Notes to Consolidated Financial Statements (Unaudited)
(Unless otherwise noted, in millions, except per share data)
Note 1: Basis of Presentation
The unaudited Consolidated Financial Statements included in this report include the accounts of American Water Works Company, Inc. and all of its subsidiaries (the “Company” or “American Water”), in which a controlling interest is maintained after the elimination of intercompany balances and transactions. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting, and the rules and regulations for reporting on Quarterly Reports on Form 10-Q (“Form 10-Q”). Accordingly, they do not contain certain information and disclosures required by GAAP for comprehensive financial statements. In the opinion of management, all adjustments necessary for a fair statement of the financial position as of June 30, 2021, and the results of operations and cash flows for all periods presented, have been made. All adjustments are of a normal, recurring nature, except as otherwise disclosed.
The unaudited Consolidated Financial Statements and Notes included in this report should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 (“Form 10-K”), which provides a more complete discussion of the Company’s accounting policies, financial position, operating results and other matters. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the year, primarily due to the seasonality of the Company’s operations.
Note 2: Significant Accounting Policies
New Accounting Standards
Presented in the table below are new accounting standards that were adopted by the Company in 2021:
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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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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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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
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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 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 June 30, 2021:
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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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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 is not permitted 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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Cash, Cash Equivalents and Restricted Funds
Presented in the table below is a reconciliation of the cash and cash equivalents and restricted funds amounts as presented on the Consolidated Balance Sheets to the sum of such amounts presented on the Consolidated Statements of Cash Flows for the periods ended June 30:
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2021
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2020
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Cash and cash equivalents (a)
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$
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70
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$
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569
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Restricted funds
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34
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36
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Cash, cash equivalents and restricted funds as presented on the Consolidated Statements of Cash Flows
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$
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104
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$
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605
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(a)The majority of the change in the cash and cash equivalents balance is due to the repayment, at maturity, of the $500 million in outstanding principal under the Term Loan Facility (as defined below). See Note 9—Short-Term Debt for additional information.
Allowance for Uncollectible Accounts
Allowances for uncollectible accounts are maintained for estimated probable losses resulting from the Company’s inability to collect receivables from customers. Accounts that are outstanding longer than the payment terms are considered past due. A number of factors are considered in determining the allowance for uncollectible accounts, including the length of time receivables are past due, previous loss history, current economic and societal conditions and reasonable and supportable forecasts that affect the collectability of receivables from customers. The Company generally writes off accounts when they become uncollectible or are over a certain number of days outstanding. An increase in the allowance for uncollectible accounts for the period ending June 30, 2021 reflects the impacts from the COVID-19 pandemic, including an increase in uncollectible accounts expense and a reduction in amounts written off due to shutoff moratoria in place across the Company’s subsidiaries.
Presented in the table below are the changes in the allowance for uncollectible accounts for the six months ended June 30:
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2021
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2020
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Balance as of January 1
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$
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(60)
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$
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(41)
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Amounts charged to expense
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(18)
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(14)
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Amounts written off
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4
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10
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Less: Allowance for uncollectible accounts included in assets held for sale (a)
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4
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2
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Balance as of June 30
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$
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(70)
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$
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(43)
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(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.
Reclassifications
Certain reclassifications have been made to prior periods in the Consolidated Financial Statements and Notes to conform to the current presentation.
Note 3: Impact of the COVID-19 Pandemic
American Water continues to monitor the COVID-19 pandemic and has experienced financial impacts since the start of the pandemic resulting from lower revenues from the suspension of late fees and foregone reconnect fees in certain states, certain incremental operation and maintenance (“O&M”) expenses, an increase in uncollectible accounts expense and additional debt costs. These impacts are collectively referred to as “financial impacts.”
As of August 2, 2021, American Water has commission orders authorizing deferred accounting or cost recovery for COVID-19 financial impacts in 11 of 14 jurisdictions, with proceedings in New York and Tennessee pending. One jurisdiction, Kentucky, issued an order denying a request to defer to a regulatory asset the financial impacts related to the COVID-19 pandemic. Other regulatory actions to date are presented in the table below:
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Commission Actions
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Description
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States
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Orders issued with deferred accounting
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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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HI, IN, MD, NJ, PA, VA, WV
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Orders issued with cost recovery
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California’s Catastrophic Event Memorandum Account allows the Company’s California subsidiary to track certain financial impacts related to the COVID-19 pandemic for future recovery requests. Iowa issued a base rate case order on June 28, 2021, authorizing recovery in rates of the COVID-19 financial impacts deferred within its annual non-recurring expense rider. Illinois has authorized cost recovery of the COVID-19 financial impacts through a special purpose rider over a 24-month period, which was implemented effective October 1, 2020. Additionally, Illinois approved a bad debt rider tariff on December 16, 2020, allowing collection of actual bad debt expense over last authorized beginning April 2021 through February 2023. Illinois approved a stipulation in March 2021 to allow the rider to be extended through the end of 2023. Missouri issued a base rate case order on April 7, 2021, authorizing recovery in rates of the COVID-19 financial impacts deferred through March 31, 2021 over a three-year period.
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CA, IA, IL, MO
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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 (a)
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(a)On July 28, 2021, the Company’s Tennessee subsidiary filed a stipulation and settlement agreement with the Consumer Advocate Unit in the Financial Division of the Office of the Tennessee Attorney General which reflects agreement on the deferral of foregone late fees and incremental operating expenses net of cost savings, all as of April 30, 2021. The deferral of these COVID-19 financial impacts will cease as of April 30, 2021. The stipulation and settlement agreement will be subject to Tennessee Public Utility Commission review and approval, with a hearing on the stipulation and settlement agreement scheduled on August 9, 2021.
The Pennsylvania Public Utility Commission (the “PaPUC”) has granted deferral authority on certain incremental expenses above those embedded in rates resulting from the COVID-19 pandemic. The Company’s Pennsylvania subsidiary has filed for confirmation to defer as a regulatory asset all identified COVID-19 financial impacts, with the proceeding currently pending before the PaPUC. A recommended decision from the Administrative Law Judge (“ALJ”) was issued on June 30, 2021, recommending the PaPUC deny the inclusion of waived late fees, waived reconnect fees, and additional interest costs. The ALJ decision recommended deferral of additional uncollectible costs not embedded in rates and COVID-19 related incremental direct costs and savings. The Company filed exceptions to this recommended decision on July 20, 2021 and reply exceptions on July 30, 2021, with a final order from the PaPUC expected later in the third quarter of 2021.
Consistent with these regulatory orders, the Company has recorded $44 million in regulatory assets and $5 million of regulatory liabilities for the financial impacts related to the COVID-19 pandemic on the Consolidated Balance Sheets as of June 30, 2021.
As of August 2, 2021, four states continue moratoria on the suspension of service disconnections due to non-payment. The moratoria on disconnects have expired in ten states.
