UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

Commission file number: 001-34028

AMERICAN WATER WORKS COMPANY, INC.

(Exact name of registrant as specified in its charter)

Delaware	51-0063696
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1 Water Street, Camden, NJ 08102-1658

(Address of principal executive offices) (Zip Code)

(856) 955-4001

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
Common stock, par value $0.01 per share	AWK	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ☒  Yes    ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐	Non-accelerated filer	☐
Smaller reporting company	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).  ☐ Yes  ☒ No    

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.

Class	Shares Outstanding as of October 23, 2023
Common Stock, par value $0.01 per share	194,704,997

TABLE OF CONTENTS

		Page
Forward-Looking Statements		1
	Part I. Financial Information
Item 1.	Consolidated Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	48
	Part II. Other Information
Item 1.	Legal Proceedings	50
Item 1A.	Risk Factors	51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51
Item 3.	Defaults Upon Senior Securities	51
Item 4.	Mine Safety Disclosures	51
Item 5.	Other Information	51
Item 6.	Exhibits	52
Signatures		53

*    *    *

Throughout this Quarterly Report on Form 10-Q (“Form 10-Q”), unless the context otherwise requires, references to the “Company” and “American Water” mean American Water Works Company, Inc. and all of its subsidiaries, taken together as a whole. References to the “parent company” mean American Water Works Company, Inc., without its subsidiaries.

The Company maintains a website at https://amwater.com, an Investor Relations website at https://ir.amwater.com, and a Diversity and Inclusion website at https://diversityataw.com. Information contained on the Company’s websites, including its Sustainability Report, its Inclusion, Diversity and Equity Report, and other reports or documents, shall not be deemed incorporated into, or to be a part of, this report, and any website references included herein are not intended to be made through active hyperlinks.

i

FORWARD-LOOKING STATEMENTS

Statements included in Part I, Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations and in other sections of this Form 10-Q are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995. In some cases, these forward-looking statements can be identified by words with prospective meanings such as “intend,” “plan,” “estimate,” “believe,” “anticipate,” “expect,” “predict,” “project,” “propose,” “assume,” “forecast,” “likely,” “uncertain,” “outlook,” “future,” “pending,” “goal,” “objective,” “potential,” “continue,” “seek to,” “may,” “can,” “should,” “will” and “could” or the negative of such terms or other variations or similar expressions. Forward-looking statements may relate to, among other things: the Company’s future financial performance, liquidity and cash flows; the timing and amount of rate and revenue adjustments, including through general rate case filings, filings for infrastructure surcharges and other governmental agency authorizations and proceedings, and filings to address regulatory lag; the Company’s growth and portfolio optimization strategies, including the timing and outcome of pending or future acquisition activity; the ability of the Company’s California subsidiary to obtain adequate alternative water supplies in lieu of diversions from the Carmel River; the amount and allocation of projected capital expenditures and related funding requirements; the Company’s ability to repay or refinance debt; the future impacts of increased or increasing financing costs, inflation and interest rates; the Company’s ability to execute its current and long-term business, operational and capital expenditures strategies; the Company’s ability to finance current operations, capital expenditures and growth initiatives by accessing the debt and equity capital markets; the outcome and impact on the Company of governmental and regulatory proceedings and related potential fines, penalties and other sanctions; the ability to meet or exceed the Company’s stated environmental and sustainability goals, including its greenhouse gas (“GHG”) emission reduction, water delivery efficiency and water system resiliency goals; the ability to complete, and the timing and efficacy of, the design, development, implementation and improvement of technology and other strategic initiatives; the ability to capitalize on existing or future utility privatization opportunities; trends in the water and wastewater industries in which the Company operates, including macro trends with respect to the Company’s efforts related to customer, technology and work execution; regulatory, legislative, tax policy or legal developments; and impacts that future significant tax legislation may have on the Company and on its business, results of operations, cash flows and liquidity.

Forward-looking statements are predictions based on the Company’s current expectations and assumptions regarding future events. They are not guarantees or assurances of any outcomes, financial results, levels of activity, performance or achievements, and readers are cautioned not to place undue reliance upon them. These forward-looking statements are subject to a number of estimates, assumptions, known and unknown risks, uncertainties and other factors. The Company’s actual results may vary materially from those discussed in the forward-looking statements included herein as a result of the following important factors:

•the decisions of governmental and regulatory bodies, including decisions to raise or lower customer rates;

•the timeliness and outcome of regulatory commissions’ and other authorities’ actions concerning rates, capital structure, authorized return on equity, capital investment, system acquisitions and dispositions, taxes, permitting, water supply and management, and other decisions;

•changes in customer demand for, and patterns of use of, water and energy, such as may result from conservation efforts, or otherwise;

•limitations on the availability of the Company’s water supplies or sources of water, or restrictions on its use thereof, resulting from allocation rights, governmental or regulatory requirements and restrictions, drought, overuse or other factors;

•a loss of one or more large industrial or commercial customers due to adverse economic conditions or other factors;

•changes in laws, governmental regulations and policies, including with respect to the environment, health and safety, data and consumer privacy, security and protection, water quality and water quality accountability, contaminants of emerging concern, public utility and tax regulations and policies, and impacts resulting from U.S., state and local elections and changes in federal, state and local executive administrations;

•the Company’s ability to collect, distribute, use, secure and store consumer data in compliance with current or future governmental laws, regulations and policies with respect to data and consumer privacy, security and protection;

•weather conditions and events, climate variability patterns, and natural disasters, including drought or abnormally high rainfall, prolonged and abnormal ice or freezing conditions, strong winds, coastal and intercoastal flooding, pandemics (including COVID-19) and epidemics, earthquakes, landslides, hurricanes, tornadoes, wildfires, electrical storms, sinkholes and solar flares;

•the outcome of litigation and similar governmental and regulatory proceedings, investigations or actions;

•the risks associated with the Company’s aging infrastructure, and its ability to appropriately improve the resiliency of or maintain, update, redesign and/or replace, current or future infrastructure and systems, including its technology and other assets, and manage the expansion of its businesses;

1

•exposure or infiltration of the Company’s technology and critical infrastructure systems, including the disclosure of sensitive, personal or confidential information contained therein, through physical or cyber attacks or other means;

•the Company’s ability to obtain permits and other approvals for projects and construction, update, redesign and/or replacement of various water and wastewater facilities;

•changes in the Company’s capital requirements;

•the Company’s ability to control operating expenses and to achieve operating efficiencies;

•the intentional or unintentional actions of a third party, including contamination of the Company’s water supplies or the water provided to its customers;

•the Company’s ability to obtain and have delivered adequate and cost-effective supplies of pipe, equipment (including personal protective equipment), chemicals, power and other fuel, water and other raw materials, and to address or mitigate supply chain constraints that may result in delays or shortages in, as well as increased costs of, supplies, products and materials that are critical to or used in the Company’s business operations;

•the Company’s ability to successfully meet its operational growth projections, either individually or in the aggregate, and capitalize on growth opportunities, including, among other things, with respect to:

•acquiring, closing and successfully integrating regulated operations;

•the Company’s Military Services Group (“MSG”) entering into new military installation contracts, price redeterminations, and other agreements and contracts with the U.S. government; and

•realizing anticipated benefits and synergies from new acquisitions;

•risks and uncertainties following the completion of the sale of the Company’s Homeowner Services Group (“HOS”), including:

•the Company’s ability to receive any contingent consideration provided for in the HOS sale, as well as amounts due, payable and owing to the Company under the seller note when due; and

•the ability of the Company to redeploy successfully and timely the net proceeds of this transaction into the Company’s Regulated Businesses;

•risks and uncertainties associated with contracting with the U.S. government, including ongoing compliance with applicable government procurement and security regulations;

•cost overruns relating to improvements in or the expansion of the Company’s operations;

•the Company’s ability to successfully develop and implement new technologies and to protect related intellectual property;

•the Company’s ability to maintain safe work sites;

