UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM
(Mark One)
For the quarterly period ended
For the transition period from_______________ to _______________
Commission File Number
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
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(Address of principal executive offices) | (Zip Code) |
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( | |
(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 No £
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12(b)-2 of the Exchange Act.:
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Accelerated Filer £ | |
Non-Accelerated Filer £ | Smaller Reporting Company |
Emerging Growth Company |
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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
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Securities registered pursuant to Section 12(b) of the Act: | ||||
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
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Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of October 23, 2023:
TABLE OF CONTENTS
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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| September 30, |
| December 31, | ||
Assets |
| 2023 |
| 2022 | ||
Property, plant and equipment, at cost |
| $ | |
| $ | |
Less: accumulated depreciation |
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Net property, plant and equipment |
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Current assets: |
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Cash and cash equivalents |
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Accounts receivable, net |
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Unbilled revenues |
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Inventory - materials and supplies |
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Inventory - gas stored |
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Current assets held for sale |
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Prepayments and other current assets |
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Regulatory assets |
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Total current assets |
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Regulatory assets |
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Deferred charges and other assets, net |
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Funds restricted for construction activity |
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Goodwill |
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Non-current assets held for sale |
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Operating lease right-of-use assets |
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Intangible assets |
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Total assets |
| $ | |
| $ | |
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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
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| September 30, |
| December 31, | ||
Liabilities and Equity |
| 2023 |
| 2022 | ||
Stockholders' equity: |
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Common stock at $ |
| $ | |
| $ | |
Capital in excess of par value |
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Retained earnings |
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Treasury stock, at cost, |
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Total stockholders' equity |
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Long-term debt, excluding current portion |
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Less: debt issuance costs |
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Long-term debt, excluding current portion, net of debt issuance costs |
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Commitments and contingencies (See Note 14) |
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Current liabilities: |
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Current portion of long-term debt |
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Loans payable |
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Accounts payable |
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Book overdraft |
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Accrued interest |
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Accrued taxes |
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Liabilities related to assets held for sale |
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Regulatory liabilities |
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Dividends payable |
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| - |
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Other accrued liabilities |
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Total current liabilities |
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Deferred credits and other liabilities: |
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Deferred income taxes and investment tax credits |
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Customers' advances for construction |
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Regulatory liabilities |
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Asset retirement obligations |
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Operating lease liabilities |
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Non-current liabilities related to assets held for sale |
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Pension and other postretirement benefit liabilities |
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Other |
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Total deferred credits and other liabilities |
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Contributions in aid of construction |
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Total liabilities and equity |
| $ | |
| $ | |
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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)
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| Three Months Ended | ||||
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| September 30, | ||||
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| 2023 |
| 2022 | ||
Operating revenues |
| $ | |
| $ | |
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Operating expenses: |
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Operations and maintenance |
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Purchased gas |
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Depreciation |
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Amortization |
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Taxes other than income taxes |
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Total operating expenses |
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Operating income |
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Other expense (income): |
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Interest expense |
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Interest income |
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| ( |
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| ( |
Allowance for funds used during construction |
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| ( |
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| ( |
Loss (gain) on sale of other assets |
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| ( |
Other |
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| ( |
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| ( |
Income before income taxes |
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Provision for income taxes (benefit) |
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| ( |
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Net income |
| $ | |
| $ | |
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Comprehensive income |
| $ | |
| $ | |
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Net income per common share: |
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Basic |
| $ | |
| $ | |
Diluted |
| $ | |
| $ | |
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Average common shares outstanding during the period: |
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Basic |
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Diluted |
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The accompanying notes are an integral part of these consolidated financial statements | ||||||
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ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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| Nine Months Ended | ||||
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| September 30, | ||||
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| 2023 |
| 2022 | ||
Operating revenues |
| $ | |
| $ | |
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Operating expenses: |
