from 2021,the binding global agreementCompany invested $1.3 billion, primarily in principle to settle claims associated with the Freedom Industries chemical spill.
Excluding these items, adjusted diluted earnings per share (a non-GAAP measure) was $1.08 for the three months ended September 30, 2017, an increase of $0.03 per diluted share, or 2.9% over the same period in 2016. This increase was primarily due to continued growth in our Regulated Businesses, segment, largely driven by infrastructureas discussed below:
Regulated Businesses - Growth and Optimization
•$1.2 billion capital investment acquisitions and organic growth, combined with growth in our Market-Based Businesses from our Homeowner Services Group. These increases were partially offset by warmer weather in the third quarter of 2016Regulated Businesses, the majority for infrastructure improvements and a discrete tax adjustment recorded at the parent company associated with legislative changesreplacements; and
•$78 million to fund acquisitions, including deposits discussed below, in the State of Illinois impacting state tax apportionment.
ForRegulated Businesses, which added approximately 6,900 water and wastewater customers through the nine months ended September 30, 2017, net income attributable2021, in addition to common stockholders was $2.39 per diluted share, an increase of $0.34 per diluted share, or 16.6% over the same period in 2016. Included in the 2017 amount was an after-tax benefit of $13 million, or $0.07 per diluted share, resulting from an insurance settlement with one of our general liability insurance carriers related to the Freedom Industries matter and an after-tax charge of $4 million, or $(0.02) per diluted share, resulting from an early debt extinguishment charge at the parent company. Included in the 2016 amount was an after-tax charge of $39 million, or $(0.22) per diluted share, resulting from the binding global agreement in principle to settle claims associated with the Freedom Industries chemical spill.
Excluding these items, adjusted diluted earnings per share (a non-GAAP measure) was $2.34 forapproximately 12,600 customers added through organic growth through the nine months ended September 30, 2017, an increase of $0.07 per diluted share, or 3.1%, over2021.
On April 6, 2021, the same period in 2016. This increase was primarily due to continued growth in our Regulated Businesses segment, largely driven by infrastructure investment, acquisitions and organic growth, combined with growth in our Market-Based Businesses from our Homeowner Services Group. These increases were partially offset by overall warmer weather in 2016 and two discrete tax adjustments recorded at the parent company associated with legislative changes in the States of New York and Illinois impacting state tax apportionment.
Adjusted diluted earnings per share represents a non-GAAP financial measure and means diluted earnings per share, calculated in accordance with U.S. GAAP, excluding the impact of (1) the September 2017 insurance settlement related to the Freedom Industries chemical spill, (2) the debt extinguishment charge incurred in September 2017 with respect to the early extinguishment of debt allocated to the parent company and (3) the October 2016 binding global agreement in principle to settle claims related to the Freedom Industries chemical spill. We believe that this non-GAAP measure provides investors with useful information by excluding certain matters that may not be indicative of our ongoing operating results, and that providing this non-GAAP measure will allow investors to understand better our businesses’ operating performance and facilitate a meaningful year-to-year comparison of our results of operations. Although management uses this non-GAAP financial measure internally to evaluate our results of operations, we do not intend results excluding the adjustments to represent results as defined by U.S. GAAP, and the reader should not consider them as indicators of performance. This non-GAAP financial measure is derived from our consolidated financial information but is not presented in our financial statements prepared in accordance with U.S. GAAP, and thus it should be considered in addition to, and not as a substitute for, measures of financial performance prepared in accordance with U.S. GAAP. In addition, this non-GAAP financial measure as defined and used above may not be comparable to similarly titled non-GAAP measures used by other companies, and, accordingly, it may have significant limitations on its use.
Focusing on Central Themes
For 2017, our focus continues to be anchored on our five central themes: 1) Safety, 2) Customers, 3) People, 4) Growth and 5) Technology and Operational Efficiency. We continue our focus on operating our business responsibly and managing our operating and capital costs in a manner that benefits our customers and produces long-term value for our stockholders. Additionally, we continue to execute on our ongoing strategy that ensures a safe workplace for our employees, emphasizes public safety for our customers and communities, and leverages our human resources, processes and technology innovation to make our business more effective and efficient. The progress that we have made during the first nine months of 2017 with respect to growth and improvement in our operational efficiency ratio is described below.
Growth—Infrastructure improvements, acquisitions and strategic capital investments
During the first nine months of 2017, we made capital investments of approximately $1.0 billion, focused in two key areas:
$963 million of which the majority was in our Regulated Businesses segment for infrastructure improvements; and
$43 million to fund acquisitions in our Regulated Businesses segment, which added approximately 16,000 water and wastewater customers. This includes the acquisition on April 3, 2017, of all the outstanding capital stock of Shorelands Water Company, Inc. (“Shorelands”), for total consideration of $33 million in the form of 438,211 shares of our common stock. Shorelands, which is now a part of our New Jersey subsidiary, provides water service to approximately 11,000 customers in Monmouth County, New Jersey.
For the full year of 2017, our capital investment, including regulated acquisitions, is expected to be approximately $1.65 billion.
Included in this range is the asset purchase agreement signed by ourCompany’s Pennsylvania subsidiary entered into an agreement to acquire substantially all of the wastewater collection and treatment system assets of the MunicipalYork City Sewer Authority for $235 million, plus an amount of average daily revenue calculated for the Cityperiod between the final meter reading and the date of McKeesport, Pennsylvania for approximately $159 million, subject to certain adjustments provided in the agreement. Theclosing. This system, currently represents approximately 22,000 wastewaterdirectly and indirectly through bulk contracts, serves more than 45,000 customers. In connection with the execution of thisthe acquisition agreement, $7the Company’s Pennsylvania subsidiary paid a $20 million in non-escrowed deposits have been madedeposit to the seller. On October 26, 2017,seller on April 30, 2021, which is refundable in the Pennsylvania Public Utility Commission approved a joint petition for settlementevent the agreement is terminated prior to closing of thisthe acquisition. The closing of this acquisition is subject to the satisfaction of various conditions and covenants. We are expectingCompany expects to close this acquisition byin the endfirst half of 2017.2022, pending regulatory approval.
On SeptemberMarch 29, 2017, our Military Services Group was awarded a contract for ownership, operation and maintenance of2021, 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 at Wright-Patterson Air Force Base,currently serve approximately 1,500 customers each, or 3,000 combined, and are being sold through the New Jersey Water Infrastructure Protection Act process. The Company expects to close this acquisition in the first half of 2022, pending regulatory approval.
As of November 2, 2021, the Company has entered into agreements for pending acquisitions in the Regulated Businesses to add approximately 82,700 additional customers.
Sale of New York American Water Company, Inc.
On November 20, 2019, the Company and the Company’s New York subsidiary entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Liberty Utilities Co., which it subsequently assigned to its indirect, wholly owned subsidiary Liberty Utilities (Eastern Water Holdings) Corp. (“Liberty”), pursuant to which Liberty will purchase all of the capital stock of the New York subsidiary (the “Stock Purchase”) for an aggregate purchase price of approximately $608 million in cash, subject to adjustment as provided in the Stock Purchase Agreement. The Company’s regulated New York operations have approximately 125,000 customers in the State of New York. Algonquin Power & Utilities Corp., Liberty’s ultimate parent company, executed and delivered an absolute and unconditional guaranty of the performance of all of the obligations of Liberty under the Stock Purchase Agreement. The Stock Purchase is subject to various conditions, including obtaining approvals and satisfying or waiving other closing conditions. The Stock Purchase Agreement as originally executed provided for an initial termination date of June 30, 2021 (the “Closing End Date”). On June 29, 2021, the parties mutually agreed to extend the Closing End Date to December 31, 2021 in accordance with the terms of the Stock Purchase Agreement, and agreed to extend further the Closing End Date to January 3, 2022 as December 31, 2021 is a federal holiday. No other provision of the Stock Purchase Agreement was modified by this mutual agreement. Liberty may also terminate the Stock Purchase Agreement if any governmental authority initiates a condemnation or eminent domain proceeding against a majority of the consolidated properties of the Company’s New York subsidiary, taken as a whole.
In 2020, the Governor of New York proposed legislation that, among other things, required the New York State Department of Public Service (“NYSDPS”) to study whether private water suppliers should be placed under municipal control. On February 3, 2021, the Governor issued a press release announcing that he directed the NYSDPS Special Counsel to commence and lead a municipalization feasibility study (the “Study”). The Study was released on March 29, 2021 finding that municipalization was feasible and in the public interest. The Study focused primarily on the imminent need for tax relief for the Company’s New York subsidiary’s customers and included recommendations to eliminate the Special Franchise Tax and create a new public authority to potentially acquire all or a portion of the system. Despite the Study’s findings, the legislative session ended without passage of legislation to eliminate the Special Franchise Tax. However, the New York State Senate and New York State Assembly passed legislation creating the North Shore Water Authority (“NSWA”) and the South Shore Water Authority (“SSWA”). The NSWA relates to a small portion of the New York subsidiary’s service area (about 4,700 customers) while the SSWA relates to the largest single-site employerportion of its service territory (about 120,000 customers). Both bills were delivered to the Governor but have not yet been signed into law. The Company’s New York subsidiary continues to work constructively with the NYSDPS, including through ongoing settlement discussions among all parties to the proceeding, and to take all actions necessary to facilitate the completion of the Stock Purchase. Subject to satisfying or waiving the various conditions to closing, and assuming no prior termination of the Stock Purchase Agreement by Liberty as described above, the Company remains confident that the Stock Purchase will be completed.
The assets and related liabilities of the Company’s New York subsidiary were classified as held for sale on the Consolidated Balance Sheets as of September 30, 2021. See Note 6—Acquisitions and Divestitures in the state of Ohio. Notes to Consolidated Financial Statements for additional information.
Operational Excellence
The contract award includes estimated revenues of approximately $490 million over a 50-year period, subject to an annual economic price adjustment. With the addition of this base, our backlog of revenue associated with our military contracts is approximately $3.5 billion over their remaining contract terms.
Technology & Operational Efficiency—Continuing Improvement in Adjusted Operation and Maintenance (“O&M”) Efficiency Ratio for our Regulated Businesses
We continued to improve on ourCompany’s adjusted regulated O&M efficiency ratio, (a non-GAAP measure). Our adjusted O&M efficiency ratiowhich is used as a measure of the operating performance of the Regulated Businesses, was 33.9% for the twelve months ended September 30, 2017 was 34.2%,2021, as compared to 34.9%34.2% for the twelve months ended September 30, 2016.2020. The improvement in this ratio forreflects the twelve months ended September 30, 2017,continued focus on operating costs, as compared to the same period in 2016, was primarily attributable towell as an increase in regulated operating revenue.revenues for the Regulated Businesses after considering the adjustment for the amortization of the excess accumulated deferred income taxes (“EADIT”) shown in the table below.
OurThe Company’s adjusted regulated O&M efficiency ratio is a non-GAAP measure, and is defined by the Company as our regulatedits operation and maintenance expenses from the Regulated Businesses, divided by regulatedthe operating revenues from the Regulated Businesses, where both operation and maintenance expenses and operating revenues were adjusted to eliminate purchased water expense. Additionally,Operating revenues were further adjusted to exclude reductions for the amortization of EADIT. Also excluded from operation and maintenance expenses we excludedis the allocable portion of non-operation and maintenancenon-O&M support services cost,costs, mainly depreciation and general taxes, that arewhich is reflected in ourthe Regulated Businesses segment as operation and maintenance expenses, but for consolidated financial reporting purposes, areis categorized within other line items in the accompanying Consolidated Statements of Operations. In addition toThe items discussed above were excluded from the standard adjustments to our adjusted O&M efficiency ratio for 2016 and 2017, we have also excluded from operation and maintenance expenses the impact of certain Freedom Industries chemical spill settlement activities. We excluded all the above items from the calculation as we believe such itemsthey are not reflective of management’s ability to increase the efficiency of our regulated operations.the Regulated Businesses.
We evaluate ourThe Company evaluates its operating performance using this ratio, and believes it is useful to investors because we believe it directly measures improvement in the operating performance and efficiency of our regulated operations.the Regulated Businesses. This information is intendedderived from the Company’s consolidated financial information but is not presented in its financial statements prepared in accordance with GAAP. This information supplements and should be read in conjunction with the Company’s GAAP disclosures, and should be considered as an addition to, enhance an investor’s overall understanding of our operating performance. Ourand not a substitute for, any GAAP measure. The Company’s adjusted regulated O&M efficiency ratio (i) is not an accounting measure that is based on GAAP; (ii) is not based on a GAAP financial measure,standard, objective industry definition or method of calculation; (iii) may not be comparable to other companies’ operating measuresmeasures; and (iv) should not be used in place of the GAAP information provided elsewhere in this report.Form 10-Q.
