Notes to Consolidated Financial Statements
(Unless otherwise noted, in millions, except per share data)
Note 1: Organization and Operation
American Water Works Company, Inc. (the “Company” or “American Water”) is a holding company for regulated and market-based subsidiaries throughout the United States. References to “parent company” mean American Water Works Company, Inc., without its subsidiaries. The Company’s primary business involves the ownership of regulated utilities that provide water and wastewater services in 16 states in the United States, collectively referred to as the “Regulated Businesses.” The Company also operates market-based businesses that provide water and wastewater services within non-reportable operating segments, collectively referred to as the “Market-Based Businesses.” The Company’s primary Market-Based Businesses include the Homeowner Services Group (“HOS”), which provides various warranty protection programs and other home services to residential customers; and the Military Services Group (“MSG”), which enters into long-term contracts with the U.S. government to provide water and wastewater services on various military installations.
Note 2: Significant Accounting Policies
Regulation
The Company’s regulated 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”). As such, the Company follows authoritative accounting principles required for rate regulated utilities, which requires the effects of rate regulation to be reflected in the Company’s Consolidated Financial Statements. PUCs generally authorize revenue at levels intended to recover the estimated costs of providing service, plus a return on net investments, or rate base. Regulators may also approve accounting treatments, long-term financing programs and cost of capital, operation and maintenance (“O&M”) expenses, capital expenditures, taxes, affiliated transactions and relationships, reorganizations, mergers, acquisitions and dispositions, along with imposing certain penalties or granting certain incentives. Due to timing and other differences in the collection of a regulated utility’s revenues, these authoritative accounting principles allow a cost that would otherwise be charged as an expense by a non-regulated entity, to be deferred as a regulatory asset if it is probable that such cost is recoverable through future rates. Conversely, these principles also require the creation of a regulatory liability for amounts collected in rates to recover costs expected to be incurred in the future, or amounts collected in excess of costs incurred and are refundable to customers. See Note 4—Regulatory Matters for additional information.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires that management make estimates, assumptions and judgments that could affect the Company’s financial condition, results of operations and cash flows. Actual results could differ from these estimates, assumptions and judgments. The Company considers its critical accounting estimates to include (i) the application of regulatory accounting principles and the related determination and estimation of regulatory assets and liabilities, (ii) revenue recognition and the estimates used in the calculation of unbilled revenue, (iii) accounting for income taxes, (iv) benefit plan assumptions and (v) the estimates and judgments used in determining loss contingencies. The Company’s critical accounting estimates that are particularly sensitive to change in the near term are amounts reported for regulatory assets and liabilities, income taxes, benefit plan assumptions and contingency-related obligations.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the accounts of American Water and all of its subsidiaries in which a controlling interest is maintained after the elimination of intercompany balances and transactions.
Property, Plant and Equipment
Property, plant and equipment consists primarily of utility plant utilized by the Company’s regulated utilities. Additions to utility plant and replacement of retirement units of utility plant are capitalized and include costs such as materials, direct labor, payroll taxes and benefits, indirect items such as engineering and supervision, transportation and an allowance for funds used during construction (“AFUDC”). Costs for repair, maintenance and minor replacements are charged to O&M expense as incurred.
The cost of utility plant is depreciated using the straight-line average remaining life, group method. The Company’s regulated utilities record depreciation in conformity with amounts approved by PUCs, after regulatory review of the information the Company submits to support its estimates of the assets’ remaining useful lives.
Nonutility property consists primarily of buildings and equipment utilized by the Company’s Market-Based Businesses and for internal operations. This property is stated at cost, net of accumulated depreciation, which is calculated using the straight-line method over the useful lives of the assets.
When units of property, plant and equipment are replaced, retired or abandoned, the carrying value is credited against the asset and charged to accumulated depreciation. To the extent the Company recovers cost of removal or other retirement costs through rates after the retirement costs are incurred, a regulatory asset is recorded. In some cases, the Company recovers retirement costs through rates during the life of the associated asset and before the costs are incurred. These amounts result in a regulatory liability being reported based on the amounts previously recovered through customer rates, until the costs to retire those assets are incurred.
The costs incurred to acquire and internally develop computer software for internal use are capitalized as a unit of property. The carrying value of these costs amounted to $360 million and $345 million as of December 31, 2020 and 2019, respectively.
Cash and Cash Equivalents, and Restricted Funds
Substantially all cash is invested in interest-bearing accounts. All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents.
Restricted funds consist primarily of proceeds from financings for the construction and capital improvement of facilities, and deposits for future services under O&M projects. Proceeds are held in escrow or interest-bearing accounts until the designated expenditures are incurred. Restricted funds are classified on the Consolidated Balance Sheets as either current or long-term based upon the intended use of the funds.
Presented in the table below is a reconciliation of the cash and cash equivalents and restricted funds amounts as presented on the Consolidated Balance Sheets to the sum of such amounts presented on the Consolidated Statements of Cash Flows for the years ended December 31:
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2020
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2019
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Cash and cash equivalents
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$
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547
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$
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60
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Restricted funds
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29
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31
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Cash and cash equivalents and restricted funds as presented on the Consolidated Statements of Cash Flows
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$
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576
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$
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91
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Accounts Receivable and Unbilled Revenues
Accounts receivable include regulated utility customer accounts receivable, which represent amounts billed to water and wastewater customers generally on a monthly basis. Credit is extended based on the guidelines of the applicable PUCs and collateral is generally not required. Also included are market-based trade accounts receivable and nonutility customer receivables of the regulated subsidiaries. Unbilled revenues are accrued when service has been provided but has not been billed to customers and when costs exceed billings on market-based construction contracts.
Allowance for Uncollectible Accounts
Allowances for uncollectible accounts are maintained for estimated probable losses resulting from the Company’s inability to collect receivables from customers. Accounts that are outstanding longer than the payment terms are considered past due. A number of factors are considered in determining the allowance for uncollectible accounts, including the length of time receivables are past due, previous loss history, current economic and societal conditions and reasonable and supportable forecasts that affect the collectability of receivables from customers. The Company generally writes off accounts when they become uncollectible or are over a certain number of days outstanding. An increase in the allowance for uncollectible accounts for the period ending December 31, 2020 reflects the impacts from the current novel coronavirus (“COVID-19”) pandemic, including an increase in uncollectible accounts expense and a reduction in amounts written off due to shutoff moratoria in place across the Company’s subsidiaries. See Note 8—Allowance for Uncollectible Accounts for additional information.
Materials and Supplies
Materials and supplies are stated at the lower of cost or net realizable value. Cost is determined using the average cost method.
Leases
On January 1, 2019, the Company adopted Accounting Standards Update 2016-02, Leases (Topic 842), and all related amendments (collectively, the “Standard”). The Company implemented the guidance in the Standard using the modified retrospective approach and applied the optional transition method, which allowed entities to apply the new Standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Under this approach, prior periods have not been restated and continue to be reported under the accounting standards in effect for those periods. The Standard includes practical expedients, which relate to the identification and classification of leases that commenced before the adoption date, initial direct costs for leases that commenced before the adoption date, the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset and the ability to carry forward accounting treatment for existing land easements.
Adoption of the Standard resulted in the recognition of operating lease right-of-use (“ROU”) assets and operating lease liabilities as of January 1, 2019 of approximately $117 million and $115 million, respectively. The difference between the ROU assets and operating lease liabilities was recorded as an adjustment to retained earnings. The Standard did not materially impact the Company’s consolidated results of operations and had no impact on cash flows.
The Company has operating and finance leases involving real property, including facilities, utility assets, vehicles, and equipment. The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease ROU assets, accrued liabilities and operating lease liabilities on the Consolidated Balance Sheets. Finance leases are included in property, plant and equipment, accrued liabilities and other long-term liabilities on the Consolidated Balance Sheets. The Company has made an accounting policy election not to include operating leases with a lease term of twelve months or less.
ROU assets represent the right to use an underlying asset for the lease term and the lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are generally recognized at the commencement date based on the present value of discounted lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of discounted lease payments. The implicit rate is used when readily determinable. ROU assets also include any upfront lease payments and excludes lease incentives. The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term.
The Company has lease agreements with lease components (e.g., fixed payments including rent, real estate taxes and insurance costs) and non-lease components (e.g., common-area maintenance costs), which are generally accounted for separately; however, the Company accounts for the lease and non-lease components as a single lease component for certain leases. Certain lease agreements include variable rental payments adjusted periodically for inflation. Additionally, the Company applies a portfolio approach to effectively account for the ROU assets and lease liabilities. The Company’s lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Goodwill
Goodwill represents the excess of the purchase price paid over the estimated fair value of the assets acquired and liabilities assumed in the acquisition of a business. Goodwill is not amortized and must be allocated at the reporting unit level, which is defined as an operating segment or one level below, and tested for impairment at least annually, or more frequently if an event occurs or circumstances change that would more likely than not, reduce the fair value of a reporting unit below its carrying value.
The Company’s goodwill is primarily associated with (i) the acquisition of American Water by an affiliate of the Company’s previous owner in 2003, (ii) the acquisition of E’town Corporation by a predecessor to the Company’s previous owner in 2001, and (iii) the acquisition of Pivotal in 2018; and has been allocated to reporting units based on the fair values at the date of the acquisitions. For purposes of testing goodwill for impairment, the reporting units in the Regulated Businesses segment are aggregated into a single reporting unit. The Market-Based Businesses is comprised of the HOS and MSG reporting units.
The Company’s annual impairment testing is performed as of November 30 of each year, in conjunction with the completion of the Company’s annual business plan. The Company assesses qualitative factors to determine whether quantitative testing is necessary. If it is determined, based upon qualitative factors, that the estimated fair value of a reporting unit is more likely than not, greater than its carrying value, no further testing is required. If the Company bypasses the qualitative assessment, or performs the qualitative assessment and determines that the estimated fair value of a reporting unit is more likely than not, less than its carrying value, a quantitative, fair value-based test is performed. This quantitative testing compares the estimated fair value of the reporting unit to its respective net carrying value, including goodwill, on the measurement date. An impairment loss will be recognized in the amount equal to the excess of the reporting unit’s carrying value compared to its estimated fair value, limited to the total amount of goodwill allocated to that reporting unit.
Application of goodwill impairment testing requires management judgment, including the identification of reporting units and determining the fair value of reporting units. Management estimates fair value using a discounted cash flow analysis. Significant assumptions used in these fair value estimations include, but are not limited to, forecasts of future operating results, discount and growth rates.
The Company believes the assumptions and other considerations used to value goodwill to be appropriate, however, if actual experience differs from the assumptions and considerations used in its analysis, the resulting change could have a material adverse impact on the Consolidated Financial Statements. See Note 9—Goodwill and Other Intangible Assets for additional information.
Intangible Assets
Intangible assets consist primarily of finite-lived customer relationships associated with the acquisition of Pivotal. Finite-lived intangible assets are initially measured at their estimated fair values, and are amortized over their estimated useful lives based on the pattern in which the economic benefits of the intangible assets are consumed or otherwise used. See Note 9—Goodwill and Other Intangible Assets for additional information.
Impairment of Long-Lived Assets
Long-lived assets include property, plant and equipment, goodwill, intangible assets and long-term investments. The Company evaluates long-lived assets for impairment when circumstances indicate the carrying value of those assets may not be recoverable. When such indicators arise, the Company estimates the fair value of the long-lived asset from future cash flows expected to result from its use and, if applicable, the eventual disposition of the asset, comparing the estimated fair value to the carrying value of the asset. An impairment loss will be recognized in the amount equal to the excess of the long-lived asset’s carrying value compared to its estimated fair value.
The long-lived assets of the Company’s regulated utilities are grouped on a separate entity basis for impairment testing, as they are integrated state-wide operations that do not have the option to curtail service and generally have uniform tariffs. A regulatory asset is charged to earnings if and when future recovery in rates of that asset is no longer probable.
The Company believes the assumptions and other considerations used to value long-lived assets to be appropriate, however, if actual experience differs from the assumptions and considerations used in its estimates, the resulting change could have a material adverse impact on the Consolidated Financial Statements.
Advances for Construction and Contributions in Aid of Construction
Regulated utility subsidiaries may receive advances for construction and contributions in aid of construction from customers, home builders and real estate developers to fund construction necessary to extend service to new areas.
Advances are refundable for limited periods of time as new customers begin to receive service or other contractual obligations are fulfilled. Included in other current liabilities as of December 31, 2020 and 2019 on the Consolidated Balance Sheets are estimated refunds of $23 million and $25 million, respectively. Those amounts represent expected refunds during the next 12-month period.
Advances that are no longer refundable are reclassified to contributions. Contributions are permanent collections of plant assets or cash for a particular construction project. For ratemaking purposes, the amount of such contributions generally serves as a rate base reduction since the contributions represent non-investor supplied funds.
Generally, the Company depreciates utility plant funded by contributions and amortizes its contributions balance as a reduction to depreciation expense, producing a result which is functionally equivalent to reducing the original cost of the utility plant for the contributions. In accordance with applicable regulatory guidelines, some of the Company’s utility subsidiaries do not amortize contributions, and any contribution received remains on the balance sheet indefinitely. Amortization of contributions in aid of construction was $32 million, $29 million and $28 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Revenue Recognition
On January 1, 2018, the Company adopted Accounting Standards Codification Topic 606, Revenue From Contracts With Customers, and all related amendments (collectively, “ASC 606”), using the modified retrospective approach, applied to contracts which were not completed as of January 1, 2018.
Under ASC 606, a performance obligation is a promise within a contract to transfer a distinct good or service, or a series of distinct goods and services, to a customer. Revenue is recognized when performance obligations are satisfied and the customer obtains control of promised goods or services. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled to receive in exchange for goods or services. Under ASC 606, a contract’s transaction price is allocated to each distinct performance obligation. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, the Company performs the following five steps: (i) identifies the contracts with a customer; (ii) identifies the performance obligations within the contract, including whether any performance obligations are distinct and capable of being distinct in the context of the contract; (iii) determines the transaction price; (iv) allocates the transaction price to the performance obligations in the contract; and (v) recognizes revenue when, or as, the Company satisfies each performance obligation.
The Company’s revenues from contracts with customers are discussed below. Customer payments for contracts are generally due within 30 days of billing and none of the contracts with customers have payment terms that exceed one year; therefore, the Company elected to apply the significant financing component practical expedient and no amount of consideration has been allocated as a financing component.
Regulated Businesses Revenue
Revenue from the Company’s Regulated Businesses is generated primarily from water and wastewater services delivered to customers. These contracts contain a single performance obligation, the delivery of water and/or wastewater services, as the promise to transfer the individual good or service is not separately identifiable from other promises within the contracts and, therefore, is not distinct. Revenues are recognized over time, as services are provided. There are generally no significant financing components or variable consideration. Revenues include amounts billed to customers on a cycle basis and unbilled amounts calculated based on estimated usage from the date of the meter reading associated with the latest customer bill, to the end of the accounting period. The amounts that the Company has a right to invoice are determined by each customer’s actual usage, an indicator that the invoice amount corresponds directly to the value transferred to the customer. The Company also recognizes revenue when it is probable that future recovery of previously incurred costs or future refunds that are to be credited to customers will occur through the ratemaking process.
Market-Based Businesses Revenue
Through various warranty protection programs and other home services, the Company provides fixed fee services to residential customers for interior and exterior water and sewer lines, interior electric and gas lines, heating and cooling systems, water heaters and other home appliances, as well as power surge protection and other related services. Most of the contracts have a one-year term and each service is a separate performance obligation, satisfied over time, as the customers simultaneously receive and consume the benefits provided from the service. Customers are obligated to pay for the protection programs ratably over 12 months or via a one-time, annual fee, with revenues recognized ratably over time for these services. Advances from customers are deferred until the performance obligation is satisfied.
The Company also has long-term, fixed fee contracts to operate and maintain water and wastewater systems for the U.S. government on various military installations and facilities owned by municipal customers. Billing and revenue recognition for the fixed fee revenues occurs ratably over the term of the contract, as customers simultaneously receive and consume the benefits provided by the Company. Additionally, these contracts allow the Company to make capital improvements to underlying infrastructure, which are initiated through separate modifications or amendments to the original contract, whereby stand-alone, fixed pricing is separately stated for each improvement. The Company has determined that these capital improvements are separate performance obligations, with revenue recognized over time based on performance completed at the end of each reporting period. Losses on contracts are recognized during the period in which the losses first become probable and estimable. Revenues recognized during the period in excess of billings on construction contracts are recorded as unbilled revenues, with billings in excess of revenues recorded as other current liabilities until the recognition criteria are met. Changes in contract performance and related estimated contract profitability may result in revisions to costs and revenues, and are recognized in the period in which revisions are determined. See Note 5—Revenue Recognition for additional information.
Income Taxes
The Company and its subsidiaries participate in a consolidated federal income tax return for U.S. tax purposes. Members of the consolidated group are charged with the amount of federal income tax expense determined as if they filed separate returns.
Certain income and expense items are accounted for in different time periods for financial reporting than for income tax reporting purposes. The Company provides deferred income taxes on the difference between the tax basis of assets and liabilities and the amounts at which they are carried in the financial statements. These deferred income taxes are based on the enacted tax rates expected to be in effect when these temporary differences are projected to reverse. In addition, the regulated utility subsidiaries recognize regulatory assets and liabilities for the effect on revenues expected to be realized as the tax effects of temporary differences, previously flowed through to customers, reverse.
Investment tax credits have been deferred by the regulated utility subsidiaries and are being amortized to income over the average estimated service lives of the related assets.
The Company recognizes accrued interest and penalties related to tax positions as a component of income tax expense and accounts for sales tax collected from customers and remitted to taxing authorities on a net basis. See Note 15—Income Taxes for additional information.