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Operations and maintenance |
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Purchased gas |
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Depreciation |
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Amortization |
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Taxes other than income taxes |
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Total operating expenses |
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Operating income |
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Other expense (income): |
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Interest expense |
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Interest income |
|
| ( |
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| ( |
Allowance for funds used during construction |
|
| ( |
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| ( |
Gain on sale of other assets |
|
| ( |
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| ( |
Other |
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| ( |
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| ( |
Income before income taxes |
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Income tax benefit |
|
| ( |
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| ( |
Net income |
| $ | |
| $ | |
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Comprehensive income |
| $ | |
| $ | |
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Net income per common share: |
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Basic |
| $ | |
| $ | |
Diluted |
| $ | |
| $ | |
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Average common shares outstanding during the period: |
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Basic |
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Diluted |
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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)
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| September 30, |
| December 31, | ||
|
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| 2023 |
| 2022 | ||
Stockholders' equity: |
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Common stock, $ |
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| $ | |
| $ | |
Capital in excess of par value |
|
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Retained earnings |
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Treasury stock, at cost |
|
|
| ( |
|
| ( |
Total stockholders' equity |
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Long-term debt of subsidiaries (substantially collateralized by utility plant): |
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Interest Rate Range | Maturity Date Range |
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Notes payable to bank under revolving credit agreement, variable rate, due |
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Unsecured notes payable: |
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Notes at |
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Notes at |
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Notes ranging from |
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Notes at |
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Notes at |
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Notes at |
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Total long-term debt |
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Current portion of long-term debt |
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Long-term debt, excluding current portion |
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Less: debt issuance costs |
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Long-term debt, excluding current portion, net of debt issuance costs |
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| | |
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Total capitalization |
|
| $ | |
| $ | |
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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)
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| Capital in |
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| Common |
| Excess of |
| Retained |
| Treasury |
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| Stock |
| Par Value |
| Earnings |
| Stock |
| Total | |||||
Balance at December 31, 2022 |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
Net income |
|
| - |
|
| - |
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|
| - |
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Dividends of March 1, 2023 ($ |
|
| - |
|
| - |
|
| ( |
|
| - |
|
| ( |
Dividends of June 1, 2023 declared ($ |
|
| - |
|
| - |
|
| ( |
|
| - |
|
| ( |
Issuance of common stock under dividend reinvestment plan ( |
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|
| - |
|
| - |
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Issuance of common stock from at-the-market sale agreements ( |
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|
| - |
|
| - |
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Repurchase of stock ( |
|
| - |
|
| - |
|
| - |
|
| ( |
|
| ( |
Equity compensation plan ( |
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| ( |
|
| - |
|
| - |
|
| - |
Exercise of stock options ( |
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| - |
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| - |
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Stock-based compensation |
|
| - |
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| ( |
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| - |
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Other |
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| - |
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| ( |
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| - |
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Balance at March 31, 2023 |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
Net income |
|
| - |
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| - |
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| - |
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Dividends of June 1, 2023 ($ |
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| - |
|
| - |
|
| ( |
|
| - |
|
| ( |
Issuance of common stock under dividend reinvestment plan ( |
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|
| - |
|
| - |
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Repurchase of stock ( |
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| - |
|
| - |
|
| - |
|
| ( |
|
| ( |
Equity compensation plan ( |
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| ( |
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| - |
|
| - |
|
| - |
Exercise of stock options ( |
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|
| - |
|
| - |
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Stock-based compensation |
|
| - |
|
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|
| ( |
|
| - |
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Other |
|
| - |
|
| ( |
|
| - |
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Balance at June 30, 2023 |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
Net income |
|
| - |
|
| - |
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| |
|
| - |
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Dividends of September 1, 2023 ($ |
|
| - |
|
| - |
|
| ( |
|
| - |
|
| ( |
Issuance of common stock under dividend reinvestment plan ( |
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| |
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| |
|
| - |
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| - |
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Issuance of common stock from at-the-market sale agreements ( |
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| |
|
| - |
|
| - |
|
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Repurchase of stock ( |
|
| - |
|
| - |
|
| - |
|
| ( |
|
| ( |
Equity compensation plan ( |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
Exercise of stock options ( |
|
| - |
|
| |
|
| - |
|
| - |
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Stock-based compensation |
|
| - |
|
| |
|
| ( |
|
| - |
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| |
Other |
|
| - |
|
| ( |
|
| - |
|
| |
|
| ( |
Balance at September 30, 2023 |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
|
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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)
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| Capital in |
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| Common |
| Excess of |
| Retained |
| Treasury |
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| ||||
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| Stock |
| Par Value |
| Earnings |
| Stock |
|
| Total | ||||
Balance at December 31, 2021 |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
Net income |
|
| - |
|
| - |
|
| |
|
| - |
|
| |
Dividends of March 1, 2022 ($ |
|
| - |
|
| - |
|
| ( |
|
| - |
|
| ( |