Note 4: Regulatory Matters
General Rate Cases and Infrastructure Surcharges
Presented in the table below are annualized incremental revenues, excluding reductions for the amortization of excess accumulated deferred income tax (“EADIT”) that are generally offset in income tax expense, assuming a constant water sales volume, resulting from general rate case authorizations and infrastructure surcharge authorizations that became effective in the current period:
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During the Three Months Ended June 30,
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During the Six Months Ended June 30,
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(In millions)
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2021
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2020
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2021
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2020
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General rate cases by state:
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Missouri (effective May 28, 2021)
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$
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22
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$
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—
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$
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22
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$
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—
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New York (a)
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7
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—
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7
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—
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Pennsylvania (effective January 28, 2021)
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—
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—
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70
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—
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Indiana (b)
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—
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13
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—
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13
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California (c)
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—
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—
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—
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5
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Total general rate cases
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$
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29
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$
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13
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$
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99
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$
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18
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Infrastructure surcharges by state:
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New Jersey (effective June 28, 2021, June 29, 2020 and January 1, 2020)
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$
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14
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$
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10
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$
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14
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$
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20
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Indiana (effective March 17, 2021)
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—
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—
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8
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—
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Pennsylvania (effective January 1, 2021, April 1, 2020 and January 1, 2020)
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—
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5
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8
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15
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Illinois (effective January 1, 2021 and January 1, 2020)
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—
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—
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7
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7
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West Virginia (effective January 1, 2021 and January 1, 2020)
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—
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—
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5
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3
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Tennessee (d)
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—
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2
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3
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2
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Missouri (effective June 27, 2020)
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—
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10
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—
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10
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Total infrastructure surcharges
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$
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14
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$
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27
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$
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45
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$
|
57
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(a)The Company’s New York subsidiary implemented additional annualized revenues of $7 million on May 1, 2021. The increase was deferred with interest from April 1, 2020.
(b)The Company’s Indiana subsidiary filed for and, on May 4, 2020, received approval to implement a $13 million increase for 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.
(d)The Company’s Tennessee subsidiary received approval for infrastructure surcharges for annualized incremental revenues of $3 million, effective January 1, 2021, and received approval on May 11, 2020 for infrastructure surcharges for annualized incremental revenues of $2 million, effective January 1, 2020.
On August 28, 2020, the Company’s Iowa subsidiary filed a general rate case requesting $3 million in annualized incremental revenues. An order was issued on June 28, 2021 authorizing an increase of $1 million. On July 9, 2021, the Company’s Iowa subsidiary filed a Motion for Clarification with respect to the required accelerated flow back of unprotected EADIT over a three-year period to recognize the increase to rate base and incremental revenues as the unprotected EADIT it amortized. The Company’s Iowa subsidiary filed tariffs consistent with the Motion for Clarification on July 16, 2021, and is awaiting a decision from the Iowa Utilities Board on the Motion for Clarification before new rates are implemented.
Effective July 1, 2021, the Company’s Kentucky subsidiary implemented infrastructure surcharges for annualized incremental revenues of $1 million.
On April 7, 2021, the Company’s Missouri subsidiary was authorized additional annualized revenues of $22 million, effective May 28, 2021, excluding agreed to reductions for EADIT as a result of the Tax Cuts and Jobs Act of 2017 (the “TCJA”). The EADIT reduction in revenues is $25 million and is offset by a like reduction in income tax expense. The protected EADIT balance of $72 million is being returned to customers using the average rate assumption method (“ARAM”), and the unprotected EADIT balance of $74 million is being returned to customers over 10 years. The $25 million EADIT reduction includes both the protected and unprotected catch-up period EADIT of $13 million. The catch-up period of January 1, 2018 through May 31, 2021 covers the period from when the lower federal corporate income tax rate went into effect until new base rates went into effect and will be amortized over 2.5 years.
On March 2, 2021, an administrative law judge (“ALJ”) in the Office of Administrative Law of New Jersey filed an Initial Decision (“ID”) with the New Jersey Board of Public Utilities (the “NJBPU”) that recommended denial of a petition filed by the Company’s New Jersey subsidiary, which sought approval of acquisition adjustments in rates of $29 million associated with the acquisitions of Shorelands Water Company, Inc. in 2017 and the Borough of Haddonfield’s water and wastewater systems in 2015. On July 29, 2021, the NJBPU issued an order adopting the ALJ’s ID without modification. The Company’s New Jersey subsidiary is continuing to evaluate next steps, including grounds to move for reconsideration within the time permitted by law. There is no financial impact to the Company as a result of the NJBPU’s order, since the acquisition adjustments are currently recorded as goodwill on the Consolidated Balance Sheets.
On February 25, 2021, the Company’s Pennsylvania subsidiary was authorized additional annualized revenues of $90 million, effective January 28, 2021, excluding agreed to reductions for EADIT as a result of the TCJA, over two steps. The EADIT reduction in revenues is $19 million. The overall increase, net of TCJA reductions, is $71 million in revenues combined over two steps. The first step was effective January 28, 2021 in the amount of $70 million ($51 million including TCJA reductions) and the second step will be effective January 1, 2022 in the amount of $20 million. The protected EADIT balance of $200 million is being returned to customers using the ARAM, and the unprotected EADIT balance of $116 million is being returned to customers over 20 years. The $19 million annually includes both the protected and unprotected EADIT amortizations and a portion of catch-up period EADIT. A bill credit of $11 million annually for two years returns to customers the remainder of the EADIT catch-up period amortization. The catch-up period of January 1, 2018 through December 31, 2020 covers the period from when the lower federal corporate income tax rate went into effect until new base rates went into effect and will be amortized over two years.
Pending General Rate Case Filings
On April 30, 2021, the Company’s West Virginia subsidiary filed a general rate case requesting $32 million in annualized incremental revenues excluding proposed reductions for EADIT as a result of TCJA and infrastructure surcharges. The proposed EADIT reduction in revenues is $1 million and the exclusion for infrastructure surcharges is $10 million.
On July 1, 2019, the Company’s California subsidiary filed a general rate case requesting $29 million in annualized incremental revenues for 2021, and increases of $10 million and $11 million in the escalation year of 2022 and the attrition year of 2023, respectively. On October 11, 2019, the Company filed its 100-day update for the same proceeding and updated the request to $27 million in annualized incremental revenues for 2021, and increases of $10 million in both the escalation year of 2022 and the attrition year of 2023, respectively. On September 10, 2020, the California Public Utilities Commission (the “CPUC”) approved the Company’s California subsidiary’s motion for interim rates, establishing a memorandum account to track the difference between interim and final rates adopted by the CPUC in this proceeding, which were effective on January 1, 2021. Following settlement discussions among all parties to the proceeding, on January 22, 2021 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 submitted its cost of capital application on May 3, 2021. Once approved by the CPUC, the new authorized cost of capital will be effective January 1, 2022.
Pending Infrastructure Surcharge Filings
On June 30, 2021, the Company’s West Virginia subsidiary filed for an infrastructure surcharge requesting $3 million in additional annualized revenues.
On June 28, 2021, the Company’s Missouri subsidiary filed for an infrastructure surcharge requesting $7 million in additional annualized revenues.
Note 5: Revenue Recognition
Disaggregated Revenues
The Company’s primary business involves the ownership of utilities that provide water and wastewater services to residential, commercial, industrial, public authority, fire service and sale for resale customers, collectively presented as the “Regulated Businesses.” The Company also operates market-based businesses that provide water, wastewater and other services to residential and smaller commercial customers, the U.S. government on military installations, as well as municipalities and utility customers, collectively presented as the “Market-Based Businesses.”