•the Company’s exposure to liabilities related to environmental laws and similar matters resulting from, among other things, water and wastewater service provided to customers;

•the ability of energy providers, state governments and other third parties to achieve or fulfill their GHG emission reduction goals, including without limitation through stated renewable portfolio standards and carbon transition plans;

•changes in general economic, political, business and financial market conditions;

•access to sufficient debt and/or equity capital on satisfactory terms and as needed to support operations and capital expenditures;

•fluctuations in inflation or interest rates, and the Company’s ability to address or mitigate the impacts thereof;

•the ability to comply with affirmative or negative covenants in the current or future indebtedness of the Company or any of its subsidiaries, or the issuance of new or modified credit ratings or outlooks by credit rating agencies with respect to the Company or any of its subsidiaries (or any current or future indebtedness thereof), which could increase financing costs or funding requirements and affect the Company’s or its subsidiaries’ ability to issue, repay or redeem debt, pay dividends or make distributions;

•fluctuations in the value of, or assumptions and estimates related to, its benefit plan assets and liabilities, including with respect to its pension and other post-retirement benefit plans, that could increase expenses and plan funding requirements;

•changes in federal or state general, income and other tax laws, including (i) future significant tax legislation or regulations, and (ii) the availability of, or the Company’s compliance with, the terms of applicable tax credits and tax abatement programs;

•migration of customers into or out of the Company’s service territories and changes in water and energy consumption resulting therefrom;

2

•the use by municipalities of the power of eminent domain or other authority to condemn the systems of one or more of the Company’s utility subsidiaries, including without limitation potential proceedings with respect to the water system assets of the Company’s California subsidiary (“Cal Am”) located in Monterey, California (the “Monterey system assets”), or the assertion by private landowners of similar rights against such utility subsidiaries;

•any difficulty or inability to obtain insurance for the Company, its inability to obtain insurance at acceptable rates and on acceptable terms and conditions, or its inability to obtain reimbursement under existing or future insurance programs and coverages for any losses sustained;

•the incurrence of impairment charges, changes in fair value and other adjustments related to the Company’s goodwill or the value of its other assets;

•labor actions, including work stoppages and strikes;

•the Company’s ability to retain and attract highly qualified and skilled employees and/or diverse talent;

•civil disturbances or unrest, or terrorist threats or acts, or public apprehension about future disturbances, unrest, or terrorist threats or acts; and

•the impact of new, and changes to existing, accounting standards.

These forward-looking statements are qualified by, and should be read together with, the risks and uncertainties set forth above, and the risk factors and other statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “Form 10-K”) and in this Form 10-Q, and readers should refer to such risks, uncertainties and risk factors in evaluating such forward-looking statements. Any forward-looking statements the Company makes shall speak only as of the date this Form 10-Q was filed with the U.S. Securities and Exchange Commission (“SEC”). Except as required by the federal securities laws, the Company does not have any obligation, and it specifically disclaims any undertaking or intention, to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or otherwise. New factors emerge from time to time, and it is not possible for the Company to predict all such factors. Furthermore, it may not be possible to assess the impact of any such factor on the Company’s businesses, either viewed independently or together, or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. The foregoing factors should not be construed as exhaustive.

3

PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Balance Sheets (Unaudited)

(In millions, except share and per share data)

	September 30, 2023		December 31, 2022
ASSETS
Property, plant and equipment	$	31,397	$	29,736
Accumulated depreciation	(6,709)		(6,513)
Property, plant and equipment, net	24,688		23,223
Current assets:
Cash and cash equivalents	628		85
Restricted funds	33		32
Accounts receivable, net of allowance for uncollectible accounts of $53 and $60, respectively	382		334
Income tax receivable	54		114
Unbilled revenues	318		275
Materials and supplies	111		98
Other	278		312
Total current assets	1,804		1,250
Regulatory and other long-term assets:
Regulatory assets	1,039		990
Seller promissory note from the sale of the Homeowner Services Group	720		720
Operating lease right-of-use assets	86		82
Goodwill	1,143		1,143
Other	338		379
Total regulatory and other long-term assets	3,326		3,314
Total assets	$	29,818	$	27,787

The accompanying notes are an integral part of these Consolidated Financial Statements.

4

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Balance Sheets (Unaudited)

(In millions, except share and per share data)

	September 30, 2023		December 31, 2022
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock ($0.01 par value; 500,000,000 shares authorized; 200,119,751 and 187,200,539 shares issued, respectively)	$	2	$	2
Paid-in-capital	8,541		6,824
Retained earnings	1,764		1,267
Accumulated other comprehensive loss	(22)		(23)
Treasury stock, at cost (5,414,867 and 5,342,477 shares, respectively)	(388)		(377)
Total common shareholders' equity	9,897		7,693
Long-term debt	11,698		10,926
Redeemable preferred stock at redemption value	3		3
Total long-term debt	11,701		10,929
Total capitalization	21,598		18,622
Current liabilities:
Short-term debt	—		1,175
Current portion of long-term debt	492		281
Accounts payable	228		254
Accrued liabilities	605		706
Accrued taxes	82		49
Accrued interest	124		91
Other	212		255
Total current liabilities	1,743		2,811
Regulatory and other long-term liabilities:
Advances for construction	340		316
Deferred income taxes and investment tax credits	2,632		2,437
Regulatory liabilities	1,478		1,590
Operating lease liabilities	74		70
Accrued pension expense	201		235
Other	213		202
Total regulatory and other long-term liabilities	4,938		4,850
Contributions in aid of construction	1,539		1,504
Commitments and contingencies (See Note 11)
Total capitalization and liabilities	$	29,818	$	27,787

The accompanying notes are an integral part of these Consolidated Financial Statements.

5

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Operations (Unaudited)

(In millions, except per share data)

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2023		2022		2023		2022
Operating revenues	$	1,167	$	1,082	$	3,202	$	2,861
Operating expenses:
Operation and maintenance	436		416		1,248		1,156
Depreciation and amortization	177		164		523		485
General taxes	76		63		227		208
Other	—		—		(1)		—
Total operating expenses, net	689		643		1,997		1,849
Operating income	478		439		1,205		1,012
Other (expense) income:
Interest expense	(117)		(111)		(342)		(317)
Interest income	23		14		52		39
Non-operating benefit costs, net	9		19		26		58
Other, net	14		6		37		38
Total other (expense) income	(71)		(72)		(227)		(182)
Income before income taxes	407		367		978		830
Provision for income taxes	84		70		205		157
Net income attributable to common shareholders	$	323	$	297	$	773	$	673
Basic earnings per share:
Net income attributable to common shareholders	$	1.66	$	1.63	$	4.03	$	3.70
Diluted earnings per share:
Net income attributable to common shareholders	$	1.66	$	1.63	$	4.03	$	3.70
Weighted-average common shares outstanding:
Basic	195		182		192		182
Diluted	195		182		192		182

The accompanying notes are an integral part of these Consolidated Financial Statements.

6

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Comprehensive Income (Unaudited)

(In millions)

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2023		2022		2023		2022
Net income attributable to common shareholders	$	323	$	297	$	773	$	673
Other comprehensive income, net of tax:
Defined benefit pension plan actuarial loss, net of tax of $0 and $1 for the three months ended September 30, 2023 and 2022, respectively and $0 and $1 for the nine months ended September 30, 2023 and 2022, respectively	1		—		1		2
Unrealized gain on cash flow hedges, net of tax of $0 for the three months ended September 30, 2023 and 2022, and $0 and $1 for the nine months ended September 30, 2023 and 2022, respectively	—		1		—		4
Unrealized (loss) gain on available-for-sale fixed-income securities, net of tax of $0 for the three months ended September 30, 2023 and 2022, and $0 for the nine months ended September 30, 2023 and 2022	(1)		—		—		—
Net other comprehensive income	—		1		1		6
Comprehensive income attributable to common shareholders	$	323	$	298	$	774	$	679

The accompanying notes are an integral part of these Consolidated Financial Statements.

