AWK 10-Q
American Water Works Company, Inc. (AWK)
10-Q
2022-04-27
For: 2022-03-31
View Original
Added on
April 09, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2022
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from ______ to ______
Commission file number: 001-34028
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(Address of principal executive offices) (Zip Code)
(856 ) 955-4001
(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 | ||||||||||||
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 every Interactive Data File required to be submitted 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 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.
☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | |||||||||||||||||||
| 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 registrant’s classes of common stock, as of the latest practicable date.
| Class | Shares Outstanding as of April 21, 2022 | ||||||||||||||||
| Common Stock, par value $0.01 per share | |||||||||||||||||
TABLE OF CONTENTS
| Page | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
* * *
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.
i
FORWARD-LOOKING STATEMENTS
Statements included in Part I, Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations and in other sections of this Form 10-Q 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: the Company’s future financial performance, liquidity and cash flows; the timing and amount of rate and revenue adjustments, including through general rate case filings, filings for infrastructure surcharges and other governmental agency authorizations and proceedings, and filings to address regulatory lag; the Company’s growth and portfolio optimization strategies, including the timing and outcome of pending or future acquisition activity; the ability of the Company’s California subsidiary to obtain adequate alternative water supplies in lieu of diversions from the Carmel River; the amount and allocation of projected capital expenditures and related funding requirements; the Company’s ability to repay or refinance debt; the future impacts of increased or increasing financing costs, inflation and interest rates; the Company’s ability to execute its current and long-term business, operational and capital expenditures strategies; the Company’s 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 proceedings and related potential fines, penalties and other sanctions; the ability to meet or exceed the Company’s stated environmental and sustainability goals, including its greenhouse gas emission reduction, water delivery efficiency and water system resiliency goals; 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 COVID-19 pandemic; the ability to capitalize on existing or future utility privatization opportunities; trends in the water and wastewater 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 the Company’s current expectations and assumptions regarding future events. They are not guarantees or assurances of any outcomes, financial results, levels of activity, performance or achievements, and readers are cautioned not to place undue reliance upon them. These forward-looking statements are subject to a number of estimates, assumptions, known and unknown risks, uncertainties and other factors. The 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 customer rates and regulatory responses to the ongoing 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, 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 with respect to the environment, health and safety, data and consumer privacy, security and protection, 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 and changes in federal, state and local executive administrations;
•the Company’s ability to collect, distribute, use, secure and store consumer data in compliance with current or future governmental laws, regulations and policies with respect to data and consumer privacy, security and protection;
•weather conditions and events, climate variability 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 governmental and regulatory proceedings, investigations or actions;
•the risks associated with the Company’s aging infrastructure, and its ability to appropriately improve the resiliency of or maintain and replace, current or future infrastructure and systems, including its technology and other assets, and manage the expansion of its businesses;
1
•exposure or infiltration of the Company’s technology and critical infrastructure systems, including the disclosure of sensitive, personal or confidential information contained therein, through physical or cyber attacks or other means;
•the Company’s ability to obtain permits and other approvals for projects and construction of various water and wastewater facilities;
•changes in the Company’s capital requirements;
•the Company’s ability to control operating expenses and to achieve operating efficiencies;
•the intentional or unintentional actions of a third party, including contamination of the Company’s water supplies or the water provided to its customers;
•the Company’s ability to obtain adequate and cost-effective supplies of pipe, equipment (including personal protective equipment), chemicals, electricity, fuel, water and other raw materials, and to address or mitigate supply chain constraints that may result in delays or shortages in, as well as increased costs of, supplies, products and materials that are critical to or used in the Company’s business operations;
•the Company’s ability to successfully meet its operational growth projections, either individually or in the aggregate, and capitalize on growth opportunities, including, among other things, with respect to:
•acquiring, closing and successfully integrating regulated operations and market-based businesses;
•the Company’s Military Services Group (“MSG”) entering into new military installation contracts, price redeterminations, and other agreements and contracts with the U.S. government; and
•realizing anticipated benefits and synergies from new acquisitions;
•risks and uncertainties following the completion of the sale of the Company’s Homeowner Services Group (“HOS”) and its New York subsidiary, including:
•the Company’s ability to receive any contingent consideration provided for in the HOS sale, as well as amounts due, payable and owing to the Company from time to time under the seller promissory note when due; and
•the ability of the Company to redeploy successfully and timely the net proceeds of these transactions into the Company’s Regulated Businesses (as defined below);
•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 the Company’s operations;
•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;
•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;
•changes in general economic, political, business and financial market conditions, including without limitation conditions and collateral consequences associated with the COVID-19 pandemic;
•access to sufficient debt and/or equity capital on satisfactory terms and when and as needed to support operations and capital expenditures;
•fluctuations in inflation or interest rates;
•the ability to comply with affirmative or negative covenants in the current or future indebtedness of the Company or any of its subsidiaries, or the issuance of new or modified credit ratings or outlooks by credit rating agencies with respect to the Company or any of its subsidiaries (or any current or future indebtedness thereof), which could increase financing costs or funding requirements and affect the Company’s or its subsidiaries’ ability to issue, repay or redeem debt, pay dividends or make distributions;
•fluctuations in the value of benefit plan assets and liabilities that could increase the Company’s cost and funding requirements;
•changes in federal or state general, income and other tax laws, including (i) future significant tax legislation, (ii) the availability of, or the Company’s compliance with, the terms of applicable tax credits and tax abatement programs, and (iii) the Company’s ability to utilize its state income tax net operating loss carryforwards;
•migration of customers into or out of the Company’s service territories;
•the use by municipalities of the power of eminent domain or other authority to condemn 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 its inability to obtain reimbursement under existing or future insurance programs and coverages for any losses sustained;
•the incurrence of impairment charges related to the 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.
2
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 the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “Form 10-K”) and in this Form 10-Q, and readers should refer to such risks, uncertainties and risk factors in evaluating such forward-looking statements. Any forward-looking statements the 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, the Company does not have any obligation, and it specifically disclaims 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 the Company to predict all such factors. Furthermore, it may not be possible to assess the impact of any such factor on the 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.
3
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)
| March 31, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Property, plant and equipment | $ | $ | |||||||||
| Accumulated depreciation | ( | ( | |||||||||
| Property, plant and equipment, net | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | |||||||||||
| Restricted funds | |||||||||||
Accounts receivable, net of allowance for uncollectible accounts of $ | |||||||||||
| Unbilled revenues | |||||||||||
| Materials and supplies | |||||||||||
| Assets held for sale | |||||||||||
| Other | |||||||||||
| Total current assets | |||||||||||
| Regulatory and other long-term assets: | |||||||||||
| Regulatory assets | |||||||||||
| Seller promissory note from the sale of the Homeowner Services Group | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Goodwill | |||||||||||
| Postretirement benefit assets | |||||||||||
| Other | |||||||||||
| Total regulatory and other long-term assets | |||||||||||
| Total assets | $ | $ | |||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
4
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Balance Sheets (Unaudited)
(In millions, except share and per share data)
| March 31, 2022 | December 31, 2021 | ||||||||||
| CAPITALIZATION AND LIABILITIES | |||||||||||
| Capitalization: | |||||||||||
Common stock ($ | $ | $ | |||||||||
| Paid-in-capital | |||||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
Treasury stock, at cost ( | ( | ( | |||||||||
| Total common shareholders' equity | |||||||||||
| Long-term debt | |||||||||||
| Redeemable preferred stock at redemption value | |||||||||||
| Total long-term debt | |||||||||||
| Total capitalization | |||||||||||
| Current liabilities: | |||||||||||
| Short-term debt | |||||||||||
| Current portion of long-term debt | |||||||||||
| Accounts payable | |||||||||||
| Accrued liabilities | |||||||||||
| Accrued taxes | |||||||||||
| Accrued interest | |||||||||||
| Liabilities related to assets held for sale | |||||||||||
| Other | |||||||||||
| Total current liabilities | |||||||||||
| Regulatory and other long-term liabilities: | |||||||||||
| Advances for construction | |||||||||||
| Deferred income taxes and investment tax credits | |||||||||||
| Regulatory liabilities | |||||||||||
| Operating lease liabilities | |||||||||||
| Accrued pension expense | |||||||||||
| Other | |||||||||||
| Total regulatory and other long-term liabilities | |||||||||||
| Contributions in aid of construction | |||||||||||
Commitments and contingencies (See Note 11) | |||||||||||
| Total capitalization and liabilities | $ | $ | |||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
5
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Statements of Operations (Unaudited)
(In millions, except per share data)
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating revenues | $ | $ | |||||||||
| Operating expenses: | |||||||||||
| Operation and maintenance | |||||||||||
| Depreciation and amortization | |||||||||||
| General taxes | |||||||||||
| Total operating expenses, net | |||||||||||
| Operating income | |||||||||||
| Other income (expense): | |||||||||||
| Interest expense | ( | ( | |||||||||
| Interest income | |||||||||||
| Non-operating benefit costs, net | |||||||||||
| Other, net | |||||||||||
| Total other (expense) income | ( | ( | |||||||||
| Income before income taxes | |||||||||||
| Provision for income taxes | |||||||||||
| Net income attributable to common shareholders | $ | $ | |||||||||
| Basic earnings per share: | |||||||||||
| Net income attributable to common shareholders | $ | $ | |||||||||
| Diluted earnings per share: | |||||||||||
| Net income attributable to common shareholders | $ | $ | |||||||||
| Weighted-average common shares outstanding: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
6
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Statements of Comprehensive Income (Unaudited)
(In millions)
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Net income attributable to common shareholders | $ | $ | |||||||||
| Other comprehensive income, net of tax: | |||||||||||
Defined benefit pension plan actuarial loss, net of tax of $ | |||||||||||
| Net other comprehensive income | |||||||||||
| Comprehensive income attributable to common shareholders | $ | $ | |||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
7
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Statements of Cash Flows (Unaudited)
(In millions)
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile to net cash flows provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Deferred income taxes and amortization of investment tax credits | ( | ||||||||||
| Provision for losses on accounts receivable | |||||||||||
| Pension and non-pension postretirement benefits | ( | ( | |||||||||
| Other non-cash, net | ( | ( | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Receivables and unbilled revenues | ( | ||||||||||
| Pension and non-pension postretirement benefit contributions | ( | ( | |||||||||
| Accounts payable and accrued liabilities | ( | ( | |||||||||
| Other assets and liabilities, net | ( | ||||||||||
| Net cash provided by operating activities | |||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Acquisitions, net of cash acquired | ( | ( | |||||||||
| Net proceeds from sale of assets | |||||||||||
| Removal costs from property, plant and equipment retirements, net | ( | ( | |||||||||
| Net cash provided by (used in) investing activities | ( | ||||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Proceeds from long-term debt | |||||||||||
| Repayments of long-term debt | ( | ( | |||||||||
| Repayments of term loan | ( | ||||||||||
| Net short-term (repayments) borrowings with maturities less than three months | ( | ||||||||||
Remittances from issuances of employee stock plans and direct stock purchase plan, net of taxes paid of $ | ( | ( | |||||||||
Advances and contributions in aid of construction, net of refunds of $ | |||||||||||
| Dividends paid | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net decrease in cash, cash equivalents and restricted funds | ( | ( | |||||||||
| Cash, cash equivalents and restricted funds at beginning of period | |||||||||||
| Cash, cash equivalents and restricted funds at end of period | $ | $ | |||||||||
| Non-cash investing activity: | |||||||||||
| Capital expenditures acquired on account but unpaid as of the end of period | $ | $ | |||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
8
American Water Works Company, Inc. and Subsidiary Companies
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
(In millions)
| Common Stock | Paid-in-Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | At Cost | ||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | $ | $ | $ | ( | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Net income attributable to common shareholders | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Common stock issuances (a) | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||
| Net other comprehensive income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | $ | $ | $ | ( | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
(a)Includes stock-based compensation, employee stock purchase plan and direct stock reinvestment and purchase plan activity.
| Common Stock | Paid-in-Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | At Cost | ||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | $ | $ | $ | $ | ( | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
| Net income attributable to common shareholders | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Common stock issuances (a) | — | — | — | ( | ( | ( | |||||||||||||||||||||||||||||||||||||||||
| Net other comprehensive income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | $ | $ | $ | ( | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||
(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.
9
American Water Works Company, Inc. and Subsidiary Companies
Notes to Consolidated Financial Statements (Unaudited)
(Unless otherwise noted, in millions, except per share data)
Note 1: Basis of Presentation
The unaudited Consolidated Financial Statements included in this report include the accounts of American Water Works Company, Inc. and all of its subsidiaries (the “Company” or “American Water”), in which a controlling interest is maintained after the elimination of intercompany balances and transactions. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting, and the rules and regulations for reporting on Quarterly Reports on Form 10-Q (“Form 10-Q”). Accordingly, they do not contain certain information and disclosures required by GAAP for comprehensive financial statements. In the opinion of management, all adjustments necessary for a fair statement of the financial position as of March 31, 2022, and the results of operations and cash flows for all periods presented, have been made. All adjustments are of a normal, recurring nature, except as otherwise disclosed.
The unaudited Consolidated Financial Statements and Notes included in this report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (“Form 10-K”), which provides a more complete discussion of the Company’s accounting policies, financial position, operating results and other matters. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the year, primarily due to the seasonality of the Company’s operations.
