UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
(Mark One)
S QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31,September 30, 2023
£ 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 1-6659
ESSENTIAL UTILITIES, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania | 23-1702594 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
| |
762 W. Lancaster Avenue, Bryn Mawr, Pennsylvania | 19010 -3489 |
(Address of principal executive offices) | (Zip Code) |
| |
(610) 527-8000 | |
(Registrant’s telephone number, including area code) | |
N/A
(Former Name, former address and former fiscal year, if changed since last report.)
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 S 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 S 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 12(b)-2 of the Exchange Act.:
Large Accelerated Filer S | 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 S
Securities registered pursuant to Section 12(b) of the Act: | ||||
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common stock, $0.50 par value | WTRG | New York Stock Exchange | ||
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of April 26,October 23, 2023: 264,379,508273,165,817
TABLE OF CONTENTS
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
(UNAUDITED)
March 31, | December 31, | September 30, | December 31, | |||||||||
Assets | 2023 | 2022 | 2023 | 2022 | ||||||||
Property, plant and equipment, at cost | $ | 13,961,209 | $ | 13,737,387 | $ | 14,681,336 | $ | 13,737,387 | ||||
Less: accumulated depreciation | 2,666,629 | 2,606,441 | 2,834,771 | 2,606,441 | ||||||||
Net property, plant and equipment | 11,294,580 | 11,130,946 | 11,846,565 | 11,130,946 | ||||||||
Current assets: | ||||||||||||
Cash and cash equivalents | 20,149 | 11,398 | 8,505 | 11,398 | ||||||||
Accounts receivable, net | 213,606 | 206,324 | 133,735 | 206,324 | ||||||||
Unbilled revenues | 117,610 | 170,504 | 75,101 | 170,504 | ||||||||
Inventory - materials and supplies | 48,401 | 46,592 | 48,811 | 46,592 | ||||||||
Inventory - gas stored | 47,506 | 153,143 | 78,634 | 153,143 | ||||||||
Current assets held for sale | 9,484 | 11,167 | 7,461 | 11,167 | ||||||||
Prepayments and other current assets | 37,301 | 39,759 | 31,409 | 39,759 | ||||||||
Regulatory assets | 15,715 | 19,272 | 25,692 | 19,272 | ||||||||
Total current assets | 509,772 | 658,159 | 409,348 | 658,159 | ||||||||
Regulatory assets | 1,429,165 | 1,342,753 | 1,564,056 | 1,342,753 | ||||||||
Deferred charges and other assets, net | 164,608 | 166,653 | 191,958 | 166,653 | ||||||||
Funds restricted for construction activity | 1,350 | 1,342 | 1,370 | 1,342 | ||||||||
Goodwill | 2,340,755 | 2,340,792 | 2,340,661 | 2,340,792 | ||||||||
Non-current assets held for sale | 32,959 | 32,124 | 37,327 | 32,124 | ||||||||
Operating lease right-of-use assets | 40,665 | 41,734 | 37,836 | 41,734 | ||||||||
Intangible assets | 4,412 | 4,604 | 3,672 | 4,604 | ||||||||
Total assets | $ | 15,818,266 | $ | 15,719,107 | $ | 16,432,793 | $ | 15,719,107 | ||||
The accompanying notes are an integral part of these consolidated financial statements | The accompanying notes are an integral part of these consolidated financial statements | The accompanying notes are an integral part of these consolidated financial statements | ||||||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
ShareBasedCompensationArrangementByShareBasedPaymentAwardEquityInstrumentsOtherThanOptionsVestedInPeriod
March 31, | December 31, | September 30, | December 31, | |||||||||
Liabilities and Equity | 2023 | 2022 | 2023 | 2022 | ||||||||
Stockholders' equity: | ||||||||||||
Common stock at $0.50 par value, authorized 600,000,000 shares, issued 267,695,463 and 266,973,321 as of March 31, 2023 and December 31, 2022 | $ | 133,848 | $ | 133,486 | ||||||||
Common stock at $0.50 par value, authorized 600,000,000 shares, issued 276,471,716 and 266,973,321 as of September 30, 2023 and December 31, 2022 | $ | 138,235 | $ | 133,486 | ||||||||
Capital in excess of par value | 3,819,804 | 3,793,262 | 4,131,834 | 3,793,262 | ||||||||
Retained earnings | 1,649,621 | 1,534,331 | 1,739,271 | 1,534,331 | ||||||||
Treasury stock, at cost, 3,318,252 and 3,236,237 shares as of March 31, 2023 and December 31, 2022 | (87,331) | (83,693) | ||||||||||
Treasury stock, at cost, 3,305,899 and 3,236,237 shares as of September 30, 2023 and December 31, 2022 | (86,783) | (83,693) | ||||||||||
Total stockholders' equity | 5,515,942 | 5,377,386 | 5,922,557 | 5,377,386 | ||||||||
Long-term debt, excluding current portion | 6,530,810 | 6,418,039 | 6,501,254 | 6,418,039 | ||||||||
Less: debt issuance costs | 46,294 | 46,982 | 45,214 | 46,982 | ||||||||
Long-term debt, excluding current portion, net of debt issuance costs | 6,484,516 | 6,371,057 | 6,456,040 | 6,371,057 | ||||||||
Commitments and contingencies (See Note 14) |
|
|
|
| ||||||||
Current liabilities: | ||||||||||||
Current portion of long-term debt | 198,683 | 199,356 | 218,619 | 199,356 | ||||||||
Loans payable | 22,500 | 228,500 | 131,832 | 228,500 | ||||||||
Accounts payable | 155,722 | 238,843 | 191,924 | 238,843 | ||||||||
Book overdraft | 20,070 | 28,694 | 19,688 | 28,694 | ||||||||
Accrued interest | 81,089 | 47,063 | 81,429 | 47,063 | ||||||||
Accrued taxes | 29,992 | 34,393 | 29,113 | 34,393 | ||||||||
Liabilities related to assets held for sale | 2,355 | 3,263 | 2,669 | 3,263 | ||||||||
Regulatory liabilities | 102,802 | 35,276 | 80,190 | 35,276 | ||||||||
Dividends payable | 75,876 | 75,808 | - | 75,808 | ||||||||
Other accrued liabilities | 114,197 | 130,673 | 141,104 | 130,673 | ||||||||
Total current liabilities | 803,286 | 1,021,869 | 896,568 | 1,021,869 | ||||||||
Deferred credits and other liabilities: | ||||||||||||
Deferred income taxes and investment tax credits | 1,413,661 | 1,345,766 | 1,486,979 | 1,345,766 | ||||||||
Customers' advances for construction | 118,269 | 114,732 | 129,139 | 114,732 | ||||||||
Regulatory liabilities | 765,949 | 778,754 | 825,659 | 778,754 | ||||||||
Asset retirement obligations | 846 | 843 | 845 | 843 | ||||||||
Operating lease liabilities | 38,629 | 37,666 | 35,133 | 37,666 | ||||||||
Non-current liabilities related to assets held for sale | 948 | 974 | 758 | 974 | ||||||||
Pension and other postretirement benefit liabilities | 31,427 | 31,244 | 32,380 | 31,244 | ||||||||
Other | 27,287 | 28,562 | 24,326 | 28,562 | ||||||||
Total deferred credits and other liabilities | 2,397,016 | 2,338,541 | 2,535,219 | 2,338,541 | ||||||||
Contributions in aid of construction | 617,506 | 610,254 | 622,409 | 610,254 | ||||||||
Total liabilities and equity | $ | 15,818,266 | $ | 15,719,107 | $ | 16,432,793 | $ | 15,719,107 | ||||
The accompanying notes are an integral part of these consolidated financial statements | The accompanying notes are an integral part of these consolidated financial statements | The accompanying notes are an integral part of these consolidated financial statements | ||||||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Three Months Ended | Three Months Ended | |||||||||||
March 31, | September 30, | |||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||
Operating revenues | $ | 726,450 | $ | 699,275 | $ | 411,255 | $ | 434,618 | ||||
Operating expenses: | ||||||||||||
Operations and maintenance | 137,994 | 142,581 | 147,018 | 151,361 | ||||||||
Purchased gas | 256,315 | 227,712 | 16,590 | 52,041 | ||||||||
Depreciation | 82,923 | 77,878 | 84,348 | 80,471 | ||||||||
Amortization | 871 | 468 | 1,687 | 2,259 | ||||||||
Taxes other than income taxes | 22,878 | 23,007 | 24,207 | 22,625 | ||||||||
Total operating expenses | 500,981 | 471,646 | 273,850 | 308,757 | ||||||||
Operating income | 225,469 | 227,629 | 137,405 | 125,861 | ||||||||
Other expense (income): | ||||||||||||
Interest expense | 72,668 | 53,636 | 68,590 | 60,488 | ||||||||
Interest income | (819) | (609) | (942) | (1,510) | ||||||||
Allowance for funds used during construction | (5,688) | (5,839) | (5,455) | (5,812) | ||||||||
Gain on sale of other assets | (249) | - | ||||||||||
Loss (gain) on sale of other assets | 285 | (299) | ||||||||||
Other | (240) | (1,702) | (1,438) | (441) | ||||||||
Income before income taxes | 159,797 | 182,143 | 76,365 | 73,435 | ||||||||
Income tax benefit | (31,637) | (17,233) | ||||||||||
Provision for income taxes (benefit) | (3,711) | 4,797 | ||||||||||
Net income | $ | 191,434 | $ | 199,376 | $ | 80,076 | $ | 68,638 | ||||
Comprehensive income | $ | 191,434 | $ | 199,376 | $ | 80,076 | $ | 68,638 | ||||
Net income per common share: | ||||||||||||
Basic | $ | 0.72 | $ | 0.76 | $ | 0.30 | $ | 0.26 | ||||
Diluted | $ | 0.72 | $ | 0.76 | $ | 0.30 | $ | 0.26 | ||||
Average common shares outstanding during the period: | ||||||||||||
Basic | 264,192 | 261,952 | 266,767 | 262,213 | ||||||||
Diluted | 264,751 | 262,431 | 267,176 | 262,754 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements | The accompanying notes are an integral part of these consolidated financial statements | The accompanying notes are an integral part of these consolidated financial statements | ||||||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Nine Months Ended | ||||||
September 30, | ||||||
2023 | 2022 | |||||
Operating revenues | $ | 1,574,405 | $ | 1,582,649 | ||
Operating expenses: | ||||||
Operations and maintenance | 418,520 | 428,923 | ||||
Purchased gas | 314,838 | 354,896 | ||||
Depreciation | 252,208 | 235,774 | ||||
Amortization | 3,282 | 4,478 | ||||
Taxes other than income taxes | 67,433 | 67,352 | ||||
Total operating expenses | 1,056,281 | 1,091,423 | ||||
Operating income | 518,124 | 491,226 | ||||
Other expense (income): | ||||||
Interest expense | 210,440 | 169,345 | ||||
Interest income | (2,731) | (2,943) | ||||
Allowance for funds used during construction | (14,567) | (17,802) | ||||
Gain on sale of other assets | (184) | (777) | ||||
Other | (2,001) | (2,566) | ||||
Income before income taxes | 327,167 | 345,969 | ||||
Income tax benefit | (35,611) | (4,336) | ||||
Net income | $ | 362,778 | $ | 350,305 | ||
Comprehensive income | $ | 362,778 | $ | 350,305 | ||
Net income per common share: | ||||||
Basic | $ | 1.37 | $ | 1.34 | ||
Diluted | $ | 1.37 | $ | 1.33 | ||
Average common shares outstanding during the period: | ||||||
Basic | 265,135 | 262,089 | ||||
Diluted | 265,688 | 262,641 | ||||
The accompanying notes are an integral part of these consolidated financial statements | ||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(In thousands of dollars, except per share amounts)
(UNAUDITED)
March 31, | December 31, | September 30, | December 31, | |||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||
Stockholders' equity: | ||||||||||||||
Common stock, $0.50 par value | $ | 133,848 | $ | 133,486 | $ | 138,235 | $ | 133,486 | ||||||
Capital in excess of par value | 3,819,804 | 3,793,262 | 4,131,834 | 3,793,262 | ||||||||||
Retained earnings | 1,649,621 | 1,534,331 | 1,739,271 | 1,534,331 | ||||||||||
Treasury stock, at cost | (87,331) | (83,693) | (86,783) | (83,693) | ||||||||||
Total stockholders' equity | 5,515,942 | 5,377,386 | 5,922,557 | 5,377,386 | ||||||||||
Long-term debt of subsidiaries (substantially collateralized by utility plant): | Long-term debt of subsidiaries (substantially collateralized by utility plant): | Long-term debt of subsidiaries (substantially collateralized by utility plant): | ||||||||||||
Interest Rate Range | Maturity Date Range | Maturity Date Range | ||||||||||||
0.00% to 0.99% | 2023 to 2033 | 1,839 | 1,875 | 2023 to 2033 | 1,411 | 1,875 | ||||||||
1.00% to 1.99% | 2023 to 2039 | 8,120 | 8,369 | 2023 to 2039 | 7,730 | 8,369 | ||||||||
2.00% to 2.99% | 2023 to 2058 | 209,434 | 209,755 | 2024 to 2058 | 208,425 | 209,755 | ||||||||
3.00% to 3.99% | 2023 to 2056 | 1,349,200 | 1,351,432 | 2023 to 2056 | 1,315,519 | 1,351,432 | ||||||||
4.00% to 4.99% | 2023 to 2059 | 1,401,796 | 1,403,313 | 2023 to 2059 | 1,398,614 | 1,403,313 | ||||||||
5.00% to 5.99% | 2023 to 2052 | 89,114 | 14,357 | 2023 to 2061 | 313,698 | 14,357 | ||||||||
6.00% to 6.99% | 2026 to 2036 | 31,000 | 31,000 | 2026 to 2036 | 31,000 | 31,000 | ||||||||
7.00% to 7.99% | 2025 to 2027 | 28,314 | 28,378 | 2025 to 2027 | 28,188 | 28,378 | ||||||||
8.00% to 8.99% | 2025 | 1,876 | 2,116 | 2025 | 1,488 | 2,116 | ||||||||
9.00% to 9.99% | 2026 | 11,800 | 11,800 | 2026 | 11,800 | 11,800 | ||||||||
3,132,493 | 3,062,395 | 3,317,873 | 3,062,395 | |||||||||||
Notes payable to bank under revolving credit agreement, variable rate, due 2027 | Notes payable to bank under revolving credit agreement, variable rate, due 2027 | 542,000 | 490,000 | Notes payable to bank under revolving credit agreement, variable rate, due 2027 | 347,000 | 490,000 | ||||||||
Unsecured notes payable: | ||||||||||||||
Notes at 2.40% due 2031 | 400,000 | 400,000 | 400,000 | 400,000 | ||||||||||
Notes at 2.704% due 2030 | 500,000 | 500,000 | 500,000 | 500,000 | ||||||||||
Notes ranging from 3.01% to 3.59% due 2029 through 2050 | Notes ranging from 3.01% to 3.59% due 2029 through 2050 | 1,125,000 | 1,125,000 | Notes ranging from 3.01% to 3.59% due 2029 through 2050 | 1,125,000 | 1,125,000 | ||||||||
Notes at 4.28%, due 2049 | Notes at 4.28%, due 2049 | 500,000 | 500,000 | Notes at 4.28%, due 2049 | 500,000 | 500,000 | ||||||||
Notes at 5.30%, due 2052 | Notes at 5.30%, due 2052 | 500,000 | 500,000 | Notes at 5.30%, due 2052 | 500,000 | 500,000 | ||||||||
Notes at 5.95%, due 2023 through 2034 | Notes at 5.95%, due 2023 through 2034 | 30,000 | 40,000 | Notes at 5.95%, due 2023 through 2034 | 30,000 | 40,000 | ||||||||
Total long-term debt | 6,729,493 | 6,617,395 | 6,719,873 | 6,617,395 | ||||||||||
Current portion of long-term debt | 198,683 | 199,356 | 218,619 | 199,356 | ||||||||||
Long-term debt, excluding current portion | Long-term debt, excluding current portion | 6,530,810 | 6,418,039 | Long-term debt, excluding current portion | 6,501,254 | 6,418,039 | ||||||||
Less: debt issuance costs | 46,294 | 46,982 | 45,214 | 46,982 | ||||||||||