Presented in the table below are operating revenues disaggregated for the three months ended June 30, 2021:
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Revenues from Contracts with Customers
|
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Other Revenues Not from Contracts with Customers (a)
|
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Total Operating Revenues
|
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Regulated Businesses:
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|
|
|
|
|
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Water services:
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|
|
|
|
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Residential
|
$
|
491
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|
|
$
|
—
|
|
|
$
|
491
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|
|
Commercial
|
170
|
|
|
—
|
|
|
170
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|
|
Fire service
|
37
|
|
|
—
|
|
|
37
|
|
|
Industrial
|
34
|
|
|
—
|
|
|
34
|
|
|
Public and other
|
56
|
|
|
—
|
|
|
56
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|
|
Total water services
|
788
|
|
|
—
|
|
|
788
|
|
|
Wastewater services:
|
|
|
|
|
|
|
Residential
|
38
|
|
|
—
|
|
|
38
|
|
|
Commercial
|
9
|
|
|
—
|
|
|
9
|
|
|
Industrial
|
1
|
|
|
—
|
|
|
1
|
|
|
Public and other
|
4
|
|
|
—
|
|
|
4
|
|
|
Total wastewater services
|
52
|
|
|
—
|
|
|
52
|
|
|
Miscellaneous utility charges
|
8
|
|
|
—
|
|
|
8
|
|
|
Alternative revenue programs
|
—
|
|
|
7
|
|
|
7
|
|
|
Lease contract revenue
|
—
|
|
|
2
|
|
|
2
|
|
|
Total Regulated Businesses
|
848
|
|
|
9
|
|
|
857
|
|
|
Market-Based Businesses
|
146
|
|
|
—
|
|
|
146
|
|
|
Other
|
(4)
|
|
|
—
|
|
|
(4)
|
|
|
Total operating revenues
|
$
|
990
|
|
|
$
|
9
|
|
|
$
|
999
|
|
(a)Includes revenues associated with provisional rates, alternative revenue programs, lease contracts and intercompany rent, which are outside the scope of Accounting Standards Codification Topic 606, Revenue From Contracts With Customers (“ASC 606”), and accounted for under other existing GAAP.
Presented in the table below are operating revenues disaggregated for the six months ended June 30, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from Contracts with Customers
|
|
Other Revenues Not from Contracts with Customers (a)
|
|
Total Operating Revenues
|
|
Regulated Businesses:
|
|
|
|
|
|
|
Water services:
|
|
|
|
|
|
|
Residential
|
$
|
921
|
|
|
$
|
—
|
|
|
$
|
921
|
|
|
Commercial
|
314
|
|
|
—
|
|
|
314
|
|
|
Fire service
|
74
|
|
|
—
|
|
|
74
|
|
|
Industrial
|
66
|
|
|
—
|
|
|
66
|
|
|
Public and other
|
100
|
|
|
—
|
|
|
100
|
|
|
Total water services
|
1,475
|
|
|
—
|
|
|
1,475
|
|
|
Wastewater services:
|
|
|
|
|
|
|
Residential
|
74
|
|
|
—
|
|
|
74
|
|
|
Commercial
|
18
|
|
|
—
|
|
|
18
|
|
|
Industrial
|
2
|
|
|
—
|
|
|
2
|
|
|
Public and other
|
8
|
|
|
—
|
|
|
8
|
|
|
Total wastewater services
|
102
|
|
|
—
|
|
|
102
|
|
|
Miscellaneous utility charges
|
16
|
|
|
—
|
|
|
16
|
|
|
Alternative revenue programs
|
—
|
|
|
16
|
|
|
16
|
|
|
Lease contract revenue
|
—
|
|
|
3
|
|
|
3
|
|
|
Total Regulated Businesses
|
1,593
|
|
|
19
|
|
|
1,612
|
|
|
Market-Based Businesses
|
283
|
|
|
—
|
|
|
283
|
|
|
Other
|
(8)
|
|
|
—
|
|
|
(8)
|
|
|
Total operating revenues
|
$
|
1,868
|
|
|
$
|
19
|
|
|
$
|
1,887
|
|
(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 $58 million and $39 million are included in unbilled revenues on the Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020, respectively. Contract assets of $26 million and $13 million are included in unbilled revenues on the Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019, respectively. There were $38 million of contract assets added during the six months ended June 30, 2021, and $19 million of contract assets were transferred to accounts receivable during the same period. There were $29 million of contract assets added during the six months ended June 30, 2020, and $16 million of contract assets were transferred to accounts receivable during the same period.
Contract liabilities of $44 million and $35 million are included in other current liabilities on the Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020, respectively. Contract liabilities of $37 million and $27 million are included in other current liabilities on the Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019, respectively. There were $90 million of contract liabilities added during the six months ended June 30, 2021, and $81 million of contract liabilities were recognized as revenue during the same period. There were $66 million of contract liabilities added during the six months ended June 30, 2020, and $56 million of contract liabilities were recognized as revenue during the same period.
Remaining Performance Obligations
Remaining performance obligations (“RPOs”) represent revenues the Company expects to recognize in the future from contracts that are in progress. The Company enters into agreements for the provision of services to water and wastewater facilities for the U.S. military, municipalities and other customers. As of June 30, 2021, the Company’s O&M and capital improvement contracts in the Market-Based Businesses have RPOs. Contracts with the U.S. government for work on various military installations expire between 2051 and 2071 and have RPOs of $6.3 billion as of June 30, 2021, as measured by estimated remaining contract revenue. Such contracts are subject to customary termination provisions held by the U.S. government, prior to the agreed-upon contract expiration. Contracts with municipalities and commercial customers expire between 2022 and 2038 and have RPOs of $624 million as of June 30, 2021, as measured by estimated remaining contract revenue. Some of the Company’s long-term contracts to operate and maintain the federal government’s, a municipality’s or other party’s water or wastewater treatment and delivery facilities include responsibility for certain maintenance for some of those facilities, in exchange for an annual fee. Unless specifically required to perform certain maintenance activities, the maintenance costs are recognized when the maintenance is performed.
Note 6: Acquisitions and Divestitures
During the six months ended June 30, 2021, the Company closed on the acquisition of seven regulated water and wastewater systems for a total aggregate purchase price of $17 million. Assets acquired from these acquisitions, principally utility plant, totaled $17 million. One of these acquisitions was accounted for as a business combination. The preliminary purchase price allocations related to an acquisition accounted for as a business combination will be finalized once the valuation of assets acquired has been completed, no later than one year after its acquisition date.
Subsequent to June 30, 2021, the Company closed on one regulated wastewater system for a total aggregate purchase price of $4 million.
On April 6, 2021, the Company’s Pennsylvania subsidiary entered into an agreement to acquire the wastewater assets of the York City Sewer Authority for $235 million, plus an amount of average daily revenue calculated for the period between the final meter reading and the date of closing. This system currently directly and indirectly through bulk contracts serves more than 45,000 customers. In connection with the execution of the acquisition agreement, the Company’s Pennsylvania subsidiary paid a $20 million deposit to the seller on April 30, 2021, which is refundable in the event the agreement is terminated prior to closing of the acquisition. The Company expects to close this acquisition in the first half of 2022, pending regulatory approval.
On March 29, 2021, the Company’s New Jersey subsidiary entered into an agreement to acquire the water and wastewater assets of Egg Harbor City for $22 million. The water and wastewater systems currently serve approximately 1,500 customers each, or 3,000 combined, and are being sold through the New Jersey Water Infrastructure Protection Act process. The Company expects to close this acquisition by the end of 2021, pending regulatory approval.