The followingPresented in the table providesbelow is the calculation of ourthe Company’s adjusted regulated O&M efficiency ratio and a reconciliation that compares operation and maintenance expenses and operating revenues, each as determined in accordance with GAAP, to those amounts utilized in the calculation of ourits adjusted O&M efficiency ratio, for the twelve months ended September 30, 2017 as compared to the same period in 2016:ratio:
| | | | | | | | | | | |
| For the Twelve Months Ended September 30, |
| (Dollars in millions) | 2021 | | 2020 |
| Total operation and maintenance expenses | $ | 1,715 | | | $ | 1,605 | |
| Less: | | | |
| Operation and maintenance expenses—Market-Based Businesses | 436 | | | 386 | |
| Operation and maintenance expenses—Other | (30) | | | (20) | |
| Total operation and maintenance expenses—Regulated Businesses | 1,309 | | | 1,239 | |
| Less: | | | |
| Regulated purchased water expenses | 154 | | | 146 | |
| Allocation of non-operation and maintenance expenses | 41 | | | 34 | |
Adjusted operation and maintenance expenses—Regulated Businesses (i) | $ | 1,114 | | | $ | 1,059 | |
| | | |
| Total operating revenues | $ | 3,902 | | | $ | 3,756 | |
| Less: | | | |
| Operating revenues—Market-Based Businesses | 575 | | | 536 | |
| Operating revenues—Other | (16) | | | (18) | |
| Total operating revenues—Regulated Businesses | 3,343 | | | 3,238 | |
| Less: | | | |
Regulated purchased water revenues (a) | 154 | | | 146 | |
| Revenue reductions for the amortization of EADIT | (93) | | | — | |
Adjusted operating revenues—Regulated Businesses (ii) | $ | 3,282 | | | $ | 3,092 | |
| | | |
Adjusted O&M efficiency ratio—Regulated Businesses (i) / (ii) | 33.9 | % | | 34.2 | % |
(a)The calculation assumes regulated purchased water revenues approximate regulated purchased water expenses.
|
| | | | | | | |
| | For the twelve months ended September 30, |
| (In millions) | 2017 | | 2016 |
| Total operation and maintenance expenses | $ | 1,383 |
| | $ | 1,511 |
|
| Less: | | | |
| Operation and maintenance expenses—Market-Based Businesses | 334 |
| | 391 |
|
| Operation and maintenance expenses—Other | (46 | ) | | (42 | ) |
| Total operation and maintenance expenses—Regulated Businesses | 1,095 |
| | 1,162 |
|
| Less: | | | |
| Regulated purchased water expenses | 124 |
| | 120 |
|
| Allocation of non-operation and maintenance expenses | 29 |
| | 29 |
|
Impact of Freedom Industries settlement activities (a) | (22 | ) | | 65 |
|
Adjusted operation and maintenance expenses—Regulated Businesses (i) | $ | 964 |
| | $ | 948 |
|
| | | | |
| Total operating revenues | $ | 3,338 |
| | $ | 3,283 |
|
| Less: | | | |
| Operating revenues—Market-Based Businesses | 419 |
| | 464 |
|
| Operating revenues—Other | (23 | ) | | (17 | ) |
| Total regulated operating revenues—Regulated Businesses | 2,942 |
| | 2,836 |
|
| Less: | | | |
Regulated purchased water revenues (b) | 124 |
| | 120 |
|
Adjusted operating revenues—Regulated Businesses (ii) | $ | 2,818 |
| | $ | 2,716 |
|
| | | | |
Adjusted operation and maintenance efficiency ratio—Regulated Businesses (i) / (ii) | 34.2 | % | | 34.9 | % |
| |
(a) | Includes binding agreement in principle in 2016 and settlement with general liability insurance carrier in 2017. |
| |
(b) | Calculation assumes purchased water revenues approximate purchased water expenses. |
Regulatory Matters
TheGeneral Rate Cases and Infrastructure Surcharges
Presented in the table below providesare annualized incremental revenues, resulting from rate authorizationsexcluding reductions for the amortization of EADIT that became effective during the nine months ended September 30, 2017 for general rate cases,are generally offset in income tax expense, assuming a constant water sales volume, resulting from general rate case authorizations and infrastructure surcharge mechanisms. There were no rate authorizations that became effective duringin the three months ended September 30, 2017.current period:
| | | | | | | | | | | | | | | | | | | | | | | |
| During the Three Months Ended September 30, | | During the Nine Months Ended September 30, |
| (In millions) | 2021 | | 2020 | | 2021 | | 2020 |
| General rate cases by state: | | | | | | | |
| Missouri (effective May 28, 2021) | $ | — | | | $ | — | | | $ | 22 | | | $ | — | |
| New York (effective May 1, 2021) | — | | | — | | | 7 | | | — | |
| Pennsylvania (effective January 28, 2021) | — | | | — | | | 70 | | | — | |
| Indiana (effective May 1, 2020) | — | | | — | | | — | | | 13 | |
| California (effective January 1, 2020) | — | | | — | | | — | | | 5 | |
| Total general rate cases | $ | — | | | $ | — | | | $ | 99 | | | $ | 18 | |
| | | | | | | |
| Infrastructure surcharges by state: | | | | | | | |
| Kentucky (effective July 1, 2021 and July 1, 2020) | $ | 1 | | | $ | 1 | | | $ | 1 | | | $ | 1 | |
| New Jersey (effective June 28, 2021, June 29, 2020 and January 1, 2020) | — | | | — | | | 14 | | | 20 | |
| Indiana (effective March 17, 2021) | — | | | — | | | 8 | | | — | |
| Pennsylvania (effective January 1, 2021, July 1, 2020, April 1, 2020 and January 1, 2020) | — | | | 4 | | | 8 | | | 19 | |
| Illinois (effective January 1, 2021 and January 1, 2020) | — | | | — | | | 7 | | | 7 | |
| West Virginia (effective January 1, 2021 and January 1, 2020) | — | | | — | | | 5 | | | 3 | |
| Tennessee (effective January 1, 2021 and January 1, 2020) | — | | | — | | | 3 | | | 2 | |
| Missouri (effective June 27, 2020) | — | | | — | | | — | | | 10 | |
| Total infrastructure surcharges | $ | 1 | | | $ | 5 | | | $ | 46 | | | $ | 62 | |
|
| | | |
| (In millions) | For the Nine Months Ended September 30, 2017 |
| General rate cases by state: | |
|
New York (effective June 1, 2017) | $ | 4 |
|
Virginia (a) | 5 |
|
Iowa (effective March 27, 2017) | 4 |
|
California (effective January 13, 2017 - February 2, 2017) | 5 |
|
Illinois (effective January 1, 2017) | 25 |
|
| Total general rate cases | $ | 43 |
|
| | |
| Infrastructure surcharges by state: | |
|
New Jersey (effective June 1, 2017) | $ | 10 |
|
Indiana (effective March 22, 2017) | 8 |
|
Tennessee (effective March 14, 2017) | 2 |
|
Pennsylvania (effective January 1, 2017) | 1 |
|
West Virginia (effective January 1, 2017) | 2 |
|
| Total infrastructure surcharges | $ | 23 |
|
| |
(a) | The effective date of the rate order was May 24, 2017, authorizing the implementation of interim rates as of April 1, 2016. |
Pending General Rate Case and CostEffective October 7, 2021, the Company’s Missouri subsidiary implemented infrastructure surcharges for annualized incremental revenues of Capital Filings$7 million.
DuringOn August 28, 2020, the second quarter of 2017, our PennsylvaniaCompany’s Iowa subsidiary filed a general rate case requesting $108$3 million in annualized incremental revenues. An order was issued on June 28, 2021 authorizing an increase of $1 million. On July 9, 2021, the Company’s Iowa subsidiary filed a Motion for Clarification with respect to the required accelerated flow back of unprotected EADIT over a three-year period to recognize the increase to rate base and incremental revenues as the unprotected EADIT is amortized. On September 21, 2021, that motion was denied. The Company’s Iowa subsidiary filed tariffs consistent with the order on September 23, 2021. Effective October 11, 2021, the Iowa Utilities Board approved the tariffs and implemented the new rates.
On April 7, 2021, the Company’s Missouri subsidiary was authorized additional annualized revenues of $22 million, effective May 28, 2021, excluding agreed to reductions for EADIT as a result of the TCJA. The EADIT reduction in revenues is $25 million and is offset by a like reduction in income tax expense. The protected EADIT balance of $72 million is being returned to customers using the average rate assumption method (“ARAM”), and the unprotected EADIT balance of $74 million is being returned to customers over 10 years. The $25 million EADIT reduction includes both the protected and unprotected catch-up period EADIT of $13 million. The catch-up period of January 1, 2018 through May 31, 2021 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 2.5 years.
On March 2, 2021, an administrative law judge (“ALJ”) in the Office of Administrative Law of New Jersey filed an initial decision with the New Jersey Board of Public Utilities (the “NJBPU”) that recommended denial of a petition filed by the Company’s New Jersey subsidiary, which sought approval of acquisition adjustments in rate base of $29 million associated with the acquisitions of Shorelands Water Company, Inc. in 2017 and the Borough of Haddonfield’s water and wastewater revenues.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. A scheduling order was issued on October 16, 2017,18, 2021 establishing a proposed settlement agreement was entered into by ourbriefing schedule through January 2022. There is no financial impact to the Company as a result of the NJBPU’s order, since the acquisition adjustments are currently recorded as goodwill on the Consolidated Balance Sheets.
On February 25, 2021, the Company’s Pennsylvania subsidiary was authorized additional annualized revenues of $90 million, effective January 28, 2021, excluding agreed to reductions for EADIT as a result of the TCJA, over two steps. The EADIT reduction in revenues is $19 million. 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 other partiessecond step will be effective January 1, 2022 in the amount of $20 million. The protected EADIT balance of $200 million is being returned to customers using the proceeding, providing for additional annualized water and wastewater revenues of $62 million, subject to approval by the administrative law judges assigned to the caseARAM, and the PaPUC.unprotected EADIT balance of $116 million is being returned to customers over 20 years. The $19 million annually includes 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 September 15, 2017, our New JerseyAugust 18, 2021, the Company’s Hawaii subsidiary filed a general rate case requesting $129$2 million in additional annualized water and wastewater revenues.
On JuneApril 30, 2017, our Missouri2021, the Company’s West Virginia subsidiary filed a general rate case requesting $84$32 million in additional annualized waterincremental revenues excluding proposed reductions for EADIT as a result of TCJA and wastewater revenues.infrastructure surcharges. The proposed EADIT reduction in revenues is $1 million and the exclusion for infrastructure surcharges is $10 million. Intervenor testimony was received on September 20, 2021. The Company’s rebuttal testimony was filed on October 5, 2021. Hearings are scheduled to start November 3, 2021.
On April 3, 2017, our California subsidiary filed an application requesting a cost of capital of 8.49%, compared to 8.41% currently authorized. The results of this proceeding will not become effective until January 2018.
DuringJuly 1, 2019, the third quarter of 2016, ourCompany’s California subsidiary filed a general rate case requesting $35$29 million in additional annualized incremental revenues for 2021, and an increaseincreases of $8$10 million and $11 million in the escalation year of 20192022 and the attrition year of 2020. During2023, respectively. On October 11, 2019, the fourth quarter of 2016, our California subsidiaryCompany filed anits 100-day update to its general rate case, adjusting its request for additional annualized revenues to $32 millionthe same proceeding and increasing itsupdated the request to $9$27 million in annualized incremental revenues for 2021, and increases of $10 million in both the escalation year of 2019.2022 and the attrition year of 2023, respectively. On September 10, 2020, the California Public Utilities Commission (the “CPUC”) approved the Company’s California subsidiary’s motion for interim rates, establishing a memorandum account to track the difference between interim and final rates adopted by the CPUC in this proceeding, which were effective on January 1, 2021. Following settlement discussions among all parties to the proceeding, on January 22, 2021, January 25, 2021, and February 11, 2021, the Company’s California subsidiary filed with the CPUC comprehensive settlements entered into among the Company’s California subsidiary, the Public Advocates Office, and other intervenors. These settlement agreements resolved all matters in dispute among the parties to the settlements, with the exception of a few disputed items between the Company’s California subsidiary and the Monterey Peninsula Water Management District (the “MPWMD”). On October 19, 2021, the CPUC issued a proposed decision in the general rate case proceeding for rates effective January 1, 2021. With minor exceptions, the proposed decision would adopt the comprehensive settlements reached with the Public Advocates Office, and other intervenors. Comments on the proposed decision are due November 8, 2021 and reply comments are due November 15, 2021. The earliest the decision could be adopted is November 18, 2021 at the CPUC’s voting meeting. The Company expects a final decision by December 31, 2021.
On January 5, 2021, the Company’s California subsidiary submitted a request to delay by one year its cost of capital filing and maintain the authorized cost of capital through 2022. On February 22, 2021, the CPUC denied the request to further delay the cost of capital filing. The Company’s California subsidiary submitted its cost of capital application on May 3, 2021. Once approved by the CPUC, the new authorized cost of capital will be effective January 1, 2022.
Pending Infrastructure Surcharge Filings
On October 31, 2017, our Virginia subsidiary filed for infrastructure surcharges requesting $1 million in additional annualized revenues.
On October 13, 2017, our New JerseySeptember 3, 2021, the Company’s Missouri subsidiary filed for an infrastructure surcharge requesting $4$11 million in additional annualized revenues.
DuringOn June 30, 2021, the second quarter of 2017, ourCompany’s West Virginia subsidiary filed for an infrastructure surcharge requesting $3 million in additional annualized revenues. On October 11, 2017, our West Virginia subsidiary filed
Legislative Updates
During 2021, the Company’s regulatory jurisdictions enacted the following legislation that has been approved and is effective as of November 2, 2021:
•The Kentucky General Assembly adopted House Bill 465 relating to the acquisition of water and wastewater utilities. The legislation affirms a settlement agreement with themethod in valuing water and wastewater systems above net book value and establishes a timeline of 60 days for Public Service Commission approval of West Virginiaan acquisition.
•Indiana House Enrolled Act 1287 creates a mechanism that reduces the required upfront cost to new customers for a water or wastewater utility to extend service to underserved areas.
•Indiana House Enrolled Act 349 establishes a tax rider for water and wastewater utilities based upon a change in state or federal income tax law. The legislation also requires the Indiana Finance Authority to prioritize loans that secure long-term benefits over shorter term projects.