Note 2: Significant Accounting Policies
New Accounting Standards
Presented in the table below are new accounting standards that were adopted by the Company in 2022:
| Standard | Description | Date of Adoption | Application | Effect on the Consolidated Financial Statements | ||||||||||||||||||||||
| Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity | Simplification of financial reporting associated with accounting for convertible instruments and contracts in an entity’s own equity. The standard reduced the number of accounting models for convertible debt instruments and convertible preferred stock. This will result in fewer embedded conversion features being separately recognized from the host contract. Earnings per share (“EPS”) calculations have been simplified for certain instruments. | January 1, 2022 | Either modified retrospective or fully retrospective | The standard did not have a material impact on its Consolidated Financial Statements. | ||||||||||||||||||||||
| Disclosures by Business Entities about Government Assistance | The amendments in this update require additional disclosures regarding government grants and contributions. These disclosures require information on the following three items about government transactions to be provided: information on the nature of transactions and related accounting policy used to account for transactions, the line items on the balance sheet and income statement affected by these transactions including amounts applicable to each line, and significant terms and conditions of the transactions, including commitments and contingencies. | January 1, 2022 | Either prospective or retrospective | The standard did not have a material impact on its Consolidated Financial Statements. | ||||||||||||||||||||||
Presented in the table below are recently issued accounting standards that have not yet been adopted by the Company as of March 31, 2022:
| Standard | Description | Date of Adoption | Application | Estimated Effect on the Consolidated Financial Statements | ||||||||||||||||||||||
| Accounting for Contract Assets and Contract Liabilities from Contracts with Customers | The guidance requires an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Codification Topic 606, as if it had originated the contracts. The amendments in this update also provide certain practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts in a business combination. | January 1, 2023; early adoption permitted | Prospective | The Company is evaluating any impact on its Consolidated Financial Statements, as well as the timing of adoption. | ||||||||||||||||||||||
Troubled debt restructurings and vintage disclosures | The main provisions of this standard eliminate the receivables accounting guidance for troubled debt restructurings (“TDRs”) by creditors while enhancing disclosure requirements when a borrower is experiencing financial difficulty. Entities must apply the loan refinancing and restructuring guidance for receivables to determine whether a modification results in a new loan or a continuation of an existing loan. Additionally, the amendments in this update require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases. | January 1, 2023; early adoption permitted | Prospective, with a modified retrospective option for amendments related to the recognition and measurement of TDRs. | The Company is evaluating any impact on its Consolidated Financial Statements, as well as the timing of adoption. | ||||||||||||||||||||||
10
Allowance for Uncollectible Accounts
Allowances for uncollectible accounts are maintained for estimated probable losses resulting from the Company’s inability to collect receivables from customers. Accounts that are outstanding longer than the payment terms are considered past due. A number of factors are considered in determining the allowance for uncollectible accounts, including the length of time receivables are past due, previous loss history, current economic and societal conditions and reasonable and supportable forecasts that affect the collectability of receivables from customers. The Company generally writes off accounts when they become uncollectible or are over a certain number of days outstanding.
Presented in the table below are the changes in the allowance for uncollectible accounts for the three months ended March 31:
| 2022 | 2021 | ||||||||||
| Balance as of January 1 | $ | ( | $ | ( | |||||||
| Amounts charged to expense | ( | ( | |||||||||
| Amounts written off | |||||||||||
| Less: Allowance for uncollectible accounts included in assets held for sale (a) | |||||||||||
| Balance as of March 31 | $ | ( | $ | ( | |||||||
(a)This portion of the allowance for uncollectible accounts is related to the sale of the Company’s New York subsidiary, which was completed on January 1, 2022, and is included in assets held for sale on the Consolidated Balance Sheets as of December 31, 2021. See Note 5—Acquisitions and Divestitures for additional information.
Reclassifications
Certain reclassifications have been made to prior periods in the Consolidated Financial Statements and Notes to conform to the current presentation.
Note 3: Regulatory Matters
General Rate Cases and Infrastructure Surcharges
Presented in the table below are annualized incremental revenues, excluding reductions for the amortization of excess accumulated deferred income tax (“EADIT”) that are generally offset in income tax expense, assuming a constant water sales volume, resulting from general rate case authorizations and infrastructure surcharge authorizations that became effective in the current period:
| During the Three Months Ended March 31, | |||||||||||
| (In millions) | 2022 | 2021 | |||||||||
| General rate cases by state: | |||||||||||
| West Virginia (effective February 25, 2022) | $ | $ | |||||||||
| California (effective January 1, 2022 and January 1, 2021) | |||||||||||
Pennsylvania (effective January 1, 2022 and January 28, 2021) | |||||||||||
| Total general rate cases | $ | $ | |||||||||
| Infrastructure surcharges by state: | |||||||||||
| Indiana (effective March 21, 2022 and March 17, 2021) | $ | $ | |||||||||
| West Virginia (effective March 1, 2022 and January 1, 2021) | |||||||||||
| Missouri (effective February 1, 2022) | |||||||||||
| Illinois (effective January 1, 2022 and January 1, 2021) | |||||||||||
| Pennsylvania (effective January 1, 2021) | |||||||||||
| Tennessee (effective January 1, 2021) | |||||||||||
| Total infrastructure surcharges | $ | $ | |||||||||
Effective April 1, 2022, the Company’s Pennsylvania subsidiary implemented infrastructure surcharges for annualized incremental revenues of $2 million.
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On February 24, 2022, the Company’s West Virginia subsidiary (“WVAWC”) was authorized additional annual revenues of $15 million in its general rate case, effective February 25, 2022, excluding agreed to reductions for EADIT as a result of the Tax Cuts and Jobs Act of 2017 (the “TCJA”). The EADIT reduction in revenues is $2 million and the exclusion for infrastructure surcharges is $10 million. Staff of the WV Public Service Commission moved for reconsideration of the Commission's final order on several grounds. The Company filed its response to the Staff's Petition for Reconsideration on March 28, 2022 in support of the Commission authorized revenue requirement. The matter is currently pending before the Commission for its consideration.
On November 18, 2021, the California Public Utilities Commission (the “CPUC”) unanimously approved a final decision in the test year 2021 general rate case filed by the Company’s California subsidiary, which is retroactive to January 1, 2021. The Company’s California subsidiary received authorization for additional annualized water and wastewater revenues of $22 million, excluding agreed to reductions for EADIT as a result of the TCJA. The EADIT reduction in revenues is $4 million and is offset by a like reduction in income tax expense. On February 16, 2022, the Company’s California subsidiary received approval to increase rates by $13 million in 2022 escalation increases, excluding $4 million of reductions related to the TCJA, which is retroactive to January 1, 2022.
On March 2, 2021, an administrative law judge (“ALJ”) in the Office of Administrative Law of New Jersey filed an initial decision with the New Jersey Board of Public Utilities (the “NJBPU”) that recommended denial of a petition filed by the Company’s New Jersey subsidiary, which sought approval of acquisition adjustments in rate base of $29 million associated with the acquisitions of Shorelands Water Company, Inc. in 2017 and the Borough of Haddonfield’s water and wastewater systems in 2015. On July 29, 2021, the NJBPU issued an order adopting the ALJ’s initial decision without modification. The Company’s New Jersey subsidiary filed a Notice of Appeal with the New Jersey Appellate Division on September 10, 2021. The Company filed its brief in support of the appeal on March 4, 2022. Response briefs are due by May 23, 2022. There is no financial impact to the Company as a result of the NJBPU’s order, since the acquisition adjustments are currently recorded as goodwill on the Consolidated Balance Sheets.
On February 25, 2021, the Company’s Pennsylvania subsidiary was authorized additional annualized revenues of $90 million, effective January 28, 2021, excluding agreed to reductions in revenues of $19 million for EADIT as a result of the TCJA. The overall increase, net of TCJA reductions, is $71 million in revenues combined over two steps. The first step was effective January 28, 2021 in the amount of $70 million ($51 million including TCJA reductions) and the second step was effective January 1, 2022 in the amount of $20 million. The protected EADIT balance of $200 million is being returned to customers using the average rate assumptions method, and the unprotected EADIT balance of $116 million is being returned to customers over 20 years. The $19 million annual reduction to revenue is comprised of both the protected and unprotected EADIT amortizations and a portion of catch-up period EADIT. A bill credit of $11 million annually for two years returns to customers the remainder of the EADIT catch-up period amortization. The catch-up period of January 1, 2018 through December 31, 2020 covers the period from when the lower federal corporate income tax rate went into effect until new base rates went into effect and will be amortized over two years .
Pending General Rate Case Filings
On February 10, 2022, the Company’s Illinois subsidiary filed a general rate case requesting $71 million in additional annualized revenues excluding proposed reductions for EADIT as a result of TCJA and infrastructure surcharges.
On January 14, 2022, the Company’s New Jersey subsidiary filed a general rate case requesting $110 million in additional annualized revenues excluding proposed reductions for EADIT as a result of TCJA and infrastructure surcharges. Public hearings were held on April 6, 2022. Settlement conferences are scheduled to commence in May 2022 with evidentiary hearings expected to begin in September 2022.
On December 1, 2021, the Company’s Kentucky subsidiary filed a wastewater rate case requesting additional revenues of $1 million, excluding proposed reductions for EADIT as a result of TCJA. The Company’s Kentucky subsidiary requested a four-step rate increase for their wastewater operations with effective dates of June 1, 2022, June 1, 2023, June 1, 2024 and June 1, 2025 for annual amounts of less than $1 88 % rather than a return on equity.
On November 15, 2021, the Company’s Virginia subsidiary filed a general rate case requesting $15 million in additional annualized revenues excluding proposed reductions for EADIT as a result of TCJA.
On August 18, 2021, the Company’s Hawaii subsidiary filed a general rate case requesting $2 million in additional annualized revenues excluding proposed reductions for EADIT as a result of TCJA. On April 11, 2022, the Company and the Division of Consumer Advocacy submitted a joint letter to the Hawaii Public Utilities Commission indicating that the parties had, in principle, reached a settlement that would resolve all disputed issues in the case. In the joint letter, the parties also requested revisions to the procedural schedule.
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The Company’s California subsidiary submitted its application on May 3, 2021 to set its cost of capital for 2022 through 2024. According to the CPUC’s procedural schedule, a decision setting the authorized cost of capital is expected to be issued in the fourth quarter of 2022.
Pending Infrastructure Surcharge Filings
On March 4, 2022, the Company’s Missouri subsidiary filed an infrastructure surcharge proceeding requesting $19 million in additional annualized revenues.
On March 1, 2022, the Company’s Kentucky subsidiary filed an infrastructure surcharge proceeding requesting $3 million in additional annualized revenues.
Other Regulatory Matters
In September 2020, the CPUC released a decision under its Low-Income Rate Payer Assistance program rulemaking that will require the Company’s California subsidiary to file a proposal to alter its water revenue adjustment mechanism in its next general rate case filing in 2022, which would become effective in January 2024. On October 5, 2020, the Company’s California subsidiary filed an application for rehearing of the decision and following the CPUC’s denial of its rehearing application in September 2021, the Company’s California subsidiary filed a petition for writ of review with the California Supreme Court on October 27, 2021.
Note 4: Revenue Recognition
Disaggregated Revenues
The Company’s primary business involves the ownership of utilities that provide water and wastewater services to residential, commercial, industrial, public authority, fire service and sale for resale customers, collectively presented as the “Regulated Businesses.” The Company also operates other market-based businesses that provide water and wastewater services to the U.S. government on military installations, as well as municipalities, and utility customers, collectively included within “Market-Based Businesses and Other.”
Presented in the table below are operating revenues disaggregated for the three months ended March 31, 2022:
| Revenues from Contracts with Customers | Other Revenues Not from Contracts with Customers (a) | Total Operating Revenues | |||||||||||||||
| Regulated Businesses: | |||||||||||||||||
| Water services: | |||||||||||||||||
| Residential | $ | $ | $ | ||||||||||||||
| Commercial | — | ||||||||||||||||
| Fire service | — | ||||||||||||||||
| Industrial | — | ||||||||||||||||
| Public and other | — | ||||||||||||||||
| Total water services | |||||||||||||||||
| Wastewater services: | |||||||||||||||||
| Residential | — | ||||||||||||||||
| Commercial | — | ||||||||||||||||
| Industrial | — | ||||||||||||||||
| Public and other | — | ||||||||||||||||
| Total wastewater services | — | ||||||||||||||||
| Miscellaneous utility charges | — | ||||||||||||||||
| Alternative revenue programs | — | ||||||||||||||||
| Lease contract revenue | — | ||||||||||||||||
| Total Regulated Businesses | |||||||||||||||||
| Market-Based Businesses and Other | — | ||||||||||||||||
| Total operating revenues | $ | $ | $ | ||||||||||||||
(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.