Allowance for Funds Used During Construction
AFUDC is a non-cash credit to income with a corresponding charge to utility plant that represents the cost of borrowed funds or a return on equity funds devoted to plant under construction. The regulated utility subsidiaries record AFUDC to the extent permitted by the PUCs. The portion of AFUDC attributable to borrowed funds is shown as a reduction of interest, net on the Consolidated Statements of Operations. Any portion of AFUDC attributable to equity funds would be included in other, net on the Consolidated Statements of Operations. Presented in the table below is AFUDC for the years ended December 31:
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2020
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2019
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2018
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Allowance for other funds used during construction
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$
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30
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$
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28
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$
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24
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Allowance for borrowed funds used during construction
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13
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13
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13
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Environmental Costs
The Company’s water and wastewater operations and the operations of its Market-Based Businesses are subject to U.S. federal, state, local and foreign requirements relating to environmental protection, and as such, the Company periodically becomes subject to environmental claims in the normal course of business. Environmental expenditures that relate to current operations or provide a future benefit are expensed or capitalized as appropriate. Remediation costs that relate to an existing condition caused by past operations are accrued, on an undiscounted basis, when it is probable that these costs will be incurred and can be reasonably estimated. A conservation agreement entered into by a subsidiary of the Company with the National Oceanic and Atmospheric Administration in 2010 and amended in 2017 required the subsidiary to, among other provisions, implement certain measures to protect the steelhead trout and its habitat in the Carmel River watershed in the State of California. The subsidiary agreed to pay $1 million annually commencing in 2010 with the final payment being made in 2021. Remediation costs accrued amounted to $1 million and $2 million as of December 31, 2020 and 2019, respectively.
Derivative Financial Instruments
The Company uses derivative financial instruments for purposes of hedging exposures to fluctuations in interest rates. These derivative contracts are entered into for periods consistent with the related underlying exposures and do not constitute positions independent of those exposures. The Company does not enter into derivative contracts for speculative purposes and does not use leveraged instruments.
All derivatives are recognized on the balance sheet at fair value. On the date the derivative contract is entered into, the Company may designate the derivative as a hedge of the fair value of a recognized asset or liability (fair-value hedge) or a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (cash-flow hedge).
Changes in the fair value of a fair-value hedge, along with the gain or loss on the underlying hedged item, are recorded in current-period earnings. The gains and losses on the effective portion of cash-flow hedges are recorded in other comprehensive income, until earnings are affected by the variability of cash flows. Any ineffective portion of designated cash-flow hedges is recognized in current-period earnings.
Cash flows from derivative contracts are included in net cash provided by operating activities on the Consolidated Statements of Cash Flows. See Note 12—Long-Term Debt for additional information.
New Accounting Standards
Presented in the table below are new accounting standards that were adopted by the Company in 2020:
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Standard
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Description
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Date of Adoption
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Application
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Effect on the Consolidated Financial Statements
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Measurement of Credit Losses on Financial Instruments
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Updated the accounting guidance on reporting credit losses for financial assets held at amortized cost basis and available-for-sale debt securities. Under this guidance, expected credit losses are required to be measured based on historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount of financial assets. Also, this guidance requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a direct write-down.
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January 1, 2020
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Modified retrospective
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The standard did not have a material impact on the Consolidated Financial Statements.
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Changes to the Disclosure Requirements for Fair Value Measurement
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Updated the disclosure requirements for fair value measurement. The guidance removes the requirements to disclose transfers between Level 1 and Level 2 measurements, the timing of transfers between levels, and the valuation processes for Level 3 measurements. Disclosure of transfers into and out of Level 3 measurements will be required. The guidance adds disclosure requirements for the change in unrealized gains and losses in other comprehensive income for recurring Level 3 measurements, as well as the range and weighted average of significant unobservable inputs used to develop Level 3 measurements.
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January 1, 2020
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Prospective for added disclosures and for the narrative description of measurement uncertainty; retrospective for all other amendments.
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The standard did not have a material impact on the Consolidated Financial Statements.
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Facilitation of the Effects of Reference Rate Reform on Financial Reporting
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Provided optional guidance for a limited time to ease the potential accounting burden associated with the transition from London Interbank Offered Rate (“LIBOR”). The guidance contains optional expedients and exceptions for contract modifications, hedging relationships, and other transactions that reference LIBOR or other reference rates expected to be discontinued. The expedients elected must be applied for all eligible contracts or transactions, with the exception of hedging relationships, which can be applied on an individual basis.
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March 12, 2020 through December 31, 2022
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Prospective for contract modifications and hedging relationships; applied as of January 1, 2020.
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The standard did not have a material impact on the Consolidated Financial Statements.
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Presented in the table below are recently issued accounting standards that have not yet been adopted by the Company as of December 31, 2020:
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Standard
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Description
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Date of Adoption
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Application
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Estimated Effect on the Consolidated Financial Statements
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Simplifying the Accounting for Income Taxes
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The guidance removes exceptions related to the incremental approach for intraperiod tax allocation, the requirement to recognize a deferred tax liability for changes in ownership of a foreign subsidiary or equity method investment, and the general methodology for calculating income taxes in an interim period when the year-to-date loss exceeds the anticipated loss. The guidance adds requirements to reflect changes to tax laws or rates in the annual effective tax rate computation in the interim period in which the changes were enacted, to recognize franchise or other similar taxes that are partially based on income as an income-based tax and any incremental amounts as non-income-based tax, and to evaluate when a step up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction.
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January 1, 2021; early adoption permitted
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Modified retrospective for amendments related to changes in ownership of a foreign subsidiary or equity method investment;
Modified retrospective or retrospective for amendments related to taxes partially based on income; Prospective for all other amendments.
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The standard will not have a material impact on the Consolidated Financial Statements.
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Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
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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.
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January 1, 2022; early adoption permitted but not before fiscal years beginning after December 15, 2020
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Either modified retrospective or fully retrospective
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The Company is evaluating any impact on its Consolidated Financial Statements, as well as the timing of adoption.
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Reclassifications
Certain reclassifications have been made to prior periods in the Consolidated Financial Statements and Notes to conform to the current presentation.
Note 3: Impact of Novel Coronavirus (COVID-19) Pandemic
American Water has been monitoring the global outbreak of the COVID-19 pandemic. To date, the Company has experienced COVID-19 financial impacts, including an increase in uncollectible accounts expense, additional debt costs, and certain incremental O&M expenses. The Company has also experienced decreased revenues as a result of the suspension of late fees and foregone reconnect fees. These impacts are collectively referred to as “financial impacts.”
As of February 24, 2021, American Water has commission orders authorizing deferred accounting for COVID-19 financial impacts in 11 of 14 jurisdictions, with proceedings in two jurisdictions pending. In addition to approving deferred accounting, to date, two regulatory jurisdictions have also approved cost recovery mechanisms for specified COVID-19 financial impacts. Regulatory actions to date are presented in the table below:
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Commission Actions
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Description
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States
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Orders issued
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Allows the Company to establish regulatory assets to record certain financial impacts related to the COVID-19 pandemic.
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CA, HI, IA, IL, IN, MD, MO, NJ, PA, VA, WV
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Cost recovery mechanisms
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California’s Catastrophic Event Memorandum Account allows the Company to track and recover certain financial impacts related to the COVID-19 pandemic. Illinois has authorized cost recovery of COVID-19 financial impacts through a special purpose rider over a 24-month period, which was implemented by the Company’s Illinois subsidiary effective October 1, 2020. Additionally, Illinois approved a bad debt rider tariff on December 16, 2020. This rider will allow the Company to collect actual bad debt expense over last authorized beginning March 2021 over a 24-month period.
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CA, IL
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Proceedings pending
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Pending proceedings considering deferred accounting authorization for the future recovery of COVID-19 financial impacts.
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NY, TN
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Consistent with these regulatory orders, the Company has recorded $30 million in regulatory assets and $4 million of regulatory liabilities for the financial impacts related to the COVID-19 pandemic on the Consolidated Balance Sheets as of December 31, 2020. On December 30, 2020, the Company’s Kentucky subsidiary received an order denying its request to defer to a regulatory asset the financial impacts related to the COVID-19 pandemic.
As of February 24, 2021, six states have ordered active moratoria on the suspension of service disconnections due to non-payment. The moratoria on disconnects have expired in eight states.
Note 4: Regulatory Matters
General Rate Cases
Presented in the table below are annualized incremental revenues, assuming a constant water sales volume, resulting from general rate cases authorizations that became effective during 2018 through 2020:
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(In millions)
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2020
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2019
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2018
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General rate cases by state:
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New Jersey (a)
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$
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39
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$
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—
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$
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40
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Indiana (b)
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13
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4
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—
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California (c)
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5
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4
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10
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Virginia (d)
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(1)
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—
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—
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Kentucky (effective June 28, 2019)
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—
|
|
|
13
|
|
|
—
|
|
New York (e)
|
—
|
|
|
4
|
|
|
5
|
|
West Virginia (effective February 25, 2019)
|
—
|
|
|
19
|
|
|
—
|
|
Maryland (effective February 5, 2019)
|
—
|
|
|
1
|
|
|
—
|
|
Missouri (effective May 28, 2018)
|
—
|
|
|
—
|
|
|
33
|
|
Pennsylvania (effective January 1, 2018)
|
—
|
|
|
—
|
|
|
62
|
|
Total general rate case authorizations
|
$
|
56
|
|
|
$
|
45
|
|
|
$
|
150
|
|
(a)The $39 million base rate increase was effective on November 1, 2020, which is net of excess accumulated deferred income taxes (“EADIT”) of $15 million being returned to customers. The unprotected EADIT balance of $133 million is being returned to customers over 15 years. The $39 million rate increase was further reduced by a bill credit, for a 10-month period beginning November 1, 2020 for both the protected and unprotected catch up period EADIT of $32.5 million. The catch up period of January 1, 2018 through October 31, 2020 covers the period from when the lower federal tax rate went into effect until new base rates went into effect. The $40 million rate increase was effective on June 15, 2018. As part of the resolution of the general rate case in 2018, the Company’s New Jersey subsidiary’s customers received refunds for the amount of provisional rates implemented as of June 15, 2018 that exceeded the final rate increase plus interest.
(b)The Company’s Indiana subsidiary received an order approving a joint settlement agreement with all major parties with respect to its general rate case filing, authorizing annualized incremental revenues of $4 million in the first rate year, effective July 1, 2019, and $13 million in the second rate year, effective May 1, 2020.
(c)The Company’s California subsidiary received approval for the third year (2020) step increase associated with its most recent general rate case authorization, effective January 1, 2020. In 2019, the step increase was effective May 11, 2019. On December 13, 2018, a settlement in this subsidiary’s general rate case filing was approved, authorizing rates effective January 1, 2018.
(d)The Company’s Virginia subsidiary received an order approving increased water revenues by $1 million, inclusive of Water & Wastewater Infrastructure Service Charge (“WWISC”) revenues of $1 million, and decreased wastewater revenue by $1 million, for a net zero award including WWISC, or an overall decrease of $1 million excluding WWISC. Unprotected EADIT is being returned to customers over eight years, and base rates include a reduction of $1 million for EADIT.
(e)The Company’s New York subsidiary implemented its third step increase associated with its most recent general rate case authorization, effective April 1, 2019.
Due in part to the COVID-19 pandemic, the New York State Public Service Commission (the “NYSPSC”) approved, through a series of orders, the Company’s New York subsidiary’s request to postpone the previously approved step increase, originally scheduled to go into effect April 1, 2020 until May 1, 2021. The orders provided a make whole provision to recover the delayed revenues with no earnings impact. These delays impact rates for all metered and fire customers, which the Company is authorized to recover in a make-whole surcharge beginning May 1, 2021.
Pending General Rate Case Filings
On August 28, 2020, the Company’s Iowa subsidiary filed a general rate case requesting $3 million in annualized incremental revenues. Office of Consumer Advocate (“OCA”) and intervenor direct testimony was filed on December 17, 2020 and cross-reply testimony was filed on December 31, 2020. The Company’s Iowa subsidiary reply testimony was filed on January 14, 2021, and OCA rebuttal testimony was filed on February 8, 2021. Evidentiary hearings are scheduled to start March 3, 2021. An order is anticipated by April 30, 2021 with new rates effective by July 1, 2021.
On June 30, 2020, the Company’s Missouri subsidiary filed a general rate case requesting $78 million in annualized incremental revenues. On August 26, 2020, the Missouri Public Service Commission (the “MPSC”) issued an order setting the test year and adopting a procedural schedule. Revenue requirement direct testimony was submitted on November 24, 2020 for all non-Company parties, and a technical conference was held on December 3, 2020. Cost of service and rate design direct testimony was submitted on December 9, 2020 for all non-company parties. Rebuttal testimony was submitted on January 15, 2021 for revenue requirement and on January 22, 2021 for rate design, and true-up data was filed on January 29, 2021, which included known and measurable changes through December 31, 2020. Settlement conferences commenced on February 16, 2021. A Motion to Suspend Procedural Schedule was filed on February 23, 2021 with the MPSC by all parties to the proceeding. The MPSC issued an order effective February 24, 2021 suspending the procedural schedule to allow for either a stipulation and agreement or a status report to be filed no later than February 26, 2021.
On April 29, 2020, the Company’s Pennsylvania subsidiary filed a general rate case requesting $92 million and $46 million in annualized incremental revenues for rate year 1 and rate year 2, respectively. On October 30, 2020, the Company’s Pennsylvania subsidiary and the Bureau of Investigation and Enforcement entered into a settlement agreement providing for a total annualized revenue increase of $71 million over a two-year period. In November 2020, the Company’s Pennsylvania subsidiary and the remaining active parties in the case presented their positions in briefs to the Administrative Law Judge, who issued to the Pennsylvania Public Utility Commission (the “PaPUC”) a recommended decision approving the settlement. The procedural schedule in this case was extended to March 15, 2021. The Company expects the PaPUC to issue a final order in the near term, and once approved by the PaPUC, new water and wastewater rates will be effective January 28, 2021.
On July 1, 2019, the Company’s California subsidiary filed a general rate case requesting $26 million in annualized incremental revenues for 2021, and increases of $10 million and $11 million in the escalation year of 2022 and the attrition year of 2023, respectively. On October 11, 2019, the Company filed its 100 day update for the same proceeding and updated the request to $27 million in annualized incremental revenues for 2021, and increases of $10 million and $10 million in the escalation year of 2022 and the attrition year of 2023, respectively. On September 10, 2020, the California Public Utilities Commission (the “CPUC”) approved the Company’s California subsidiary’s motion for interim rates, establishing a memorandum account to track the difference between interim and final rates adopted by the CPUC in this proceeding, which were effective on January 1, 2021. Following settlement discussions among all parties to the proceeding, on January 22, 2021 and January 25, 2021, the Company’s California subsidiary filed with the CPUC a comprehensive settlement entered into among the Company’s California subsidiary, the Public Advocates Office, and other intervenors. These settlement agreements resolved all matters in dispute among the parties to the settlements. These settlements as well as resolution of issues raised by non-settling parties are now before the CPUC for approval.
On January 22, 2020, the Company’s California subsidiary submitted a request to delay by one year its cost of capital filing and maintain its current authorized cost of capital through 2021. On March 12, 2020, the CPUC granted the request for a one year extension of the cost of capital filing to May 1, 2021, to set its authorized cost of capital beginning January 1, 2022. On January 5, 2021, the Company’s California subsidiary submitted a request to further delay by one year its cost of capital filing and maintain the authorized cost of capital through 2022. On February 22, 2021, the CPUC denied the request to further delay the cost of capital filing. The Company’s California subsidiary will submit a cost of capital application by May 1, 2021, with a new authorized cost of capital beginning January 1, 2022.
Infrastructure Surcharges
A number of states have authorized the use of regulatory mechanisms that permit rates to be adjusted outside of a general rate case for certain costs and investments, such as infrastructure surcharge mechanisms that permit recovery of capital investments to replace aging infrastructure. Presented in the table below are annualized incremental revenues, assuming a constant water sales volume, resulting from infrastructure surcharge authorizations that became effective during 2018 through 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions)
|
2020
|
|
2019
|
|
2018
|
Infrastructure surcharges by state:
|
|
|
|
|
|
Missouri (a)
|
$
|
12
|
|
|
$
|
14
|
|
|
$
|
6
|
|
Pennsylvania (b)
|
27
|
|
|
11
|
|
|
—
|
|
Kentucky (effective July 1, 2020)
|
1
|
|
|
—
|
|
|
—
|
|
New Jersey (c)
|
20
|
|
|
15
|
|
|
—
|
|
Tennessee (effective January 1, 2020, September 1, 2019 and April 10, 2018)
|
2
|
|
|
1
|
|
|
1
|
|
Illinois (effective January 1, 2020, January 1, 2019 and January 1, 2018)
|
7
|
|
|
8
|
|
|
3
|
|
West Virginia (effective January 1, 2020, January 1, 2019 and January 1, 2018)
|
3
|
|
|
2
|
|
|
3
|
|
New York (effective August 1, 2019)
|
—
|
|
|
2
|
|
|
—
|
|
Indiana (effective March 14, 2018)
|
—
|
|
|
—
|
|
|
7
|
|
Virginia (effective March 1, 2018)
|
—
|
|
|
—
|
|
|
1
|
|
Total infrastructure surcharge authorizations
|
$
|
72
|
|
|
$
|
53
|
|
|
$
|
21
|
|
(a)In 2020, $2 million was effective December 14 and $10 million was effective June 27. In 2019, $5 million was effective December 21 and $9 million was effective June 24. In 2018, the effective date was December 15.
(b)In 2020, $8 million was effective October 1, $4 million was effective July 1, $5 million was effective April 1 and $10 million was effective January 1. In 2019, $6 million was effective October 1, $3 million was effective July 1 and $2 million was effective April 1.
(c)In 2020, $10 million was effective June 29 and $10 million was effective January 1. In 2019, the effective date was July 1.