•New Jersey passed Lead Service Line Replacement Bill, Senate Bill 3398/Assembly Bill 5343, which provides for the replacement of lead service lines within 10 years of the effective date of the bill and authorizes cost recovery of customer-owned lead service lines as an O&M expense plus interest through a semi-annual surcharge.
•Missouri passed the Water and Sewer Infrastructure Act, Senate Bill 44/House Bill 397, to establish a new statewide surcharge mechanism program which covers replacement of aging water distribution and sewer collection infrastructure. This legislation broadens the eligible projects covered by the current Infrastructure System Replacement Surcharge mechanism and expands its applicability to projects across the state.
•Illinois passed House Bill 414, Low Income Water & Sewer Financial Assistance Program, which authorizes the state’s Department of Commerce and Economic Opportunity to institute a water and sewer assistance program for customers of privately and publicly owned systems. The program is modeled off the existing energy supplemental state Low Income Home Energy Assistance Program.
During 2021, the Company’s regulatory jurisdictions enacted the following legislation that has been approved but is not yet effective as of November 2, 2021:
•New Jersey passed Senate Bill 647/House Bill 4825, which strengthens the state’s existing Water Quality Accountability Act (“WVPSC”WQAA”), whereby all parties by requiring the Department of Environmental Protection to adopt regulations to implement the WQAA, enhancing asset management plans and reporting, upgrading cyber security standards and adding criminal penalties for falsifying reports. Legislation is awaiting the Governor’s signature.
•California passed electronic payment legislation, Assembly Bill 1058, which permanently changes state law to allow investor-owned water and wastewater utilities to accept electronic payments, including credit and debit cards, without charging processing fees to customers. Legislation was signed by the Governor with an effective date of January 1, 2022.
•California passed CPUC consolidation timeline legislation, Assembly Bill 1250, which requires the CPUC to make timely decisions on applications to acquire systems. Consolidations of less than $5 million are to be processed within 180 days and those more than $5 million are required to be processed within 12 months. Legislation was signed by the Governor with an effective date of January 1, 2022.
Condemnation and Eminent Domain
All or portions of the Regulated Businesses’ utility assets could be acquired by state, municipal or other government entities through one or more of the following methods: (i) eminent domain (also known as condemnation); (ii) the right of purchase given or reserved by a municipality or political subdivision when the original certificate of public convenience and necessity (a “CPCN”) was granted; and (iii) the right of purchase given or reserved under the law of the state in which the utility subsidiary was incorporated or from which it received its CPCN. The acquisition consideration related to such a proceeding initiated by a local government may be determined consistent with applicable eminent domain law, or may be negotiated or fixed by appraisers as prescribed by the law of the state or in the particular CPCN.
As such, the Regulated Businesses are periodically subject to condemnation proceedings in the ordinary course of business. For example, a citizens group in Monterey, California successfully added “Measure J” to the proceedingNovember 2018 election ballot asking voters to decide whether the MPWMD should conduct a feasibility study concerning the potential purchase of the Monterey water service system assets (the “Monterey system assets”) of the Company’s California subsidiary, and, if feasible, to proceed with a purchase of those assets without an additional public vote. This service territory represents approximately 40,000 customers. In November 2018, Measure J was certified to have agreedpassed.
In August 2019, the MPWMD’s General Manager issued a report that recommends that the MPWMD board (1) develop criteria to an infrastructure surcharge that providesdetermine which water systems should be considered for approximatelyacquisition; (2) examine the requested increase amount in annualized revenues, subject to approvalfeasibility of acquiring the Monterey system assets and consider public ownership of smaller systems only if the MPWMD becomes the owner of a larger system; (3) evaluate whether the acquisition of the Monterey system assets by the WVPSC.MPWMD is in the public interest and sufficiently satisfies the criterion of “feasible” as provided in Measure J; (4) ensure there is significant potential for cost savings before agreeing to commence an acquisition; and (5) develop more fully alternate operating plans before deciding whether to consider a Resolution of Necessity.
DuringIn November 2019, the second quarterMPWMD issued a preliminary valuation and cost of 2017, our Missouriservice analysis report, finding in part that (1) an estimate of the Monterey system assets’ total value plus adjustments would be approximately $513 million, (2) the cost of service modeling results indicate significant annual reductions in revenue requirements and projected monthly water bills, and (3) the acquisition of the Monterey system assets by the MPWMD would be economically feasible. On June 12, 2020, the MPWMD issued a draft environmental impact report for the potential acquisition of the Monterey system assets and a related district boundary adjustment that would be required if the MPWMD were to acquire and operate certain of the Monterey system assets located outside the MPWMD’s boundaries. On September 15, 2020, the MPWMD gave notice of its intention to appraise the Monterey system assets and related property interests. On September 29, 2020, the Company’s California subsidiary fileddeclined to make the Monterey system assets and related property interests available for an infrastructure surcharge requesting $5 millioninspection or to comply with any of the other requests contained in additional annualized revenues.the MPWMD’s notice. On August 29, 2017, our Missouri subsidiary refiledOctober 7, 2020, the MPWMD issued a final environmental impact report (“FEIR”), and adjustedon November 4, 2020, the MPWMD certified the FEIR, which purports to analyze the environmental impacts of the MPWMD’s project to (1) acquire the Monterey system assets through the power of eminent domain, if necessary, and (2) expand its request for additional annualized revenuesgeographic boundaries to $6 million.
Other Regulatory Filings
include all parts of this system. On August 4, 2017, our IllinoisNovember 25, 2020, the Company’s California subsidiary filed a petition challenging this certification in court. A hearing on the matter was held on August 30, 2021, and a decision from the court remains pending. See Item 3—Legal Proceedings—Challenge of Certification — Proposed Monterey System Final Environmental Impact Report in the Company’s Form 10-K, and Part II, Item 1—Legal Proceedings in this Form 10-Q.
On February 26, 2021, the MPWMD filed an application with Illinois Commercethe Local Agency Formation Commission of Monterey County (“ICC”LAFCO”) seeking approval to placebecome a retail water provider and annex approximately 58 parcels of land into effect revised depreciation rates applicablethe MPWMD’s boundaries. On June 28, 2021, LAFCO’s board of directors voted to depreciable waterrequire a third-party independent financial study as to the feasibility of an acquisition by the MPWMD of the Monterey system assets. By letter dated July 30, 2021, LAFCO notified the MPWMD that its application was complete and wastewater plant resulting from a new depreciation study. The petition requested that these new rates would be effective January 1, 2017. We expectconsidered for action at a public hearing, which will now take place on December 6, 2021. LAFCO also indicated that, in accordance with the ICCLAFCO board of directors’ directive, a consultant was engaged to provideperform an independent financial review of the application, which will support LAFCO’s analysis of the application at the public hearing. Approval by LAFCO is a precondition to the MPWMD’s ability to file an eminent domain proceeding against the Company’s California subsidiary to acquire the Monterey system assets. If the MPWMD were to make a final ruling ondetermination that an acquisition of the petitionMonterey system assets is feasible, it would then need to file a multi-year eminent domain proceeding against the Company’s California subsidiary. In that proceeding, it would first need to establish its right to take the Monterey system assets. If such right is established, the amount of just compensation to be paid to the California subsidiary for such assets would then need to be determined. The MPWMD has stated that it anticipates filing such an eminent domain proceeding in late 2021 or early 2022.
Also, five municipalities in the fourth quarterChicago, Illinois area (approximately 30,300 customers in total) formed a water agency and filed an eminent domain lawsuit against the Company in January 2013, seeking to condemn the water pipeline that serves those five municipalities. Before filing its eminent domain lawsuit, the water agency made an offer of 2017.$38 million for the pipeline. The estimated effectparties have filed with the court updated valuation reports. A valuation trial that was originally scheduled for October 2021 has been continued to June 2022.
Furthermore, the law in certain jurisdictions in which the Regulated Businesses operate provides for eminent domain rights allowing private property owners to file a lawsuit to seek just compensation against a public utility, if a public utility’s infrastructure has been determined to be a substantial cause of damage to that property. In these actions, the new study isplaintiff would not have to lower depreciation expense by approximately $16 million on an annualized basis.
There is no assuranceprove that all or any portionthe public utility acted negligently. In California, lawsuits have been filed in connection with large-scale natural events such as wildfires. Some of these requests willlawsuits have included allegations that infrastructure of certain utilities triggered the natural event that resulted in damage to the property. In some cases, the PUC has allowed certain costs or losses incurred by the utility to be granted.
Other Tax Matters
On April 11, 2017, the State of New York enacted legislation that increased the state income tax rate on our taxable income attributable to New York. This legislation eliminated the production of water as a qualified manufacturing activityrecovered from customers in New York, which effectively increased the state income tax raterates, but in New York. As a result of the legislative change, we were required to re-measure our cumulative deferred tax balances using the higher state income tax rate in the second quarter of 2017. This change in legislation was the primary cause of an increase to our unitary deferred tax liability of $11 million. The portion of this increase related to our New York subsidiary calculated on a stand-alone basis was $7 million, and was offset by a regulatory asset, as we believe it is probable ofother cases such recovery in future rates. The remaining increase inrates has been disallowed. Also, the deferred tax liability was calculated through state tax apportionment rates and recordedutility may have obtained insurance that could respond to some or all of such losses, although the utility would be at risk for any losses not ultimately subject to rate or insurance recovery or losses that exceed the consolidated level, resulting in a non-cash, cumulative charge to earningslimits of $4 million during the second quartersuch insurance.
On July 7, 2017, the State of Illinois enacted legislation that increased, effective July 1, 2017, the state income tax rate on our taxable income attributable to Illinois from 7.75% to 9.5%. As a result of the legislative change, we were required to re-measure our cumulative deferred tax balances using the higher state income tax rate in the third quarter of 2017. This change in legislation was the primary cause of an increase to our unitary deferred tax liability of $7 million. The portion of this increase related to our Illinois subsidiary calculated on a stand-alone basis was $4 million, and was offset by a regulatory asset, as we believe it is probable of recovery in future rates. The remaining increase in the deferred tax liability was recorded at the consolidated level, resulting in a non-cash, cumulative charge to earnings of $3 million during the third quarter of 2017.
During the second quarter of 2017, we were notified by the assessor for St. Louis County, Missouri, that it was changing its long standing practice of valuing regulated water and wastewater property located in the County using a seven-year life, and instead intends to use a twenty-year life for a substantial portion of this property. During the second quarter of 2017, we were also notified by the assessor for Platte County, Missouri, that it intended to change its long standing practice of valuing regulated water and wastewater property located in the County using a twenty-year life, and instead intends to use a fifty-year life for a substantial portion of this property. These changes in practice and the resulting valuations as assessed by the respective County, will increase our property tax obligation beginning in 2017. We have asked the Missouri regulator for an accounting recovery mechanism that would allow deferral of any increase in tax resulting from these changes in long standing practice, and we believe these increases are recoverable through future customer rates. As a result, during the second quarter of 2017, we recorded the additional estimated increase in property tax obligation of $2 million, with an offset to a regulatory asset. During the third quarter of 2017, we filed complaints with the Missouri State Tax Commission, seeking review of property assessments in Platte County.