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Presented in the table below are operating revenues disaggregated for the three months ended March 31, 2021:
| Revenues from Contracts with Customers | Other Revenues Not from Contracts with Customers (a) | Total Operating Revenues | |||||||||||||||
| Regulated Businesses: | |||||||||||||||||
| Water services: | |||||||||||||||||
| Residential | $ | $ | $ | ||||||||||||||
| Commercial | — | ||||||||||||||||
| Fire service | — | ||||||||||||||||
| Industrial | — | ||||||||||||||||
| Public and other | — | ||||||||||||||||
| Total water services | |||||||||||||||||
| Wastewater services: | |||||||||||||||||
| Residential | — | ||||||||||||||||
| Commercial | — | ||||||||||||||||
| Industrial | — | ||||||||||||||||
| Public and other | — | ||||||||||||||||
| Total wastewater services | — | ||||||||||||||||
| Miscellaneous utility charges | — | ||||||||||||||||
| Alternative revenue programs | — | ||||||||||||||||
| Lease contract revenue | — | ||||||||||||||||
| Total Regulated Businesses | |||||||||||||||||
| Market-Based Businesses and Other | — | ||||||||||||||||
| Total operating revenues | $ | $ | $ | ||||||||||||||
(a)Includes revenues associated with provisional rates, alternative revenue programs, lease contracts and intercompany rent, which are outside the scope of ASC 606, and accounted for under other existing GAAP.
Contract Balances
Contract assets and contract liabilities are the result of timing differences between revenue recognition, billings and cash collections. In Market-Based Businesses and Other, certain contracts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Contract assets are recorded when billing occurs subsequent to revenue recognition and are reclassified to accounts receivable when billed and the right to consideration becomes unconditional. Contract liabilities are recorded when the Company receives advances from customers prior to satisfying contractual performance obligations, particularly for construction contracts and home warranty protection program contracts, and are recognized as revenue when the associated performance obligations are satisfied.
Contract assets of $78 million and $71 million are included in unbilled revenues on the Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021, respectively. There were $18 million of contract assets added during the three months ended March 31, 2022, and $11 million of contract assets were transferred to accounts receivable during the same period. There were $19 million of contract assets added during the three months ended March 31, 2021, and $8 million of contract assets were transferred to accounts receivable during the same period.
Contract liabilities of $20 million and $19 million are included in other current liabilities on the Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021, respectively. There were $36 million of contract liabilities added during the three months ended March 31, 2022, and $35 million of contract liabilities were recognized as revenue during the same period. There were $57 million of contract liabilities added during the three months ended March 31, 2021, and $48 million of contract liabilities were recognized as revenue during the same period.
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Remaining Performance Obligations
Remaining performance obligations (“RPOs”) represent revenues the Company expects to recognize in the future from contracts that are in progress. The Company enters into agreements for the provision of services to water and wastewater facilities for the U.S. military, municipalities and other customers. As of March 31, 2022, the Company’s operation and maintenance (“O&M”) and capital improvement contracts in Market-Based Businesses and Other have RPOs. Contracts with the U.S. government for work on various military installations expire between 2051 and 2071 and have RPOs of $6.2 billion as of March 31, 2022, as measured by estimated remaining contract revenue. Such contracts are subject to customary termination provisions held by the U.S. government, prior to the agreed-upon contract expiration. Contracts with municipalities and commercial customers expire between 2022 and 2038 and have RPOs of $580 million as of March 31, 2022, as measured by estimated remaining contract revenue. Some of the Company’s long-term contracts to operate and maintain the federal government’s, a municipality’s or other party’s water or wastewater treatment and delivery facilities include responsibility for certain maintenance for some of those facilities, in exchange for an annual fee. Unless specifically required to perform certain maintenance activities, the maintenance costs are recognized when the maintenance is performed.
Note 5: Acquisitions and Divestitures
Regulated Businesses
During the three months ended March 31, 2022, the Company closed on the acquisition of four regulated water and wastewater systems for a total aggregate purchase price of $5 million. Assets acquired from these acquisitions consisted principally of utility plant.
On April 6, 2021, the Company’s Pennsylvania subsidiary entered into an Asset Purchase Agreement with the York City Sewer Authority (the “Seller”) and the City of York, with respect to the purchase of the Seller’s public wastewater collection and treatment system assets (the “System Assets”). On April 14, 2022, the Pennsylvania Public Utility Commission (“PaPUC”) approved the Company’s Pennsylvania subsidiary’s application to acquire the System Assets from the Seller for a purchase price of $235 million, plus an amount of average daily revenue calculated for the period between the final meter reading and the date of closing. The System Assets serve, directly and indirectly through bulk contracts, more than 45,000 customers. Assuming no successful contest of the PaPUC’s approval occurs within 30 days thereafter, this approval would satisfy a significant remaining condition to the closing of the transaction, which is expected to occur by or before mid-June 2022.
On March 29, 2021, the Company’s New Jersey subsidiary entered into an agreement to acquire the water and wastewater assets of Egg Harbor City for $22 million. The water and wastewater systems currently serve approximately 1,500 3,000 combined, and are being sold through the New Jersey Water Infrastructure Protection Act process. The Company expects to close this acquisition in the second half of 2022, pending regulatory approval.
Sale of New York American Water Company, Inc.
On January 1, 2022, the Company completed the previously disclosed sale of its regulated utility operations in New York to Liberty Utilities (Eastern Water Holdings) Corp. (“Liberty”), an indirect, wholly owned subsidiary of Algonquin Power & Utilities Corp. Liberty purchased from the Company all of the capital stock of the Company’s New York subsidiary for a purchase price of $608 million in cash. During the first quarter of 2022, the Company recognized a loss on sale of $2 million.
Sale of Michigan American Water Company
On February 4, 2022, the Company completed the sale of its operations in Michigan for $6 million.
Sale of Homeowner Services Group
On December 9, 2021, the Company sold all of the equity interests in subsidiaries that comprised the Company’s Homeowner Services Group (“HOS”) to a wholly owned subsidiary of funds advised by Apax Partners LLP, a global private equity advisory firm (the “Buyer”), for total consideration of approximately $1.275 billion, resulting in pre-tax gain on sale of $748 million during the fourth quarter of 2021. The consideration was comprised of $480 million in cash, a seller promissory note issued by the Buyer in the principal amount of $720 million, and a contingent cash payment of $75 million payable upon satisfaction of certain conditions on or before December 31, 2023. See Note 13—Fair Value of Financial Information for additional information relating to the seller promissory note and contingent cash payment. During the first quarter of 2022, the Company recorded a post-close adjustment totaling approximately $10 million pre-tax, which is included in Other, net on the Consolidated Statements of Operations.
The seller note has a five-year term, is payable in cash, and bears interest at a rate of 7.00 % per year during the term. The Company recognized $13 million of interest income during the first quarter of 2022 from the seller note.
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The Company and the Buyer also entered into a revenue share agreement, pursuant to which the Company is to receive 10 % of the revenue generated from customers who are billed for home warranty services through an applicable Company subsidiary (an “on-bill” arrangement), and 15 % of the revenue generated from any future on-bill arrangements entered into after the closing. Unless earlier terminated, this agreement has a term of up to 15 years, which may be renewed for up to two five-year periods. The Company recognized $2 million of income during the first quarter of 2022 from the revenue share agreement, which is included in Other, net on the Consolidated Statements of Operations.
The pro forma impact of the Company’s acquisitions was not material to the Consolidated Statements of Operations for the periods ended March 31, 2022 and 2021.
Note 6: Shareholders’ Equity
Accumulated Other Comprehensive Loss
Presented in the table below are the changes in accumulated other comprehensive loss by component, net of tax, for the three months ended March 31, 2022 and 2021, respectively:
| Defined Benefit Pension Plans | Loss on Cash Flow Hedges | Accumulated Other Comprehensive Loss | |||||||||||||||||||||||||||
| Employee Benefit Plan Funded Status | Amortization of Prior Service Cost | Amortization of Actuarial Loss | |||||||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | ( | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | |||||||||||||||||||||||||||||
| Net other comprehensive income | |||||||||||||||||||||||||||||
| Balance as of March 31, 2022 | $ | ( | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||
| Balance as of December 31, 2020 | $ | ( | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | |||||||||||||||||||||||||||||
| Net other comprehensive income | |||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | $ | ( | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||
The Company does not reclassify the amortization of defined benefit pension cost components from accumulated other comprehensive loss directly to net income in its entirety, as a portion of these costs have been deferred as a regulatory asset. These accumulated other comprehensive loss components are included in the computation of net periodic pension cost.
The amortization of the gain (loss) on cash flow hedges is reclassified to net income during the period incurred and is included in interest, net in the accompanying Consolidated Statements of Operations.
Dividends
On March 1, 2022, the Company paid a quarterly cash dividend of $0.6025 per share to shareholders of record as of February 8, 2022.
On April 27, 2022, the Company’s Board of Directors declared a quarterly cash dividend payment of $0.6550 per share, payable on June 1, 2022 to shareholders of record as of May 10, 2022. Future dividends, when and as declared at the discretion of the Board of Directors, will be dependent upon future earnings and cash flows, compliance with various regulatory, financial and legal requirements, and other factors. See Note 10—Shareholders' Equity in the Notes to Consolidated Financial Statements in the Company’s Form 10-K for additional information regarding the payment of dividends on the Company’s common stock.
Note 7: Long-Term Debt
During the three months ended March 31, 2022, American Water Capital Corp. (“AWCC”) and the Company’s regulated subsidiaries issued in the aggregate $11 million of private activity bonds and government funded debt in multiple transactions with annual interest rates of 0.74 %, maturing in 2041 . During the three months ended March 31, 2022, AWCC and the Company’s regulated subsidiaries made sinking fund payments for, or repaid at maturity, $5 million in aggregate principal amount of outstanding long-term debt, with annual interest rates ranging from 0.00 % to 12.25 %, a weighted average interest rate of 3.06 %, and maturity dates ranging from 2022 to 2048 .
16
Note 8: Short-Term Debt
Liquidity needs for capital investment, working capital and other financial commitments are generally funded through cash flows from operations, public and private debt offerings, commercial paper markets and, if and to the extent necessary, borrowings under the AWCC revolving credit facility. Additionally, proceeds from the aforementioned sales of HOS and the Company’s New York subsidiary will be used primarily for capital investment in the Regulated Businesses. The revolving credit facility provides $2.25 billion in aggregate total commitments from a diversified group of financial institutions. The termination date of the credit agreement with respect to AWCC’s revolving credit facility is March 21, 2025. The facility is used principally to support AWCC’s commercial paper program, to provide additional liquidity support and to provide a sub-limit of up to $150 million for letters of credit. As of March 31, 2022 and December 31, 2021, there were no
Short-term debt consists of commercial paper and credit facility borrowings totaling $321 million and $584 million as of March 31, 2022 and December 31, 2021, respectively. The weighted-average interest rate on AWCC’s outstanding short-term borrowings was approximately 0.26 % and 0.25 % at March 31, 2022 and December 31, 2021, respectively. As of March 31, 2022 and December 31, 2021, there were no
Presented in the tables below is the aggregate credit facility commitments, commercial paper limit and letter of credit availability under the revolving credit facility, as well as the available capacity for each:
| As of March 31, 2022 | |||||||||||||||||
| Commercial Paper Limit | Letters of Credit | Total (a) | |||||||||||||||
| (In millions) | |||||||||||||||||
| Total availability | $ | $ | $ | ||||||||||||||
| Outstanding debt | ( | ( | ( | ||||||||||||||
| Remaining availability as of March 31, 2022 | $ | $ | $ | ||||||||||||||
(a)Total remaining availability of $1.85 billion as of March 31, 2022 may be accessed through revolver draws.
| As of December 31, 2021 | |||||||||||||||||
| Commercial Paper Limit | Letters of Credit | Total (a) | |||||||||||||||
| (In millions) | |||||||||||||||||
| Total availability | $ | $ | $ | ||||||||||||||
| Outstanding debt | ( | ( | ( | ||||||||||||||
| Remaining availability as of December 31, 2021 | $ | $ | $ | ||||||||||||||
(a)Total remaining availability of $1.59 billion as of December 31, 2021 may be accessed through revolver draws.
Presented in the table below is the Company’s total available liquidity as of March 31, 2022 and December 31, 2021, respectively:
| Cash and Cash Equivalents | Availability on Revolving Credit Facility | Total Available Liquidity | |||||||||||||||
| (In millions) | |||||||||||||||||
| Available liquidity as of March 31, 2022 | $ | $ | $ | ||||||||||||||
| Available liquidity as of December 31, 2021 | $ | $ | $ | ||||||||||||||
Note 9: Income Taxes
The Company’s effective income tax rate was 18.1 % and 14.2 % for the three months ended March 31, 2022 and 2021, respectively. The Company’s effective income tax rate reflects the amortization of EADIT pursuant to regulatory orders.
17
Note 10: Pension and Other Postretirement Benefits
Presented in the table below are the components of net periodic benefit credit:
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Components of net periodic pension benefit credit: | |||||||||||
| Service cost | $ | $ | |||||||||
| Interest cost | |||||||||||
| Expected return on plan assets | ( | ( | |||||||||
| Amortization of prior service credit | ( | ( | |||||||||
| Amortization of actuarial loss | |||||||||||
| Net periodic pension benefit credit | $ | ( | $ | ||||||||
| Components of net periodic other postretirement benefit credit: | |||||||||||
| Service cost | $ | $ | |||||||||
| Interest cost | |||||||||||
| Expected return on plan assets | ( | ( | |||||||||
| Amortization of prior service credit | ( | ( | |||||||||
| Net periodic other postretirement benefit credit | $ | ( | $ | ( | |||||||
The Company contributed $9 10 million of contributions for the funding of the Company’s other postretirement benefit plans for the three months ended March 31, 2022 and no such contributions for the three months ended March 31, 2021. The Company expects to make pension contributions to the plan trusts of $28 million during the remainder of 2022.