Presented in the table below are annualized incremental revenues, assuming a constant water sales volume, resulting from infrastructure surcharge authorizations that became effective after January 1, 2020:
|
|
|
|
|
|
(In millions)
|
Amount
|
Infrastructure surcharge filings by state:
|
|
Pennsylvania (effective January 1, 2021)
|
$
|
8
|
|
Illinois (effective January 1, 2021)
|
7
|
|
West Virginia (effective January 1, 2021)
|
5
|
|
Tennessee (effective January 1, 2021)
|
3
|
|
Total infrastructure surcharge filings
|
$
|
23
|
|
Pending Infrastructure Surcharge Filings
On January 15, 2021, the Company’s Indiana subsidiary filed for an infrastructure surcharge requesting $8 million in additional annualized revenues.
On May 29, 2020, the Company’s New York subsidiary filed for an infrastructure surcharge requesting $1 million in additional annualized revenues. New rates related to this infrastructure surcharge were first deferred until January 1, 2021. Thereafter, on December 30, 2020, the NYSPSC ordered the postponement of rate changes until May 1, 2021, which will be recoverable, with interest, through a separate, make-whole recovery mechanism commencing May 1, 2021 through March 31, 2022.
Regulatory Assets
Regulatory assets represent costs that are probable of recovery from customers in future rates. Approximately 50% of the Company’s total regulatory asset balance at December 31, 2020 earns a return. Presented in the table below is the composition of regulatory assets as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Deferred pension expense
|
$
|
374
|
|
|
$
|
384
|
|
Removal costs recoverable through rates
|
314
|
|
|
305
|
|
Regulatory balancing accounts
|
57
|
|
|
96
|
|
Other
|
446
|
|
|
398
|
|
Less: Regulatory assets included in assets held for sale (a)
|
(64)
|
|
|
(55)
|
|
Total regulatory assets
|
$
|
1,127
|
|
|
$
|
1,128
|
|
(a)These regulatory assets are related to the pending transactions contemplated by the Stock Purchase Agreement and are included in assets held for sale on the Consolidated Balance Sheets. See Note 6—Acquisitions and Divestitures for additional information.
The Company’s deferred pension expense includes a portion of the underfunded status that is probable of recovery through rates in future periods of $366 million and $375 million as of December 31, 2020 and 2019, respectively. The remaining portion is the pension expense in excess of the amount contributed to the pension plans which is deferred by certain subsidiaries and will be recovered in future service rates as contributions are made to the pension plan.
Removal costs recoverable through rates represent costs incurred for removal of property, plant and equipment or other retirement costs.
Regulatory balancing accounts accumulate differences between revenues recognized and authorized revenue requirements until they are collected from customers or are refunded. Regulatory balancing accounts include low income programs and purchased power and water accounts.
Other regulatory assets include the financial impacts relating to the COVID-19 pandemic, purchase premium recoverable through rates, tank painting costs, certain construction costs for treatment facilities, property tax stabilization, employee-related costs, business services project expenses, coastal water project costs, rate case expenditures and environmental remediation costs among others. These costs are deferred because the amounts are being recovered in rates or are probable of recovery through rates in future periods.
Regulatory Liabilities
Regulatory liabilities generally represent amounts that are probable of being credited or refunded to customers through the rate making process. Also, if costs expected to be incurred in the future are currently being recovered through rates, the Company records those expected future costs as regulatory liabilities. Presented in the table below is the composition of regulatory liabilities as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Income taxes recovered through rates
|
$
|
1,230
|
|
|
$
|
1,258
|
|
Removal costs recovered through rates
|
301
|
|
|
297
|
|
Postretirement benefit liability
|
170
|
|
|
186
|
|
Other
|
111
|
|
|
102
|
|
Less: Regulatory liabilities included in liabilities related to assets held for sale (a)
|
(42)
|
|
|
(37)
|
|
Total regulatory liabilities
|
$
|
1,770
|
|
|
$
|
1,806
|
|
(a)These regulatory liabilities are related to the pending transactions contemplated by the Stock Purchase Agreement and are included in liabilities related to assets held for sale on the Consolidated Balance Sheets. See Note 6—Acquisitions and Divestitures for additional information.
Income taxes recovered through rates relate to deferred taxes that will likely be refunded to the Company’s customers. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “TCJA”) was signed into law, which, among other things, enacted significant and complex changes to the Code, including a reduction in the federal corporate income tax rate from 35% to 21% as of January 1, 2018. The enactment of the TCJA required a re-measurement of the Company’s deferred income taxes. The portion of this re-measurement related to the Regulated Businesses was substantially offset by a regulatory liability as excess accumulated deferred income taxes (“EADIT”) will be used to benefit its regulated customers in future rates. Nine of the Company’s regulated subsidiaries are amortizing EADIT and crediting customers, including one which is using the EADIT to offset future infrastructure investments. The Company expects the timing of the amortization of EADIT credits by the five remaining regulated subsidiaries to be addressed in pending or future rate cases or other proceedings.
Removal costs recovered through rates are estimated costs to retire assets at the end of their expected useful lives that are recovered through customer rates over the lives of the associated assets.
On August 31, 2018, the Postretirement Medical Benefit Plan was remeasured to reflect an announced plan amendment which changed benefits for certain union and non-union plan participants. As a result of the remeasurement, the Company recorded a $227 million reduction to the net accumulated postretirement benefit obligation, with a corresponding regulatory liability.
Other regulatory liabilities include the financial impacts relating to the COVID-19 pandemic, TCJA reserve on revenue, pension and other postretirement benefit balancing accounts, legal settlement proceeds, deferred gains and various regulatory balancing accounts.
Note 5: Revenue Recognition
Disaggregated Revenues
Presented in the table below are operating revenues disaggregated for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from Contracts with Customers
|
|
Other Revenues Not from Contracts with Customers (a)
|
|
Total Operating Revenues
|
Regulated Businesses:
|
|
|
|
|
|
Water services:
|
|
|
|
|
|
Residential
|
$
|
1,895
|
|
|
$
|
—
|
|
|
$
|
1,895
|
|
Commercial
|
627
|
|
|
—
|
|
|
627
|
|
Fire service
|
147
|
|
|
—
|
|
|
147
|
|
Industrial
|
133
|
|
|
—
|
|
|
133
|
|
Public and other
|
201
|
|
|
—
|
|
|
201
|
|
Total water services
|
3,003
|
|
|
—
|
|
|
3,003
|
|
Wastewater services:
|
|
|
|
|
|
Residential
|
134
|
|
|
—
|
|
|
134
|
|
Commercial
|
34
|
|
|
—
|
|
|
34
|
|
Industrial
|
3
|
|
|
—
|
|
|
3
|
|
Public and other
|
14
|
|
|
—
|
|
|
14
|
|
Total wastewater services
|
185
|
|
|
—
|
|
|
185
|
|
Miscellaneous utility charges
|
32
|
|
|
—
|
|
|
32
|
|
Alternative revenue programs
|
—
|
|
|
25
|
|
|
25
|
|
Lease contract revenue
|
—
|
|
|
10
|
|
|
10
|
|
Total Regulated Businesses
|
3,220
|
|
|
35
|
|
|
3,255
|
|
Market-Based Businesses
|
540
|
|
|
—
|
|
|
540
|
|
Other
|
(17)
|
|
|
(1)
|
|
|
(18)
|
|
Total operating revenues
|
$
|
3,743
|
|
|
$
|
34
|
|
|
$
|
3,777
|
|
(a)Includes revenues associated with provisional rates, alternative revenue programs, lease contracts and intercompany rent, which are outside the scope of ASC 606, and accounted for under other existing GAAP.
Contract Balances
Contract assets and contract liabilities are the result of timing differences between revenue recognition, billings and cash collections. In the Company’s Market-Based Businesses, certain contracts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Contract assets are recorded when billing occurs subsequent to revenue recognition and are reclassified to accounts receivable when billed and the right to consideration becomes unconditional. Contract liabilities are recorded when the Company receives advances from customers prior to satisfying contractual performance obligations, particularly for construction contracts and home warranty protection program contracts, and are recognized as revenue when the associated performance obligations are satisfied.
Contract assets of $39 million, $13 million and $14 million are included in unbilled revenues on the Consolidated Balance Sheets as of December 31, 2020, 2019 and 2018, respectively. There were $60 million of contract assets added during 2020, and $34 million of contract assets were transferred to accounts receivable during 2020. There were $27 million of contract assets added during 2019, and $28 million of contract assets were transferred to accounts receivable during 2019.
Contract liabilities of $35 million, $27 million and $20 million are included in other current liabilities on the Consolidated Balance Sheets as of December 31, 2020, 2019 and 2018, respectively. There were $120 million of contract liabilities added during 2020, and $112 million of contract liabilities were recognized as revenue during 2020. There were $62 million of contract liabilities added during 2019, and $55 million of contract liabilities were recognized as revenue during 2019.
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 December 31, 2020, the Company’s O&M and capital improvement contracts in the Market-Based Businesses have RPOs. Contracts with the U.S. government for work on various military installations expire between 2051 and 2071 and have RPOs of $6.3 billion as of December 31, 2020, 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 2021 and 2038 and have RPOs of $478 million as of December 31, 2020, as measured by estimated remaining contract revenue. Some of the Company’s long-term contracts to operate and maintain the federal government’s, a municipality’s or other party’s water or wastewater treatment and delivery facilities include responsibility for certain maintenance for some of those facilities, in exchange for an annual fee. Unless specifically required to perform certain maintenance activities, the maintenance costs are recognized when the maintenance is performed.
Note 6: Acquisitions and Divestitures
Regulated Businesses
Acquisitions
During 2020, the Company closed on 23 acquisitions of various regulated water and wastewater systems for a total aggregate purchase price of $135 million. Assets acquired from these acquisitions, principally utility plant, totaled $159 million and liabilities assumed totaled $29 million, including $21 million of contributions in aid of construction and assumed debt of $7 million. The Company recorded additional goodwill of $5 million associated with two of its acquisitions, which is reported in its Regulated Businesses segment. Several of these acquisitions were accounted for as business combinations, as the Company continues to grow its business through regulated acquisitions. The preliminary purchase price allocations related to acquisitions accounted for as business combinations will be finalized once the valuation of assets acquired has been completed, no later than one year after their acquisition date.
During 2019, the Company closed on 21 acquisitions of various regulated water and wastewater systems for a total aggregate purchase price of $235 million. Assets acquired from these acquisitions, principally utility plant, totaled $237 million and liabilities assumed, primarily contributions in aid of construction, totaled $5 million. The Company recorded additional goodwill of $3 million associated with three of its acquisitions, which is reported in its Regulated Businesses segment.
During 2018, the Company closed on 15 acquisitions of various regulated water and wastewater systems for a total aggregate purchase price of $33 million. Assets acquired from these acquisitions, principally utility plant, totaled $32 million and liabilities assumed, primarily contributions in aid of construction, totaled $1 million. The Company recorded additional goodwill of $2 million associated with one of its acquisitions, which is reported in its Regulated Businesses segment.
Assets Held for Sale
On November 20, 2019, the Company and the Company’s New York subsidiary, entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Liberty Utilities Co., which it subsequently assigned to its indirect, wholly owned subsidiary Liberty Utilities (Eastern Water Holdings) Corp. (“Liberty”), pursuant to which Liberty will purchase all of the capital stock of the New York subsidiary (the “Stock Purchase”) for an aggregate purchase price of approximately $608 million in cash, subject to adjustment as provided in the Stock Purchase Agreement. The Company’s regulated New York operations have approximately 125,000 customers in the State of New York. Algonquin Power & Utilities Corp., Liberty’s ultimate parent company, executed and delivered an absolute and unconditional guaranty of the performance of all of the obligations of Liberty under the Stock Purchase Agreement. The Stock Purchase is subject to various conditions, including obtaining approvals and satisfying or waiving other closing conditions. The Stock Purchase Agreement has an initial termination date of June 30, 2021. Either party may extend the agreement beyond June 30, 2021, and the Company intends to extend the agreement, if necessary, provided all of the conditions to closing have been or are capable of being met, other than obtaining regulatory approvals. If not otherwise extended, the ultimate termination date is December 31, 2021. Liberty may also terminate the Stock Purchase Agreement if any governmental authority initiates a condemnation or eminent domain proceeding against a majority of the consolidated properties of the New York subsidiary, taken as a whole. The assets and related liabilities of the New York subsidiary were classified as held for sale on the Consolidated Balance Sheets as of December 31, 2020.
Presented in the table below are the components of assets held for sale and liabilities related to assets held for sale of the New York subsidiary as of December 31, 2020:
|
|
|
|
|
|
|
December 31, 2020
|
Property, plant and equipment
|
$
|
504
|
|
Current assets
|
12
|
|
Regulatory assets
|
64
|
|
Goodwill
|
39
|
|
Other assets
|
10
|
|
Assets held for sale
|
$
|
629
|
|
Current liabilities
|
14
|
|
Deferred income taxes
|
69
|
|
Regulatory liabilities
|
42
|
|
Other liabilities
|
12
|
|
Liabilities related to assets held for sale
|
$
|
137
|
|
Market-Based Businesses
Pivotal Acquisition
On June 4, 2018, the Company, through its wholly owned subsidiary American Water Enterprises, LLC, completed the acquisition of Pivotal for a total purchase price of $365 million, net of cash received. Pivotal is complementary to the Company’s HOS product offerings and enhances its presence in the home warranty solutions markets through utility partnerships. The results of Pivotal have been consolidated into the HOS non-reportable operating segment.
Divestitures
On December 12, 2019, American Industrial Water LLC, a wholly owned subsidiary of the Company (“AIW”), sold all of the outstanding membership interests in Water Solutions Holdings, LLC (“WSH”), which was a wholly owned subsidiary of AIW, to a natural gas and oil industry investment group, for total cash consideration of $31 million. WSH was the parent company of Keystone Clearwater Solutions, LLC (“Keystone”). Keystone provided water transportation services to shale natural gas exploration and production customers in the Appalachian Basin. As a result of the sale, the Company recorded a pre-tax loss on sale of $44 million, or $35 million after-tax, during the fourth quarter of 2019.
The pro forma impact of the Company’s acquisitions was not material to the Consolidated Statements of Operations for the years ended December 31, 2020, 2019 and 2018.
Note 7: Property, Plant and Equipment
Presented in the table below are the major classes of property, plant and equipment by category as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
Range of Remaining Useful Lives
|
|
Weighted Average Useful Life
|
Utility plant:
|
|
|
|
|
|
|
|
Land and other non-depreciable assets
|
$
|
174
|
|
|
$
|
166
|
|
|
|
|
|
Sources of supply
|
897
|
|
|
858
|
|
|
2 to 127 years
|
|
47 years
|
Treatment and pumping facilities
|
3,984
|
|
|
3,750
|
|
|
3 to 111 years
|
|
41 years
|
Transmission and distribution facilities
|
11,457
|
|
|
10,807
|
|
|
9 to 149 years
|
|
69 years
|
Services, meters and fire hydrants
|
4,555
|
|
|
4,304
|
|
|
5 to 90 years
|
|
31 years
|
General structures and equipment
|
2,003
|
|
|
1,748
|
|
|
1 to 109 years
|
|
16 years
|
Waste collection
|
1,288
|
|
|
1,153
|
|
|
5 to 113 years
|
|
59 years
|
Waste treatment, pumping and disposal
|
859
|
|
|
720
|
|
|
2 to 139 years
|
|
47 years
|
Construction work in progress
|
837
|
|
|
801
|
|
|
|
|
|
Less: Utility plant included in assets held for sale (a)
|
(646)
|
|
|
(587)
|
|
|
|
|
|
Total utility plant
|
25,408
|
|
|
23,720
|
|
|
|
|
|
Nonutility property
|
211
|
|
|
226
|
|
|
3 to 50 years
|
|
8 years
|
Less: Nonutility plant included in assets held for sale (a)
|
(5)
|
|
|
(5)
|
|
|
|
|
|
Total property, plant and equipment
|
$
|
25,614
|
|
|
$
|
23,941
|
|
|
|
|
|
(a)This property, plant and equipment is related to the pending transactions contemplated by the Stock Purchase Agreement and is included in assets held for sale on the Consolidated Balance Sheets. See Note 6—Acquisitions and Divestitures for additional information.
Property, plant and equipment depreciation expense amounted to $520 million, $508 million and $497 million for the years ended December 31, 2020, 2019 and 2018, respectively and was included in depreciation and amortization expense on the Consolidated Statements of Operations. The provision for depreciation expressed as a percentage of the aggregate average depreciable asset balances was 2.82%, 2.96% and 3.09% for years December 31, 2020, 2019 and 2018, respectively. Additionally, the Company had capital expenditures acquired on account but unpaid of $221 million and $235 million included in accrued liabilities on the Consolidated Balance Sheets as of December 31, 2020 and 2019, respectively.
In 2019, the Company completed and submitted its project completion certification to the New Jersey Economic Development Authority (“NJEDA”) in connection with its capital investment in its corporate headquarters in Camden, New Jersey. The NJEDA has determined that the Company is qualified to receive $164 million in tax credits over a ten year period. The Company is required to meet various annual requirements in order to monetize one-tenth of the tax credits annually, and is subject to a claw-back period if the Company does not meet certain NJEDA requirements of the tax credit program in years 11 through 15. As a result, the Company had receivables of $33 million and $131 million in other current assets and other long-term assets, respectively, on the Consolidated Balance Sheets as of December 31, 2020. In March 2020, in connection with the COVID-19 pandemic, the NJEDA, pursuant to Executive Order 103 - State of Emergency and a Public Health Emergency effective immediately (“EO-103”), temporarily waived the requirement that a full-time employee must spend at least 80% of his or her time at the qualified business facility to meet the definition of eligible position or full-time job. The waiver remains in effect for the period of time that the EO-103 is in effect.
Note 8: Allowance for Uncollectible Accounts
Presented in the table below are the changes in the allowances for uncollectible accounts for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Balance as of January 1
|
$
|
(41)
|
|
|
$
|
(45)
|
|
|
$
|
(42)
|
|
Amounts charged to expense
|
(34)
|
|
|
(28)
|
|
|
(33)
|
|
Amounts written off
|
12
|
|
|
32
|
|
|
34
|
|
Recoveries of amounts written off
|
—
|
|
|
—
|
|
|
(4)
|
|
Less: Allowance for uncollectible accounts included in assets held for sale (a)
|
3
|
|
|
—
|
|
|
—
|
|
Balance as of December 31
|
$
|
(60)
|
|
|
$
|
(41)
|
|
|
$
|
(45)
|
|
(a)This portion of the allowance for uncollectible accounts is related to the pending transactions contemplated by the Stock Purchase Agreement among the Company, the Company’s New York subsidiary and an affiliate of Liberty Utilities Co., and is included in assets held for sale on the Consolidated Balance Sheets. See Note 6—Acquisitions and Divestitures for additional information.