Consolidated Results of Operations
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | Increase (Decrease) | | 2017 | | 2016 | | Increase (Decrease) |
| (In millions) | | | | | | | | | | | | | | | |
| Operating revenues | $ | 936 |
| | $ | 930 |
| | $ | 6 |
| | 0.6 | % | | $ | 2,536 |
| | $ | 2,500 |
| | $ | 36 |
| | 1.4 | % |
| Operating expenses: | | | | | | | | | | | | | | | |
| Operation and maintenance | 324 |
| | 432 |
| | (108 | ) | | (25.0 | )% | | 1,010 |
| | 1,131 |
| | (121 | ) | | (10.7 | )% |
| Depreciation and amortization | 128 |
| | 119 |
| | 9 |
| | 7.6 | % | | 378 |
| | 350 |
| | 28 |
| | 8.0 | % |
| General taxes | 61 |
| | 65 |
| | (4 | ) | | (6.2 | )% | | 192 |
| | 195 |
| | (3 | ) | | (1.5 | )% |
| Gain on asset dispositions and purchases | (7 | ) | | (5 | ) | | (2 | ) | | 40.0 | % | | (9 | ) | | (8 | ) | | (1 | ) | | 12.5 | % |
| Total operating expenses, net | 506 |
| | 611 |
| | (105 | ) | | (17.2 | )% | | 1,571 |
| | 1,668 |
| | (97 | ) | | (5.8 | )% |
| Operating income | 430 |
| | 319 |
| | 111 |
| | 34.8 | % | | 965 |
| | 832 |
| | 133 |
| | 16.0 | % |
| Other income (expenses): | | | | | | | | | | | | | | | |
| Interest, net | (89 | ) | | (81 | ) | | (8 | ) | | 9.9 | % | | (259 | ) | | (242 | ) | | (17 | ) | | 7.0 | % |
| Loss on extinguishment of debt | (6 | ) | | — |
| | (6 | ) | | 100.0% |
| | (6 | ) | | — |
| | (6 | ) | | 100.0% |
|
| Other, net | 5 |
| | 5 |
| | — |
| | — | % | | 11 |
| | 14 |
| | (3 | ) | | (21.4 | )% |
| Total other income (expenses) | (90 | ) | | (76 | ) | | (14 | ) | | 18.4 | % | | (254 | ) | | (228 | ) | | (26 | ) | | 11.4 | % |
| Income before income taxes | 340 |
| | 243 |
| | 97 |
| | 39.9 | % | | 711 |
| | 604 |
| | 107 |
| | 17.7 | % |
| Provision for income taxes | 137 |
| | 95 |
| | 42 |
| | 44.2 | % | | 284 |
| | 237 |
| | 47 |
| | 19.8 | % |
| Net income attributable to common stockholders | $ | 203 |
| | $ | 148 |
| | $ | 55 |
| | 37.2 | % | | $ | 427 |
| | $ | 367 |
| | $ | 60 |
| | 16.3 | % |
Comparison of Consolidated Results of Operations
Operating revenues. For the three months ended September 30, 2017, operating revenues increased primarilydue to a:
$16 million increase in our Regulated Businesses segment principally due to authorized rate increases to fund infrastructure investment growth, acquisitions and organic growth, partially offset by lower water services demand in 2017, including a $7 million reduction due to warmer weatherPresented in the third quartertable below are the Company’s consolidated results of 2016; partially offset by aoperations:
$9 million decrease in our Market-Based Businesses primarily due to lower capital upgrades in our Military Services Group, largely from reduced military base budgets, partially offset by incremental revenues in our Homeowner Services Group from customer growth and price increases for existing customers. | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| (In millions) | | | | | | | |
| Operating revenues | $ | 1,092 | | | $ | 1,079 | | | $ | 2,979 | | | $ | 2,854 | |
| Operating expenses: | | | | | | | |
| Operation and maintenance | 436 | | | 419 | | | 1,286 | | | 1,193 | |
| Depreciation and amortization | 161 | | | 154 | | | 476 | | | 451 | |
| General taxes | 78 | | | 73 | | | 241 | | | 225 | |
| Total operating expenses, net | 675 | | | 646 | | | 2,003 | | | 1,869 | |
| Operating income | 417 | | | 433 | | | 976 | | | 985 | |
| Other income (expense): | | | | | | | |
| Interest, net | (101) | | | (99) | | | (300) | | | (296) | |
| Non-operating benefit costs, net | 20 | | | 12 | | | 59 | | | 37 | |
| Other, net | 4 | | | 6 | | | 11 | | | 17 | |
| Total other income (expense) | (77) | | | (81) | | | (230) | | | (242) | |
| Income before income taxes | 340 | | | 352 | | | 746 | | | 743 | |
| Provision for income taxes | 62 | | | 88 | | | 128 | | | 179 | |
| Net income attributable to common shareholders | $ | 278 | | | $ | 264 | | | $ | 618 | | | $ | 564 | |
For the nine months ended September 30, 2017, operating revenues increased primarily due to a:
$71 million increase in our Regulated Businesses segment principally due to authorized rate increases to fund infrastructure investment growth, acquisitions and organic growth, partially offset by lower water services demand in 2017, including a $12 million reduction due to overall warmer weather in 2016; partially offset by a
$32 million decrease in our Market-Based Businesses primarily due to lower capital upgrades in our Military Services Group, largely from reduced military base budgets and the completion of a large project in mid-2016 at Fort Polk, partially offset by incremental revenues in our Homeowner Services Group from customer growth and price increases for existing customers.
Operation and maintenance. For the three months ended September 30, 2017,operation and maintenance expense decreased primarily due to a:
$88 million decrease in our Regulated Businesses segment principally due to a $65 million charge recorded in the third quarter of 2016, resulting from the binding global agreement in principle to settle claims associated with the Freedom Industries chemical spill in West Virginia, and a $22 million benefit recorded in the third quarter of 2017, resulting from an insurance settlement with one of our general liability insurance carriers also related to this matter in West Virginia; partially offset by a
$17 million decrease in our Market-Based Businesses primarily due to lower capital upgrades in our Military Services Group, as discussed above.
For the nine months ended September 30, 2017,operation and maintenance expense decreased primarily due to a:
$87 million decrease in our Regulated Businesses segment due to a $65 million charge recorded in the third quarter of 2016, resulting from the binding global agreement in principle to settle claims associated with the Freedom Industries chemical spill in West Virginia, and a $22 million benefit recorded in the third quarter of 2017, resulting from an insurance settlement with one of our general liability insurance carriers also related to this matter in West Virginia; and a
$6 million increase in our Regulated Business segment principally due to increases in production costs, employee-related costs and operating supplies and services; partially offset by a
$38 million decrease in our Market-Based Businesses primarily due to lower capital upgrades in our Military Services Group, as discussed above, partially offset by incremental costs associated with growth in our Homeowner Services Group.
Depreciation and amortization. For the three and nine months ended September 30, 2017, depreciation and amortization expense increased primarily due to additional utility plant placed in service.
General taxes. For the three and nine months ended September 30, 2017, general taxes decrease largely due to property tax refund credits in our Pennsylvania subsidiary.
Other income (expenses). For the three and nine months ended September 30, 2017, other income (expenses) increased principally due to: (i) an increase in interest expense from the issuance of long-term debt in the fourth quarter of 2016 and in the third quarter of 2017; (ii) a $6 million early debt extinguishment charge at the parent company; and (iii) additional interest expense incurred on long-term debt that was refinanced in August 2017, but did not mature until October 2017.
Provision for income taxes. For the three and nine months ended September 30, 2017, our provision for income taxes increased primarily due to higher pretax income and two discrete tax adjustments of $4 million and $3 million recorded at the parent company in the second and third quarters of 2017, associated with legislative changes in the States of New York and Illinois impacting state tax apportionment.
Segment Results of Operations
OurThe Company’s operating segments are determined based on how wecomprised of the revenue-generating components of its business for which separate financial information is internally produced and regularly used by management to make operating decisions, assess performance and allocate our resources. We evaluate the performance of our segments and allocate resources based on several factors, with the primary measure being income from continuing operations.
We conduct ourThe Company operates its business primarily through one reportable segment, ourthe Regulated Businesses segment. WeThe Company also operate severaloperates market-based businesses that provide a broad range of related and complementary water and wastewater services within four operating segments that, individually, do not meet the criteria of a reportable segment in accordance with GAAP. These four non-reportable operating segmentsGAAP, and are collectively presented as our “Market-Based Businesses”,the Market-Based Businesses, which is consistent with how management assesses the results of ourthese businesses.
Regulated Businesses Segment
The followingPresented in the table summarizes certainbelow is financial information for ourthe Regulated Businesses segment:Businesses:
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| (In millions) | | | | | | | |
| Operating revenues | $ | 944 | | | $ | 945 | | | $ | 2,556 | | | $ | 2,468 | |
| Operation and maintenance | 338 | | | 335 | | | 983 | | | 932 | |
| Depreciation and amortization | 151 | | | 138 | | | 449 | | | 417 | |
| General taxes | 74 | | | 69 | | | 226 | | | 211 | |
| (Gain) on asset dispositions and purchases | — | | | — | | | — | | | (3) | |
| Other income (expenses) | (49) | | | (56) | | | (146) | | | (166) | |
| Income before income taxes | 332 | | | 346 | | | 752 | | | 744 | |
| Provision for income taxes | 60 | | | 85 | | | 130 | | | 183 | |
| Net income attributable to common shareholders | 273 | | | 261 | | | 623 | | | 561 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | Increase (Decrease) | | 2017 | | 2016 | | Increase (Decrease) |
| (In millions) | | | | | | | | | | | | | | | |
| Operating revenues | $ | 842 |
| | $ | 826 |
| | $ | 16 |
| | 1.9 | % | | $ | 2,247 |
| | $ | 2,176 |
| | $ | 71 |
| | 3.3 | % |
| Operation and maintenance | 262 |
| | 350 |
| | (88 | ) | | (25.1 | )% | | 800 |
| | 881 |
| | (81 | ) | | (9.2 | )% |
| Total operating expenses, net | 433 |
| | 521 |
| | (88 | ) | | (16.9 | )% | | 1,327 |
| | 1,385 |
| | (58 | ) | | (4.2 | )% |
| Net income attributable to common stockholders | 212 |
| | 152 |
| | 60 |
| | 39.5 | % | | 446 |
| | 374 |
| | 72 |
| | 19.3 | % |
Operating revenues.The followingPresented in the tables and discussion provide explanationbelow is information regarding the main components of the variances related to the three componentsRegulated Businesses’ operating revenues:
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| (In millions) | | | | | | | |
| Water services: | | | | | | | |
| Residential | $ | 545 | | | $ | 562 | | | $ | 1,466 | | | $ | 1,435 | |
| Commercial | 197 | | | 187 | | | 511 | | | 471 | |
| Fire service | 38 | | | 37 | | | 112 | | | 110 | |
| Industrial | 39 | | | 38 | | | 105 | | | 101 | |
| Public and other | 68 | | | 60 | | | 184 | | | 178 | |
| Total water services | 887 | | | 884 | | | 2,378 | | | 2,295 | |
| Wastewater services: | | | | | | | |
| Residential | 38 | | | 35 | | | 112 | | | 99 | |
| Commercial | 10 | | | 8 | | | 28 | | | 25 | |
| Industrial | 1 | | | 1 | | | 3 | | | 2 | |
| Public and other | 4 | | | 4 | | | 12 | | | 11 | |
| Total wastewater services | 53 | | | 48 | | | 155 | | | 137 | |
Other (a) | 4 | | | 13 | | | 23 | | | 36 | |
| Total operating revenues | $ | 944 | | | $ | 945 | | | $ | 2,556 | | | $ | 2,468 | |
(a)Includes other operating revenues consisting primarily of operating revenues—water services revenues, wastewater services revenuesmiscellaneous utility charges, fees and other revenues:rents.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | Increase (Decrease) | | 2017 | | 2016 | | Increase (Decrease) |
| (In millions) | | | | | | | | | | | | | | | |
| Billed water services: | | | | | | | | | | | | | | | |
| Residential | $ | 477 |
| | $ | 468 |
| | $ | 9 |
| | 1.9 | % | | $ | 1,244 |
| | $ | 1,199 |
| | $ | 45 |
| | 3.8 | % |
| Commercial | 176 |
| | 172 |
| | 4 |
| | 2.3 | % | | 453 |
| | 436 |
| | 17 |
| | 3.9 | % |
| Industrial | 37 |
| | 38 |
| | (1 | ) | | (2.6 | )% | | 103 |
| | 101 |
| | 2 |
| | 2.0 | % |
| Public and other | 96 |
| | 94 |
| | 2 |
| | 2.1 | % | | 262 |
| | 253 |
| | 9 |
| | 3.6 | % |
| Other water revenues | 6 |
| | 16 |
| | (10 | ) | | (62.5 | )% | | 31 |
| | 42 |
| | (11 | ) | | (26.2 | )% |
| Billed water services | 792 |
| | 788 |
| | 4 |
| | 0.5 | % | | 2,093 |
| | 2,031 |
| | 62 |
| | 3.1 | % |
| Unbilled water services | — |
| | (4 | ) | | 4 |
| | (100.0 | )% | | 8 |
| | 23 |
| | (15 | ) | | (65.2 | )% |
| Total water services revenues | 792 |
| | 784 |
| | 8 |
| | 1.0 | % | | 2,101 |
| | 2,054 |
| | 47 |
| | 2.3 | % |
| Wastewater services revenues | 36 |
| | 28 |
| | 8 |
| | 28.6 | % | | 106 |
| | 83 |
| | 23 |
| | 27.7 | % |
| Other revenues | 14 |
| | 14 |
| | — |
| | — | % | | 40 |
| | 39 |
| | 1 |
| | 2.6 | % |
| Total operating revenues | $ | 842 |
| | $ | 826 |
| | $ | 16 |
| | 1.9 | % | | $ | 2,247 |
| | $ | 2,176 |
| | $ | 71 |
| | 3.3 | % |
| | | | | | | | | | | | | | | | | | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | 2021 | | 2020 | | 2021 | | 2020 |
| | 2017 | | 2016 | | Increase (Decrease) | | 2017 | | 2016 | | Increase (Decrease) | |
| (In millions) | | | | | | | | | | | | | | | | |
| (Gallons in millions) | | (Gallons in millions) | | | | | | | |
| Billed water services volumes: | | | | | | | | | | | | | | | | Billed water services volumes: | | | | |
| Residential | 53,928 |
| | 55,108 |
| | (1,180 | ) | | (2.1 | )% | | 131,488 |
| | 132,453 |
| | (965 | ) | | (0.7 | )% | Residential | 53,526 | | | 57,917 | | | 133,282 | | | 135,875 | |
| Commercial | 24,913 |
| | 25,170 |
| | (257 | ) | | (1.0 | )% | | 61,793 |
| | 62,273 |
| | (480 | ) | | (0.8 | )% | Commercial | 23,981 | | | 23,556 | | | 58,559 | | | 56,434 | |
| Industrial | 10,661 |
| | 11,013 |
| | (352 | ) | | (3.2 | )% | | 29,218 |
| | 29,194 |
| | 24 |
| | 0.1 | % | Industrial | 10,400 | | | 9,925 | | | 26,843 | | | 26,422 | |
| Public and other | 15,085 |
| | 14,512 |
| | 573 |
| | 3.9 | % | | 38,920 |
| | 37,983 |
| | 937 |
| | 2.5 | % | |
| Billed water services volumes | 104,587 |
| | 105,803 |
| | (1,216 | ) | | (1.1 | )% | | 261,419 |
| | 261,903 |
| | (484 | ) | | (0.2 | )% | |
| Fire service, public and other | | Fire service, public and other | 14,978 | | | 14,783 | | | 38,385 | | | 37,414 | |
| Total billed water services volumes | | Total billed water services volumes | 102,885 | | | 106,181 | | | 257,069 | | | 256,145 | |
For the three months ended September 30, 2017,2021, operating revenues increaseddecreased $1 million, primarily due to a:
$20a $56 million increase from authorized rate increases, andincluding infrastructure surcharges, principally to fund infrastructure investment growth in various states;states, and a
$12 $6 million increase attributable to recentfrom water and wastewater acquisitions, as well as organic growth in existing systems; partiallysystems. These increases were offset by an estimated net decrease of $17 million from weather in both 2021 and 2020, and a
$19 $24 million decrease in revenues due to lower water services demand, excluding the impactamortization of completed acquisitions, includingEADIT, which is generally offset with a $7reduction in income tax expense. There was an estimated $11 million reductiondecrease in 2021 due to warmer weatherhigher demand in the third quarter of 2016.2020 as a result of the COVID-19 pandemic, which had no estimated net impact on revenue for the full year 2020. Additionally, there was an $8 million decrease in revenue due to the denial of recovery of certain COVID-19 financial impacts based on the PaPUC order received by the Company’s Pennsylvania subsidiary. See Note 3—Impact of the COVID-19 Pandemic in the Notes to Consolidated Financial Statements for additional information.