Assets Held for Sale
On November 20, 2019, the Company and the Company’s New York subsidiary, entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with Liberty Utilities Co., which it subsequently assigned to its indirect, wholly owned subsidiary Liberty Utilities (Eastern Water Holdings) Corp. (“Liberty”), pursuant to which Liberty will purchase all of the capital stock of the New York subsidiary (the “Stock Purchase”) for an aggregate purchase price of approximately $608 million in cash, subject to adjustment as provided in the Stock Purchase Agreement. The Company’s regulated New York operations have approximately 125,000 customers in the State of New York. Algonquin Power & Utilities Corp., Liberty’s ultimate parent company, executed and delivered an absolute and unconditional guaranty of the performance of all of the obligations of Liberty under the Stock Purchase Agreement. The Stock Purchase is subject to various conditions, including obtaining approvals and satisfying or waiving other closing conditions. The Stock Purchase Agreement as originally executed provided for an initial termination date of June 30, 2021 (the “Closing End Date”). On June 29, 2021, the parties mutually agreed to extend the Closing End Date to December 31, 2021 in accordance with the terms of the Stock Purchase Agreement, and agreed to extend further the Closing End Date to January 3, 2022 as December 31, 2021 is a federal holiday. No other provision of the Stock Purchase Agreement was modified by this mutual agreement. Liberty may also terminate the Stock Purchase Agreement if any governmental authority initiates a condemnation or eminent domain proceeding against a majority of the consolidated properties of the Company’s New York subsidiary, taken as a whole. The assets and related liabilities of the Company’s New York subsidiary were classified as held for sale on the Consolidated Balance Sheets as of June 30, 2021.
Presented in the table below are the components of assets held for sale and liabilities related to assets held for sale of the New York subsidiary as of June 30, 2021:
|
|
|
|
|
|
|
|
|
June 30, 2021
|
|
Property, plant and equipment
|
$
|
535
|
|
|
Current assets
|
17
|
|
|
Regulatory assets
|
77
|
|
|
Goodwill
|
27
|
|
|
Other assets
|
10
|
|
|
Assets held for sale
|
$
|
666
|
|
|
Current liabilities
|
15
|
|
|
Regulatory liabilities
|
48
|
|
|
Other liabilities
|
16
|
|
|
Liabilities related to assets held for sale
|
$
|
79
|
|
Note 7: Shareholders' Equity
Accumulated Other Comprehensive Loss
Presented in the table below are the changes in accumulated other comprehensive loss by component, net of tax, for the six months ended June 30, 2021 and 2020, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension Plans
|
|
Gain (Loss) on Cash Flow Hedges
|
|
Accumulated Other Comprehensive Loss
|
|
|
Employee Benefit Plan Funded Status
|
|
Amortization of Prior Service Cost
|
|
Amortization of Actuarial Loss
|
|
|
|
Balance as of December 31, 2020
|
$
|
(106)
|
|
|
$
|
1
|
|
|
$
|
63
|
|
|
$
|
(7)
|
|
|
$
|
(49)
|
|
|
Other comprehensive income before reclassifications
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
Net other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
2
|
|
|
1
|
|
|
3
|
|
|
Balance as of June 30, 2021
|
$
|
(106)
|
|
|
$
|
1
|
|
|
$
|
65
|
|
|
$
|
(6)
|
|
|
$
|
(46)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2019
|
$
|
(94)
|
|
|
$
|
1
|
|
|
$
|
60
|
|
|
$
|
(3)
|
|
|
$
|
(36)
|
|
|
Other comprehensive loss before reclassifications
|
—
|
|
|
—
|
|
|
—
|
|
|
(4)
|
|
|
(4)
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
Net other comprehensive income (loss)
|
—
|
|
|
—
|
|
|
1
|
|
|
(4)
|
|
|
(3)
|
|
|
Balance as of June 30, 2020
|
$
|
(94)
|
|
|
$
|
1
|
|
|
$
|
61
|
|
|
$
|
(7)
|
|
|
$
|
(39)
|
|
The Company does not reclassify the amortization of defined benefit pension cost components from accumulated other comprehensive loss directly to net income in its entirety, as a portion of these costs have been deferred as a regulatory asset. These accumulated other comprehensive loss components are included in the computation of net periodic pension cost.
The amortization of the gain (loss) on cash flow hedges is reclassified to net income during the period incurred and is included in interest, net in the accompanying Consolidated Statements of Operations.
Dividends
On June 1, 2021, the Company paid a quarterly cash dividend of $0.6025 per share to shareholders of record as of May 11, 2021.
On July 28, 2021, the Company’s Board of Directors declared a quarterly cash dividend payment of $0.6025 per share, payable on September 1, 2021 to shareholders of record as of August 10, 2021. Future dividends, when and as declared at the discretion of the Board of Directors, will be dependent upon future earnings and cash flows, compliance with various regulatory, financial and legal requirements, and other factors. See Note 10—Shareholders' Equity in the Notes to Consolidated Financial Statements in the Company’s Form 10-K for additional information regarding the payment of dividends on the Company’s common stock.
Note 8: Long-Term Debt
On May 10, 2021, American Water Capital Corp. (“AWCC”) completed a $1.1 billion debt offering, which included the sale of $550 million aggregate principal amount of its 2.30% senior notes due 2031 and $550 million aggregate principal amount of its 3.25% senior notes due 2051. At the closing of the offering, AWCC received, after deduction of underwriting discounts and before deduction of offering expenses, net proceeds of $1,086 million. AWCC used the net proceeds of this offering: (i) to lend funds to parent company and its regulated subsidiaries; (ii) to prepay $251 million aggregate principal amount of AWCC’s outstanding 5.77% Series D Senior Notes due December 21, 2021 (the “Series D Notes”) and $76 million aggregate principal amount of AWCC’s outstanding 6.55% Series H Senior Notes due May 15, 2023 (the “Series H Notes,” and together with the Series D Notes, the “Series Notes”); (iii) to repay AWCC’s commercial paper obligations; and (iv) for general corporate purposes. After the prepayments described above, none of the Series D Notes, and approximately $14 million aggregate principal amount of the Series H Notes, remain outstanding. As a result of AWCC’s prepayment of the Series Notes, a make-whole premium of $15 million was paid to the holders thereof on June 14, 2021. Substantially all of the early debt extinguishment costs were allocable to the Company’s utility subsidiaries and recorded as regulatory assets, as the Company believes they are probable of recovery in future rates.
On May 6, 2021, the Company entered into two 10-year treasury lock agreements, with notional amounts of $125 million and $150 million, to reduce interest rate exposure on debt, which was subsequently issued on May 10, 2021. These treasury lock agreements had an average fixed rate of 1.58%. The Company designated these treasury lock agreements as cash flow hedges, with their fair value recorded in accumulated other comprehensive gain or loss. On May 10, 2021, the Company terminated these two treasury lock agreements with an aggregate notional amount of $275 million, realizing a net gain of less than $1 million, to be amortized through interest, net over a 10-year period, in accordance with the terms of the $1.1 billion new debt issued on May 10, 2021. No ineffectiveness was recognized on hedging instruments for the three and six months ended June 30, 2021 and 2020.