Note 11: Commitments and Contingencies
Contingencies
The Company is routinely involved in legal actions incident to the normal conduct of its business. As of March 31, 2022, the Company has accrued approximately $6 million of probable loss contingencies and has estimated that the maximum amount of losses associated with reasonably possible loss contingencies that can be reasonably estimated is $3 million. For certain matters, claims and actions, the Company is unable to estimate possible losses. The Company believes that damages or settlements, if any, recovered by plaintiffs in such matters, claims or actions, other than as described in this Note 11—Commitments and Contingencies, will not have a material adverse effect on the Company.
West Virginia Elk River Freedom Industries Chemical Spill
On June 8, 2018, the U.S. District Court for the Southern District of West Virginia granted final approval of a settlement class and global class action settlement (the “Settlement”) for all claims and potential claims by all class members (collectively, the “West Virginia Plaintiffs”) arising out of the January 2014 Freedom Industries, Inc. chemical spill in West Virginia. The effective date of the Settlement was July 16, 2018. Under the terms and conditions of the Settlement, WVAWC and certain other Company-affiliated entities did not admit, and will not admit, any fault or liability for any of the allegations made by the West Virginia Plaintiffs in any of the actions that were resolved.
The aggregate pre-tax amount contributed by WVAWC of the $126 million portion of the Settlement with respect to the Company, net of insurance recoveries, is $19 million. As of March 31, 2022, $0.5 million of the aggregate Settlement amount of $126 million has been reflected in accrued liabilities, and $0.5 million in offsetting insurance receivables have been reflected in other current assets on the Consolidated Balance Sheets. The amount reflected in accrued liabilities as of March 31, 2022 reflects reductions in the liability and appropriate reductions to the offsetting insurance receivable reflected in other current assets, associated with payments made to the Settlement fund, the receipt of a determination by the Settlement fund’s appeal adjudicator on all remaining medical claims and the calculation of remaining attorneys’ fees and claims administration costs. The Company funded WVAWC’s contributions to the Settlement through existing sources of liquidity.
18
Dunbar, West Virginia Water Main Break Class Action Litigation
On the evening of June 23, 2015, a 36-inch pre-stressed concrete transmission water main, installed in the early 1970s, failed. The water main is part of the West Relay pumping station located in the City of Dunbar, West Virginia and owned by WVAWC. The failure of the main caused water outages and low pressure for up to approximately 25,000 WVAWC customers. In the early morning hours of June 25, 2015, crews completed a repair, but that same day, the repair developed a leak. On June 26, 2015, a second repair was completed and service was restored that day to approximately 80 % of the impacted customers, and to the remaining approximately 20 % by the next morning. The second repair showed signs of leaking, but the water main was usable until June 29, 2015 to allow tanks to refill. The system was reconfigured to maintain service to all but approximately 3,000 customers while a final repair was being completed safely on June 30, 2015. Water service was fully restored by July 1, 2015 to all customers affected by this event.
On June 2, 2017, a complaint captioned Jeffries, et al. v. West Virginia-American Water Company was filed in West Virginia Circuit Court in Kanawha County on behalf of an alleged class of residents and business owners who lost water service or pressure as a result of the Dunbar main break. The complaint alleges breach of contract by WVAWC for failure to supply water, violation of West Virginia law regarding the sufficiency of WVAWC’s facilities and negligence by WVAWC in the design, maintenance and operation of the water system. The Jeffries plaintiffs seek unspecified alleged damages on behalf of the class for lost profits, annoyance and inconvenience, and loss of use, as well as punitive damages for willful, reckless and wanton behavior in not addressing the risk of pipe failure and a large outage.
In February 2020, the Jeffries plaintiffs filed a motion seeking class certification on the issues of breach of contract and negligence, and to determine the applicability of punitive damages and a multiplier for those damages if imposed. In July 2020, the Circuit Court entered an order granting the Jeffries plaintiffs’ motion for certification of a class regarding certain liability issues but denying certification of a class to determine a punitive damages multiplier. In August 2020, WVAWC filed a Petition for Writ of Prohibition in the Supreme Court of Appeals of West Virginia seeking to vacate or remand the Circuit Court’s order certifying the issues class. On January 28, 2021, the Supreme Court of Appeals remanded the case back to the Circuit Court for further consideration in light of a decision issued in another case relating to the class certification issues raised on appeal. On July 16, 2021, oral argument was heard by the Circuit Court on the issue of addressing the Supreme Court of Appeals’ remand. This matter remains pending.
The Company and WVAWC believe that WVAWC has valid, meritorious defenses to the claims raised in this class action complaint. WVAWC is vigorously defending itself against these allegations. The Company cannot currently determine the likelihood of a loss, if any, or estimate the amount of any loss or a range of such losses related to this proceeding.
Chattanooga, Tennessee Water Main Break Class Action Litigation
On September 12, 2019, the Company’s Tennessee subsidiary (“TAWC”), experienced a leak in a 36-inch water transmission main, which caused service fluctuations or interruptions to TAWC customers and the issuance of a boil water notice. TAWC repaired the main by early morning on September 14, 2019, and restored full water service by the afternoon of September 15, 2019, with the boil water notice lifted for all customers on September 16, 2019.
On September 17, 2019, a complaint captioned Bruce, et al. v. American Water Works Company, Inc., et al. was filed in the Circuit Court of Hamilton County, Tennessee against TAWC, the Company and American Water Works Service Company, Inc. (“Service Company” and, together with TAWC and the Company, collectively, the “Tennessee-American Water Defendants”), on behalf of a proposed class of individuals or entities who lost water service or suffered monetary losses as a result of the Chattanooga incident (the “Tennessee Plaintiffs”). The complaint alleged breach of contract and negligence against the Tennessee-American Water Defendants, as well as an equitable remedy of piercing the corporate veil. In the complaint as originally filed, the Tennessee Plaintiffs were seeking an award of unspecified alleged damages for wage losses, business and economic losses, out-of-pocket expenses, loss of use and enjoyment of property and annoyance and inconvenience, as well as punitive damages, attorneys’ fees and pre- and post-judgment interest. In September 2020, the court dismissed all of the Tennessee Plaintiffs’ claims in their complaint, except for the breach of contract claims against TAWC, which remain pending. In October 2020, TAWC answered the complaint, and the parties have been engaging in discovery. The court has entered an agreed scheduling order, which sets a hearing in October 2022 to address the question of class certification.
TAWC and the Company believe that TAWC has meritorious defenses to the claims raised in this class action complaint, and TAWC is vigorously defending itself against these allegations. The Company cannot currently determine the likelihood of a loss, if any, or estimate the amount of any loss or a range of such losses related to this proceeding.
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Alternative Water Supply in Lieu of Carmel River Diversions
Compliance with Orders to Reduce Carmel River Diversions—Monterey Peninsula Water Supply Project
Under a 2009 order (the “2009 Order”) of the State Water Resources Control Board (the “SWRCB”), the Company’s California subsidiary (“Cal Am”) is required to decrease significantly its yearly diversions of water from the Carmel River according to a set reduction schedule. In 2016, the SWRCB issued an order (the “2016 Order”) approving a deadline of December 31, 2021 for Cal Am’s compliance with these prior orders.
Cal Am is currently involved in developing the Monterey Peninsula Water Supply Project (the “Water Supply Project”), which includes the construction of a desalination plant, to be owned by Cal Am, and the construction of wells that would supply water to the desalination plant. In addition, the Water Supply Project also includes Cal Am’s purchase of water from a groundwater replenishment project (the “GWR Project”) between Monterey One Water and the Monterey Peninsula Water Management District (the “MPWMD”). The Water Supply Project is intended, among other things, to fulfill Cal Am’s obligations under the 2009 Order and the 2016 Order.
Cal Am’s ability to move forward on the Water Supply Project is subject to administrative review by the CPUC and other government agencies, obtaining necessary permits, and intervention from other parties. In September 2016, the CPUC unanimously approved a final decision to authorize Cal Am to enter into a water purchase agreement for the GWR Project and to construct a pipeline and pump station facilities and recover up to $50 million in associated incurred costs plus an allowance for funds used during construction (“AFUDC”), subject to meeting certain criteria.
In September 2018, the CPUC unanimously approved another final decision finding that the Water Supply Project meets the CPUC’s requirements for a certificate of public convenience and necessity and an additional procedural phase was not necessary to consider alternative projects. The CPUC’s 2018 decision concludes that the Water Supply Project is the best project to address estimated future water demands in Monterey, and, in addition to the cost recovery approved in its 2016 decision, adopts Cal Am’s cost estimates for the Water Supply Project, which amounted to an aggregate of $279 million plus AFUDC at a rate representative of Cal Am’s actual financing costs. The 2018 final decision specifies the procedures for recovery of all of Cal Am’s prudently incurred costs associated with the Water Supply Project upon its completion, subject to the frameworks included in the final decision related to cost caps, operation and maintenance costs, financing, ratemaking and contingency matters. The reasonableness of the Water Supply Project costs will be reviewed by the CPUC when Cal Am seeks cost recovery for the Water Supply Project. Cal Am has incurred $192 million in aggregate costs as of March 31, 2022 related to the Water Supply Project, which includes $50 million in AFUDC.
In September 2021, Cal Am, Monterey One Water and the MPWMD reached an agreement on Cal Am’s purchase of additional water from an expansion to the GWR Project, which is not expected to produce additional water until 2024 at the earliest. The amended and restated water purchase agreement for the GWR Project expansion is subject to review and approval of the CPUC, and on November 29, 2021, Cal Am filed an application with the CPUC seeking review and approval of the amended and restated water purchase agreement. Cal Am is also requesting rate base treatment of the additional capital investment for certain Cal Am facilities required to maximize the water supply from the expansion to the GWR Project and a related Aquifer Storage and Recovery Project, totaling approximately $81 million. This amount is in addition to, and consistent in regulatory treatment with, the prior $50 million of cost recovery for facilities associated with the original water purchase agreement, which was approved by the CPUC in its 2016 final decision.
While Cal Am believes that its expenditures to date have been prudent and necessary to comply with the 2009 Order and the 2016 Order, as well as the CPUC’s 2016 and 2018 final decisions, Cal Am cannot currently predict its ability to recover all of its costs and expenses associated with the Water Supply Project and there can be no assurance that Cal Am will be able to recover all of such costs and expenses in excess of the $50 million in construction costs previously approved by the CPUC in its 2016 final decision.
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Coastal Development Permit Application
In June 2018, Cal Am submitted a coastal development permit application to the City of Marina (the “City”) for those project components of the Water Supply Project located within the City’s coastal zone. Members of the City’s Planning Commission, as well as City councilpersons, have publicly expressed opposition to the Water Supply Project. In May 2019, the City issued a notice of final local action based upon the denial by the Planning Commission of Cal Am’s coastal development permit application. Thereafter, Cal Am appealed this decision to the California Coastal Commission (the “Coastal Commission”), as permitted under the City’s code and the California Coastal Act. At the same time, Cal Am submitted an application to the Coastal Commission for a coastal development permit for those project components located within the Coastal Commission’s original jurisdiction. In October 2019, staff of the Coastal Commission issued a report recommending a denial of Cal Am’s application for a coastal development permit with respect to the Water Supply Project, largely based on a memorandum prepared by the general manager of the MPWMD that contradicted findings made by the CPUC in its final decision approving the Water Supply Project. In November 2019, discussions between staffs of the Coastal Commission and the CPUC took place regarding the Coastal Commission staff recommendation, at which time the CPUC raised questions about the Coastal Commission staff’s findings on water supply and demand, groundwater impacts and the viability of a project that the Coastal Commission staff believes may be a possible alternative to the Water Supply Project.
In August 2020, the staff of the Coastal Commission released a report again recommending denial of Cal Am’s application for a coastal development permit. Although the report concluded that the Water Supply Project would have a negligible impact on groundwater resources, the report also concluded it would impact other coastal resources, such as environmentally sensitive habitat areas and wetlands, and that the Coastal Commission staff believes that a feasible alternative project exists that would avoid those impacts. The staff’s report also noted disproportionate impacts to communities of concern. In September 2020, Cal Am withdrew its original jurisdiction application to allow additional time to address the Coastal Commission staff’s environmental justice concerns. The withdrawal of the original jurisdiction application did not impact Cal Am’s appeal of the City’s denial, which remains pending before the Coastal Commission. Cal Am refiled the original jurisdiction application in November 2020. In December 2020, the Coastal Commission sent to Cal Am a notice of incomplete application, identifying certain additional information needed to consider the application complete. In March 2021, Cal Am provided responses to the Coastal Commission’s notice of incomplete application. On June 18, 2021, the Coastal Commission responded, acknowledging the responses and requesting certain additional information before the application could be considered complete. Cal Am responded with the requested additional information on January 11, 2022, and on February 8, 2022, the Coastal Commission requested additional information. The original jurisdiction application remains pending.
Cal Am continues to work constructively with all appropriate agencies to provide necessary information in connection with obtaining required approvals for the Water Supply Project. However, there can be no assurance that the Water Supply Project in its current configuration will be completed on a timely basis, if ever. Beginning in January 2022, Cal Am expects to be able to comply with the diversion reduction requirements contained in the 2016 Order, but continued compliance with the diversion reduction requirements for 2023 and future years will depend on successful development of alternate water supply sources, sufficient to meet customer demand. The 2009 Order and the 2016 Order remain in effect until Cal Am certifies to the SWRCB, and the SWRCB concurs, that Cal Am has obtained a permanent supply of water to substitute for past unauthorized Carmel River diversions. While the Company cannot currently predict the likelihood or result of any adverse outcome associated with these matters, further attempts to comply with the 2009 Order and the 2016 Order may result in material additional costs and obligations to Cal Am, including fines and penalties against Cal Am in the event of noncompliance with the 2009 Order and the 2016 Order.