7

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Cash Flows (Unaudited)

(In millions)

	For the Nine Months Ended September 30,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	773	$	673
Adjustments to reconcile to net cash flows provided by operating activities:
Depreciation and amortization	523		485
Deferred income taxes and amortization of investment tax credits	129		13
Provision for losses on accounts receivable	17		17
Pension and non-pension postretirement benefits	(2)		(37)
Other non-cash, net	(28)		(31)
Changes in assets and liabilities:
Receivables and unbilled revenues	(109)		(129)
Income tax receivable	60		(40)
Pension and non-pension postretirement benefit contributions	(34)		(40)
Accounts payable and accrued liabilities	18		(9)
Accrued taxes	37		(108)
Other assets and liabilities, net	(37)		(30)
Net cash provided by operating activities	1,347		764
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures	(1,779)		(1,597)
Acquisitions, net of cash acquired	(36)		(288)
Net proceeds from sale of assets	—		608
Removal costs from property, plant and equipment retirements, net	(113)		(85)
Net cash used in investing activities	(1,928)		(1,362)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt	1,246		822
Repayments of long-term debt	(263)		(14)
Net proceeds from common stock financing	1,688		—
Net short-term repayments with maturities less than three months	(1,175)		50
Advances and contributions in aid of construction, net of refunds of $21 and $13 for the nine months ended September 30, 2023 and 2022, respectively	40		64
Debt issuance costs and make-whole premium on early debt redemption	(15)		(7)
Dividends paid	(395)		(348)
Other, net	(1)		(1)
Net cash provided by financing activities	1,125		566
Net increase (decrease) in cash, cash equivalents and restricted funds	544		(32)
Cash, cash equivalents and restricted funds at beginning of period	117		136
Cash, cash equivalents and restricted funds at end of period	$	661	$	104
Non-cash investing activity:
Capital expenditures acquired on account but unpaid as of the end of period	$	348	$	347

 The accompanying notes are an integral part of these Consolidated Financial Statements.

8

American Water Works Company, Inc. and Subsidiary Companies

Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)

(In millions)

	Common Stock			Paid-in-Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock			Total Shareholders' Equity
	Shares	Par Value								Shares	At Cost
Balance as of December 31, 2022	187.4	$	2	$	6,824	$	1,267	$	(23)	(5.4)	$	(377)	$	7,693
Net income attributable to common shareholders	—	—		—		170		—		—	—		170
Common stock issuances (a)	12.7	—		1,695		—		—		—	(11)		1,684
Net other comprehensive income	—	—		—		—		—		—	—		—
Balance as of March 31, 2023	200.1	$	2	$	8,519	$	1,437	$	(23)	(5.4)	$	(388)	$	9,547
Net income attributable to common shareholders	—	—		—		280		—		—	—		280
Common stock issuances (a)	—	—		10		—		—		—	—		10
Net other comprehensive income	—	—		—		—		1		—	—		1
Dividends ($0.7075 declared per common share)	—	—		—		(137)		—		—	—		(137)
Balance as of June 30, 2023	200.1	$	2	$	8,529	$	1,580	$	(22)	(5.4)	$	(388)	$	9,701
Net income attributable to common shareholders	—	—		—		323		—		—	—		323
Common stock issuances (a)	—	—		12		—		—		—	—		12
Net other comprehensive income	—	—		—		—		—		—	—		—
Dividends ($0.7075 declared per common share)	—	—		—		(139)		—		—	—		(139)
Balance as of September 30, 2023	200.1	$	2	$	8,541	$	1,764	$	(22)	(5.4)	$	(388)	$	9,897

(a)Includes stock-based compensation, employee stock purchase plan and dividend reinvestment and direct stock purchase plan activity.

	Common Stock			Paid-in-Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock			Total Shareholders' Equity
	Shares	Par Value								Shares	At Cost
Balance as of December 31, 2021	186.9	$	2	$	6,781	$	925	$	(45)	(5.3)	$	(365)	$	7,298
Net income attributable to common shareholders	—	—		—		158		—		—	—		158
Common stock issuances (a)	0.2	—		15		—		—		—	(12)		3
Net other comprehensive income	—	—		—		—		1		—	—		1
Balance as of March 31, 2022	187.1	$	2	$	6,796	$	1,083	$	(44)	(5.3)	$	(377)	$	7,460
Net income attributable to common shareholders	—	—		—		218		—		—	—		218
Common stock issuances (a)	—	—		8		—		—		—	—		8
Net other comprehensive income	—	—		—		—		4		—	—		4
Dividends ($0.6550 declared per common share)	—	—		—		(120)		—		—	—		(120)
Balance as of June 30, 2022	187.1	$	2	$	6,804	$	1,181	$	(40)	(5.3)	$	(377)	$	7,570
Net income attributable to common shareholders	—	—		—		297		—		—	—		297
Common stock issuances (a)	0.1	—		9		—		—		—	—		9
Net other comprehensive income	—	—		—		—		1		—	—		1
Dividends ($0.6550 declared per common share)	—	—		—		(119)		—		—	—		(119)
Balance as of September 30, 2022	187.2	$	2	$	6,813	$	1,359	$	(39)	(5.3)	$	(377)	$	7,758

(a)Includes stock-based compensation, employee stock purchase plan and dividend reinvestment and direct stock purchase plan activity.

The accompanying notes are an integral part of these Consolidated Financial Statements.

9

American Water Works Company, Inc. and Subsidiary Companies

Notes to Consolidated Financial Statements (Unaudited)

(Unless otherwise noted, in millions, except per share data)

Note 1: Basis of Presentation

The unaudited Consolidated Financial Statements included in this report include the accounts of American Water Works Company, Inc. and all of its subsidiaries (the “Company” or “American Water”), in which a controlling interest is maintained after the elimination of intercompany balances and transactions. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting, and the rules and regulations for reporting on Quarterly Reports on Form 10-Q (“Form 10-Q”). Accordingly, they do not contain certain information and disclosures required by GAAP for comprehensive financial statements. In the opinion of management, all adjustments necessary for a fair statement of the financial position as of September 30, 2023, 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, 2022 (“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 2023:

Standard	Description	Date of Adoption	Application	Effect on the Consolidated Financial Statements
Accounting for Contract Assets and Contract Liabilities from Contracts with Customers	The guidance requires an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Accounting Standards Codification Topic 606, as if it had originated the contracts. The amendments in this update also provide certain practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts in a business combination.	January 1, 2023	Prospective	This standard did not have a material impact on the Consolidated Financial Statements
Troubled Debt Restructurings and Vintage Disclosures	The main provisions of this standard eliminate the receivables accounting guidance for troubled debt restructurings (“TDRs”) by creditors while enhancing disclosure requirements when a borrower is experiencing financial difficulty. Entities must apply the loan refinancing and restructuring guidance for receivables to determine whether a modification results in a new loan or a continuation of an existing loan. Additionally, the amendments in this update require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases.	January 1, 2023	Prospective, with a modified retrospective option for amendments related to the recognition and measurement of TDRs.	This standard did not have a material impact on the Consolidated Financial Statements
Presentation and Disclosure Requirements	The guidance amends GAAP disclosure and presentation requirements for various subtopics in the Financial Accounting Standards Board Codification and was issued in response to the U.S. Securities and Exchange Commission’s (“SEC”) final rule published in August 2018 that updated and simplified disclosure requirements that it believed were outdated, superseded, overlapping, duplicative and redundant. The new guidance is intended to align GAAP requirements with those of the SEC for all entities.	The date on which the SEC’s removal of the related disclosure requirement became effective	Prospective	This standard did not have a material impact on the Consolidated Financial Statements

Property, Plant and Equipment

The New Jersey Economic Development Authority (“NJEDA”) determined that the Company was qualified to receive $161 million in tax credits in connection with its capital investment in its corporate headquarters in Camden, New Jersey. The Company was qualified to receive the tax credits over a 10-year period commencing in 2019.

