American Water Works Company, Inc. - 10-K filing on 2020-02-18

Regulatory Assets and Liabilities

12 Months Ended

Dec. 31, 2019

Note 7: Regulatory Assets and Liabilities

Regulatory Assets

Regulatory assets represent costs that are probable of recovery from customers in future rates. The majority of the regulatory assets earn a return. Presented in the table below is the composition of regulatory assets as of December 31:



	2019			2018
Deferred pension expense	$	384		$	362
Removal costs recoverable through rates	305			292
Regulatory balancing accounts	96			110
Other	398			392
Less: Regulatory assets included in assets held for sale (a)	(55		)	—
Total regulatory assets	$	1,128		$	1,156


(a)	These regulatory assets are related to the pending transactions contemplated by the Stock Purchase Agreement and are included in assets held for sale on the Consolidated Balance Sheets. See Note 4—Acquisitions and Divestitures for additional information.

The Company’s deferred pension expense includes a portion of the underfunded status that is probable of recovery through rates in future periods of $375 million and $352 million as of December 31, 2019 and 2018, respectively. The remaining portion is the pension expense in excess of the amount contributed to the pension plans which is deferred by certain subsidiaries and will be recovered in future service rates as contributions are made to the pension plan.

Removal costs recoverable through rates represent costs incurred for removal of property, plant and equipment or other retirement costs.

Regulatory balancing accounts accumulate differences between revenues recognized and authorized revenue requirements until they are collected from customers or are refunded. Regulatory balancing accounts include low income programs and purchased power and water accounts.

Other regulatory assets include San Clemente Dam project costs, debt expense, purchase premium recoverable through rates, tank painting costs, certain construction costs for treatment facilities, property tax stabilization, employee-related costs, deferred other postretirement benefit expense, business services project expenses, coastal water project costs, rate case expenditures and environmental remediation costs among others. These costs are deferred because the amounts are being recovered in rates or are probable of recovery through rates in future periods.

Regulatory Liabilities

Regulatory liabilities generally represent amounts that are probable of being credited or refunded to customers through the rate making process. Also, if costs expected to be incurred in the future are currently being recovered through rates, the Company records those expected future costs as regulatory liabilities. Presented in the table below is the composition of regulatory liabilities as of December 31:



	2019			2018
Income taxes recovered through rates	$	1,258		$	1,279
Removal costs recovered through rates	297			309
Postretirement benefit liability	186			209
Other	102			110
Less: Regulatory liabilities included in liabilities related to assets held for sale (a)	(37		)	—
Total regulatory liabilities	$	1,806		$	1,907


(a)	These regulatory liabilities are related to the pending transactions contemplated by the Stock Purchase Agreement and are included in liabilities related to assets held for sale on the Consolidated Balance Sheets. See Note 4—Acquisitions and Divestitures for additional information.

Income taxes recovered through rates relate to deferred taxes that will likely be refunded to the Company’s customers. On December 22, 2017, the TCJA was signed into law, which, among other things, enacted significant and complex changes to the Internal Revenue Code of 1986 (the “Code”), including a reduction in the maximum U.S. federal corporate income tax rate from 35% to 21% as of January 1, 2018. The TCJA created significant excess deferred income taxes that the Company and its regulatory jurisdictions believe should be refunded to customers. Since these are significant refundable amounts, the Company believes it is probable these amounts will be refunded to customers through future rates, and as such the amounts have been recorded to a regulatory liability.

During 2018, the Company’s 14 regulatory jurisdictions began to seek to address the impacts of the TCJA. The Company has adjusted customer rates to reflect the lower income tax rate in 11 states. In one of those 11 states, a portion of the tax savings is being used to reduce certain regulatory assets. In one additional state, the Company is using the tax savings to offset additional capital investment and to reduce a regulatory asset. Proceedings in the other two jurisdictions remain pending. With respect to excess accumulated deferred income taxes (“EADIT”), six of the Company’s regulated subsidiaries are amortizing EADIT and crediting customers, including one which is using the EADIT to offset future infrastructure investments. The Company expects the timing of the amortization of EADIT credits by the eight remaining regulated subsidiaries to be addressed in pending or future rate cases or other proceedings.

Removal costs recovered through rates are estimated costs to retire assets at the end of their expected useful lives that are recovered through customer rates over the lives of the associated assets.

On August 31, 2018, the Postretirement Medical Benefit Plan was remeasured to reflect an announced plan amendment which changed benefits for certain union and non-union plan participants. As a result of the remeasurement, the Company recorded a $227 million reduction to the net accumulated postretirement benefit obligation, with a corresponding regulatory liability.

Other regulatory liabilities include TCJA reserve on revenue, pension and other postretirement benefit balancing accounts, legal settlement proceeds, deferred gains and various regulatory balancing accounts.