Note 9: Goodwill and Other Intangible Assets
Goodwill
Presented in the table below are the changes in the carrying value of goodwill for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulated Businesses
|
|
Market-Based Businesses
|
|
Consolidated
|
|
Cost
|
|
Accumulated Impairment
|
|
Cost
|
|
Accumulated Impairment
|
|
Cost
|
|
Accumulated Impairment
|
|
Total Net
|
Balance as of January 1, 2019
|
$
|
3,494
|
|
|
$
|
(2,332)
|
|
|
$
|
574
|
|
|
$
|
(161)
|
|
|
$
|
4,068
|
|
|
$
|
(2,493)
|
|
|
$
|
1,575
|
|
Goodwill from acquisitions
|
3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
Goodwill reduced through sale of Keystone operations
|
—
|
|
|
—
|
|
|
(91)
|
|
|
53
|
|
|
(91)
|
|
|
53
|
|
|
(38)
|
|
Less: Goodwill included in assets held for sale (a)
|
(39)
|
|
|
—
|
|
|
—
|
|
|
|
|
(39)
|
|
|
—
|
|
|
(39)
|
|
Balance as of December 31, 2019
|
$
|
3,458
|
|
|
$
|
(2,332)
|
|
|
$
|
483
|
|
|
$
|
(108)
|
|
|
$
|
3,941
|
|
|
$
|
(2,440)
|
|
|
$
|
1,501
|
|
Goodwill from acquisitions
|
5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
5
|
|
Measurement period adjustments
|
(2)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2)
|
|
|
—
|
|
|
(2)
|
|
Balance as of December 31, 2020
|
$
|
3,461
|
|
|
$
|
(2,332)
|
|
|
$
|
483
|
|
|
$
|
(108)
|
|
|
$
|
3,944
|
|
|
$
|
(2,440)
|
|
|
$
|
1,504
|
|
(a)This goodwill is related to the pending transactions contemplated by the Stock Purchase Agreement and is included in assets held for sale on the Consolidated Balance Sheets as of December 31, 2020 and 2019. See Note 6—Acquisitions and Divestitures for additional information.
In 2020, the Company acquired goodwill of $5 million associated with two of its acquisitions in the Regulated Businesses segment. See Note 6—Acquisitions and Divestitures for additional information.
The Company completed its annual impairment testing of goodwill as of November 30, 2020, which included qualitative assessments of its Regulated Businesses, HOS and MSG reporting units. Based on these assessments, the Company determined that there were no factors present that would indicate that the fair value of these reporting units was less than their respective carrying values as of November 30, 2020.
In 2019, the Company acquired goodwill of $3 million associated with three of its acquisitions in the Regulated Businesses segment. Additionally, as part of the sale of the Company’s Keystone operations on December 12, 2019, the Company reduced goodwill, net, by $38 million.
Intangible Assets
The Company held finite-lived intangible assets, including customer relationships and other intangible assets as of December 31, 2020. The gross carrying value of customer relationships and other intangible assets was $78 million and $13 million, respectively, as of December 31, 2020 and 2019. Accumulated amortization of customer relationships and other intangible assets was $20 million and $4 million, respectively, as of December 31, 2019. Amortization expense related to customer relationships and other intangible assets was $9 million and $3 million, respectively, for the year ended December 31, 2020. The net book value of customer relationships and other intangible assets was $49 million and $6 million, respectively, as of December 31, 2020.
Intangible asset amortization expense amounted to $12 million, $14 million and $12 million for the years ended December 31, 2020, 2019 and 2018, respectively. Estimated amortization expense for the next five years subsequent to December 31, 2020 is as follows:
|
|
|
|
|
|
|
Amount
|
2021
|
$
|
10
|
|
2022
|
8
|
|
2023
|
6
|
|
2024
|
5
|
|
2025
|
4
|
|
Note 10: Shareholders’ Equity
Common Stock
Under the Company’s dividend reinvestment and direct stock purchase plan (the “DRIP”), shareholders may reinvest cash common stock dividends and purchase additional shares of Company common stock, up to certain limits, through the plan administrator without paying brokerage commissions. Shares purchased by participants through the DRIP may be newly issued shares, treasury shares, or at the Company’s election, shares purchased by the plan administrator in the open market or in privately negotiated transactions. Purchases generally will be made and credited to DRIP accounts once each week. As of December 31, 2020, there were approximately 4.2 million shares available for future issuance under the DRIP.
Anti-dilutive Stock Repurchase Program
In February 2015, the Company’s Board of Directors authorized an anti-dilutive stock repurchase program, which allows the Company to purchase up to 10 million shares of its outstanding common stock from time to time over an unrestricted period of time. The Company did not repurchase shares of common stock during the year ended December 31, 2020. The Company repurchased 0.4 million shares of common stock in the open market at an aggregate cost of $36 million under this program for the year ended December 31, 2019. As of December 31, 2020, there were 5.1 million shares of common stock available for purchase under the program.
Accumulated Other Comprehensive Loss
Presented in the table below are the changes in accumulated other comprehensive loss by component, net of tax, for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Plans
|
|
Foreign Currency Translation
|
|
Gain (Loss) on Cash Flow Hedge
|
|
Accumulated Other Comprehensive Loss
|
|
Employee Benefit Plan Funded Status
|
|
Amortization of Prior Service Cost
|
|
Amortization of Actuarial Loss
|
|
|
|
Beginning balance as of January 1, 2019
|
$
|
(102)
|
|
|
$
|
1
|
|
|
$
|
56
|
|
|
$
|
1
|
|
|
$
|
10
|
|
|
$
|
(34)
|
|
Other comprehensive income (loss) before reclassification
|
8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(13)
|
|
|
(5)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
4
|
|
|
(1)
|
|
|
—
|
|
|
3
|
|
Net other comprehensive income
|
8
|
|
|
—
|
|
|
4
|
|
|
(1)
|
|
|
(13)
|
|
|
(2)
|
|
Ending balance as of December 31, 2019
|
$
|
(94)
|
|
|
$
|
1
|
|
|
$
|
60
|
|
|
$
|
—
|
|
|
$
|
(3)
|
|
|
$
|
(36)
|
|
Other comprehensive income (loss) before reclassification
|
(12)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4)
|
|
|
(16)
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Net other comprehensive income (loss)
|
(12)
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
(4)
|
|
|
(13)
|
|
Ending balance as of December 31, 2020
|
$
|
(106)
|
|
|
$
|
1
|
|
|
$
|
63
|
|
|
$
|
—
|
|
|
$
|
(7)
|
|
|
$
|
(49)
|
|
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. See Note 16—Employee Benefits for additional information.
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 and Distributions
The Company’s Board of Directors authorizes the payment of dividends. The Company’s ability to pay dividends on its common stock is subject to having access to sufficient sources of liquidity, net income and cash flows of the Company’s subsidiaries, the receipt of dividends and direct and indirect distributions from, and repayments of indebtedness of, the Company’s subsidiaries, compliance with Delaware corporate and other laws, compliance with the contractual provisions of debt and other agreements and other factors.
The Company’s dividend rate on its common stock is determined by the Board of Directors on a quarterly basis and takes into consideration, among other factors, current and possible future developments that may affect the Company’s income and cash flows. When dividends on common stock are declared, they are typically paid in March, June, September and December. Historically, dividends have been paid quarterly to holders of record less than 30 days prior to the distribution date. Since the dividends on the Company’s common stock are not cumulative, only declared dividends are paid.
During 2020, 2019 and 2018, the Company paid $389 million, $353 million and $319 million in cash dividends, respectively. Presented in the table below is the per share cash dividends paid for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
December
|
$
|
0.55
|
|
|
$
|
0.50
|
|
|
$
|
0.455
|
|
September
|
$
|
0.55
|
|
|
$
|
0.50
|
|
|
$
|
0.455
|
|
June
|
$
|
0.55
|
|
|
$
|
0.50
|
|
|
$
|
0.455
|
|
March
|
$
|
0.50
|
|
|
$
|
0.455
|
|
|
$
|
0.415
|
|
On December 10, 2020, the Company’s Board of Directors declared a quarterly cash dividend payment of $0.55 per share payable on March 2, 2021, to shareholders of record as of February 8, 2021.
Under applicable law, the Company’s subsidiaries may pay dividends on their capital stock or other equity only from retained, undistributed or current earnings. A significant loss recorded at a subsidiary may limit the amount of the dividend that the subsidiary can pay. The ability of the Company’s subsidiaries to pay upstream dividends, make other upstream distributions or repay indebtedness to parent company or American Water Capital Corp. (“AWCC”), the Company’s wholly owned financing subsidiary, as applicable, is subject to compliance with applicable corporate, tax and other laws, regulatory restrictions and financial and other contractual obligations, including, for example, (i) regulatory capital, surplus or net worth requirements, (ii) outstanding debt service obligations, (iii) requirements to make preferred and preference stock dividend payments, and (iv) other contractual agreements, covenants or obligations made or entered into by the Company and its subsidiaries.
Regulatory Restrictions on Indebtedness
The issuance of long-term debt or equity securities by the Company or long-term debt by AWCC does not require authorization of any state PUC if no guarantee or pledge of the regulated subsidiaries is utilized. Based on the needs of the Regulated Businesses and parent company, AWCC may borrow funds or issue its debt in the capital markets and then, through intercompany loans, provide these borrowings to the Regulated Businesses or parent company. PUC authorization is generally required for the regulated subsidiaries to incur long-term debt. The Company’s regulated subsidiaries normally obtain these required PUC authorizations on a periodic basis to cover their anticipated financing needs for a period of time, or, as necessary, in connection with a specific financing or refinancing of debt.
Note 11: Stock Based Compensation
The Company has granted stock options, stock units and dividend equivalents to non-employee directors, officers and other key employees of the Company pursuant to the terms of its 2007 Omnibus Equity Compensation Plan (the “2007 Plan”). Stock units under the 2007 Plan generally vest based on (i) continued employment with the Company (“RSUs”), or (ii) continued employment with the Company where distribution of the shares is subject to the satisfaction in whole or in part of stated performance-based goals (“PSUs”). The 2007 Plan has been replaced by the 2017 Omnibus Plan, as defined below, and no additional awards may be granted under the 2007 Plan. However, shares may still be issued under the 2007 Plan pursuant to the terms of awards previously issued under that plan prior to May 12, 2017.
In May 2017, the Company’s shareholders approved the American Water Works Company, Inc. 2017 Omnibus Equity Compensation Plan (the “2017 Omnibus Plan”). The Company has granted stock units, including RSUs and PSUs, stock awards and dividend equivalents to non-employee directors, officers and employees under the 2017 Omnibus Plan. A total of 7.2 million shares of common stock may be issued under the 2017 Omnibus Plan. As of December 31, 2020, 6.7 million shares were available for grant under the 2017 Omnibus Plan. The 2017 Omnibus Plan provides that grants of awards may be in any of the following forms: incentive stock options, nonqualified stock options, stock appreciation rights, stock units, stock awards, other stock-based awards and dividend equivalents. Dividend equivalents may be granted only on stock units or other stock-based awards. The 2017 Omnibus Plan expires in 2027.
The cost of services received from employees in exchange for the issuance of stock options and restricted stock awards is measured based on the grant date fair value of the awards issued. The value of stock options and stock unit awards at the date of the grant is amortized through expense over the requisite service period. All awards granted in 2020, 2019 and 2018 are classified as equity. The Company recognizes compensation expense for stock awards over the vesting period of the award. The Company stratified its grant populations and used historic employee turnover rates to estimate employee forfeitures. The estimated rate is compared to the actual forfeitures at the end of the reporting period and adjusted as necessary. There have been no significant adjustments to the forfeiture rates during 2020, 2019 and 2018. There were no grants of stock options to employees after 2016, and the remaining stock options outstanding as of December 31, 2020 were not material. Presented in the table below is the stock-based compensation expense recorded in O&M expense in the accompanying Consolidated Statements of Operations for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
RSUs and PSUs
|
$
|
19
|
|
|
$
|
15
|
|
|
$
|
15
|
|
Nonqualified employee stock purchase plan
|
2
|
|
|
2
|
|
|
1
|
|
Stock-based compensation
|
21
|
|
|
17
|
|
|
16
|
|
Income tax benefit
|
(5)
|
|
|
(4)
|
|
|
(5)
|
|
Stock-based compensation expense, net of tax
|
$
|
16
|
|
|
$
|
13
|
|
|
$
|
11
|
|
There were no significant stock-based compensation costs capitalized during the years ended December 31, 2020, 2019 and 2018.
Subject to limitations on deductibility imposed by the Federal income tax code, the Company receives a tax deduction based on the intrinsic value of the award at the exercise date for stock options and the distribution date for stock units. For each award, throughout the requisite service period, the Company records the tax impacts related to compensation costs as deferred income tax assets. The tax deductions in excess of the deferred benefits recorded throughout the requisite service period are recorded to the Consolidated Statements of Operations and are presented in the financing section of the Consolidated Statements of Cash Flows.
Stock Units
During 2020, 2019 and 2018, the Company granted RSUs to certain employees under the 2017 Omnibus Plan. RSUs generally vest based on continued employment with the Company over periods ranging from one to three years.
During 2020, 2019 and 2018, the Company granted stock units to non-employee directors under the 2017 Omnibus Plan. The stock units were vested in full on the date of grant; however, distribution of the shares will be made within 30 days of the earlier of (i) 15 months after the date of the last annual meeting of shareholders, subject to any deferral election by the director, or (ii) the participant’s separation from service. Because these stock units vested on the grant date, the total grant date fair value was recorded in operation and maintenance expense on the grant date.
The RSUs are valued at the closing price of the Company’s common stock on the date of the grant and the majority vest ratably over a three-year service period. These RSUs are amortized through expense over the requisite service period using the straight-line method.
Presented in the table below is RSU activity for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (in thousands)
|
|
Weighted Average Grant Date Fair Value (per share)
|
Non-vested total as of December 31, 2019
|
118
|
|
|
$
|
85.41
|
|
Granted
|
55
|
|
|
129.39
|
|
Vested
|
(71)
|
|
|
98.67
|
|
Forfeited
|
(10)
|
|
|
97.24
|
|
Non-vested total as of December 31, 2020
|
92
|
|
|
$
|
100.39
|
|
As of December 31, 2020, $4 million of total unrecognized compensation cost related to the nonvested RSUs is expected to be recognized over the weighted average remaining life of 1.34 years. The total fair value of stock units and RSUs vested was $5 million, $4 million and $4 million for the years ended December 31, 2020, 2019 and 2018, respectively.
During 2020, 2019 and 2018, the Company granted PSUs to certain employees under the 2017 Omnibus Plan. The majority of PSUs vest ratably based on continued employment with the Company over the three-year performance period (the “Performance Period”). Distribution of the performance shares is contingent upon the achievement of one or more internal performance measures and, separately, a relative total shareholder return performance measure, over the Performance Period.
Presented in the table below is PSU activity for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (in thousands)
|
|
Weighted Average Grant Date Fair Value (per share)
|
Non-vested total as of December 31, 2019
|
316
|
|
|
$
|
83.89
|
|
Granted
|
149
|
|
|
116.27
|
|
Vested
|
(160)
|
|
|
72.13
|
|
Forfeited
|
(12)
|
|
|
108.36
|
|
Non-vested total as of December 31, 2020
|
293
|
|
|
$
|
105.70
|
|
As of December 31, 2020, $4 million of total unrecognized compensation cost related to the nonvested PSUs is expected to be recognized over the weighted average remaining life of 0.92 years. The total fair value of PSUs vested was $18 million, $14 million and $12 million for the years ended December 31, 2020, 2019 and 2018, respectively.
PSUs granted with one or more internal performance measures are valued at the market value of the closing price of the Company’s common stock on the date of grant. PSUs granted with a relative total shareholder return condition are valued using a Monte Carlo model. Expected volatility is based on historical volatilities of traded common stock of the Company and comparative companies using daily stock prices over the past three years. The expected term is three years and the risk-free interest rate is based on the three-year U.S. Treasury rate in effect as of the measurement date. Presented in the table below are the weighted average assumptions used in the Monte Carlo simulation and the weighted average grant date fair values of PSUs granted for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Expected volatility
|
16.65%
|
|
16.80%
|
|
17.23%
|
Risk-free interest rate
|
1.28%
|
|
2.47%
|
|
2.36%
|
Expected life (years)
|
3.0
|
|
3.0
|
|
3.0
|
Grant date fair value per share
|
$159.64
|
|
$110.37
|
|
$73.62
|
The grant date fair value of PSUs that vest ratably and have market and/or performance conditions are amortized through expense over the requisite service period using the graded-vesting method.
Employee Stock Purchase Plan
The Company maintains a nonqualified employee stock purchase plan (the “ESPP”) that expires in 2027 through which employee participants (other than the Company’s executive officers) may use payroll deductions to acquire Company common stock at a purchase price of 85% of the fair market value of the common stock at the end of a three-month purchase period. A total of 2.0 million shares may be issued under the ESPP, and as of December 31, 2020, there were 1.7 million shares of common stock reserved for issuance under the ESPP. The ESPP is considered compensatory. During the years ended December 31, 2020, 2019 and 2018, the Company issued 86 thousand, 88 thousand and 95 thousand shares, respectively, under the ESPP.