In March 2023, the NJEDA issued the utilization certificate for the 2020 tax credits to the Company in the amount of $16 million. The Company sold these tax credits to external parties in March 2023 for $15 million. As of September 30, 2023 and December 31, 2022, the Company had $32 million and $48 million, respectively, in Other current assets and $97 million in Other long-term assets on the Consolidated Balance Sheets as a result of these tax credits. The Company has made the necessary annual filing for the years ended December 31, 2021 and 2022.

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Allowance for Uncollectible Accounts

Allowances for uncollectible accounts are maintained for estimated probable losses resulting from the Company’s inability to collect receivables from customers. Accounts that are outstanding longer than the payment terms are considered past due. A number of factors are considered in determining the allowance for uncollectible accounts, including the length of time receivables are past due, previous loss history, current economic and societal conditions and reasonable and supportable forecasts that affect the collectability of receivables from customers. The Company generally writes off accounts when they become uncollectible or are over a certain number of days outstanding.

Presented in the table below are the changes in the allowance for uncollectible accounts for the nine months ended September 30:

	2023		2022
Balance as of January 1	$	(60)	$	(75)
Amounts charged to expense	(17)		(17)
Amounts written off	20		19
Other, net (a)	4		9
Balance as of September 30	$	(53)	$	(64)

(a)This portion of the allowance for uncollectible accounts is primarily related to COVID-19 related regulatory asset activity.

Reclassifications

Certain reclassifications have been made to prior periods in the Consolidated Financial Statements and Notes to conform to the current presentation.

Note 3: Regulatory Matters

General Rate Cases

Presented in the table below are annualized incremental revenues, including reductions for the amortization of the excess accumulated deferred income taxes (“EADIT”) that are generally offset in income tax expense, assuming a constant sales volume and customer count, resulting from general rate case authorizations that became effective during 2023:

(In millions)	Effective Date	Amount
General rate cases by state:
Missouri	May 28, 2023	$	44
Virginia	April 24, 2023 (a)	11
Pennsylvania	January 28, 2023	138
Illinois	January 1, 2023	67
California, Step Increase	January 1, 2023	13
Total general rate case authorizations		$	273

(a)Interim rates were effective May 1, 2022, and the difference between interim and final approved rates were subject to refund. The Virginia State Corporation Commission issued its final Order on April 24, 2023.

On June 29, 2023, the California Public Utilities Commission (“CPUC”) issued a decision on the cost of capital application for the Company’s California subsidiary, which authorizes a return on equity of 8.98% and a capital structure with an equity component of 57.04% for the three-year period from 2022 to 2024. The CPUC’s decision is not retroactive and was effective from the date of the order through the end of 2024. The decision includes a Water Cost of Capital Mechanism (the “WCCM”) that would allow the California subsidiary to increase its return on equity for the remainder of 2023 and 2024 based on capital market rates. As authorized by the WCCM, on June 30, 2023, the California subsidiary filed with the CPUC staff an advice letter to seek a 52 basis point increase to the return on equity for 2023, which was approved on July 25, 2023, increasing the return on equity to 9.50%, effective July 31, 2023. On October 16, 2023, the California subsidiary filed with the CPUC staff an advice letter to implement a 70 basis point increase to the return on equity, effective January 1, 2024, based on the triggering of the WCCM. After approval, the authorized return on equity will increase to 10.20%.

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On May 3, 2023, the Missouri Public Service Commission issued an order approving the March 3, 2023, joint settlement agreement in the general rate case filed on July 1, 2022, by the Company’s Missouri subsidiary. The general rate case order approved a $44 million annualized increase in water and wastewater revenues, excluding $51 million in previously approved infrastructure surcharges, and authorized implementation of the new water and wastewater rates effective May 28, 2023. The annualized revenue increase is driven primarily by significant incremental capital investments since the Missouri subsidiary’s 2021 rate case order. The Missouri subsidiary’s view of its rate base is $2.3 billion, and its view as to its return on equity and long-term debt ratio (each of which is based on the general rate case order but was not disclosed therein) is 9.75% and 50.0%, respectively.

On April 24, 2023, the Virginia State Corporation Commission issued an order approving the settlement of the rate case filed on September 26, 2022, by the Company’s Virginia subsidiary. The general rate case order approved an $11 million annualized increase in water and wastewater revenues. Interim rates in this proceeding were effective on May 1, 2022, and the order required that the difference between interim and the final approved rates were subject to refund within 90 days of the order issuance. The order approves the settlement terms with a return on equity of 9.7% and a common equity ratio of 40.7%. The annualized revenue increase is driven primarily by significant incremental capital investments since the Virginia subsidiary’s 2020 rate case order that have been completed or were planned through April 30, 2023, increases in pension and other postretirement benefits expense and increases in production costs, including chemicals, fuel and power costs. The general rate case order includes recovery of the Virginia subsidiary’s COVID-19 deferral balance. It also includes approval of the accounting deferral of deviations in pension and other postretirement benefits expense from those established in base rates, until the Virginia subsidiary’s next base rate case.

On December 8, 2022, the Pennsylvania Public Utility Commission issued an order approving the joint settlement agreement in the rate case filed on April 29, 2022, by the Company’s Pennsylvania subsidiary. The general rate case order approved a $138 million annualized increase in water and wastewater revenues, excluding $24 million for previously approved infrastructure filings, and authorizes implementation of the new water and wastewater rates effective January 28, 2023. The annualized revenue increase is driven primarily by significant incremental capital investments since the Pennsylvania subsidiary’s 2021 rate case order that will be completed through December 31, 2023, increases in pension and other postretirement benefits expense and increases in production costs, including chemicals, fuel and power costs. The general rate case order also includes recovery of the Pennsylvania subsidiary’s COVID-19 deferral balance. The Pennsylvania subsidiary’s view of its rate base is $5.1 billion, and its view as to its return on equity and long-term debt ratio (each of which is based on the general rate case order but was not disclosed therein) is 10.0% and 44.8%, respectively.

On December 15, 2022, the Illinois Commerce Commission issued an order approving the adjustment of base rates requested in a rate case filed on February 10, 2022, by the Company’s Illinois subsidiary. As updated in the Illinois subsidiary’s June 29, 2022 rebuttal filing, the request sought $83 million in additional annualized revenues, excluding previously recovered infrastructure surcharges. The general rate case order approved a $67 million annualized increase in water and wastewater system revenues, excluding previously recovered infrastructure surcharges of $18 million, effective January 1, 2023, based on an authorized return on equity of 9.78%, authorized rate base of $1.64 billion, a common equity ratio of 49.0% and a debt ratio of 51.0%. The annualized revenue increase is being driven primarily by significant water and wastewater system capital investments since the Illinois subsidiary’s 2017 rate case order that have been completed or are planned through December 31, 2023, expected higher pension and other postretirement benefit costs, and increases in production costs, including chemicals, fuel and power costs.

Pending General Rate Case Filings

On November 1, 2023, the Company’s Virginia subsidiary filed a general rate case requesting $20 million in additional annualized revenues. Interim rates will be effective May 1, 2024, with the difference between interim and final approved rates subject to refund.

On June 30, 2023, the Company’s Kentucky subsidiary filed a general rate case requesting $26 million in additional annualized revenues, excluding infrastructure surcharges of $10 million. An order is expected in the general rate case by the end of the first quarter of 2024.

On May 1, 2023, the Company’s West Virginia subsidiary filed a general rate case requesting $45 million in additional annualized revenues, excluding previously approved infrastructure surcharges of $7 million. The general rate case includes a future test year capturing planned investment through 2025 and an order is expected to be issued by February 25, 2024. On June 30, 2023, the West Virginia subsidiary filed its annual infrastructure surcharge requesting $8 million in additional annualized revenues for planned investment through 2024. The infrastructure surcharge will be aligned with the investments recognized in the general rate case if the future test year is approved.