Dividends of June 1, 2022 declared ($ |
|
| - |
|
| - |
|
| ( |
|
| - |
|
| ( |
Issuance of common stock under dividend reinvestment plan ( |
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| |
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| |
|
| - |
|
| - |
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| |
Repurchase of stock ( |
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| - |
|
| - |
|
| - |
|
| ( |
|
| ( |
Equity compensation plan ( |
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| |
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| ( |
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| - |
|
| - |
|
| - |
Exercise of stock options ( |
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| - |
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| - |
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Stock-based compensation |
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| - |
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| |
|
| ( |
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| - |
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Other |
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| - |
|
| ( |
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| - |
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| |
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| |
Balance at March 31, 2022 |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
Net income |
|
| - |
|
| - |
|
| |
|
| - |
|
| |
Dividends of June 1, 2022 ($ |
|
| - |
|
| - |
|
| ( |
|
| - |
|
| ( |
Issuance of common stock from stock purchase contracts ( |
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| |
|
| ( |
|
| - |
|
| - |
|
| - |
Issuance of common stock under dividend reinvestment plan ( |
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| |
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| |
|
| - |
|
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| |
Repurchase of stock ( |
|
| - |
|
| - |
|
| - |
|
| ( |
|
| ( |
Equity compensation plan ( |
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| |
|
| ( |
|
| - |
|
| - |
|
| - |
Exercise of stock options ( |
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| |
|
| |
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| - |
|
| - |
|
| |
Stock-based compensation |
|
| - |
|
| |
|
| ( |
|
| - |
|
| |
Other |
|
| - |
|
| ( |
|
| - |
|
| |
|
| |
Balance at June 30, 2022 |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
Net income |
|
| - |
|
| - |
|
| |
|
| - |
|
| |
Dividends of September 1, 2022 ($ |
|
| - |
|
| - |
|
| ( |
|
| - |
|
| ( |
Issuance of common stock under dividend reinvestment plan ( |
|
| |
|
| |
|
| - |
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| - |
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| |
Repurchase of stock ( |
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| - |
|
| - |
|
| - |
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| ( |
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| ( |
Equity compensation plan ( |
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| |
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| ( |
|
| - |
|
| - |
|
| - |
Exercise of stock options ( |
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| |
|
| |
|
| - |
|
| - |
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| |
Stock-based compensation |
|
| - |
|
| |
|
| ( |
|
| - |
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| |
Other |
|
| - |
|
| ( |
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| - |
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| |
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| |
Balance at September 30, 2022 |
| $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
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The accompanying notes are an integral part of these consolidated financial statements |
Click or tap here to enter text.
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands of dollars)
(UNAUDITED)
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| Nine Months Ended | ||||
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| September 30, | ||||
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| 2023 |
| 2022 | ||
Cash flows from operating activities: |
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Net income |
| $ | |
| $ | |
Adjustments to reconcile net income to net cash flows from operating activities: |
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Depreciation and amortization |
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Deferred income taxes |
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| ( |
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Provision for doubtful accounts |
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Stock-based compensation |
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Gain on sale of utility systems and other assets |
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| ( |
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| ( |
Net change in receivables, deferred purchased gas costs, inventory and prepayments |
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| ( |
Net change in payables, accrued interest, accrued taxes and other accrued liabilities |
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| ( |
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Pension and other postretirement benefits contributions |
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| ( |
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| ( |
Other |
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| ( |
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| ( |
Net cash flows from operating activities |
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Cash flows from investing activities: |
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Property, plant and equipment additions, including the debt component of allowance for funds used during construction of $ |
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| ( |
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| ( |
Acquisitions of utility systems, net |
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| ( |
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| ( |
Net proceeds from the sale of utility systems and other assets |
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Other |
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Net cash flows used in investing activities |
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| ( |
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| ( |
Cash flows from financing activities: |
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Customers' advances and contributions in aid of construction |
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Repayments of customers' advances |
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| ( |
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| ( |
Net proceeds (repayments) of short-term debt |
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| ( |
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Proceeds from long-term debt |
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Repayments of long-term debt |
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| ( |
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| ( |
Change in cash overdraft position |
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| ( |
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| ( |
Proceeds from issuance of common stock under dividend reinvestment plan |
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Proceeds from issuance of common stock from at-the-market sale agreement |
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Proceeds from exercised stock options |
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Repurchase of common stock |
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| ( |
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| ( |
Dividends paid on common stock |
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| ( |
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| ( |
Other |
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Net cash flows from financing activities |
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Net change in cash and cash equivalents |
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| ( |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
| $ | |
| $ | |
| ||||||
Non-cash investing activities: | ||||||
Property, plant and equipment additions purchased at the period end, but not yet paid for |
| $ | |
| $ | |
Non-cash utility property contributions |
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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)
The accompanying unaudited consolidated balance sheets and statements of capitalization of Essential Utilities, Inc. and subsidiaries (collectively, the “Company”, “we”, “us” or “our”) at September 30, 2023, 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 nine months ended 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.