Long-term debt, excluding current portion, net of debt issuance costs | Long-term debt, excluding current portion, net of debt issuance costs | 6,484,516 | 6,371,057 | Long-term debt, excluding current portion, net of debt issuance costs | 6,456,040 | 6,371,057 | ||||||||
Total capitalization | $ | 12,000,458 | $ | 11,748,443 | $ | 12,378,597 | $ | 11,748,443 | ||||||
The accompanying notes are an integral part of these consolidated financial statements | The accompanying notes are an integral part of these consolidated financial statements | The accompanying notes are an integral part of these consolidated financial statements | ||||||||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Capital in | Capital in | |||||||||||||||||||||||||||||
Common | Excess of | Retained | Treasury | Common | Excess of | Retained | Treasury | |||||||||||||||||||||||
Stock | Par Value | Earnings | Stock | Total | Stock | Par Value | Earnings | Stock | Total | |||||||||||||||||||||
Balance at December 31, 2022 | $ | 133,486 | $ | 3,793,262 | $ | 1,534,331 | $ | (83,693) | $ | 5,377,386 | $ | 133,486 | $ | 3,793,262 | $ | 1,534,331 | $ | (83,693) | $ | 5,377,386 | ||||||||||
Net income | - | - | 191,434 | - | 191,434 | - | - | 191,434 | - | 191,434 | ||||||||||||||||||||
Dividends of March 1, 2023 ($0.287 per share) | - | - | (1) | - | (1) | |||||||||||||||||||||||||
Dividends of June 1, 2023 declared ($0.287 per share) | - | - | (75,876) | - | (75,876) | |||||||||||||||||||||||||
Dividends of March 1, 2023 ($0.2870 per share) | - | - | (1) | - | (1) | |||||||||||||||||||||||||
Dividends of June 1, 2023 declared ($0.2870 per share) | - | - | (75,876) | - | (75,876) | |||||||||||||||||||||||||
Issuance of common stock under dividend reinvestment plan (97,315 shares) | 49 | 4,068 | - | - | 4,117 | 49 | 4,068 | - | - | 4,117 | ||||||||||||||||||||
Issuance of common stock from at-the-market sale agreements (399,128 shares) | 200 | 19,094 | - | - | 19,294 | 200 | 19,094 | - | - | 19,294 | ||||||||||||||||||||
Repurchase of stock (88,051 shares) | - | - | - | (3,911) | (3,911) | - | - | - | (3,911) | (3,911) | ||||||||||||||||||||
Equity compensation plan (222,782 shares) | 111 | (111) | - | - | - | 111 | (111) | - | - | - | ||||||||||||||||||||
Exercise of stock options (2,917 shares) | 2 | 101 | - | - | 103 | 2 | 101 | - | - | 103 | ||||||||||||||||||||
Stock-based compensation | - | 3,410 | (267) | - | 3,143 | - | 3,410 | (267) | - | 3,143 | ||||||||||||||||||||
Other | - | (20) | - | 273 | 253 | - | (20) | - | 273 | 253 | ||||||||||||||||||||
Balance at March 31, 2023 | $ | 133,848 | $ | 3,819,804 | $ | 1,649,621 | $ | (87,331) | $ | 5,515,942 | $ | 133,848 | $ | 3,819,804 | $ | 1,649,621 | $ | (87,331) | $ | 5,515,942 | ||||||||||
Net income | - | - | 91,268 | - | 91,268 | |||||||||||||||||||||||||
Dividends of June 1, 2023 ($0.2870 per share) | - | - | (1) | - | (1) | |||||||||||||||||||||||||
Issuance of common stock under dividend reinvestment plan (102,676 shares) | 51 | 3,901 | - | - | 3,952 | |||||||||||||||||||||||||
Repurchase of stock (971 shares) | - | - | - | (42) | (42) | |||||||||||||||||||||||||
Equity compensation plan (17,054 shares) | 9 | (9) | - | - | - | |||||||||||||||||||||||||
Exercise of stock options (3,026 shares) | 1 | 105 | - | - | 106 | |||||||||||||||||||||||||
Stock-based compensation | - | 3,515 | (206) | - | 3,309 | |||||||||||||||||||||||||
Other | - | (117) | - | 281 | 164 | |||||||||||||||||||||||||
Balance at June 30, 2023 | $ | 133,909 | $ | 3,827,199 | $ | 1,740,682 | $ | (87,092) | $ | 5,614,698 | ||||||||||||||||||||
Net income | - | - | 80,076 | - | 80,076 | |||||||||||||||||||||||||
Dividends of September 1, 2023 ($0.3071 per share) | - | - | (81,230) | - | (81,230) | |||||||||||||||||||||||||
Issuance of common stock under dividend reinvestment plan (113,043 shares) | 56 | 3,936 | - | - | 3,992 | |||||||||||||||||||||||||
Issuance of common stock from at-the-market sale agreements (8,539,711 shares) | 4,270 | 299,419 | - | - | 303,689 | |||||||||||||||||||||||||
Repurchase of stock (48 shares) | - | - | - | (2) | (2) | |||||||||||||||||||||||||
Equity compensation plan (133 shares) | - | - | - | - | - | |||||||||||||||||||||||||
Exercise of stock options (610 shares) | - | 20 | - | - | 20 | |||||||||||||||||||||||||
Stock-based compensation | - | 1,967 | (257) | - | 1,710 | |||||||||||||||||||||||||
Other | - | (707) | - | 311 | (396) | |||||||||||||||||||||||||
Balance at September 30, 2023 | $ | 138,235 | $ | 4,131,834 | $ | 1,739,271 | $ | (86,783) | $ | 5,922,557 | ||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements | The accompanying notes are an integral part of these consolidated financial statements | The accompanying notes are an integral part of these consolidated financial statements | ||||||||||||||||||||||||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Capital in | Capital in | |||||||||||||||||||||||||||||
Common | Excess of | Retained | Treasury | Common | Excess of | Retained | Treasury | |||||||||||||||||||||||
Stock | Par Value | Earnings | Stock | Total | Stock | Par Value | Earnings | Stock | Total | |||||||||||||||||||||
Balance at December 31, 2021 | $ | 128,050 | $ | 3,705,814 | $ | 1,434,201 | $ | (83,615) | $ | 5,184,450 | $ | 128,050 | $ | 3,705,814 | $ | 1,434,201 | $ | (83,615) | $ | 5,184,450 | ||||||||||
Net income | - | - | 199,376 | - | 199,376 | - | - | 199,376 | - | 199,376 | ||||||||||||||||||||
Dividends of March 1, 2022 ($0.2682 per share) | - | - | (67,821) | - | (67,821) | - | - | (67,821) | - | (67,821) | ||||||||||||||||||||
Dividends of June 1, 2022 declared ($0.2682 per share) | - | - | (67,863) | - | (67,863) | - | - | (67,863) | - | (67,863) | ||||||||||||||||||||
Issuance of common stock under dividend reinvestment plan (93,833 shares) | 47 | 4,070 | - | - | 4,117 | 47 | 4,070 | - | - | 4,117 | ||||||||||||||||||||
Repurchase of stock (21,290 shares) | - | - | - | (1,012) | (1,012) | - | - | - | (1,012) | (1,012) | ||||||||||||||||||||
Equity compensation plan (57,052 shares) | 29 | (29) | - | - | - | 29 | (29) | - | - | - | ||||||||||||||||||||
Exercise of stock options (28,516 shares) | 14 | 998 | - | - | 1,012 | 14 | 998 | - | - | 1,012 | ||||||||||||||||||||
Stock-based compensation | - | 2,716 | (136) | - | 2,580 | - | 2,716 | (136) | - | 2,580 | ||||||||||||||||||||
Other | - | (9) | - | 270 | 261 | - | (9) | - | 270 | 261 | ||||||||||||||||||||
Balance at March 31, 2022 | $ | 128,140 | $ | 3,713,560 | $ | 1,497,757 | $ | (84,357) | $ | 5,255,100 | $ | 128,140 | $ | 3,713,560 | $ | 1,497,757 | $ | (84,357) | $ | 5,255,100 | ||||||||||
Net income | - | - | 82,291 | - | 82,291 | |||||||||||||||||||||||||
Dividends of June 1, 2022 ($0.2682 per share) | - | - | (2,424) | - | (2,424) | |||||||||||||||||||||||||
Issuance of common stock from stock purchase contracts (9,029,461 shares) | 4,515 | (4,515) | - | - | - | |||||||||||||||||||||||||
Issuance of common stock under dividend reinvestment plan (92,889 shares) | 47 | 4,007 | - | 4,054 | ||||||||||||||||||||||||||
Repurchase of stock (305 shares) | - | - | - | (15) | (15) | |||||||||||||||||||||||||
Equity compensation plan (4,736 shares) | 2 | (2) | - | - | - | |||||||||||||||||||||||||
Exercise of stock options (6,462 shares) | 3 | 224 | - | - | 227 | |||||||||||||||||||||||||
Stock-based compensation | - | 2,725 | (182) | - | 2,543 | |||||||||||||||||||||||||
Other | - | (24) | - | 280 | 256 | |||||||||||||||||||||||||
Balance at June 30, 2022 | $ | 132,707 | $ | 3,715,975 | $ | 1,577,442 | $ | (84,092) | $ | 5,342,032 | ||||||||||||||||||||
Net income | - | - | 68,638 | - | 68,638 | |||||||||||||||||||||||||
Dividends of September 1, 2022 ($0.2870 per share) | - | - | (75,246) | - | (75,246) | |||||||||||||||||||||||||
Issuance of common stock under dividend reinvestment plan (89,123 shares) | 44 | 4,206 | - | - | 4,250 | |||||||||||||||||||||||||
Repurchase of stock (604 shares) | - | - | - | (29) | (29) | |||||||||||||||||||||||||
Equity compensation plan (6,555 shares) | 3 | (3) | - | - | - | |||||||||||||||||||||||||
Exercise of stock options (18,992 shares) | 10 | 660 | - | - | 670 | |||||||||||||||||||||||||
Stock-based compensation | - | 2,702 | (182) | - | 2,520 | |||||||||||||||||||||||||
Other | - | (17) | - | 284 | 267 | |||||||||||||||||||||||||
Balance at September 30, 2022 | $ | 132,764 | $ | 3,723,523 | $ | 1,570,652 | $ | (83,837) | $ | 5,343,102 | ||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements | The accompanying notes are an integral part of these consolidated financial statements | The accompanying notes are an integral part of these consolidated financial statements | ||||||||||||||||||||||||||||
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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands of dollars)
(UNAUDITED)
Three Months Ended | Nine Months Ended | |||||||||||
March 31, | September 30, | |||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 191,434 | $ | 199,376 | $ | 362,778 | $ | 350,305 | ||||
Adjustments to reconcile net income to net cash flows from operating activities: | ||||||||||||
Depreciation and amortization | 83,794 | 78,346 | 255,490 | 240,252 | ||||||||
Deferred income taxes | (33,257) | (19,774) | (40,541) | (12,794) | ||||||||
Provision for doubtful accounts | 4,532 | 5,991 | 17,021 | 18,519 | ||||||||
Stock-based compensation | 3,422 | 2,732 | 8,929 | 8,164 | ||||||||
Gain on sale of utility systems and other assets | (249) | (19) | (184) | (777) | ||||||||
Net change in receivables, deferred purchased gas costs, inventory and prepayments | 219,624 | 49,050 | 265,922 | (116,804) | ||||||||
Net change in payables, accrued interest, accrued taxes and other accrued liabilities | (58,361) | (5,354) | (5,266) | 65,845 | ||||||||
Pension and other postretirement benefits contributions | (20,343) | (20,390) | ||||||||||
Other | (9,311) | 256 | (39,237) | (13,161) | ||||||||
Net cash flows from operating activities | 401,628 | 310,604 | 804,569 | 519,159 | ||||||||
Cash flows from investing activities: | ||||||||||||
Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $1,428 and $1,449 | (243,730) | (183,322) | ||||||||||
Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $4,502 and $4,527 | (874,491) | (719,688) | ||||||||||
Acquisitions of utility systems, net | (136) | (50,009) | (45,303) | (104,383) | ||||||||
Net proceeds from the sale of utility systems and other assets | 337 | 19 | 634 | 797 | ||||||||
Other | 321 | 80 | 451 | 205 | ||||||||
Net cash flows used in investing activities | (243,208) | (233,232) | (918,709) | (823,069) | ||||||||
Cash flows from financing activities: | ||||||||||||
Customers' advances and contributions in aid of construction | 7,010 | 2,962 | 13,151 | 10,732 | ||||||||
Repayments of customers' advances | (984) | (159) | (5,222) | (1,726) | ||||||||
Net proceeds (repayments) of short-term debt | (206,000) | 14,744 | (96,668) | 148,235 | ||||||||
Proceeds from long-term debt | 229,770 | 165,000 | 681,203 | 944,882 | ||||||||
Repayments of long-term debt | (114,889) | (67,023) | (570,634) | (521,792) | ||||||||
Change in cash overdraft position | (8,624) | (81,722) | (9,006) | (64,326) | ||||||||
Proceeds from issuance of common stock under dividend reinvestment plan | 4,117 | 4,117 | 12,061 | 12,421 | ||||||||
Proceeds from issuance of common stock from at-the-market sale agreement | 19,294 | - | 322,983 | - | ||||||||
Proceeds from exercised stock options | 103 | 1,012 | 229 | 1,909 | ||||||||
Repurchase of common stock | (3,911) | (1,012) | (3,955) | (1,056) | ||||||||
Dividends paid on common stock | (75,808) | (67,821) | (232,916) | (213,354) | ||||||||
Other | 253 | 261 | 21 | 784 | ||||||||
Net cash flows used in financing activities | (149,669) | (29,641) | ||||||||||
Net cash flows from financing activities | 111,247 | 316,709 | ||||||||||
Net change in cash and cash equivalents | 8,751 | 47,731 | (2,893) | 12,799 | ||||||||
Cash and cash equivalents at beginning of period | 11,398 | 10,567 | 11,398 | 10,567 | ||||||||
Cash and cash equivalents at end of period | $ | 20,149 | $ | 58,298 | $ | 8,505 | $ | 23,366 | ||||
Non-cash investing activities: | Non-cash investing activities: | Non-cash investing activities: | ||||||||||
Property, plant and equipment additions purchased at the period end, but not yet paid for | $ | 86,136 | $ | 74,451 | $ | 106,150 | $ | 97,777 | ||||
Non-cash utility property contributions | 13,126 | 1,829 | 36,913 | 21,736 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements | The accompanying notes are an integral part of these consolidated financial statements | The accompanying notes are an integral part of these consolidated financial statements | ||||||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 1 – Basis of Presentation
The accompanying unaudited consolidated balance sheets and statements of capitalization of Essential Utilities, Inc. and subsidiaries (collectively, the “Company”, “we”, “us” or “our”) at March 31,September 30, 2023, and the unaudited consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2023, and the unaudited consolidated statements of cash flows and of equity for the threenine months ended March 31,September 30, 2023 and 2022, have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim reporting and the rules and regulations for reporting on Quarterly Reports on Form 10-Q. Because they cover interim periods, the statements and related notes to the financial statements do not include all disclosures and notes normally provided in annual financial statements and, therefore, should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Interim results are not necessarily indicative of results for a full year. In the opinion of management, all adjustments, consisting of only recurring accruals, which are necessary to present a fair statement of its consolidated balance sheets, consolidated statements of equity, consolidated statements of operations and comprehensive income, and consolidated cash flow for the periods presented, have been made.