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On March 31, 2023, the Company’s Indiana subsidiary filed a general rate case requesting $87 million in additional annualized revenues, excluding $41 million of revenue from infrastructure filings already approved, which includes three step increases, with $43 million of the increase to be included in rates in January 2024, $18 million in May 2024, and $26 million in May 2025. Hearings were completed in September and an order is expected in the general rate case by the end of January 2024.

On July 1, 2022, the Company’s California subsidiary filed a general rate case requesting an increase in 2024 revenue of $56 million and a total increase in revenue over the 2024 to 2026 period of $95 million, all as compared to 2022 revenues. The Company updated its filing in January 2023 to capture the authorized step increase effective January 1, 2023. The filing was also updated to incorporate a decoupling proposal and a revision to the Company’s sales and associated variable expense forecast. The revised filing requested additional annualized revenues for the test year 2024 of $37 million, compared to 2023 revenues. This excludes the proposed step rate and attrition rate increase for 2025 and 2026 of $20 million and $19 million, respectively. The total revenue requirement request for the three-year rate case cycle, incorporating updates to present rate revenues and forecasted demand, is $76 million. In October 2023, evidentiary hearings were held, and an order is expected in the general rate case in 2024 with rates retroactive to January 1, 2024.

Infrastructure Surcharges

A number of states have authorized the use of regulatory mechanisms that permit rates to be adjusted outside of a general rate case for certain costs and investments, such as infrastructure surcharge mechanisms that permit recovery of capital investments to replace aging infrastructure. Presented in the table below are annualized incremental revenues, assuming a constant water sales volume and customer count, resulting from infrastructure surcharge authorizations that became effective during 2023:

(In millions)	Effective Date	Amount
Infrastructure surcharges by state:
New Jersey	(a)	$	32
Kentucky	October 1, 2023	4
Indiana	(b)	26
Missouri	January 16, 2023	14
Pennsylvania	January 1, 2023	3
West Virginia	January 1, 2023	7
Total infrastructure surcharge authorizations		$	86

(a)In 2023, $15 million was effective October 30, $1 million was effective June 29 and $16 million was effective April 29.

(b)In 2023, $20 million was effective March 23 and $6 million was effective March 8.

Pending Infrastructure Surcharge Filings

On September 1, 2023, the Company’s Missouri subsidiary filed an infrastructure surcharge proceeding requesting $23 million in additional annualized revenues.

Other Regulatory Matters

In September 2020, the CPUC released a decision under its Low-Income Rate Payer Assistance program rulemaking that required the Company’s California subsidiary to file a proposal to alter its water revenue adjustment mechanism in its next general rate case filing in 2022, which would have become effective upon receiving an order in the current pending rate case. On October 5, 2020, the Company’s California subsidiary filed an application for rehearing of the decision and following the CPUC’s denial of its rehearing application in September 2021, the Company’s California subsidiary filed a petition for writ of review with the California Supreme Court on October 27, 2021. On May 18, 2022, the California Supreme Court issued a writ of review for the California subsidiary’s petition and the petitions filed by other entities challenging the decision. Independent of the judicial challenge, California passed Senate Bill 1469, which allows the CPUC to consider and authorize the implementation of a mechanism that separates the water corporation’s revenue and its water sales. Legislation was signed by the Governor on September 30, 2022, and became effective on January 1, 2023. In response to the legislation, on January 27, 2023, the Company’s California subsidiary filed an updated application requesting the CPUC to consider a Water Resources Sustainability Plan decoupling mechanism in its pending 2022 general rate case, which will become effective upon receiving an order in the current pending rate case.

13

On March 2, 2021, an administrative law judge (“ALJ”) in the Office of Administrative Law of New Jersey filed an initial decision with the New Jersey Board of Public Utilities (“NJBPU”) that recommended denial of a petition filed by the Company’s New Jersey subsidiary, which sought approval of acquisition adjustments in rate base of $29 million associated with the acquisitions of Shorelands Water Company, Inc. in 2017 and the Borough of Haddonfield’s water and wastewater systems in 2015. On July 29, 2021, the NJBPU issued an order adopting the ALJ’s initial decision without modification. The Company’s New Jersey subsidiary filed a Notice of Appeal with the New Jersey Appellate Division on September 10, 2021. The Company’s New Jersey subsidiary filed its brief in support of the appeal on March 4, 2022. Response and Reply briefs were filed on June 22, 2022, and August 4, 2022, respectively. Oral argument was held on March 22, 2023, and the Company expects a decision by the end of 2023. 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.

Note 4: Revenue Recognition

Disaggregated Revenues

The Company’s primary business involves the ownership of utilities that provide water and wastewater services to residential, commercial, industrial, public authority, fire service and sale for resale customers, collectively presented as the “Regulated Businesses.” The Company also operates other businesses that provide water and wastewater services to the U.S. government on military installations, as well as municipalities, collectively presented throughout this Form 10-Q within “Other.”

Presented in the table below are operating revenues disaggregated for the three months ended September 30, 2023:

	Revenues from Contracts with Customers		Other Revenues Not from Contracts with Customers (a)		Total Operating Revenues
Regulated Businesses:
Water services:
Residential	$	607	$	—	$	607
Commercial	231		—		231
Fire service	40		—		40
Industrial	50		—		50
Public and other	77		—		77
Total water services	1,005		—		1,005
Wastewater services:
Residential	58		—		58
Commercial	16		—		16
Industrial	2		—		2
Public and other	8		—		8
Total wastewater services	84		—		84
Miscellaneous utility charges	9		—		9
Alternative revenue programs	—		(5)		(5)
Lease contract revenue	—		2		2
Total Regulated Businesses	1,098		(3)		1,095
Other	72		—		72
Total operating revenues	$	1,170	$	(3)	$	1,167

(a)Includes revenues associated with alternative revenue programs, lease contracts and intercompany rent, which are outside the scope of Accounting Standards Codification Topic 606, Revenue From Contracts With Customers (“ASC 606”), and accounted for under other existing GAAP.

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Presented in the table below are operating revenues disaggregated for the three months ended September 30, 2022:

	Revenues from Contracts with Customers		Other Revenues Not from Contracts with Customers (a)		Total Operating Revenues
Regulated Businesses:
Water services:
Residential	$	556	$	1	$	557
Commercial	207		1		208
Fire service	36		—		36
Industrial	41		1		42
Public and other	82		—		82
Total water services	922		3		925
Wastewater services:
Residential	45		1		46
Commercial	12		—		12
Industrial	1		—		1
Public and other	7		—		7
Total wastewater services	65		1		66
Miscellaneous utility charges	9		—		9
Alternative revenue programs	—		1		1
Lease contract revenue	—		2		2
Total Regulated Businesses	996		7		1,003
Other	80		(1)		79
Total operating revenues	$	1,076	$	6	$	1,082

(a)Includes revenues associated with provisional rates, alternative revenue programs, lease contracts and intercompany rent, which are outside the scope of ASC 606, and accounted for under other existing GAAP.

15

Presented in the table below are operating revenues disaggregated for the nine months ended September 30, 2023:

	Revenues from Contracts with Customers		Other Revenues Not from Contracts with Customers (a)		Total Operating Revenues
Regulated Businesses:
Water services:
Residential	$	1,622	$	—	$	1,622
Commercial	600		—		600
Fire service	118		—		118
Industrial	126		—		126
Public and other	208		—		208
Total water services	2,674		—		2,674
Wastewater services:
Residential	169		—		169
Commercial	46		—		46
Industrial	6		—		6
Public and other	21		—		21
Total wastewater services	242		—		242
Miscellaneous utility charges	26		—		26
Alternative revenue programs	—		12		12
Lease contract revenue	—		6		6
Total Regulated Businesses	2,942		18		2,960
Other	243		(1)		242
Total operating revenues	$	3,185	$	17	$	3,202

(a)Includes revenues associated with 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.