Note 12: Long-Term Debt
The Company obtains long-term debt through AWCC primarily to fund capital expenditures of the Regulated Businesses and to lend funds to parent company to refinance debt and for other purposes. Presented in the table below are the components of long-term debt as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate
|
|
Weighted Average Rate
|
|
Maturity
|
|
2020
|
|
2019
|
Long-term debt of AWCC: (a)
|
|
|
|
|
|
|
|
|
|
Senior notes—fixed rate
|
2.80%-8.27%
|
|
4.05%
|
|
2021-2050
|
|
$
|
8,191
|
|
|
$
|
7,191
|
|
Private activity bonds and government funded debt—fixed rate
|
0.60%-2.90%
|
|
1.64%
|
|
2021-2031
|
|
191
|
|
|
191
|
|
Long-term debt of other American Water subsidiaries:
|
|
|
|
|
|
|
|
|
|
Private activity bonds and government funded debt—fixed rate
|
0.00%-5.50%
|
|
1.74%
|
|
2021-2048
|
|
735
|
|
|
724
|
|
Mortgage bonds—fixed rate
|
6.35%-9.69%
|
|
7.48%
|
|
2021-2039
|
|
565
|
|
|
578
|
|
Mandatorily redeemable preferred stock
|
8.47%-9.75%
|
|
8.57%
|
|
2024-2036
|
|
5
|
|
|
7
|
|
Finance lease obligations
|
12.25%
|
|
12.25%
|
|
2026
|
|
1
|
|
|
1
|
|
Long-term debt
|
|
|
|
|
|
|
9,688
|
|
|
8,692
|
|
Unamortized debt (discount) premium, net (b)
|
|
|
|
|
|
|
(4)
|
|
|
1
|
|
Unamortized debt issuance costs
|
|
|
|
|
|
|
(22)
|
|
|
(21)
|
|
Less current portion of long-term debt
|
|
|
|
|
|
|
(329)
|
|
|
(28)
|
|
Total long-term debt
|
|
|
|
|
|
|
$
|
9,333
|
|
|
$
|
8,644
|
|
(a)This indebtedness is considered “debt” for purposes of a support agreement between parent company and AWCC, which serves as a functional equivalent of a guarantee by parent company of AWCC’s payment obligations under such indebtedness.
(b)Includes debt discount, net of fair value adjustments previously recognized in acquisition purchase accounting.
All mortgage bonds and $734 million of the private activity bonds and government funded debt held by the Company’s subsidiaries were collateralized as of December 31, 2020.
Long-term debt indentures contain a number of covenants that, among other things, limit, subject to certain exceptions, AWCC from issuing debt secured by the Company’s consolidated assets. Certain long-term notes require the Company to maintain a ratio of consolidated total indebtedness to consolidated total capitalization of not more than 0.70 to 1.00. The ratio as of December 31, 2020 was 0.63 to 1.00. In addition, the Company has $868 million of notes which include the right to redeem the notes at par value, in whole or in part, from time to time, subject to certain restrictions, with a weighted average interest rate of 1.85%.
Presented in the table below are future sinking fund payments and debt maturities:
|
|
|
|
|
|
|
Amount
|
2021
|
$
|
329
|
|
2022
|
14
|
|
2023
|
356
|
|
2024
|
474
|
|
2025
|
597
|
|
Thereafter
|
7,918
|
|
Presented in the table below are the issuances of long-term debt in 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Type
|
|
Rate
|
|
Weighted Average Rate
|
|
Maturity
|
|
Amount
|
AWCC
|
|
Senior notes—fixed rate
|
|
2.80%-3.45%
|
|
3.13%
|
|
2030-2050
|
|
$
|
1,000
|
|
AWCC (a)
|
|
Private activity bonds and government funded debt—fixed rate
|
|
0.60%-0.70%
|
|
0.42%
|
|
2023-2023
|
|
86
|
|
Other American Water subsidiaries
|
|
Private Activity Mortgage Bonds
|
|
0.85%-1.20%
|
|
1.10%
|
|
2023-2027
|
|
225
|
|
Other American Water subsidiaries
|
|
Private activity bonds and government funded debt—fixed rate
|
|
0.00%-5.00%
|
|
0.16%
|
|
2021-2048
|
|
23
|
|
Total issuances
|
|
|
|
|
|
|
|
|
|
$
|
1,334
|
|
(a)This indebtedness has a mandatory redemption provision callable in 2023.
The Company incurred debt issuance costs of $15 million related to the above issuances.
Presented in the table below are the retirements and redemptions of long-term debt in 2020 through sinking fund provisions, optional redemption or payment at maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
|
|
Type
|
|
Rate
|
|
Weighted Average Rate
|
|
Maturity
|
|
Amount
|
AWCC
|
|
Private activity bonds and government funded debt—fixed rate
|
|
1.79%-5.38%
|
|
5.29%
|
|
2020-2031
|
|
$
|
87
|
|
Other American Water subsidiaries
|
|
Private activity mortgage bonds
|
|
4.45%-5.60%
|
|
5.19%
|
|
2020
|
|
225
|
|
Other American Water subsidiaries
|
|
Private activity bonds and government funded debt—fixed rate
|
|
0.00%-5.60%
|
|
2.08%
|
|
2020-2048
|
|
15
|
|
Other American Water subsidiaries
|
|
Mortgage bonds
|
|
3.92%-9.71%
|
|
7.83%
|
|
2020-2021
|
|
13
|
|
Other American Water subsidiaries
|
|
Mandatory redeemable preferred stock
|
|
8.49%-9.18%
|
|
8.64%
|
|
2031-2036
|
|
2
|
|
Total retirements and redemptions
|
|
|
|
|
|
|
|
|
|
$
|
342
|
|
On April 14, 2020, AWCC completed a $1.0 billion debt offering which included the sale of $500 million aggregate principal amount of its 2.80% senior notes due 2030 and $500 million aggregate principal amount of its 3.45% senior notes due 2050. At the closing of the offering, AWCC received, after deduction of underwriting discounts and before deduction of offering expenses, net proceeds of $989 million. AWCC used the net proceeds of this offering: to (i) lend funds to parent company and its regulated subsidiaries; (ii) to fund sinking fund payments for, and to repay at maturity, $28 million in aggregate principal amount of outstanding long-term debt of AWCC and certain of the Company’s regulated subsidiaries; (iii) to repay AWCC’s commercial paper obligations and short-term indebtedness under AWCC’s $2.25 billion unsecured revolving credit facility; and (iv) for general corporate purposes.
One of the principal market risks to which the Company is exposed is changes in interest rates. In order to manage the exposure, the Company follows risk management policies and procedures, including the use of derivative contracts such as swaps. The Company reduces exposure to interest rates by managing commercial paper and debt maturities. The Company also does not enter into derivative contracts for speculative purposes and does not use leveraged instruments. The derivative contracts entered into are for periods consistent with the related underlying exposures. The Company is exposed to the risk that counterparties to derivative contracts will fail to meet their contractual obligations and minimizes this risk by dealing only with leading, credit-worthy financial institutions having long-term credit ratings of “A” or better.
During March 2020, the Company entered into four 10-year treasury lock agreements, each with a notional amount of $100 million, to reduce interest rate exposure on debt, which was subsequently issued on April 14, 2020. These treasury lock agreements had an average fixed rate of 0.94%. The Company designated these treasury lock agreements as cash flow hedges, with their fair value recorded in accumulated other comprehensive gain or loss. On April 8, 2020 the Company terminated these four treasury lock agreements with an aggregate notional amount of $400 million, realizing a net loss of $6 million, to be amortized through interest, net over a 10 year period, in accordance with the terms of the $1.0 billion new debt issued on April 14, 2020. No ineffectiveness was recognized on hedging instruments for the years ended December 31, 2020 and 2019.
Note 13: Short-Term Debt
To ensure adequate liquidity given the impacts of the COVID-19 pandemic on debt and capital markets, on March 20, 2020, AWCC entered into a Term Loan Credit Agreement, by and among parent company, AWCC and the lenders party thereto, which provided for a term loan facility of up to $750 million (the “Term Loan Facility”). On March 20, 2020, AWCC borrowed $500 million under the Term Loan Facility, the proceeds of which were used for general corporate purposes of AWCC and parent company, and to provide additional liquidity. The Term Loan Facility allowed for a single additional borrowing of up to $250 million, which expired unused on June 19, 2020. The Term Loan Facility commitments terminate on March 19, 2021. AWCC may prepay all or a portion of amounts due under the Term Loan Facility without any premium or penalty. Borrowings under the Term Loan Facility bear interest at a variable annual rate based on LIBOR, plus a margin of 0.80%. The credit agreement for the Term Loan Facility contains the same affirmative and negative covenants and events of default as under AWCC’s $2.25 billion revolving credit facility. As of December 31, 2020, $500 million of principal was outstanding under the Term Loan Facility.
Short-term debt consists of commercial paper and credit facility borrowings totaling $786 million for both periods ending December 31, 2020 and 2019. The weighted average interest rate on AWCC short-term borrowings was approximately 1.16% and 2.54% for the year ended December 31, 2020 and 2019, respectively. As of December 31, 2020 there were no borrowings outstanding with maturities greater than three months.
Liquidity needs for capital investment, working capital and other financial commitments are funded through cash flows from operations, public and private debt offerings, commercial paper markets and, if and to the extent necessary, borrowings under the AWCC revolving credit facility and, in the future, issuances of equity. The revolving credit facility provides $2.25 billion in aggregate total commitments from a diversified group of financial institutions. On April 1, 2020, the termination date of the credit agreement with respect to AWCC’s revolving credit facility was extended, pursuant to the terms of the credit agreement, from March 21, 2024 to March 21, 2025. The facility is used principally to support AWCC’s commercial paper program and to provide a sub-limit of up to $150 million for letters of credit. Letters of credit are non-debt instruments maintained to provide credit support for certain transactions as requested by third parties. 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 December 31, 2020, AWCC had no outstanding borrowings and $76 million of outstanding letters of credit under the revolving credit facility, with $1.39 billion available to fulfill the Company’s short-term liquidity needs and to issue letters of credit. During 2020, the Company borrowed and subsequently repaid $650 million under the revolving credit facility. The Company regularly evaluates the capital markets and closely monitors the financial condition of the financial institutions with contractual commitments in its revolving credit facility. Interest rates on advances under the facility are based on a credit spread to the LIBOR rate (or applicable market replacement rate) or base rate in accordance with Moody Investors Service’s and Standard & Poor’s Financial Services’ then applicable credit rating on AWCC’s senior unsecured, non-credit enhanced debt.
Presented in the tables below are 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 December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
Commercial Paper Limit
|
|
Letters of Credit
|
|
Total (a)
|
(In millions)
|
|
|
|
|
|
Total availability
|
$
|
2,100
|
|
|
$
|
150
|
|
|
$
|
2,250
|
|
Outstanding debt
|
(786)
|
|
|
(76)
|
|
|
(862)
|
|
Remaining availability as of December 31, 2020
|
$
|
1,314
|
|
|
$
|
74
|
|
|
$
|
1,388
|
|
(a)Total remaining availability of $1.39 billion as of December 31, 2020 may be accessed through revolver draws.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
Commercial Paper Limit
|
|
Letters of Credit
|
|
Total (a)
|
(In millions)
|
|
|
|
|
|
Total availability
|
$
|
2,100
|
|
|
$
|
150
|
|
|
$
|
2,250
|
|
Outstanding debt
|
(786)
|
|
|
(76)
|
|
|
(862)
|
|
Remaining availability as of December 31, 2019
|
$
|
1,314
|
|
|
$
|
74
|
|
|
$
|
1,388
|
|
(a)Total remaining availability of $1.39 billion as of December 31, 2019 may be accessed through revolver draws.
Presented in the table below is the Company’s total available liquidity as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
Availability on Revolving Credit Facility
|
|
Total Available Liquidity
|
(In millions)
|
|
|
|
|
|
Available liquidity as of December 31, 2020
|
$
|
547
|
|
|
$
|
1,388
|
|
|
$
|
1,935
|
|
Available liquidity as of December 31, 2019
|
$
|
60
|
|
|
$
|
1,388
|
|
|
$
|
1,448
|
|
Presented in the table below is the short-term borrowing activity for AWCC for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Average borrowings
|
$
|
1,047
|
|
|
$
|
726
|
|
Maximum borrowings outstanding
|
2,172
|
|
|
1,271
|
|
Weighted average interest rates, computed on daily basis
|
1.16
|
%
|
|
2.54
|
%
|
Weighted average interest rates, as of December 31
|
0.53
|
%
|
|
1.86
|
%
|
The changes in average borrowings between periods were mainly attributable to the $500 million borrowed under the Term Loan Facility during 2020, which is scheduled to terminate on March 19, 2021.
The credit facility requires the Company to maintain a ratio of consolidated debt to consolidated capitalization of not more than 0.70 to 1.00. The ratio as of December 31, 2020 was 0.63 to 1.00.
None of the Company’s borrowings are subject to default or prepayment as a result of a downgrading of securities, although such a downgrading could increase fees and interest charges under AWCC’s revolving credit facility.
Note 14: General Taxes
Presented in the table below is the components of general tax expense for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Property and capital stock
|
$
|
140
|
|
|
$
|
124
|
|
|
$
|
120
|
|
Gross receipts and franchise
|
116
|
|
|
110
|
|
|
112
|
|
Payroll
|
36
|
|
|
35
|
|
|
33
|
|
Other general
|
11
|
|
|
11
|
|
|
12
|
|
Total general taxes
|
$
|
303
|
|
|
$
|
280
|
|
|
$
|
277
|
|
Note 15: Income Taxes
Presented in the table below is the components of income tax expense for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Current income taxes:
|
|
|
|
|
|
State
|
$
|
8
|
|
|
$
|
4
|
|
|
$
|
26
|
|
Federal
|
—
|
|
|
—
|
|
|
1
|
|
Total current income taxes
|
$
|
8
|
|
|
$
|
4
|
|
|
$
|
27
|
|
Deferred income taxes:
|
|
|
|
|
|
State
|
$
|
49
|
|
|
$
|
54
|
|
|
$
|
33
|
|
Federal
|
159
|
|
|
155
|
|
|
163
|
|
Amortization of deferred investment tax credits
|
(1)
|
|
|
(1)
|
|
|
(1)
|
|
Total deferred income taxes
|
207
|
|
|
208
|
|
|
195
|
|
Provision for income taxes
|
$
|
215
|
|
|
$
|
212
|
|
|
$
|
222
|
|
Presented in the table below is a reconciliation between the statutory federal income tax rate and the Company’s effective tax rate for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Income tax at statutory rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
Increases (decreases) resulting from:
|
|
|
|
|
|
State taxes, net of federal taxes
|
4.8
|
%
|
|
5.4
|
%
|
|
5.5
|
%
|
EADIT
|
(2.1)
|
%
|
|
(0.9)
|
%
|
|
1.5
|
%
|
Other, net
|
(0.4)
|
%
|
|
(0.1)
|
%
|
|
0.2
|
%
|
Effective tax rate
|
23.3
|
%
|
|
25.4
|
%
|
|
28.2
|
%
|
Presented in the table below are the components of the net deferred tax liability as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
Deferred tax assets:
|
|
|
|
Advances and contributions
|
$
|
424
|
|
|
$
|
410
|
|
Tax losses and credits
|
65
|
|
|
136
|
|
Regulatory income tax assets
|
329
|
|
|
335
|
|
Pension and other postretirement benefits
|
100
|
|
|
94
|
|
Other
|
165
|
|
|
151
|
|
Total deferred tax assets
|
1,083
|
|
|
1,126
|
|
Valuation allowance
|
(19)
|
|
|
(21)
|
|
Total deferred tax assets, net of allowance
|
$
|
1,064
|
|
|
$
|
1,105
|
|
Deferred tax liabilities:
|
|
|
|
Property, plant and equipment
|
$
|
2,913
|
|
|
$
|
2,760
|
|
Deferred pension and other postretirement benefits
|
97
|
|
|
77
|
|
Other
|
216
|
|
|
207
|
|
Total deferred tax liabilities
|
3,226
|
|
|
3,044
|
|
Less: Deferred tax liabilities included in liabilities related to assets held for sale (a)
|
69
|
|
|
67
|
|
Total deferred tax liabilities, net of deferred tax assets
|
$
|
(2,093)
|
|
|
$
|
(1,872)
|
|
(a)These deferred tax liabilities are related to the pending transactions contemplated by the Stock Purchase Agreement and are included in liabilities related to assets held for sale on the Consolidated Balance Sheets. See Note 6—Acquisitions and Divestitures for additional information.
As of December 31, 2020 and 2019, the Company recognized federal net operating loss (“NOL”) carryforwards of $366 million and $673 million, respectively. The Company’s federal NOL carryforwards begin to expire in 2029, however, the Company expects to fully utilize its federal NOL carryforwards in 2021, and therefore, no valuation allowance is required.
As of December 31, 2020 and 2019, the Company had state NOLs of $357 million and $453 million, respectively, a portion of which are offset by a valuation allowance because the Company does not believe these NOLs are more likely than not to be realized. The state NOL carryforwards began to expire in 2020 and will continue through 2040.
The Company files income tax returns in the United States federal jurisdiction and various state and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state or local or non-U.S. income tax examinations by tax authorities for years on or before 2012. The Company has state income tax examinations in progress and does not expect material adjustments to result.
Presented in the table below are the changes in gross liability, excluding interest and penalties, for unrecognized tax benefits:
|
|
|
|
|
|
|
Amount
|
Balance as of January 1, 2019
|
$
|
97
|
|
Increases in current period tax positions
|
17
|
|
Decreases in prior period measurement of tax positions
|
(4)
|
|
Balance as of December 31, 2019
|
$
|
110
|
|
Increases in current period tax positions
|
18
|
|
Decreases in prior period measurement of tax positions
|
(6)
|
|
Balance as of December 31, 2020
|
$
|
122
|
|
The Company’s tax positions relate primarily to the deductions claimed for repair and maintenance costs on its utility plant. The Company does not anticipate material changes to its unrecognized tax benefits within the next year. As discussed above, the Company expects to utilize its remaining federal NOLs in 2021, and therefore this federal tax attribute will not be available to reduce the federal liabilities for uncertain tax positions or interest accrued as presented on the Company’s Consolidated Financial Statements.