In addition to the senior notes issued and retired by AWCC as described above, during the six months ended June 30, 2021, the Company’s regulated subsidiaries issued in the aggregate $2 million of private activity bonds and government funded debt in multiple transactions with annual interest rates ranging from 0.00% to 5.00%, with a weighted average interest rate of 0.27%, maturing in 2022 through 2047. During the six months ended June 30, 2021, AWCC and the Company’s regulated subsidiaries retired or paid at maturity an aggregate of $37 million of long-term debt issues with annual interest rates ranging from 0.00% to 12.25%, with a weighted average interest rate of 8.33%, maturing in 2021 through 2048.
Note 9: Short-Term Debt
Liquidity needs for capital investment, working capital and other financial commitments are funded through cash flows from operations, public and private debt offerings, commercial paper markets and, if and to the extent necessary, borrowings under the AWCC revolving credit facility. The revolving credit facility provides $2.25 billion in aggregate total commitments from a diversified group of financial institutions. The termination date of the credit agreement with respect to AWCC’s revolving credit facility is March 21, 2025. The facility is used principally to support AWCC’s commercial paper program, to provide additional liquidity support and to provide a sub-limit of up to $150 million for letters of credit.
On March 20, 2020, AWCC entered into a Term Loan Credit Agreement, by and among parent company, AWCC and the lenders party thereto (the “Term Loan Facility”). As of December 31, 2020, $500 million of principal was outstanding under the Term Loan Facility. The Term Loan Facility commitments terminated at maturity on March 19, 2021 and the Term Loan Facility was repaid in full. Borrowings under the Term Loan Facility bore interest at a variable annual rate based on LIBOR, plus a margin of 0.80%.
Short-term debt consists of commercial paper and credit facility borrowings totaling $606 million and $786 million as of June 30, 2021 and December 31, 2020, respectively. The weighted-average interest rate on AWCC’s outstanding short-term borrowings, including $500 million of outstanding principal on the Term Loan Facility as of December 31, 2020, was approximately 0.13% and 0.53% at June 30, 2021 and December 31, 2020, respectively. As of June 30, 2021 and December 31, 2020, there were no commercial paper or credit facility borrowings outstanding with maturities greater than three months.
Presented in the tables below is the aggregate credit facility commitments, commercial paper limit and letter of credit availability under the revolving credit facility, as well as the available capacity for each:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2021
|
|
|
Commercial Paper Limit
|
|
Letters of Credit
|
|
Total (a)
|
|
(In millions)
|
|
|
|
|
|
|
Total availability
|
$
|
2,100
|
|
|
$
|
150
|
|
|
$
|
2,250
|
|
|
Outstanding debt
|
(606)
|
|
|
(76)
|
|
|
(682)
|
|
|
Remaining availability as of June 30, 2021
|
$
|
1,494
|
|
|
$
|
74
|
|
|
$
|
1,568
|
|
(a)Total remaining availability of $1.57 billion as of June 30, 2021 may be accessed through revolver draws.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
|
Commercial Paper Limit
|
|
Letters of Credit
|
|
Total (a)
|
|
(In millions)
|
|
|
|
|
|
|
Total availability
|
$
|
2,100
|
|
|
$
|
150
|
|
|
$
|
2,250
|
|
|
Outstanding debt
|
(786)
|
|
|
(76)
|
|
|
(862)
|
|
|
Remaining availability as of December 31, 2020
|
$
|
1,314
|
|
|
$
|
74
|
|
|
$
|
1,388
|
|
(a)Total remaining availability of $1.39 billion as of December 31, 2020 may be accessed through revolver draws.
Presented in the table below is the Company’s total available liquidity as of June 30, 2021 and December 31, 2020, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
|
Availability on Revolving Credit Facility
|
|
Total Available Liquidity
|
|
(In millions)
|
|
|
|
|
|
|
Available liquidity as of June 30, 2021
|
$
|
70
|
|
|
1,568
|
|
|
$
|
1,638
|
|
|
Available liquidity as of December 31, 2020
|
$
|
547
|
|
|
$
|
1,388
|
|
|
$
|
1,935
|
|
Note 10: Income Taxes
The Company’s effective income tax rate was 17.5% and 24.1% for the three months ended June 30, 2021 and 2020, respectively, and 16.3% and 23.3% for the six months ended June 30, 2021 and 2020, respectively. The decrease in the Company’s effective income tax rate for the three and six months ended June 30, 2021 was primarily due to an increase in the amortization of EADIT resulting from the TCJA, pursuant to regulatory orders, and an increase in deductions for stock based compensation benefits.
Note 11: Pension and Other Postretirement Benefits
Presented in the table below are the components of net periodic benefit cost (credit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30,
|
|
For the Six Months Ended June 30,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Components of net periodic pension benefit cost:
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
9
|
|
|
$
|
8
|
|
|
$
|
18
|
|
|
$
|
16
|
|
|
Interest cost
|
16
|
|
|
18
|
|
|
33
|
|
|
37
|
|
|
Expected return on plan assets
|
(32)
|
|
|
(28)
|
|
|
(64)
|
|
|
(56)
|
|
|
Amortization of prior service credit
|
—
|
|
|
(1)
|
|
|
(1)
|
|
|
(2)
|
|
|
Amortization of actuarial loss
|
6
|
|
|
8
|
|
|
13
|
|
|
16
|
|
|
Net periodic pension benefit (credit) cost before settlements
|
(1)
|
|
|
5
|
|
|
(1)
|
|
|
11
|
|
|
Settlements (a)
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
Net periodic pension benefit (credit) cost
|
$
|
(1)
|
|
|
$
|
6
|
|
|
$
|
(1)
|
|
|
$
|
12
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic other postretirement benefit credit:
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
Interest cost
|
2
|
|
|
3
|
|
|
4
|
|
|
6
|
|
|
Expected return on plan assets
|
(5)
|
|
|
(5)
|
|
|
(10)
|
|
|
(9)
|
|
|
Amortization of prior service credit
|
(8)
|
|
|
(8)
|
|
|
(16)
|
|
|
(16)
|
|
|
Amortization of actuarial loss
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Net periodic other postretirement benefit credit
|
$
|
(10)
|
|
|
$
|
(9)
|
|
|
$
|
(20)
|
|
|
$
|
(16)
|
|
(a)Due to the amount of lump sum payment distributions from the Company’s New York Water Service Corporation Pension Plan, a settlement charge of less than $1 million was recorded during the three and six months ended June 30, 2021, and a settlement charge of $1 million was recorded during the three and six months ended June 30, 2020. In accordance with existing regulatory accounting treatment, the Company has maintained the settlement charge in regulatory assets. The amount is being amortized in accordance with existing regulatory practice.
The Company contributed $9 million and $18 million for the funding of its defined benefit pension plans for the three and six months ended June 30, 2021, respectively, and contributed $12 million and $22 million for the funding of its defined benefit pension plans for the three and six months ended June 30, 2020, respectively. The Company made no contributions for the funding of its other postretirement benefit plans for each of the three and six months ended June 30, 2021 and 2020. The Company expects to make pension and postretirement contributions to the plan trusts of $22 million during the remainder of 2021.