16

Presented in the table below are operating revenues disaggregated for the nine months ended September 30, 2022:

	Revenues from Contracts with Customers		Other Revenues Not from Contracts with Customers (a)		Total Operating Revenues
Regulated Businesses:
Water services:
Residential	$	1,467	$	2	$	1,469
Commercial	534		1		535
Fire service	109		—		109
Industrial	115		1		116
Public and other	195		—		195
Total water services	2,420		4		2,424
Wastewater services:
Residential	128		1		129
Commercial	33		—		33
Industrial	3		—		3
Public and other	14		—		14
Total wastewater services	178		1		179
Miscellaneous utility charges	27		—		27
Alternative revenue programs	—		10		10
Lease contract revenue	—		6		6
Total Regulated Businesses	2,625		21		2,646
Other	216		(1)		215
Total operating revenues	$	2,841	$	20	$	2,861

(a)Includes revenues associated with provisional rates, alternative revenue programs, lease contracts and intercompany rent, which are outside the scope of ASC 606, and accounted for under other existing GAAP.

Contract Balances

Contract assets and contract liabilities are the result of timing differences between revenue recognition, billings, and cash collections. In the Company’s Military Services Group (“MSG”), certain contracts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Contract assets are recorded when billing occurs subsequent to revenue recognition and are reclassified to accounts receivable when billed and the right to consideration becomes unconditional. Contract liabilities are recorded when the Company receives advances from customers prior to satisfying contractual performance obligations, particularly for construction contracts, and are recognized as revenue when the associated performance obligations are satisfied.

Contract assets of $112 million and $86 million are included in unbilled revenues on the Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022, respectively. Contract liabilities of $65 million and $91 million are included in other current liabilities on the Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022, respectively. Revenues recognized for the nine months ended September 30, 2023 and 2022, from amounts included in contract liabilities were $92 million and $94 million, respectively.

17

Remaining Performance Obligations

Remaining performance obligations (“RPOs”) represent revenues the Company expects to recognize in the future from contracts that are in progress. The Company enters into agreements for the provision of services to water and wastewater facilities for the U.S. military, municipalities and other customers. As of September 30, 2023, the Company’s operation and maintenance (“O&M”) and capital improvement contracts in the MSG and the Contract Services Group have RPOs. Contracts with the U.S. government for work on various military installations expire between 2051 and 2073 and have RPOs of $7.0 billion as of September 30, 2023, as measured by estimated remaining contract revenue. Such contracts are subject to customary termination provisions held by the U.S. government, prior to the agreed-upon contract expiration. Contracts with municipalities and commercial customers expire between 2026 and 2038 and have RPOs of $554 million as of September 30, 2023, as measured by estimated remaining contract revenue. Some of the Company’s long-term contracts to operate and maintain the federal government’s, a municipality’s or other party’s water or wastewater treatment and delivery facilities include responsibility for certain maintenance for some of those facilities, in exchange for an annual fee. Unless specifically required to perform certain maintenance activities, the maintenance costs are recognized when the maintenance is performed.

Note 5: Acquisitions and Divestitures

Regulated Businesses

Closed Acquisitions

During the nine months ended September 30, 2023, the Company closed on 14 acquisitions of various regulated water and wastewater systems for a total aggregate purchase price of $36 million, which added approximately 7,900 water and wastewater customers. This includes the Company’s New Jersey subsidiary’s acquisition of the water and wastewater assets of Egg Harbor City on June 1, 2023, for a cash purchase price of $22 million, $2 million of which was funded as a deposit to the seller in March 2021 in connection with the execution of the acquisition agreement. The Egg Harbor City acquisition was accounted for as a business combination and the assets acquired consisted primarily of $22 million of utility plant.

Pending Acquisitions

On April 6, 2023, the Company’s Illinois subsidiary entered into an agreement to acquire the wastewater treatment plant from Granite City for an amended purchase price of $86 million. This plant provides wastewater service for approximately 26,000 customer connections. The Company expects to close this acquisition around year-end 2023, pending regulatory approval.

Effective March 24, 2023, the Company’s Pennsylvania subsidiary acquired the rights to buy the wastewater system assets of the Township of Towamencin, for an aggregate purchase price of $104 million, subject to adjustment as provided in the asset purchase agreement. This system provides wastewater services to approximately 6,300 customer connections in seven townships in Montgomery County, Pennsylvania. The Company expects to close this acquisition in late 2024 or early 2025, pending final regulatory approval.

On October 11, 2022, the Company’s Pennsylvania subsidiary entered into an agreement to acquire the wastewater assets of the Butler Area Sewer Authority for an amended purchase price of $230 million in cash, subject to adjustment as provided for in the asset purchase agreement. This system provides wastewater service for approximately 14,700 customer connections. The Company expects to close this acquisition by the end of 2023, pending regulatory approval.

Note 6: Shareholders’ Equity

Common Stock Offering

On March 3, 2023, the Company completed an underwritten public offering of an aggregate of 12,650,000 shares of parent company common stock. Upon closing of this offering, the Company received, after deduction of the underwriting discount and before deduction of offering expenses, net proceeds of approximately $1,688 million. The Company used the net proceeds of the offering to repay short-term commercial paper obligations of American Water Capital Corp. (“AWCC”), the wholly owned finance subsidiary of parent company, and for general corporate purposes.

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Accumulated Other Comprehensive Loss

Presented in the table below are the changes in accumulated other comprehensive loss by component, net of tax, for the nine months ended September 30, 2023 and 2022, respectively:

	Defined Benefit Pension Plans						Loss on Cash Flow Hedges		Accumulated Other Comprehensive Loss
	Employee Benefit Plan Funded Status		Amortization of Prior Service Cost		Amortization of Actuarial Loss
Balance as of December 31, 2022	$	(93)	$	1	$	70	$	(1)	$	(23)
Other comprehensive income before reclassifications	—		—		—		—		—
Amounts reclassified from accumulated other comprehensive loss	—		—		1		—		1
Net other comprehensive income	—		—		1		—		1
Balance as of September 30, 2023	$	(93)	$	1	$	71	$	(1)	$	(22)
Balance as of December 31, 2021	$	(107)	$	1	$	67	$	(6)	$	(45)
Other comprehensive income before reclassifications	—		—		—		4		4
Amounts reclassified from accumulated other comprehensive income	—		—		2		—		2
Net other comprehensive income	—		—		2		4		6
Balance as of September 30, 2022	$	(107)	$	1	$	69	$	(2)	$	(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.

An unrealized gain (loss) on available-for-sale fixed-income securities is reclassified to net income upon sale of the securities as a realized gain or loss and is included in Other, net in the accompanying Consolidated Statements of Operations.

Dividends

On September 1, 2023, the Company paid a quarterly cash dividend of $0.7075 per share to shareholders of record as of August 8, 2023.

On October 31, 2023, the Company’s Board of Directors declared a quarterly cash dividend payment of $0.7075 per share, payable on December 1, 2023, to shareholders of record as of November 14, 2023. 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 9—Shareholders’ Equity in the Notes to Consolidated Financial Statements in the Company’s Form 10-K for additional information regarding the payment of dividends on the Company’s common stock.

Note 7: Long-Term Debt

On June 29, 2023, AWCC issued $1,035 million aggregate principal amount of 3.625% Exchangeable Senior Notes due 2026 (the “Notes”). AWCC received net proceeds of approximately $1,022 million, after deduction of underwriting discounts and commissions but before deduction of offering expenses payable by AWCC. A portion of the net proceeds was used to repay AWCC’s commercial paper obligations and the remainder is being used for general corporate purposes. The Notes are senior unsecured obligations of AWCC and have the benefit of a support agreement from parent company, which serves as the functional equivalent of a guarantee by parent company of the obligations of AWCC under the Notes. The Notes will mature on June 15, 2026 (the “Maturity Date”), unless earlier exchanged or repurchased.