The preparation of financial statements often requires the selection of specific accounting methods and policies. Significant estimates and judgments may be required in selecting and applying those methods and policies in the recognition of the assets and liabilities in its consolidated balance sheets, the revenues and expenses in its consolidated statements of operations and comprehensive income, and the information that is contained in its summary of significant accounting policies and notes to consolidated financial statements. Making these estimates and judgments requires the analysis of information concerning events that may not yet be complete and of facts and circumstances that may change over time. Furthermore, we are exposed to the uncertain state of the economy and macroeconomic conditions, including inflation and rising interest rates. As these continue to evolve, future events and effects related to these conditions cannot be determined with precision. Accordingly, actual amounts or future results can differ materially from those estimates that the Company includes currently in its consolidated financial statements, summary of significant accounting policies, and notes.
There have been no changes to the summary of significant accounting policies previously identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 2 – Revenue Recognition
The following table presents our revenues disaggregated by major source and customer class:
Three Months Ended | Three Months Ended | Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||
March 31, 2023 | March 31, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||
Water Revenues | Wastewater Revenues | Natural Gas Revenues | Other Revenues | Water Revenues | Wastewater Revenues | Natural Gas Revenues | Other Revenues | Water Revenues | Wastewater Revenues | Natural Gas Revenues | Other Revenues | Water Revenues | Wastewater Revenues | Natural Gas Revenues | Other Revenues | |||||||||||||||||||||||||||||||
Revenues from contracts with customers: | ||||||||||||||||||||||||||||||||||||||||||||||
Residential | $ | 147,252 | $ | 33,490 | $ | 292,230 | $ | - | $ | 131,288 | $ | 26,495 | $ | 285,106 | $ | - | $ | 173,331 | $ | 36,096 | $ | 46,501 | $ | - | $ | 173,798 | $ | 32,806 | $ | 65,631 | $ | - | ||||||||||||||
Commercial | 40,954 | 8,591 | 65,157 | - | 35,120 | 6,065 | 57,040 | - | 49,699 | 9,396 | 9,577 | - | 49,026 | 8,769 | 15,180 | - | ||||||||||||||||||||||||||||||
Fire protection | 10,259 | - | - | - | 9,193 | - | - | - | 10,350 | - | - | - | 9,934 | - | - | - | ||||||||||||||||||||||||||||||
Industrial | 7,857 | 578 | 1,789 | - | 7,181 | 344 | 1,842 | - | 9,438 | 500 | 353 | - | 9,291 | 466 | 990 | - | ||||||||||||||||||||||||||||||
Gas transportation & storage | - | - | 67,653 | - | - | - | 79,174 | - | - | - | 26,636 | - | - | - | 26,824 | - | ||||||||||||||||||||||||||||||
Other water | 8,844 | - | - | - | 17,351 | - | - | - | 15,549 | - | - | - | 11,920 | - | - | - | ||||||||||||||||||||||||||||||
Other wastewater | - | 2,734 | - | - | - | 2,498 | - | - | - | 2,827 | - | - | - | 2,175 | - | - | ||||||||||||||||||||||||||||||
Other utility | - | - | 13,077 | 6,159 | - | - | 23,226 | 2,915 | - | 11,731 | 2,898 | - | - | 11,096 | 2,362 | |||||||||||||||||||||||||||||||
Revenues from contracts with customers | 215,166 | 45,393 | 439,906 | 6,159 | 200,133 | 35,402 | 446,388 | 2,915 | 258,367 | 48,819 | 94,798 | 2,898 | 253,969 | 44,216 | 119,721 | 2,362 | ||||||||||||||||||||||||||||||
Alternative revenue program | 402 | 180 | 1,389 | - | 615 | (27) | (176) | - | 434 | 73 | - | - | 669 | 60 | - | - | ||||||||||||||||||||||||||||||
Other and eliminations | - | - | - | 17,855 | - | - | - | 14,025 | - | - | - | 5,866 | 545 | - | - | 13,076 | ||||||||||||||||||||||||||||||
Consolidated | $ | 215,568 | $ | 45,573 | $ | 441,295 | $ | 24,014 | $ | 200,748 | $ | 35,375 | $ | 446,212 | $ | 16,940 | $ | 258,801 | $ | 48,892 | $ | 94,798 | $ | 8,764 | $ | 255,183 | $ | 44,276 | $ | 119,721 | $ | 15,438 | ||||||||||||||
Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
September 30, 2023 | September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||
Water Revenues | Wastewater Revenues | Natural Gas Revenues | Other Revenues | Water Revenues | Wastewater Revenues | Natural Gas Revenues | Other Revenues | |||||||||||||||||||||||||||||||||||||||
Revenues from contracts with customers: | ||||||||||||||||||||||||||||||||||||||||||||||
Residential | $ | 487,704 | $ | 103,632 | $ | 415,207 | $ | - | $ | 454,628 | $ | 89,954 | $ | 446,679 | $ | - | ||||||||||||||||||||||||||||||
Commercial | 137,427 | 26,643 | 91,031 | - | 125,171 | 21,807 | 91,073 | - | ||||||||||||||||||||||||||||||||||||||
Fire protection | 30,794 | - | - | - | 28,674 | - | - | - | ||||||||||||||||||||||||||||||||||||||
Industrial | 25,584 | 1,587 | 2,613 | - | 24,076 | 1,242 | 3,789 | - | ||||||||||||||||||||||||||||||||||||||
Gas transportation & storage | - | - | 129,151 | - | - | - | 146,571 | - | ||||||||||||||||||||||||||||||||||||||
Other water | 36,310 | - | - | - | 45,170 | - | - | - | ||||||||||||||||||||||||||||||||||||||
Other wastewater | - | 8,291 | - | - | - | 8,180 | - | - | ||||||||||||||||||||||||||||||||||||||
Other utility | - | - | 35,653 | 11,706 | - | 46,162 | 8,602 | |||||||||||||||||||||||||||||||||||||||
Revenues from contracts with customers | 717,819 | 140,153 | 673,655 | 11,706 | 677,719 | 121,183 | 734,274 | 8,602 | ||||||||||||||||||||||||||||||||||||||
Alternative revenue program | 1,603 | 282 | 1,421 | - | 2,393 | (128) | - | - | ||||||||||||||||||||||||||||||||||||||
Other and eliminations | - | - | - | 27,766 | - | - | - | 38,606 | ||||||||||||||||||||||||||||||||||||||
Consolidated | $ | 719,422 | $ | 140,435 | $ | 675,076 | $ | 39,472 | $ | 680,112 | $ | 121,055 | $ | 734,274 | $ | 47,208 | ||||||||||||||||||||||||||||||
Note 3 – Acquisitions
Water and Wastewater Utility Acquisitions - Completed
In July 2023, the Company completed the following water utility asset acquisitions: Shenandoah Borough, Pennsylvania, which serves approximately 2,900 customers for $12,291; La Rue, an Ohio municipality, which serves approximately 300 customers for $2,253; and, Southern Oaks Water System, which serves approximately 750 customers in Texas for $3,321. Additionally, in July 2023, the Company completed their acquisition of a portion of the water and wastewater utility assets of the Village of Frankfort, an Illinois municipality, which serves approximately 1,400 customers for $1,424.
In June 2023, the Company acquired the wastewater utility assets of Union Rome, Ohio, which serves approximately 4,300 customers for a cash purchase price of $25,547.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
In March 2023, the Company acquired the North Heidelberg Sewer Company in Berks County, Pennsylvania, which serves 273 customer connections for a cash purchase price of $136.
In November 2022, the Company acquired certain water utility assets of Oak Brook, Illinois, which serve 2,037 customers for a cash purchase price of $12,500.
In AugustOn July 29, 2022, the Company acquiredPennsylvania Public Utility Commission issued an order (the “PUC Order”) approving the Company’s acquisition of the municipal wastewater assets of East Whiteland Township, Chester County, Pennsylvania, which serves 4,018 customers (the “East Whiteland Wastewater Assets”). On August 12, 2022, the Company acquired the East Whiteland Wastewater Assets for a cash purchase price of $54,374. Subsequently on August 25, 2022, the Office of Consumer Advocate (“OCA”) filed an appeal of the PUC Order to the Pennsylvania Commonwealth Court. On July 31, 2023, a decision was issued by the Pennsylvania Commonwealth Court, in which the Pennsylvania Commonwealth Court agreed with the OCA and reversed the PUC order which approved the acquisition. On September 26, 2023, the Pennsylvania Commonwealth Court denied our motion for reargument. On October 26, 2023, the Company, the Pennsylvania Public Utility Commission, and East Whiteland Township filed an appeal to the Pennsylvania Supreme Court. The Company is currently waiting to see if the Supreme Court will grant allocatur. Management believes the final resolution of this matter is not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
In March 2022, the Company acquired the wastewater system of Lower Makefield Township, which serves 11,323 customer connections in Lower Makefield, Falls and Middletown townships, and Yardley Borough, Bucks County, Pennsylvania, for a cash purchase price of $53,000.
The purchase price allocation for these acquisitions consisted primarily of acquired property, plant and equipment.
The pro forma effect of the utility systems acquired is not material either individually or collectively to the Company’s results of operations.
Water and Wastewater Utility Acquisitions – Pending Completion
In September 2023, the Company entered into a purchase agreement to acquire Greenville Municipal Water Authority’s water system in Greenville, Pennsylvania which serves approximately 3,000 customers for $18,000.
In June 2023, the Company entered into a purchase agreement to acquire Westfield HOA wastewater assets, which serves approximately 225 customers within Westfield Homeowners Subdivision in Glenview, Illinois for $50.
In April 2023, the Company entered into a purchase agreement to acquire Greenville Sanitation Authority’s wastewater utility assets, which serves approximately 2,300 customers in Greenville, Pennsylvania for $18,000.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Water and Wastewater Utility Acquisitions – Pending Completion
In April 2023, the Company entered into a purchase agreement to acquire Greenville Sanitation Authority’s wastewater utility assets, which serves approximately 2,300 customers in Greenville, Pennsylvania for $18,000.
In January 2023, the Company entered into a purchase agreement to acquire the water utility assets of La Rue, an Ohio municipality, which serves approximately 300 customers for $2,250.
In December 2022, the Company entered into a purchase agreement to acquire the wastewater utility assets of Union Rome Sewer, which serves approximately 5,300 customers in the southeast corner of Lawrence County, Ohio, for $25,500.
In August 2022, the Company entered into a purchase agreement to acquire a portion of the water and wastewater utility assets of the Village of Frankfort, an Illinois municipality, which serves approximately 1,400 customers for $1,400.
In December 2021, the Company entered into a purchase agreement to acquire the water utility assets of the Southern Oaks Water System, which serves approximately 740 customers in Texas for $3,300.In October 2021, the Company entered into a purchase agreement to acquire the wastewater utility assets of the City of Beaver Falls, Pennsylvania which consists of approximately 7,600 equivalent retail customers for $41,250. In July 2021, the Company entered into a purchase agreement to acquire the water utility assets of Shenandoah Borough, Pennsylvania which consists of approximately 2,930 customers for $12,000.
In January 2021, the Company entered into a purchase agreement to acquire the wastewater utility system assets of Willistown Township, Pennsylvania, which consist of approximately 2,300 customers, for $17,500. On April 14, 2023, the Willistown Township supervisors exercised their right to terminate the agreement.
The purchase price for these pending acquisitions are subject to certain adjustments at closing, and are subject to regulatory approval, including the final determination of the fair value of the rate base acquired. We plan to finance the purchase price of these acquisitions by utilizing our revolving credit facility until permanent debt and common equity are secured. These pending acquisitions are expected to close in 2023 and in 2024. Closing for our utility acquisitions are subject to the timing of the respective regulatory approval processes.
In January 2021, the Company entered into a purchase agreement to acquire the wastewater utility system assets of Willistown Township, Pennsylvania, which consist of approximately 2,300 customers, for $17,500. On April 14, 2023, the Willistown Township supervisors exercised their right to terminate the agreement.
DELCORA Purchase Agreement
In September 2019, the Company entered into a purchase agreement to acquire the wastewater utility system assets of the Delaware County Regional Water Quality Control Authority (“DELCORA”), which consists of approximately 16,000 customers, or the equivalent of 198,000 retail customers, in 42 municipalities in Southeast Pennsylvania for $276,500. In May 2020, Delaware County, Pennsylvania, filed a lawsuit alleging that DELCORA doesdid not have the legal authority to establish and fund a customer trust with the net proceeds of the transaction. In December 2020, the judge in the Delaware County Court lawsuit issued an order that (1) the County cannot interfere with the purchase agreement between DELCORA and the Company; (2) the County cannot terminate DELCORA prior to the closing
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
of the transaction; and (3) the establishment of the customer trust was valid. Delaware County appealed this decision to Commonwealth Court of Pennsylvania. On March 3, 2022, the Commonwealth Court issued a decision finding that Delaware County can dissolve the AuthorityDELCORA if it so chooses, but the purchase agreement must be upheld regardless of who is operating the system. The case was remanded back to the trial court for the entry of an order consistent with the Commonwealth Court’s opinion. This order was issued on September 8, 2022 (“Remand Order”). Since then, the County has challenged the Remand Order through two separate actions:actions described in the below bullet points. The effect of those proceedings has resulted in the Remand Order being on appeal to the Commonwealth Court. Argument has not yet been scheduled by the Commonwealth Court on the appeal.
First, Delaware County filed an Application for Determination of Finality (“Application”) on October 13, 2022.2022, with the Delaware County Court of Common Pleas. The Company filed its opposition to the Application on October 27, 2022, and on November 2, 2022, the Delaware County Court of Common Pleas denied Delaware County’s Application for Determination of Finality indicating that its previous order already constituted a final order that addressed the claims of all parties. On December 2, 2022, following the denial of its Application, Delaware County filed a Petition for Permission to Appeal (“Petition”) the Remand Order in the Commonwealth Court of Pennsylvania. On December 16, 2022, the Company filed an Answer in opposition to the Petition. The Commonwealth Court issued an Order denying the County’s Petition on February 2,
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
2023. The County filed an Application for Reconsideration of the Commonwealth Court’s February 22023 Order, which the Commonwealth Court granted on April 4, 2023. In that April 4, 2023 Order, the Commonwealth Court construed the Petition as a Notice of Appeal and has initiated a briefing schedule for this appeal.
Second, on November 2, 2022, Delaware County filed a Notice of Appeal (“Notice of Appeal”) from the Remand Order.Order with the Delaware County Court of Common Pleas. On December 2, 2022, the Delaware County Court of Common Pleas issued an Opinion concluding that the County Court did not err in issuing the Remand Order. On January 13, 2023, Delaware County filed an Application in Commonwealth Court seeking confirmation of briefing deadlines with respect to the Notice of Appeal. In response, by Order dated January 24, 2023, the Commonwealth Court stated that “the record received from the Court of Common Pleas of Delaware County is currently under review for finality. A briefing schedule will be issued upon completion of this review.” The Company filed an Application to quash the County’s Appeal on February 7, 2023. On April 4, 2023, the Commonwealth Court granted the Company’s Application and quashed the appeal.
On January 25, 2023, DELCORA filed in the Delaware Court of Common Pleas a complaint for Declaratory Judgment against the Company and Delaware County seeking resolution of whether the County Ordinance dissolving DELCORA is a final action prohibiting DELCORA from carrying out the material transaction of the Asset Purchase Agreement and, in the event that DELCORA retains the ability to close the transaction, whether DELCORA is permitted to exist as a trust. The Company filed preliminary objections to DELCORA’s complaint, which were scheduled for a hearing on October 12, 2023. However, prior to the scheduled hearing, the Court notified the parties that the hearing was canceled and would be re-listed after the parties receive the benefit of the Commonwealth Court’s decision on the appeal addressed above.