Note 12: Commitments and Contingencies
Contingencies
The Company is routinely involved in legal actions incident to the normal conduct of its business. As of June 30, 2021, the Company has accrued approximately $5 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 $2 million. For certain matters, claims and actions, the Company is unable to estimate possible losses. The Company believes that damages or settlements, if any, recovered by plaintiffs in such matters, claims or actions, other than as described in this Note 12—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 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 June 30, 2021, $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 June 30, 2021 reflects reductions in the liability and appropriate reductions to the offsetting insurance receivable reflected in other current assets, associated with payments made to the Settlement fund, the receipt of a determination by the Settlement fund’s appeal adjudicator on all remaining medical claims and the calculation of remaining attorneys’ fees and claims administration costs. The Company funded WVAWC’s contributions to the Settlement through existing sources of liquidity.
Dunbar, West Virginia Water Main Break Class Action Litigation
On the evening of June 23, 2015, a 36-inch pre-stressed concrete transmission water main, installed in the early 1970s, failed. The water main is part of the West Relay pumping station located in the City of Dunbar, West Virginia and owned by WVAWC. The failure of the main caused water outages and low pressure for up to approximately 25,000 WVAWC customers. In the early morning hours of June 25, 2015, crews completed a repair, but that same day, the repair developed a leak. On June 26, 2015, a second repair was completed and service was restored that day to approximately 80% of the impacted customers, and to the remaining approximately 20% by the next morning. The second repair showed signs of leaking, but the water main was usable until June 29, 2015 to allow tanks to refill. The system was reconfigured to maintain service to all but approximately 3,000 customers while a final repair was being completed safely on June 30, 2015. Water service was fully restored by July 1, 2015 to all customers affected by this event.
On June 2, 2017, a complaint captioned Jeffries, et al. v. West Virginia-American Water Company was filed in West Virginia Circuit Court in Kanawha County on behalf of an alleged class of residents and business owners who lost water service or pressure as a result of the Dunbar main break. The complaint alleges breach of contract by WVAWC for failure to supply water, violation of West Virginia law regarding the sufficiency of WVAWC’s facilities and negligence by WVAWC in the design, maintenance and operation of the water system. The Jeffries plaintiffs seek unspecified alleged damages on behalf of the class for lost profits, annoyance and inconvenience, and loss of use, as well as punitive damages for willful, reckless and wanton behavior in not addressing the risk of pipe failure and a large outage.
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 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. A briefing schedule has been set and, following briefing by all parties, oral argument on the issue of class certification was heard on July 16, 2021. This matter remains pending.
The Company and WVAWC believe that WVAWC has valid, meritorious defenses to the claims raised in this class action complaint. WVAWC is vigorously defending itself against these allegations. The Company cannot currently determine the likelihood of a loss, if any, or estimate the amount of any loss or a range of such losses related to this proceeding.
Chattanooga, Tennessee Water Main Break Class Action Litigation
On September 12, 2019, the Company’s Tennessee subsidiary (“TAWC”), experienced a leak in a 36-inch water transmission main, which caused service fluctuations or interruptions to TAWC customers and the issuance of a boil water notice. TAWC repaired the main by early morning on September 14, 2019, and restored full water service by the afternoon of September 15, 2019, with the boil water notice lifted for all customers on September 16, 2019.
On September 17, 2019, a complaint captioned Bruce, et al. v. American Water Works Company, Inc., et al. was filed in the Circuit Court of Hamilton County, Tennessee against TAWC, the Company and American Water Works Service Company, Inc. (“Service Company,” and together with TAWC and the Company, collectively, the “Tennessee-American Water Defendants”), on behalf of a proposed class of individuals or entities who lost water service or suffered monetary losses as a result of the Chattanooga incident (the “Tennessee Plaintiffs”). The complaint alleged breach of contract and negligence against the Tennessee-American Water Defendants, as well as an equitable remedy of piercing the corporate veil. In the complaint as originally filed, the Tennessee Plaintiffs were seeking an award of unspecified alleged damages for wage losses, business and economic losses, out-of-pocket expenses, loss of use and enjoyment of property and annoyance and inconvenience, as well as punitive damages, attorneys’ fees and pre- and post-judgment interest.
On November 22, 2019, the Tennessee-American Water Defendants filed a motion to dismiss the complaint for failure to state a claim upon which relief may be granted, and, with respect to the Company, for lack of personal jurisdiction. Oral argument on the motion to dismiss took place on September 9, 2020. On September 18, 2020, the court (i) granted the motion to dismiss the Tennessee Plaintiffs’ negligence claim against all Tennessee-American Water Defendants, (ii) denied the motion to dismiss the breach of contract claim against TAWC, (iii) held in abeyance the motion to dismiss the breach of contract claims against the Company and Service Company pending a further hearing and (iv) held in abeyance the Company’s motion to dismiss the complaint for lack of personal jurisdiction. On September 24, 2020, at the request of the Tennessee Plaintiffs, the court dismissed without prejudice all claims in the Bruce complaint against the Company and Service Company. The impact of the September 2020 court orders was that all of the Tennessee Plaintiffs’ claims in this complaint were dismissed, other than the breach of contract claims against TAWC. On October 16, 2020, TAWC answered the complaint, and the parties are conducting discovery.
TAWC and the Company believe that TAWC has meritorious defenses to the claims raised in this class action complaint, and TAWC is vigorously defending itself against these allegations. The Company cannot currently determine the likelihood of a loss, if any, or estimate the amount of any loss or a range of such losses related to this proceeding.
Alternative Water Supply in Lieu of Carmel River Diversions
Compliance with Orders to Reduce Carmel River Diversions—Monterey Peninsula Water Supply Project
Under a 2009 order (the “2009 Order”) of the State Water Resources Control Board (the “SWRCB”), the Company’s California subsidiary (“Cal Am”) is required to decrease significantly its yearly diversions of water from the Carmel River according to a set reduction schedule. In 2016, the SWRCB issued an order (the “2016 Order”) approving a deadline of December 31, 2021 for Cal Am’s compliance with these prior orders (the “2021 Deadline”).
Cal Am is currently involved in developing the Monterey Peninsula Water Supply Project (the “Water Supply Project”), which includes the construction of a desalination plant, to be owned by Cal Am, and the construction of wells that would supply water to the desalination plant. In addition, the Water Supply Project also includes Cal Am’s purchase of water from a groundwater replenishment project (the “GWR Project”) between Monterey One Water and the 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 an allowance for funds used during construction (“AFUDC”), subject to meeting certain criteria.
In September 2018, the CPUC unanimously approved another final decision finding that (i) the Water Supply Project meets the CPUC’s requirements for a certificate of public convenience and necessity, (ii) the issuance of the final decision should not be delayed, and (iii) an additional procedural phase was not necessary to consider alternative projects. The CPUC’s 2018 decision concludes that the Water Supply Project is the best project to address estimated future water demands in Monterey, and, in addition to the cost recovery approved in its 2016 decision, adopts Cal Am’s cost estimates for the Water Supply Project, which amounted to an aggregate of $279 million plus AFUDC at a rate representative of Cal Am’s actual financing costs. The 2018 final decision specifies the procedures for recovery of all of Cal Am’s prudently incurred costs associated with the Water Supply Project upon its completion, subject to the frameworks included in the final decision related to cost caps, operation and maintenance costs, financing, ratemaking and contingency matters. The reasonableness of the Water Supply Project costs will be reviewed by the CPUC when Cal Am seeks cost recovery for the Water Supply Project. Cal Am has incurred $166 million in aggregate costs as of June 30, 2021 related to the Water Supply Project, which includes $41 million in AFUDC. While Cal Am believes that its expenditures to date have been prudent and necessary to comply with the 2009 Order and the 2016 Order, as well as the CPUC’s 2016 and 2018 final decisions, Cal Am cannot currently predict its ability to recover all of its costs and expenses associated with the Water Supply Project and there can be no assurance that Cal Am will be able to recover all of such costs and expenses in excess of the $50 million in construction costs previously approved by the CPUC in its 2016 final decision.