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The Notes are exchangeable at an initial exchange rate of 5.8213 shares of parent company's common stock per $1,000 principal amount of Notes (equivalent to an initial exchange price of approximately $171.78 per share of common stock). The initial exchange rate of the Notes is subject to adjustment as provided in the indenture pursuant to which the Notes were issued (the “Note Indenture”). Prior to the close of business on the business day immediately preceding March 15, 2026, the Notes are exchangeable at the option of the noteholders only upon the satisfaction of specified conditions and during certain periods described in the Note Indenture. On or after March 15, 2026, until the close of business on the business day immediately preceding the Maturity Date, the Notes will be exchangeable at the option of the noteholders at any time regardless of these conditions or periods. Upon any exchange of the Notes, AWCC will (1) pay cash up to the aggregate principal amount of the Notes and (2) pay or deliver (or cause to be delivered), as the case may be, cash, shares of parent company's common stock, or a combination of cash and shares of such common stock, at AWCC's election, in respect of the remainder, if any, of AWCC’s exchange obligation in excess of the aggregate principal amount of the Notes being exchanged.

AWCC may not redeem the Notes prior to the Maturity Date, and no sinking fund is provided for the Notes. Subject to certain conditions, holders of the Notes will have the right to require AWCC to repurchase all or a portion of their Notes upon the occurrence of a fundamental change, as defined in the Note Indenture, at a repurchase price of 100% of their principal amount plus any accrued and unpaid interest.

In addition to the Notes issued by AWCC as described above, during the nine months ended September 30, 2023, AWCC and the Company’s regulated subsidiaries issued in the aggregate $211 million of private activity bonds and government funded debt in multiple transactions, with annual interest rates ranging from 0.00% to 3.88%, a weighted average interest rate of 3.50%, and maturity dates ranging from 2025 to 2041. During the nine months ended September 30, 2023, $125 million of the $211 million of private activity bonds and government funded debt issued by AWCC and the Company's regulated subsidiaries were collateralized. During the nine months ended September 30, 2023, AWCC and the Company’s regulated subsidiaries made sinking fund payments for, or repaid at maturity, $263 million in aggregate principal amount of outstanding long-term debt, with annual interest rates ranging from 0.00% to 6.55%, a weighted average interest rate of 1.64%, and maturity dates ranging from 2023 to 2051.

During 2022 and the first half of 2023, the Company had entered into 11 treasury lock agreements, each with a term of 10 years, with notional amounts totaling $300 million. The Company designated these treasury lock agreements as cash flow hedges, with their fair value recorded in accumulated other comprehensive gain or loss. In June 2023, the Company terminated the treasury lock agreements realizing a net gain of $3 million included in Other, net in the accompanying Consolidated Statements of Operations.

No ineffectiveness was recognized on hedging instruments for the three and nine months ended September 30, 2023 or 2022.

Note 8: Short-Term Debt

Liquidity needs for capital investment, working capital and other financial commitments are generally funded through cash flows from operations, public and private debt offerings, commercial paper markets and, if and to the extent necessary, borrowings under the AWCC revolving credit facility, and issuances of equity. The revolving credit facility provides $2.75 billion in aggregate total commitments from a diversified group of financial institutions. On October 26, 2023, the termination date of the credit agreement with respect to AWCC’s revolving credit facility was extended, as permitted by the terms of the credit agreement, from October 2027 to October 2028. The revolving credit facility is used principally to support AWCC’s commercial paper program, to provide additional liquidity support and to provide a sub-limit of up to $150 million for letters of credit. As of September 30, 2023 and December 31, 2022, there were no borrowings under the revolving credit facility. As of September 30, 2023 and December 31, 2022, there were $75 million and $78 million, respectively, of outstanding letters of credit under the revolving credit facility.

At September 30, 2023, there was no outstanding short-term debt. In the second quarter of 2023, the net proceeds of the Notes were used to repay the short-term commercial paper obligations. See Note 7—Long-Term Debt for additional information relating to the Notes.

At December 31, 2022, short-term debt consisting of commercial paper borrowings totaled $1,177 million, or net of discount $1,175 million. The weighted-average interest rate on AWCC’s outstanding short-term borrowings was approximately 4.41% and there were no commercial paper borrowings outstanding with maturities greater than three months.

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Presented in the tables below is the aggregate credit facility commitments, commercial paper limit and letter of credit availability under the revolving credit facility, as well as the available capacity for each:

	As of September 30, 2023
	Commercial Paper Limit		Letters of Credit		Total (a)
(In millions)
Total availability	$	2,600	$	150	$	2,750
Outstanding debt	—		(75)		(75)
Remaining availability as of September 30, 2023	$	2,600	$	75	$	2,675

(a)Total remaining availability of $2.68 billion as of September 30, 2023, may be accessed through revolver draws.

	As of December 31, 2022
	Commercial Paper Limit		Letters of Credit		Total (a)
(In millions)
Total availability	$	2,600	$	150	$	2,750
Outstanding debt	(1,177)		(78)		(1,255)
Remaining availability as of December 31, 2022	$	1,423	$	72	$	1,495

(a)Total remaining availability of $1.50 billion as of December 31, 2022, was accessible through revolver draws.

Presented in the table below is the Company’s total available liquidity as of September 30, 2023 and December 31, 2022, respectively:

	Cash and Cash Equivalents		Availability on Revolving Credit Facility		Total Available Liquidity
(In millions)
Available liquidity as of September 30, 2023	$	628	$	2,675	$	3,303
Available liquidity as of December 31, 2022	$	85	$	1,495	$	1,580

Note 9: Income Taxes

The Company’s effective income tax rate was 20.6% and 19.1% for the three months ended September 30, 2023 and 2022, respectively, and 21.0% and 18.9% for the nine months ended September 30, 2023 and 2022, respectively. The increase in the Company’s effective income tax rate for the three and nine months ended September 30, 2023, was primarily due to the decrease in the amortization of EADIT pursuant to regulatory orders. The amortization of EADIT is generally offset with a reduction in revenue.

On August 16, 2022, the Inflation Reduction Act of 2022 (the “IRA”) was signed into law. The IRA contains a Corporate Alternative Minimum Tax (“CAMT”) provision, effective January 1, 2023. To determine if a company is considered an applicable corporation subject to CAMT, the company’s average adjusted financial statement income (“AFSI”) for the three consecutive years preceding the tax year must exceed $1 billion. An applicable corporation must make several adjustments to net income when determining AFSI. The Company evaluated the potential impacts of the CAMT provision within the IRA and believes it does not exceed the $1 billion AFSI threshold, and therefore, is not currently subject to CAMT in 2023. The Company is continuing to assess the impact of the initial guidance regarding the application of the CAMT and will continue to monitor as additional guidance is released.

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Note 10: Pension and Other Postretirement Benefits

Presented in the table below are the components of net periodic benefit costs:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2023		2022		2023		2022
Components of net periodic pension benefit cost (credit):
Service cost	$	4	$	8	$	12	$	23
Interest cost	22		16		65		48
Expected return on plan assets	(23)		(31)		(69)		(92)
Amortization of prior service credit	(1)		(1)		(3)		(3)
Amortization of actuarial loss	4		5		11		15
Net periodic pension benefit cost (credit)	$	6	$	(3)	$	16	$	(9)
Components of net periodic other postretirement benefit credit:
Service cost	$	1	$	1	$	2	$	3
Interest cost	4		3		11		8
Expected return on plan assets	(3)		(5)		(9)		(15)
Amortization of prior service credit	(8)		(8)		(24)		(24)
Amortization of actuarial loss	1		—		2		—
Net periodic other postretirement benefit credit	$	(5)	$	(9)	$	(18)	$	(28)

The Company contributed $11 million and $31 million for the funding of its defined benefit pension plans for the three and nine months ended September 30, 2023, respectively, and contributed $9 million and $27 million for the funding of its defined benefit pension plans for the three and nine months ended September 30, 2022, respectively. The Company expects to make pension contributions to the plan trusts of $11 million during the remainder of 2023.

There were $3 million of contributions for the funding of the Company’s other postretirement benefit plans for the three and nine months ended September 30, 2023, and there were no material contributions and $13 million of contributions for the funding of the Company’s other postretirement benefit plans for the three and nine months ended September 30, 2022, respectively.