For the nine months ended September 30, 2017,2021, operating revenues increased $88 million, primarily due to a:
$67$152 million increase from authorized rate increases, andincluding infrastructure surcharges, principally to fund infrastructure investment growth in various states;
$31states, and a $22 million increase attributable to recentfrom water and wastewater acquisitions, as well as organic growth in existing systems; and a
$6 million increase in wastewater services, excluding the impact of completed acquisitions, resulting from higher treatment volumes, as well as an increase in private fire service connections; partiallysystems. These increases were offset by an estimated net decrease of $11 million from weather in both 2021 and 2020, and a
$36 $68 million decrease in revenues due to lower water services demand, excluding the impactamortization of completed acquisitions, includingEADIT, which is generally offset with a $12reduction in income tax expense. Additionally, there was an $8 million reductiondecrease in revenue due to overall warmer weatherthe denial of recovery of certain COVID-19 financial impacts based on the PaPUC order received by the Company’s Pennsylvania subsidiary. See Note 3—Impact of the COVID-19 Pandemic in 2016.the Notes to Consolidated Financial Statements for additional information.
Operation and maintenance. The followingMaintenance
Presented in the table summarizesbelow is information regarding the main components of operationthe Regulated Businesses’ operating and maintenance expense:
| | | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | Increase (Decrease) | | 2017 | | 2016 | | Increase (Decrease) | | 2021 | | 2020 | | 2021 | | 2020 |
| (In millions) | | | | | | | | | | | | | | | | (In millions) | | | | | | | |
| Employee-related costs | | Employee-related costs | $ | 132 | | | $ | 125 | | | $ | 391 | | | $ | 369 | |
| Production costs | $ | 87 |
| | $ | 86 |
| | $ | 1 |
| | 1.2 | % | | $ | 224 |
| | $ | 220 |
| | $ | 4 |
| | 1.8 | % | Production costs | 101 | | | 100 | | | 268 | | | 253 | |
| Employee-related costs | 112 |
| | 107 |
| | 5 |
| | 4.7 | % | | 334 |
| | 328 |
| | 6 |
| | 1.8 | % | |
| Operating supplies and services | 51 |
| | 50 |
| | 1 |
| | 2.0 | % | | 150 |
| | 149 |
| | 1 |
| | 0.7 | % | Operating supplies and services | 56 | | | 65 | | | 171 | | | 175 | |
| Maintenance materials and supplies | 15 |
| | 16 |
| | (1 | ) | | (6.3 | )% | | 49 |
| | 46 |
| | 3 |
| | 6.5 | % | Maintenance materials and supplies | 19 | | | 18 | | | 66 | | | 56 | |
| Customer billing and accounting | 14 |
| | 17 |
| | (3 | ) | | (17.6 | )% | | 37 |
| | 41 |
| | (4 | ) | | (9.8 | )% | Customer billing and accounting | 17 | | | 14 | | | 49 | | | 41 | |
| Other | (17 | ) | | 74 |
| | (91 | ) | | (123.0 | )% | | 6 |
| | 97 |
| | (91 | ) | | (93.8 | )% | Other | 13 | | | 13 | | | 38 | | | 38 | |
| Total | $ | 262 |
| | $ | 350 |
| | $ | (88 | ) | | (25.1 | )% | | $ | 800 |
| | $ | 881 |
| | $ | (81 | ) | | (9.2 | )% | Total | $ | 338 | | | $ | 335 | | | $ | 983 | | | $ | 932 | |
For the three months ended September 30, 2017,2021, operation and maintenance expense decreasedincreased $3 million primarily due to a:
$91a $7 million decreaseincrease in other operationemployee-related costs from higher headcount and maintenancerelated compensation expense principally due to a $65 million charge recordedin support of the growth in the third quarter of 2016, resulting from the binding global agreement in principle to settle claims associated with the Freedom Industries chemical spill in West Virginia,business and a $22$3 million benefit recorded in the third quarter of 2017, resulting from an insurance settlement with one of our general liability insurance carriers also related to this matter in West Virginia; as well as lower casualty insurance expense attributable to a decrease in historical claims experience; and a
$3 million decreaseincrease in customer billing and accounting largelyprimarily due to a decrease inhigher call volumes experienced at our customer uncollectible expense resulting from focused collection efforts;service centers. These increases were partially offset by a
$5 $9 million increase in employee-related costs primarily due to higher pension expense resulting from a decrease in the discount rate and increased plan obligations, as well as higher other postretirement benefit plan expense resulting from plan amendments approved in the third quarter of 2016; and a
$1 million increase in operating supplies and services principally due to a $5 million write-off recorded in the third quartertiming of 2016, related to timekeeping system costs that were previously capitalized, partially offset by higher contracted services expense.expenses.
For the nine months ended September 30, 2017,2021, operation and maintenance expense decreasedincreased $51 million, primarily due to a:
$91 million decrease in other operation and maintenance expense principally due to a $65 million charge recorded in the third quarter of 2016, resulting from the binding global agreement in principle to settle claims associated with the Freedom Industries chemical spill in West Virginia, and a $22 million benefit recordedincrease in employee-related costs from higher headcount and related compensation expense in support of the growth in the third quarter of 2017, resulting from an insurance settlement with one of our general liability insurance carriers also related to this matter in West Virginia; as well as lower casualty insurancebusiness and higher pension expense attributable to a decrease in historical claims experience; and a
$4 million decrease in customer billing and accounting largely due to higher service costs. There was a decrease in customer uncollectible expense resulting from focused collection efforts; partially offset by a
$4$15 million increase in production costs primarily due to higher purchased water price and usage increases in ourthe Company’s California subsidiary as well asand increased fuel and power price increases;
$6 million increase in employee-related costs primarily due to higher pension expense resulting from a decrease in the discount rate and increased plan obligations, as well as higher compensation expense in support of the growth of the business;
$1 million increase in operating supplies and services principally due to a $5 million write-off of timekeeping system costs that were previously capitalizedacross several subsidiaries and a $7 million judgment in litigation, both recorded in the third quarter of 2016, partially offset by higher contracted services expense; and a
$3$10 million increase in maintenance materials and supplies largely due to the timing of maintenance activities.and tank painting projects in the Company’s New Jersey subsidiary and increased paving costs from a higher volume of main breaks.
Operating expenses, net. Depreciation and Amortization
For the three and nine months ended September 30, 2017, operating expenses, net decreased primarily due to the decrease in operating and maintenance expense as explained above, as well a $3 million decrease in property taxes in our Pennsylvania subsidiary from credit refunds and a $7 million gain recognized on a land sale in our Kentucky subsidiary, partially offset by higher2021, depreciation and amortization expense of $10increased $13 million and $29$32 million, respectively, primarily due to additional utility plant placed in service.
service from capital infrastructure investments and acquisitions.
General Taxes
For the three and nine months ended September 30, 2021, general taxes increased $5 million and $15 million, respectively, primarily due to increased capital investments, including acquisitions and an increase in the New Jersey Gross Receipts Tax.
Other Income (Expenses)
For the three and nine months ended September 30, 2021, other income (expenses) increased $7 million and $20 million, respectively, primarily due to the reduction in the non-service cost components of pension and other postretirement benefits expense resulting from higher asset returns.
Provision for Income Taxes
For the three and nine months ended September 30, 2021, the Regulated Businesses’ provision for income taxes decreased $25 million and $53 million, respectively. The Regulated Businesses’ effective income tax rate was 18.1% and 24.6% for the three months ended September 30, 2021 and 2020, respectively, and 17.3% and 24.6% for the nine months ended September 30, 2021 and 2020, respectively. The decrease in the Regulated Businesses’ effective income tax rate for the three and nine months ended September 30, 2021 was primarily due to an increase in the amortization of EADIT resulting from the TCJA, pursuant to regulatory orders. The amortization of EADIT is generally offset with reductions in revenue.
Market-Based Businesses
The followingPresented in the table summarizes certain financialbelow is information for ourthe Market-Based Businesses:
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
| (In millions) | | | | | | | |
| Operating revenues | $ | 152 | | | $ | 139 | | | $ | 435 | | | $ | 399 | |
| Operation and maintenance | 113 | | | 99 | | | 332 | | | 284 | |
| Depreciation and amortization | 6 | | | 7 | | | 17 | | | 20 | |
| Income before income taxes | 31 | | | 31 | | | 79 | | | 91 | |
| Provision for income taxes | 8 | | | 7 | | | 20 | | | 23 | |
| Net income attributable to common shareholders | 23 | | | 23 | | | 59 | | | 68 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | Increase (Decrease) | | 2017 | | 2016 | | Increase (Decrease) |
| (In millions) | | | | | | | | | | | | | | | |
| Operating revenues | $ | 100 |
| | $ | 109 |
| | $ | (9 | ) | | (8.3 | )% | | $ | 306 |
| | $ | 338 |
| | $ | (32 | ) | | (9.5 | )% |
| Operation and maintenance | 75 |
| | 92 |
| | (17 | ) | | (18.5 | )% | | 247 |
| | 285 |
| | (38 | ) | | (13.3 | )% |
| Total operating expenses, net | 80 |
| | 98 |
| | (18 | ) | | (18.4 | )% | | 263 |
| | 300 |
| | (37 | ) | | (12.3 | )% |
Net income attributable to common
stockholders | 14 |
| | 7 |
| | 7 |
| | 100.0 | % | | 29 |
| | 26 |
| | 3 |
| | 11.5 | % |
Operating revenues. For the three and nine months ended September 30, 2021, operating revenues increased $13 million and $36 million, respectively, due to an increase in capital and O&M projects in the MSG, across several of the Company’s military bases, primarily at the United States Military Academy at West Point, New York, Fort Hood and Joint Base San Antonio.
Operation and Maintenance
For the three months ended September 30, 2017, operating revenues decreased2021, operation and maintenance expense increased $14 million, primarily due to a:
$12 million decreasecosts associated with MSG from increased capital and O&M projects as discussed above and an increase in our Militaryadditional O&M costs related to the Contract Services Group principally due to lower capital upgrades in 2017, largely from reduced military base budgets; partially offset by a
$5 million increase in our Homeowner Services Group from customer growth and price increases for existing customers.(“CSG”).
For the nine months ended September 30, 2017, operating revenues decreased primarily due to a:
$49 million decrease in our Military Services Group principally due to lower capital upgrades in 2017, largely from reduced military base budgets, and the completion of a large project in mid-2016 at Fort Polk; partially offset by a
$15 million increase in our Homeowner Services Group from customer growth and price increases for existing customers.
Operation and maintenance. The following table summarizes information regarding the components of operation and maintenance expense:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| | 2017 | | 2016 | | Increase (Decrease) | | 2017 | | 2016 | | Increase (Decrease) |
| (In millions) | | | | | | | | | | | | | | | |
| Production costs | $ | 9 |
| | $ | 10 |
| | $ | (1 | ) | | (10.0 | )% | | $ | 28 |
| | $ | 27 |
| | $ | 1 |
| | 3.7 | % |
| Employee-related costs | 21 |
| | 24 |
| | (3 | ) | | (12.5 | )% | | 69 |
| | 72 |
| | (3 | ) | | (4.2 | )% |
| Operating supplies and services | 26 |
| | 38 |
| | (12 | ) | | (31.6 | )% | | 84 |
| | 128 |
| | (44 | ) | | (34.4 | )% |
| Maintenance materials and supplies | 13 |
| | 18 |
| | (5 | ) | | (27.8 | )% | | 54 |
| | 51 |
| | 3 |
| | 5.9 | % |
| Other | 6 |
| | 2 |
| | 4 |
| | 200.0 | % | | 12 |
| | 7 |
| | 5 |
| | 71.4 | % |
| Total | $ | 75 |
| | $ | 92 |
| | $ | (17 | ) | | (18.5 | )% | | $ | 247 |
| | $ | 285 |
| | $ | (38 | ) | | (13.3 | )% |
For the three months ended September 30, 2017,2021, operation and maintenance expense decreasedincreased $48 million primarily due to a:
$12 million decrease in operating suppliescosts associated with MSG from increased capital and services primarily due to lower capital upgrades in our Military Services Group in 2017,O&M projects as discussed above, as well as lower advertising and marketing expense in our Homeowners Services Group; and a
$5 million decrease in maintenance materials and supplies principally due to the timingabove; additional costs associated with an increase of claims activity in our Homeowners Services Group, as well as2021 in HOS, including from extreme cold weather across the volume country during the first quarter of 2021, primarily in Texas and timing of specific maintenance activities; partially offset by a
$4 million increase in other operationIllinois; and maintenance expense largely due to an increase in customer uncollectible expense and billing and collection fees, primarily in our Homeowner Services Group.additional O&M costs related to CSG.