Coastal Development Permit Application
In June 2018, Cal Am submitted a coastal development permit application to the City of Marina (the “City”) for those project components of the Water Supply Project located within the City’s coastal zone. Members of the City’s Planning Commission, as well as City councilpersons, have publicly expressed opposition to the Water Supply Project. In May 2019, the City issued a notice of final local action based upon the denial by the Planning Commission of Cal Am’s coastal development permit application. Thereafter, Cal Am appealed this decision to the California Coastal Commission (the “Coastal Commission”), as permitted under the City’s code and the California Coastal Act. At the same time, Cal Am submitted an application to the Coastal Commission for a coastal development permit for those project components located within the Coastal Commission’s original jurisdiction. In October 2019, staff of the Coastal Commission issued a report recommending a denial of Cal Am’s application for a coastal development permit with respect to the Water Supply Project, largely based on a memorandum prepared by the general manager of the MPWMD that contradicted findings made by the CPUC in its final decision approving the Water Supply Project. In November 2019, discussions between staffs of the Coastal Commission and the CPUC took place regarding the Coastal Commission staff recommendation, at which time the CPUC raised questions about the Coastal Commission staff’s findings on water supply and demand, groundwater impacts and the viability of a project that the Coastal Commission staff believes may be a possible alternative to the Water Supply Project.
In August 2020, the staff of the Coastal Commission released a report again recommending denial of Cal Am’s application for a coastal development permit. Although the report concluded that the Water Supply Project would have a negligible impact on groundwater resources, the report also concluded it would impact other coastal resources, such as environmentally sensitive habitat areas and wetlands, and that the Coastal Commission staff believes that a feasible alternative project exists that would avoid those impacts. The staff’s report also noted disproportionate impacts to communities of concern. In September 2020, Cal Am withdrew its original jurisdiction application to allow additional time to address the Coastal Commission staff’s environmental justice concerns. The withdrawal of the original jurisdiction application did not impact Cal Am’s appeal of the City’s denial, which remains pending before the Coastal Commission. Cal Am refiled the original jurisdiction application in November 2020. In December 2020, the Coastal Commission sent to Cal Am a notice of incomplete application, identifying certain additional information needed to consider the application complete. In March 2021, Cal Am provided responses to the Coastal Commission’s notice of incomplete application. On June 18, 2021, the Coastal Commission responded, acknowledging the responses and requesting certain additional information before the application could be considered complete. The original jurisdiction application remains pending.
Cal Am continues to work constructively with all appropriate agencies to provide necessary information in connection with obtaining required approvals for the Water Supply Project. However, based on the foregoing, there can be no assurance that the Water Supply Project in its current configuration will be completed on a timely basis, if ever. Due to the delay in the approval schedule for the Water Supply Project, Cal Am currently does not expect that it will be able to comply with the diversion reduction requirement schedule contained in the 2016 Order until January 2022. The 2009 Order and the 2016 Order remain in effect until Cal Am certifies to the SWRCB, and the SWRCB concurs, that Cal Am has obtained a permanent supply of water to substitute for past unauthorized Carmel River diversions. While the Company cannot currently predict the likelihood or result of any adverse outcome associated with these matters, further attempts to comply with the 2009 Order and the 2016 Order, or the 2021 Deadline, may result in material additional costs and obligations to Cal Am, including fines and penalties against Cal Am in the event of noncompliance with the 2009 Order and the 2016 Order.
Note 13: Earnings per Common Share
Presented in the table below is a reconciliation of the numerator and denominator for the basic and diluted EPS calculations:
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For the Three Months Ended June 30,
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For the Six Months Ended June 30,
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2021
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2020
|
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2021
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2020
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|
Numerator:
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Net income attributable to common shareholders
|
$
|
207
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$
|
176
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$
|
340
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$
|
300
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Denominator:
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Weighted-average common shares outstanding—Basic
|
182
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|
181
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|
181
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|
181
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Effect of dilutive common stock equivalents
|
—
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|
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—
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1
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|
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—
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Weighted-average common shares outstanding—Diluted
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182
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|
|
181
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|
|
182
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|
|
181
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|
The effect of dilutive common stock equivalents is related to outstanding stock options, restricted stock units (“RSUs”) and performance stock units (“PSUs”) granted under the Company’s 2007 Omnibus Equity Compensation Plan and outstanding RSUs and PSUs granted under the Company’s 2017 Omnibus Equity Compensation Plan, as well as estimated shares to be purchased under the Company’s 2017 Nonqualified Employee Stock Purchase Plan. Less than one million share-based awards were excluded from the computation of diluted EPS for the three and six months ended June 30, 2021 and 2020, because their effect would have been anti-dilutive under the treasury stock method.
Note 14: Fair Value of Financial Information
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments:
Current assets and current liabilities—The carrying amounts reported on the Consolidated Balance Sheets for current assets and current liabilities, including revolving credit debt, due to the short-term maturities and variable interest rates, approximate their fair values.
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:
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As of June 30, 2021
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Carrying Amount
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At Fair Value
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Level 1
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Level 2
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Level 3
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Total
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Preferred stock with mandatory redemption requirements
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$
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4
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$
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—
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$
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—
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|
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$
|
6
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$
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6
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Long-term debt (excluding finance lease obligations)
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10,390
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10,288
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|
62
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1,660
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12,010
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As of December 31, 2020
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Carrying Amount
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At Fair Value
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Level 1
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Level 2
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Level 3
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Total
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Preferred stock with mandatory redemption requirements
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$
|
5
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$
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—
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$
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—
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|
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$
|
7
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|
|
$
|
7
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Long-term debt (excluding finance lease obligations)
|
9,656
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|
|
9,639
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|
|
415
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|
|
1,753
|
|
|
11,807
|
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Recurring Fair Value Measurements
Presented in the tables below are assets and liabilities measured and recorded at fair value on a recurring basis and their level within the fair value hierarchy:
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As of June 30, 2021
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Level 1
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Level 2
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Level 3
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Total
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Assets:
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Restricted funds
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$
|
34
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$
|
—
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|
|
$
|
—
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|
|
$
|
34
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Rabbi trust investments
|
22
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|
|
—
|
|
|
—
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|
|
22
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|
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Deposits
|
26
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|
|
—
|
|
|
—
|
|
|
26
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|
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Other investments
|
17
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|
|
—
|
|
|
—
|
|
|
17
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Total assets
|
99
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|
|
—
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|
|
—
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|
|
99
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Liabilities:
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|
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|
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Deferred compensation obligations
|
26
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|
|
—
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|
|
—
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|
|
26
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Total liabilities
|
26
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|
|
—
|
|
|
—
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|
|
26
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Total assets
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$
|
73
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|
|
$
|
—
|
|
|
$
|
—
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|
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$
|
73
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As of December 31, 2020
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Level 1
|
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Level 2
|
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Level 3
|
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Total
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Assets:
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Restricted funds
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$
|
29
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$
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—
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|
|
$
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—
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|
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$
|
29
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Rabbi trust investments
|
19
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—
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—
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|
19
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Deposits
|
4
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|
—
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—
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4
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Other investments
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11
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—
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—
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|
|
11
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Total assets
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63
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—
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—
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63
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Liabilities:
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Deferred compensation obligations
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24
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—
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—
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24
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Total liabilities
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24
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—
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—
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24
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Total assets
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$
|
39
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$
|
—
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|
$
|
—
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$
|
39
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|
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 June 30, 2021.