Meanwhile, the administrative law judges (“ALJ”) in the regulatory approval process recommended that the Company’s application to acquire DELCORA be denied, and subsequently, the Company provided exceptions to the recommended decision. On March 30, 2021, the Pennsylvania Public Utility Commission (“PUC”) ruled that the case be remanded back to the Office of Administrative Law Judge and vacated the original administrative law judges’ recommended decision (“2021 Order”). This 2021 Order was also appealed to the Commonwealth Court by Delaware County on April 29, 2021. A decision was issued by the Commonwealth Court on September 12, 2022, which dismissed the appeal of the County.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
After the PUC issued the 2021 Order, on April 16, 2021, the ALJ issued an order staying the proceeding until the Delaware County Court lawsuit is final and unappealable. On March 25, 2022, the Company sent a letter notifying the PUC of the March 3, 2022, Commonwealth Court decision (that originated in Delaware County Court of Common Pleas) and requested that the PUC move forward with processing the application. On July 14, 2022, the Commission moved to lift the stay imposed by the ALJ, and required the ALJ to establish a schedule on remand for the proceeding. The publishedALJ established a procedural schedule hasfor the proceeding concludingremand proceeding.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
On August 17, 2022, Receiver for the City of Chester filed suit in June 2023.Delaware County Common Pleas Court against DELCORA premised upon the claimed reversionary interest of the City in some of DELCORA’s assets. The Company intervened in that matter on October 19, 2022 and on March 27, 2023 filed preliminary objections. Following a hearing on the Company’s preliminary objections on August 28, 2023, the Receiver for the City of Chester discontinued the case without prejudice.
On January 26, 2023, several parties involved in the PUC case filed a joint motion for stay based on DELCORA’s filing of the January 25, 2023 Complaint for Declaratory Judgment and referenced the City of Chester’s bankruptcy filing in which the City of Chester has asserted reversionary contract interests regarding tosome of DELCORA’s wastewater assets. On February 6, 2023, the ALJ stayed the PUC DELCORA application proceedings againagain.
On May 23, 2023, the Bankruptcy Court issued an order in the City of Chester’s bankruptcy filing staying the PUC proceedings until relief from the stay is granted by the Bankruptcy Court. The Company appealed the Bankruptcy Court stay order to the United States District Court for the Eastern District of Pennsylvania on June 6, 2023. The Company filed its brief on August 7, 2023, to which the City responded on September 6, 2023. The Company filed its Reply brief on September 20, 2023, and we are awaiting the Court to determine whether oral argument will be scheduled or a decision rendered based solely on the briefing.
On June 16, 2023, the Company filed a Complaint against DELCORA in the Delaware County Court of Common Pleas requesting a declaratory judgment and injunctive relief regarding breach of the Asset Purchase Agreement in acting outside the ordinary course of business by attempting to enter into a new agreement with Philadelphia Water Department (“PWD”) for the treatment of wastewater without the Company’s consent. DELCORA filed an answer, new matter and counterclaim against the Company, alleging that the Company has tortiously interfered with DELCORA’s contract with the PWD. The Company filed preliminary objections to the counterclaim, and DELCORA filed an amended counterclaim. The Company filed preliminary objections to the amended counterclaim, and on October 9, 2023, DELCORA filed a second amended counterclaim, to which the Company filed preliminary objections.
The purchase price for this pending acquisition is subject to certain adjustments at closing, and is subject to regulatory approval, including the final determination of the fair value of the rate base acquired. We plan to finance the purchase price of this acquisition by the issuancewith a mix of common stockequity and bydebt financing, utilizing our revolving credit facility until permanent debt is secured. Closing of our acquisition of DELCORA is subject to the timing of the above-described regulatory approval process and on-going litigation.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 4 – Assets Held for Sale and Dispositions
In the fourth quarter of 2022, the Company decided to market for sale the assets of its regulated natural gas system in West Virginia that serves approximately 13,000 customers and is part of the Company’s Regulated Natural Gas segment. On December 31, 2022, the Company entered into a definitive agreement with Hope Gas, Inc. for the sale of its membership interestsregulated natural gas utility assets in its West Virginia, assetswhich served approximately 13,000 customers or about 2% of the Company’s regulated natural gas customers (“Peoples Gas West Virginia”). The Peoples Gas West Virginia sale closed on October 1, 2023 for cash at closing of $37,000. Thean estimated purchase price isof $39,965, subject to certain adjustments at closingworking capital and is subject to applicable regulatory approvals. Closingother adjustments. The sale of Peoples Gas West Virginia had no major effect on the sale is expected in mid-2023, and completion of this transaction will conclude the Company’s operations in West Virginia. Based on an assessment ofand did not meet the sale price and the carrying value of the planned disposition, there is no anticipated impairment expectedrequirements to be recognized because of this sale agreement. Theseclassified as a discontinued operation. The assets and liabilities do not qualify as discontinued operations, areof Peoples Gas West Virginia were reported as held for sale in the Company’saccompanying consolidated balance sheet, carried at the lower of its carrying amount or fair value less costs to sell, and consistconsisted of the following:
September 30, 2023 | December 31, 2022 | ||||
Inventory - gas stored | $ | 1,197 | $ | 2,807 | |
Other current assets | 1,334 | 3,284 | |||
Regulatory assets | 4,930 | 5,076 | |||
Current assets held for sale | $ | 7,461 | $ | 11,167 | |
Property, plant and equipment, net | 35,232 | 30,267 | |||
Regulatory assets and other | 2,095 | 1,857 | |||
Non-current assets held for sale | $ | 37,327 | $ | 32,124 | |
Current liabilities related to assets held for sale | $ | 2,669 | $ | 3,263 | |
Regulatory liabilities | 509 | 649 | |||
Other long-term liabilities | 249 | 325 | |||
Non-current liabilities related to assets held for sale | $ | 758 | $ | 974 | |
March 31, 2023 | December 31, 2022 | ||||
Inventory - gas stored | $ | 2 | $ | 2,807 | |
Other current assets | 3,656 | 3,284 | |||
Regulatory assets | 5,826 | 5,076 | |||
Current assets held for sale | $ | 9,484 | $ | 11,167 | |
Property, plant and equipment, net | 30,807 | 30,267 | |||
Regulatory assets and other | 2,152 | 1,857 | |||
Non-current assets held for sale | $ | 32,959 | $ | 32,124 | |
Current liabilities related to assets held for sale | $ | 2,355 | $ | 3,263 | |
Regulatory liabilities | 648 | 649 | |||
Other long-term liabilities | 300 | 325 | |||
Non-current liabilities related to assets held for sale | $ | 948 | $ | 974 | |
In October 2023, the Company entered into an agreement to sell its interest in three non-utility local microgrid and distributed energy projects for $165,000. Balances associated with these projects are included in deferred charges and other assets, net, in the consolidated balance sheets as of September 30, 2023, and December 31, 2022. The sale is subject to various closing conditions and regulatory approvals and is expected to be completed in late 2023 or early 2024.
Note 5 – Goodwill
The following table summarizes the changes in the Company’s goodwill, by business segment:
Regulated Water | Regulated Natural Gas | Other | Consolidated | Regulated Water | Regulated Natural Gas | Other | Consolidated | |||||||||||||||||
Balance at December 31, 2022 | $ | 58,504 | $ | 2,277,447 | $ | 4,841 | $ | 2,340,792 | $ | 58,504 | $ | 2,277,447 | $ | 4,841 | $ | 2,340,792 | ||||||||
Reclassification to utility plant acquisition adjustment | (37) | - | - | (37) | (131) | - | - | (131) | ||||||||||||||||
Balance at March 31, 2023 | $ | 58,467 | $ | 2,277,447 | $ | 4,841 | $ | 2,340,755 | ||||||||||||||||
Balance at September 30, 2023 | $ | 58,373 | $ | 2,277,447 | $ | 4,841 | $ | 2,340,661 | ||||||||||||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The reclassification of goodwill to utility plant acquisition adjustment results from a mechanism approved by the applicable utility commission. The mechanism provides for the transfer over time, and the recovery through customer rates, of goodwill associated with some acquisitions upon achieving specific objectives.
According to our normal schedule, we will be performing our annual goodwill impairment test during the fourth quarter for our Regulated Water, Regulated Natural Gas, and Other reporting units.
Note 6 – Capitalization
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
At-the-Market Offering
On October 14, 2022, the Company entered into at-the market sales agreements (“ATM”) with third-party sales agents, under which the Company may offer and sell shares of its common stock, from time to time, at its option, having an aggregate gross offering price of up to $500,000 pursuant to the Company’s effective shelf registration statement on Form S-3 (File No. 333-255235). The Company intends to use the net proceeds from the sales of shares through the ATM for working capital, capital expenditures, water and wastewater utility acquisitions and repaying outstanding indebtedness. As of December 31, 2022, the Company issued 1,321,994 shares of common stock under the ATM for proceeds of $63,040, net of expenses. In JanuaryDuring the three and nine months ended September 30, 2023, the Company issued 399,128sold 8,539,711 and 8,938,839 shares of common stock, in exchange for net proceeds of $303,689 and $322,983, respectively, under the ATMATM. As of September 30, 2023, approximately $110,000 remained available for proceeds of $19,294, net of expenses.sale under the ATM.
Tangible Equity Units
On April 23, 2019, the Company issued $690,000, less expenses of $16,358, of its tangible equity units (the “Units”), with a stated amount of $50.00 per unit. This issuance was part of the permanent financing to close the Peoples Gas Acquisition. Each Unit consisted of a prepaid stock purchase contract and an amortizing note, each issued by the Company. The amortizing notes had an initial principal amount of $8.62909, or $119,081 in aggregate, and yielded interest at a rate of 3.00% per year, and paid equal quarterly per unit cash installments of $0.75 per amortizing note (except for the July 30, 2019 installment payment, which was $0.80833 per amortizing note), that constituted a payment of interest and a partial repayment of principal. This cash payment in the aggregate was equivalent to 6.00% per year with respect to each $50.00 stated amount of the Units. The amortizing notes represented unsecured senior obligations of the Company.
Certain holders of the tangible equity units had early settled their prepaid stock purchase contracts prior to the due date, and, in exchange, the Company issued shares of its common stock. During April 2022, 981,919 stock purchase contracts were early settled by the holders of the contracts, resulting in the issuance of 1,166,107 shares of the Company’s common stock. On May 2, 2022, the remaining 6,621,315 stock purchase contracts were each mandatorily settled for 1.18758 shares of the Company’s common stock, and in the aggregate the Company issued 7,863,354 shares of its common stock. Additionally, the final quarterly installment payment was made, which resulted in the complete pay-off of the amortizing notes.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Long-term Debt and Loans Payable
In August 2023, the Company’s subsidiary, Aqua Pennsylvania, issued $225,000 in aggregate principal amount of first mortgage bonds. The bonds consisted of $175,000 of 5.48% first mortgage bonds due in 2053; and $50,000 of 5.56% first mortgage bonds due in 2061. The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.
On June 29, 2023, Aqua Pennsylvania and Peoples Natural Gas Companies amended the terms of their respective $100,000 and $300,000, 364-day revolving credit agreements, as follows: (1) extended the maturity dates to June 27, 2024; and (2) updated the adjustment on the Bloomberg Short-Term Bank Yield Index (BSBY) Rate.
In January 2023 and October 2022, the Company’s subsidiary, Aqua Pennsylvania, issued $75,000 and $125,000 of first mortgage bonds, due in 2043 and 2052, and with interest rates of 5.60% and 4.50%, respectively. The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
On June 30, 2022, the following debt amendments were executed: (1) Peoples Natural Gas Companies amended its 364-day revolving credit agreement primarily to increase the amount of the facility from $100,000 to $300,000 and to update the termination date of the facility to June 29, 2023, and (2) Aqua Pennsylvania amended its 364-day revolving credit agreement primarily to update the termination date of the facility to June 29, 2023 to coincide with the term of the Peoples Natural Gas Companies’ facility.
On December 14, 2022, the Company entered into a five year $1,000,000 unsecured revolving credit facility, which replaced the Company’s prior five year $1,000,000 unsecured revolving credit facility. The Company’s new unsecured revolving credit facility was used to repay all indebtedness and fees under our prior unsecured revolving credit facility, and for other general corporate purposes. The facility includes a $100,000 sublimit for daily demand loan. Funds borrowed under this facility are classified as long-term debt and are used to provide working capital as well as support for letters of credit for insurance policies and other financing arrangements. As of March 31,September 30, 2023, the Company has the following sublimits and available capacity under the credit facility: $100,000 letter of credit sublimit, $82,362$82,664 of letters of credit available capacity, $0 borrowed under the swing-line commitment, $100,000 was available for borrowing under the swing-line commitment, $440,362$635,664 available for borrowing and $542,000$347,000 of funds borrowed under the agreement.
Note 7 – Financial Instruments
Financial instruments are recorded at carrying value in the financial statements and approximate fair value as of the dates presented. The fair value of these instruments is disclosed below in accordance with current accounting guidance related to financial instruments. There have been no changes in the valuation techniques used to measure fair value, or asset or liability transfers between the levels of the fair value hierarchy for the threenine months ended March 31,September 30, 2023 and 2022.
The fair value of loans payable is determined based on its carrying amount and utilizing Level 1 methods and assumptions. As of March 31,September 30, 2023 and December 31, 2022, the carrying amount of the Company’s loans payable was $22,500$131,832 and $228,500, respectively, which equates to their estimated fair value. The fair value of cash and cash equivalents, is determined based on Level 1
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
methods and assumptions. As of March 31,September 30, 2023 and December 31, 2022, the carrying amounts of the Company's cash and cash equivalents was $20,149$8,505 and $11,398, respectively, which equates to their fair value. The Company’s assets underlying the deferred compensation and non-qualified pension plans are determined by the fair value of mutual funds, which are based on quoted market prices from active markets utilizing Level 1 methods and assumptions. As of March 31,September 30, 2023 and December 31, 2022, the carrying amount of these securities was $24,934$26,297 and $24,962, respectively, which equates to their fair value, and is reported in the consolidated balance sheet in deferred charges and other assets.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Unrealized gain and lossesloss on equity securities held in conjunction with our non-qualified pension plan is as follows:
Three Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||
March 31, | September 30, | September 30, | ||||||||||||||||
2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||
Net gain (loss) recognized during the period on equity securities | $ | 131 | $ | (278) | $ | 155 | $ | (257) | $ | 497 | $ | (994) | ||||||
Less: net gain / loss recognized during the period on equity securities sold during the period | - | - | - | - | - | - | ||||||||||||
Unrealized gain (loss) recognized during the reporting period on equity securities still held at the reporting date | $ | 131 | $ | (278) | $ | 155 | $ | (257) | $ | 497 | $ | (994) | ||||||
The net gain (loss) recognized on equity securities is presented on the consolidated statements of operations and comprehensive income on the line item “Other.”
The carrying amounts and estimated fair values of the Company’s long-term debt is as follows:
March 31, | December 31, | September 30, | December 31, | |||||||||
2023 | 2022 | 2023 | 2022 | |||||||||
Carrying amount | $ | 6,729,493 | $ | 6,617,395 | $ | 6,719,873 | $ | 6,617,395 | ||||
Estimated fair value | 5,684,609 | 5,528,131 | 5,300,219 | 5,528,131 | ||||||||
The fair value of long-term debt has been determined by discounting the future cash flows using current market interest rates for similar financial instruments of the same duration utilizing Level 2 methods and assumptions.
The Company’s customers’ advances for construction have a carrying value of $118,269$129,139 as of March 31,September 30, 2023, and $114,732 as of December 31, 2022. Their relative fair values cannot be accurately estimated because future refund payments depend on several variables, including new customer connections, customer consumption levels, and future rates. Portions of these non-interest-bearing instruments are payable annually through 2032, and amounts not paid by the respective contract expiration dates become non-refundable. The fair value of these amounts would, however, be less than their carrying value due to the non-interest-bearing feature.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 8 – Net Income per Common Share
Basic net income per common share is based on the weighted average number of common shares outstanding and the weighted average minimum number of shares issued upon settlement of the stock purchase contracts issued under the tangible equity units. Diluted net income per common share is based on the weighted average number of common shares outstanding and potentially dilutive shares. The dilutive effect of employee stock-based compensation is included in the computation of diluted net income per common share. The dilutive effect of stock-based compensation is calculated using the treasury stock method and expected proceeds upon exercise of the stock-based compensation. The treasury stock method assumes that the proceeds from stock-based compensation is used to purchase the Company’s common stock at the average market price during the period. The following table summarizes the shares, in thousands, used in computing basic and diluted net income per common share:
Three Months Ended | Three Months Ended | Nine Months Ended | ||||||||||
March 31, | September 30, | September 30, | ||||||||||
2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||
Average common shares outstanding during the period for basic computation | 264,192 | 261,952 | 266,767 | 262,213 | 265,135 | 262,089 | ||||||
Effect of dilutive securities: | ||||||||||||
Employee stock-based compensation | 559 | 479 | 409 | 541 | 553 | 552 | ||||||
Average common shares outstanding during the period for diluted computation | 264,751 | 262,431 | 267,176 | 262,754 | 265,688 | 262,641 | ||||||
For the three months ended March 31, 2022, the average common shares outstanding during the period for basic computation includes the weighted-average impact of 9,029,461 shares, basedBased on the minimum number of shares to be issued upon settlement of the stock purchase contracts issued in April 2019 under the tangible equity units.units, the average common shares outstanding for basic computation for the three and nine months ended September 30, 2022 includes the weighted-average impact of 0 and 3,920,087 shares, respectively. On May 2, 2022, all of the remaining stock purchase contracts under the tangible equity units were mandatorily settled.