If the Company sustains all of its positions as of December 31, 2020, an unrecognized tax benefit of $12 million, excluding interest and penalties, would impact the Company’s effective tax rate. The Company had an insignificant amount of interest and penalties related to its tax positions as of December 31, 2020 and 2019.
Presented in the table below are the changes in the valuation allowance:
|
|
|
|
|
|
|
Amount
|
Balance as of January 1, 2018
|
$
|
13
|
|
Increases in current period tax positions
|
1
|
|
Balance as of December 31, 2018
|
$
|
14
|
|
Increases in current period tax positions
|
7
|
|
Balance as of December 31, 2019
|
$
|
21
|
|
Decreases in current period tax positions
|
(2)
|
|
Balance as of December 31, 2020
|
$
|
19
|
|
Note 16: Employee Benefits
Pension and Other Postretirement Benefits
The Company maintains noncontributory defined benefit pension plans covering eligible employees of its regulated utility and shared services operations. Benefits under the plans are based on the employee’s years of service and compensation. The pension plans have been closed for all new employees. The pension plans were closed for most employees hired on or after January 1, 2006. Union employees hired on or after January 1, 2001, except for specific eligible groups specified in the plan, had their accrued benefit frozen and will be able to receive this benefit as a lump sum upon termination or retirement. Union employees hired on or after January 1, 2001 and non-union employees hired on or after January 1, 2006 are provided with a 5.25% of base pay defined contribution plan. The Company does not participate in a multi-employer plan. The Company also has unfunded noncontributory supplemental nonqualified pension plans that provide additional retirement benefits to certain employees.
The Company’s pension funding practice is to contribute at least the greater of the minimum amount required by the Employee Retirement Income Security Act of 1974 or the normal cost. Further, the Company will consider additional cash contributions and/or available prefunding balances if needed to avoid “at risk” status and benefit restrictions under the Pension Protection Act of 2006 (“PPA”). The Company may also consider increased contributions, based on other financial requirements and the plans’ funded position. Pension expense in excess of the amount contributed to the pension plans is deferred by certain regulated subsidiaries pending future recovery in rates charged for utility services as contributions are made to the plans. See Note 4—Regulatory Matters for additional information. Pension plan assets are invested in a number of actively managed, commingled funds, and limited partnerships including equities, fixed income securities, guaranteed annuity contracts with insurance companies, real estate funds and real estate investment trusts (“REITs”).
The Company maintains other postretirement benefit plans providing varying levels of medical and life insurance to eligible retirees. The retiree welfare plans are closed for union employees hired on or after January 1, 2006. The plans had previously closed for non-union employees hired on or after January 1, 2002. The Company’s policy is to fund other postretirement benefit costs up to the amount recoverable through rates. Assets of the plans are invested in a number of actively managed funds in the form of separate accounts, commingled funds and limited partnerships, including equities and fixed income securities.
The investment policy guideline of the pension plan is focused on diversification, improving returns and reducing the volatility of the funded status over a long-term horizon. The investment policy guidelines of the postretirement plans focus on the appropriate strategy given the funded status of the plans. None of the Company’s securities are included in pension or other postretirement benefit plan assets.
The Company uses fair value for all classes of assets in the calculation of market-related value of plan assets. As of 2018, the fair values and asset allocations of the pension plan assets include the American Water Pension Plan, the New York Water Service Corporation Pension Plan, and the Shorelands Water Company, Inc. Pension Plan.
Upon completion of the pending transactions contemplated by the Stock Purchase Agreement among the Company, the Company’s New York subsidiary and Liberty, there will be a transfer of assets from two pension plans and two other postretirement benefit plans from the Company to Liberty. The Company does not expect the assets to be transferred to be a significant percentage of the Company’s overall pension and other postretirement benefit plans.
Presented in the tables below are the fair values and asset allocations of the pension plan assets as of December 31, 2020 and 2019, respectively, by asset category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
|
2021 Target Allocation
|
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
Percentage of Plan Assets as of December 31, 2020
|
Cash
|
|
|
|
$
|
78
|
|
|
$
|
78
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
4
|
%
|
Equity securities:
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
|
420
|
|
|
420
|
|
|
—
|
|
|
—
|
|
|
21
|
%
|
U.S. small cap
|
|
|
|
124
|
|
|
124
|
|
|
—
|
|
|
—
|
|
|
6
|
%
|
International
|
|
|
|
367
|
|
|
8
|
|
|
169
|
|
|
190
|
|
|
18
|
%
|
Real estate fund
|
|
|
|
120
|
|
|
—
|
|
|
—
|
|
|
120
|
|
|
6
|
%
|
REITs
|
|
|
|
7
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
—
|
%
|
Fixed income securities:
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and government bonds
|
|
|
|
171
|
|
|
163
|
|
|
8
|
|
|
—
|
|
|
9
|
%
|
Corporate bonds
|
|
|
|
594
|
|
|
—
|
|
|
594
|
|
|
—
|
|
|
30
|
%
|
Mortgage-backed securities
|
|
|
|
9
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
—
|
%
|
Municipal bonds
|
|
|
|
34
|
|
|
—
|
|
|
34
|
|
|
—
|
|
|
2
|
%
|
Treasury futures
|
|
|
|
10
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
1
|
%
|
Long duration bond fund
|
|
|
|
10
|
|
|
7
|
|
|
3
|
|
|
—
|
|
|
1
|
%
|
Guarantee annuity contracts
|
|
|
|
46
|
|
|
—
|
|
|
—
|
|
|
46
|
|
|
2
|
%
|
Total
|
|
100
|
%
|
|
$
|
1,990
|
|
|
$
|
810
|
|
|
$
|
824
|
|
|
$
|
356
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
|
2020 Target Allocation
|
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
Percentage of Plan Assets as of December 31, 2019
|
Cash
|
|
|
|
$
|
39
|
|
|
$
|
39
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
2
|
%
|
Equity securities:
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
|
358
|
|
|
358
|
|
|
—
|
|
|
—
|
|
|
20
|
%
|
U.S. small cap
|
|
|
|
84
|
|
|
78
|
|
|
6
|
|
|
—
|
|
|
5
|
%
|
International
|
|
|
|
320
|
|
|
6
|
|
|
137
|
|
|
177
|
|
|
18
|
%
|
Real estate fund
|
|
|
|
127
|
|
|
—
|
|
|
—
|
|
|
127
|
|
|
7
|
%
|
REITs
|
|
|
|
7
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
—
|
%
|
Fixed income securities:
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and government bonds
|
|
|
|
169
|
|
|
158
|
|
|
11
|
|
|
—
|
|
|
10
|
%
|
Corporate bonds
|
|
|
|
542
|
|
|
—
|
|
|
542
|
|
|
—
|
|
|
31
|
%
|
Mortgage-backed securities
|
|
|
|
14
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
1
|
%
|
Municipal bonds
|
|
|
|
26
|
|
|
—
|
|
|
26
|
|
|
—
|
|
|
1
|
%
|
Treasury futures
|
|
|
|
8
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
1
|
%
|
Long duration bond fund
|
|
|
|
8
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
1
|
%
|
Guarantee annuity contracts
|
|
|
|
45
|
|
|
—
|
|
|
—
|
|
|
45
|
|
|
3
|
%
|
Total
|
|
100
|
%
|
|
$
|
1,747
|
|
|
$
|
655
|
|
|
$
|
743
|
|
|
$
|
349
|
|
|
100
|
%
|
Presented in the tables below are a reconciliation of the beginning and ending balances of the fair value measurements using significant unobservable inputs (Level 3) for 2020 and 2019, respectively:
|
|
|
|
|
|
|
Level 3
|
Balance as of January 1, 2020
|
$
|
349
|
|
Actual return on assets
|
3
|
|
Purchases, issuances and settlements, net
|
4
|
|
Balance as of December 31, 2020
|
$
|
356
|
|
|
|
|
|
|
|
|
Level 3
|
Balance as of January 1, 2019
|
$
|
230
|
|
Actual return on assets
|
25
|
|
Purchases, issuances and settlements, net
|
94
|
|
Balance as of December 31, 2019
|
$
|
349
|
|
The Company’s postretirement benefit plans have different levels of funded status and the assets are held under various trusts. The investments and risk mitigation strategies for the plans are tailored specifically for each trust. In setting new strategic asset mixes, consideration is given to the likelihood that the selected asset allocation will effectively fund the projected plan liabilities and meet the risk tolerance criteria of the Company. The Company periodically updates the long-term, strategic asset allocations for these plans through asset liability studies and uses various analytics to determine the optimal asset allocation. Considerations include plan liability characteristics, liquidity needs, funding requirements, expected rates of return and the distribution of returns.
In 2018, the Company announced plan design changes to the medical bargaining benefit plan, which resulted in a cap on future benefits and an over funded postretirement medical benefits bargaining plan. As a result of the change in funded status, the Company decreased the investment risk in the plan and reduced its exposure to changes in interest rates by matching the assets of the plan to the projected cash flows for future benefit payments of the liability.
The Company engages third-party investment managers for all invested assets. Managers are not permitted to invest outside of the asset class (e.g. fixed income, equity, alternatives) or strategy for which they have been appointed. Investment management agreements and recurring performance and attribution analysis are used as tools to ensure investment managers invest solely within the investment strategy they have been provided. Futures and options may be used to adjust portfolio duration to align with a plan’s targeted investment policy.
In order to minimize asset volatility relative to the liabilities, a portion of plan assets is allocated to long duration fixed income investments that are exposed to interest rate risk. Increases in interest rates generally will result in a decline in the value of fixed income assets while reducing the present value of the liabilities. Conversely, rate decreases will increase fixed income assets, partially offsetting the related increase in the liabilities. Within equities, risk is mitigated by constructing a portfolio that is broadly diversified by geography, market capitalization, manager mandate size, investment style and process. For the postretirement medical bargaining plan, its asset structure is designed to meet the cash flows of the liabilities. This design reduces the plan’s exposure to changes in interest rates.
Actual allocations to each asset class vary from target allocations due to periodic investment strategy updates, market value fluctuations, the length of time it takes to fully implement investment allocations, and the timing of benefit payments and contributions. The asset allocation is rebalanced on a quarterly basis, if necessary. Voluntary Employees’ Beneficiary Association (“VEBA”) Trust assets include the American Water Postretirement Medical Benefits Bargaining Plan, the New York Water Service Corporation Postretirement Medical Benefits Bargaining Plan, the American Water Postretirement Medical Benefits Non-Bargaining Plan, and the American Water Life Insurance Trust.
Presented in the tables below are the fair values and asset allocations of the postretirement benefit plan assets as of December 31, 2020 and 2019, respectively, by asset category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
|
2021 Target Allocation
|
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
Percentage of Plan Assets as of December 31, 2020
|
Bargain VEBA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
$
|
12
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
3
|
%
|
Equity securities:
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
|
14
|
|
|
14
|
|
|
—
|
|
|
—
|
|
|
3
|
%
|
Fixed income securities:
|
|
96
|
%
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and government bonds
|
|
|
|
389
|
|
|
308
|
|
|
81
|
|
|
—
|
|
|
93
|
%
|
Long duration bond fund
|
|
|
|
5
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
1
|
%
|
Total bargain VEBA
|
|
100
|
%
|
|
$
|
420
|
|
|
$
|
339
|
|
|
$
|
81
|
|
|
$
|
—
|
|
|
100
|
%
|
Non-bargain VEBA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
Equity securities:
|
|
60
|
%
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
|
51
|
|
|
51
|
|
|
—
|
|
|
—
|
|
|
38
|
%
|
International
|
|
|
|
33
|
|
|
33
|
|
|
—
|
|
|
—
|
|
|
24
|
%
|
Fixed income securities:
|
|
40
|
%
|
|
|
|
|
|
|
|
|
|
|
Core fixed income bond fund (a)
|
|
|
|
50
|
|
|
—
|
|
|
50
|
|
|
—
|
|
|
38
|
%
|
Total non-bargain VEBA
|
|
100
|
%
|
|
$
|
135
|
|
|
$
|
85
|
|
|
$
|
50
|
|
|
$
|
—
|
|
|
100
|
%
|
Life VEBA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
70
|
%
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
%
|
Fixed income securities:
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
Core fixed income bond fund (a)
|
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
100
|
%
|
Total life VEBA
|
|
100
|
%
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
100
|
%
|
Total
|
|
100
|
%
|
|
$
|
556
|
|
|
$
|
425
|
|
|
$
|
131
|
|
|
$
|
—
|
|
|
100
|
%
|
(a)Includes cash for margin requirements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Category
|
|
2020 Target Allocation
|
|
Total
|
|
Quoted Prices in Active Markets for Identical Assets (Level 1)
|
|
Significant Observable Inputs (Level 2)
|
|
Significant Unobservable Inputs (Level 3)
|
|
Percentage of Plan Assets as of 12/31/2019
|
Bargain VEBA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
2
|
%
|
Equity securities:
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
|
13
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
3
|
%
|
Fixed income securities:
|
|
96
|
%
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and government bonds
|
|
|
|
373
|
|
|
298
|
|
|
75
|
|
|
—
|
|
|
94
|
%
|
Long duration bond fund
|
|
|
|
4
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
1
|
%
|
Total bargain VEBA
|
|
100
|
%
|
|
$
|
396
|
|
|
$
|
321
|
|
|
$
|
75
|
|
|
$
|
—
|
|
|
100
|
%
|
Non-bargain VEBA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
Equity securities:
|
|
60
|
%
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
|
48
|
|
|
48
|
|
|
—
|
|
|
—
|
|
|
36
|
%
|
International
|
|
|
|
30
|
|
|
30
|
|
|
—
|
|
|
—
|
|
|
23
|
%
|
Fixed income securities:
|
|
40
|
%
|
|
|
|
|
|
|
|
|
|
|
Core fixed income bond fund (a)
|
|
|
|
50
|
|
|
—
|
|
|
50
|
|
|
—
|
|
|
41
|
%
|
Total non-bargain VEBA
|
|
100
|
%
|
|
$
|
132
|
|
|
$
|
82
|
|
|
$
|
50
|
|
|
$
|
—
|
|
|
100
|
%
|
Life VEBA:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
70
|
%
|
|
|
|
|
|
|
|
|
|
|
U.S. large cap
|
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
50
|
%
|
Fixed income securities:
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
Core fixed income bond fund (a)
|
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
50
|
%
|
Total life VEBA
|
|
100
|
%
|
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
100
|
%
|
Total
|
|
100
|
%
|
|
$
|
532
|
|
|
$
|
407
|
|
|
$
|
125
|
|
|
$
|
—
|
|
|
100
|
%
|
(a)Includes cash for margin requirements.
Valuation Techniques Used to Determine Fair Value
Cash—Cash and investments with maturities of three months or less when purchased, including certain short-term fixed-income securities, are considered cash and are included in the recurring fair value measurements hierarchy as Level 1.
Equity securities—For equity securities, the trustees obtain prices from pricing services, whose prices are obtained from direct feeds from market exchanges, that the Company is able to independently corroborate. Certain equity securities are valued based on quoted prices in active markets and categorized as Level 1. Other equities, such as international securities held in the pension plan, are invested in commingled funds and/or limited partnerships. These funds are valued to reflect the plan fund’s interest in the fund based on the reported year-end net asset value. Since net asset value is not directly observable or not available on a nationally recognized securities exchange for the commingled funds, they are categorized as Level 2. For limited partnerships, the assets as a whole are categorized as Level 3 due to the fact that the partnership provides the pricing and the pricing inputs are less readily observable. In addition, the limited partnership vehicle cannot be readily traded.
Fixed-income securities—The majority of U.S. Treasury securities and government bonds have been categorized as Level 1 because they trade in highly-liquid and transparent markets and their prices can be corroborated. The fair values of corporate bonds, mortgage backed securities, and certain government bonds are based on prices that reflect observable market information, such as actual trade information of similar securities. They are categorized as Level 2 because the valuations are calculated using models which utilize actively traded market data that the Company can corroborate. Exchange-traded options and futures, for which market quotations are readily available, are valued at the last reported sale price or official closing price on the primary market or exchange on which they are traded and are classified as Level 1.
Real estate fund—Real estate fund is categorized as Level 3 as the fund uses significant unobservable inputs for fair value measurement and the vehicle is in the form of a limited partnership.
REITs—REITs are invested in commingled funds. Commingled funds are valued to reflect the plan fund’s interest in the fund based on the reported year-end net asset value. Since the net asset value is not directly observable for the commingled funds, they are categorized as Level 2.
Guaranteed annuity contracts—Guaranteed annuity contracts are categorized as Level 3 because the investments are not publicly quoted. Since these market values are determined by the provider, they are not highly observable and have been categorized as Level 3. Exchange-traded future and option positions are reported in accordance with changes in variation margins that are settled daily.