Note 12: Earnings per Common Share
Presented in the table below is a reconciliation of the numerator and denominator for the basic and diluted EPS calculations:
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Numerator: | |||||||||||
| Net income attributable to common shareholders | $ | $ | |||||||||
| Denominator: | |||||||||||
| Weighted-average common shares outstanding—Basic | |||||||||||
| Effect of dilutive common stock equivalents | |||||||||||
| Weighted-average common shares outstanding—Diluted | |||||||||||
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Note 13: Fair Value of Financial Information
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Current assets and current liabilities—The carrying amounts reported on the Consolidated Balance Sheets for current assets and current liabilities, including revolving credit debt, due to the short-term maturities and variable interest rates, approximate their fair values.
Seller promissory note from the sale of HOS — The carrying amount reported on the Consolidated Balance Sheets for the seller promissory note from the sale of HOS is $720 700 million and $720 million as March 31, 2022 and December 31, 2021, respectively. The seller note is classified as Level 3 within the fair value hierarchy.
Preferred stock with mandatory redemption requirements and long-term debt—The fair values of preferred stock with mandatory redemption requirements and long-term debt are categorized within the fair value hierarchy based on the inputs that are used to value each instrument. The fair value of long-term debt classified as Level 1 is calculated using quoted prices in active markets. Level 2 instruments are valued using observable inputs and Level 3 instruments are valued using observable and unobservable inputs.
Presented in the tables below are the carrying amounts, including fair value adjustments previously recognized in acquisition purchase accounting, and the fair values of the Company’s financial instruments:
| As of March 31, 2022 | |||||||||||||||||||||||||||||
| Carrying Amount | At Fair Value | ||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||
| Preferred stock with mandatory redemption requirements | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Long-term debt (excluding finance lease obligations) | |||||||||||||||||||||||||||||
| As of December 31, 2021 | |||||||||||||||||||||||||||||
| Carrying Amount | At Fair Value | ||||||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||||
| Preferred stock with mandatory redemption requirements | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Long-term debt (excluding finance lease obligations) | |||||||||||||||||||||||||||||
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Recurring Fair Value Measurements
Presented in the tables below are assets and liabilities measured and recorded at fair value on a recurring basis and their level within the fair value hierarchy:
| As of March 31, 2022 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Restricted funds | $ | $ | $ | $ | |||||||||||||||||||
| Rabbi trust investments | |||||||||||||||||||||||
| Deposits | |||||||||||||||||||||||
| Other investments | |||||||||||||||||||||||
| Contingent cash payment from the sale of HOS | |||||||||||||||||||||||
| Total assets | |||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Deferred compensation obligations | |||||||||||||||||||||||
| Total liabilities | |||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | |||||||||||||||||||
| As of December 31, 2021 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Restricted funds | $ | $ | $ | $ | |||||||||||||||||||
| Rabbi trust investments | |||||||||||||||||||||||
| Deposits | |||||||||||||||||||||||
| Other investments | |||||||||||||||||||||||
| Contingent cash payment from the sale of HOS | |||||||||||||||||||||||
| Total assets | |||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Deferred compensation obligations | |||||||||||||||||||||||
| Total liabilities | |||||||||||||||||||||||
| Total assets | $ | $ | $ | $ | |||||||||||||||||||
Restricted funds—The Company’s restricted funds primarily represent proceeds received from financings for the construction and capital improvement of facilities and from customers for future services under operation, maintenance and repair projects.
Rabbi trust investments—The Company’s rabbi trust investments consist of equity and index funds from which supplemental executive retirement plan benefits and deferred compensation obligations can be paid. The Company includes these assets in other long-term assets on the Consolidated Balance Sheets.
Deposits—Deposits include escrow funds and certain other deposits held in trust. The Company includes cash deposits in other current assets on the Consolidated Balance Sheets.
Deferred compensation obligations—The Company’s deferred compensation plans allow participants to defer certain cash compensation into notional investment accounts. The Company includes such plans in other long-term liabilities on the Consolidated Balance Sheets. The value of the Company’s deferred compensation obligations is based on the market value of the participants’ notional investment accounts. The notional investments are comprised primarily of mutual funds, which are based on observable market prices.
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Mark-to-market derivative assets and liabilities—The Company employs derivative financial instruments in the form of variable-to-fixed interest rate swaps and treasury lock agreements, classified as economic hedges and cash flow hedges, respectively, in order to fix the interest cost on existing or forecasted debt. The Company may use fixed-to-floating interest rate swaps, typically designated as fair-value hedges, to achieve a targeted level of variable-rate debt as a percentage of total debt. The Company uses a calculation of future cash inflows and estimated future outflows, which are discounted, to determine the current fair value. Additional inputs to the present value calculation include the contract terms, counterparty credit risk, interest rates and market volatility. The Company had no significant mark-to-market derivatives outstanding as of March 31, 2022.
Other investments—Other investments primarily represent money market funds used for active employee benefits. The Company includes other investments in other current assets on the Consolidated Balance Sheets.
Contingent cash payment from the sale of HOS—The Company’s contingent cash payment derivative included as part of the consideration from the sale of HOS is included in other long-term assets on the Consolidated Balance Sheets. The fair value of the contingent cash payment is estimated using the probability of the outcome of receipt of the $75 million, a Level 3 input.
Note 14: Leases
The Company has operating and finance leases involving real property, including facilities, utility assets, vehicles, and equipment. Certain operating leases have renewal options ranging from to 60 years. The exercise of lease renewal options is at the Company’s sole discretion. Renewal options that the Company was reasonably certain to exercise are included in the Company’s right-of-use (“ROU”) assets. Certain operating leases contain the option to purchase the leased property. The operating leases for real property, vehicles and equipment will expire over the next 38 years, five years , and five years , respectively.
The Company participates in a number of arrangements with various public entities (“Partners”) in West Virginia. Under these arrangements, the Company transferred a portion of its utility plant to the Partners in exchange for an equal principal amount of Industrial Development Bonds (“IDBs”) issued by the Partners under the Industrial Development and Commercial Development Bond Act. The Company leased back the utility plant under agreements for a period of 30 to 40 years. The Company has recorded these agreements as finance leases in property, plant and equipment, as ownership of the assets will revert back to the Company at the end of the lease term. The carrying value of the finance lease assets was $146
The Company also enters into O&M agreements with the Partners. The Company pays an annual fee for use of the Partners’ assets in performing under the O&M agreements. The O&M agreements are recorded as operating leases, and future annual use fees of $3 million in 2022 and $4 48 million thereafter, are included in operating lease ROU assets and operating lease liabilities on the Consolidated Balance Sheets.
Rental expenses under operating and finance leases were $3
For the three months ended March 31, 2022, cash paid for amounts in lease liabilities, which includes operating and financing cash flows from operating and finance leases, was $3 million. For the three months ended March 31, 2022, there were ROU assets obtained in exchange for new operating lease liabilities of $1 million.
As of March 31, 2022, the weighted-average remaining lease term of the finance lease and operating leases were four years and 18 years, respectively, and the weighted-average discount rate of the finance lease and operating leases were 12 % and 4 %, respectively.
The future maturities of lease liabilities at March 31, 2022 are $9 million in 2022, $9 million in 2023, $8 million in 2024, $8 million in 2025, $7 million in 2026 and $88 million thereafter. At March 31, 2022, imputed interest was $43 million.
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Note 15: Segment Information
The Company’s operating segments are comprised of the revenue-generating components of its businesses for which separate financial information is internally produced and regularly used by management to make operating decisions, assess performance and allocate resources. The Company operates its businesses primarily through one reportable segment, the Regulated Businesses segment. “Market-Based Businesses and Other” includes market-based businesses that, individually, do not meet the criteria of a reportable segment in accordance with GAAP, corporate costs that are not allocated to the Company’s operating segments, eliminations of inter-segment transactions and fair value adjustments and associated income and deductions related to acquisitions that have not been allocated to the operating segments for evaluation of performance and allocation of resource purposes. The adjustments related to the acquisitions are reported in Market-Based Businesses and Other as they are excluded from segment performance measures evaluated by management.
As a result of the sale of HOS, the categories which were previously shown as “Market-Based Businesses” and “Other” have been combined and shown as “Market-Based Businesses and Other.” Segment results for the three months ended March 31, 2021 have been adjusted retrospectively to reflect this change.
Presented in the tables below is summarized segment information:
| As of or for the Three Months Ended March 31, 2022 | |||||||||||||||||
| Regulated Businesses | Market-Based Businesses and Other | Consolidated | |||||||||||||||
| Operating revenues | $ | $ | $ | ||||||||||||||
| Depreciation and amortization | |||||||||||||||||
| Total operating expenses, net | |||||||||||||||||
| Interest expense | ( | ( | ( | ||||||||||||||
| Interest income | |||||||||||||||||
| Income before income taxes | ( | ||||||||||||||||
| Provision for income taxes | ( | ||||||||||||||||
| Net income attributable to common shareholders | ( | ||||||||||||||||
| Total assets | |||||||||||||||||
| Cash paid for capital expenditures | |||||||||||||||||
| As of or for the Three Months Ended March 31, 2021 | |||||||||||||||||
| Regulated Businesses | Market-Based Businesses and Other | Consolidated | |||||||||||||||
| Operating revenues | $ | $ | $ | ||||||||||||||
| Depreciation and amortization | |||||||||||||||||
| Total operating expenses, net | |||||||||||||||||
| Interest expense | ( | ( | ( | ||||||||||||||
| Interest income | |||||||||||||||||
| Income before income taxes | ( | ||||||||||||||||
| Provision for income taxes | ( | ||||||||||||||||
| Net income attributable to common shareholders | ( | ||||||||||||||||
| Total assets | |||||||||||||||||
| Cash paid for capital expenditures | |||||||||||||||||
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read together with the unaudited Consolidated Financial Statements and the Notes thereto included elsewhere in this Form 10-Q, and in the Company’s Form 10-K for the year ended December 31, 2021. This discussion contains forward-looking statements that are based on management’s current expectations, estimates and projections about the Company’s business, operations and financial performance. The cautionary statements made in this Form 10-Q should be read as applying to all related forward-looking statements whenever they appear in this Form 10-Q. The Company’s actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those that are discussed under “Forward-Looking Statements” and elsewhere in this Form 10-Q. The Company has a disclosure committee consisting of members of senior management and other key employees involved in the preparation of the Company’s SEC reports. The disclosure committee is actively involved in the review and discussion of the Company’s SEC filings.
Overview
American Water is the largest and most geographically diverse, publicly traded water and wastewater utility company in the United States, as measured by both operating revenues and population served. The Company’s primary business involves the ownership of utilities that provide water and wastewater services to residential, commercial, industrial, public authority, fire service and sale for resale customers, collectively presented as the “Regulated Businesses.” Services provided by the Company’s utilities are subject to regulation by multiple state utility commissions or other entities engaged in utility regulation, collectively referred to as public utility commissions (“PUCs”). The Company also operates other market-based businesses not subject to economic regulation by state PUCs that provide water and wastewater services to the U.S. government on military installations, as well as municipalities, and utility customers, collectively included within “Market-Based Businesses and Other.” See Part I, Item 1—Business in the Company’s Form 10-K for additional information.
Financial Results
For the three months ended March 31, 2022, diluted earnings per share, prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), were $0.87, an increase of $0.14 per diluted share, as compared to the same period in the prior year. This increase was primarily driven by continued growth in the Regulated Businesses from infrastructure investment, acquisitions and organic growth. Also, included in 2022 results is $0.06 per share from interest income earned on the seller note and income earned on the revenue share agreement from the sale of HOS. See Note 5—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional information.
Growth Through Capital Investment in Infrastructure and Regulated Acquisitions
The Company continues to grow its businesses, with the majority of its growth to be achieved in the Regulated Businesses through (i) continued capital investment in the Company’s infrastructure to provide safe, clean, reliable and affordable water and wastewater services to its customers, and (ii) regulated acquisitions to expand the Company’s services to new customers. The Company plans to invest approximately $2.5 billion across its footprint in 2022. During the first three months of 2022, the Company invested $437 million, primarily in the Regulated Businesses, as discussed below:
Regulated Businesses - Growth and Optimization
•$430 million capital investment in the Regulated Businesses, the majority for infrastructure improvements and replacements; and
•$5 million to fund acquisitions in the Regulated Businesses, which added approximately 1,800 water and wastewater customers, in addition to approximately 3,700 customers added through organic growth.
On April 6, 2021, the Company’s Pennsylvania subsidiary entered into an Asset Purchase Agreement with the York City Sewer Authority (the “Seller”) and the City of York, with respect to the purchase of the Seller’s public wastewater collection and treatment system assets (the “System Assets”). On April 14, 2022, the Pennsylvania Public Utility Commission (“PaPUC”) approved the Company’s Pennsylvania subsidiary’s application to acquire the System Assets from the Seller for a purchase price of $235 million, plus an amount of average daily revenue calculated for the period between the final meter reading and the date of closing. The System Assets serve, directly and indirectly through bulk contracts, more than 45,000 customers. Assuming no successful contest of the PaPUC’s approval occurs within 30 days thereafter, this approval would satisfy a significant remaining condition to the closing of the transaction, which is expected to occur by or before mid-June 2022.