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)
The following table presents our revenues disaggregated by major source and customer class:
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| Three Months Ended |
| Three 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: |
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Residential | $ | |
| $ | |
| $ | |
| $ | - |
| $ | |
| $ | |
| $ | |
| $ | - |
Commercial |
| |
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| |
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| |
|
| - |
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| |
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| |
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| |
|
| - |
Fire protection |
| |
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| - |
|
| - |
|
| - |
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| |
|
| - |
|
| - |
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| - |
Industrial |
| |
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| |
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| |
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| - |
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| |
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| |
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| |
|
| - |
Gas transportation & storage |
| - |
|
| - |
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| |
|
| - |
|
| - |
|
| - |
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| |
|
| - |
Other water |
| |
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| - |
|
| - |
|
| - |
|
| |
|
| - |
|
| - |
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| - |
Other wastewater |
| - |
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| |
|
| - |
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| - |
|
| - |
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| |
|
| - |
|
| - |
Other utility |
| - |
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| |
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| |
|
| - |
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| - |
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Revenues from contracts with customers |
| |
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Alternative revenue program |
| |
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| |
|
| - |
|
| - |
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| |
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| |
|
| - |
|
| - |
Other and eliminations |
| - |
|
| - |
|
| - |
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| |
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| |
|
| - |
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| - |
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Consolidated | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
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| 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: |
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Residential | $ | |
| $ | |
| $ | |
| $ | - |
| $ | |
| $ | |
| $ | |
| $ | - |
Commercial |
| |
|
| |
|
| |
|
| - |
|
| |
|
| |
|
| |
|
| - |
Fire protection |
| |
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| - |
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| - |
|
| - |
|
| |
|
| - |
|
| - |
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| - |
Industrial |
| |
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| |
|
| |
|
| - |
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| |
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| |
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| |
|
| - |
Gas transportation & storage |
| - |
|
| - |
|
| |
|
| - |
|
| - |
|
| - |
|
| |
|
| - |
Other water |
| |
|
| - |
|
| - |
|
| - |
|
| |
|
| - |
|
| - |
|
| - |
Other wastewater |
| - |
|
| |
|
| - |
|
| - |
|
| - |
|
| |
|
| - |
|
| - |
Other utility |
| - |
|
| - |
|
| |
|
| |
|
| - |
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Revenues from contracts with customers |
| |
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| |
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| |
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| |
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| |
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Alternative revenue program |
| |
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| |
|
| |
|
| - |
|
| |
|
| ( |
|
| - |
|
| - |
Other and eliminations |
| - |
|
| - |
|
| - |
|
| |
|
| - |
|
| - |
|
| - |
|
| |
Consolidated | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
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Water and Wastewater Utility Acquisitions - Completed
In July 2023, the Company completed the following water utility asset acquisitions: Shenandoah Borough, Pennsylvania, which serves approximately
In June 2023, the Company acquired the wastewater utility assets of Union Rome, Ohio, which serves approximately
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
In November 2022, the Company acquired certain water utility assets of Oak Brook, Illinois, which serve
On July 29, 2022, the Pennsylvania 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
In March 2022, the Company acquired the wastewater system of Lower Makefield Township, which serves
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
In June 2023, the Company entered into a purchase agreement to acquire Westfield HOA wastewater assets, which serves approximately
In April 2023, the Company entered into a purchase agreement to acquire Greenville Sanitation Authority’s wastewater utility assets, which serves approximately
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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
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 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
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
First, Delaware County filed an Application for Determination of Finality (“Application”) on October 13, 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 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 2023 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 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.
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 ALJ established a procedural schedule for the remand 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 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 some of DELCORA’s wastewater assets. On February 6, 2023, the ALJ stayed the PUC DELCORA application proceedings again.
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 with a mix of equity and debt 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)
On December 31, 2022, the Company entered into a definitive agreement with Hope Gas, Inc. for the sale of its regulated natural gas utility assets in West Virginia, which served approximately
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| September 30, 2023 |
| December 31, 2022 | ||
Inventory - gas stored | $ | |
| $ | |
Other current assets |
| |
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| |
Regulatory assets |
| |
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| |
Current assets held for sale | $ | |
| $ | |
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Property, plant and equipment, net |
| |
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| |
Regulatory assets and other |
| |
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| |
Non-current assets held for sale | $ | |
| $ | |
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Current liabilities related to assets held for sale | $ | |
| $ | |
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Regulatory liabilities |
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| |
Other long-term liabilities |
| |
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Non-current liabilities related to assets held for sale | $ | |
| $ | |
The following table summarizes the changes in the Company’s goodwill, by business segment:
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| Regulated Water |
| Regulated Natural Gas |
| Other |
| Consolidated | ||||
Balance at December 31, 2022 |
| $ | |
| $ |
| $ |
| $ | | ||
Reclassification to utility plant acquisition adjustment |
|
| ( |
|
| - |
|
| - |
|
| ( |
Balance at September 30, 2023 |
| $ | |
| $ | |
| $ | |
| $ | |
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.