Presented in the table below is a rollforward of the changes in the benefit obligation and plan assets for the two most recent years, for all plans combined:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
Benefit obligation as of January 1,
|
$
|
2,161
|
|
|
$
|
1,892
|
|
|
$
|
374
|
|
|
$
|
353
|
|
Service cost
|
31
|
|
|
28
|
|
|
4
|
|
|
4
|
|
Interest cost
|
73
|
|
|
82
|
|
|
12
|
|
|
15
|
|
Plan participants' contributions
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
Plan amendments
|
—
|
|
|
—
|
|
|
5
|
|
|
(1)
|
|
Actuarial loss (gain)
|
233
|
|
|
264
|
|
|
13
|
|
|
25
|
|
Settlements (a)
|
(3)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Gross benefits paid
|
(109)
|
|
|
(105)
|
|
|
(29)
|
|
|
(25)
|
|
Federal subsidy
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Benefit obligation as of December 31,
|
$
|
2,386
|
|
|
$
|
2,161
|
|
|
$
|
382
|
|
|
$
|
374
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
Fair value of plan assets as of January 1,
|
$
|
1,747
|
|
|
$
|
1,499
|
|
|
$
|
532
|
|
|
$
|
507
|
|
Actual return on plan assets
|
314
|
|
|
319
|
|
|
53
|
|
|
51
|
|
Employer contributions
|
41
|
|
|
33
|
|
|
(2)
|
|
|
(2)
|
|
Plan participants' contributions
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
Settlements (a)
|
(3)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Benefits paid
|
(109)
|
|
|
(104)
|
|
|
(29)
|
|
|
(26)
|
|
Fair value of plan assets as of December 31,
|
$
|
1,990
|
|
|
$
|
1,747
|
|
|
$
|
556
|
|
|
$
|
532
|
|
Funded value as of December 31,
|
$
|
(396)
|
|
|
$
|
(414)
|
|
|
$
|
174
|
|
|
$
|
158
|
|
Amounts recognized on the balance sheet:
|
|
|
|
|
|
|
|
Noncurrent asset
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
173
|
|
|
$
|
159
|
|
Current liability
|
(2)
|
|
|
(3)
|
|
|
—
|
|
|
—
|
|
Noncurrent liability
|
(388)
|
|
|
(411)
|
|
|
(1)
|
|
|
(1)
|
|
(Liabilities) assets related to assets held for sale (b)
|
(6)
|
|
|
—
|
|
|
2
|
|
|
—
|
|
Net amount recognized
|
$
|
(396)
|
|
|
$
|
(414)
|
|
|
$
|
174
|
|
|
$
|
158
|
|
(a)The Company paid $3 million of lump sum payment distributions from the Company’s New York Water Service Corporation Pension Plan for the year ended December 31, 2020. There were no lump sum payments made for the year ended December 31, 2019.
(b)These balances are related to the pending transactions contemplated by the Stock Purchase Agreement and are included in assets held for sale and liabilities related to assets held for sale on the Consolidated Balance Sheets as of December 31, 2020. See Note 6—Acquisitions and Divestitures for additional information.
Presented in the table below are the components of accumulated other comprehensive income and regulatory assets that have not been recognized as components of periodic benefit costs as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net actuarial loss
|
$
|
436
|
|
|
$
|
435
|
|
|
$
|
49
|
|
|
$
|
72
|
|
Prior service credit
|
(16)
|
|
|
(19)
|
|
|
(217)
|
|
|
(257)
|
|
Net amount recognized
|
$
|
420
|
|
|
$
|
416
|
|
|
$
|
(168)
|
|
|
$
|
(185)
|
|
|
|
|
|
|
|
|
|
Regulatory assets (liabilities)
|
$
|
366
|
|
|
$
|
375
|
|
|
$
|
(168)
|
|
|
$
|
(185)
|
|
Accumulated other comprehensive income
|
54
|
|
|
41
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
420
|
|
|
$
|
416
|
|
|
$
|
(168)
|
|
|
$
|
(185)
|
|
Presented in the tables below are the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with a projected obligation in excess of plan assets as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected Benefit Obligation Exceeds the Fair Value of Plans' Assets
|
|
2020
|
|
2019
|
Projected benefit obligation
|
$
|
2,386
|
|
|
$
|
2,161
|
|
Fair value of plan assets
|
1,990
|
|
|
1,748
|
|
|
|
|
|
|
Accumulated Benefit Obligation Exceeds the Fair Value of Plans' Assets
|
|
2020
|
|
2019
|
Accumulated benefit obligation
|
$
|
2,188
|
|
|
$
|
2,018
|
|
Fair value of plan assets
|
1,990
|
|
|
1,748
|
|
The accumulated postretirement plan assets exceed benefit obligations for all of the Company’s other postretirement benefit plans, except for the Northern Illinois Retiree Welfare Plan.
In 2006, the PPA replaced the funding requirements for defined benefit pension plans by requiring that defined benefit plans contribute to 100% of the current liability funding target over seven years. Defined benefit plans with a funding status of less than 80% of the current liability are defined as being “at risk” and additional funding requirements and benefit restrictions may apply. The PPA was effective for the 2008 plan year with short-term phase-in provisions for both the funding target and at-risk determination. The Company’s qualified defined benefit plan is currently funded above the at-risk threshold, and therefore the Company expects that the plans will not be subject to the “at risk” funding requirements of the PPA. The Company is proactively monitoring the plan’s funded status and projected contributions under the law to appropriately manage the potential impact on cash requirements.
Minimum funding requirements for the qualified defined benefit pension plan are determined by government regulations and not by accounting pronouncements. The Company plans to contribute amounts at least equal to or greater than the minimum required contributions or the normal cost in 2021 to the qualified pension plans. Contributions may be in the form of cash contributions as well as available prefunding balances.
Presented in the table below is information about the expected cash flows for the pension and postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
2021 expected employer contributions:
|
|
|
|
To plan trusts
|
$
|
37
|
|
|
$
|
—
|
|
To plan participants
|
2
|
|
|
—
|
|
Presented in the table below are the net benefits expected to be paid from the plan assets or the Company’s assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
Expected Benefit Payments
|
|
Expected Benefit Payments
|
|
Expected Federal Subsidy Payments
|
2021
|
$
|
127
|
|
|
$
|
27
|
|
|
$
|
1
|
|
2022
|
128
|
|
|
27
|
|
|
1
|
|
2023
|
133
|
|
|
27
|
|
|
1
|
|
2024
|
135
|
|
|
27
|
|
|
1
|
|
2025
|
137
|
|
|
26
|
|
|
1
|
|
2026-2030
|
692
|
|
|
123
|
|
|
4
|
|
Because the above amounts are net benefits, plan participants’ contributions have been excluded from the expected benefits.
Accounting for pensions and other postretirement benefits requires an extensive use of assumptions about the discount rate, expected return on plan assets, the rate of future compensation increases received by the Company’s employees, mortality, turnover and medical costs. Each assumption is reviewed annually. The assumptions are selected to represent the average expected experience over time and may differ in any one year from actual experience due to changes in capital markets and the overall economy. These differences will impact the amount of pension and other postretirement benefit expense that the Company recognizes.
Presented in the table below are the significant assumptions related to the pension and other postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Benefits
|
|
2020
|
|
2019
|
|
2018
|
|
2020
|
|
2019
|
|
2018
|
Weighted average assumptions used to determine December 31 benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
2.74%
|
|
3.44%
|
|
4.38%
|
|
2.56%
|
|
3.36%
|
|
4.32%
|
Rate of compensation increase
|
3.51%
|
|
2.97%
|
|
3.00%
|
|
N/A
|
|
N/A
|
|
N/A
|
Medical trend
|
N/A
|
|
N/A
|
|
N/A
|
|
graded from
|
|
graded from
|
|
graded from
|
|
|
|
|
|
|
|
6.25% in 2021
|
|
6.50% in 2020
|
|
6.75% in 2019
|
|
|
|
|
|
|
|
to 5.00% in 2026+
|
|
to 5.00% in 2026+
|
|
to 5.00% in 2026+
|
Weighted average assumptions used to determine net periodic cost:
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
3.44%
|
|
4.38%
|
|
3.75%
|
|
3.36%
|
|
4.32%
|
|
4.23%
|
Expected return on plan assets
|
6.50%
|
|
6.20%
|
|
5.95%
|
|
3.68%
|
|
3.56%
|
|
4.77%
|
Rate of compensation increase
|
2.97%
|
|
3.00%
|
|
3.02%
|
|
N/A
|
|
N/A
|
|
N/A
|
Medical trend
|
N/A
|
|
N/A
|
|
N/A
|
|
graded from
|
|
graded from
|
|
graded from
|
|
|
|
|
|
|
|
6.50% in 2020
|
|
6.75% in 2019
|
|
7.00% in 2018
|
|
|
|
|
|
|
|
to 5.00% in 2026+
|
|
to 5.00% in 2026+
|
|
to 4.50% in 2026+
|
NOTE “N/A” in the table above means assumption is not applicable.
The discount rate assumption was determined for the pension and postretirement benefit plans independently. The Company uses an approach that approximates the process of settlement of obligations tailored to the plans’ expected cash flows by matching the plans’ cash flows to the coupons and expected maturity values of individually selected bonds. Historically, for each plan, the discount rate was developed at the level equivalent rate that would produce the same present value as that using spot rates aligned with the projected benefit payments.
The expected long-term rate of return on plan assets is based on historical and projected rates of return, prior to administrative and investment management fees, for current and planned asset classes in the plans’ investment portfolios. Assumed projected rates of return for each of the plans’ projected asset classes were selected after analyzing historical experience and future expectations of the returns and volatility of the various asset classes. Based on the target asset allocation for each asset class, the overall expected rate of return for the portfolio was developed, adjusted for historical and expected experience of active portfolio management results compared to the benchmark returns. The Company’s pension expense increases as the expected return on assets decreases. The Company used an expected return on plan assets of 6.50% to estimate its 2020 pension benefit costs, and an expected blended return based on weighted assets of 3.68% to estimate its 2020 other postretirement benefit costs.
The Company had previously adopted a mortality table based on the Society of Actuaries RP 2014 mortality table including a generational MP-2018 projection scale. In 2020, the Company adopted the Pri-2012 base mortality table and the new MP-2020 mortality improvement scale to replace the previous assumption.
Presented in the table below are the components of net periodic benefit costs for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Components of net periodic pension benefit cost:
|
|
|
|
|
|
Service cost
|
$
|
31
|
|
|
$
|
28
|
|
|
$
|
34
|
|
Interest cost
|
73
|
|
|
82
|
|
|
76
|
|
Expected return on plan assets
|
(111)
|
|
|
(91)
|
|
|
(97)
|
|
Amortization of prior service (credit) cost
|
(3)
|
|
|
(3)
|
|
|
1
|
|
Amortization of actuarial loss
|
30
|
|
|
32
|
|
|
27
|
|
Settlements (a)
|
1
|
|
|
—
|
|
|
—
|
|
Net periodic pension benefit cost
|
$
|
21
|
|
|
$
|
48
|
|
|
$
|
41
|
|
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
|
|
|
|
|
|
Current year actuarial (gain) loss
|
$
|
12
|
|
|
$
|
(8)
|
|
|
$
|
(60)
|
|
Amortization of actuarial loss
|
(3)
|
|
|
(4)
|
|
|
(7)
|
|
Total recognized in other comprehensive income
|
9
|
|
|
(12)
|
|
|
(67)
|
|
Total recognized in net periodic benefit cost and other comprehensive income
|
$
|
30
|
|
|
$
|
36
|
|
|
$
|
(26)
|
|
Components of net periodic other postretirement benefit (credit) cost:
|
|
|
|
|
|
Service cost
|
$
|
4
|
|
|
$
|
4
|
|
|
$
|
8
|
|
Interest cost
|
12
|
|
|
15
|
|
|
20
|
|
Expected return on plan assets
|
(19)
|
|
|
(18)
|
|
|
(26)
|
|
Amortization of prior service credit
|
(34)
|
|
|
(35)
|
|
|
(23)
|
|
Amortization of actuarial loss
|
2
|
|
|
3
|
|
|
3
|
|
Net periodic other postretirement benefit (credit) cost
|
$
|
(35)
|
|
|
$
|
(31)
|
|
|
$
|
(18)
|
|
(a)Due to the amount of lump sum payment distributions from the Company’s New York Water Service Corporation Pension Plan, settlement charges of less than $1 million were recorded for the year ended December 31, 2020. There were no settlement charges recorded for the year ended December 31, 2019. In accordance with existing regulatory accounting treatment, the Company has maintained the settlement charges in regulatory assets on the Consolidated Balance Sheets. The amount is being amortized in accordance with existing regulatory practice.
The Company’s policy is to recognize curtailments when the total expected future service of plan participants is reduced by greater than 10% due to an event that results in terminations and/or retirements.
Cumulative gains and losses that are in excess of 10% of the greater of either the projected benefit obligation or the fair value of plan assets are amortized over the expected average remaining future service of the current active membership for the plans.
Savings Plans for Employees
The Company maintains 401(k) savings plans that allow employees to save for retirement on a tax-deferred basis. Employees can make contributions that are invested at their direction in one or more funds. The Company makes matching contributions based on a percentage of an employee’s contribution, subject to certain limitations. Due to the Company’s discontinuing new entrants into the defined benefit pension plan, on January 1, 2006, the Company began providing an additional 5.25% of base pay defined contribution benefit for union employees hired on or after January 1, 2001 and non-union employees hired on or after January 1, 2006. The Company’s 401(k) savings plan expenses totaled $12 million, $12 million and $12 million for 2020, 2019 and 2018, respectively. Additionally, the Company’s 5.25% of base pay defined contribution benefit expenses totaled $15 million, $13 million and $11 million for 2020, 2019 and 2018, respectively. All of the Company’s contributions are invested in one or more funds at the direction of the employees.
Note 17: Commitments and Contingencies
Commitments have been made in connection with certain construction programs. The estimated capital expenditures required under legal and binding contractual obligations amounted to $484 million as of December 31, 2020.
The Company’s regulated subsidiaries maintain agreements with other water purveyors for the purchase of water to supplement their water supply. Presented in the table below are the future annual commitments related to minimum quantities of purchased water having non-cancelable contracts:
|
|
|
|
|
|
|
Amount
|
2021
|
$
|
66
|
|
2022
|
67
|
|
2023
|
66
|
|
2024
|
52
|
|
2025
|
52
|
|
Thereafter
|
618
|
|
The Company enters into agreements for the provision of services to water and wastewater facilities for the U.S. military, municipalities and other customers. See Note 5—Revenue Recognition for additional information regarding the Company’s performance obligations.
Contingencies
The Company is routinely involved in legal actions incident to the normal conduct of its business. As of December 31, 2020, the Company has accrued approximately $10 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 $4 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 17—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, the Company’s West Virginia subsidiary (“WVAWC”) and certain other Company affiliated entities (collectively, the “West Virginia-American Water Defendants”) 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 December 31, 2020, $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 December 31, 2020 reflects reductions in the liability and appropriate reductions to the offsetting insurance receivable reflected in other current assets, associated with payments made to the Settlement fund, the receipt of a determination by the Settlement fund’s appeal adjudicator on all remaining medical claims and the calculation of remaining attorneys’ fees and claims administration costs. The Company funded WVAWC’s contributions to the Settlement through existing sources of liquidity.
Dunbar, West Virginia Water Main Break Class Action Litigation
On the evening of June 23, 2015, a 36-inch pre-stressed concrete transmission water main, installed in the early 1970s, failed. The water main is part of the West Relay pumping station located in the City of Dunbar, West Virginia and owned by WVAWC. The failure of the main caused water outages and low pressure for up to approximately 25,000 WVAWC customers. In the early morning hours of June 25, 2015, crews completed a repair, but that same day, the repair developed a leak. On June 26, 2015, a second repair was completed and service was restored that day to approximately 80% of the impacted customers, and to the remaining approximately 20% by the next morning. The second repair showed signs of leaking but the water main was usable until June 29, 2015 to allow tanks to refill. The system was reconfigured to maintain service to all but approximately 3,000 customers while a final repair was 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.
On February 4, 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. On July 14, 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. On August 31, 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. At the request of the parties, on September 10, 2020, the Circuit Court ordered the stay of all matters in the class proceeding pending consideration of this petition. On December 3, 2020, the Supreme Court of Appeals issued an order to show cause stating that there are sufficient grounds for oral argument to consider prohibiting the class certification order. On January 28, 2021, the Supreme Court of Appeals granted a motion by the Jeffries plaintiffs to remand the case back to the Circuit Court for further consideration in light of a recent Supreme Court of Appeals decision issued in another case relating to the class certification issues raised.
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 filed, the Tennessee Plaintiffs were seeking an award of unspecified alleged damages for wage losses, business and economic losses, out-of-pocket expenses, loss of use and enjoyment of property and annoyance and inconvenience, as well as punitive damages, attorneys’ fees and pre- and post-judgment interest.
On November 22, 2019, the Tennessee-American Water Defendants filed a motion to dismiss the complaint for failure to state a claim upon which relief may be granted, and, with respect to the Company, for lack of personal jurisdiction. Oral argument on the motion to dismiss took place on September 9, 2020. On September 18, 2020, the court (i) granted the motion to dismiss the Tennessee Plaintiffs’ negligence claim against all Tennessee-American Water Defendants, (ii) denied the motion to dismiss the breach of contract claim against TAWC, (iii) held in abeyance the motion to dismiss the breach of contract claims against the Company and Service Company pending a further hearing and (iv) held in abeyance the Company’s motion to dismiss the complaint for lack of personal jurisdiction. On September 24, 2020, at the request of the Tennessee Plaintiffs, the court dismissed without prejudice all claims in the Bruce complaint against the Company and Service Company. The impact of the September 2020 court orders was that all of the Tennessee Plaintiffs’ claims in this complaint were dismissed, other than the breach of contract claims against TAWC. On October 16, 2020, TAWC answered the complaint, and the parties are commencing with discovery.
TAWC and the Company believe that TAWC has meritorious defenses to the claims raised in this class action complaint, and TAWC is vigorously defending itself against these allegations. The Company cannot currently determine the likelihood of a loss, if any, or estimate the amount of any loss or a range of such losses related to this proceeding..
Alternative Water Supply in Lieu of Carmel River Diversions
Compliance with Orders to Reduce Carmel River Diversions—Monterey Peninsula Water Supply Project
Under a 2009 order (the “2009 Order”) of the State Water Resources Control Board (the “SWRCB”), the Company’s California subsidiary (“Cal Am”) is required to decrease significantly its yearly diversions of water from the Carmel River according to a set reduction schedule. In 2016, the SWRCB issued an order (the “2016 Order”) approving a deadline of December 31, 2021 for Cal Am’s compliance with these prior orders (the “2021 Deadline”).
Cal Am is currently involved in developing the Monterey Peninsula Water Supply Project (the “Water Supply Project”), which includes the construction of a desalination plant, to be owned by Cal Am, and the construction of wells that would supply water to the desalination plant. In addition, the Water Supply Project also includes Cal Am’s purchase of water from a groundwater replenishment project (the “GWR Project”) between Monterey One Water and the 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 California Public Utilities Commission (the “CPUC”) and other government agencies, obtaining necessary permits, and intervention from other parties. In September 2016, the CPUC unanimously approved a final decision to authorize Cal Am to enter into a water purchase agreement for the GWR Project and to construct a pipeline and pump station facilities and recover up to the incurred $50 million in associated costs plus AFUDC, subject to meeting certain criteria.