On March 29, 2021, the Company’s New Jersey subsidiary entered into an agreement to acquire the water and wastewater assets of Egg Harbor City for $22 million. The water and wastewater systems currently serve approximately 1,500 customers each, or 3,000 combined, and are being sold through the New Jersey Water Infrastructure Protection Act process. The Company expects to close this acquisition in the second half of 2022, pending regulatory approval.
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As of March 31, 2022, the Company has entered into agreements for pending acquisitions in the Regulated Businesses, including the York City Sewer Authority and Egg Harbor City agreements discussed above, to add approximately 77,300 additional customers.
Sale of New York American Water Company, Inc.
On January 1, 2022, the Company completed the previously disclosed sale of its regulated utility operations in New York to Liberty Utilities (Eastern Water Holdings) Corp. (“Liberty”), an indirect, wholly owned subsidiary of Algonquin Power & Utilities Corp. Liberty purchased from the Company all of the capital stock of the Company’s New York subsidiary for a purchase price of $608 million in cash.
Sale of Michigan American Water Company
On February 4, 2022, the Company completed the sale of its operations in Michigan for $6 million.
Operational Excellence
The Company’s adjusted regulated O&M efficiency ratio, which is used as a measure of the operating performance of the Regulated Businesses, was 33.9% for the twelve months ended March 31, 2022, as compared to 34.1% for the twelve months ended March 31, 2021. The ratio reflects the continued focus on operating costs, as well as an increase in operating revenues for the Regulated Businesses after considering the adjustment for the amortization of the excess accumulated deferred income taxes (“EADIT”) shown in the table below.
The Company’s adjusted regulated O&M efficiency ratio is a non-GAAP measure, and is defined by the Company as its operation and maintenance expenses from the Regulated Businesses, divided by the operating revenues from the Regulated Businesses, where both operation and maintenance expenses and operating revenues were adjusted to eliminate purchased water expense. Operating revenues were further adjusted to exclude reductions for the amortization of the EADIT. Also excluded from operation and maintenance expenses is the allocable portion of non-O&M support services costs, mainly depreciation and general taxes, which is reflected in the Regulated Businesses segment as operation and maintenance expenses, but for consolidated financial reporting purposes, is categorized within other line items in the accompanying Consolidated Statements of Operations. The items discussed above were excluded from the O&M efficiency ratio calculation as they are not reflective of management’s ability to increase the efficiency of the Regulated Businesses.
The Company evaluates its operating performance using this ratio, and believes it is useful to investors because it directly measures improvement in the operating performance and efficiency of the Regulated Businesses. This information is derived from the Company’s consolidated financial information but is not presented in its financial statements prepared in accordance with GAAP. This information supplements and should be read in conjunction with the Company’s GAAP disclosures, and should be considered as an addition to, and not a substitute for, any GAAP measure. The Company’s adjusted regulated O&M efficiency ratio (i) is not an accounting measure that is based on GAAP; (ii) is not based on a standard, objective industry definition or method of calculation; (iii) may not be comparable to other companies’ operating measures; and (iv) should not be used in place of the GAAP information provided elsewhere in this Form 10-Q.
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Presented in the table below is the calculation of the Company’s adjusted regulated O&M efficiency ratio and a reconciliation that compares operation and maintenance expenses and operating revenues, each as determined in accordance with GAAP, to those amounts utilized in the calculation of its adjusted O&M efficiency ratio:
| For the Twelve Months Ended March 31, | |||||||||||
| (Dollars in millions) | 2022 | 2021 | |||||||||
| Total operation and maintenance expenses | $ | 1,723 | $ | 1,658 | |||||||
| Less: | |||||||||||
| Operation and maintenance expenses—Market-Based Businesses and Other | 403 | 378 | |||||||||
| Total operation and maintenance expenses—Regulated Businesses | 1,320 | 1,280 | |||||||||
| Less: | |||||||||||
| Regulated purchased water expenses | 155 | 152 | |||||||||
| Allocation of non-operation and maintenance expenses | 29 | 43 | |||||||||
Adjusted operation and maintenance expenses—Regulated Businesses (i) | $ | 1,136 | $ | 1,085 | |||||||
| Total operating revenues | $ | 3,881 | $ | 3,822 | |||||||
| Less: | |||||||||||
| Operating revenues—Market-Based Businesses and Other | 474 | 532 | |||||||||
| Total operating revenues—Regulated Businesses | 3,407 | 3,290 | |||||||||
| Less: | |||||||||||
Regulated purchased water revenues (a) | 155 | 152 | |||||||||
| Revenue reductions from the amortization of EADIT | (102) | (46) | |||||||||
Adjusted operating revenues—Regulated Businesses (ii) | $ | 3,354 | $ | 3,184 | |||||||
Adjusted O&M efficiency ratio—Regulated Businesses (i) / (ii) | 33.9 | % | 34.1 | % | |||||||
(a)The calculation assumes regulated purchased water revenues approximate regulated purchased water expenses.
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Regulatory Matters
General Rate Cases and Infrastructure Surcharges
Presented in the table below are annualized incremental revenues, excluding reductions for the amortization of EADIT that are generally offset in income tax expense, assuming a constant water sales volume, resulting from general rate case authorizations and infrastructure surcharge authorizations that became effective in the current period:
| During the Three Months Ended March 31, | |||||||||||
| (In millions) | 2022 | 2021 | |||||||||
| General rate cases by state: | |||||||||||
| West Virginia (effective February 25, 2022) | $ | 15 | $ | — | |||||||
| California (effective January 1, 2022 and January 1, 2021) | 13 | 22 | |||||||||
Pennsylvania (effective January 1, 2022 and January 28, 2021) | 20 | 70 | |||||||||
| Total general rate cases | $ | 48 | $ | 92 | |||||||
| Infrastructure surcharges by state: | |||||||||||
| Indiana (effective March 21, 2022 and March 17, 2021) | $ | 8 | $ | 8 | |||||||
| West Virginia (effective March 1, 2022 and January 1, 2021) | 3 | 5 | |||||||||
| Missouri (effective February 1, 2022) | 12 | — | |||||||||
| Illinois (effective January 1, 2022 and January 1, 2021) | 6 | 7 | |||||||||
| Pennsylvania (effective January 1, 2021) | — | 8 | |||||||||
| Tennessee (effective January 1, 2021) | — | 3 | |||||||||
| Total infrastructure surcharges | $ | 29 | $ | 31 | |||||||
Effective April 1, 2022, the Company’s Pennsylvania subsidiary implemented infrastructure surcharges for annualized incremental revenues of $2 million.
On February 24, 2022, the Company’s West Virginia subsidiary was authorized additional annual revenues of $15 million in its general rate case, effective February 25, 2022, excluding agreed to reductions for EADIT as a result of the Tax Cuts and Jobs Act of 2017 (the “TCJA”). The EADIT reduction in revenues is $2 million and the exclusion for infrastructure surcharges is $10 million. Staff of the WV Public Service Commission moved for reconsideration of the Commission's final order on several grounds. The Company filed its response to the Staff's Petition for Reconsideration on March 28, 2022 in support of the Commission authorized revenue requirement. The matter is currently pending before the Commission for its consideration.
On November 18, 2021, the California Public Utilities Commission (the “CPUC”) unanimously approved a final decision in the test year 2021 general rate case filed by the Company’s California subsidiary, which is retroactive to January 1, 2021. The Company’s California subsidiary received authorization for additional annualized water and wastewater revenues of $22 million, excluding agreed to reductions for EADIT as a result of the TCJA. The EADIT reduction in revenues is $4 million and is offset by a like reduction in income tax expense. On February 16, 2022, the Company’s California subsidiary received approval to increase rates by $13 million in 2022 escalation increases, excluding $4 million of reductions related to the TCJA, which is retroactive to January 1, 2022.
On March 2, 2021, an administrative law judge (“ALJ”) in the Office of Administrative Law of New Jersey filed an initial decision with the New Jersey Board of Public Utilities (the “NJBPU”) that recommended denial of a petition filed by the Company’s New Jersey subsidiary, which sought approval of acquisition adjustments in rate base of $29 million associated with the acquisitions of Shorelands Water Company, Inc. in 2017 and the Borough of Haddonfield’s water and wastewater systems in 2015. On July 29, 2021, the NJBPU issued an order adopting the ALJ’s initial decision without modification. The Company’s New Jersey subsidiary filed a Notice of Appeal with the New Jersey Appellate Division on September 10, 2021. The Company filed its brief in support of the appeal on March 4, 2022. Response briefs are due by May 23, 2022. There is no financial impact to the Company as a result of the NJBPU’s order, since the acquisition adjustments are currently recorded as goodwill on the Consolidated Balance Sheets.
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On February 25, 2021, the Company’s Pennsylvania subsidiary was authorized additional annualized revenues of $90 million, effective January 28, 2021, excluding agreed to reductions in revenues of $19 million for EADIT as a result of the TCJA. The overall increase, net of TCJA reductions, is $71 million in revenues combined over two steps. The first step was effective January 28, 2021 in the amount of $70 million ($51 million including TCJA reductions) and the second step was effective January 1, 2022 in the amount of $20 million. The protected EADIT balance of $200 million is being returned to customers using the average rate assumptions method, and the unprotected EADIT balance of $116 million is being returned to customers over 20 years. The $19 million annual reduction to revenue is comprised of both the protected and unprotected EADIT amortizations and a portion of catch-up period EADIT. A bill credit of $11 million annually for two years returns to customers the remainder of the EADIT catch-up period amortization. The catch-up period of January 1, 2018 through December 31, 2020 covers the period from when the lower federal corporate income tax rate went into effect until new base rates went into effect and will be amortized over two years.
Pending General Rate Case Filings
On February 10, 2022, the Company’s Illinois subsidiary filed a general rate case requesting $71 million in additional annualized revenues excluding proposed reductions for EADIT as a result of TCJA and infrastructure surcharges.
On January 14, 2022, the Company’s New Jersey subsidiary filed a general rate case requesting $110 million in additional annualized revenues excluding proposed reductions for EADIT as a result of TCJA and infrastructure surcharges. Public hearings were held on April 6, 2022. Settlement conferences are scheduled to commence in May 2022 with evidentiary hearings expected to begin in September 2022.
On December 1, 2021, the Company’s Kentucky subsidiary filed a wastewater rate case requesting additional revenues of $1 million, excluding proposed reductions for EADIT as a result of TCJA. The Company’s Kentucky subsidiary requested a four-step rate increase for their wastewater operations with effective dates of June 1, 2022, June 1, 2023, June 1, 2024 and June 1, 2025 for annual amounts of less than $1 million each year. The Company’s Kentucky subsidiary filed their wastewater case under the alternative rate filing process for smaller utilities which calculates an operating ratio of 88% rather than a return on equity.
On November 15, 2021, the Company’s Virginia subsidiary filed a general rate case requesting $15 million in additional annualized revenues excluding proposed reductions for EADIT as a result of TCJA.
On August 18, 2021, the Company’s Hawaii subsidiary filed a general rate case requesting $2 million in additional annualized revenues excluding proposed reductions for EADIT as a result of TCJA. On April 11, 2022, the Company and the Division of Consumer Advocacy submitted a joint letter to the Hawaii Public Utilities Commission indicating that the parties had, in principle, reached a settlement that would resolve all disputed issues in the case. In the joint letter, the parties also requested revisions to the procedural schedule.
The Company’s California subsidiary submitted its application on May 3, 2021 to set its cost of capital for 2022 through 2024. According to the CPUC’s procedural schedule, a decision setting the authorized cost of capital is expected to be issued in the fourth quarter of 2022.
Pending Infrastructure Surcharge Filings
On March 4, 2022, the Company’s Missouri subsidiary filed an infrastructure surcharge proceeding requesting $19 million in additional annualized revenues.
On March 1, 2022, the Company’s Kentucky subsidiary filed an infrastructure surcharge proceeding requesting $3 million in additional annualized revenues.
Other Regulatory Matters
In September 2020, the CPUC released a decision under its Low-Income Rate Payer Assistance program rulemaking that will require the Company’s California subsidiary to file a proposal to alter its water revenue adjustment mechanism in its next general rate case filing in 2022, which would become effective in January 2024. On October 5, 2020, the Company’s California subsidiary filed an application for rehearing of the decision and following the CPUC’s denial of its rehearing application in September 2021, the Company’s California subsidiary filed a petition for writ of review with the California Supreme Court on October 27, 2021.
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Legislative Updates
During 2022, the Company’s regulatory jurisdictions enacted the following legislation that has been approved but is not yet effective as of April 27, 2022:
•Indiana passed Senate Enrolled Act 272, which requires public reporting of a non-jurisdictional utility’s asset management programs and creates a water and wastewater research and extension program at a state university to serve as a repository for data collected from utilities. Additionally, the legislation establishes oversight and a receivership program in the Indiana Utility Regulatory Commission for non-jurisdictional utilities with violations that create environmental or human health and safety issues. Legislation was signed by the Governor on March 7, 2022 and becomes effective on July 1, 2022.