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 $
Tangible Equity Units
On April 23, 2019, the Company issued $
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,
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 $
On June 29, 2023, Aqua Pennsylvania and Peoples Natural Gas Companies amended the terms of their respective $
In January 2023 and October 2022, Aqua Pennsylvania, issued $
On December 14, 2022, the Company entered into a
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 nine months ended 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 September 30, 2023 and December 31, 2022, the carrying amount of the Company’s loans payable was $
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 September 30, 2023 and December 31, 2022, the carrying amounts of the Company's cash and cash equivalents was $
Unrealized gain and loss on equity securities held in conjunction with our non-qualified pension plan is as follows:
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| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Net gain (loss) recognized during the period on equity securities |
| $ | |
| $ | ( |
| $ | |
| $ | ( |
Less: net gain / loss recognized during the period on equity securities sold during the period |
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Unrealized gain (loss) recognized during the reporting period on equity securities still held at the reporting date |
| $ | |
| $ | ( |
| $ | |
| $ | ( |
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:
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| September 30, |
| December 31, | ||
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| 2023 |
| 2022 | ||
Carrying amount |
| $ | |
| $ | |
Estimated fair value |
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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 $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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:
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|
| Three Months Ended |
| Nine Months Ended | ||||
|
| September 30, |
| September 30, | ||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 |
Average common shares outstanding during the period for basic computation |
| |
| |
| |
| |
Effect of dilutive securities: |
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|
|
|
|
|
|
Employee stock-based compensation |
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|
| |
| | ||
Average common shares outstanding during the period for diluted computation |
| |
| |
| |
| |
Based 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, the average common shares outstanding for basic computation for the three and nine months ended September 30, 2022 includes the weighted-average impact of
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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
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
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|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Stock-based compensation within operations and maintenance expenses |
| $ | |
| $ | |
| $ | |
| $ | |
Income tax benefit |
|
| |
|
| |
|
| |
|
| |
The following table summarizes the PSU transactions for the nine months ended September 30, 2023:
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| Number |
| Weighted | |
|
|
| of |
| Average | |
|
|
| Share Units |
| Fair Value | |
Nonvested share units at beginning of period |
|
| |
| $ | |
Granted |
|
| |
|
| |
Performance criteria adjustment |
|
| ( |
|
| |
Actual vested |
|
| ( |
|
| |
Forfeited |
|
| ( |
|
| |
Nonvested share units at end of period |
|
| |
| $ | |
|
|
|
|
|
|
|
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 nine months ended September 30, 2023 and 2022 was $
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
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|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Stock-based compensation within operations and maintenance expenses |
| $ | |
| $ | |
| $ | |
| $ | |
Income tax benefit |
|
| |
|
| |
|
| |
|
| |
The following table summarizes the RSU transactions for the nine months ended September 30, 2023:
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| Number |
| Weighted | |
|
|
| of |
| Average | |
|
|
| Stock Units |
| Fair Value | |
Nonvested stock units at beginning of period |
|
| |
| $ | |
Granted |
|
| |
|
| |
Stock units vested and issued |
|
| ( |
|
| |
Forfeited |
|
| ( |
|
| |
Nonvested stock units at end of period |
|
| |
| $ | |
The per unit weighted-average fair value at the date of grant for RSUs granted during the nine months ended September 30, 2023 and 2022 was $
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
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|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
|
| September 30, | |||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Stock-based compensation within operations and maintenance expenses |
| $ | |
| $ | |
| $ | |
| $ | |
Income tax benefit |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
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|
| 2023 |
| 2022 | ||
Expected term (years) |
|
|
| ||
Risk-free interest rate |
|
|
| ||
Expected volatility |
|
|
| ||
Dividend yield |
|
|
| ||
Grant date fair value per option | $ |
| $ |
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 nine months ended September 30, 2023:
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|
| Weighted |
| Weighted |
|
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| |
|
|
|
| Average |
| Average |
| Aggregate | ||
|
|
|
| Exercise |
| Remaining |
| Intrinsic | ||
|
| Shares |
| Price |
| Life (years) |
| Value | ||
Outstanding at beginning of period |
| |
| $ | |
|
|
|
|
|
Granted |
| |
|
| |
|
|
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|
|
Forfeited |
| ( |
|
| |
|
|
|
|
|
Expired |
| ( |
|
| |
|
|
|
|
|
Exercised |
| ( |