In September 2018, the CPUC unanimously approved another final decision finding that (i) the Water Supply Project meets the CPUC’s requirements for a certificate of public convenience and necessity, (ii) the issuance of the final decision should not be delayed, and (iii) an additional procedural phase was not necessary to consider alternative projects. The CPUC’s 2018 decision concludes that the Water Supply Project is the best project to address estimated future water demands in Monterey, and, in addition to the cost recovery approved in its 2016 decision, adopts Cal Am’s cost estimates for the Water Supply Project, which amounted to an aggregate of $279 million plus AFUDC at a rate representative of Cal Am’s actual financing costs. The 2018 final decision specifies the procedures for recovery of all of Cal Am’s prudently incurred costs associated with the Water Supply Project upon its completion, subject to the frameworks included in the final decision related to cost caps, operation and maintenance costs, financing, ratemaking and contingency matters. The reasonableness of the Water Supply Project costs will be reviewed in the first general rate case filed by Cal Am after it becomes operational. Cal Am has incurred $154 million in aggregate costs as of December 31, 2020 related to the Water Supply Project, which includes $36 million in AFUDC. While Cal Am believes that its expenditures to date have been prudent and necessary to comply with the 2009 Order and the 2016 Order, as well as the CPUC’s 2016 and 2018 final decisions, Cal Am cannot currently predict its ability to recover all of its costs and expenses associated with the Water Supply Project and there can be no assurance that Cal Am will be able to recover all of such costs and expenses in excess of the $50 million in construction costs previously approved by the CPUC in its 2016 final decision.
Coastal Development Permit Application
In June 2018, Cal Am submitted a coastal development permit application to the City of Marina (the “City”) for those project components of the Water Supply Project located within the City’s coastal zone. Members of the City’s Planning Commission, as well as City councilpersons, have publicly expressed opposition to the Water Supply Project. In May 2019, the City issued a notice of final local action based upon the denial by the Planning Commission of Cal Am’s coastal development permit application. Thereafter, Cal Am appealed this decision to the California Coastal Commission (the “Coastal Commission”), as permitted under the City’s code and the California Coastal Act. At the same time, Cal Am submitted an application to the Coastal Commission for a coastal development permit for those project components located within the Coastal Commission’s original jurisdiction. In October 2019, staff of the Coastal Commission issued a report recommending a denial of Cal Am’s application for a coastal development permit with respect to the Water Supply Project, largely based on a memorandum prepared by the general manager of the MPWMD that contradicted findings made by the CPUC in its final decision approving the Water Supply Project. In November 2019, discussions between staffs of the Coastal Commission and the CPUC took place regarding the Coastal Commission staff recommendation, at which time the CPUC raised questions about the Coastal Commission staff’s findings on water supply and demand, groundwater impacts and the viability of a project that the Coastal Commission staff believes may be a possible alternative to the Water Supply Project.
On August 25, 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. On September 16, 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 on November 6, 2020. On December 3, 2020, the Coastal Commission sent to Cal Am a notice of incomplete application, identifying certain additional information needed to consider the application complete. Cal Am is preparing a response to the Coastal Commission’s notice.
Cal Am continues to work constructively with all appropriate agencies to provide necessary information in connection with obtaining required approvals for the Water Supply Project. However, based on the foregoing, there can be no assurance that the Water Supply Project in its current configuration will be completed on a timely basis, if ever. Due to the delay in the approval schedule, Cal Am currently does not believe that it will be able to fully comply with the diversion reduction requirements and other remaining requirements under the 2009 Order and the 2016 Order, including the 2021 Deadline. While the Company cannot currently predict the likelihood or result of any adverse outcome associated with these matters, further attempts to comply with the 2009 Order and the 2016 Order, or the 2021 Deadline, may result in material additional costs and obligations to Cal Am, including fines and penalties against Cal Am in the event of noncompliance with the 2009 Order and the 2016 Order.
Note 18: Earnings per Common Share
Presented in the table below is a reconciliation of the numerator and denominator for the basic and diluted earnings per share (“EPS”) calculations for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Numerator:
|
|
|
|
|
|
Net income attributable to common shareholders
|
$
|
709
|
|
|
$
|
621
|
|
|
$
|
567
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Weighted average common shares outstanding—Basic
|
181
|
|
|
181
|
|
|
180
|
|
Effect of dilutive common stock equivalents
|
1
|
|
|
—
|
|
|
—
|
|
Weighted average common shares outstanding—Diluted
|
182
|
|
|
181
|
|
|
180
|
|
The effect of dilutive common stock equivalents is related to outstanding stock options, RSUs and PSUs granted under the Company’s 2007 Plan and outstanding RSUs and PSUs granted under the Company’s 2017 Omnibus Equity Compensation Plan, as well as estimated shares to be purchased under the Company’s 2017 Nonqualified Employee Stock Purchase Plan. Less than one million share-based awards were excluded from the computation of diluted EPS for the years ended December 31, 2020, 2019 and 2018, because their effect would have been anti-dilutive under the treasury stock method.
Note 19: Fair Value of Financial Information
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.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
December 31, 2020
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Preferred stock with mandatory redemption requirements
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
7
|
|
Long-term debt (excluding finance lease obligations)
|
9,656
|
|
|
9,639
|
|
|
415
|
|
|
1,753
|
|
|
11,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Amount
|
|
December 31, 2019
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Preferred stock with mandatory redemption requirements
|
$
|
7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
9
|
|
Long-term debt (excluding finance lease obligations)
|
8,664
|
|
|
7,689
|
|
|
417
|
|
|
1,664
|
|
|
9,770
|
|
Fair Value Measurements
To increase consistency and comparability in fair value measurements, GAAP establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:
Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date. Financial assets and liabilities utilizing Level 1 inputs include active exchange-traded equity securities, exchange-based derivatives, mutual funds and money market funds.
Level 2—Inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data. Financial assets and liabilities utilizing Level 2 inputs include fixed income securities, non-exchange-based derivatives, commingled investment funds not subject to purchase and sale restrictions and fair-value hedges.
Level 3—Unobservable inputs, such as internally-developed pricing models for the asset or liability due to little or no market activity for the asset or liability. Financial assets and liabilities utilizing Level 3 inputs include infrequently-traded non-exchange-based derivatives and commingled investment funds subject to purchase and sale restrictions.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At Fair Value as of December 31, 2020
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Restricted funds
|
$
|
29
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
29
|
|
Rabbi trust investments
|
19
|
|
|
—
|
|
|
—
|
|
|
19
|
|
Deposits
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Other investments
|
11
|
|
|
—
|
|
|
—
|
|
|
11
|
|
Total assets
|
63
|
|
|
—
|
|
|
—
|
|
|
63
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred compensation obligations
|
24
|
|
|
—
|
|
|
—
|
|
|
24
|
|
Total liabilities
|
24
|
|
|
—
|
|
|
—
|
|
|
24
|
|
Total assets
|
$
|
39
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At Fair Value as of December 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
Restricted funds
|
$
|
31
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
31
|
|
Rabbi trust investments
|
17
|
|
|
—
|
|
|
—
|
|
|
17
|
|
Deposits
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Other investments
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
Total assets
|
59
|
|
|
—
|
|
|
—
|
|
|
59
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Deferred compensation obligations
|
21
|
|
|
—
|
|
|
—
|
|
|
21
|
|
Total liabilities
|
21
|
|
|
—
|
|
|
—
|
|
|
21
|
|
Total assets (liabilities)
|
$
|
38
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
38
|
|
Restricted funds—The Company’s restricted funds primarily represent proceeds received from financings for the construction and capital improvement of facilities and from customers for future services under operation, maintenance and repair projects.
Rabbi trust investments—The Company’s rabbi trust investments consist of equity and index funds from which supplemental executive retirement plan benefits and deferred compensation obligations can be paid. The Company includes these assets in other long-term assets on the Consolidated Balance Sheets.
Deposits—Deposits include escrow funds and certain other deposits held in trust. The Company includes cash deposits in other current assets on the Consolidated Balance Sheets.
Deferred compensation obligations—The Company’s deferred compensation plans allow participants to defer certain cash compensation into notional investment accounts. The Company includes such plans in other long-term liabilities on the Consolidated Balance Sheets. The value of the Company’s deferred compensation obligations is based on the market value of the participants’ notional investment accounts. The notional investments are comprised primarily of mutual funds, which are based on observable market prices.
Mark-to-market derivative assets and liabilities— The Company employs derivative financial instruments in the form of variable-to-fixed interest rate swaps and treasury lock agreements, classified as economic hedges and cash flow hedges, respectively, in order to fix the interest cost on existing or forecasted debt. The Company may use fixed-to-floating interest rate swaps, typically designated as fair-value hedges, to achieve a targeted level of variable-rate debt as a percentage of total debt. The Company uses a calculation of future cash inflows and estimated future outflows, which are discounted, to determine the current fair value. Additional inputs to the present value calculation include the contract terms, counterparty credit risk, interest rates and market volatility. The Company had no significant mark-to-market derivatives outstanding as of December 31, 2020.
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.
Note 20: Leases
The Company has operating and finance leases involving real property, including facilities, utility assets, vehicles, and equipment. Certain operating leases have renewal options ranging from one to 60 years. The exercise of lease renewal options is at the Company’s sole discretion. Renewal options that the Company was reasonably certain to exercise are included in the Company’s 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 39 years, six years, and five years, respectively.
The Company participates in a number of arrangements with various public entities (“Partners”) in West Virginia. Under these arrangements, the Company transferred a portion of its utility plant to the Partners in exchange for an equal principal amount of Industrial Development Bonds (“IDBs”) issued by the Partners under the Industrial Development and Commercial Development Bond Act. The Company leased back the utility plant under agreements for a period of 30 to 40 years. The Company has recorded these agreements as finance leases in property, plant and equipment, as ownership of the assets will revert back to the Company at the end of the lease term. The carrying value of the finance lease assets was $147 million and $147 million as of December 31, 2020 and 2019, respectively. The Company determined that the finance lease obligations and the investments in IDBs meet the conditions for offsetting, and as such, are reported net on the Consolidated Balance Sheets and excluded from the finance lease disclosure presented below.
The Company also enters into O&M agreements with the Partners. The Company pays an annual fee for use of the Partners’ assets in performing under the O&M agreements. The O&M agreements are recorded as operating leases, and future annual use fees of $4 million in 2021 through 2025, and $52 million thereafter, are included in operating lease ROU assets and operating lease liabilities on the Consolidated Balance Sheets.
Rental expenses under operating and finance leases presented on the Consolidated Balance Sheets were $14 million and $16 million for the years ended December 31, 2020 and 2019, respectively. Rental expenses under operating leases which included variable and short-term lease costs were $35 million for the year ended December 31, 2018.
For the year ended December 31, 2020, cash paid for amounts in lease liabilities, which includes operating and financing cash flows from operating and finance leases, was $14 million. For the year ended December 31, 2020, ROU assets obtained in exchange for new operating lease liabilities was $2 million.
As of December 31, 2020, the weighted-average remaining lease term of the finance lease and operating leases were five years and 19 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 December 31, 2020 are $13 million in 2021, $12 million in 2022, $8 million in 2023, $7 million in 2024, $7 million in 2025 and $94 million thereafter. At December 31, 2020 imputed interest was $49 million.
Note 21: 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. The Company also operates market-based businesses that, individually, do not meet the criteria of a reportable segment in accordance with GAAP, and are collectively presented as the Market-Based Businesses.
The Regulated Businesses segment is the largest component of the Company’s business and includes subsidiaries that provide water and wastewater services to customers in 16 states.
The Company’s primary Market-Based Businesses include HOS, which provides various warranty protection programs and other home services to residential customers, and MSG, which enters into long-term contracts with the U.S. government to provide water and wastewater services on various military installations.
The accounting policies of the segments are the same as those described in Note 2—Significant Accounting Policies. The Regulated Businesses segment and Market-Based Businesses include intercompany costs that are allocated by Service Company and intercompany interest that is charged by AWCC, both of which are eliminated to reconcile to the Consolidated Statements of Operations. Inter-segment revenues include the sale of water from a regulated subsidiary to market-based subsidiaries, leased office space, and furniture and equipment provided by the market-based subsidiaries to regulated subsidiaries. “Other” includes corporate costs that are not allocated to the Company’s operating segments, eliminations of inter-segment transactions, fair value adjustments, and associated income and deductions related to the acquisitions that have not been allocated to the operating segments for evaluation of performance and allocation of resource purposes. The adjustments related to the acquisitions are reported in Other as they are excluded from segment performance measures evaluated by management.
Presented in the tables below is summarized segment information as of and for the years ended December 31:
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2020
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|
Regulated
Businesses
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|
Market-Based
Businesses
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Other
|
|
Consolidated
|
Operating revenues
|
$
|
3,255
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|
|
$
|
540
|
|
|
$
|
(18)
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|
|
$
|
3,777
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|
Depreciation and amortization
|
562
|
|
|
26
|
|
|
16
|
|
|
604
|
|
Total operating expenses, net
|
2,102
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|
|
421
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|
|
6
|
|
|
2,529
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|
Interest, net
|
(291)
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|
|
1
|
|
|
(105)
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|
|
(395)
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|
Income before income taxes
|
932
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|
|
120
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|
|
(128)
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|
|
924
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|
Provision for income taxes
|
217
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|
|
29
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|
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(31)
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|
215
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|
Net income attributable to common shareholders
|
715
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|
|
91
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|
|
(97)
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|
|
709
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|
Total assets
|
22,357
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|
|
891
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|
|
1,518
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|
|
24,766
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Cash paid for capital expenditures
|
1,804
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|
10
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|
|
8
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|
|
1,822
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|
2019
|
|
Regulated
Businesses
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|
Market-Based
Businesses
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Other
|
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Consolidated
|
Operating revenues
|
$
|
3,094
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|
|
$
|
539
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|
$
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(23)
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|
|
$
|
3,610
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Depreciation and amortization
|
529
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|
|
37
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|
|
16
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|
|
582
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|
Total operating expenses, net
|
1,964
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|
|
480
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(4)
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|
2,440
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Interest, net
|
(295)
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|
|
5
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|
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(92)
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|
|
(382)
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Income before income taxes
|
869
|
|
|
66
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|
|
(102)
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|
|
833
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|
Provision for income taxes
|
215
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|
20
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(23)
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|
|
212
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Net income attributable to common shareholders
|
654
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|
|
46
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(79)
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|
621
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Total assets
|
20,318
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|
|
1,008
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|
|
1,356
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|
|
22,682
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Cash paid for capital expenditures
|
1,627
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|
|
13
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|
|
14
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|
|
1,654
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|
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|
2018
|
|
Regulated
Businesses
|
|
Market-Based
Businesses
|
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Other
|
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Consolidated
|
Operating revenues
|
$
|
2,984
|
|
|
$
|
476
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|
|
$
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(20)
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|
|
$
|
3,440
|
|
Depreciation and amortization
|
500
|
|
|
29
|
|
|
16
|
|
|
545
|
|
Impairment charge
|
—
|
|
|
57
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|
|
—
|
|
|
57
|
|
Total operating expenses, net
|
1,912
|
|
|
441
|
|
|
(15)
|
|
|
2,338
|
|
Interest, net
|
(280)
|
|
|
4
|
|
|
(74)
|
|
|
(350)
|
|
Income before income taxes
|
826
|
|
|
41
|
|
|
(80)
|
|
|
787
|
|
Provision for income taxes
|
224
|
|
|
11
|
|
|
(13)
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|
|
222
|
|
Net income attributable to common shareholders
|
602
|
|
|
32
|
|
|
(67)
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|
|
567
|
|
Total assets
|
18,680
|
|
|
999
|
|
|
1,544
|
|
|
21,223
|
|
Cash paid for capital expenditures
|
1,477
|
|
|
13
|
|
|
96
|
|
|
1,586
|
|
Note 22: Unaudited Quarterly Data
Presented in the tables below are supplemental, unaudited, consolidated, quarterly financial data for each of the four quarters in the years ended December 31, 2020 and 2019, respectively. The operating results for any quarter are not indicative of results that may be expected for a full year or any future periods.
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2020
|
|
First Quarter
|
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Second Quarter
|
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Third Quarter
|
|
Fourth Quarter
|
Operating revenues
|
$
|
844
|
|
|
$
|
931
|
|
|
$
|
1,079
|
|
|
$
|
923
|
|
Operating income
|
239
|
|
|
313
|
|
|
433
|
|
|
263
|
|
Net income attributable to common shareholders
|
124
|
|
|
176
|
|
|
264
|
|
|
145
|
|
Basic earnings per share: (a)
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
$
|
0.69
|
|
|
$
|
0.97
|
|
|
$
|
1.46
|
|
|
$
|
0.80
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
0.68
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|
|
0.97
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|
|
1.46
|
|
|
0.80
|
|
(a)Amounts may not sum due to rounding.
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|
|
|
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|
|
|
2019
|
|
First Quarter
|
|
Second Quarter
|
|
Third Quarter
|
|
Fourth Quarter
|
Operating revenues
|
$
|
813
|
|
|
$
|
882
|
|
|
$
|
1,013
|
|
|
$
|
902
|
|
Operating income
|
238
|
|
|
302
|
|
|
406
|
|
|
224
|
|
Net income attributable to common shareholders
|
113
|
|
|
170
|
|
|
240
|
|
|
98
|
|
Basic earnings per share: (a)
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
$
|
0.62
|
|
|
$
|
0.94
|
|
|
$
|
1.33
|
|
|
$
|
0.54
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
Net income attributable to common shareholders
|
0.62
|
|
|
0.94
|
|
|
1.33
|
|
|
0.54
|
|
(a)Amounts may not sum due to rounding.