The number of outstanding employee stock options that were not included in the diluted earnings per share calculation because the effect would have been anti-dilutive was 152,138was: 150,062 for the three and nine months ended March 31, 2023. ForSeptember 30, 2023; and 81,729 for the three and nine months ended March 31, 2022, all of the Company’s outstanding employee stock options were included in the calculations of diluted net income per share as the calculated cost to exercise employee stock options was less than the average market price of the Company’s common stock during this period.September 30, 2022. Additionally, the dilutive effect of performance share units and restricted share units granted are included in the Company’s calculation of diluted net income per share.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 9 – Stock-based Compensation
Under the Company’s Amended and Restated Equity Compensation Plan (the “Plan”) approved by the Company’s shareholders on May 2, 2019, to replace the 2004 Equity Compensation Plan, stock options, stock units, stock awards, stock appreciation rights, dividend equivalents, and other stock-based awards may be granted to employees, non-employee directors, and consultants and advisors. The Plan authorizes 6,250,000 shares for issuance under the Plan. A maximum of 3,125,000 shares under the
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Plan may be issued pursuant to stock awards, stock units and other stock-based awards, subject to adjustment as provided in the Plan. During any calendar year, no individual may be granted (i) stock options and stock appreciation rights under the Plan for more than 500,000 shares of Company stock in the aggregate or (ii) stock awards, stock units or other stock-based awards under the Plan for more than 500,000 shares of Company stock in the aggregate, subject to adjustment as provided in the Plan. Awards to employees and consultants under the Plan are made by a committee of the Board of Directors of the Company, except that with respect to awards to the Chief Executive Officer, the committee recommends those awards for approval by the non-employee directors of the Board of Directors. In the case of awards to non-employee directors, the Board of Directors makes such awards. At March 31,September 30, 2023, 1,506,0591,533,338 shares were still available for issuance under the Plan. No further grants may be made under the Company’s 2004 Equity Compensation Plan.
Performance Share Units – A performance share unit (“PSU”) represents the right to receive a share of the Company’s common stock if specified performance goals are met over the three year performance period specified in the grant, subject to exceptions through the respective vesting period, which is generally three years. Each grantee is granted a target award of PSUs and may earn between 0% and 200% of the target amount depending on the Company’s performance against the performance goals. The following table provides compensation expense for PSUs:
Three Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||
March 31, | September 30, | September 30, | ||||||||||||||||
2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||
Stock-based compensation within operations and maintenance expenses | $ | 2,443 | $ | 1,650 | $ | 1,039 | $ | 1,676 | $ | 5,444 | $ | 5,018 | ||||||
Income tax benefit | 612 | 467 | 260 | 309 | 1,364 | 1,261 | ||||||||||||
The following table summarizes the PSU transactions for the threenine months ended March 31,September 30, 2023:
Number | Weighted | Number | Weighted | |||||||||
of | Average | of | Average | |||||||||
Share Units | Fair Value | Share Units | Fair Value | |||||||||
Nonvested share units at beginning of period | 556,462 | $ | 42.77 | 556,462 | $ | 42.77 | ||||||
Granted | 161,981 | 45.06 | 162,030 | 45.06 | ||||||||
Performance criteria adjustment | (14,805) | 43.36 | ||||||||||
Actual vested | (157,862) | 53.83 | (168,549) | 53.77 | ||||||||
Forfeited | (1,310) | 42.79 | (12,513) | 44.10 | ||||||||
Nonvested share units at end of period | 559,271 | 43.81 | 522,625 | $ | 39.88 | |||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
A portion of the fair value of PSUs was estimated at the grant date based on the probability of satisfying the market-based conditions using the Monte Carlo valuation method, which assesses probabilities of various outcomes of market conditions. The other portion of the fair value of the PSUs is based on the fair market value of the Company’s stock at the grant date, regardless of whether the market-based condition is satisfied. The per unit weighted-average fair value at the date of grant for PSUs granted during the threenine months ended March 31,September 30, 2023 and 2022 was $45.06 and $42.31, respectively. The fair value of each PSU grant is amortized monthly into compensation expense on a straight-line basis over their respective vesting periods, generally 36 months. The accrual of compensation costs is based on the Company’s estimate of the final expected value of the award and is adjusted as required for the portion based on the performance-based condition. The Company assumes that forfeitures will be minimal, and recognizes forfeitures as they occur, which results in a reduction in compensation expense. As the payout of the PSUs includes dividend equivalents, no separate dividend yield assumption is required in calculating the fair value of the PSUs. The recording of compensation expense for PSUs has no impact on net cash flows.
Restricted Stock Units – A restricted stock unit (“RSU”) represents the right to receive a share of the Company’s common stock. RSUs are eligible to be earned at the end of a specified restricted period, which is generally three years, beginning on the date of grant. The Company assumes that forfeitures will be minimal and recognizes forfeitures as they occur, which results in a reduction in compensation expense. As the payout of the RSUs includes dividend equivalents, no separate dividend yield assumption is required in calculating the fair value of the RSUs. The following table provides the compensation expense and income tax benefit for RSUs:
Three Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||
March 31, | September 30, | September 30, | ||||||||||||||||
2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||
Stock-based compensation within operations and maintenance expenses | $ | 681 | $ | 777 | $ | 746 | $ | 702 | $ | 2,186 | $ | 2,206 | ||||||
Income tax benefit | 171 | 219 | 187 | 126 | 548 | 554 | ||||||||||||
The following table summarizes the RSU transactions for the threenine months ended March 31,September 30, 2023:
Number | Weighted | Number | Weighted | |||||||||
of | Average | of | Average | |||||||||
Stock Units | Fair Value | Stock Units | Fair Value | |||||||||
Nonvested stock units at beginning of period | 180,306 | $ | 45.94 | 180,306 | $ | 45.94 | ||||||
Granted | 73,696 | 45.61 | 75,414 | 45.53 | ||||||||
Stock units vested and issued | (50,555) | 49.44 | (52,744) | 49.25 | ||||||||
Forfeited | (495) | 43.29 | (5,104) | 45.54 | ||||||||
Nonvested stock units at end of period | 202,952 | 44.95 | 197,872 | $ | 45.07 | |||||||
The per unit weighted-average fair value at the date of grant for RSUs granted during the threenine months ended March 31,September 30, 2023 and 2022 was $45.61$45.53 and $45.10, respectively.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Stock Options – A stock option represents the option to purchase a number of shares of common stock of the Company as specified in the stock option grant agreement at the exercise price per share as determined by the closing market price of our common stock on the grant date. Stock options are exercisable in installments of 33% annually, starting one year from the grant date and expire 10 years from the grant date, subject to satisfaction of designated performance goals. The fair value of each stock option is amortized into compensation expense using the graded-vesting method, which results in the recognition of compensation costs over the requisite service period for each separately vesting tranche of the stock options as though the stock options were, in substance, multiple stock option grants. The following table provides the compensation cost and income tax benefit for stock-based compensation related to stock options:
Three Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||
March 31, | September 30, | September 30, | ||||||||||||||||
2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||
Stock-based compensation within operations and maintenance expenses | $ | 77 | $ | 100 | $ | 181 | $ | 139 | $ | 480 | $ | 380 | ||||||
Income tax benefit | 19 | 28 | 45 | 26 | 120 | 95 | ||||||||||||
The fair value of options was estimated at the grant date using the Black-Scholes option-pricing model. The following assumptions were used in the application of this valuation model:
2023 | 2023 | 2022 | |||||
Expected term (years) | 5.5 | 5.5 | 5.5 | ||||
Risk-free interest rate | 4.03% | 4.03% | 1.92% | ||||
Expected volatility | 27.80% | 27.80% | 26.50% | ||||
Dividend yield | 2.53% | 2.53% | 2.37% | ||||
Grant date fair value per option | $ | 11.37 | $ | 11.37 | $ | 9.34 | |
Historical information was the principal basis for the selection of the expected term and dividend yield. The expected volatility is based on a weighted-average combination of historical and implied volatilities over a time period that approximates the expected term of the option. The risk-free interest rate was selected based upon the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The following table summarizes stock option transactions for the threenine months ended March 31,September 30, 2023:
Weighted | Weighted | Weighted | Weighted | |||||||||||||||||
Average | Average | Aggregate | Average | Average | Aggregate | |||||||||||||||
Exercise | Remaining | Intrinsic | Exercise | Remaining | Intrinsic | |||||||||||||||
Shares | Price | Life (years) | Value | Shares | Price | Life (years) | Value | |||||||||||||
Outstanding at beginning of period | 820,061 | $ | 36.29 | 820,061 | $ | 36.29 | ||||||||||||||
Granted | 74,632 | 45.39 | 74,632 | 45.39 | ||||||||||||||||
Forfeited | (2,076) | 45.31 | ||||||||||||||||||
Expired | (664) | 35.20 | ||||||||||||||||||
Exercised | (2,917) | 35.21 | (6,553) | 34.98 | ||||||||||||||||
Outstanding at end of period | 891,776 | $ | 37.05 | 6.3 | $ | 6,130,820 | 885,400 | $ | 37.04 | 5.8 | $ | 206 | ||||||||
Exercisable at end of period | 766,704 | $ | 35.71 | 5.8 | $ | 6,130,820 | 762,586 | $ | 35.72 | 5.3 | $ | 206 | ||||||||
Restricted Stock – Restricted stock awards provide the grantee with the rights of a shareholder, including the right to receive dividends and to vote such shares, but not the right to sell or otherwise transfer the shares during the restriction period. Restricted stock awards result in compensation expense that is equal to the fair market value of the stock on the date of the grant and is amortized ratably over the restriction period. The Company expects forfeitures of restricted stock to be de minimis. The following table provides the compensation cost and income tax benefit for stock-based compensation related to restricted stock:
Three Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||
March 31, | September 30, | September 30, | ||||||||||||||||
2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||
Stock-based compensation within operations and maintenance expenses | $ | 12 | $ | 12 | $ | 12 | $ | 13 | $ | 37 | $ | 38 | ||||||
Income tax benefit | 3 | 4 | 3 | 4 | 10 | 11 | ||||||||||||
The following table summarizes restricted stock transactions for the three months ended March 31, 2023:
Number | Weighted | ||||
of | Average | ||||
Shares | Fair Value | ||||
Nonvested restricted stock at beginning of period | 1,170 | $ | 42.75 | ||
Granted | - | - | |||
Vested | - | - | |||
Nonvested restricted stock at end of period | 1,170 | $ | 42.75 | ||
There were no restricted stock awards granted during the three months ended March 31, 2023.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The following table summarizes restricted stock transactions for the nine months ended September 30, 2023:
Number | Weighted | ||||
of | Average | ||||
Shares | Fair Value | ||||
Nonvested restricted stock at beginning of period | 1,170 | $ | 42.75 | ||
Granted | - | - | |||
Vested | (1,170) | (42.75) | |||
Nonvested restricted stock at end of period | - | $ | - | ||
The weighted-average fair value at the date of the grant for restricted stock awards granted during the nine months ended September 30, 2022 was $42.75. There were no restricted stock awards granted during the nine months ended September 30, 2023.
Stock Awards – Stock awards represent the issuance of the Company’s common stock, without restriction. The issuance of stock awards results in compensation expense that is equal to the fair market value of the stock on the grant date and is expensed immediately upon grant. The following table provides the compensation cost and income tax benefit for stock-based compensation related to stock awards:
Three Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||
March 31, | September 30, | September 30, | ||||||||||||||||
2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||
Stock-based compensation within operations and maintenance expenses | $ | 210 | $ | 192 | $ | - | $ | 165 | $ | 780 | $ | 522 | ||||||
Income tax benefit | 59 | 56 | - | 48 | 219 | 151 | ||||||||||||
There were no stock awards granted during the three months ended September 30, 2023.
The following table summarizes stock award transactions for the threenine months ended March 31,September 30, 2023:
Number | Weighted | Number | Weighted | |||||||
of | Average | of | Average | |||||||
Stock Awards | Fair Value | Stock Awards | Fair Value | |||||||
Nonvested stock awards at beginning of period | - | $ | - | - | $ | - | ||||
Granted | 4,914 | 42.77 | 18,676 | 41.78 | ||||||
Vested | (4,914) | (42.77) | (18,676) | (41.78) | ||||||
Nonvested stock awards at end of period | - | - | - | - | ||||||
The weighted-average fair value at the date of grant for stock awards granted during the threenine months ended March 31,September 30, 2023 and 2022 was $42.77$41.78 and $51.66,$46.40, respectively.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 10 – Pension Plans and Other Postretirement Benefits
The Company maintains a qualified defined benefit pension plan (the “Pension Plan”), a nonqualified pension plan, and other postretirement benefit plans for certain of its employees.
The following tables provide the components of net periodic benefit cost (credit) for the Company’s pension and other postretirement benefit plans:
Pension Benefits | Pension Benefits | |||||||||||||||||
Three Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||
March 31, | September 30, | September 30, | ||||||||||||||||
2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||
Service cost | $ | 401 | $ | 707 | $ | 400 | $ | 707 | $ | 1,201 | $ | 2,121 | ||||||
Interest cost | 4,308 | 3,201 | 4,309 | 3,202 | 12,926 | 9,605 | ||||||||||||
Expected return on plan assets | (5,672) | (5,895) | (5,673) | (5,895) | (17,018) | (17,684) | ||||||||||||
Amortization of prior service cost | 171 | 134 | 171 | 134 | 513 | 402 | ||||||||||||
Amortization of actuarial loss | 809 | 435 | 810 | 435 | 2,428 | 1,306 | ||||||||||||
Net periodic benefit cost (credit) | $ | 17 | $ | (1,418) | $ | 17 | $ | (1,417) | $ | 50 | $ | (4,250) | ||||||
Other | ||||||||||||||||||
Postretirement Benefits | ||||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||||
September 30, | September 30, | |||||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||||
Service cost | $ | 337 | $ | 478 | $ | 1,011 | $ | 1,433 | ||||||||||
Interest cost | 1,119 | 842 | 3,357 | 2,527 | ||||||||||||||
Expected return on plan assets | (1,093) | (1,142) | (3,279) | (3,376) | ||||||||||||||
Amortization of actuarial loss | (329) | (334) | (988) | (1,002) | ||||||||||||||
Net periodic benefit cost (credit) | $ | 34 | $ | (156) | $ | 101 | $ | (418) | ||||||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Other | ||||||
Postretirement Benefits | ||||||
Three Months Ended | ||||||
March 31, | ||||||
2023 | 2022 | |||||
Service cost | $ | 337 | $ | 478 | ||
Interest cost | 1,119 | 842 | ||||
Expected return on plan assets | (1,093) | (1,125) | ||||
Amortization of actuarial loss | (329) | (334) | ||||
Net periodic benefit cost (credit) | $ | 34 | $ | (139) | ||
The net periodic benefit cost (credit) is based on estimated values and an extensive use of assumptions about the discount rate, expected return on plan assets, the rate of future compensation increases received by the Company’s employees, mortality, turnover, and medical costs. The Company presents the components of net periodic benefit cost (credit) other than service cost in the consolidated statements of operations and comprehensive income on the line item “Other”.