For the nine months ended September 30, 2017, operation and maintenance expense decreased primarily due to a:
$44 million decrease in operating supplies and services primarily due to lower capital upgrades in our Military Services Group in 2017, as discussed above, as well as lower advertising and marketing expense in our Homeowners Services Group; partially offset by a
$5 million increase in other operation and maintenance expense largely due to an increase in customer uncollectible expense and billing and collection fees, principally in our Homeowner Services Group.
Liquidity and Capital Resources
For a general overview of ourthe sources and uses of capital resources, see the introductory discussion in Part II, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources contained in ourthe Company’s Form 10-K.
We fund liquidityLiquidity 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, borrowingborrowings under the American Water Capital Corp. (“AWCC”)AWCC’s revolving credit facility.facility, and, in the future, issuances of equity. The Company’s revolving credit facility provides $1.75$2.25 billion in aggregate total commitments from a diversified group of financial institutions with an expiration dateinstitutions. The revolving credit facility is used principally to support AWCC’s commercial paper program, to provide additional liquidity support, and to provide for the issuance of June 2020 (subject to extension by us for up to two one-year periods). We regularly evaluate the capital markets and closely monitor the financial condition$150 million in letters of the financial institutions with contractual commitments in our revolving credit facility.
In order to meet ourcredit. The maximum aggregate principal amount of short-term liquidity needs, we, through AWCC, our wholly owned financing subsidiary, issueborrowings authorized for issuance under AWCC’s commercial paper whichprogram is supported$2.10 billion. Subject to satisfying certain conditions, the credit agreement also permits AWCC to increase the maximum commitment under the facility by our revolving credit facility.up to an aggregate of $500 million. As of September 30, 2017, AWCC had2021 and December 31, 2020, there were noborrowings outstanding under the revolving credit facility. The weighted-average interest rate on AWCC’s outstanding short-term borrowings, and $86including as of December 31, 2020, $500 million of outstanding lettersprincipal on the Term Loan Facility (as defined below), was approximately 0.13% and 0.53% at September 30, 2021 and December 31, 2020, respectively.
To ensure adequate liquidity given the impacts of the COVID-19 pandemic on debt and capital markets, on March 20, 2020, AWCC entered into a Term Loan Credit Agreement, by and among parent company, AWCC and the lenders party thereto (the “Term Loan Facility”). The proceeds were used for general corporate purposes of AWCC and American Water and to provide additional liquidity. As of December 31, 2020, $500 million of principal was outstanding under the Term Loan Facility. The Term Loan Facility commitments terminated at maturity on March 19, 2021 and the Term Loan Facility was repaid in full.
Presented in the tables below is the aggregate credit facility commitments, commercial paper limit and letter of credit availability under the revolving credit facility, with $1.66as well as the available capacity for each:
| | | | | | | | | | | | | | | | | |
| As of September 30, 2021 |
| Commercial Paper Limit | | Letters of Credit | | Total (a) |
| (In millions) | | | | | |
| Total availability | $ | 2,100 | | | $ | 150 | | | $ | 2,250 | |
| Outstanding debt | (684) | | | (76) | | | (760) | |
| Remaining availability as of September 30, 2021 | $ | 1,416 | | | $ | 74 | | | $ | 1,490 | |
(a)Total remaining availability of $1.49 billion available to fulfill our short-term liquidity needs and to issue letters of credit. As as of September 30, 2017,2021 may be accessed through revolver draws.
| | | | | | | | | | | | | | | | | |
| As of December 31, 2020 |
| Commercial Paper Limit | | Letters of Credit | | Total (a) |
| (In millions) | | | | | |
| Total availability | $ | 2,100 | | | $ | 150 | | | $ | 2,250 | |
| Outstanding debt | (786) | | | (76) | | | (862) | |
| Remaining availability as of December 31, 2020 | $ | 1,314 | | | $ | 74 | | | $ | 1,388 | |
(a)Total remaining availability may be accessed through revolver draws.
Presented in the revolving credit facility supported $103 million in outstanding commercial paper. We believetable below is the Company’s total available liquidity as of September 30, 2021 and December 31, 2020, respectively:
| | | | | | | | | | | | | | | | | |
| Cash and Cash Equivalents | | Availability on Revolving Credit Facility | | Total Available Liquidity |
| (In millions) | | | | | |
| Available liquidity as of September 30, 2021 | $ | 70 | | | $ | 1,490 | | | $ | 1,560 | |
| Available liquidity as of December 31, 2020 | $ | 547 | | | $ | 1,388 | | | $ | 1,935 | |
The Company believes that our abilityexisting sources of liquidity are sufficient to accessmeet its cash requirements for the capital markets, our revolving credit facility and our cash flows from operations will generate sufficient cash to fund our short-term requirements. However, weforeseeable future. Though not currently anticipated, no assurances can provide no assurancesbe provided that the lenders will meet their existing commitments to AWCC under the revolving credit facility, or that weAWCC will be able to access the commercial paper or loan markets in the future on terms acceptable terms.See Note 9—Short-Term Debt in the Notes to us or at all.Consolidated Financial Statements for additional information.
On AugustMay 10, 2017,2021, AWCC completed a $1,350 million$1.1 billion debt offering, which included the sale of $600$550 million aggregate principal amount of its 2.95% Senior Notes2.30% senior notes due in 20272031 and $750$550 million aggregate principal amount of its 3.75% Senior Notes3.25% senior notes due in 2047.2051. At the closing of the offering, AWCC received, after deduction of underwriting discounts and debt issuance costs, $1,333before deduction of offering expenses, net proceeds of $1,086 million. On September 13, 2017, AWCC used the net proceeds from theof this offering: (i) to lend funds to parent company and its regulated subsidiaries; (ii) to prepay $138$251 million aggregate principal amount of its outstanding 5.62% Series C Senior Notes due December 21, 2018 (“Series C Senior Notes”) and $181 million of itsAWCC’s outstanding 5.77% Series D Senior Notes due December 21, 2021 (“(the “Series D Notes”) and $76 million aggregate principal amount of AWCC’s outstanding 6.55% Series H Senior Notes due May 15, 2023 (the “Series H Notes,” and together with the Series D SeniorNotes, the “Series Notes”); (ii)(iii) to repay AWCC’s commercial paper obligations; and (iii)(iv) for general corporate purposes. Subsequently, AWCC used proceeds fromAfter the offering to repay at maturity, $524prepayments described above, none of the Series D Notes, and approximately $14 million aggregate principal amount of its 6.085% Seniorthe Series H Notes, on October 15, 2017. In addition, the Company repaid $33 million of 7.08% subsidiary debt at maturity on November 1, 2017.
remain outstanding. As a result of AWCC’s prepayment of the Series C and Series D Senior Notes, and payment of a make-whole premium of $15 million was paid to the holders thereof of $34 million, we recorded an early debt extinguishment charge of $6 million, which was associated with the portion of the debt allocable to our parent company.on June 14, 2021. Substantially all of the early debt extinguishment costs were allocable to ourthe Company’s utility subsidiaries wereand recorded as regulatory assets, that we believeas the Company believes they are probable of recovery in future rates.
On August 7, 2017, we terminated four forward starting swapMay 6, 2021, the Company entered into two 10-year treasury lock agreements, with an aggregate notional amountamounts of $300$125 million realizing a gain of $19 million to be amortized through interest, net over 30 years. We have one remaining forward swap agreement, which was entered into on February 8, 2017, with a notional amount of $100and $150 million, to reduce interest rate exposure for a portion of the expected refinancing of AWCC’s Series C Senior Notes. This forward starting swap agreement terminates in November 2018 and hason debt, which was subsequently issued on May 10, 2021. These treasury lock agreements had an average fixed rate of 2.67%1.58%. We haveThe Company designated this forward starting swap agreementthese treasury lock agreements as a cash flow hedgehedges, with itstheir fair value recorded in accumulated other comprehensive gain or loss. Upon termination,On May 10, 2021, the cumulativeCompany terminated these two treasury lock agreements with an aggregate notional amount of $275 million, realizing a net gain or loss recorded in accumulated other comprehensive gain or loss willof less than $1 million, to be amortized through interest, net over a 10-year period, in accordance with the termterms of the $1.1 billion new debt.
On October 15, 2017, our interest rate swap to hedge $100 million of AWCC’s 6.085% Senior Notes matured. See Note 6—Long-Term Debt indebt issued on May 10, 2021. No ineffectiveness was recognized on hedging instruments for the Notes to Consolidated Financial Statements for further information.
three and nine months ended September 30, 2021 and 2020.
Cash Flows Provided by Operating Activities
Cash flows provided by operating activities primarily result from the sale of water and wastewater services and, due to the seasonality of demand, are generally greater during the third quarter of each fiscal year. The followingwarmer months. Presented in the table providesbelow is a summary of the major items affecting the Company’s cash flows provided by our operating activities:
| | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2021 | | 2020 |
| (In millions) | | | |
| Net income | $ | 618 | | | $ | 564 | |
| Add (less): | | | |
| Depreciation and amortization | 476 | | | 451 | |
| Deferred income taxes and amortization of investment tax credits | 121 | | | 174 | |
Other non-cash activities (a) | (37) | | | (25) | |
Changes in working capital (b) | (118) | | | (145) | |
| Pension and postretirement healthcare contributions | (31) | | | (31) | |
| Net cash flows provided by operating activities | $ | 1,029 | | | $ | 988 | |
|
| | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2017 | | 2016 |
| (In millions) | | | |
| Net income | $ | 427 |
| | $ | 367 |
|
| Add (less): | | | |
Non-cash activities (a) | 659 |
| | 598 |
|
Changes in working capital (b) | (64 | ) | | 22 |
|
| Pension and postretirement healthcare contributions | (36 | ) | | (42 | ) |
| Net cash flows provided by operations | $ | 986 |
| | $ | 945 |
|
| |
(a) | Includes depreciation and amortization, deferred income taxes and amortization of deferred investment tax credits, provision for losses on accounts receivable, gain on asset dispositions and purchases, pension and non-pension postretirement benefits expense and other non-cash, net. Details of each component can be found in the Consolidated Statements of Cash Flows. |
| |
(b) | Changes in working capital include changes to receivables and unbilled revenues, accounts payable and accrued liabilities, and other current assets and liabilities, net. |
(b)Changes in working capital include changes to receivables and unbilled revenues, accounts payable and accrued liabilities, the settlement of cash flow hedges and other current assets and liabilities, net.
For the nine months ended September 30, 2017, the increase in2021, cash flows fromprovided by operating activities as compared to the same period in 2016, is primarilyincreased $41 million, due to an increase in net income, after non-cash adjustments. The main factors contributing to the net income increase are described in this section under “Comparison of Consolidated Results of Operations” and included higher operating revenue and lower operation and maintenance expense. The increase in non-cash activities was mainly the result of an increase in depreciation and amortization attributableprimarily due to additional utility plant placed in service from capital infrastructure investments and acquisitions and changes in working capital, partially offset by a decrease in deferred income taxes and amortization of investment projects placed into service andtax credits primarily driven by an increase in deferred income taxes.
The change in working capital was primarily the resultamortization of the following: (i) timing of accounts payable and accrued liabilities, including the accrual recorded during the third quarter of 2016 for costs associated with the binding global agreement in principle as to settlement of claims related to the Freedom Industries chemical spill in West Virginia; (ii) the $34 million make-whole premium paid on early debt extinguishment associated with the prepayment of $138 million of outstanding Series C Senior Notes and $181 million of outstanding Series D Senior Notes; (iii) a decrease in unbilled revenues as a result of our Military Services Group achieving significant capital project milestones during 2016; and (iv) change in other current assets and liabilities, including an increase in prepaid taxes, partially offset by the decrease of other current assets associated with the termination of our four forward starting swap agreements.EADIT.
Cash Flows Used in Investing Activities
The followingPresented in the table provides information regardingbelow is a summary of the major items affecting the Company’s cash flows used in our investing activities:
| | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2021 | | 2020 |
| (In millions) | | | |
| Net capital expenditures | $ | (1,205) | | | $ | (1,314) | |
| Acquisitions | (78) | | | (59) | |
Other investing activities, net (a) | (70) | | | (73) | |
| Net cash flows used in investing activities | $ | (1,353) | | | $ | (1,446) | |
|
| | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2017 | | 2016 |
| (In millions) | | | |
| Net capital expenditures | $ | (964 | ) | | $ | (928 | ) |
| Acquisitions | (10 | ) | | (29 | ) |
Other investing activities, net (a) | (47 | ) | | (57 | ) |
| Net cash flows used in investing activities | $ | (1,021 | ) | | $ | (1,014 | ) |
| |
(a) | Includes removal costs from property, plant and equipment retirements, net, proceeds from sale of assets and net funds restricted. |
For the nine months ended September 30, 2017,2021, cash used in investing activities increaseddecreased $93 million, primarily due to continued investment across all infrastructure categories, mainly replacement and renewalthe timing of transmission and distribution infrastructure in our Regulated Businesses, partially offset by decreased cash used for acquisitions. We expect investments of approximately $1.65 billion in 2017payments for capital expenditures and acquisitions. Constructionexpenditures. Partially, offsetting this decrease was an increase in acquisitions primarily due to the acquisition of our new corporate headquarters buildingthe East Pasadena Water Company in Camden, New Jersey is underway.California for $34 million during the third quarter of 2021. The costCompany plans to invest approximately $1.9 billion across its footprint in 2021.