•Indiana passed water and wastewater utility asset financing legislation, Senate Enrolled Act 273, which authorizes the recovery of property tax in Distribution System Improvement Charge filings. The legislation also permits the Indiana Utility Regulatory Commission to allow recovery through tracking mechanisms for changes in property tax and for costs attributable to referenda or action by elected or appointed individuals. Legislation was signed by the Governor on March 10, 2022 and becomes effective on July 1, 2022.
•Virginia passed Senate Bill 500 and House Bill 182 which requires the Virginia State Corporation Commission, in any future ratemaking proceeding for an investor-owned water/wastewater utility, to evaluate the utility on a stand-alone basis and utilize the utility’s actual end-of-test period capital structure and cost of capital without regard to the cost of capital, capital structure, or investments of any other entities with which the utility may be affiliated. Legislation was signed by the Governor on April 11, 2022 and becomes effective on July 1, 2022.
Condemnation and Eminent Domain
All or portions of the Regulated Businesses’ utility assets could be acquired by state, municipal or other government entities through one or more of the following methods: (i) eminent domain (also known as condemnation); (ii) the right of purchase given or reserved by a municipality or political subdivision when the original certificate of public convenience and necessity (a “CPCN”) was granted; and (iii) the right of purchase given or reserved under the law of the state in which the utility subsidiary was incorporated or from which it received its CPCN. The acquisition consideration related to such a proceeding initiated by a local government may be determined consistent with applicable eminent domain law, or may be negotiated or fixed by appraisers as prescribed by the law of the state or in the particular CPCN.
As such, the Regulated Businesses are periodically subject to condemnation proceedings in the ordinary course of business. For example, a citizens group in Monterey, California successfully added “Measure J” to the November 2018 election ballot asking voters to decide whether the Monterey Peninsula Water Management District (the “MPWMD”) should conduct a feasibility study concerning the potential purchase of the Monterey water service system assets (the “Monterey system assets”) of the Company’s California subsidiary, and, if feasible, to proceed with a purchase of those assets without an additional public vote. This service territory represents approximately 40,000 customers. In November 2018, Measure J was certified to have passed.
In August 2019, the MPWMD’s General Manager issued a report that recommends that the MPWMD board (1) develop criteria to determine which water systems should be considered for acquisition; (2) examine the feasibility of acquiring the Monterey system assets and consider public ownership of smaller systems only if the MPWMD becomes the owner of a larger system; (3) evaluate whether the acquisition of the Monterey system assets by the MPWMD is in the public interest and sufficiently satisfies the criterion of “feasible” as provided in Measure J; (4) ensure there is significant potential for cost savings before agreeing to commence an acquisition; and (5) develop more fully alternate operating plans before deciding whether to consider a Resolution of Necessity.
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In November 2019, the MPWMD issued a preliminary valuation and cost of service analysis report, finding in part that (1) an estimate of the Monterey system assets’ total value plus adjustments would be approximately $513 million, (2) the cost of service modeling results indicate significant annual reductions in revenue requirements and projected monthly water bills, and (3) the acquisition of the Monterey system assets by the MPWMD would be economically feasible. In November 2020, the MPWMD certified a final environmental impact report (“FEIR”), analyzing the environmental impacts of the MPWMD’s project to (1) acquire the Monterey system assets through the power of eminent domain, if necessary, and (2) expand its geographic boundaries to include all parts of this system. In February 2021, the MPWMD filed an application with the Local Agency Formation Commission of Monterey County (“LAFCO”) seeking approval to become a retail water provider and annex approximately 58 parcels of land into the MPWMD’s boundaries. In June 2021, LAFCO’s commissioners voted to require a third-party independent financial study as to the feasibility of an acquisition by the MPWMD of the Monterey system assets. On December 6, 2021, LAFCO’s commissioners denied the MPWMD’s application to become a retail water provider, determining that the MPWMD does not have the authority to proceed with a condemnation of the Monterey system assets, and on January 5, 2022, LAFCO’s commissioners confirmed the denial. On February 28, 2022, LAFCO’s commissioners voted to deny the MPWMD’s application for reconsideration of LAFCO’s confirmation of denial. On April 1, 2022, the MPWMD filed a lawsuit against LAFCO challenging its decision to deny the MPWMD’s application seeking approval to become a retail water provider.
Also, five municipalities in the Chicago, Illinois area (approximately 30,300 customers in total) formed a water agency and filed an eminent domain lawsuit against the Company in January 2013, seeking to condemn the water pipeline that serves those five municipalities. Before filing its eminent domain lawsuit, the water agency made an offer of $38 million for the pipeline. The parties have filed with the court updated valuation reports. A valuation trial was originally scheduled for October 2021 but has been continued to June 2022.
Furthermore, the law in certain jurisdictions in which the Regulated Businesses operate provides for eminent domain rights allowing private property owners to file a lawsuit to seek just compensation against a public utility, if a public utility’s infrastructure has been determined to be a substantial cause of damage to that property. In these actions, the plaintiff would not have to prove that the public utility acted negligently. In California, lawsuits have been filed in connection with large-scale natural events such as wildfires. Some of these lawsuits have included allegations that infrastructure of certain utilities triggered the natural event that resulted in damage to the property. In some cases, the PUC has allowed certain costs or losses incurred by the utility to be recovered from customers in rates, but in other cases such recovery in rates has been disallowed. Also, the utility may have obtained insurance that could respond to some or all of such losses, although the utility would be at risk for any losses not ultimately subject to rate or insurance recovery or losses that exceed the limits of such insurance.
Consolidated Results of Operations
Presented in the table below are the Company’s consolidated results of operations:
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In millions) | |||||||||||
| Operating revenues | $ | 842 | $ | 888 | |||||||
| Operating expenses: | |||||||||||
| Operation and maintenance | 364 | 419 | |||||||||
| Depreciation and amortization | 158 | 157 | |||||||||
| General taxes | 74 | 83 | |||||||||
| Total operating expenses, net | 596 | 659 | |||||||||
| Operating income | 246 | 229 | |||||||||
| Other income (expense): | |||||||||||
| Interest expense | (100) | (98) | |||||||||
| Interest income | 13 | — | |||||||||
| Non-operating benefit costs, net | 19 | 20 | |||||||||
| Other, net | 15 | 4 | |||||||||
| Total other income (expense) | (53) | (74) | |||||||||
| Income before income taxes | 193 | 155 | |||||||||
| Provision for income taxes | 35 | 22 | |||||||||
| Net income attributable to common shareholders | $ | 158 | $ | 133 | |||||||
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Segment Results of Operations
The Company’s operating segments are comprised of the revenue-generating components of its business for which separate financial information is internally produced and regularly used by management to make operating decisions, assess performance and allocate resources. The Company operates its businesses primarily through one reportable segment, the Regulated Businesses segment. “Market-Based Businesses and Other” includes market-based businesses that, individually, do not meet the criteria of a reportable segment in accordance with GAAP, corporate costs that are not allocated to the Company’s operating segments, eliminations of inter-segment transactions, and fair value adjustments and associated income and deductions related to acquisitions that have not been allocated to the operating segments for evaluation of performance and allocation of resource purposes. The adjustments related to the acquisitions are reported in Market-Based Businesses and Other as they are excluded from segment performance measures evaluated by management. This presentation is consistent with how management assesses the results of these businesses.
As a result of the sale of HOS, the categories which were previously shown as “Market-Based Businesses” and “Other” have been combined and shown as “Market-Based Businesses and Other.” Segment results for the three months ended March 31, 2021 have been adjusted retrospectively to reflect this change.
Regulated Businesses Segment
Presented in the table below is financial information for the Regulated Businesses:
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In millions) | |||||||||||
| Operating revenues | $ | 778 | $ | 755 | |||||||
| Operation and maintenance | 315 | 320 | |||||||||
| Depreciation and amortization | 155 | 147 | |||||||||
| General taxes | 68 | 76 | |||||||||
| Other income (expenses) | (44) | (48) | |||||||||
| Income before income taxes | 196 | 163 | |||||||||
| Provision for income taxes | 36 | 28 | |||||||||
| Net income attributable to common shareholders | 160 | 135 | |||||||||
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Operating Revenues
Presented in the tables below is information regarding the main components of the Regulated Businesses’ operating revenues:
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In millions) | |||||||||||
| Water services: | |||||||||||
| Residential | $ | 428 | $ | 430 | |||||||
| Commercial | 153 | 144 | |||||||||
| Fire service | 36 | 37 | |||||||||
| Industrial | 36 | 32 | |||||||||
| Public and other | 59 | 53 | |||||||||
| Total water services | 712 | 696 | |||||||||
| Wastewater services: | |||||||||||
| Residential | 41 | 36 | |||||||||
| Commercial | 10 | 9 | |||||||||
| Industrial | 1 | 1 | |||||||||
| Public and other | 3 | 4 | |||||||||
| Total wastewater services | 55 | 50 | |||||||||
Other (a) | 11 | 9 | |||||||||
| Total operating revenues | $ | 778 | $ | 755 | |||||||
(a)Includes other operating revenues consisting primarily of miscellaneous utility charges, fees and rents.
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (Gallons in millions) | |||||||||||
| Billed water services volumes: | |||||||||||
| Residential | 34,160 | 36,859 | |||||||||
| Commercial | 16,339 | 15,898 | |||||||||
| Industrial | 8,619 | 8,069 | |||||||||
| Fire service, public and other | 11,756 | 10,863 | |||||||||
| Total billed water services volumes | 70,874 | 71,689 | |||||||||
Included in operating revenues for the three months ended March 31, 2021 was $23 million related to the Company’s New York operations. Excluding the Company’s New York operations, for the three months ended March 31, 2022, operating revenues increased $46 million, primarily due to a $40 million increase from authorized rate increases, including infrastructure surcharges, principally to fund infrastructure investment in various states and a $5 million increase from water and wastewater acquisitions, as well as organic growth in existing systems.
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Operation and Maintenance
Presented in the table below is information regarding the main components of the Regulated Businesses’ operating and maintenance expense:
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In millions) | |||||||||||
| Employee-related costs | $ | 126 | $ | 130 | |||||||
| Production costs | 84 | 78 | |||||||||
| Operating supplies and services | 57 | 57 | |||||||||
| Maintenance materials and supplies | 22 | 24 | |||||||||
| Customer billing and accounting | 13 | 17 | |||||||||
| Other | 13 | 14 | |||||||||
| Total | $ | 315 | $ | 320 | |||||||
Included in operation and maintenance expense for the three months ended March 31, 2021 was $12 million related to the Company’s New York operations. Excluding the Company’s New York operations, operation and maintenance expense increased $7 million primarily due to higher purchased water usage in the Company’s California subsidiary and increased chemicals costs across several subsidiaries.
Depreciation and Amortization
For the three months ended March 31, 2022, depreciation and amortization increased $8 million, primarily due to additional utility plant placed in service from capital infrastructure investments and acquisitions.
General Taxes
Included in general taxes for the three months ended March 31, 2021 was $12 million related to the Company’s New York operations. Excluding the Company’s New York operations, general taxes increased $4 million primarily due to increased capital investments, including acquisitions and an increase in the New Jersey Gross Receipts Tax.
Provision for Income Taxes
For the three months ended March 31, 2022, the Regulated Businesses’ provision for income taxes increased $8 million. The Regulated Businesses’ effective income tax rate was 18.4% and 17.2% for the three months ended March 31, 2022 and 2021, respectively. The Regulated Businesses’ effective income tax rate for the three months ended March 31, 2022 reflects the amortization of EADIT pursuant to regulatory orders.
Market-Based Businesses and Other
Presented in the table below is information for Market-Based Businesses and Other:
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In millions) | |||||||||||
| Operating revenues | $ | 64 | $ | 133 | |||||||
| Operation and maintenance | 50 | 99 | |||||||||
| Depreciation and amortization | 3 | 10 | |||||||||
| Interest expense | (30) | (27) | |||||||||
| Interest income | 13 | — | |||||||||
| Income before income taxes | (3) | (8) | |||||||||
| Provision for income taxes | (1) | (6) | |||||||||
| Net income attributable to common shareholders | (2) | (2) | |||||||||
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Operating Revenues
For the three months ended March 31, 2022, operating revenues decreased $69 million, due primarily to the sale of HOS.
Operation and Maintenance
For the three months ended March 31, 2022, operation and maintenance expense decreased $49 million primarily due to the sale of HOS.
Depreciation and Amortization
For the three months ended March 31, 2022, depreciation and amortization decreased $7 million primarily due to the sale of HOS.
Interest Income
For the three months ended March 31, 2022, interest income increased $13 million due to interest recognized on the seller note related to the sale of HOS. See Note 5—Acquisitions and Divestitures in the Notes to Consolidated Financial Statements for additional information.
Liquidity and Capital Resources
For a general overview of the sources and uses of capital resources, see the introductory discussion in Part II, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources in the Company’s Form 10-K.
Liquidity needs for capital investment, working capital and other financial commitments are generally funded through cash flows from operations, public and private debt offerings, commercial paper markets, and, if and to the extent necessary, borrowings under AWCC’s revolving credit facility, and, in the future, issuances of equity.