There were no$20,343 in cash contributions made to the Pension Plan during the first threenine months of 2023.ended September 30, 2023, which completed the Company’s expected cash contributions for the year.
Note 11 – Rate Activity
On MarchSeptember 28, 2023, the CompanyCompany’s regulated water and wastewater operating subsidiary in Texas, Aqua Texas, received authorization, in advance of thea final order being approved, to implementfrom the Public Utility Commission of Texas approving infrastructure rehabilitation surcharges designed to increase total operating revenues by $8,388 annually. The rates authorized on March 28, 2023 and implemented on an annualinterim basis by $7,685 in its water and wastewater utility operating divisions in Texas effective on April 1, 2023. The additional revenue billed and collected prior to2023 did not change with the final order is subject to refund based on the outcomeorder.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
During the first three months ofOn July 27, 2023, the Company’s regulated water and wastewater operating subsidiary in Virginia, Aqua Virginia, filed an application with the State Corporation Commission designed to increase revenues by $6,911 annually.
On June 5, 2023, the Company’s regulated water and wastewater operating subsidiary in North Carolina, Aqua North Carolina, received an order from the North Carolina Utilities Commission designed to increase rates by $14,001 in the first year of new rates being implemented, then an additional $3,743 and $4,130 in the second and third years, respectively. In February 2023, the Company had implemented interim rates, based on an estimate of the final outcome of the order, and no refunds or additional billings are required for the difference between interim and final approved rates.
In January 2023, the Company’s two other water utility operating divisions in Ohio that are regulated by local regulatory authorities implemented base rate increases designed to increase total operating revenues on an annual basis by $1,569. Further, one of the Company’s wastewater divisions in Indiana implemented a base rate increase designed to increase operating revenues on an annual basis by $134. Lastly, during the first threenine months of 2023, the Company implemented infrastructure rehabilitation surcharges designed to increase total operating revenues on an annual basis by $1,846$5,022 in its water and wastewater utility operating divisions in Pennsylvania, New Jersey, and Illinois and by $1,483$21,272 in its natural gas operating divisiondivisions in Kentucky.Kentucky and Pennsylvania.
On December 30, 2022, our regulated water and wastewater utility operating divisions in Ohio filed an application with the Public Utilities Commission of Ohio designed to increase rates by $9,816 annually.
On September 21, 2022, our regulated water and wastewater utility operating divisions in Ohio received an order from the Public Utilities Commission of Ohio which willdesigned to increase operating revenues by $5,483 annually. New rates for water and sewer service went into effect on September 21, 2022.
On June 30, 2022, the Company’s regulated water and wastewater operating subsidiary in North Carolina, Aqua North Carolina, filed an application with the North Carolina Utilities Commission designed to increase rates by $18,064 in the first year of new rates being implemented, then an
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
additional $4,303 and $4,577 in the second and third years, respectively. In February 2023, the Company implemented interim rates which may be subject to refund for the difference between interim and final approved rates pending the final order.
On May 16, 2022, the Company’s regulated water and wastewater operating subsidiary in Pennsylvania, Aqua Pennsylvania, received an order from the Pennsylvania Public Utility Commission that allowed base rate increases that would increase total annual operating revenues by $69,251. New rates went into effect on May 19, 2022. At the time the rate order was received, the rates in effect also included $35,470 in Distribution System Improvement Charges (“DSIC”), which was 7.2% above prior base rates. Consequently, the aggregate base rates increased by $104,721 since the last base rate increase and DSIC was reset to zero.
On January 3, 2022, the Company’s natural gas operating division in Kentucky received an order from the Kentucky Public Service Commission resulting in an increase of $5,238 in annual revenues, and new rates went into effect on January 4, 2022. On June 7, 2022, an additional $260 was approved and made effective by the Commission, resulting from a rehearing requested by the operating division.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 12 – Taxes Other than Income Taxes
The following table provides the components of taxes other than income taxes:
Three Months Ended | Three Months Ended | Nine Months Ended | ||||||||||||||||
March 31, | September 30, | September 30, | ||||||||||||||||
2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||
Property | $ | 8,104 | $ | 8,014 | $ | 7,402 | $ | 8,545 | $ | 23,937 | $ | 24,798 | ||||||
Gross receipts, excise and franchise | 4,030 | 4,100 | 5,456 | 4,371 | 13,661 | 12,484 | ||||||||||||
Payroll | 6,632 | 6,661 | 4,901 | 4,695 | 16,468 | 16,133 | ||||||||||||
Regulatory assessments | 1,684 | 1,765 | 2,146 | 1,486 | 5,544 | 5,063 | ||||||||||||
Pumping fees | 1,466 | 1,375 | 3,320 | 2,824 | 4,967 | 6,147 | ||||||||||||
Other | 962 | 1,092 | 982 | 704 | 2,856 | 2,727 | ||||||||||||
Total taxes other than income | $ | 22,878 | $ | 23,007 | $ | 24,207 | $ | 22,625 | $ | 67,433 | $ | 67,352 | ||||||
Note 13 – Segment Information
The Company has eleven operating segments and two reportable segments. The Regulated Water segment is comprised of eight operating segments representing its water and wastewater regulated utility companies, which are organized by the states where the Company provides water and wastewater services. The eight water and wastewater utility operating segments are aggregated into one reportable segment, because each of these operating segments has the following similarities: economic characteristics, nature of services, production processes, customers, water distribution or wastewater collection methods, and the nature of the regulatory environment. The Regulated Natural Gas segment is comprised of one operating segment representing natural gas utility companies, acquired in the Peoples Gas Acquisition, for which the Company provides natural gas distribution services.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
In addition to the Company’s two reportable segments, we include two of our operating segments within the Other category below. These segments are not quantitatively significant and are comprised of our non-regulated natural gas operations and Aqua Resources. Our non-regulated natural gas operations consist of utility service line protection solutions and repair services to households and the operation of gas marketing and production entities. Aqua Resources offers, through a third party, water and sewer service line protection solutions and repair services to households. In addition to these segments, Other is comprised of business activities not included in the reportable segments, corporate costs that have not been allocated to the Regulated Water and Regulated Natural Gas segments, and intersegment eliminations. Corporate costs include general and administrative expenses, and interest expense. The Company reports these corporate costs within Other as they relate to corporate-focused responsibilities and decisions and are not included in internal measures of segment operating performance used by the Company to measure the underlying performance of the operating segments.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The following table presents information about the Company’s reportable segments:
Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2023 | September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
Regulated Water | Regulated Natural Gas | Other | Consolidated | Regulated Water | Regulated Natural Gas | Other | Consolidated | |||||||||||||||||||||||||||||||||||||||||
Operating revenues | $ | 310,591 | $ | 94,798 | $ | 5,866 | $ | 411,255 | $ | 301,335 | $ | 118,985 | $ | 14,298 | $ | 434,618 | ||||||||||||||||||||||||||||||||
Operations and maintenance expense | 98,695 | 50,006 | (1,683) | 147,018 | 94,854 | 51,850 | 4,657 | 151,361 | ||||||||||||||||||||||||||||||||||||||||
Purchased gas | - | 14,408 | 2,182 | 16,590 | - | 41,124 | 10,917 | 52,041 | ||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 54,695 | 31,141 | 199 | 86,035 | 51,522 | 30,295 | 913 | 82,730 | ||||||||||||||||||||||||||||||||||||||||
Interest expense, net (a) | 30,867 | 19,405 | 17,376 | 67,648 | 27,762 | 20,323 | 10,893 | 58,978 | ||||||||||||||||||||||||||||||||||||||||
Allowance for funds used during construction | (4,643) | (812) | - | (5,455) | (5,161) | (651) | - | (5,812) | ||||||||||||||||||||||||||||||||||||||||
Provision for income taxes (benefit) | 16,186 | (16,905) | (2,992) | (3,711) | 19,182 | (12,734) | (1,651) | 4,797 | ||||||||||||||||||||||||||||||||||||||||
Net income (loss) | 99,916 | (9,776) | (10,064) | 80,076 | 98,586 | (17,133) | (12,815) | 68,638 | ||||||||||||||||||||||||||||||||||||||||
Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
March 31, 2023 | March 31, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||
Regulated Water | Regulated Natural Gas | Other | Consolidated | Regulated Water | Regulated Natural Gas | Other | Consolidated | Regulated Water | Regulated Natural Gas | Other | Consolidated | Regulated Water | Regulated Natural Gas | Other | Consolidated | |||||||||||||||||||||||||||||||||
Operating revenues | $ | 267,300 | $ | 441,295 | $ | 17,855 | $ | 726,450 | $ | 239,198 | $ | 445,183 | $ | 14,894 | $ | 699,275 | $ | 871,563 | $ | 675,076 | $ | 27,766 | $ | 1,574,405 | $ | 809,888 | $ | 731,897 | $ | 40,864 | $ | 1,582,649 | ||||||||||||||||
Operations and maintenance expense | 82,802 | 57,150 | (1,958) | 137,994 | 86,088 | 59,452 | (2,959) | 142,581 | 274,724 | 148,270 | (4,474) | 418,520 | 273,757 | 156,209 | (1,043) | 428,923 | ||||||||||||||||||||||||||||||||
Purchased gas | - | 241,856 | 14,459 | 256,315 | - | 217,306 | 10,406 | 227,712 | - | 295,929 | 18,909 | 314,838 | - | 321,822 | 33,074 | 354,896 | ||||||||||||||||||||||||||||||||
Depreciation and amortization | 53,467 | 30,128 | 199 | 83,794 | 48,716 | 29,704 | (74) | 78,346 | 161,393 | 93,457 | 640 | 255,490 | 150,498 | 89,130 | 624 | 240,252 | ||||||||||||||||||||||||||||||||
Interest expense, net (a) | 29,713 | 27,507 | 14,629 | 71,849 | 27,554 | 20,652 | 4,821 | 53,027 | 91,103 | 67,894 | 48,712 | 207,709 | 82,920 | 60,146 | 23,336 | 166,402 | ||||||||||||||||||||||||||||||||
Allowance for funds used during construction | (4,946) | (742) | - | (5,688) | (5,149) | (690) | - | (5,839) | (12,529) | (2,038) | - | (14,567) | (15,657) | (2,145) | - | (17,802) | ||||||||||||||||||||||||||||||||
Provision for income taxes (benefit) | 13,514 | (43,484) | (1,667) | (31,637) | 7,499 | (26,474) | 1,742 | (17,233) | 45,559 | (73,703) | (7,467) | (35,611) | 40,528 | (44,378) | (486) | (4,336) | ||||||||||||||||||||||||||||||||
Net income (loss) | 77,402 | 123,546 | (9,514) | 191,434 | 60,543 | 139,486 | (653) | 199,376 | 267,345 | 127,400 | (31,967) | 362,778 | 235,471 | 133,831 | (18,997) | 350,305 | ||||||||||||||||||||||||||||||||
Capital expenditures | 159,394 | 81,669 | 2,667 | 243,730 | 100,803 | 82,122 | 397 | 183,322 | 493,851 | 377,562 | 3,078 | 874,491 | $ | 382,853 | $ | 335,738 | $ | 1,097 | 719,688 | |||||||||||||||||||||||||||||
(a) The regulated water and regulated natural gas segments report interest expense that includes long-term debt that was pushed-down to the regulated operating subsidiaries from Essential Utilities, Inc.
March 31, | December 31, | September 30, | December 31, | |||||||||
2023 | 2022 | 2023 | 2022 | |||||||||
Total assets: | ||||||||||||
Regulated water | $ | 8,893,947 | $ | 8,792,633 | $ | 9,331,307 | $ | 8,792,633 | ||||
Regulated natural gas | 6,556,182 | 6,528,654 | 6,691,622 | 6,528,654 | ||||||||
Other | 368,137 | 397,820 | 409,864 | 397,820 | ||||||||
Consolidated | $ | 15,818,266 | $ | 15,719,107 | $ | 16,432,793 | $ | 15,719,107 | ||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
Note 14 – Commitments and Contingencies
The Company is routinely involved in various disputes, claims, lawsuits and other regulatory and legal matters, including both asserted and unasserted legal claims, in the ordinary course of business. The status of each such matter, referred to herein as a loss contingency, is reviewed and assessed in accordance with applicable accounting rules regarding the nature of the matter, the likelihood that a loss will be incurred, and the amounts involved. As of March 31,September 30, 2023, the aggregate amount of $19,500$19,063 is accrued for loss contingencies and is reported in the Company’s consolidated balance sheet as other accrued liabilities and other liabilities. These accruals represent management’s best estimate of probable loss (as defined in the accounting guidance) for loss contingencies or the low end of a range of losses if no single probable loss can be estimated. For some loss contingencies, the Company is unable to estimate the amount of the probable loss or range of probable losses. Further, Essential Utilities has insurance coverage for certain of these loss contingencies, and as of March 31,September 30, 2023, estimates that
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
approximately $1,476$1,410 of the amount accrued for these matters are probable of recovery through insurance, which amount is also reported in the Company’s consolidated balance sheet as deferred charges and other assets, net.
During a portion of 2019, the Company initiated a do not consume advisory for some of its customers in one division served by the Company’s Illinois subsidiary. The do not consume advisory was lifted in 2019 and, in 2022, the water system was determined to be in compliance with the federal Lead and Copper Rule. During the secondthird quarter of 2021,2023, an amount was accrued for the portionpenalty and other fees that will be paid as a result of a conditional settlement that was reached with the fine or penalty that we determined to be probable and estimableregulators. The settlement is the subject of being incurred.court approval. In addition, on September 3, 2019, two individuals, on behalf of themselves and those similarly situated, commenced an action against the Company’s Illinois subsidiary in the State court in Will County, Illinois related to this do not consume advisory. The complaint seeks class action certification, attorney's fees, and "damages, including, but not limited to, out of pocket damages, and discomfort, aggravation, and annoyance” based upon the water provided by the Company’s subsidiary to a discrete service area in University Park, Illinois. The complaint contains allegations of damages as a result of supplied water that exceeded the standards established by the federal Lead and Copper Rule. The complaint is in the discovery phase and class certification has not been granted. During the third quarter of 2022, the Company established an accrual for the amount of loss asserted in the complaint that we determined to be probable and estimable of being incurred. The Company is vigorously defending against this claim. The Company submitted a claim for the expenses incurred to its insurance carrier for potential recovery of a portion of these costs and is currently in litigation with one of its carriers seeking to enforce its claims. The Company continues to assess the potential loss contingency on this matter. While the final outcome of this claim cannot be predicted with certainty, and unfavorable outcomes could negatively impact the Company, at this time in the opinion of management, the final resolution of this matter is not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
Although the results of legal proceedings cannot be predicted with certainty, other than disclosed above, there are no pending legal proceedings to which the Company or any of its subsidiaries is a party or to which any of its properties is the subject that are material or are expected to have a material effect on the Company’s financial position, results of operations, or cash flows.
In addition to the aforementioned loss contingencies, the Company self-insures a portion of its employee medical benefit program, and maintains stop-loss coverage to limit the exposure arising from these claims. The Company’s reserve for these claims totaled $1,846 at September 30, 2023 and represents a reserve for unpaid claim costs, including an estimate for the cost of incurred but not reported claims.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
claims. The Company’s reserve for these claims totaled $2,327 at March 31, 2023 and represents a reserve for unpaid claim costs, including an estimate for the cost of incurred but not reported claims.
Note 15 – Income Taxes
The Company’s effective tax rate was (19.8)(4.9)% and (9.5)(10.9)% for the three and nine months ended March 31,September 30, 2023, respectively. The Company’s effective tax rate was 6.5% and (1.3)% for the three and nine months ended September 30, 2022, respectively. The decreasedecreases in the effective tax rate for the firstthird quarter of the year isand nine months ended September 30, 2023 are primarily attributed to the increase in income tax benefits associated with the tax deduction for qualifying infrastructure. In determining its interim tax provision, the Company reflects its estimated permanent and flow-through tax differences for the taxable year. The Company uses the flow-through method to account for the tax deduction for qualifying utility infrastructure at its regulated Pennsylvania and New Jersey subsidiaries.