Cash Flows Provided byfrom Financing Activities
The followingPresented in the table provides information regardingbelow is a summary of the major items affecting the Company’s cash flows provided by our financing activities:
| | | | | | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2021 | | 2020 |
| (In millions) | | | |
| Proceeds from long-term debt | $ | 1,113 | | | $ | 1,250 | |
| Repayments of long-term debt | (370) | | | (266) | |
| (Repayments of) proceeds from term loan | (500) | | | 500 | |
| Net short-term borrowings with maturities less than three months | (97) | | | (242) | |
| Debt issuance costs and make-whole premium on early debt redemption | (26) | | | (12) | |
| Dividends paid | (318) | | | (290) | |
Other financing activities, net (a) | 46 | | | 26 | |
| Net cash flows (used in) provided by financing activities | $ | (152) | | | $ | 966 | |
|
| | | | | | | |
| | For the Nine Months Ended September 30, |
| | 2017 | | 2016 |
| (In millions) | | | |
| Proceeds from long-term debt | $ | 1,382 |
| | $ | 2 |
|
| Repayments of long-term debt | (334 | ) | | (20 | ) |
| Net proceeds from short-term borrowings | (746 | ) | | 322 |
|
| Dividends paid | (215 | ) | | (194 | ) |
| Anti-dilutive stock repurchases | (54 | ) | | (65 | ) |
Other financing activities, net (a) | 20 |
| | 25 |
|
| Net cash flows provided by financing activities | $ | 53 |
| | $ | 70 |
|
| |
(a) | Includes proceeds from issuances of common stock under various employee stock plans and our dividend reinvestment plan, advances and contributions for construction, net of refunds, taxes paid related to employee stock plans and debt issuance costs. |
For the nine months ended September 30, 2017, the decrease in2021, cash flows provided by financing activities as compared to the same period in 2016, isdecreased $1,118 million, primarily due to the $500 million borrowed under the Term Loan Facility during the first quarter of 2020 which was repaid in full at maturity in 2021, an increase in cash used for dividend payments in 2017. Additionally, the Company issued approximately $1,333 millionrepayments of long-term debt after deductiondue to the prepayment of underwriting discounts$327 million in aggregate principal amount of AWCC’s outstanding senior notes during the second quarter of 2021 and debt issuance costs, as part of the August 10, 2017 debt financing, of which approximately $319 million was used for the early extinguishment of pre-existing long-term debt. Additional proceeds from the debt financing were used for the repayment of pre-existing short-term borrowings, resultinghigher dividends paid in a2021, partially offset by lower net cash outflow for the nine months ended September 30, 2017 of $746 million.
Credit Facilities and Short-Term Debt
The following table summarizes information regarding our aggregate credit facility commitments, letter of credit sub-limits and available funds under those revolving credit facilities, as well as outstanding amountsrepayments of commercial paper and outstanding borrowings under the respective facilities as of September 30, 2017:borrowings.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Credit Facilities Commitment (a) | | Available Credit Facility Capacity (a) | | Letter of Credit Sublimit | | Available Letter of Credit Capacity | | Commercial Paper Limit | | Available Commercial Paper Capacity |
| (In millions) | | | | | | | | | | | |
| September 30, 2017 | $ | 1,762 |
| | $ | 1,669 |
| | $ | 150 |
| | $ | 86 |
| | $ | 1,600 |
| | $ | 1,497 |
|
| |
(a) | Includes amounts related to the revolving credit facility of Keystone Clearwater Solutions, LLC (“Keystone”), our water management solutions subsidiary. As of September 30, 2017, the total commitment under the Keystone revolving credit facility was $12 million, of which $5 million was available for borrowing, subject to compliance with a collateral base calculation. At September 30, 2017, there were no outstanding borrowings under this credit facility. |
The weighted-average interest rate on AWCC short-term borrowings for three months ended September 30, 2017 and 2016 was approximately 1.38% and 0.78%, respectively. The weighted-average interest rate on AWCC short-term borrowings for the nine months ended September 30, 2017 and 2016 was approximately 1.19% and 0.76%, respectively.
Capital Structure
The following table indicates the percentage of our capitalization represented by the components of our capital structure as of the dates set forth below:
|
| | | | | |
| | September 30, 2017 | | December 31, 2016 |
| Total common stockholders' equity | 42.5 | % | | 42.1 | % |
| Long-term debt and redeemable preferred stock at redemption value | 51.4 | % | | 46.4 | % |
| Short-term debt and current portion of long-term debt | 6.1 | % | | 11.5 | % |
| | 100 | % | | 100 | % |
Debt Covenants
OurThe Company’s debt agreements contain financial and non-financial covenants. To the extent that we arethe Company is not in compliance with these covenants, an event of default may occur under one or more debt agreements and wethe Company or ourits subsidiaries may be restricted in ourits ability to pay dividends, issue new debt or access ourthe revolving credit facility. OurThe long-term debt indentures contain a number of covenants that, among other things, prohibit or restrict the Company from issuing debt secured by the Company’s assets, subject to certain exceptions. Our failureFailure to comply with any of these covenants could accelerate repayment obligations.
Covenants in certain long-term notes and the revolving credit facility require usthe Company to maintain a ratio of consolidated debt to consolidated capitalization (as defined in the relevant documents) of not more than 0.70 to 1.00. On September 30, 2017, our2021, the Company’s ratio was 0.580.62 to 1.00 and therefore we werethe Company was in compliance with the covenants.
Security Ratings
Our access to the capital markets, including the commercial paper market, and respective financing costs in those markets, may be directly affected by our securities ratings. We primarily access the debt capital markets, including the commercial paper market, through AWCC. However, we have also issued debt through our regulated subsidiaries, primarilyPresented in the form of tax exempt securities or borrowings under state revolving funds, to lower our overall cost of debt.
Ourtable below are long-term and short-term credit ratings and rating outlooks as of September 30, 2017:
November 2, 2021 as issued by the following rating agencies: |
| | | | | | | | | | | | | |
| Securities | | Moody's
Investors Service | | Standard & Poor's
Ratings Service |
| Rating outlook | | Stable | | Stable |
| Senior unsecured debt | | A3Baa1 | | A |
| Commercial paper | | P-2 | | A-1 |
A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency, and each rating should be evaluated independently of any other rating. Security ratings are highly dependent upon ourthe ability to generate cash flows in an amount sufficient to service our debt and meet our investment plans. WeThe Company can provide no assurances that ourits ability to generate cash flows is sufficient to maintain ourits existing ratings. None of ourthe Company’s borrowings are subject to default or prepayment as a result of athe downgrading of these security ratings, although such a downgrading could increase fees and interest charges under ourits credit facility.
As part of its normal course of business, the Company routinely enters into contracts for the purchase and sale of water, energy, chemicals and other services. These contracts either contain express provisions or otherwise permit the Company and its counterparties to demand adequate assurance of future performance when there are reasonable grounds for doing so. In accordance with the contracts and applicable contract law, if the Company is downgraded by a credit rating agency, especially if such downgrade is to a level below investment grade, it is possible that a counterparty would attempt to rely on such a downgrade as a basis for making a demand for adequate assurance of future performance, which could include a demand that the Company must provide collateral to secure its obligations. The Company does not expect to post any collateral which will have a material adverse impact on the Company’s results of operations, financial position or cash flows.
Access to the capital markets, including the commercial paper market, and respective financing costs in those markets, may be directly affected by the Company’s securities ratings. The Company primarily accesses the debt capital markets, including the commercial paper market, through AWCC. However, the Company has also issued debt through its regulated subsidiaries, primarily in the form of tax-exempt securities or borrowings under state revolving funds, to lower the overall cost of debt.
Dividends
On September 1, 2017, we paid a cash dividend of $0.415 per share to our stockholders of record as of August 9, 2017.
On October 31, 2017, our Board of Directors declared a quarterly cash dividend payment of $0.415 per share payable on December 1, 2017 to stockholders of record as of November 10, 2017. Future dividends, when and as declared at the discretionFor discussion 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 Part II, ItemCompany’s dividends, see Note 7—Management’s Discussion and Analysis ofShareholders' Equity in the Notes to Consolidated Financial Condition and Results of Operations—Liquidity and Capital Resources—Dividends in our Form 10-KStatements for more information regarding restrictions on the payment of dividends on our common stock.additional information.
Application of Critical Accounting Policies and Estimates
Our financialFinancial condition of the Company, results of operations and cash flows are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. See Part II, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates in ourthe Company’s Form 10-K for a discussion of ourits critical accounting policies. Additionally, see Note 2—Significant Accounting Policies in the Notes to Consolidated Financial Statements for updates, if any, to the significant accounting policies previously disclosed in the Company’s Form 10-K.
Recent Accounting Standards
See Note 2—NewSignificant Accounting Standards toPolicies in the Notes to Consolidated Financial Statements included in Part I, Item 1—Consolidated Financial Statements of this Quarterly Report on Form 10-Q for a description of new accounting standards recently adopted or pending adoption.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subjectThe Company is exposed to market risksrisk in the normal course of business, including changes in commodity prices, equity prices and interest rates and equity prices.rates. For afurther discussion of ourits exposure to market risk, refer tosee Part II, Item 7A—Quantitative and Qualitative Disclosures about Market Risk contained in ourthe Company’s Form 10-K. Except as described below, thereThere have been no significant changes to ourthe Company’s exposure to market risk since December 31, 2016.2020.
On February 8, 2017, we entered into a forward starting swap agreement with a notional amountThe Company had no significant derivative instruments outstanding as of $100 million to reduce interest rate exposure on debt expected to be issued in 2018. This forward starting swap agreement terminates in November 2018 and has an average fixed rate of 2.67%. A hypothetical one hundred basis point change in the forward starting swap rates would have resulted in a $21 million increase or decrease in fair value of this swap agreement for the nine months ended September 30, 2017.2021.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
American Water maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
OurThe Company’s management, including the Chief Executive Officer and the Chief Financial Officer, conducted an evaluation of the effectiveness of ourits disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of September 30, 2017.2021.
Based on that evaluation, ourthe Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2017, our2021, the Company’s disclosure controls and procedures were effective at a reasonable level of assurance.
Changes in Internal Control over Financial Reporting
WeThe Company concluded that there have been no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2017,2021, that have materially affected, or are reasonably likely to materially affect, ourthe Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following information updates and amends the information provided in ourthe Company’s Form 10-K in Part I, Item 3—Legal Proceedings, and in our Quarterly ReportsReport on Form 10-Q for the quartersquarter ended March 31, 2017 and June 30, 20172021 in Part II, Item 1—Legal Proceedings. Capitalized terms used but not otherwise defined herein have the meanings set forth in ourthe Company’s Form 10-K. In accordance with the SEC’s disclosure rules, the Company has elected to disclose environmental proceedings involving the Company and a governmental authority if the amount of potential monetary sanctions, exclusive of interest and costs, that the Company reasonably believes will result from such proceeding is $1 million or more.
Alternative Water Supply in Lieu of Carmel River Diversions
Regional Desalination Project Litigation
Following the court’s disposition of a related issue in another case, MCWD’s petition to the Supreme Court of California for review of the CPUC approval of a settlement agreement resolving matters among the signatory parties has been remanded to the CPUC, and remains pending.
Trial has been set for June 18, 2018 in the consolidated action in San Francisco County Superior Court associated with the failure of the RDP.
Monterey Peninsula Water Supply Project
Water Supply Project Land Acquisition and Slant Well Site Use
On January 12, 2017,October 7, 2021, the CPUC issuedcourt granted a Draftmotion filed by Cal Am related to MCWD’s cross-complaint against Cal Am, CEMEX and MCWRA, which motion requested a referral of certain issues related to MCWD’s water rights and unreasonable use claims to the SWRCB for its expert advisory opinion.
Challenge of Certification — Proposed Monterey System Acquisition Final Environmental Impact Report/Environmental Impact Statement. The comment periodReport
On November 25, 2020, the Company’s California subsidiary filed a petition for this report expired March 29, 2017 andwrit of mandate in Monterey County Superior Court challenging certification of the issuance of a final report is expected to be issued in the first quarter of 2018.
The CPUC has set hearings for October 25 through November 3, 2017 on Cal Am’s request for a certificate of public convenience and necessityFEIR by MPWMD for the Water Supply Project.
After conducting a trialpotential acquisition of the Monterey system assets. A hearing on the matter was held on August 30, 20172021, and a decision from the court remains pending.
Other Matters
On April 2, 2021, American Water Resources, LLC (“AWR”), an indirect, wholly owned subsidiary of parent company, and one of the entities comprising HOS, received a grand jury subpoena for all matters raisedcertain of its records in MCWD’s November 2015 challengeconnection with an investigation by the U.S. Attorney’s Office for the Eastern District of New York (the “EDNY”).The subpoena seeks information about AWR’s operations and its contractor network in the New York City metropolitan area.In connection with the proposed sale of HOS to the amendmentBuyer, the Company, AWR and the Buyer will enter into, at the closing,a Common Interest and Cooperation Agreement (the “Cooperation Agreement”), in order to facilitate a common defense for, and to share information concerning, this investigation and any legal or regulatory inquiries or proceedings related to or resulting from it or the subject matter in the subpoena (collectively, the “Covered Matters”). The Company will, on behalf of Cal Am’s coastal development permitsAWR, defend any Covered Matter, using commercially reasonable efforts to resolve it on a reasonably expedient basis. Further, the Company will be required to consult with the Buyer in specified circumstances and obtain its prior written consent (which consent may not be unreasonably withheld, conditioned or delayed) before entering into any resolution of any Covered Matter that imposes non-monetary provisions or undertakings or any other terms for which there will be no indemnification under the test slant well, other than claims that had been deniedCooperation Agreement. In addition, for 39 months after the date of the closing, the Company will indemnify the Buyer for any monetary losses or out-of-pocket damages (as described in the Cooperation Agreement) incurred by the court in September 2016, the court on October 3, 2017 denied all of MCWD’s claims with respect to these matters.