|
| |
|
|
|
|
|
Outstanding at end of period |
| |
| $ | |
|
| $ | | |
|
|
|
|
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|
|
|
|
|
|
Exercisable at end of period |
| |
| $ | |
|
| $ | |
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:
|
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|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Stock-based compensation within operations and maintenance expenses |
| $ | |
| $ | |
| $ | |
| $ | |
Income tax benefit |
|
| |
|
| |
|
| |
|
| |
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 |
| |
| $ | |
Granted |
| |
|
| |
Vested |
| ( |
|
| ( |
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 $
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:
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Stock-based compensation within operations and maintenance expenses |
| $ | - |
| $ | |
| $ | |
| $ | |
Income tax benefit |
|
| - |
|
| |
|
| |
|
| |
There were
The following table summarizes stock award transactions for the nine months ended September 30, 2023:
|
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|
|
|
|
|
|
|
|
|
|
|
| Number |
| Weighted | |
|
| of |
| Average | |
|
| Stock Awards |
| Fair Value | |
Nonvested stock awards at beginning of period |
|
| $ | ||
Granted |
| |
|
| |
Vested |
| ( |
|
| ( |
Nonvested stock awards at end of period |
|
|
|
|
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
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 | ||||||||||
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Service cost |
| $ | |
| $ | |
| $ | |
| $ | |
Interest cost |
|
| |
|
| |
|
| |
|
| |
Expected return on plan assets |
|
| ( |
|
| ( |
|
| ( |
|
| ( |
Amortization of prior service cost |
|
| |
|
| |
|
| |
|
| |
Amortization of actuarial loss |
|
| |
|
| |
|
| |
|
| |
Net periodic benefit cost (credit) |
| $ | |
| $ | ( |
| $ | |
| $ | ( |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other | ||||||||||
|
| Postretirement Benefits | ||||||||||
|
|
| Three Months Ended |
|
| Nine Months Ended | ||||||
|
|
| September 30, |
|
| September 30, | ||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Service cost |
| $ | |
| $ | |
| $ | |
| $ | |
Interest cost |
|
| |
|
| |
|
| |
|
| |
Expected return on plan assets |
|
| ( |
|
| ( |
|
| ( |
|
| ( |
Amortization of actuarial loss |
|
| ( |
|
| ( |
|
| ( |
|
| ( |
Net periodic benefit cost (credit) |
| $ | |
| $ | ( |
| $ | |
| $ | ( |
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 $
On September 28, 2023, the Company’s regulated water and wastewater operating subsidiary in Texas, Aqua Texas, received a final order from the Public Utility Commission of Texas approving infrastructure rehabilitation surcharges designed to increase revenues by $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
On 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 $
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 $
In January 2023, the Company’s two 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 $
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 $
On September 21, 2022, our regulated water and wastewater utility operating divisions in Ohio received an order from the Public Utilities Commission of Ohio designed to increase operating revenues by $
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 $
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 $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The following table provides the components of taxes other than income taxes:
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||
|
| September 30, |
| September 30, | ||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Property |
| $ | |
| $ | |
| $ | |
| $ | |
Gross receipts, excise and franchise |
|
| |
|
| |
|
| |
|
| |
Payroll |
|
| |
|
| |
|
| |
|
| |
Regulatory assessments |
|
| |
|
| |
|
| |
|
| |
Pumping fees |
|
| |
|
| |
|
| |
|
| |
Other |
|
| |
|
| |
|
| |
|
| |
Total taxes other than income |
| $ | |
| $ | |
| $ | |
| $ | |
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has
In addition to the Company’s
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:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Operations and maintenance expense |
|
| |
|
| |
|
| ( |
|
| |
|
| |
|
| |
|
| |
|
| |
Purchased gas |
|
| - |
|
| |
|
| |
|
| |
|
| - |
|
| |
|
| |
|
| |
Depreciation and amortization |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest expense, net (a) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Allowance for funds used during construction |
|
| ( |
|
| ( |
|
| - |
|
| ( |
|
| ( |
|
| ( |
|
| - |
|
| ( |
Provision for income taxes (benefit) |
|
| |
|
| ( |
|
| ( |
|
| ( |
|
| |
|
| ( |
|
| ( |
|
| |
Net income (loss) |
|
| |
|
| ( |
|
| ( |
|
| |
|
| |
|
| ( |
|
| ( |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended |
| Nine Months Ended | ||||||||||||||||||||
|
| September 30, 2023 |
| September 30, 2022 | ||||||||||||||||||||
|
| Regulated Water |
| Regulated Natural Gas |
| Other |
| Consolidated |
| Regulated Water |
| Regulated Natural Gas |
| Other |
| Consolidated | ||||||||
Operating revenues |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Operations and maintenance expense |
|
| |
|
| |
|
| ( |
|
| |
|
| |
|
| |
|
| ( |
|
| |
Purchased gas |
|
| - |
|
| |
|
| |
|
| |
|
| - |
|
| |
|
| |
|
| |
Depreciation and amortization |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Interest expense, net (a) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Allowance for funds used during construction |
|
| ( |
|
| ( |
|
| - |
|
| ( |
|
| ( |
|
| ( |
|
| - |
|
| ( |
Provision for income taxes (benefit) |
|
| |
|
| ( |
|
| ( |
|
| ( |
|
| |
|
| ( |
|
| ( |
|
| ( |
Net income (loss) |
|
| |
|
| |
|
| ( |
|
| |
|
| |
|
| |
|
| ( |
|
| |
Capital expenditures |
|
| |
|
| |
|
| |
|
| |
| $ | |
| $ | |
| $ | |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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.