The statutory Federal tax rate is 21.0% for the threenine months ended March 31,September 30, 2023 and 2022. For states with a corporate net income tax, the state corporate net income tax rates range from 2.5% to 8.99%9.99% for all periods presented. On July 8, 2022, Pennsylvania enacted House Bill 1342 into law, which among other things, reduces Pennsylvania’s corporate income tax rate from 9.99% to 8.99% beginning January 1, 2023, and an additional 0.5% annually through 2031, when it reaches to 4.99%. The Company evaluated the impacts of the tax rate change and recorded, in the year ended December 31, 2022, a reduction to our deferred tax liabilities of $244,537 with a corresponding reduction primarily to our regulatory assets.
The Company uses a method of tax accounting for certain qualifying infrastructure investments at its Peoples Natural Gas and Peoples Gas Company subsidiaries, its largest natural gas subsidiaries in Pennsylvania, that allows a tax deduction for qualifying utility infrastructure. In the fourth quarter of 2022, the Company applied the same method of tax accounting for its Aqua New Jersey subsidiary. Consistent with the Company’s accounting for differences between book and tax expenditures in Pennsylvania in its other regulated subsidiaries, the Company uses the flow-through method to account for this timing difference. In April 2023, the Internal Revenue Service issued Revenue Procedure 2023-15 which provides a safe harbor method of accounting that taxpayers may use to determine whether expenses to repair, maintain, replace, or improve natural gas transmission and distribution property must be capitalized for tax purposes. The Company is evaluating this guidancethe safe harbor and intends to determineadopt the impact, if any,methodology on its 2023 tax return. In the second quarter of 2023, based on the Company’s tax position.legislative guidance that was issued, the Company reevaluated the uncertain tax positions related to the Regulated Water Segment and ultimately released a portion of its historical income tax reserves. Concurrently, the Company deferred this tax benefit from the reserve release as a regulatory liability, as the accounting treatment is expected to be determined in the next rate case.
Note 16 – Recent Accounting Pronouncements
Pronouncement adopted during the year:
In October 2021, the FASB issued accounting guidance on accounting for acquired revenue contracts with customers in a business combination. The guidance specifies for all acquired revenue contracts, regardless of their timing of payment, the circumstances in which the acquirer should recognize contract assets and contract liabilities that are acquired in a business combination, as well as how to measure those contract assets and contract liabilities. The updated accounting guidance is effective for fiscal years beginning after December 15, 2022 with early adoption permitted. The Company adopted this guidance effective January 1, 2023, and will apply it prospectively to business combinations occurring on or after that date.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(In thousands of dollars, except per share amounts)
This Management’s Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report contain, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements address, among other things: the expected timing of closing of our acquisitions; the projected impact of various legal proceedings; the projected effects of recent accounting pronouncements; prospects, plans, objectives, expectations and beliefs of management, as well as information contained in this report where statements are preceded by, followed by or include the words “believes,” “expects,” “estimates,” “anticipates,” “plans,” “future,” “potential,” “probably,” “predictions,” “intends,” “will,” “continue,” “in the event” or the negative of such terms or similar expressions. Forward-looking statements are based on a number of assumptions concerning future events, and are subject to a number of risks, uncertainties and other factors, many of which are outside our control, which could cause actual results to differ materially from those expressed or implied by such statements. These risks and uncertainties include, among others, the effects of regulation, abnormal weather, geopolitical forces, the impact of inflation and supply chain pressures, changes in capital requirements and funding, our ability to close acquisitions, changes to the capital markets, the COVID-19 pandemic, and our ability to assimilate acquired operations, as well as those risks, uncertainties and other factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, and the Form 10-Q for the quarter ended March 31, 2023 under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in such report and those included under the captions “Risk Factors” and this Quarterly Report.reports. As a result, readers are cautioned not to place undue reliance on any forward-looking statements. We undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.
Essential Utilities, Inc. (“we”, “us”, “our” or the “Company”), a Pennsylvania corporation, is the holding company for regulated utilities providing water, wastewater, or natural gas services to an estimated five5.5 million people in Pennsylvania, Ohio, Texas, Illinois, North Carolina, New Jersey, Indiana, Virginia, West Virginia, and Kentucky under the Aqua and Peoples brands. One of our largest operating subsidiaries, Aqua Pennsylvania, Inc. (“Aqua Pennsylvania”), provides water or wastewater services to approximately one-half of the total number of water or wastewater customers we serve, who are located in the suburban areas in counties north and west of the City of Philadelphia and in 27 other counties in Pennsylvania. Our other regulated water or wastewater utility subsidiaries provide similar services in seven additional states. Additionally, commencing on March 16, 2020, with the completion of the Peoples Gas Acquisition, the Company began to provide natural gas distribution services to customers in western Pennsylvania, Kentucky, and West Virginia. Approximately 93% of the total number of natural gas utility customers we serve are in western Pennsylvania. The Company also operates market-based businesses, conducted through its non-regulated subsidiaries, that provide utility service line protection solutions and repair services to households and gas marketing and production activities. During the fourth quarter of 2022, the Company signed an agreement to sell its regulated natural gas utility assets in
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
West Virginia, which represent approximately two percent of the Company’s regulated natural gas customers.
For many years, starting in the early 1990s, our business strategy was primarily directed toward the regulated water and wastewater utility industry, where we have more than quadrupled the number of regulated customers we serve, and have extended our regulated operations from southeastern Pennsylvania to include our current regulated utility operations throughout Pennsylvania and in seven additional states. On March 16, 2020, we completed the Peoples Gas Acquisition, a natural gas distribution utility, expanding the Company’s regulated utility business to include natural gas. Currently, the Company seeks to acquire businesses in the U.S. regulated sector, focusing on water and wastewater utilities and to opportunistically pursue growth ventures in select market-based activities, such as infrastructure opportunities that are supplementary and complementary to our regulated water utility businesses.
During the fourth quarter of 2022, the Company signed an agreement to sell its regulated natural gas utility assets in West Virginia, which represented approximately two percent of the Company’s regulated natural gas customers. The sale closed on October 1, 2023 for an estimated purchase price of $39,965, subject to working capital and other adjustments. In October 2023, the Company entered into an agreement to sell its interest in three non-utility local microgrid and distributed energy projects. The sale is expected to be completed in late 2023 or early 2024. These transactions are consistent with the Company’s long-term strategy of focusing on its core business and will allow the Company to prioritize the growth of its utilities in states where it has scale. The Company intends to use the proceeds from these transactions to finance its capital expenditures and water and wastewater acquisitions, in place of external funding from equity and debt issuances.
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes.
Recent Developments
Macroeconomic Factors
Macroeconomic factors and uncertainties continue to affect the overall business climate as well as our business. Inflation, higher interest rates, higher insurance costs due to market conditions, and supply chain pressures resulted toin an increase in our operating and capital spending requirements in 2022 and 2023 to date, which we expect to continue through 2023.the remainder of 2023 and into 2024. We continue to pursue enhancements to our regulatory practices to facilitate the efficient recovery of the increased cost of providing services and infrastructure improvements in our rates and mitigate the inherent regulatory lag associated with traditional rate making processes.
Environmental Compliance
Provision of water and wastewater services is subject to regulation under the federal Safe Drinking Water Act, the Clean Water Act, and related state laws, and under federal and state regulations issued under these laws. These laws and regulations establish criteria and standards for drinking water and for wastewater discharges. On March 14, 2023, the U.S. Environmental Protection Agency (“EPA”) announced the proposed National Primary Drinking Water Regulation (“NPDWR”) for the treatment of six per- and polyfluoroalkyl substances or compounds (“PFAS”).
The proposed NPDWR was issued for public comment and EPA expects to finalize the regulation by early 2024. We are currently reviewing the provisions of the proposed regulation as compared to our current treatment standards and expect that the regulation, once finalized, will result in changes to or addition of certain treatment processes that will require increased capital expenditures and operating expenses. The Company will submit comments on the proposed rulemaking to EPA by May 30, 2023. Both the Pennsylvania and New Jersey Departments of Environmental Protection have already established enforceable drinking water standards for several of the same PFAS compounds proposed by
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
On March 14, 2023, the U.S. Environmental Protection Agency (“EPA”) announced the proposed National Primary Drinking Water Regulation (“NPDWR”) for the treatment of six per- and polyfluoroalkyl substances or compounds (“PFAS”). The Company submitted comments on the NPDWR, which would establish legally enforceable levels for PFAS in drinking water. It is expected that the EPA will finalize the regulation by the end of 2023 or early 2024. The Company will be provided a three-year window to comply with the NPDWR, and the Safe Drinking Water Act allows for an additional potential for a two-year extension at the state level (the “Compliance Period”).
We expect that the regulation, once finalized, will result in changes to or addition of certain treatment processes that will require increased capital expenditures and operating expenses. The Company performed its initial analysis of the NPDWR and estimates an investment of approximately $450,000 of capital expenditures to install additional treatment facilities over the Compliance Period in order to comply with the proposed federal regulation would set limits lower than currently enforcedNPDWR. Additionally, the Company estimates annual operating expenses of approximately five percent of the installed capital expenditures, in Pennsylvaniatoday’s dollars, related to testing, treatment, and New Jersey.disposal. These are preliminary estimates and actual capital expenditures and expenses may differ based upon a variety of factors, including supply chain issues and a site-by-site analysis. The Company continues to advocate for actions to hold polluters accountable and is part of the Multi-District Litigation and other legal actions against multiple PFAS manufacturers and polluters to attempt to ensure that the ultimate responsibility for the cleanup of these contaminants is attributed to the polluters.polluters and is seeking damages and other costs to address the contamination of its public water supply systems by PFAS. Capital expenditures and operating costs required as a result of water quality standards have been traditionally recognized by state utility commissions as appropriate for inclusion in establishing rates.rates; however, we are also actively applying for grants and low interest loans, whenever possible, to reduce the overall cost to customers. The Company is also monitoring ongoing litigation and settlement activity with manufacturers of PFAS in these proceedings, including deadlines set in the multi-district litigation on December 4, 2023 and December 11, 2023 for water utilities, including the Company, to opt out of proposed class action settlements with certain of such manufacturers. For more information, see Part II, Item 1—Legal Proceedings.
Our regulated water and gas business is capital intensive and requires a significant level of capital spending. The liquidity required to fund our working capital, capital expenditures and other cash needs is provided from a combination of internally generated cash flows and external debt and equity financing. The Company’s consolidated balance sheet historically has had a negative working capital position whereby our current liabilities routinely exceed our current assets. Management believes that internally generated funds along with existing credit facilities, and the proceeds from the issuance of long-term debt and equity will be adequate to provide sufficient working capital to maintain normal operations and to meet our financing requirements for at least the next twelve months.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Our operating cash flow can be significantly affected by changes in operating working capital, especially during periods with significant changes in natural gas commodity prices and also the timing of our natural gas inventory purchases. Cash flow from operations was $401,628$804,569 for the first quarternine months of 2023, compared to $310,604$519,159 for the first quarternine months of 2022. The net change in working capital and other assets and liabilities resulted in an increase in cash from operations of $151,952$221,419 for the first quarternine months of 2023 compared to an increasea decrease of $43,952$64,120 for the first quarternine months of 2022. The net change in working capital for the first quarter ofin 2023 as compared to the first quarter of 2022 was primarily due to a larger changedriven by the year over year decrease in inventory –accounts receivable, unbilled revenues and deferred purchased gas stored during the first quarter of 2023cost balances, and most significantly in gas inventory, as a result of a higher cost of gas.lower gas prices in the current period as compared with the prior period for our Regulated Natural Gas segment.
During the first threenine months of 2023, we incurred $243,730$874,491 of capital expenditures, expended $136$45,303 for the acquisition of a wastewater utility system, issued $229,770$681,203 of long-term debt, repaid short-term debt, and made sinking fund contributions and other long-term debt repayments in aggregate of $320,889.$667,302. The capital expenditures were related to new and replacement water, wastewater, and natural gas mains, improvements to treatment plants, tanks, hydrants, and service lines, well and booster improvements, information technology improvements, and other enhancements and improvements. The proceeds from the issuance of long-term debt, including borrowings from our revolving credit facility, were used for capital expenditures, repayment of existing indebtedness, general corporate purposes, and acquisitions. Cash flows used in financing activities were higher during the first quarternine months of 2023 principally as a result of a greater amount for the paydown of loans payable associated with the financing of inventory.
In August 2023, the Company’s subsidiary, Aqua Pennsylvania, issued $225,000 in aggregate principal amount of first mortgage bonds. The bonds consisted of $175,000 of 5.48% first mortgage bonds due in 2053; and $50,000 of 5.56% first mortgage bonds due in 2061. The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.
In January 2023 and October 2022, Aqua Pennsylvania issued $75,000 and $125,000 of first mortgage bonds, due in 2043 and 2052, and with interest rates of 5.60% and 4.50%, respectively. The proceeds from these bonds were used to repay existing indebtedness and for general corporate purposes.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
On October 14, 2022, the Company entered into at-the market sales agreements (“ATM”) with third-party sales agents, under which the Company may offer and sell shares of its common stock, from time to time, at its option, having an aggregate gross offering price of up to $500,000 pursuant to the Company’s effective shelf registration statement on Form S-3 (File No. 333-255235). As of December 31, 2022, the Company had issued 1,321,994 shares of common stock for net proceeds of $63,040 under the ATM. During the three and nine months ended September 30, 2023, the Company sold 8,539,711 and 8,938,839 shares of common stock, in exchange for net proceeds of $303,689 and $322,983, respectively, under the ATM. As of September 30, 2023, approximately $110,000 remained available for sale under the ATM. The Company intends to useused the net proceeds from the sales of shares through the ATM for working capital, capital expenditures, water and wastewater utility acquisitions, and repaying outstanding indebtedness. As
Table of December 31, 2022, the Company had issued 1,321,994 sharesContents
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of common stock for net proceeds of $63,040 under the ATM. In January 2023, the Company issued 399,128 shares of common stock for net proceeds of $19,294 under the ATM.dollars, except per share amounts)
As of September 30, 2023, our credit ratings remained at investment grade levels. On July 12, 2023, S&P affirmed an A issuer credit rating for the Company, Aqua Pennsylvania, and Peoples Natural Gas Companies, and revised its outlook from stable to negative for the companies, citing weakening financial measures as a result of inflationary pressures and our significant capital spending. However, as can be noted in their report, S&P continues to assess our business risk profile as excellent, considering our low-risk and rate-regulated water and gas distribution operations in credit-supportive regulatory environments, our geographic and regulatory diversity, our large and stable residential and commercial customer base, and our solid and reliable operations. On August 29, 2023, Moody’s Investors Service (“Moody’s”) affirmed the Company’s senior unsecured notes rating of Baa2 and stable outlook; and, affirmed Peoples Natural Gas Companies’ senior secured notes rating of Baa1 and revised its outlook from stable to negative. The Company’s ability to maintain its credit rating depends, among other things, on adequate and timely rate relief, its ability to fund capital expenditures in a balanced manner using both debt and equity, and its ability to generate cash flow. A material downgrade of our credit rating may result in the imposition of additional financial and/or other covenants, impact the market prices of equity and debt securities, increase our borrowing costs, and adversely affect our liquidity, among other things. Management continues to enhance our regulatory practices to address regulatory lag and recover capital project costs and increases in operating costs efficiently and timely through various rate-making mechanisms.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||
2023 | 2022 | Increase (Decrease) | % change | 2023 | 2022 | 2023 | 2022 | |||||||||||||
Operating revenues | $ | 726,450 | $ | 699,275 | $ | 27,175 | 3.9% | $ | 411,255 | $ | 434,618 | $ | 1,574,405 | $ | 1,582,649 | |||||
Operations and maintenance expense | $ | 137,994 | $ | 142,581 | $ | (4,587) | -3.2% | $ | 147,018 | $ | 151,361 | $ | 418,520 | $ | 428,923 | |||||
Purchased gas | $ | 256,315 | $ | 227,712 | $ | 28,603 | 12.6% | $ | 16,590 | $ | 52,041 | $ | 314,838 | $ | 354,896 | |||||
Net income | $ | 191,434 | $ | 199,376 | $ | (7,942) | -4.0% | $ | 80,076 | $ | 68,638 | $ | 362,778 | $ | 350,305 | |||||
Operating Statistics | ||||||||||||||||||||
Selected operating results as a percentage of operating revenues: | ||||||||||||||||||||
Operations and maintenance | 19.0% | 20.4% | 35.7% | 34.8% | 26.6% | 27.1% | ||||||||||||||
Purchased gas | 35.3% | 32.6% | 4.0% | 12.0% | 20.0% | 22.4% | ||||||||||||||
Depreciation and amortization | 11.5% | 11.2% | 20.9% | 19.0% | 16.2% | 15.2% | ||||||||||||||
Taxes other than income taxes | 3.1% | 3.3% | 5.9% | 5.2% | 4.3% | 4.3% | ||||||||||||||
Interest expense, net of interest income | 9.9% | 7.6% | 16.4% | 13.6% | 13.2% | 10.5% | ||||||||||||||
Net income | 26.4% | 28.5% | 19.5% | 15.8% | 23.0% | 22.1% | ||||||||||||||
Effective tax rate | -19.8% | -9.5% | -4.9% | 6.5% | -10.9% | -1.3% | ||||||||||||||
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
decrease in customer assistance surcharge costs of $2,044 in our Regulated Natural Gas segment, which has an equivalent offsetting amount in revenues;
decrease in insurance expense of $2,824, which is the result of a lower reserve for claims expense, partially offset by the increase in insurance premiums in 2023;
decrease in employee related costs of $6,267, primarily due to the one-time incentive compensation provided to employees during the third quarter of 2022 and increased capitalization in 2023 as a result of greater capital spend; offset by
an increase in production costs for water and wastewater operations of $2,894,$3,212, primarily due to higher chemical prices and increased purchased water costs;
increase in legal expenses of $1,490;
additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $1,630;
increase in legal expenses of $1,320; offset by,
a decrease in customer assistance surcharge costs of $2,539 in our Regulated Natural Gas segment, which has an equivalent offsetting amount in revenues;
lower weather-related water main break activity during the first quarter of 2023 compared to the prior period that resulted in $2,170 reduction in related expenses;
decrease in postretirement benefit expense of $2,100;
an asset impairment charge recognized in the first quarter of 2022 of $1,801 to write down a portion of the right of use asset of our Regulated Natural Gas segment’s office space to fair value;
decrease in bad debt expense of $1,459;$1,704; and,
expenses of $112,$135, associated with remediating an advisory for some of our water utility customers served by our Illinois subsidiary. We expect the expenses associated with remediating the advisory to continue through 2023.