The Company expects to fund future maturities of long-term debt through a combination of external debt and, to the extent available, cash flows from operations. Since the Company expects its capital investments over the next few years to be greater than its cash flows from operating activities, the Company currently plans to fund the excess of its capital investments over its cash flows from operating activities for the next five years through a combination of long-term debt and equity in addition to the proceeds from the sales of HOS and the Company’s New York subsidiary. If necessary, the Company may delay certain capital investments or other funding requirements, or pursue financing from other sources to preserve liquidity. In this event, the Company believes it can rely upon cash flows from operations to meet its obligations and fund its minimum required capital investments for an extended period of time.
The Company’s revolving credit facility provides $2.25 billion in aggregate total commitments from a diversified group of financial institutions. The revolving credit facility is used principally to support AWCC’s commercial paper program, to provide additional liquidity support, and to provide for the issuance of up to $150 million in letters of credit. The maximum aggregate principal amount of short-term borrowings authorized for issuance under AWCC’s commercial paper program is $2.10 billion. Subject to satisfying certain conditions, the credit agreement also permits AWCC to increase the maximum commitment under the facility by up to an aggregate of $500 million. As of March 31, 2022 and December 31, 2021, there were no borrowings outstanding under the revolving credit facility. The weighted-average interest rate on AWCC’s outstanding short-term borrowings was approximately 0.26% and 0.25% at March 31, 2022 and December 31, 2021, respectively.
Presented in the tables below is the aggregate credit facility commitments, commercial paper limit and letter of credit availability under the revolving credit facility, as well as the available capacity for each:
| As of March 31, 2022 | |||||||||||||||||
| Commercial Paper Limit | Letters of Credit | Total (a) | |||||||||||||||
| (In millions) | |||||||||||||||||
| Total availability | $ | 2,100 | $ | 150 | $ | 2,250 | |||||||||||
| Outstanding debt | (321) | (76) | (397) | ||||||||||||||
| Remaining availability as of March 31, 2022 | $ | 1,779 | $ | 74 | $ | 1,853 | |||||||||||
(a)Total remaining availability of $1.85 billion as of March 31, 2022 may be accessed through revolver draws.
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| As of December 31, 2021 | |||||||||||||||||
| Commercial Paper Limit | Letters of Credit | Total (a) | |||||||||||||||
| (In millions) | |||||||||||||||||
| Total availability | $ | 2,100 | $ | 150 | $ | 2,250 | |||||||||||
| Outstanding debt | (584) | (76) | (660) | ||||||||||||||
| Remaining availability as of December 31, 2021 | $ | 1,516 | $ | 74 | $ | 1,590 | |||||||||||
(a)Total remaining availability of $1.59 billion as of December 31, 2021 may be accessed through revolver draws.
Presented in the table below is the Company’s total available liquidity as of March 31, 2022 and December 31, 2021, respectively:
| Cash and Cash Equivalents | Availability on Revolving Credit Facility | Total Available Liquidity | |||||||||||||||
| (In millions) | |||||||||||||||||
| Available liquidity as of March 31, 2022 | $ | 75 | $ | 1,853 | $ | 1,928 | |||||||||||
| Available liquidity as of December 31, 2021 | $ | 116 | $ | 1,590 | $ | 1,706 | |||||||||||
The Company believes that its ability to access the debt and equity capital markets, the revolving credit facility and cash flows from operations will generate sufficient cash to fund the Company’s short-term requirements. The Company believes it has sufficient liquidity and the ability to manage its expenditures, should there be a disruption of the capital and credit markets. However, there can be no assurance that the lenders will be able to meet existing commitments to AWCC under the revolving credit facility, or that AWCC will be able to access the commercial paper or loan markets in the future on acceptable terms or at all. See Note 8—Short-Term Debt in the Notes to Consolidated Financial Statements for additional information.
Cash Flows from Operating Activities
Cash flows from operating activities primarily result from the sale of water and wastewater services and, due to the seasonality of demand, are generally greater during the warmer months. Presented in the table below is a summary of the major items affecting the Company’s cash flows provided by operating activities:
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In millions) | |||||||||||
| Net income | $ | 158 | $ | 133 | |||||||
| Add (less): | |||||||||||
| Depreciation and amortization | 158 | 157 | |||||||||
| Deferred income taxes and amortization of investment tax credits | (61) | 26 | |||||||||
Other non-cash activities (a) | (11) | (40) | |||||||||
Changes in working capital (b) | (71) | (88) | |||||||||
| Pension and non-pension postretirement benefit contributions | (19) | (9) | |||||||||
| Net cash provided by operating activities | $ | 154 | $ | 179 | |||||||
(a)Includes provision for losses on accounts receivable, pension and non-pension postretirement benefits and other non-cash, net. Details of each component can be found on the Consolidated Statements of Cash Flows.
(b)Changes in working capital include changes to receivables and unbilled revenues, accounts payable and accrued liabilities and other current assets and liabilities, net.
For the three months ended March 31, 2022, cash provided by operating activities decreased $25 million, primarily due to changes in working capital including the contribution of $45 million to the American Water Charitable Foundation which was authorized and accrued in the fourth quarter of 2021 and paid in the first quarter of 2022, partially offset by an increase in net income. The decrease in deferred income taxes from the sale of the Company's New York operations is offset in current taxes payable within other assets and liabilities.
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Cash Flows from Investing Activities
Presented in the table below is a summary of the major items affecting the Company’s cash flows used in investing activities:
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In millions) | |||||||||||
| Net capital expenditures | $ | (424) | $ | (342) | |||||||
| Acquisitions | (5) | (3) | |||||||||
| Net proceeds from sale of assets | 608 | — | |||||||||
Other investing activities, net (a) | (20) | (18) | |||||||||
| Net cash provided by (used in) investing activities | $ | 159 | $ | (363) | |||||||
(a)Includes removal costs from property, plant and equipment retirements.
For the three months ended March 31, 2022, cash provided by investing activities increased $522 million, primarily due to proceeds of $608 million received from the sale of the Company's New York operations offset by increased payments for capital expenditures. The Company plans to invest approximately $2.5 billion across its footprint in 2022.
Cash Flows from Financing Activities
Presented in the table below is a summary of the major items affecting the Company’s cash flows from financing activities:
| For the Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In millions) | |||||||||||
| Proceeds from long-term debt | $ | 11 | $ | 2 | |||||||
| Repayments of long-term debt | (5) | (25) | |||||||||
| Repayments of term loan | — | (500) | |||||||||
| Net short-term (repayments) borrowings with maturities less than three months | (263) | 334 | |||||||||
| Dividends paid | (109) | (100) | |||||||||
Other financing activities, net (a) | 13 | (4) | |||||||||
| Net cash used in financing activities | $ | (353) | $ | (293) | |||||||
(a)Includes proceeds from issuances of common stock under various employee stock plans and the Company’s dividend reinvestment plan, net of taxes paid, and advances and contributions in aid of construction, net of refunds.
For the three months ended March 31, 2022, cash used in financing activities increased $60 million, primarily due to net repayments of commercial paper borrowings during the first quarter of 2022 offset by the repayment in full at maturity of the $500 million term loan during the first quarter of 2021.
Debt Covenants
The Company’s debt agreements contain financial and non-financial covenants. To the extent that the Company is not in compliance with these covenants, an event of default may occur under one or more debt agreements and the Company, or its subsidiaries, may be restricted in its ability to pay dividends, issue new debt or access the revolving credit facility. The long-term debt indentures contain a number of covenants that, among other things, prohibit or restrict the Company from issuing debt secured by the Company’s assets, subject to certain exceptions. Failure to comply with any of these covenants could accelerate repayment obligations.
Covenants in certain long-term notes and the revolving credit facility require the Company to maintain a ratio of consolidated debt to consolidated capitalization (as defined in the relevant documents) of not more than 0.70 to 1.00. On March 31, 2022, the Company’s ratio was 0.59 to 1.00 and therefore the Company was in compliance with the covenants.
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Security Ratings
Presented in the table below are long-term and short-term credit ratings and rating outlooks as of April 27, 2022 as issued by the following rating agencies:
| Securities | Moody’s Investors Service | Standard & Poor’s Ratings Service | ||||||||||||
| Rating outlook | Stable | Stable | ||||||||||||
| Senior unsecured debt | Baa1 | A | ||||||||||||
| Commercial paper | P-2 | A-1 | ||||||||||||
A security rating is not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by the assigning rating agency, and each rating should be evaluated independently of any other rating. Security ratings are highly dependent upon the ability to generate cash flows in an amount sufficient to service debt and meet investment plans. The Company can provide no assurances that its ability to generate cash flows is sufficient to maintain its existing ratings. None of the Company’s borrowings are subject to default or prepayment as a result of the downgrading of these security ratings, although such a downgrading could increase fees and interest charges under its credit facility.
As part of its normal course of business, the Company routinely enters into contracts for the purchase and sale of water, energy, chemicals and other services. These contracts either contain express provisions or otherwise permit the Company and its counterparties to demand adequate assurance of future performance when there are reasonable grounds for doing so. In accordance with the contracts and applicable contract law, if the Company is downgraded by a credit rating agency, especially if such downgrade is to a level below investment grade, it is possible that a counterparty would attempt to rely on such a downgrade as a basis for making a demand for adequate assurance of future performance, which could include a demand that the Company must provide collateral to secure its obligations. The Company does not expect to post any collateral which will have a material adverse impact on the Company’s results of operations, financial position or cash flows.
Access to the capital markets, including the commercial paper market, and respective financing costs in those markets, may be directly affected by the Company’s securities ratings. The Company primarily accesses the debt capital markets, including the commercial paper market, through AWCC. However, the Company has also issued debt through its regulated subsidiaries, primarily in the form of mortgage bonds and tax-exempt securities or borrowings under state revolving funds, to lower the overall cost of debt.
Dividends
For discussion of the Company’s dividends, see Note 6—Shareholders’ Equity in the Notes to Consolidated Financial Statements for additional information.
Application of Critical Accounting Policies and Estimates
Financial condition of the Company, results of operations and cash flows are impacted by the methods, assumptions and estimates used in the application of critical accounting policies. See Part II, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates in the Company’s Form 10-K for a discussion of its critical accounting policies. Additionally, see Note 2—Significant Accounting Policies in the Notes to Consolidated Financial Statements for updates, if any, to the significant accounting policies previously disclosed in the Company’s Form 10-K.
Recent Accounting Standards
See Note 2—Significant Accounting Policies in the Notes to Consolidated Financial Statements for a description of new accounting standards recently adopted or pending adoption.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk in the normal course of business, including changes in commodity prices, equity prices and interest rates. For further discussion of its exposure to market risk, see Part II, Item 7A—Quantitative and Qualitative Disclosures about Market Risk in the Company’s Form 10-K. There have been no significant changes to the Company’s exposure to market risk since December 31, 2021.
The Company had no significant derivative instruments, which are exposed to market risk, outstanding as of March 31, 2022.
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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 Company’s President, Chief Executive Officer and 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 objective.
The Company’s management, including the Company’s President, Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of March 31, 2022.
Based on that evaluation, the Company’s President, Chief Executive Officer and Chief Financial Officer, has concluded that, as of March 31, 2022, the Company’s disclosure controls and procedures were effective at a reasonable level of assurance.
Changes in Internal Control over Financial Reporting
The Company concluded that there have been no changes in internal control over financial reporting that occurred during the three months ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The following information updates and amends the information provided in the Company’s Form 10-K in Part I, Item 3—Legal Proceedings. Capitalized terms used but not otherwise defined herein have the meanings set forth in the 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
Monterey Peninsula Water Supply Project
Water Supply Project Land Acquisition and Slant Well Site Use
The SWRCB has scheduled hearings in late October and early November 2022 related to the referral by Cal Am to the SWRCB of certain issues for the SWRCB’s expert advisory opinion. The Monterey County Superior Court has set a trial date of October 23, 2023 for the City’s lawsuit seeking declaratory relief.
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this report, readers should carefully consider the factors discussed in Part I, Item 1A—Risk Factors in the Form 10-K, and in the Company’s other filings with the SEC, which could materially affect the 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 the 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 March 31, 2022. From April 1, 2015, the date repurchases under the anti-dilutive stock repurchase program commenced, through March 31, 2022, the Company repurchased an aggregate of 4,860,000 shares of common stock under the program, leaving an aggregate of 5,140,000 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.
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ITEM 6. EXHIBITS
| Exhibit Number | Exhibit Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| *10.1 | ||||||||
| *10.2 | ||||||||
| *10.3 | ||||||||
| *10.4 | ||||||||
| *10.5 | ||||||||
| *10.6 | ||||||||
| *10.7 | ||||||||
| *10.8 | ||||||||
| *10.9 | ||||||||
| 10.10 | ||||||||
| *10.11 | ||||||||
| 10.12 | ||||||||
| 22.1 | ||||||||
| *31.1 | ||||||||
| **32.1 | ||||||||
| 101.INS | XBRL Instance Document - the instance 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 applicable taxonomy extension information contained in Exhibits 101). | |||||||
* Filed herewith.
** Furnished herewith.
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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 27th day of April, 2022.
AMERICAN WATER WORKS COMPANY, INC. | |||||
(REGISTRANT) | |||||
| By | /s/ M. SUSAN HARDWICK | ||||
| M. Susan Hardwick President, Chief Executive Officer and Chief Financial Officer (Principal Executive Officer and Principal Financial Officer) | |||||
| By | /s/ MELISSA K. WIKLE | ||||
| Melissa K. Wikle Chief Accounting Officer (Principal Accounting Officer) | |||||
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