|
|
|
|
|
|
|
|
| September 30, |
| December 31, | ||
|
| 2023 |
| 2022 | ||
Total assets: |
|
|
|
|
|
|
Regulated water |
| $ | |
| $ | |
Regulated natural gas |
|
| |
|
| |
Other |
|
| |
|
| |
Consolidated |
| $ | |
| $ | |
|
|
|
|
|
|
|
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 September 30, 2023, the aggregate amount of $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
approximately $
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 third quarter of 2023, an amount was accrued for the penalty and other fees that will be paid as a result of a conditional settlement that was reached with the regulators. The settlement is the subject of court approval. In addition, on September 3, 2019,
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 $
ESSENTIAL UTILITIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(In thousands of dollars, except per share amounts)
(UNAUDITED)
The Company’s effective tax rate was (
The statutory Federal tax rate is
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 the safe harbor and intends to adopt the methodology on its 2023 tax return. In the second quarter of 2023, based on the tax 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.
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 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 5.5 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.
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)
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 in an increase in our operating and capital spending requirements in 2022 and 2023 to date, which we expect to continue through 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.
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 NPDWR. Additionally, the Company estimates annual operating expenses of approximately five percent of the installed capital expenditures, in today’s dollars, related to testing, treatment, and 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 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; 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 $804,569 for the first nine months of 2023, compared to $519,159 for the first nine months of 2022. The net change in working capital and other assets and liabilities resulted in an increase in cash from operations of $221,419 for the first nine months of 2023 compared to a decrease of $64,120 for the first nine months of 2022. The change in working capital in 2023 was primarily driven by the year over year decrease in accounts receivable, unbilled revenues and deferred purchased gas cost balances, and most significantly in gas inventory, as a result of lower gas prices in the current period as compared with the prior period for our Regulated Natural Gas segment.
During the first nine months of 2023, we incurred $874,491 of capital expenditures, expended $45,303 for the acquisition of a wastewater utility system, issued $681,203 of long-term debt, repaid short-term debt, and made sinking fund contributions and other long-term debt repayments in aggregate of $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 nine 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.
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 used 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.
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)
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 September 30, |
| Nine Months Ended September 30, | ||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Operating revenues | $ | 411,255 |
| $ | 434,618 |
| $ | 1,574,405 |
| $ | 1,582,649 |
Operations and maintenance expense | $ | 147,018 |
| $ | 151,361 |
| $ | 418,520 |
| $ | 428,923 |
Purchased gas | $ | 16,590 |
| $ | 52,041 |
| $ | 314,838 |
| $ | 354,896 |
Net income | $ | 80,076 |
| $ | 68,638 |
| $ | 362,778 |
| $ | 350,305 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating Statistics |
|
|
|
|
|
|
|
|
|
|
|
Selected operating results as a percentage of operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
Operations and maintenance |
| 35.7% |
|
| 34.8% |
|
| 26.6% |
|
| 27.1% |
Purchased gas |
| 4.0% |
|
| 12.0% |
|
| 20.0% |
|
| 22.4% |
Depreciation and amortization |
| 20.9% |
|
| 19.0% |
|
| 16.2% |
|
| 15.2% |
Taxes other than income taxes |
| 5.9% |
|
| 5.2% |
|
| 4.3% |
|
| 4.3% |
Interest expense, net of interest income |
| 16.4% |
|
| 13.6% |
|
| 13.2% |
|
| 10.5% |
Net income |
| 19.5% |
|
| 15.8% |
|
| 23.0% |
|
| 22.1% |
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
| -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 $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 $1,704; and,
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.