Depreciation and amortization expense increased by $5,448$3,305 or 7.0%4.0% principally due to continued capital expenditures to expand and improve our utility facilities and our acquisitions of new utility systems.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
The following tables present selected operating results and statistics for our Regulated Water segment for the three monthsperiods ended March 31:September 30, 2023 and 2022:
Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||
2023 | 2022 | Increase (Decrease) | % change | 2023 | 2022 | 2023 | 2022 | |||||||||||||
Operating revenues | $ | 267,300 | $ | 239,198 | $ | 28,102 | 11.7% | $ | 310,591 | $ | 301,335 | $ | 871,563 | $ | 809,888 | |||||
Operations and maintenance expense | $ | 82,802 | $ | 86,088 | $ | (3,286) | -3.8% | $ | 98,695 | $ | 94,854 | $ | 274,724 | $ | 273,757 | |||||
Segment net income | $ | 77,402 | $ | 60,543 | $ | 16,859 | 27.8% | $ | 99,916 | $ | 98,586 | $ | 267,345 | $ | 235,471 | |||||
Operating Statistics | ||||||||||||||||||||
Selected operating results as a percentage of operating revenues: | ||||||||||||||||||||
Operations and maintenance | 31.0% | 36.0% | 31.8% | 31.5% | 31.5% | 33.8% | ||||||||||||||
Depreciation and amortization | 20.0% | 20.4% | 17.6% | 17.1% | 18.5% | 18.6% | ||||||||||||||
Taxes other than income taxes | 5.9% | 6.6% | 5.5% | 5.6% | 5.4% | 6.0% | ||||||||||||||
Interest expense, net of interest income | 11.1% | 11.5% | 9.9% | 9.2% | 10.5% | 10.2% | ||||||||||||||
Segment net income | 29.0% | 25.3% | 32.2% | 32.7% | 30.7% | 29.1% | ||||||||||||||
Effective tax rate | 14.9% | 11.0% | 13.9% | 16.3% | 14.6% | 14.7% | ||||||||||||||
decrease in volume consumption of $5,671 as a result of wetter weather conditions in the third quarter of 2023.
increase in production costs for water and wastewater operations of $3,212, primarily due to higher chemical prices and increased purchased water costs;
additional operating costs resulting from acquired water and wastewater utility systems and higher customer base of $1,704;
increase in insurance expense of $1,018 due to higher insurance premiums in 2023;
increase in bad debt expense of $1,307; offset by
decrease in employee related costs of $3,429, primarily due to lower post-retirement benefit costs, higher capitalization in 2023 due to greater capital spend, and one-time incentive compensation in 2022; and,
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
expenses of $135, associated with remediating an advisory for some of our water utility customers served by our Illinois subsidiary. We expect the expenses associated with remediating the advisory to continue through 2023.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
increase in legal expenses of $1,503;
lower bad debt expenses of $2,077;
decrease in postretirement benefit expense of $2,100;
lower maintenance and contractor outside services expenses;period; and
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
The following tables present selected operating results and statistics for our Regulated Natural Gas segment, for the three monthsperiods ended March 31:September 30, 2023 and 2022:
Three Months Ended March 31, | Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||
2023 | 2022 | Increase (Decrease) | % change | 2023 | 2022 | 2023 | 2022 | |||||||||||||
Operating revenues | $ | 441,295 | $ | 445,183 | $ | (3,888) | -0.9% | $ | 94,798 | $ | 118,985 | $ | 675,076 | $ | 731,897 | |||||
Operations and maintenance expense | $ | 57,150 | $ | 59,452 | $ | (2,302) | -3.9% | $ | 50,006 | $ | 51,850 | $ | 148,270 | $ | 156,209 | |||||
Purchased gas | $ | 241,856 | $ | 217,306 | $ | 24,550 | 11.3% | $ | 14,408 | $ | 41,124 | $ | 295,929 | $ | 321,822 | |||||
Segment net income | $ | 123,546 | $ | 139,486 | $ | (15,940) | -11.4% | |||||||||||||
Segment net income (loss) | $ | (9,776) | $ | (17,133) | $ | 127,400 | $ | 133,831 | ||||||||||||
Operating Statistics | ||||||||||||||||||||
Selected operating results as a percentage of operating revenues: | ||||||||||||||||||||
Operations and maintenance | 13.0% | 13.4% | 52.8% | 43.6% | 22.0% | 21.3% | ||||||||||||||
Purchased gas | 54.8% | 48.8% | 15.2% | 34.6% | 43.8% | 44.0% | ||||||||||||||
Depreciation and amortization | 6.8% | 6.7% | 32.8% | 25.5% | 13.8% | 12.2% | ||||||||||||||
Taxes other than income taxes | 1.3% | 1.4% | 6.9% | 4.3% | 2.6% | 2.3% | ||||||||||||||
Segment net income | 28.0% | 31.3% | ||||||||||||||||||
Interest expense, net of interest income | 20.5% | 17.1% | 10.1% | 8.2% | ||||||||||||||||
Segment net income (loss) | -10.3% | -14.4% | 18.9% | 18.3% | ||||||||||||||||
Effective tax rate | -54.3% | -23.4% | 63.4% | 42.6% | -137.3% | -49.6% | ||||||||||||||
impact of lower gas usagecost of $30,488, primarily due to milder winter weather conditions$26,716 during the first quarter of 2023as compared to the prior period;
decrease in customer assistance surcharge of $2,539,$2,044, which has an equivalent offsetting amount in operations and maintenance expense; and offset by,
impact of higher gas cost of $24,550 during the quarter as compared to the prior period; and,
an increase of $3,608$4,413 due to higher rates and other surcharges.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
decrease in customer assistance surcharge costs of $2,044, which has an equivalent offsetting amount in revenues;
net decrease of $1,632 in labor and management fees, due to higher capitalization as a result of greater capital spend during 2023 and one-time incentive compensation in 2022; offset by,
increase in legal expenses of $1,143; and
increase in materials and supplies expenses of $575.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
an increase of $7,912 due to higher rates and other surcharges, largely resulting from the weather normalization charge in Kentucky and favorable merchant function charge rider in Pennsylvania during the first quarter of the year.
The Regulated Natural Gas segment is subject to seasonal fluctuations with the peak usage period occurring in the heating season which generally runs from October to March. A heating degree day (HDD) is each degree that the average of the high and low temperatures for a day is below 65 degrees Fahrenheit in a specific geographic location. Particularly during the heating season, this measure is used to reflect the demand for natural gas needed for heating based on the extent to which the average temperature falls below a reference temperature above which no heating is required (65 degrees Fahrenheit). During the first quarter ofnine months ended September 30, 2023, we experienced actual HDDs of 2,3302,963 days, which was warmer by 19.0%17.8% than the actual HDDs of 2,8783,606 days in the first quarternine months of 2022 for Pittsburgh, Pennsylvania, which we use as a proxy for our western Pennsylvania service territory. As a result, the operating revenue impact of the lower demand for gas volume was $30,488$35,076 and is largely attributed to the warmer winter weather experienced in 2023.
Purchased gas decreased by $25,893 or 8.0%. The decrease is the result of lower gas usage during the first nine months of 2023, offset by the impact of the higher average cost of gas withdrawn from storage during the first quarter of 2023.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
(In thousands of dollars, except per share amounts)
decrease in customer assistance surcharge costs of $2,539, which has an equivalent offsetting amount in revenues; and,
an asset impairment charge recognized in the first quarter of 2022 of $1,801 to write down a portion of the right of use asset of our Regulated Natural Gas segment’s office space to fair value; offset by,
increase in material and supplies of $1,324.
Impact of Recent Accounting Pronouncements
We describe the impact of recent accounting pronouncements in Note 16, Recent Accounting Pronouncements, to the consolidated financial statements in this report.
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risks in the normal course of business, including changes in interest rates and equity prices. Refer to Item 7A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed March 1, 2023, for additional information on market risks.
Item 4 – Controls and Procedures
(a)Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report are effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.
(b)Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting occurred during the quarter ended March 31,September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Part II. Other Information
Item 1 – Legal Proceedings
We are party to various legal proceedings in the ordinary course of business. Although the results of these legal proceedings cannot be predicted with certainty, besides the matter described below, there are no other pending legal proceedings to which we or any of our subsidiaries is a party or to which any of our properties is the subject that we believe are material or are expected to have a material adverse effect on our financial position, results of operations or cash flows.
PFAS Litigation
Several of the Company’s subsidiaries are parties to several lawsuits against manufacturers of certain PFAS for damages, contribution and reimbursement of costs incurred and continuing to be incurred to address the presence of such PFAS in public water supply systems owned and operated by these utility subsidiaries and throughout its service area. One such suit to which the Company is a party is a multi-district litigation (the “MDL”) lawsuit which commenced on December 7, 2018, in the United States District Court for the District of South Carolina. In August 2023, a potential class action settlement involving defendants The Chemours Company, Corteva, Inc., and DuPont de Nemours, Inc. to resolve claims brought in the MDL against them by public water systems, including the Company, and a similar class action settlement with defendant 3M Company received preliminary approval from the MDL court. The Company is monitoring and evaluating the ongoing litigation and settlement activity with the PFAS manufacturers for potential impacts to the various claims that the Company has asserted, including deadlines set in the MDL of December 4, 2023 and December 11, 2023 for water utilities, including the Company, to opt out of the proposed settlements.
Item 1A – Risk Factors
Please review the risks disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, under “Part 1, Item 1A – Risk Factors” as supplemented byand in our Form 10-Q for the following:quarter ended March 31, 2023.
Risks Related to the Operation of our Business
Inflation could adversely impact our ability to control costs, including operating expenses and capital costs.
Although inflation has been relatively low in recent years, it rose significantly in the second half of 2021 and through 2022. In addition, global and industry-wide supply chain disruptions have resulted in shortages in labor, materials and services. Such shortages have resulted in inflationary cost increases for labor, materials and services and could continue to cause costs to increase, as well as a scarcity of certain products and raw materials. Inflation, higher interest rates and supply chain pressures resulted in an increase in our operating
and capital spending requirements in 2022, which we expect will continue in 2023. To the extent inflation remains elevated, we may experience further cost increases for our operations, as well as increased labor costs. We cannot predict any future trends in the rate of inflation and interest rates, and a significant increase in inflation, to the extent we are unable to recover higher costs through rate cases, could negatively impact our business, financial condition and results of operation.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes the Company’s purchases of its common stock for the quarter ended March 31,September 30, 2023:
Issuer Purchases of Equity Securities | |||||||||
Total | Maximum | ||||||||
Number of | Number of | ||||||||
Shares | Shares | ||||||||
Purchased | that May | ||||||||
as Part of | Yet be | ||||||||
Total | Publicly | Purchased | |||||||
Number | Average | Announced | Under the | ||||||
of Shares | Price Paid | Plans or | Plan or | ||||||
Period | Purchased (1) | per Share | Programs | Programs | |||||
January 1 - 31, 2023 | 183 | $ | 47.55 | - | - | ||||
February 1 - 28, 2023 | 87,061 | $ | 44.43 | - | - | ||||
March 1 - 31, 2023 | 807 | $ | 42.85 | - | - | ||||
Total | 88,051 | $ | 44.42 | - | - | ||||
Issuer Purchases of Equity Securities | |||||||||
Total | Maximum | ||||||||
Number of | Number of | ||||||||
Shares | Shares | ||||||||
Purchased | that May | ||||||||
as Part of | Yet be | ||||||||
Total | Publicly | Purchased | |||||||
Number | Average | Announced | Under the | ||||||
of Shares | Price Paid | Plans or | Plan or | ||||||
Period | Purchased (1) | per Share | Programs | Programs | |||||
July 1-31, 2023 | 24 | $ | 39.67 | - | - | ||||
August 1-31, 2023 | 24 | $ | 37.07 | - | - | ||||
September 1-30, 2023 | - | $ | - | - | - | ||||
Total | 48 | $ | 38.37 | - | - | ||||
(1)These amounts consist of 88,05148 shares we acquired from employees associated with the withholding of shares to pay certain withholding taxes upon the vesting of stock-based compensation. This feature of our equity compensation plan is available to all employees who receive stock-based compensation under the plan. We purchased these shares at their fair market value, as determined by reference to the closing price of our common stock on the day prior to the award vesting.
Item 5 - Other Information
During the quarter ended September 30, 2023, none of the Company’s directors or executive officers adopted, modified or terminated any contract, instruction or written plan for the purchase or sale of Company securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”
Item 6 – Exhibits
Exhibit No. | Description | |
3.2 | ||
10.1* | ||
31.1* | ||
31.2* | ||
32.1* | Certification of Chief Executive Officer, furnished pursuant to 18 U.S.C. Section 1350 | |
32.2* | Certification of Chief Financial Officer, furnished pursuant to 18 U.S.C. Section 1350 | |
101.INS | Inline XBRL Instance Document – The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRES | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
104 | The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended |
*Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be executed on its behalf by the undersigned thereunto duly authorized.
May 9,November 7, 2023
Essential Utilities, Inc. | |||
Registrant | |||
/s/ Christopher H. Franklin | |||
Christopher H. Franklin | |||
Chairman, President and | |||
Chief Executive Officer | |||
/s/ Daniel J. Schuller | |||
Daniel J. Schuller | |||
Executive Vice President and | |||
Chief Financial Officer | |||