On July 13, 2017, the Coastal Commission adopted a consent agreement and cease and desist order requiring sand mining operations on the property on which intake wells will be located to cease by the end of 2020 and the property to be sold to either a non-profitBuyer or governmental entity. The consent agreement strictly limits future usecertain of the property but preserves Cal Am’s existing property rights and allows uses consistentHOS subsidiaries to the extent directly arising in connection with, existing easements and other rights of record. If the test slant well is to remain at the site and be used as part of the Water Supply Project, as currently proposed, Cal Am will likely need to seek an amendment and extension of its coastal development permit to allow the test slant well to remain and be maintained in the interim period until the Water Supply Project is operational. Cal Am will also need to seek an extension of its current lease for the test slant well with the State Lands Commission. This lease expires on December 16, 2017. Cal Am has filed an application for extension of this lease with the State Lands Commission, and approval of the application is to be considered at its November 29, 2017 meeting.or directly resulting from, any Covered Matter.
Based on the foregoing, including the information contained in our Form 10-K with respect to the Water Supply Project (other than as updated in this Form 10-Q), Cal Am estimates that the earliest date by which the Water Supply Project desalination plant could be completed is sometime in 2021. There can be no assurance that Cal Am’s application for the Water Supply Project will be approved or that the Water Supply Project will be completed on a timely basis, if ever. Furthermore, there can be no assurance that Cal Am will be able to complysubpoena and discussions with the diversion reduction requirements and other remaining requirements underEDNY, the 2009 Order andinvestigation does not appear to be focused on the 2016 Order, or that any such compliance will not result in material additional costs or obligations to Cal Amparent company or the Company.
California Public Utilities Commission Residential Rate Design Proceeding
Hearings before the administrative law judge in this proceeding took place in August and September 2017, and a subsequent hearing is currently scheduled for November 27, 2017. Cal Am also submitted additional testimony on the issue of whether Cal Am should be penalized, and if so, the reasonable amountoperations of any such penalty.
West Virginia Elk River Freedom Industries Chemical Spill
Preliminary Approval of WVAWC Global Class Action Litigation Settlement
On September 21, 2017, the court in the Federal action issued an order granting preliminary approval of a settlement class and proposed class action settlement (the “Settlement”) with respect to claims against the American Water Defendants by all putative class members (collectively, the “Plaintiffs”) for all claims and potential claims arising out of the January 9, 2014 Freedom Industries, Inc. chemical spill into the Elk River in West Virginia. Preliminary approval was granted after the parties to the Settlement filedits other subsidiaries.AWR is fully cooperating with the court in the Federal action a proposed amended global agreement and related materials on August 25, 2017 addressing the matters set forth in the court’s July 6, 2017 order denying without prejudice the joint motion for preliminary approval of the Settlement.
The Settlement covered by the order proposes a global resolution of all federal and state litigation and potential claims against the American Water Defendants and their insurers. Under the terms and conditions of the Settlement and the proposed amended settlement agreement, the American Water Defendants haveinvestigation.While it is not admitted, and will not admit, any fault or liability for any of the allegations made by the Plaintiffs in any of the actions to be resolved. Under federal class action rules, a claimant may elect to opt out of the final Settlement, in which case such claimant will not receive any benefit from or be bound by the terms of the Settlement. The American Water Defendants would have the right to withdraw from the Settlement if more than a certain number of putative class members opt out of the Settlement. The deadline imposed by the court in the Federal action for any Plaintiff to opt out of the Settlement or file an objection to the Settlement is December 8, 2017.
The proposed aggregate pre-tax amount of the Settlement with respect to the Company remainspossible at $126 million. However, the aggregate portion of the Settlement to be contributed by WVAWC, net of insurance recoveries, has been reduced from $65 million to $43 million (approximately $26 million after-tax) due to the recent settlement with one of the Company’s general liability insurance carriers, as discussed below. This reduction will apply to WVAWC’s contributions to the guaranteed fund. The contribution by another defendant to the Settlement remains at $25 million. If any final approval order by the court with respect to the Settlement is appealed and such appeal would delay potential payment to claimants under the Settlement, WVAWC and the other defendant to the Settlement will contribute up to $50 million and $25 million, respectively, to the Settlement (not including, in the case of WVAWC, any contributions by the Company’s general liability insurance carriers which would not be made until suchthis time as a final, non-appealable order is issued) into an escrow account during the pendency of such appeals. For certain claims, WVAWC and the other defendant to the Settlement may, in lieu of these escrowed contributions, make advance payments of such claims if agreed to by the parties. All administrative expenses of the Settlement and attorneys’ fees of class counsel related thereto would be paid from the funds designated to pay claims covered by the Settlement.
Notice of the terms of the Settlement to members of the settlement class commenced on October 11, 2017 and is expected to be completed by November 8, 2017. Following the notice period, the court will hold a fairness hearing to consider final approval of the Settlement, which is currently scheduled to be held on January 9, 2018. There can be no assurance that the Settlement will not be amended further or that the court will provide its final approval as to any agreement negotiated between the parties reflecting the terms of the Settlement.
The court in the Federal action has currently postponed a trial indefinitely in light of the preliminary approval of the Settlement and the global settlement agreement described above, and the Mass Litigation Panel stayed its proceedings until January 23, 2018.
Two of the Company’s insurance carriers that provide an aggregate of $50 million in insurance coverage to the Company under its general liability policies, had been originally requested, but at the time of the initial filing of the binding agreement in principle with the court in the Federal action in October 2016, had not agreed, to participate in the Settlement. WVAWC had filed a lawsuit against one of these carriers alleging that the carrier’s failure to agree to participate in the Settlement constituted a breach of contract. On September 19, 2017, the Company and the insurance carrier settled this lawsuit for $22 million, out of a maximum of $25 million in potential coverage under the terms of the relevant policy, in exchange for a full release by the Company and WVAWC of all claims against the insurance carrier related to the Freedom Industries chemical spill, and the parties agreed to stay this litigation pending final approval of the Settlement. The settlement with the insurance carrier reduced the total amount of WVAWC’s potential contributions to the Settlement from $65 million to $43 million. In the third quarter of 2017, WVAWC recorded an additional insurance receivable of $22 million, resulting in an after-tax benefit of $13 million.
The Company and WVAWC continue to pursue vigorously their rights to insurance coverage for contributions by WVAWC to the Settlement in mandatory arbitration with the remaining non-participating carrier. This arbitration proceeding remains pending. Despite these efforts, the Company may not ultimately be successful in obtaining further reimbursement under the remaining insurance policy for amounts that WVAWC may be required to contribute to the Settlement.
Dunbar, West Virginia Water Main Break Class Action Litigation
On October 12, 2017, WVAWC filed with the court a motion seeking to dismiss all of the plaintiffs’ counts alleging statutory and common law tort claims. Furthermore, WVAWC asserts that the PSC, and not the court, has primary jurisdiction over allegations involving violations of the applicable tariff, the public utility code and related rules. This motion remains pending.
The Company and WVAWC believe that WVAWC has valid, meritorious defenses to the claims raised in this class action complaint. WVAWC is vigorously defending itself against these allegations. While WVAWC and the Company are unable to predict the outcome of this matter, an adverse outcome couldthe investigation or determine the amount, if any, of fines, penalties or other liabilities that may be incurred in connection with it, the Company does not currently believe that the investigation will have a material adverse effect on the Company’s financial condition, results of operations, cash flows, liquidity and/financial condition or reputation.liquidity.
Contract Operations Group -- East Palo Alto Water System Voluntary Report
By letter dated October 4, 2017, the SWRCB advised AWE that it is in compliance with all of the directives and relevant statutory and administrative provisions specified in the SWRCB’s June 15, 2017 citation. While AWE has completed all required compliance activities with respect to the citation, the SWRCB has previously reserved the right to take additional enforcement action. Proven violations of the CSDWA may result in civil and criminal penalties. AWE continues to cooperate with the SWRCB, the City of East Palo Alto and other authorities regarding this matter.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, youreaders should carefully consider the factors discussed in Part I, Item 1A—Risk Factors in ourthe Form 10-K, and in ourthe Company’s other public filings with the SEC, which could materially affect ourthe Company’s business, financial condition, cash flows or future results. There have been no material changes from the risk factors previously disclosed in Part I, Item 1A—Risk Factors in ourthe Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In February 2015, the Board of Directors authorized an anti-dilutive stock repurchase program to mitigate the dilutive effect of shares issued through the Company’s dividend reinvestment, employee stock purchase and executive compensation activities. The program allows the Company to purchase up to 10 million shares of its outstanding common stock over an unrestricted period of time in the open market or through privately negotiated transactions. The program is conducted in accordance with Rule 10b-18 of the Exchange Act, and, to facilitate these repurchases, the Company enters into Rule 10b5-1 stock repurchase plans with a third-party broker, which allow the Company to repurchase shares of its common stock at times when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. Subject to applicable regulations, the Company may elect to amend or cancel the program or the stock repurchase parameters at its discretion to manage dilution.
The Company did not repurchase shares of common stock during the three months ended September 30, 2017.2021. From April 1, 2015, the date repurchases under the anti-dilutive stock repurchase program commenced, through September 30, 2017,2021, the Company repurchased an aggregate of 3,950,0004,860,000 shares of common stock under the program, leaving an aggregate of 6,050,0005,140,000 shares available for repurchase under this program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
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| | | | | | | |
| Exhibit Number | | Exhibit Description |
3.1#2.1.1 | | Stock Purchase Agreement, dated November 20, 2019, by and among American Water Works Company, Inc., New York American Water Company, Inc. and Liberty Utilities Co. (incorporated by reference to Exhibit 2.1 to American Water Works Company, Inc.’s Current Report on Form 8-K, File No. 001-34028, filed November 20, 2019). |
| 2.1.2 | | Letter Agreement, dated June 29, 2021, by and among the Company, New York American Water Company, Inc., and Liberty Utilities (Eastern Water Holdings) Corp. (incorporated by reference to Exhibit 2.1 to American Water Works Company, Inc.’s Current Report on Form 8-K, File No. 001-34028, filed June 29, 2021). |
| #2.2 | | Membership Interest Purchase Agreement, dated as of October 28, 2021, by and among American Water Works Company, Inc., American Water Enterprises, LLC, American Water (USA), LLC, American Water Resources, LLC, Pivotal Home Solutions, LLC, American Water Resources Holdings, LLC and Lakehouse Buyer Inc. (incorporated by reference to Exhibit 2.1 to American Water Works Company, Inc.’s Current Report on Form 8-K, File No. 001-34028, filed October 29, 2021). |
| 3.1 | | |
| 3.2 | | |
| 4.1 | | |
| 4.2 | | |
| 4.3 | | |
| 10.1 | | |
4.110.2 | | Officers’ Certificate of American Water Capital Corp.,Works Company, Inc. Change of Control Severance Policy, dated August 10, 2017, establishing the termsas of its 2.95% Senior Notes due 2027July 27, 2021 (incorporated by reference to Exhibit 4.110.3 to the Company’s CurrentQuarterly Report on Form 8-K,10-Q, File No. 001-34028, filed August 10, 2017)2, 2021). |
4.2*31.1 | | |
10.1 | | |
*31.1 | | |
| *31.2 | | |
| **32.1 | | |
| **32.2 | | |
*101101.INS | | The following financial statements from American Water Works Company, Inc.’s Quarterly Report on Form 10-Q forXBRL Instance Document - the quarterly period ended September 30, 2017, filedinstance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL with the Securities and Exchange Commission on November 1, 2017, formattedapplicable taxonomy extension information contained in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Cash Flows; (v) the Consolidated Statements of Changes in Stockholders’ Equity; and (vi) the Notes to Consolidated Financial Statements.Exhibits 101). |
# Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company will furnish the omitted schedules and exhibits to the SEC upon request.
* Filed herewith.
** Furnished herewith.herewith
The agreements filed as Exhibits 2.1.1 and 2.2 hereto has been included to provide investors and security holders with information regarding its terms. It is not intended to provide any other factual information about the parties thereto, or any of their respective subsidiaries or affiliates. The representations, warranties and covenants contained in the agreements (i) were made by the parties thereto only for purposes of that agreement and as of specific dates; (ii) were made solely for the benefit of the parties to each agreement; (iii) may be subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosures exchanged between the parties in connection with the execution of each agreement (such disclosures include information that has been included in public disclosures, as well as additional non-public information); (iv) may have been made for the purposes of allocating contractual risk between the parties to each agreement instead of establishing these matters as facts; and (v) may be subject to standards of materiality applicable to the contracting parties that differ from those applicable to investors.
Investors should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of the parties thereto, or any of their respective subsidiaries or affiliates. Additionally, the representations, warranties, covenants, conditions and other terms of each agreement may be subject to subsequent waiver or modification. Moreover, information concerning the subject matter of the representations, warranties and covenants may change after the date of each agreement, which subsequent information may or may not be fully reflected in the Company’s public disclosures. Each agreement should not be read alone, but should instead be read in conjunction with the other information regarding the Company that is or will be contained in, or incorporated by reference into, the reports and other documents that are filed by the Company with the SEC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 1st2nd day of November, 2017.
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| | | | |
| AMERICAN WATER WORKS COMPANY, INC. |
| (REGISTRANT) |
| By | /s/ SUSAN N. STORYWALTER J. LYNCH |
| Susan N. Story
Walter J. Lynch
President and Chief Executive Officer
(Principal Executive Officer)
|
| By | /s/ LINDA G. SULLIVANM. SUSAN HARDWICK |
| Linda G. Sullivan
M. Susan Hardwick
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
|
| By | /s/ MELISSA K. WIKLE |
| Melissa K. Wikle
Vice President and Controller
(Principal Accounting Officer)
|