Note 11: Commitments and Contingencies

Contingencies

The Company is routinely involved in legal actions incident to the normal conduct of its business. As of September 30, 2023, the Company has accrued approximately $4 million of probable loss contingencies associated with such actions and has estimated that the maximum amount of loss associated with reasonably possible loss contingencies associated with such actions, which can be reasonably estimated, is $3 million. For certain legal actions, the Company is unable to estimate possible losses. The Company believes that damages or settlements, if any, recovered by plaintiffs in such actions, other than as described in this Note 11—Commitments and Contingencies, will not have a material adverse effect on the Company.

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 the Company’s West Virginia subsidiary (“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.

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On June 2, 2017, a complaint captioned Jeffries, et al. v. West Virginia-American Water Company was filed in West Virginia Circuit Court in Kanawha County on behalf of an alleged class of residents and business owners who lost water service or pressure as a result of the Dunbar main break. The complaint alleges breach of contract by WVAWC for failure to supply water, violation of West Virginia law regarding the sufficiency of WVAWC’s facilities and negligence by WVAWC in the design, maintenance and operation of the water system. The Jeffries plaintiffs seek unspecified alleged damages on behalf of the class for lost profits, annoyance and inconvenience, and loss of use, as well as punitive damages for willful, reckless and wanton behavior in not addressing the risk of pipe failure and a large outage.

In February 2020, the Jeffries plaintiffs filed a motion seeking class certification on the issues of breach of contract and negligence, and to determine the applicability of punitive damages and a multiplier for those damages if imposed. In July 2020, the Circuit Court entered an order granting the Jeffries plaintiffs’ motion for certification of a class regarding certain liability issues but denying certification of a class to determine a punitive damages multiplier. In August 2020, WVAWC filed a Petition for Writ of Prohibition in the Supreme Court of Appeals of West Virginia seeking to vacate or remand the Circuit Court’s order certifying the issues class. In January 2021, the Supreme Court of Appeals remanded the case back to the Circuit Court for further consideration in light of a decision issued in another case relating to the class certification issues raised on appeal. On July 5, 2022, the Circuit Court entered an order again certifying a class to address at trial certain liability issues but not to consider damages. On August 26, 2022, WVAWC filed another Petition for Writ of Prohibition in the Supreme Court of Appeals of West Virginia challenging the West Virginia Circuit Court’s July 5, 2022 order, which petition was denied on June 8, 2023. On August 21, 2023, the Circuit Court set a date of September 9, 2024 for a class trial on issues relating to duty and breach of that duty. The trial will not find class-wide or punitive damages.

The Company and WVAWC believe that WVAWC has valid, meritorious defenses to the claims raised in this class action complaint. WVAWC is vigorously defending itself against these allegations. Given the current stage of this proceeding, the Company cannot reasonably estimate the amount of any reasonably possible loss or a range of loss related to this proceeding.

Chattanooga, Tennessee Water Main Break Class Action Litigation

On September 12, 2019, the Company’s Tennessee subsidiary (“TAWC”), experienced a leak in a 36-inch water transmission main, which caused service fluctuations or interruptions to TAWC customers and the issuance of a boil water notice. TAWC repaired the main by early morning on September 14, 2019, and restored full water service by the afternoon of September 15, 2019, with the boil water notice lifted for all customers on September 16, 2019.

On September 17, 2019, a complaint captioned Bruce, et al. v. American Water Works Company, Inc., et al. was filed in the Circuit Court of Hamilton County, Tennessee against TAWC, the Company and American Water Works Service Company, Inc. (“Service Company” and, together with TAWC and the Company, collectively, the “Tennessee-American Water Defendants”), on behalf of a proposed class of individuals or entities who lost water service or suffered monetary losses as a result of the Chattanooga incident (the “Tennessee Plaintiffs”). The complaint alleged breach of contract and negligence against the Tennessee-American Water Defendants, as well as an equitable remedy of piercing the corporate veil. In the complaint as originally filed, the Tennessee Plaintiffs were seeking an award of unspecified alleged damages for wage losses, business and economic losses, out-of-pocket expenses, loss of use and enjoyment of property and annoyance and inconvenience, as well as punitive damages, attorneys’ fees and pre- and post-judgment interest. In September 2020, the court dismissed all of the Tennessee Plaintiffs’ claims in their complaint, except for the breach of contract claims against TAWC, which remain pending. In October 2020, TAWC answered the complaint, and the parties have been engaging in discovery. On January 12, 2023, after hearing oral argument, the court issued an oral ruling denying the Tennessee Plaintiffs’ motion for class certification. On February 9, 2023, the Tennessee Plaintiffs sought reconsideration of the ruling by the court, and any final ruling is appealable to the Tennessee Court of Appeals, as allowed under Tennessee law. On September 21, 2023, the court upheld its prior ruling but gave the Tennessee Plaintiffs the option to file an amended class definition. On October 12, 2023, the Tennessee Plaintiffs filed an amended class definition seeking certification of a business customer-only class. An order denying the original proposed class and addressing the proposed amended class has not been entered by the court and remains pending.

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,” and, together with the 2009 Order, the “Orders”) approving a deadline of December 31, 2021, for Cal Am’s compliance with these prior orders.

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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 Orders.

Cal Am’s ability to move forward on the Water Supply Project is subject to administrative review by the CPUC and other government agencies, obtaining necessary permits, and intervention from other parties. In September 2016, the CPUC unanimously approved a final decision to authorize Cal Am to enter into a water purchase agreement for the GWR Project and to construct a pipeline and pump station facilities and recover up to $50 million in associated incurred costs, plus an allowance for funds used during construction (“AFUDC”), subject to meeting certain criteria.

In September 2018, the CPUC unanimously approved another final decision finding that the Water Supply Project meets the CPUC’s requirements for a certificate of public convenience and necessity and an additional procedural phase was not necessary to consider alternative projects. The CPUC’s 2018 decision concludes that the Water Supply Project is the best project to address estimated future water demands in Monterey, and, in addition to the cost recovery approved in its 2016 decision, adopts Cal Am’s cost estimates for the Water Supply Project, which amounted to an aggregate of $279 million plus AFUDC at a rate representative of Cal Am’s actual financing costs. The 2018 final decision specifies the procedures for recovery of all of Cal Am’s prudently incurred costs associated with the Water Supply Project upon its completion, subject to the frameworks included in the final decision related to cost caps, operation and maintenance costs, financing, ratemaking and contingency matters. The reasonableness of the Water Supply Project costs will be reviewed by the CPUC when Cal Am seeks cost recovery for the Water Supply Project. Cal Am is also required to implement mitigation measures to avoid, minimize or offset significant environmental impacts from the construction and operation of the Water Supply Project and comply with a mitigation monitoring and reporting program, a reimbursement agreement for CPUC costs associated with that program, and reporting requirements on plant operations following placement of the Water Supply Project in service. Cal Am has incurred $233 million in aggregate costs as of September 30, 2023 related to the Water Supply Project, which includes $69 million in AFUDC.

In September 2021, Cal Am, Monterey One Water and the MPWMD reached an agreement on Cal Am’s purchase of additional water from an expansion to the GWR Project, which is not expected to produce additional water until 2024 at the earliest. On December 5, 2022, the CPUC issued a final decision that authorized Cal Am to enter into the amended water purchase agreement, and specifically to increase pumping capacity and reliability of groundwater extraction from the Seaside Groundwater Basin. The final decision sets the cost cap for the proposed facilities at approximately $62 million. Cal Am may seek recovery of amounts above the cost cap in a subsequent rate filing or general rate case. Additionally, the final decision authorizes AFUDC at Cal Am’s actual weighted average cost of debt for most of the facilities. On December 30, 2022, Cal Am filed with the CPUC an application for rehearing of the CPUC’s December 5, 2022, final decision, and on March 30, 2023, the CPUC issued a decision denying Cal Am’s application for rehearing