Depreciation and amortization expense increased by $3,305 or 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 periods ended September 30, 2023 and 2022:
|
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|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Operating revenues | $ | 310,591 |
| $ | 301,335 |
| $ | 871,563 |
| $ | 809,888 |
Operations and maintenance expense | $ | 98,695 |
| $ | 94,854 |
| $ | 274,724 |
| $ | 273,757 |
Segment net income | $ | 99,916 |
| $ | 98,586 |
| $ | 267,345 |
| $ | 235,471 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating Statistics |
|
|
|
|
|
|
|
|
|
|
|
Selected operating results as a percentage of operating revenues: |
|
|
|
|
|
|
|
|
|
|
|
Operations and maintenance |
| 31.8% |
|
| 31.5% |
|
| 31.5% |
|
| 33.8% |
Depreciation and amortization |
| 17.6% |
|
| 17.1% |
|
| 18.5% |
|
| 18.6% |
Taxes other than income taxes |
| 5.5% |
|
| 5.6% |
|
| 5.4% |
|
| 6.0% |
Interest expense, net of interest income |
| 9.9% |
|
| 9.2% |
|
| 10.5% |
|
| 10.2% |
Segment net income |
| 32.2% |
|
| 32.7% |
|
| 30.7% |
|
| 29.1% |
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
| 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)
Our effective income tax rate for our Regulated Water Segment was an expense of 14.6% in the first nine months of 2023, compared to an expense of 14.7% in the first nine months of 2022.
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 periods ended September 30, 2023 and 2022:
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
Operating revenues | $ | 94,798 |
| $ | 118,985 |
| $ | 675,076 |
| $ | 731,897 |
Operations and maintenance expense | $ | 50,006 |
| $ | 51,850 |
| $ | 148,270 |
| $ | 156,209 |
Purchased gas | $ | 14,408 |
| $ | 41,124 |
| $ | 295,929 |
| $ | 321,822 |
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 |
| 52.8% |
|
| 43.6% |
|
| 22.0% |
|
| 21.3% |
Purchased gas |
| 15.2% |
|
| 34.6% |
|
| 43.8% |
|
| 44.0% |
Depreciation and amortization |
| 32.8% |
|
| 25.5% |
|
| 13.8% |
|
| 12.2% |
Taxes other than income taxes |
| 6.9% |
|
| 4.3% |
|
| 2.6% |
|
| 2.3% |
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 |
| 63.4% |
|
| 42.6% |
|
| -137.3% |
|
| -49.6% |
impact of lower gas cost of $26,716 during the quarter as compared to the prior period;
decrease in customer assistance surcharge of $2,044, which has an equivalent offsetting amount in operations and maintenance expense; and offset by,
an increase of $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 nine months ended September 30, 2023, we experienced actual HDDs of 2,963 days, which was warmer by 17.8% than the actual HDDs of 3,606 days in the first nine 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 $35,076 and is largely attributed to the warmer 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)
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 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” and in our Form 10-Q for the quarter ended March 31, 2023.
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 September 30, 2023:
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| Issuer Purchases of Equity Securities |
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| Total |
| Maximum |
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| Number of |
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| Shares |
| Shares |
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| Purchased |
| that May |
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| as Part of |
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| Total |
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| Publicly |
| Purchased |
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| Number |
| Average |
| Announced |
| Under the | |
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| 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 48 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
Item 6 – Exhibits
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Exhibit No. |
| Description |
3.2 |
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10.1* |
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31.1* |
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31.2* |
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32.1* |
| Certification of Chief Executive Officer, furnished pursuant to 18 U.S.C. Section 1350 |
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32.2* |
| Certification of Chief Financial Officer, furnished pursuant to 18 U.S.C. Section 1350 |
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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. |
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101.SCH |
| Inline XBRL Taxonomy Extension Schema Document |
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101.CAL |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF |
| Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB |
| Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRES |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104 |
| The cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL (included in Exhibit 101) |
*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.
November 7, 2023
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| Essential Utilities, Inc. | |
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| Registrant | |
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| /s/ Christopher H. Franklin | |
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| Christopher H. Franklin | |
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| Chairman, President and | |
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| Chief Executive Officer | |
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| /s/ Daniel J. Schuller | |
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| Daniel J. Schuller | |
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| Executive Vice President and | |
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| Chief Financial Officer |