Other investments—Other investments primarily represent money market funds used for active employee benefits. The Company includes other investments in other current assets on the Consolidated Balance Sheets.
Note 15: Leases
The Company has operating and finance leases involving real property, including facilities, utility assets, vehicles, and equipment. Certain operating leases have renewal options ranging from one to 60 years. The exercise of lease renewal options is at the Company’s sole discretion. Renewal options that the Company was reasonably certain to exercise are included in the Company’s right-of-use (“ROU”) assets. Certain operating leases contain the option to purchase the leased property. The operating leases for real property, vehicles and equipment will expire over the next 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 $146 million and $147 million as of June 30, 2021 and December 31, 2020, 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 $2 million in 2021 and $4 million in 2022 through 2025, and $52 million thereafter, are included in operating lease ROU assets and operating lease liabilities on the Consolidated Balance Sheets.
Rental expenses under operating and finance leases were $4 million and $3 million for the three months ended June 30, 2021 and June 30, 2020, respectively, and $7 million and $7 million for the six months ended June 30, 2021 and June 30, 2020, respectively.
For the three and six months ended June 30, 2021, cash paid for amounts in lease liabilities, which includes operating and financing cash flows from operating and finance leases, were $4 million and $7 million, respectively. For the three months ended June 30, 2021, there were no ROU assets obtained in exchange for new operating lease liabilities. For the six months ended June 30, 2021, there were ROU assets obtained in exchange for new operating lease liabilities of $6 million.
As of June 30, 2021, 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 June 30, 2021 are $6 million in 2021, $12 million in 2022, $8 million in 2023, $7 million in 2024, $7 million in 2025 and $96 million thereafter. At June 30, 2021 imputed interest was $46 million.
Note 16: Segment Information
The Company’s operating segments are comprised of the revenue-generating components of its businesses for which separate financial information is internally produced and regularly used by management to make operating decisions, assess performance and allocate resources. The Company 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. “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:
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As of or for the Three Months Ended June 30, 2021
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Regulated Businesses
|
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Market-Based Businesses
|
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Other
|
|
Consolidated
|
|
Operating revenues
|
$
|
857
|
|
|
$
|
146
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|
|
$
|
(4)
|
|
|
$
|
999
|
|
|
Depreciation and amortization
|
151
|
|
|
6
|
|
|
1
|
|
|
158
|
|
|
Total operating expenses, net
|
552
|
|
|
119
|
|
|
(2)
|
|
|
669
|
|
|
Interest, net
|
(72)
|
|
|
(1)
|
|
|
(28)
|
|
|
(101)
|
|
|
Income before income taxes
|
257
|
|
|
26
|
|
|
(32)
|
|
|
251
|
|
|
Provision for income taxes
|
42
|
|
|
6
|
|
|
(4)
|
|
|
44
|
|
|
Net income attributable to common shareholders
|
215
|
|
|
19
|
|
|
(27)
|
|
|
207
|
|
|
Total assets
|
22,445
|
|
|
899
|
|
|
1,608
|
|
|
24,952
|
|
|
Cash paid for capital expenditures
|
406
|
|
|
2
|
|
|
2
|
|
|
410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the Three Months Ended June 30, 2020
|
|
|
Regulated Businesses
|
|
Market-Based Businesses
|
|
Other
|
|
Consolidated
|
|
Operating revenues
|
$
|
803
|
|
|
$
|
132
|
|
|
$
|
(4)
|
|
|
$
|
931
|
|
|
Depreciation and amortization
|
144
|
|
|
7
|
|
|
1
|
|
|
152
|
|
|
Total operating expenses, net
|
512
|
|
|
102
|
|
|
4
|
|
|
618
|
|
|
Interest, net
|
(74)
|
|
|
—
|
|
|
(27)
|
|
|
(101)
|
|
|
Income before income taxes
|
236
|
|
|
30
|
|
|
(34)
|
|
|
232
|
|
|
Provision for income taxes
|
58
|
|
|
8
|
|
|
(10)
|
|
|
56
|
|
|
Net income attributable to common shareholders
|
177
|
|
|
23
|
|
|
(24)
|
|
|
176
|
|
|
Total assets
|
21,536
|
|
|
1,075
|
|
|
1,398
|
|
|
24,009
|
|
|
Cash paid for capital expenditures
|
457
|
|
|
3
|
|
|
2
|
|
|
462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the Six Months Ended June 30, 2021
|
|
|
Regulated Businesses
|
|
Market-Based Businesses
|
|
Other
|
|
Consolidated
|
|
Operating revenues
|
$
|
1,612
|
|
|
$
|
283
|
|
|
$
|
(8)
|
|
|
$
|
1,887
|
|
|
Depreciation and amortization
|
298
|
|
|
11
|
|
|
6
|
|
|
315
|
|
|
Total operating expenses, net
|
1,095
|
|
|
233
|
|
|
—
|
|
|
1,328
|
|
|
Interest, net
|
(143)
|
|
|
(2)
|
|
|
(54)
|
|
|
(199)
|
|
|
Income before income taxes
|
420
|
|
|
48
|
|
|
(62)
|
|
|
406
|
|
|
Provision for income taxes
|
70
|
|
|
12
|
|
|
(16)
|
|
|
66
|
|
|
Net income attributable to common shareholders
|
350
|
|
|
36
|
|
|
(46)
|
|
|
340
|
|
|
Total assets
|
22,445
|
|
|
899
|
|
|
1,608
|
|
|
24,952
|
|
|
Cash paid for capital expenditures
|
744
|
|
|
4
|
|
|
4
|
|
|
752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the Six Months Ended June 30, 2020
|
|
|
Regulated Businesses
|
|
Market-Based Businesses
|
|
Other
|
|
Consolidated
|
|
Operating revenues
|
$
|
1,523
|
|
|
$
|
260
|
|
|
$
|
(8)
|
|
|
$
|
1,775
|
|
|
Depreciation and amortization
|
279
|
|
|
13
|
|
|
5
|
|
|
297
|
|
|
Total operating expenses, net
|
1,015
|
|
|
201
|
|
|
7
|
|
|
1,223
|
|
|
Interest, net
|
(146)
|
|
|
1
|
|
|
(52)
|
|
|
(197)
|
|
|
Income before income taxes
|
398
|
|
|
60
|
|
|
(67)
|
|
|
391
|
|
|
Provision for income taxes
|
98
|
|
|
16
|
|
|
(23)
|
|
|
91
|
|
|
Net income attributable to common shareholders
|
300
|
|
|
45
|
|
|
(45)
|
|
|
300
|
|
|
Total assets
|
21,536
|
|
|
1,075
|
|
|
1,398
|
|
|
24,009
|
|
|
Cash paid for capital expenditures
|
861
|
|
|
6
|
|
|
3
|
|
|
870
|
|
